LON EAGLE INDUSTRIAL LTD. v. REALY TRADING CO. (a firm) AND OTHERS

HCA14359/97

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO. 14359 OF 1997

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J U D G M E N T

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Introduction

1. The Plaintiff brings this action against the three defendants. According to the Statement of Claim, the liabilities of the 1st Defendant ("D1") and the 2nd Defendant ("D2") arose out of:-

(a) a contractual obligation to pay the balance of price of goods sold and delivered;

(b) a separate contractual obligation to pay under a written agreement dated 4 July, 1997.

Further, the Statement of Claim alleges that the 3rd Defendant ("D3") was liable under a written Guarantee dated 4 July, 1997 to pay the debt due from D1 and D2 to the Plaintiff. The Statement of Claim described D1 as either a partnership consisting of D3, a Ms Ip Lai Kuen ("Ip") and a Mr Kwong Kwok Choi ("Kwong"), or (in substance) a sole proprietorship operated by D2 : see para. 2(i) and (ii) thereof.

2. At the hearing on 6 September, 1999, none of the three defendants appeared in Court but Ip and Kwong appeared and claimed they were the former partners of D1. They further claimed that D1 ceased to be a partnership before it began to have dealings with the Plaintiff. For these reasons, they denied they are personally liable to the Plaintiff for the claim against D1.

The Position of D2 and D3

3. From the records in the Court file, at the hearing of the summons for directions on 27 January, 1999, the former solicitors for the defence informed the Court they wanted to cease to act for the defence. That application, as well as the Check-list hearing, were adjourned to 3 March, 1999. At the hearing on 3 March, the matters were further adjourned to 24 March. At the adjourned hearing on 24 March, 1999, the application to cease to act was granted and leave was given for the case to be set down. None of the three defendants appeared on any of these occasions. The action came up for trial on 26 April, 1999. Again, none of the defendants appeared but Ip appeared in person. The trial did not proceed on that day because counsel for the Plaintiff informed the Court that Ip had applied for legal aid.

4. The action came before me for trial on 6 September, 1999. D2 and D3 failed to turn up yet again. In these circumstances, I consider it appropriate for the case against them to proceed.

5. For reasons which will be set out in more detail below, I am satisfied the Plaintiff's evidence has established its claim against D2 and D3. Judgment in the sums of:-

(a) $2,269,222.47 (comprising a principal sum of $2,008,482.10 and interest at 12% per annum from the date of accrual to 30 June, 1997);

(b) further interest at 12% per annum from 1 July, 1997 to date of Judgment;

(c) interest at judgment rate from date of Judgment to date of payment

is entered against D2 and D3 in the Plaintiff's favour.

The Position of Ip and Kwong

6. The dispute before me relates to whether Ip and Kwong are also liable to the Plaintiff. From the way in which the Plaintiff's case was advanced, it appears that the Plaintiff did not seriously challenge the assertion that Ip and Kwong had ceased to be partners of D1 at some earlier stage (although this allegation of Ip and Kwong was not accepted in the Plaintiff's written opening).

7. In her written opening, Ms Lee for the Plaintiff relied (mainly) on the provisions in the Partnership Ordinance, Cap. 38 relating to the requirement for giving notice of retirement. On the other hand, Ip and Kwong did not contend that any such notice had been given, but asserted that the mere fact of retirement is sufficient. Ip further suggested to the Plaintiff's witness (supported to an extent by some documents) that the Plaintiff knew D1 was a sole proprietorship and not a partnership.

8. Thus, the liability of Ip and Kwong would depend on:-

(a) whether they can prove they had ceased to be partners of D1 prior to D1's dealings with the Plaintiff;

(b) if so, whether their liability discontinued after their retirement;

(c) in any event, whether the Plaintiff knew D1 was operated by D2.

9. These matters will be dealt with under separate headings. Although to a large extent there was no dispute on the facts, there are certain factual issues arising from the witnesses' testimony which need to be resolved before dealing with the matters set out above. The findings on the testimony are dealt with under the next sub-heading.

