XCHRX TOSHIBA HONG KONG LTD. v. FORMATIVE WAY CO. LTD. and Others

1997, No.A4472

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

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J U D G M E N T

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1. This is an appeal against the order of Master Jones on 13 October 1997 which was in the following terms :

"1. Final judgment be entered :

(a) against the 1^st Defendant for the sum of HK$56,119,455.67;

(b) against the 2^nd Defendant for the sum of HK$20,000,000.00; and

(c) against the 3^rd Defendant for the sum of HK$11,000,000.00 together with interests and costs (including costs of and occasioned by this application) as claimed in the Statement of Claim.

2. Interlocutory judgment in this action be entered against the 2^nd Defendant for damages for breach of Clause 11(1)(d) of the 1^st Guarantee to be assessed, together with interest and costs (including costs of and occasioned by this application), as claimed in the Statement of Claim filed herein.

3. Costs on full indemnity basis to the Plaintiff."

2. The Defendants apply for the order of Master Jones to be rescinded, and for unconditional leave to be granted to the 1^st, 2^nd and 3^rd Defendants to defend this action.

3. The Plaintiff's claims against the Defendants are based squarely upon three written agreements which were executed by the parties ("The Agreements"), namely :

(1) The Repayment Agreement concluded between the Plaintiff and the 1^st Defendant on 20 May 1996 in terms of which the 1^st Defendant, inter alia, undertook to repay a trading debt of $71,049,760.00;

(2) Supplemental to the Repayment Agreement, a Continuing Guarantee and Indemnity concluded between the Plaintiff and the 2nd Defendant on the same day, in terms of which the 2^nd Defendant, inter alia, guaranteed the repayment by the 1^st Defendant of its aforesaid indebtedness to the Plaintiff up to a maximum of $20 million;

(3) Also supplemental to the Repayment Agreement, a further Continuing Guarantee and Indemnity concluded between the Plaintiff and the 3^rd Defendant on the same day, in terms of which the 3^rd Defendant, inter alia, guaranteed the repayment by the 1^st Defendant of its aforesaid indebtedness to the Plaintiff up to a maximum of $11 million.

4. The documents are apparently entirely regular on the face of them, and all duly signed and sealed by the parties thereto.

The Defendant's case

5. The 3^rd Defendant together with his wife are the sole directors of the 1^st and 2^nd Defendants. In his affirmations sworn for the purpose of the proceedings before the Master, the 3^rd Defendant deposed that in reality there was no "trade debt" owed by the 1st Defendant to the Plaintiff, and that the Agreements were not in fact what they appeared to be. He provided a detailed description of his own personal background and also the history of the business dealings between the Plaintiff and the 1^st Defendant. He described how initially the 1^st Defendant did indeed buy goods from the Plaintiff, which it subsequently resold in China. Around the end of 1994 however the nature of their dealings changed, in that thereafter the Plaintiff placed goods with the 1^st Defendant on a consignment for sale basis, the agreement being that if the 1^st Defendant succeeded in selling the goods it would then be liable to pay the Plaintiff, and if on the contrary it was unable to sell the goods they would be returned to the Plaintiff. Pursuant to this arrangement, the Invoices which were prepared by the Plaintiff were intended simply to serve as records of the goods which the Plaintiff had delivered into the 1^st Defendant's warehouses on consignment. In other words, the Plaintiff was using the 1^st Defendant "as a distributor simpliciter". The Plaintiff's employees Messrs Lam & Pun had frequently visited the 1^st Defendant's warehouses in China to see how the Plaintiff's goods were distributed by the 1^st Defendant.

6. In mid-August 1995, at the request of Messrs Lam & Pun, the 3^rd Defendant and his wife agreed that the Plaintiff could place on consignment with the 1^st Defendant certain outdated models of electronic goods for sale in China; it was further agreed that the goods would be disassembled before they were shipped to China, in order to avoid customs duties being levied upon them. Pursuant to this agreement the Plaintiff did proceed to deliver such goods to the 1^st Defendant's warehouses to a value of over $56 million, and in line with the previous practice the Invoices which it prepared were intended solely to be a record of the goods which had been thus delivered. The Plaintiff actively assisted the 1^st Defendant in implementing this agreement by sending two technicians to the 1^st Defendant's warehouses to assist in disassembling the goods ( the name cards of the technicians were annexed to the 3^rd Defendant's affirmation.

