STAR GLORY INVESTMENT LTD v. KAI TUO (HK) TECHNOLOGY CO LTD AND OTHERS

HCA 3523/2002

 IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 3523 OF 2002

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REASONS   FOR   JUDGMENT

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Introduction

1.  The plaintiff commenced this action in September 2002 and claims against the 3 defendants the sum of HK$45 million odd by way of debts due and payable.  The basis of the claim is relatively simple and straight-forward:-

(a)	the 1st defendant (“D1”) was the debtor who has entered into 5 written loan agreements in Chinese respectively dated 15 November and 3 December 1996 and 1 April (two loan agreements) and 28 April 1997 (respectively “the 1st loan agreement” to “the 5th loan agreement” and collectively “the loan agreements”);
(b)	the 2nd defendant (“D2”) was the guarantor who has entered into 4 irrevocable guarantees in Chinese respectively dated 3 December and 15 November 1996 and 1 April 1997 (two guarantees) (collectively “D2’s guarantees”);
(c)	the 3rd defendant (“D3”) was the guarantor who has signed an irrevocable guarantee in Chinese dated 28 April 1997 (“D3’s guarantee”).

D2’s guarantees and D3’s guarantee are collectively called “the said guarantees” below.  The plaintiff sues as the assignee of the benefits of the loan agreements and the said guarantees.  The assignor was in effect the plaintiff’s predecessor, a company called “Pointsder Finance Ltd.” (“Pointsder”).

2.  The defence raised in the Amended Defence and Counterclaim dated 30 December 2003 is essentially as follows:-

(1)	the loan agreements and the said guarantees were in fact not loans or guarantees but documents entered into to enable funds to be paid to D1 in relation to a joint-venture business between D1 (taking over from D2) and the “中國農業銀行—佛山分行” (“the Bank”) trading in D1’s name.  The funds paid by the Bank were by way of capital investment for the use of the said joint-venture;
(2)	in essence, Pointsder and the plaintiff acted as the Bank’s paying agent;
(3)	the alleged loans were never received by the defendants;
(4)	because there was in fact no loan, there was no benefit capable of being assigned to the plaintiff.  Further, it is not admitted notice of assignment has been given to D1;
(5)	the joint-venture business has failed resulting in a loss of about HK$20 million as at the end of 2000.  The said business has ceased since then.  D1 counterclaims the plaintiff should bear half of that loss (of about HK$10 million).

The defendants indicated at trial the defence set out at sub-para. (3) above is no longer pursued.

3.  At the end of the trial, I entered judgment in the plaintiff’s favour and dismissed the counterclaim, indicating reasons for so deciding would be handed down later.  They are as follows.

Credibility of Witnesses

4.  The following witnesses testified at trial:-

(a)	Xu Ying Hao (許英豪) (“Xu”), a staff of the Bank and a director of Pointsder;
(b)	Tai Hing Chung (戴慶忠) (“Tai”), a staff of the Bank;
(c)	D2;
(d)	D3.

5.  In short, I find the plaintiff’s witnesses, Xu and Tai, to be credible and reliable witnesses.  On the other hand, I find the testimony of D2 and D3 to be untruthful.

6.  The following documents in the trial bundles are of particular importance to the assessment of the credibility and reliability of the testimony.

7.  The documents relied upon by the plaintiff include:-

(a)	documents evidencing the loan agreements;
(b)	documents evidencing the said guarantees;
(c)	a letter dated 1 February 2001 sent by D1 to the Bank.  It was signed by D3 (“the Feb 2001 letter”);
(d)	a letter dated 29 March 2001 sent by D1 to the Bank.  It was also signed by D3 (“the Mar 2001 letter”).

(The Feb 2001 letter and the Mar 2001 letter are collectively “the said letters”).

8.  The documents evidencing the loan agreements were clearly expressed as such and the relevant terms have been set out in the plaintiff’s pleadings.  The same can be said of the documents evidencing the said guarantees.  Hence, at least on their face, these documents support the testimony of the plaintiff’s witnesses and contradict that of the defence witnesses.

