AUSTEAR LTD v. FONG WING SENG (a male)

HCA 2534/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2534 OF 2005

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D E C I S I O N

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1.  The plaintiff sues D2 as a guarantor. The issues are whether or not D2’s liabilities as a guarantor had been compromised and whether or not the plaintiff had been lending money in breach of the Money Lenders Ordinance, Cap 163 (“MLO”). A Master gave unconditional leave to D2 to defend and leave to amend his defence. This is the plaintiff’s appeal.

Background

2.  One Mr Kwok was a director and one of the beneficial owners of the plaintiff.

3.  At all material times prior to May 2003, D1 and D2 were the directors and beneficial owners of 2 companies known as Timlex and Welback, which dealt in electronic products.

4.  The plaintiff claims against both defendants as joint and several guarantors under a guarantee dated 1 June 2001 (“the guarantee”) in respect of the debts of Timlex and Welback.  The amount claimed was US$979,814.42, after taking into account part payment of HK$3,000,000 from Tripoli Investments Ltd (“Tripoli”) owned indirectly by D1 and D2. 

5.  By his defence filed on 6 January 2006, D2 admitted the claim but asserted that (a) there had been another part payment of US$100,000; and (b) his liability under the guarantee should be apportioned at 46.06%, with the rest borne by D1.

6.  Defence (a) would have entitled the plaintiff to substantial part judgment. Defence (b) would not be sustainable as a matter of law because D2’s liability with D1 was “joint and several”. 

7.  The plaintiff nonetheless filed its reply and then left the case to sleep for 8 years until the Order 14 summons was taken out against D2 on 31 October 2014.  The plaintiff conceded the part payment of US$100,000 and claimed for US$879,814.42 (about HK$6,800,000).

8.  D2 filed an affirmation raising, for the first time, the following lines of defence:

A. That Mr Kwok had promised to release D2 from all liabilities under the guarantee (“the 1^st promise” );

B. That Mr Kwok again promised D2 to release D2 from all liabilities under the guarantee (“the 2^nd promise”);

C. That the plaintiff had advanced loans in breach of the MLO;

D. That post-writ conduct of Mr Kwok was inconsistent with

D2 owing the plaintiff or Mr Kwok money.

D2’s case

9.  It is D2’s case that on the day of execution of the guarantee, 2 other agreements were entered into by the plaintiff on the one part, and Timlex and Welback on the other: (a) the Raw Materials Agreement; and (b) the Manufactured Goods Agreement (collectively “the Agreements”).  The arrangement was such that the plaintiff would be artificially pulled in to purchase and pay for the raw materials from suppliers of Timlex and Welback.  The plaintiff would in turn sell the raw materials to Timlex and Welback for manufacturing into products, which would be on sold to a buyer (“Argus”) designated by Timlex and Welback.  In so doing, the plaintiff was allegedly lending to Timlex and Welback at an interest rate of 42%.

10.  Argus failed to pay.  On 28 January 2003, Tripoli issued a cheque for the HK$3,000,000 made payable to Mr Kwok.  It is common ground that that was in partial settlement of the sums due from Timlex and Welback to the plaintiff.

11.  On 7 May 2003, D1 revoked the guarantee in relation to his liabilities.

12.  Welback was wound up by the court on 24 December 2003.

13.  Tripoli was wound up by the court on 17 May 2004.  Tripoli’s liquidator claimed that the $3,000,000 was a “loan” to Mr Kwok and sought to recover it (“the liquidator’s claim”).

14.  Allegedly because of the 1^st promise, D2 signed a statutory declaration on 28 April 2005 (“the SD”) prepared by Mr Kwok’s then solicitors to defend the liquidator’s claim.

15.  In about December 2005, Mr Kwok told him that D1 had been pressurizing Tripoli’s liquidators to pursue the liquidator’s claim.  Mr Kwok said he was legally advised to commence proceedings under the guarantee to pressurize D1 and reveal the genesis of the $3m in the proceedings; that D2 would be named as one of the defendants but it was not the plaintiff’s intention to seek recovery against D2 personally. 