7. Towards the end of 1995 and early 1996, all these goods were seized by the customs authorities of the PRC, which necessarily meant that they could not be sold. Mr Lam contacted the 3^rd Defendant and told him that the Plaintiff was pressing him (Lam) very hard to obtain payment for the aforesaid goods, and he asked if the 1^st Defendant could provide some repayment in the meantime while the problems were being sorted out with the customs authorities. The 3^rd Defendant deposed that because he "felt a moral responsibility towards the Plaintiff's loss", he agreed to do whatever he could to help.

8. On 19 April 1996 he had a meeting with Mr Lam in the offices of the Plaintiff's solicitors in Central, and Lam asked him to sign certain repayment documents and guarantees to help him (Lam) pacify the Plaintiff; moreover he told the 3^rd Defendant that the latter could easily recover the impounded goods by activating his connections in the PRC, so that in the end nobody would suffer any loss. "In reliance on his representation, and eager to maintain a good relationship with the Plaintiff, I just signed the documents on behalf of the 1^st and 2^nd Defendants and myself... moreover, at the time, I was encouraged by prospective buyers at Whampao and Shekou, PRC who expressed interest in buying the products... these sales were eventually called off because I failed to procure the release of the goods from the customs officers...".

9. He acknowledges that he was completely misguided in signing the Agreements and in making several repayments to the Plaintiff in pursuance of the Repayment Agreement, since in the first place the 1^st Defendant should not be held liable for the price of the goods under the "consignment sale" arrangement with the Plaintiff; "secondly I should have sought legal advice rather than just relied on the representation of Mr Lam in signing the document. This is not to mention the fact that I did not know English and my education was at the primary level".

10. Mr Warren Chan submitted that the matters deposed to buy the 3^rd Defendant, supported as they are by certain documents, do raise an arguable and bona fide defence on the part of all of the Defendants.

11. In addition, as a matter of law, the Repayment Agreement and the Guarantee by the 2^nd Defendant are not binding upon the 1^st and 2^nd Defendants because they have not been validly executed, and the Plaintiff should have been put on inquiry as to whether or not they were properly executed.

12. For all of the above reasons the matter ought to go to trial, and the Plaintiff's application for summary judgment should be dismissed.

13. Mr Chan referred me to various authorities explicating the test to be applied in considering applications for summary judgment. The principles are well-known : the procedure is designed to enable a plaintiff to obtain a quick judgment where there is plainly no defence to the claim. "When the judge is satisfied not only that there is no defence but no fairly arguable point to be argued on behalf of the defendant, it is his duty to give judgment for the plaintiff" (per Jessel N. R., Anglo-Italian Bank the Wells (1978) 38 L.T.197 p.201, C.A.). As Godfrey JA stated in Ng Shou Chun v. Hung Chung San [1994] 1 HKC 155 at 158G-H :

"The issue is not whether the defendant's assertions are to be believed; it is whether those assertions are believable."

The Plaintiff's case : the Agreements

14. Mr Godfrey Chiu who affirmed several affirmations on behalf of the Plaintiff, categorically denied all the suggestions of the 3^rd Defendant and his wife, which he submitted were a "total fabrication", and that this could be clearly seen by reference to the contemporaneous documents upon which the Plaintiff's claim is based.

15. Mr Ma referred to the Agreements in detail. The Repayment Agreement which was concluded between the Plaintiff and the 1^st Defendant on 20 May 1996 was drafted by the Plaintiff's solicitors and is indeed a weighty document, running to 14 pages in all. It is essentially, as Mr Ma submitted, a re-scheduling of a pre-existing indebtedness owed by the 1^st Defendant to the Plaintiff. It contains an express acknowledgement of such pre-existing indebtedness :

"WHEREAS :

(1) The creditor intends to bring an action against the Debtor to recover a trading debt of HONG KONG DOLLARS SEVENTY ONE MILLION FORTY NINE THOUSAND SEVEN HUNDRED AND SIXTY (HK$71,490,760) in respect of which the Debtor hereby agrees to admit and confirm that it does not have any defence or counterclaim whatsoever.

(2) The parties hereto are desirous of concluding a repayment agreement for the full and final pre-action settlement of such intended action on the terms but subject to the conditions in this Agreement."