9.  The material parts of the Feb 2001 letter are:-

“… 佛山銀行同意資金方面通過其香港辦事處負責安排 …

… 整個 ATM 項目在佛山銀行的資金支特下得以順利展開 …

… 但公司內部管理層卻開始出現問題 … 中方股東原總經理 … 的離開並將客戶帶走，同時還破壞公司聲譽 … 使銀總行 … 下令 … 暫停購 … ATM 產品 … 加上亞洲金融衰退 … 所以自該時起公司財政狀況出現很大問題 …

… 現香港開拓科技工程公司仍然保留 … 希望能看準機會東山再起，以便盡快退回原佛山銀行經香港所提供的資金 … ”.

10.  The material parts of the Mar 2001 letter are:-

“… 就有關退回原佛山銀行經香港所提供的資金，在現時的困境下，要馬上解決是不能做到的。 …

希望貴行能諒解 … 特別是在時間上給予延長 … ”.

11.  When cross-examined, D2 has testified to the effect that the loan agreements and the said guarantees were documents entered into purely for the sake of the record.  D3 in effect accepts D2’s testimony to be true and correct.  This part of the defence testimony, if accepted to be credible, would provide an explanation why the loan agreements and the said guarantee would be executed for the purpose of the Bank’s capital investment in D1.

12.  The assessment of a witness’s credibility and/or reliability is a task frequently undertaken by the court in litigation (in fact, very often an essential task).  I consider the following to be the appropriate test to adopt:-

“There are two objective tests for assessing a witness’s credibility regarding a matter to which he has testified:-
(a)	whether that part of his testimony is inherently plausible or implausible;
(b)	whether that part of his testimony is, in a material way, contradicted by other evidence which is undisputed or indisputable (an example often given of such evidence is contemporaneous documents).
Further, where it is shown that a witness has been discredited over one or more matters to which he has testified (using the above tests), this fact is relevant to the assessment of his overall credibility.  Likewise, regard may be had to a witness’s motive for deliberately not giving truthful testimony.  For example, telling the truth may prejudice his interest, or a just determination of the litigation may affect his interest”.

(See, for example, the decisions in Chiu Chi Tong v. Lau Chong Sai & Another, HCA 765/2002 (para. 28) and Yu Ming Investment Ltd. v. Pang Ru Chuan, Richard HCA 814/2002 (para. 13)).

13.  D2 must have been an experienced and sophisticated businessman when the loan agreements and the said guarantees were entered into.  He must have been aware of the legal consequence of entering into the loan agreements and the said guarantees.  Likewise, D3 should possess a sufficient degree of commercial experience and sophistication to comprehend the importance of those documents.

14.  Because of the matters set out below, it is inherently implausible that the loan agreements or the said guarantees were executed “purely for the sake of the record”.

15.  The amounts paid to D1 were relatively large sums of money.  The plaintiff’s (and Pointsder’s) business has been money-lending.  Pointsder and the plaintiff were in effect subsidiaries of the Bank (itself very probably a state enterprise in the mainland).  In any event, the individuals which allegedly represented to the defendants the loans would not be enforced were, according to the defence, merely employees.  In other words, they should not have absolute authority as regards the disposal of the assets of Pointsder or the plaintiff.

16.  In relation to the said letters, D2’s explanation in testimony was that they were also written for the sake of the record, and to help the individuals in the plaintiff (and/or Pointsder) who allegedly represented the loans would not be enforced to “get over a temporary difficult situation”.  This was also accepted by D3.  The defence has been vague what that “temporary difficult situation” actually referred to. 

17.  Further, that the individuals in Pointsder and the plaintiff did not have a final say is confirmed by the need for the said letters to be written.

18.  For the reasons set out above, I disbelieve the testimony of the defence witnesses for being inherently implausible.

