SEC CONSTRUCTION MATERIAL LTD. v. TAN KIN, GEORGE AND ANOTHER

HCA 423/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 423 OF 2001

____________

____________

_______________

J U D G M E N T

_______________

1. This is an action on a guarantee. Judgment in default of notice of intention to defend was entered against the 2nd defendant on 28 June 2001 and this trial proceeded solely against the 1st defendant.

2. The case of the plaintiff is very straightforward. By a "Cooperative Agreement" made between the plaintiff and a BVI company called Theodore Developments Ltd (Theodore), dated 20 April 1998, the provisions of which I shall look at in more detail later, the plaintiff agreed to lend to Theodore the sum of $4,000,000.00 as a short term loan for a period of six months with interest at 20% per annum to be calculated on the basis of the actual number of days elapsed. The agreement also provided for security for the loan to be given by way of joint and several guarantees by the defendants herein, the directors of Theodore, and a share mortgage of all the issued share capital of Theodore, which was held by the defendants and a Ms Kang Yu Jie.

3. The guarantees and the share mortgage were executed on 8 June 1998, and on 11 June the plaintiff caused a bank draft for $4,000,000.00 to be issued, payable, according to the plaintiff on the instructions of the defendants, to a company called Sky Power (Tianjin) Company Ltd. The draft was handed to the defendants, or one of them, on 13 June and the same day, or shortly thereafter, the defendants signed a receipt for it on behalf of Theodore, referring to the cooperative agreement. The loan not being repaid on the date six months from payment, the parties negotiated a six month extension of the loan, and a letter to this effect was signed by the 2nd defendant on behalf of Theodore on 9 February 1999, together with a cheque for interest up to 31 March 1999. The cheque was from Sky Power Holdings Ltd, the Tianjin company's holding company.

4. The loan was not repaid on the new due date, 8 August 1999, and a demand letter was sent to Theodore and to the defendants on that date. There was no response from the defendants. Further letters were sent a year later, one from the plaintiff's solicitors, and on 5 December 2000 the 1st defendant's solicitors replied stating that proceedings would be resisted on the basis that the plaintiff has no entitlement to the sum claimed.

5. The 1st defendant does not deny signing the documents referred to above, but claims that no loan was made to Theodore and that the payment of the $4,000,000.00 was either a loan to Sky Power (Tianjin) Company Ltd (Sky Power), a joint venture company in which the plaintiff or its directors had an interest, or an injection of capital to Sky Power. In either event, the 1st defendant contends, it was not payment under the terms of the cooperative agreement and Theodore was not liable to repay it.

6. The background to these events lies in the joint venture. It is not in dispute that discussions took place in early 1998 about a project by way of joint venture in the mainland to build footbridges in major cities, starting with Tianjin, and selling advertising space on them for profit. The plaintiff is in the business of supplying building materials, and fibre glass, and the defendants' company, Thematic Advertising Ltd, is, as the name suggests, in the business of advertising. The discussions took place between the defendants, and Mr Vincent Choi and Mr Nelson Chiu, directors of the plaintiff, although the latter does not seem to have had a lot to do with the matter after the various documents were signed. The 1st defendant in his evidence said that he was given to understand by Mr Choi that the plaintiff, being part of a large group, Sino Consolidated Enterprises Ltd, since renamed Sun Consolidated Enterprises Ltd, had access to funds to assist finance the project. In addition the plaintiff was in the business of trading and manufacturing construction chemicals and materials such as concrete admixtures and fibre glass products. The discussions clearly went well and resulted in two agreements in April 1998. The first of these was the cooperative agreement, dated 20 April, and the second the joint venture agreement, dated 23 April.

7. The cooperative agreement was made, as I have said, between the plaintiff and Theodore. The scope of cooperation was stated to be: the identification of suitable locations in the PRC and then to invest in and construct footbridges and other structures for the purpose of advertising; the plaintiff to supply construction materials under supply contracts, the terms of which were to be mutually agreed later; Theodore to secure advertising contracts; and to participate in any other business which might be mutually agreed. The only matter which was not subject to future agreement was the loan referred to above, the terms of which were carefully set out and agreed. It was however specifically agreed also that the agreement was not to constitute a partnership or joint venture between these two parties.