(1) Findings of fact

(a) Credibility of the Plaintiff's witness

10. The Plaintiff called one witness, a Mr Kwok Wing Chung ("Kwok"), to testify. He adopted the contents of his witness statement dated 2 November, 1998 as his testimony. The parts of his statement dealing with the issues before me stated in essence:-

(a) since he became the Plaintiff's general manager in 1995, he always thought he was dealing with the very same D1 as its name and account had remained the same;

(b) he never noticed D1 ceasing business at any time;

(c) before the commencement of this action, he was informed that the Plaintiff's solicitors made a business registration search of D1 and found that it was a partnership consisting of D1, Ip and Kwong until March, 1996 when it ceased operation as such.

11. In view of the brevity of Kwok's statement, it is not surprising that Ms Lee had to question this witness further. In the course of her questioning of this witness, Kwok said that he regarded D1 as a partnership company but he did not know who the other partners were. He said he had seen Ip before and knew she was D3's younger sister. When questioned by Ip, Kwok agreed that about four to five cheques of D2 were accepted by the Plaintiff for payment of D1's trading debts in the past. I also asked Kwok how he knew D1 was a partnership. He answered in essence that he made that inference from a statement made by D3 in about mid-1996 after there was a payment problem. When he asked for payment, D3 told him that the other partners had no money and D1 asked Kwok to be patient. Kwok also agreed that he dealt only with D3 and had not seen any other partners of D1, in particular, Kwong, before.

12. Ms Lee further questioned Kwok and he stated he first learnt that D1 was a partnership when he first reported for duty to the Plaintiff. He was then informed by his colleague(s) that D1 was a family business and it had quite a reputation in the trade.

13. Before making a finding on Kwok's credibility, parts of the contents of the two agreements made in July, 1997 (that is, the repayment agreement and the guarantee) should be set out:-

(a) the 4 July, 1997 repayment agreement was drafted by solicitors acting for the Plaintiff. The parties to the agreement were the Plaintiff and D1 and D1 was described therein as "WELLTRADE HOLDINGS LTD trading as REALY TRADING COMPANY ... ". D3 signed for D1 and he was described as "SIGNED by the Debtor by Ip Tat Kuen Eric its director ... ";

(b) the guarantee dated 4 July, 1997 was also drafted by the same solicitors. In the recital, D1 was described as "The Welltrade Holdings Ltd trading as Realy Trading Company ('the Debtor') is indebted to the Creditor ... ".

14. Kwok said in his statement that it was D3 who told him he should write the purchaser's name as D2 trading as D1 on these two documents. At that time, he did not think that the name of the purchaser was of much importance and so he instructed the Plaintiff's solicitors to draft the documents in that way. When further questioned by Ms Lee, he said it would be more advantageous to the Plaintiff to include two companies in the agreements, thinking that this would enable the Plaintiff to claim against both.

15. Further, Ip produced two documents which in effect were credit notes from D1 (marked as exhibits "D-1" and "D-2"). She drew attention to the composite signature (a chop and D3's signature) at the bottom of these documents which stated:-

"For and on behalf of
Welltrade Holdings Limited
Trading as Realy Trading Co.
...............................
Authorized signature".

Ip contended that the Plaintiff should have known of the real status of D1 long ago as these "credit notes" clearly showed D1 was operated by D2. When these documents were shown to Kwok, he admitted having seen them before but said he attached no significance to the chops there.

16. I do not accept Kwok's testimony regarding the following matters and for the reasons stated below:-

(a) I do not accept Kwok's assertion that he learnt that D1 was a partnership when he first reported for duty because:-

(1) what he said came from a hearsay source, namely, allegedly from his colleague(s);

(2) it was in very vague terms;

(3) not only was it not mentioned in his statement, his initial answer to my questions about his belief was not in such terms and he only said that D3 told him so sometime in mid-1996;

(4) although he had met Ip before, he admitted he did not know Ip was a partner;

(5) he admitted he had never met Kwong before and only learnt of Kwong's name after the solicitors made the business registration search;

(b) I do not accept Kwok's assertion regarding why the two July, 1997 agreements referred to D1 as "Welltrade Holdings Ltd trading as Realy Trading Company" because:-

(1) the description set out in the two documents was clear and unambiguous regarding the status of D1;

(2) such description was inconsistent with both Kwok's statement and his testimony as to why D1 was described in such way. If the Plaintiff were not concerned with the actual identity of D1, the description should merely have been "Realy Trading Company". If the Plaintiff had wanted to make two companies liable, D2 and D3 should (for example) have been made jointly and severally liable.

