HARVEST INDUSTRIAL (HK) CO LTD v. NG NG YEUNG AND ANOTHER

DCCJ 175/2010

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 175 OF 2010

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J U D G M E N T

1.  The Plaintiff (“HI”) supplied goods to the 2^nd Defendant (“MS”), for which the 1^st Defendant (“Ng”) drew on the account of MS 6 post-dated cheques purportedly to pay for the goods in the total sum of HK$687,199. The cheques were all bounced and the cost of the goods never paid.

2.  HI sues MS for the amount of the dishonoured cheques or the cost of the goods.  HI sues Ng in the tort of deceit; and asks that the corporate veil of MS should be lifted so that Ng should be held to be liable personally for what MS owes HI.

3.  On 22 April 2010, judgment in default was entered against MS.

4.  Prohibition order has been made against Ng as the director of MS incidental to the examination of debtor proceedings.

5.  Ng’s solicitors ceased to act for him in July 2011 after this case against Ng had already been set down for trial.  Ng was aware of this trial; but he chose to be absent.  I saw no reason why HI should be prevented from proceeding.

Undisputed facts

6.  As evidenced by the following invoices, in late 2008, HI delivered electronic goods to or at the request of MS.  MS has issued the following post-dated cheques for payment:

7. Upon presentment, all of the above post-dated cheques were dishonoured for insufficient fund.

8. Ng was at all material times the sole shareholder and director of MS.  He was also the sole signatory of his company’s bank accounts.

The claim against Ng

9.  As pleaded, the deceit and misrepresentation on the part of Ng essentially came in 2 forms.  First, it is alleged that Ng was well aware that his company was insolvent; yet he still ordered for the goods to be sold and delivered.  Second, Ng allegedly misrepresented that the post-dated cheques would be honoured so as to induce HI to part with possession of the goods.

10.  The fact, it is contended, was that neither MS nor Ng had the intention of honouring the cheques or that they were well aware that there would be no fund for honouring those cheques when due.  Shortly after obtaining the goods without payment, the office premises of MS in North Point, Hong Kong, were also abandoned.

11.  HI contends that that was premeditated fraud to obtain property by deception; and HI was one of the many victims.  Report has made to the police; whilst Ng has been evading the law.

The defence

12.  Through solicitors, Ng filed his Defence which contained nothing more than bare denial.  Nevertheless, Ng sought to strike out HI’s claim.  The attempt failed; and then Ng amended his Defence.

13.  By the Amended Defence, Ng refers to the annual turnover and strength in terms of manpower for the year ending December 2007.  He denies that his company was insolvent when trading with HI.  He relies on his company’s overdraft facility with the bank in the sum of HK$3 million.

14.  Further, Ng describes himself as the managing director of MS; and he had to travel on business frequently.  All dealings of MS with suppliers were handled by the purchasing department; while the account department was responsible for arranging cheques for payment for his endorsement.

15.  As to why his company’s cheques were eventually dishonoured, Ng blames that on the financial crisis and delay in sales.  That, according to him, caused cash flow problem of MS and its inability to meet the demand for payment for the goods or the rent for its Hong Kong office.  The office premises of MS had also been forfeited by the landlord.

Discussion

16.  The director of HI, Yuan, adopted his statement as his evidence, which basically reproduced HI’s pleading.  Ng has made a statement for the purpose of this trial; but in his absence, that could not be accepted as evidence.  The previous affirmations of Ng were also included in the trial bundle.  Not tested in court, what he deposed to in his affirmations cannot be accepted as evidence either; but the same may be used by HI for submission purpose.

When the goods were ordered

17.  It is unclear exactly when MS placed its orders for the goods in question from HI.  Judging from the dates of the above invoices from HI, it can be safely inferred that all the relevant orders had been placed by late 2008.

18.  Mr Chung of the solicitors for HI submitted that it is against the law for a company to trade while it is insolvent.  But he could not point to the source of such legal argument; and the statutory provision in the Companies Ordinance, Cap.32 that he sought to rely on is entirely irrelevant.

19.  In my view, it is not inherently wrong, let alone unlawful, to run business on a margin, namely that the income receivable in the course of the business would suffice to meet the liability when it becomes due.  But as Ng chose to be absent, he could not be heard in this regard.

When the post-dated cheques were tendered

20.  HI contends that Ng and MS tendered the cheques with the representation that they would be honoured upon presentment on or after their due dates.  Relying on such representation, HI was induced to part with possession of the goods.

21.  In my judgment, the contention is not sound.  First, tendering a cheque for payment invariably carries with it the representation that it will be honoured upon presentment. The fact is that this is the very contract embodied in the cheque.  Second, according to the relevant invoices from HI, it was the payment term of HI that MS would settle by 30-day post-dated cheque.  It was pursuant to such payment term that HI parted with possession of the goods with postponed payment.

Intention to honour the cheques

22.  HI also contends that when tendering the cheques to HI, Ng and MS had no intention of honouring them or they were well aware of the inability to honour them upon their becoming due.  In my view, the case against Ng re4ally boils down to this contention.

23.  The solicitors for HI have requested for discovery of MS’s financial and bank statements for the months between November 2008 and January 2009, which was the relevant time when the post-dated cheques were drawn and due.  Ng disclosed by affirmation in June 2010 the statements of MS’s account kept with the Shanghai Commercial Bank Limited for the months of October and November 2008 only.

24.  The available statements show 1 savings account and 2 current accounts with the bank, one in Hong Kong dollars (“HK$ Account”) and the other in US dollars (“the US$ Account”).  The really active accounts were the current accounts.  Whilst there were substantial deposits into the HK$ Account from time to time, they were almost immediately used up to meet cheques previously drawn from both accounts.