There follow nearly two pages defining the terms used in the Agreement, which then goes on to recite that in consideration of the Debtor agreeing to repay all such indebtedness to the Plaintiff, and to procure the 2nd and 3rd Defendants to guarantee the repayment of the debt, and admitting and confirming that it does not have any defence or counterclaim whatsoever in respect of the debt, the Plaintiff agrees not to bring an action against the Debtor or to recover the debt, subject to the conditions set out in the Agreement. Clause 3 contains a covenant by the Debtor to repay the debt as follows :

"(a) On or before 25 April 1996, the provision of a guarantee by Hua Chiao Commercial Bank Limited in favour of the Plaintiff up to the limit of $3 million;

(b) On or before 31 May 1996, the payment by the debtor to the creditor of $8 million;

(c) Commencing from June 1996 onwards the payment by the debtor to the creditor of $3 million a month until the debt, including all interest thereon, has been fully paid off."

16. Clause 6 sets out detailed provisions in relation to further securities which the debtor shall execute if and when the creditor shall reasonably require such; Clause 9 contains detailed warranties given by the Debtor, including a warranty that "it has full power to execute and deliver this agreement, and to perform all of its obligations, covenants and undertakings hereunder..."; that "all necessary corporate, shareholder and other actions have been taken to approve and authorise the execution, delivery and performance of this Agreement"; that the Agreement constitutes a legal, valid and binding obligation; and that the agreement shall at all times be enforceable in accordance with its terms.

17. In Clause 11 no fewer than 17 different "Events of Default" are defined, upon the occurrence of any one of which it is provided that the Plaintiff may serve a notice upon the 1^st Defendant stating that its commitment to the 1st Defendant under the agreement shall determine, and that "the Debt, all interest thereon and other indebtedness payable hereunder shall become due and payable... the creditor's opinion as to whether or not an Event of Default has occurred shall be final and conclusive and binding upon the Debtor".

18. Clause 12 sub-titled "Entire Agreement" provides inter alia :

"(1) This Agreement constitutes the entire agreement between the parties hereto in relation to the subject matter hereof.

(2) It is hereby acknowledged that there are no understandings, representations, arrangements, undertakings and agreements whatsoever, oral or written, between the parties hereto in relation to the subject matter hereof which are not fully expressed in this Agreement."

19. Yet further detailed terms are provided, which it is not necessary to expound for present purposes. The Agreement is duly signed and sealed on behalf of both parties.

20. There is no dispute that payments were subsequently made by the 1^st Defendant pursuant to the Repayment Agreement amounting to $14,930,304.33. Thereafter, in breach of the Agreement, no further payments were made.

21. A notice dated 26 April 1997 was then sent in terms of Clause 11(2) of the Agreement to the 1^st Defendant demanding payment of the outstanding indebtedness of $56,119,455.67. The 1^st Defendant is accordingly, in terms of the Agreement, liable to the Plaintiff in this sum.

22. Also in pursuance of the Repayment Agreement and on the same day the 2^nd Defendant executed a "Continuing Guarantee And Indemnity" in favour of the Creditor in respect of and for securing the obligations and undertakings of the 1^st Defendant under the Repayment Agreement.

23. Also on the same day, the 3^rd Defendant executed a similar "Continuing Guarantee And Indemnity" in favour of the Plaintiff which is similarly expressed to be for the purpose of securing the obligations and undertakings of the 1^st Defendant under the Repayment Agreement, and in terms of it the 3^rd Defendant "hereby irrevocably and unconditionally guarantees and indemnifies that the Guarantor will pay to the Creditor on demand (without requiring the Creditor first to take steps against the Debtor or any other person)... all monies obligations and liabilities, whether present or future, actual or contingent, which are payable by the Debtor to the Creditor under the Repayment Agreement...", the 3^rd Defendant's liability under the Agreement not to exceed $11 million.

24. The two guarantees are drafted in very similar terms, with very detailed provisions spelling out the precise rights and obligations of the parties thereto. They were both duly signed and sealed by both parties in the presence of a solicitor.

25. As indicated above, payment was due under both these Guarantees upon demand : the Plaintiff duly demanded payment from both the 2^nd and 3^rd Defendants on 26 April 1997, which the Defendants have failed to provide. Both the 2^nd and 3^rd Defendants are therefore liable in terms of their respective Guarantees.

26. The Plaintiff also has a separate claim against the 2^nd Defendant for breaching Clause 11(1)(d) of the Guarantee, since the 2^nd Defendant has agreed to sell the properties which it had covenanted not to sell.