16.  The plaintiff issued the writ on 16 December 2005.

17.  Allegedly because of the 2^nd promise, D2 (a) signed and filed the defence prepared by a solicitor arranged by Mr Kwok; (b) did not plead the 1^st promise or illegality under MLO in his defence; and (c) did not bring a counterclaim against the plaintiff, Mr Kwok or his other companies. 

18.  D2 asserts that it was because of the 2^nd promise that the plaintiff had not proceeded to obtain summary judgment for so long.  He also understood that the $3m dispute had not been proceeded with.

19.  In addition, D2 claims that he all along had good relationship with Mr Kwok until 2009/2010, as evidenced by post-writ transactions:

(a) That Mr Kwok kept D2’s assets or companies to set off all debts due from Timlex and Welback;

(b) That D2 was allowed to squat at Mr Kwok’s office until D2 incorporated a company called Gamze;

(c) That D2 and Mr Kwok had jointly invested in 5 Shenzhen Offices in August 2006;

(d) That Mr Kwok’s companies advanced loans to Gamze (which Mr Kwok knew was owned by D2) up to about 2008‑9.

20.  The plaintiff denies ever drafting any legal documents for D2, including the SD.  Mr Kwok confirms that he had never borrowed HK$3m from Tripoli which was in serious financial difficulty.  He believes that Tripoli’s liquidators did not pursue the $3m because they could not establish a case.  To the contrary, Mr Kwok asserts that it was D2 who felt guilty about the liquidators’ pursuit of Mr Kwok and requested Mr Kwok to provide him with information so that he could explain to the liquidators.  Mr Kwok did not know that the information he gave D2 was for making the SD. 

Legal principles

21.  An appeal against a Master’s decision is by way of rehearing. The burden is on the defendant to raise triable issues.  He has to condescend upon particulars. There should not be a mini-trial on affirmations.

Some preliminary observations of the defence

22.  D2 claims to have disposed of all relevant documents given the long lapse of time.  The copy SD was obtained from the plaintiff but its attachments are no longer available. 

23.  D2 says that given the limited time available to file the affirmation in opposition, the passage of time, his inability to locate all the relevant documents and the numerous transactions between Mr Kwok and him, he had not been able to set out the full picture and “there are bound to be some mistakes in this affirmation”.

24.  Accordingly, the defence contains mostly bare assertions, is thinly supported by documents and contained unidentified mistakes.  In particular, there is no documentary proof of the 1^st promise, 2^nd promise, D2’s assets or their value.

25.  Despite the new defences, D2 has never resiled from the admissions in his defence.  (See paragraph 21 of his affirmation.)  Mr Chong, his counsel, confirms that D2 is not so resiling.

26.  Regardless of who had drafted the SD, D2 never denied the truth of its contents. He subscribed to the statement therein that D2 “[made] this statutory declaration on [his] own volition” and “[made] this solemn declaration conscientiously believing the same to be true.”  Mr Chong also expressly stated that D2 “stands by the SD".

27.  Further, D2 never denied the existence of the manufacture, sale and purchase of products pursuant to the Agreements.  In fact, the SD stated that:

“After various meetings, we [D1 and D2] felt that Ausyear could financial assist both Timlex and Welback by entering into commercial agreements. Ausyear could be the middle party which purchase/sell products to the supplier/buyers of Timlex and Welback…” (underline added)

Mr Chong stated in §17 of his skeleton submission that there was “no falsehood in the SD”.

Analyses of the various defences

28.  Firstly, as regards the 1^st promise, D2 is effectively saying that his liability of about HK$6,800,000 had been waived because he agreed to tell the truth (by way of the SD) about the HK$3,000,000.  One may ask: what good would it have done to Mr Kwok? It was in the interest of D2 to tell the truth anyway, for if the Tripoli’s liquidators successfully recovered HK$3,000,000 from Mr Kwok, D2 would have been liable for 46.6% (on his case) of that amount as guarantor. 

29.  Secondly, as regards the 2^nd promise, D2 did not make clear which solicitor the plaintiff had arranged to draft the defence for him. Anyhow, if the defence was really just to help the plaintiff to convince Tripoli’s liquidators, there was no need for D2 to plead another part payment of $100,000 and admit that D2 was only liable for 46.06%. 

