FOSHAN FOREIGN ECONOMIC AND TRADE IMPORT AND EXPORT CORPORATION OF GUANGDONG AND ANOTHER v. SABINA ENTERPRISES LTD. AND ANOTHER

HCA 20342/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 20342 OF 1998

__________________

J U D G M E N T

__________________

1. The 1st plaintiff is and was at all material times a company incorporated in the Mainland and carrying on business in Guangdong and in Hong Kong. The 2nd plaintiff is and was at all material times a bank incorporated in the Mainland carrying on business as a licensed banker in the Mainland. The 1st defendant is a limited company incorporated in Hong Kong. The 2nd defendant is and was at all material times a director and shareholder of the 1st defendant.

2. The 1st plaintiff's claim against the 1st defendant is in respect of breach of six sub-sale contracts ("the sub-sale contracts") it entered into with the 1st defendant made on 21 April 1998 whereby the 1st defendant agreed to purchase from the 1st plaintiff primary nickel of minimium 99.8% purity in the form of six London Metal Exchange Warrants ("the LME warrants") at US$5,700.00 per metric ton.

3. I heard evidence from Shen Jia Guo, General Manager of the 1st plaintiff and Guo Hua Hui, the Deputy Manager of the International Business Department of the Foshan Branch of the 2nd plaintiff at all material times. I have no hesitation in accepting them as honest witnesses. I accept their evidence.

4. The background to the sub-sale contracts is the entering into of six sales contracts dated 16 April 1998 by Refco Investment Services Pte Ltd. ("Refco") with the 1st plaintiff whereby the 1st plaintiff agreed to purchase primary nickel of 99.8% purity in the form of the LME warrants at US$5,700.00 per metric ton. The value of each contract was US$991,800.00 making a total sum of US$5,950,800.00 for the six contracts. Payment was to be by way of irrevocable 90 days sight letter of credit issued by the Foshan Branch of the 2nd plaintiff.

5. On 21 April 1998 pursuant to the instructions of the 1st plaintiff, the 2nd plaintiff issued six irrevocable letters of credit in favour of Refco for payment of the six LME warrants. Each of these was for the payment of the contract sum of US$991,800.00 making a total sum of US$5,950,880.00.

6. On the evidence of Shen Jia Guo, which I accept, the application for the letters of credit were mistakenly made by an associated company of the 1st plaintiff namely, Guangdong Yungtongda (Foshan) Co. Limited and not the 1st plaintiff. Also, the 1st plaintiff's staff mistakenly applied for payment to be made under the letters of credit by drafts at sight instead of 90 days after sight under the contracts. Because of these mistakes the letters of credit were amended on 23 April 1998 to, inter alia, amend the applicant to the 1st plaintiff and to change the tenor of the drafts to be drawn under the letters of credit from sight to 90 days after sight.

7. Shen Jia Guo gave evidence that after purchasing the LME warrants from Refco he discovered that the original purchase price was in fact higher than the then market price. As he was concerned that he would be suspected of having been cheated and of acting in breach of his duty to the 1st plaintiff, he requested the 1st plaintiff's agent, Best Finance International Inc. ("Best Finance"), to resell the LME warrants at its original unit purchase price as soon as possible so as to minimize the loss to the 1st plaintiff. Shen's evidence was that Best Finance persuaded the 1st defendant to purchase from the 1st plaintiff the LME warrants at approximately the original unit price of US$5,700.00 per metric ton. However, the 1st plaintiff had to pay the 1st defendant interest and other charges not exceeding 3% of the purchase price. The sub-sale contracts all dated 21 April 1998 were then entered into between Best Finance on behalf of the 1st plaintiff and the 1st defendant. By the sub-sale contracts the 1st plaintiff agreed to sub-sell the benefits of the LME warrants to the 1st defendant at cost. By the sub-sale contracts the 1st defendant was to pay the 1st plaintiff 85% of the invoice sums upon confirmation of payment by the 2nd plaintiff to the negotiating bank of Refco under the letters of credit and upon release by the 1st plaintiff to the 1st defendant of the LME warrants. The 1st defendant was to deduct from the 85% of the invoice sums, interest and expenses amounting to 3% of the purchase price. Further, the 1st defendant was to hold a sum equal to 15% of the invoice sums as deposit and should repay the same to the 1st plaintiff on or about 10 days prior to the due date of payment under the letters of credit. The 1st defendant would also issue a post-dated cheque for an amount equal to the balance of 15% to be given as security for the repayment of the 15%.

8. On 22 April 1998 the 2nd defendant executed a guarantee in favour of the 1st plaintiff whereby she agreed to, inter alia, guarantee the full, prompt and complete observance and performance by the 1st defendant of the terms under the sub-sale contracts.