27. It will be recalled that the defence which the Defendants say they are entitled to have duly tried is that the aforesaid Agreements are in effect a sham, since there was in fact no pre-existing indebtedness owed by 1^st Defendant to the Plaintiff; the Agreements were framed as they were solely to assist Messrs Lam & Pun to pacify their bosses, and the Defendants entered into the Agreements only upon the assurances of Lam & Pun that the Plaintiff would never attempt to enforce them, and hence the 3^rd Defendant and his wife had no need to seek legal advice.

28. Mr Warren Chan was realistic enough to acknowledge the difficulties in the Defendants' case, acknowledging that their version is inconsistent with the contemporaneous documents and the ensuing conduct of the Defendants. He submitted however that albeit that the 3^rd Defendant "may have a difficult time in the witness box", it does not follow that his version of events is unbelievable.

29. He attacked the affidavit evidence presented by Mr Godfrey Chiu on behalf of the Plaintiff, relying upon the decision in In re J.L. Young Manufacturing Company Limited [1900] 2 Ch.753, to the effect that : "an affidavit of information and belief, not stating the source of the information or belief, is irregular, and therefore inadmissible as evidence, whether on an interlocutory or a final application...". Mr Chiu, he submitted, simply denied the 3^rd Defendant's version of the events without indicating that he had ever checked the facts with the personnel allegedly involved in them, such as the technicians whom the 3rd Defendant alleged that the Plaintiff sent to help disassemble the goods which the Plaintiff had delivered upon consignment.

30. Mr Chan submitted that the Plaintiff's own conduct as evidenced in some of the documents is not consistent with its own version of events and raises a serious question as to the possibility of the 3rd Defendant's version being true. The "Outstanding Invoice Enquiries" showed that payment was due on the same date that the invoices were prepared. Yet the document headed "Outstanding Invoice List as of 1997-09-19", which was prepared by the Plaintiff for the purposes of these proceedings, indicated that at least from August 1995 to January 1996 the Plaintiff continued to deliver large quantities of goods to the 1^st Defendant allegedly on the same straightforward purchase and sale basis with no suggestion that credit terms had been agreed, even though the 1^st Defendant had not paid any of the sums outstanding in terms of the preceding invoices delivered by the Defendant during that period. Thus, the cumulative total outstanding as at the 22 January 1996 was $56,119,455.67, the 1^st Defendant having paid not a penny on account since August 1995. Nor was there any suggestion that the Plaintiff sought to charge interest upon the aforesaid outstanding sums. This pattern of conduct, he submitted, supports the Defendants' version that the 1^st Defendant was only obliged to pay after it had succeeded in selling the goods.

31. There is also in evidence a Stock List which was sent by the 1^st Defendant to the Plaintiff showing the stock held by the 1st Defendant in various cities throughout China to a value of over $50 million; furthermore, other documents show that on 21 March 1996 the 1^st Defendant returned certain unsold goods to the Plaintiff, for which the Plaintiff issued credit notes to it. All these documents, it was submitted, are consistent with the Defendants' version of the events aforesaid.

Conclusion

32. In my view, Mr Godfrey Chiu's affidavits are quite admissible as evidence in these proceedings. He states that he is the General Manager and a Director of the Plaintiff, and duly authorised to make the affirmations on its behalf, and that "unless otherwise stated, all the facts deposed herein are within my personal knowledge and are true and correct to the best of my knowledge, information and belief". He describes the suggestions of the 3^rd Defendant as a "total fabrication", which he claims becomes crystal clear when the contemporaneous documents are looked at.

33. I agree entirely with Mr Ma's submissions that the contemporaneous documents effectively give the lie to the allegations of the 3^rd Defendant and his wife. The Repayment Agreement and the Guarantees pursuant thereto were each detailed and weighty contracts, very carefully drafted by the Plaintiff's solicitors. It emerges clearly from the terms of these Agreements than that they were seriously and solemnly entered into, and intended by all of the parties to be binding. Their raison de'tre was the $71 million trade debt which the 1^st Defendant owed the Plaintiff as at 20 May 1996. They were executed in order to implement an agreement whereunder the Plaintiff, in consideration of its not suing the 1^st Defendant for payment of the said sum, agreed to re-schedule the 1^st Defendant's indebtedness upon the terms set out therein.

34. The existence of the trade debt is substantiated by the contemporaneous Invoices which were prepared by the Plaintiff, under the cover of which the goods in question were delivered to the 1st Defendant.