19.  On the other hand, the defence relies on some documents to show that the Bank has in fact agreed to a joint-venture with D1.

20.  One of these was a document dated 2 December 1987 signed by “佛山市農行信息科代表” and a Modern Electronic Component Company, a firm owned by D2.  It purports to record a friendly cooperation between “信息科” and Modern Electronic Component Company.  I agree with the plaintiff this does not show a joint-venture between the Bank and D1.  Further, para. 2 thereof states that the funds required for the cooperation were to be separately obtained by the parties (“… 所需費用各自籌措解決 … ”).  This contradicts the defence that capital investment of the joint-venture should be provided by the Bank.

21.  Another document was dated 16 February 1990 signed by the Bank.  The title of the document is “技術合作情況介紹”.  This document is ambiguous as regards whether there was a joint-venture between the Bank and D1.  When considered together with the loan agreements and the said guarantees as well as the said letters, I do not consider it to be able to support the defence or to cast doubt on the credibility of the plaintiff witnesses.

22.  To avoid doubt, I have already considered the parties’ submissions, in particular their final submissions, when assessing credibility and reliability.  I do not propose to set out those submissions in full.

23.  As stated above, it is part of the defence case the loan agreements and the said guarantees were executed “for the sake of the record”.  Even if this part of the testimony of D2 and D3 were believable, this shows that neither the Bank, Pointsder nor the plaintiff has held out the individuals alleged making representations to D2 were in fact authorised to do so.  Para. 15 and 17 above are repeated.

24.  The fact that false documents have to be executed to cover the true nature of the transaction must mean that the truth has to be concealed from the Bank, Pointsder and the plaintiff.  This must have been apparent to the defendants.  The frolic of an employee cannot be relied upon by a party to the frolic to bind the employee’s principal.

25.  Finally, despite the defence allegation that there was a joint-venture from at least about December 1987 to about the end of 2000 ( a period of about 13 years), there is no evidence of any distribution of profit by D1 to the Bank.

26.  The defence mentioned two payments of HK$8 million and US$3 million respectively.  D3 confirmed in his testimony these payments had nothing to do with the joint-venture or the loan agreements.  There is no evidence regarding the identity of the recipient(s).  If any findings need to be made in relation to these payments, they tend to indicate transactions have been carried on behind the back of the Bank, Pointsder and the plaintiff.

Findings of Fact

27.  Consequently, I find as facts the following:-

(a)	the loan agreements and the said guarantees are valid legal documents binding on the defendants;
(b)	there is no admissible evidence (such testimony having been rejected) that there was a joint-venture between the Bank and D1.  Any such suggestion is rejected;
(c)	there is no admissible evidence (such testimony having been rejected) that the funds paid to (or as directed by) D1 were capital investment and were not loans.  Suggestion to this effect is rejected;
(d)	there is no admissible evidence (such testimony having been rejected) that Pointsder or the plaintiff were the paying agents for the Bank for the purpose of the joint-venture between the Bank and D1.  Any such suggestion is also rejected;
(e)	the loan agreements and the said guarantees were validly assigned to the plaintiff;
(f)	loans (totalling the amount claimed in this action) were advanced to (or as directed by) D1.

28.  I also note that the provisions of the Money Lenders Ordinance (Cap. 163) and Companies Ordinance (Cap. 32) have been mentioned from time to time during the trial but no illegality has been pleaded or alleged by the defence.

The Plaintiff’s Claim

29.  For the above reasons, judgment should be entered against the defendants in the plaintiff’s favour.

The Counterclaim

30.  For the above reasons, the counterclaim should be dismissed.

31.  The plaintiff also argues that, even if there was a joint-venture between the Bank and D1, the plaintiff (not being a party to the joint-venture) cannot be held liable for the loss of the joint-venture.  This argument involves a point of mixed law and fact, namely, whether a debt owed to an agent’s debt can be set-off against the debt owed by its principal.  The findings of fact I made above does not provide a basis for this argument to be properly considered.