30.  Insofar as D2 claims that because of the 2^nd promise, he did not look into pre-writ transactions to see if a counterclaim was justified, it is not even alleged that the plaintiff had debts due to D2.

31.  Thirdly, as regards the defence on breach of MLO, one queries why the plaintiff needed to lend money to Timlex and Welback in a convoluted way, when the interests of 42% per annum did not violate MLO and Mr Kwok had a lawful money lending company “Gold Star”.

32.  Fourthly, in respect of the post-writ conduct of Mr Kwok:

(a) D2 is effectively saying that Timlex and Welback had also been exonerated from liability because he had used his personal assets of an unknown value to off-set their debts. One queries why D2 had to do this when Welback had been wound up, his interests were only about 46.06% and his relationship with D1 had broken down.

(b) Squatting at Mr Kwok’s office and incorporating Gamze there took place in September 2003 and March 2004 (pre-writ). I fail to see how that could assist D2 in his defence.

(c) About 7 months after the writ was issued, 3 units of the Shenzhen Offices were registered in the name of Mr Kwok and his wife, and 2 in the name of D2’s son. Mr Kwok and D2 would each contribute 50% of the mortgage and down payments. The total purchase price was RMB10,500,000, with total down payments of RMB4,200,000. There are some documents to show the purchase. Mr Kwok did not deny the transactions although he said the investment was not in joint names with D2. He joined in the purchase just to help D2 obtain mortgage loans and build up D2’s credit. The importance of these transactions, however, is that D2’s half share of down payments (RMB2,100,000) would have paid off 1/3 of his liability under the guarantee. All that Mr Kwok said was that D2 had bad credit rating in 2006. These transactions lent some support to D2’s assertion that he did not owe the plaintiff money.

(d) There had been alleged dealings between Mr Kwok and D2, and the plaintiff and Gamze, but not between the plaintiff and D2. Mr Kwok admitted lending D2 money. However, the document showing outstanding sums due to the plaintiff and Gold Star did not show D2 to be the borrower. Mr Kwok confirmed that he was a shareholder and director of Gold Star but Gold Star had nothing to do with these proceedings nor was it a party to the Agreements. I accept that an individual and a company are separate legal entities. However, this head of defence shows that Mr Kwok and D2 remained of good relationship and still lent his company money.

33.  In summary, the defences in paragraphs 8A-C simply defy logic.  In respect of paragraph 8D, only items (c) and (d) of the post-writ conduct lent some support to the assertion that D2 did not owe the plaintiff/Mr Kwok money.

34.  Although the defences do appear illogical at first blush, the overall circumstances have to be looked at.  The plaintiff has delayed for 8 years before seeking summary judgment.  Delay in itself would not necessarily preclude the plaintiff from succeeding, but, having regard to the delay, the court should look at his case with great circumspection:  Resona Bank Ltd v Lam Sie & ors [2004] 4 HKC 601, 612F, Tang J (as he then was).

35.  D2 says that the plaintiff has delayed in taking out the Order 14 summons because of the 1^st and 2^nd promises.  Having regard to Mr Kwok’s post-writ conduct of continuing to lend D2/Gamze money and investment with D2, there might be some truth in it.

36.  D2 had been in disputes with one Mr Wan Tak Choi (“Mr Wan”).  Mr Kwok had assisted Mr Wan to make an affirmation in one of the cases. D2 believed that it was Mr Wan “who instigated the revival of the present proceedings as Wan has run out of options to harass [D2]”.  This explanation, in my view, is far-fetched.  There was nothing to show that Mr Wan “harassed” D2, still less to show that Mr Kwok/the plaintiff had cause to join in any “harassment”.

37.  On the other hand, the plaintiff’s explanation for its delay is that Mr Kwok knew that D2 was in great financial difficulty and it would not be worthwhile to pursue him.  He later learnt that D2 had initiated proceedings against 5 defendants.  Mr Kwok thought that if D2 had funds to initiate proceedings and pay his legal team, he should have the means to pay the plaintiff back.  He allegedly pursued the present application for fear that D2 was at risk of bankruptcy.  He says that D2 was playing delaying tactics.

38.  It is true that Tripoli, Timlex and Welback (all partly and beneficially owned by D2) were wound up in 2003-2004.  However, the assertion that D2 was in financial difficulty sat uncomfortably with the fact that D2 had money to invest in Shenzhen.