35. The conduct of the parties both before and after the conclusion of the Agreements, was completely consistent with the terms of those Agreements :

(1) At a meeting held in February 1996 between the 3^rd Defendant and representatives of the Plaintiff, the 1^st Defendant expressly acknowledged its liability for the aforesaid debt to the Plaintiff, and methods of payment were also agreed.

(2) At a subsequent meeting held on 19 April 1996 between the Plaintiff and the Defendants further methods of payment by the 1^st Defendant were discussed and agreed, which were eventually reflected in the Agreements which were eventually concluded. The 3^rd Defendant signed the minutes of both these meetings, and I note that Godfrey Chiu, who as the Plaintiff's Managing Director was apparently intimately involved in the events in question, was a signatory to the minutes of the latter meeting.

(3) In a letter dated 28 February 1996 from the 1^st Defendant to the Plaintiff, the 1^st Defendant referred to discussions "about our business and to the repayment by our company and the opening of letter of credit with the bank".

(4) A letter of demand was sent to the 1^st Defendant by the Plaintiff's solicitors on 2-4-96 enclosing full details of the relevant invoices which reflected the indebtedness of over $71 million, and stating that if payment was not made or an agreement as to repayment arrangements concluded within seven days, "we have firm instructions to take further steps against you without further notice".

(5) This was followed by a further letter on 18 April 1996 enclosing a draft Writ, and stating that in the absence of a satisfactory settlement concluded at the meeting scheduled for the following day, "the Writ will be issued without further notice".

(6) There was no response by the 1^st Defendant to either of these letters. On the contrary, meetings were held between the parties to discuss ways by which the 1^st Defendant might pay off its debt, as indicated above.

(7) The Plaintiff's solicitors subsequently, by letter dated 29 April 1996 to the 1^st Defendant referred to the meeting held on 19 April and sent it a draft of each of the three Agreements for its approval, and invited the 1^st Defendant to "remit the same to your solicitors for their independent legal advice".

(8) Far from suggesting that it was not indebted to the Plaintiff, or raising any defence thereto, the 1^st Defendant in fact suggested various amendments to the drafts.

(9) Thereafter the 1^st Defendant procured a guarantee dated 24 April 1996 by the Hua Chiao Commercial Bank to the Plaintiff in the sum of $3 million.

(10) It is common ground that after the Repayment Agreement had been concluded, the 1^st Defendant made various payments pursuant to such Agreement amounting to $14,930,304.33, after which no further payments were made (leaving a balance owing of $56,119,455.67). Thereafter letters of demand were sent to all three Defendants, and there was no suggestion from any of them that they were not indebted to the Plaintiff as claimed.

36. The 1^st and 2^nd Defendants have raised a further defence that since the 3^rd Defendant did not have the authority of the respective Boards of Directors of those companies, the Repayment Agreement and the Guarantee entered into by the 2^nd Defendant are not enforceable for lack of proper execution. This defence shows every indication of having been an afterthought, raised as it was for the first time in the 3^rd affirmation of the 3^rd Defendant dated 9 October 1997, a few days before the hearing before the Master. It is nevertheless entitled to be judged on its merits.

37. It has never been asserted that the Plaintiff was or should have been aware of the 3^rd Defendant's lack of authority. On the contrary, the 1st Defendant expressly warranted in Clause 9 of the Repayment Agreement that it had full power to execute and deliver the document and that all necessary corporate actions to approve and authorise the Agreement had been taken. I note also that the 3^rd Defendant is the major shareholder in the 1^st Defendant, the balance of the shares being held by his wife. There can be no doubt that he had the necessary authority to enter into contracts on behalf of the 1st Defendant. He also signed the minutes of the meeting between the Plaintiff and the 1^st Defendant in February 1996.

38. In any event the law is clear that a bona fide third party such as the Plaintiff is entitled to assume that persons purporting to sign on behalf of a company and to use the company seal have the necessary authority to do so (the "Turquand Rule").

39. Duck v. Tower Galvanizing Co. Ltd. [1901] 2 KB 314

Gore-Browne on Companies, at para.5.2.

40. The Plaintiff has clearly proved its claim. It is plain on the facts that the assertions of the Defendants are not worthy of any credit. They have failed to set up a bona fide defence or to raise any fairly arguable point which ought to be tried. The Plaintiff is entitled to summary judgment, and I can find no fault with the order which was made by the Master.

41. The Defendants' appeal is dismissed, and I make an order nisi that the Defendants are to pay the Plaintiff's costs of the appeal.