(c) I do not accept the Plaintiff did not know of the real identity of D1 as a sole proprietorship operated by D2 because of:-

(1) the two July, 1997 agreements;

(2) the Plaintiff's acceptance of four to five cheques drawn by D2;

(3) the two credit notes (exhibits "D-1" and "D-2").

17. For the above reasons, in relation to the status of D1, I find that:-

(a) the Plaintiff either did not know that D1 was a partnership until after the debts in this action fell due;

(b) alternatively (and more probably), the Plaintiff knew at some stage when trading with D1 that it was in substance operated by D2 as a sole proprietorship and was contented with this.

18. Apart from what is stated above, I accept the Plaintiff's evidence regarding the liability of D2 and D3.

(b) Credibility of Ip and Kwong

19. Ip testified and her testimony can be summarized as follows. She had no job in 1993. She had a discussion with Kwong and D3 about starting a business together. This resulted in the formation of D1. Sometime in February or March, 1994 she found a job. Similarly, Kwong found a job in mid-1994. They therefore withdrew from the partnership. At the end of February, 1995, she and Kwong each signed an agreement with D3 to transfer their shares to D3. The document relating to Ip was included as p.42 of the Bundle of Documents. She further contended that from:-

(a) the description of D1 in the two July, 1997 agreements;

(b) the Plaintiff's acceptance of the cheques from D2;

(c) the exhibits marked "D1" and "D2" which she produced,

the Plaintiff knew that D1 was operated by D2.

20. Ms Lee's cross-examination was, in essence, aimed at showing that Ip had not given any notice to D1's creditors, for example, serving actual notices, advertising in the newspapers or deleting her name from the business registration records. Ip admitted these but claimed she relied on D3 to handle the last matter.

21. I notice that there are some discrepancies between Ip's testimony and her witness statement dated 22 January, 1999. In her statement she stated:-

(a) the sale of shares occurred in March, 1995 and the reasons were that the business was not profitable and she was pregnant at that time;

(b) at that time, she signed a number of documents for transferring her shares to D3 and gave them to him for filing with the authorities.

22. Notwithstanding the above discrepancies, I find Ip to be a credible and reliable witness and accept her testimony as truthful and reliable.

23. Further, I also accept Kwong's testimony to be truthful and reliable. Hence, I find that he had withdrawn from the partnership in about mid-1994. I also find that the partnership only dealt in one order in stuffed toys with another company (not the Plaintiff) and that Kwong had signed some documents to transfer his shares to D3.

(2) Has there been any holding out and reliance thereon?

24. Having found that the partnership had already been terminated by about February, 1995 at the latest, neither s.7 or s.17 of Cap.38 is applicable to the business dealings between the Plaintiff and D1 in 1996.

25. Although it was not referred to in Ms Lee's arguments, s.16 of Cap. 38 warrants some consideration. It stipulates that:-

"Every one who, by words spoken or written or by conduct, represents himself, or who knowingly suffers himself to be represented, as a partner in a particular firm is liable as a partner to any one who has, on the faith of any such representation, given credit to the firm, whether the representation has or has not been made or communicated to the person so giving credit by or with the knowledge of the apparent partner making the representation or suffering it to be made ... " (italics and bold type supplied).

This is commonly known as liability arising out of a "holding out".

26. The difficulty facing the Plaintiff if it wants to apply this provision is that there is no evidence that Ip or Kwong had themselves made any representation, or that they knowingly suffered any representation to be made. In particular, there is no evidence (which I found to be admissible or reliable) that any such "holding out" was made or suffered to be made before credit was given by the Plaintiff: see Lindley & Banks on Partnership (1995) 17th Ed., para. 5-45, text to n.39.