8. The joint venture agreement, which was entered into shortly afterwards, was between a company called Mars International Enterprises Ltd (Mars) another BVI company, Theodore, the defendants herein and Ms Kang. While no secret has been made of the shareholdings and directorship of Theodore, there is no direct evidence as to who is the beneficial owner of Mars, or who are the directors. The 1st defendant says that he understood from Mr Choi that it was a company within the same group as the plaintiff. Mr Choi has been at pains to deny this, and to distance himself from it, but for the reasons below I am satisfied that it was his creation, and over which he exercised absolute control, making him in effect a partner in the joint venture in the name of Mars. The name of the joint venture company was initially International Advertising Ltd, later changed to Sky Power.

9. The joint venture agreement was signed on behalf of Mars by a Ms Karen Ip and Ms Rosalina Ting Kit Ying. From the evidence of Ms Ting, which I fully accept as the truth, it is clear that Ms Ip was executive secretary to the senior partner of a firm of certified public accountants, Messrs Lee, Sek, Chiu & Hui, which had offices on the same floor as the plaintiff and therefore Mr Choi, which did company secretarial work for the plaintiff, and of which Mr Nelson Chiu was also a partner, albeit inactive, as he gave his attention to other companies of which he was a director, including the plaintiff. She was aged 24 at the time and there is no evidence as to her education, experience in business or means. Mr Choi's evidence was that he believed that Ms Ip was an independent investor and that Mars was her company, and that he introduced her to the defendants as an appropriate partner in the joint venture. However, there is no evidence as to why he believed this. He admitted knowing nothing of her or the company, and there was accordingly nothing upon which he could put her or the company forward as a partner.

10. The other signatory was Ms Ting. Her evidence was that she was interviewed and employed by Mr Choi with the intention that she would be employed by the joint venture, reporting to Mr Choi. She was then 23 years old and had a degree in, and experience in working in, accounts, but otherwise no exposure to business. She said that she and Ms Ip were just asked by Mr Choi to sign the joint venture on behalf of Mars. They otherwise had no connection with that company and, as far as they knew, had not been appointed officers of that company. They were then appointed, with the 1st defendant, as directors of the joint venture, Sky Power. There is no evidence of by whom they were appointed. However, Ms Ting admitted that she had no power to make decisions, but could only act as instructed by Mr Choi, who approved the issue of cheques, for which she and Ms Ip were signatories.

11. If I needed further evidence of the fact that it was Mr Choi who was behind Mars, and that Ms Ip and Ms Ting had no interest in the business nor any function other than to sign documents when instructed by him, I only have to look at the events after April 1998 towards putting the venture into effect. On at least two occasions of ceremonies in China with city representatives to sign agreements in relation to the project, neither of these ladies ever attended. Of the directors, it was only the 1st defendant who was the apparent representative of the joint venture, Sky Power. However, Mr Choi was also there, and clearly playing a major role. This does not fit well with his assertions that he was only there as a guest in view of his connections, and his assistance to the joint venture to secure contracts, which would benefit his company under the cooperation agreement. In the event, there were no contracts for his company in the project, and no evidence of any discussion to agree on supply contracts under it. The only inference is that he was motivated by a wish to see the joint venture succeed because of his own interest in it.

12. There are in addition several instances of documentary evidence pointing to Mr Choi as closely involved in the joint venture, including queries from the 1st defendant as to the drafting of parts of the agreement, and fax messages afterwards seeking his comments and approval of a number of aspects, including at least one request for authorisation for payment.

13. The overwhelming evidence here is that Mars was a vehicle created for the purpose of the joint venture by Mr Choi, whether on behalf of himself or the plaintiff is not clear, and the two employees appointed by him to act as directors had no powers and no beneficial interest in it, and his evidence to the contrary I have no hesitation in rejecting. I would add that the plaintiff saw fit not to call Ms Ip to substantiate Mr Choi's account, although I understand that she still works for the same firm and is readily available.

14. But does that mean that the money paid is inevitably either a loan to Sky Power or an injection of capital? It certainly cannot be the latter. If it were, it would, as Ms Ting, who was in charge of the accounts, says, be treated as capital and be credited as a shareholding. But it was not. The accounts of Sky Power clearly show the $4,000,000.00 as a loan, without a note saying to whom it was owed. The 1st defendant says that, under the joint venture agreement it was the responsibility of Mars to provide funding, and this is what it was. That is not strictly correct, the agreement merely gives Mars' role as assisting in arranging funding for the project, not providing it itself. Further the agreement clearly provides for working capital to be raised by loans from banks or other sources, with specific provision that no shareholder shall be required to contribute funds additional to their original subscription.