9. On or about 30 April 1998 the documents required under the letters of credit were presented to the 2nd plaintiff. The drafts presented under the letters of credit were dated 28 April 1998. The drafts were accepted by the 2nd plaintiff. As payment was to be 90 days after sight, payment was due by the 2nd plaintiff on or about 29 July 2001. The 1st plaintiff sent a letter of release to the negotiating bank of Refco requesting them to release the LME warrants to the 1st defendant which was duly complied with and the LME warrants were transferred to the 1st defendant. At the same time the 1st plaintiff instructed Best Finance to collect the 85% of the price under the sub-sale contracts less the 3% agreed to be deducted by the 1st defendant, namely the total sum of US$4,903,896.79 and also to collect a post-dated cheque from the 1st defendant for the 15% balance as security. The 1st plaintiff requested that the payee was to be the 2nd plaintiff as the cheque would be used to repay the 1st plaintiff's debt to the 2nd plaintiff.

10. Thereafter, Best Finance received two sums from the 1st defendant being US$4,300,000.00 and US$603,896.79 respectively, totalling US$4,903,896.79. This was for the payment of 85% (less 3%) of the purchase price. On 15 May 1998 Best Finance also received from the 1st defendant a cheque post-dated to 19 July 1998 payable to the 2nd plaintiff in the sum of HK$6,958,835.00 which was equivalent to US$865,393.55 being the 15% balance of payment due. The date of 19 July 1998 was 10 days before the maturity date of the said drafts payable on 29 July 1998. The 1st plaintiff received the post-dated cheque and handed it over to the 2nd plaintiff. The post-dated cheque was presented for payment on due date but the same was dishonoured for the reason that the account was closed. As the account was closed the drawee bank was under no obligation to pay the proceeds of the cheque. That being so, notice of dishonour was dispensed with under s. 50(2)(c)(iv) of the Bills of Exchange Ordinance, Cap. 19.

11. On 4 August 1999 the 1st defendant paid the 1st plaintiff the sum of HK$2,958,835.00 in partial payment of the balance of the purchase price leaving an outstanding balance of HK$4,000,000.00 owing by the 1st defendant to the 1st plaintiff under the sub-sale contracts.

12. On 6 August 1998 the 1st plaintiff asked the 2nd plaintiff to request a letter of undertaking from the 1st defendant. This was obtained by the 2nd plaintiff from the 1st defendant and was addressed to the 2nd plaintiff. It provided that the outstanding balance of HK$4,000,000.00. would be paid by the 1st defendant on 12 August 1998. The 1st defendant, however, failed to honour that undertaking.

13. On 30 October 1998 the 2nd defendant signed a letter of undertaking whereby she personally guaranteed to the 2nd plaintiff that the 1st defendant would pay the outstanding sum of HK$4,000,000.00 in full on or before 5 November 1998. No such payment was made on or before 5 November 1998 or at all.

14. I am satisfied that the above facts have been proved by the plaintiffs on the evidence of Shen Jia Guo and Guo Hua Hui which, as I have said, I accept.

15. The defence and counterclaim filed on behalf of the 1st and 2nd defendants pleads that the 2nd plaintiff and the 2nd defendant entered into an agreement whereby the 2nd defendant agreed to act as agent for and on behalf of the 2nd plaintiff to procure foreign currencies for the use of and to be paid to the 2nd plaintiff in Hong Kong in the sum of US$6,000,000.00 ("the procurement agreement"). It is also pleaded in effect that the sub-sale contracts between the 1st plaintiff and the 1st defendant were all sham agreements to disguise or cover up the true intent and purport of the procurement agreement. It is in effect alleged that under the procurement agreement the 2nd plaintiff was trying to get money out of the Mainland in breach of foreign exchange control regulations of the Mainland and of Singapore and Hong Kong under the Bretton Woods Agreement and that, therefore, the procurement agreement was illegal and void. It is also alleged that the guarantee of the 2nd defendant was tainted with illegality and void against the 2nd defendant. It is further alleged that the post-dated cheque was issued for appearance only and was not intended to be presented for payment. The defence and counterclaim also alleges that the payment of HK$2,958,835.00 was not in fact partial repayment to the 1st plaintiff but was a loan by the 2nd defendant, through the 1st defendant, to the 2nd plaintiff.

16. The 1st and 2nd defendants have not appeared at the trial. No evidence has been adduced on their behalf. The plaintiffs' witnesses have denied the various allegations of the defendants which are unsupported by any evidence. The evidence adduced by the plaintiffs and the documentary evidence in my judgment overwhelmingly supports the plaintiffs' case. I have no hesitation in rejecting the defence allegations which have been pleaded but which are wholly unsupported by evidence. I am satisfied that the plaintiffs have proved their case and that both plaintiffs are entitled to judgment against both defendants.

17. I give judgment to the 1st and 2nd plaintiffs against the 1st and 2nd defendants for the sum of HK$4,000,000.00. Under the last letter of undertaking dated 30 October 1998 the said sum of HK$4,000,000.00 should have been paid by 5 November 1998 at the latest. I also give judgment for interest on the said sum of HK$4,000,000.00 at 1% above prime rate from 6 November 1998 until judgment and thereafter at judgment rate until payment. The counterclaim is dismissed. Costs of the action and the counterclaim to the plaintiffs to be borne by the defendants.