27. Although this was not argued by Ms Lee, it appears that the mere fact that a person's name still remains in the business registration records per se does not amount to "holding out": see Lindley & Banks, para. 5-47, text to n.45 citing Bishop v. Tudor Estates [1952] C.P.L. 807.

28. For the above reasons, I find that there was no "holding out" by either Ip or Kwong: see Lindley & Banks, para. 5-43, 5-54, text to n.65 and 5-56, text to n.70. I also find that there was no evidence of any "reliance" by the Plaintiff upon any such "holding out": see Lindley & Banks, para. 5-49.

(3) Was notice of retirement necessary?

29. The other provision relied upon by Ms Lee in her arguments was s. 38(1) of Cap. 38 which reads:-

"Where a person deals with a firm after a change in its constitution, he is entitled to treat all apparent members of the old firm as still being members of the firm until he has notice of the change" (italics and bold type supplied).

30. It has been pointed out that the liability under this provision is independent of (and strictly distinguishable from) that imposed in cases of pure holding out, since a prospective plaintiff does not have to prove any form of reliance other than the fact that he dealt with the firm: see Lindley & Banks, para. 13-43, text to n.23.

31. However, a truly dormant partner will, by definition, not be an apparent member of the firm, so that this provision will not apply to him: see Lindley & Banks, para. 13-44, text to n.24 and 13-54; see also 35 Halsbury's Laws of England (1994) 4th Ed., text to n.3 and n.3. This principle applies equally to a case of an outgoing active partner, provided that the conditions (provided for in s.38(3)) are fulfilled at the relevant time: see Lindley & Banks, para. 13-57, text to n.50. The common law position prior to the enactment of the statue was the same: see Lindley & Banks, para. 13-40 and 13-54, text to nn.44 to 46.

32. In view of the findings of fact made above, I consider that there was no need for Ip or Kwong to give any notice to the Plaintiff because they were not apparent members of the old firm vis-à-vis the Plaintiff.

(4) The two July, 1997 agreements

33. Section 19(3) of Cap.38 provides that:-

"A retiring partner may be discharged from any existing liabilities by an agreement to that effect between himself and the members of the firm as newly constituted and the creditors, and this agreement may be either express or inferred as a fact from the course of dealing between the creditors and the firm as newly constituted." (italics and bold type supplied).

34. Having found that there was no "holding out" by Ip or Kwong, that there was no reliance placed by the Plaintiff upon any such "holding out" and that neither Ip nor Kwong was required to give any notice pursuant to s.38(1) by reason they were not apparent members, there is strictly no need to consider s.19(3). If it had been necessary to do so, I would have found that by virtue of:-

(a) the description of D1 in the two July, 1997 agreements;

(b) the Plaintiff's acceptance of the cheques from D2;

(c) the Plaintiff's acceptance of the exhibits marked "D1" and "D2",

it should be inferred that the Plaintiff traded with D1 knowing it was operated by D2; the Plaintiff had thereby discharged Ip and Kwong from any existing liabilities: see 35 Halsbury 70, text to nn.2 and 3.

35. Further, an estoppel (though not pleaded) may arguably have been created in favour of Ip and Kwong: see Lindley & banks, para.13-123. It is, however, unnecessary to decide this point in this action.

Conclusion

36. As stated above, Judgment is entered against D2 and D3 in the Plaintiff's favour.

37. For the reasons stated earlier, I disagree with Ms Lee's submissions. From the findings I made above, D1 was in substance a sole proprietorship operated by D2. Since Judgment has already been entered against D2, there is no need to deal with D1's liability further. In fact, I consider it inappropriate to enter Judgment against D1 in view of the issues raised (regarding its composition) since to do so may create confusion as to whether Ip and Kwong are liable. As set out above, I do not find Ip or Kwong to be liable to the Plaintiff and the claim against them is dismissed.

Costs Order Nisi

38. There is no apparent reason why a costs order nisi should not be made pursuant to R.H.C. Ord.42 r.5B(6). Costs of action are to be paid by D2 and D3 to the Plaintiff to be taxed if not agreed. There will be no order as to costs between the Plaintiff and D1, or between the Plaintiff and Ip and Kwong.