39.  Moreover, as Mr Chong aptly pointed out, the plaintiff had issued demand letters dated 9 May 2003 and 9 July 2004 respectively only to D1 but not D2. The former letter was only copied to D2, Timlex and Welback “for record”.

40.  Further, it was the plaintiff who first mentioned the $3,000,000 in the statement of claim.  However, almost half of D2’s defence (paragraphs 3-5, and 8-12) were devoted to explaining why that sum was paid and how Mr Kwok helped out Timlex and Welback.  Those paragraphs of the defence look odd in the light of the plaintiff’s admission of part-payment and D2’s admission of liability.

41.  In addition, as rightly pointed out by Mr Chong, the arrangements in paragraph 9 above were strange in that it was the plaintiff (not Timlex or Welback) who handled payments and receipts directly with the suppliers and the buyer. Mr Chong submits that the plaintiff was artificially brought into those transactions to lend and collect the repayment. 

42.  Whether a transaction was a “loan” within the meaning of the MLO has to be looked at in substance rather than form.  See definition of “loan” in section 2 of MLO. 

43.  Whether a person/entity is in the business of money lending within the meaning of section 2 of MLO is a question of fact: Chan Miu Chu Zoe v Choi Chiu Yuk, HCA 698/2012, 21 February 2014, Mr Registrar Lung, at §§21, 29.

44.  A party does not become a money lender by reason of occasional loans to relations, friends or acquaintances, whether interest be charged or not: Edgelow v MacElwee [1918] 1 KB 205, at 206.  However, if D2 is able to convince the court that the plaintiff did lend money in the convoluted way as stated in the Agreements, the transactions involved may not just be “occasional loans” but systematic lending.  Once found to be so, the transaction may be unenforceable for lack of the memorandum and other formalities in breach of section 18 of MLO.

Leave to defend

45.  Though a defence may be shadowy, it does not necessarily entitle the plaintiff to summary judgment if the plaintiff’s case has its own weakness.  In Billion Silver Development Ltd v All Wide Investments Ltd [2000] 2 HKC 262, 268C-D, Ribeiro J (as he then was) held that,

“The importance of there being doubts or suspicion as to the validity of the plaintiff’s case is that such doubts detract from the plaintiff’s right to summary judgment. It was not to the point to dismiss them on the basis that they did not improve the quality of the defence and ‘raise it’ beyond the category of ‘shadowy’. If possibly genuine weaknesses were exposed in the plaintiff’s case, this casts doubt on the plaintiff’s right to invoke the summary procedure in the first place.”

46.  Where there are unexplained features of both the claim and the defence which are disturbing because they bear appearance of falsity and disreputable business dealings and questionable conduct, the court should not make tentative assessments of the respective chances of success of the parties or the relative strengths of their good or bad faith, and should not on such an examination grant the defendant conditional leave to defend, but should give unconditional leave to defend: Hong Kong Civil Procedure 2015, Vol 1, §14/4/9, at p 264; Billion Silver Development Ltd v All Wide Investments Ltd [2000] 2 HKC 262, 266D-E, Mayo JA.

47.  There are features in this case that are disturbing and inconsistent with D2 owing the plaintiff money.  D2 should be given unconditional leave to defend.

48.  Mr Chong informs this court that the defence is ready for filing.  I therefore extend time for D2 to file his defence within 14 days from the date of this decision. The plaintiff shall file and serve a reply, if so advised, within 28 days thereafter.

49.  Given the inaction for 8 years, I expect parties to move quickly towards trial.  I therefore order that the plaintiff shall take out a case management summons by 4 August 2015 returnable before a Master.

Conclusion

50.  In summary, I dismiss the appeal.  D2 shall file and serve his defence within 14 days from today.  The plaintiff shall file and serve its reply, if so advised, within 28 days thereafter.  The plaintiff shall take out a case management summons returnable before a Master, for hearing on or before 4 August 2015.

51.  The arguments are basically re-run of those before the Master.  I make an order nisi that the costs of this appeal shall be to the 2^nd defendant summarily assessed at $80,000.

52.  I thank counsel for their assistance.