25.  More importantly, the withdrawal from the HK$ Account at the end of October and November 2008 already ate into the HK$3 million overdraft facility to the extent of over HK$1.84 million and HK$2.48 million respectively.  That left MS with a liquidity by reliance on the overdraft facility to slightly more than half a million.

26.  As mentioned, the post-dated cheques to HI were due on various dates between early December 2008 and early January 2009.  That would have exceeded the available liquidity by drawing down the remaining overdraft facility.  Further the cheques to HI were not the only liabilities that MS had to meet.

27.  The fact was that MS had also ordered electronic goods from at least another supplier probably also by the end of 2008.  MS purported to pay for the goods by 7 post-dated cheques that were due on various dates between late November 2008 and early January. Again, all the cheques were bounced for insufficient fund.

28.  As a result, that company has commenced action against Ng and MS (High Court Action No. 122 of 2011).  The plaintiff there was represented by the same solicitors now acting for HI.  The pleaded case against Ng and MS in that action was essentially identical to that of HI here.  Judgment in default was given against both Ng and MS on 23 March 2011.  That judgment remains unsatisfied.

29.  Noteworthy is that in that other action, the amount involved was over US$633,000 or about HK$5 million.  In other words, during the relevant period, Ng has drawn cheques on the account of MS for a total sum of nearly HK$5.7 million to be due mostly in the last 2 months of 2008.  Judging from the bank balance as at November 2008, there was simply no way that reliance on the overdraft facility could meet the liability.

30.  The financial situation of MS since December 2008 could not be ascertained by reference to documents because Ng declared that somehow he did not possess or have control over these other documents of MS.  This goes contrary to his pleaded case that his company was departmentalised and had a “good system”.  In my view, this was simply selective discovery.

31.  Further, in respect of Ng’s admission that the office premises of MS had been forfeited by the landlord for non-payment of rent by the end of 2008, the solicitors for HI have served interrogatories for answer as to the monthly rent, the amount of rent in arrears and the period of default in payment.  His answer suggested that the monthly rent was HK$25,000; but provided no information about the other parts of the interrogatories.

32.  Nevertheless, in the normal course of events, forfeiture of tenancy by the landlord could only be the result of a few months of default in payment of rent.  The timing of default coincided with that of the drawing of the post-dated cheques.  The inability of MS to pay even the monthly rent of HK$25,000 reinforces the inference that there was no real prospect of honouring the cheques when they fell due.

33.  Being the sole shareholder and director, and hence the alter ego, of his company, it just sounds unconvincing that he was not aware of his company’s dire financial situation when he drew those cheques.

Piercing the corporate veil

34.  Mr Chung provided the written reasons for the decision of the court on 15 November 2010 in dismissing Ng’s application to strike out the claim.  There the Temporary Registrar referred to numerous authorities on the principles on lifting the corporate veil.  During the hearing, I referred Mr Chung to Lee Sow Keng Janet v Kelly McKenzie Limited & Ors, DCCJ 2303/2002 (29 July 2003) (which was upheld on appeal); and Lee Thai Lai v Wong Chung Kai & Anor, HCLA 64/2003 (8 December 2003) for they, in my view, gave a good summary of the principles.

35.  In Lee Thai Lai, the court had this to say (at para.6):

“…… The general rule of company law is that a company is a separate legal entity from its controlling shareholders and directors: Salomon v Salomon & Co [1897] AC 22, even in a one-man company situation. The company is neither an agent nor a trustee of its shareholders in respect of the company’s assets, business and affairs. The corporate veil may only be lifted in very limited circumstances. The relevant legal principles have been discussed in Gower and Davies Principles of Modern Company Law (7^th ed) 184 et seq; Gore-Browne on Companies (44^th ed) paras 1.3.1 and 1.3.2. Without seeking to be exhaustive, the normal circumstances for lifting the corporate veil are the prevention of the corporate form from being used for the purposes of fraud, or as a device to evade a contractual or other legal obligation. On the other hand, using a corporate structure to avoid the incurring of any legal obligation in the first place is not objectionable; the court’s power to lift the corporate veil does not exist for the purpose of reversing such avoidance so as to create the legal obligations: China Ocean Shipping Co v Mitrans Shipping Co Ltd [1995] 3 HKC 123. The court cannot lift the veil merely because it considers that justice so requires: China Ocean Shipping Co at page 128B/C to F/G (per Nazareth VP).”

36.  In the present case, there is allegation of fraud.  Call that fraud or not, what was discussed above leads to one conclusion, namely, that when drawing the post-dated cheques purporting to pay for the goods, there was no way that Ng could claim to be unaware of his company’s dire financial situation and hence inability to honour the cheques when they fell due in the following 2 months.  Any suggestion that Ng believed or intended at the time when he drew those cheques that they would be honoured on due dates cannot be genuine objectively.

37.  In default of payment, the consideration for the goods sold and delivered should have totally failed. There was no mention in Ng’s pleading of any intention to return the goods or even the whereabout of the goods.  HI’s contention that this is a case of obtaining property by deception is somehow understandable.

38.  In my judgment, this is more than merely requirement of justice; but a case of the alter ego of a company drawing the company’s cheques for payment for goods received without genuine intention or belief that they would be honoured.  I am satisfied that Ng should not be allowed to evade liability by hiding behind MS’s corporate veil.

Order

39.  I give judgment in the sum of HK$687,199 against Ng with interest at the judgment rate from the date of writ until payment.  Ng shall pay the costs of this action, which shall be taxed, if not agreed.