15. The 1st defendant maintains that Theodore had no need of the loan, and it was requested for Sky Power as there was urgent need to put the latter in funds to comply with mainland company requirements of minimum capital. Mr Chan for the 1st defendant submits that the fact of the payment being made to Sky Power direct and the interest paid by Sky Power in February 1999 is evidence that this was intended as a loan to Sky Power. However, this does not begin to deal with, not only the lack of any documentary or other evidence of the terms of such a loan, but the almost overwhelming evidence that it was the payment of the loan agreed to be made to Theodore.

16. We start with the cooperation agreement itself. This, as I have already pointed out, only had the loan as the one matter finally agreed, with anything else subject to further agreements. It was clearly intended that, whatever else happened, the loan would be made. It was to be made to Theodore, a company formed for the sole purpose of the joint venture, and having no other business, and guaranteed by its directors. The inevitable conclusion again is that Theodore anticipated needing the money to proceed with the joint venture. The money was then paid, in precisely the amount agreed, and as to this I accept the evidence of Mr Choi that it was at the request of the defendants that it was payable to Sky Power, although, in view of his own interest, I have no doubt that the decision was not made without his influence.

17. In any event, the defendants signed a receipt for the money, on behalf of Theodore, and referring to the cooperation agreement. The 1st defendant's explanation for signing this, if it were not the loan to Theodore, I find unconvincing to say the least. He merely says it was signed at Mr Choi's request because it had something to do with "money engineering" and was the only way to get quick funding. The receipt is clear of the face of it, and anyone signing must have done so in the full knowledge of what it referred to. In his witness statement the 1st defendant merely says that he signed the receipt at Mr Choi's request, without giving any reason why he should do so. The explanation appeared for the first time in his examination in chief, and was not put to Mr Choi, and I am bound to treat it with a great degree of circumspection.

18. This was followed by the letter of 9 February 1999 which again referred to the cooperative agreement, the guarantees, the share mortgage agreement and the subsequent loan. It was only signed by the 2nd defendant on behalf of Theodore, but the 1st defendant is unable to cast doubt on its authenticity, and it is pleaded in the defence that this was a letter from Theodore to the plaintiff.

19. Lastly there is the letter of 19 June 1999 from the plaintiff's auditors requesting confirmation for audit purposes of the loan to Theodore. This was signed by the 1st defendant for Theodore agreeing to the existence of the loan from the plaintiff, the terms and the interest. The 1st defendant had little answer to this evidence. He could not deny signing it, although he claimed not to remember doing so, nor that he would not have read it before signing. But he still claimed the contents were not true.

20. In my view the documentary evidence here of a loan to Theodore is unanswerable. The explanations given by the 1st defendant do not bear close examination, bearing in mind that these were all experienced businessmen, not innocents abroad being led astray and deceived by a wily fraudster. Everything here has the impression of being carefully drafted and the terms considered during that drafting. There is no evidence of the defendants being deceived, and to his credit the 1st defendant does not directly accuse the plaintiff of that. There may well be matters that have not been brought to the court's attention, and there may well have been some arrangements for the raising of funding for the joint venture which has not been fully explained here. But on the evidence before me, it is abundantly clear that this part of it was to be by way of a loan to Theodore, to then go into the project, and in the event that it was unsuccessful and the sum had to be repaid by others, the defendants took that responsibility firmly on their own shoulders.

21. While, therefore, I find that the plaintiff's witness Mr Choi was less than frank and honest in attempting to disguise his part in the joint venture, I am equally unsatisfied with the 1st defendant's evidence as to what was meant by the otherwise crystal clear documentary evidence of this loan and his consequent indebtedness to the plaintiff.

22. For these reasons I give judgment for the plaintiff for the sum claimed in the statement of claim as amended with my leave at the commencement of this hearing. This is for the sum of $7,285,393.00 and further interest on the sum of $4,288,889.00 at the rate of 4% per month from 23 January 2001 to the date hereof, and then at judgment rate until payment. As the cooperation agreement, under which the loan was made, provides for an indemnity against any loss or expense in the event of default, I also make an order nisi that the 1st defendant pay the costs of the plaintiff on the indemnity basis.