RE JIALING XIN TUO INTERNATIONAL LTD

HCCW 800/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 800 OF 2005

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J U D G M E N T

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1.  This is a petition to wind up Jialing Xin Tuo International Limited (“the Company”), presented by Rabobank International Hong Kong branch, on the ground that the Company is unable to pay its debts.

2.  The demand under section 178(1)(a) of the Companies Ordinance, Cap. 32 was served on the Company on 16 September 2005.  The debt in the demand was for HK$19,753,629.07 and a breakdown was provided.  It was made up of 6 items.  A detailed description was given of each item, when it was incurred and the respective amount due as at the date of the demand.  The first item was a trade finance loan drawn by the Company under a General Commercial Agreement (“the GCA”) dated 16 April 1997 and the petitioner's facility letter dated 31 August 1999 (“the facility letter”) in the sum of US$1,316,404.63, equivalent to HK$10,267,956.11.  The second item was interest on the trade finance loan at the contractual rate, calculated up to the date of the demand, in the sum of HK$3 million odd.  The other 4 items were for legal costs incurred in HCCL No. 56 of 2001 (“the High Court Action”) brought by the petitioner against the Bank of China (“BOC”) and in issuing the statutory demand and interest thereon.

3.  In the letter of the petitioner's solicitors to the Company's solicitors dated 28 March 2006, the petitioner's solicitors stated that to narrow the issues in this petition, the petitioner will concede on the following issues:

(1)     the petitioner will not rely on any of the legal costs incurred in the High Court Action as a debt to which the Company has no substantial defence.  The petitioner will accept, for the purpose of agreeing what is in issue on the hearing of this petition only, that liability and quantum of such costs are disputed on substantial grounds; and

(2)     the petitioner will accept the findings of Stone J in the High Court Action that the petitioner did not negotiate the master letter of credit.

4.  I will first set out the facts that are not in dispute or not capable of being disputed.

5.  The trade finance loan made to the Company on 19 November 1999 was pursuant to the GCA and the facility letter.  This was paid by the petitioner transferring US$1,316,404.63 to the Standard Chartered Bank Malaysia (“SCB”) on the Company's instructions under a letter of credit No. ILC 90512.

6.  Except for the amounts recovered from the Company's accounts with the petitioner by way of set-off, the balance of the principal sum of the trade finance loan, in the sum of HK$10,151,478.09, has remained outstanding.

7.  The circumstances in which the finance loan was made was set out in the judgment of Stone J, given on 11 June 2004 and reported in [2004] 3 HKLRD 477, at paragraphs 1 to 25.  The High Court Action was brought by the petitioner, in the capacity of a negotiating bank, to recover payment of a letter of credit (“the master letter of credit”) from the issuing bank, BOC, in the amount of US$1.4 million odd.  The master letter of credit was issued on 26 October 1999 with the Company as beneficiary.  On 28 October 1999, the Company applied to the petitioner for a back-to-back letter of credit in favour of Shin Yang Trading Sdn. Bhd. (“Shin Yang”), a company in Malaysia from whom the Company was buying the goods for onsale to the applicant of the master letter of credit.  On 29 October 1999, the petitioner issued the letter of credit mentioned earlier naming Shin Yang as the beneficiary, in the amount of US$1,316,404.63.  The back-to-back letter of credit was advised through SCB.  The petitioner also informed BOC on the same day that the Company had assigned to the petitioner the master letter of credit as continuing security, for the payment of all amounts due from the Company to the petitioner.

8.  I should mention that by the facility letter, the Company was granted trade facility up to US$7 million, available for the issuance of sight letters of credit on a “mirror back-to-back basis” against master letters of credit issued by banks acceptable to the petitioner calling for full set of title documents under the petitioner's control, and for subsequent import loan financing for a maximum tenor of 14 days.

9.  On 5 November 1999, SCB advised the petitioner it had negotiated the bill of exchange drawn under the back-to-back letter of credit and presented the documents required by that letter of credit, and requested the petitioner to remit the proceeds thereof to the branch of SCB in New York.

10.  On 9 November 1999, the Company gave the petitioner a document entitled “Collection Order” and submitted a bill of exchange drawn in favour of the petitioner under the master letter of credit for US$1.4 million odd, with other documents required to be presented under that letter of credit.  The Company requested the petitioner to “please negotiate the above bill and pay our import bill under [the back-to-back letter of credit] favouring [Shin Yang] for US$1,316,404.63.”

11.  On 12 November 1999, the petitioner sent BOC the documents required to be presented under the master letter of credit, with the bill of exchange drawn by the Company in the petitioner's favour at 85 days sight and stated in the accompanying letter that it had on the same day negotiated the bill and requested that upon the maturity of the bill the funds be remitted to the petitioner's stipulated account.

12.  On 19 November 1999, acting on the Company's instructions in the Collection Order, the petitioner remitted to SCB the payment in respect of the back-to-back letter of credit in the amount of US$1,316,404.63 and sent the Company a “Credit Advice” and a “Debit Advice”.  In the Credit Advice, it was stated that the petitioner had on 19 November 1999 negotiated the bill for US$1,316,404.63 and the said sum was sent by telegraphic transfer to Shin Yang as per the instructions of the Company.  In the Debit Advice, it was stated that on 19 November 1999, the petitioner had debited the Company's Advance Account – Import Loan in the same amount.

13.  On 22 November 1999, BOC issued a rejection notice on the ground of non-compliant presentation.

14.  Also on 22 November 1999, the Intermediate People's Court of Wuhu City, Anhui Province handed down a property attachment and preservation order, by which all documents under the master letter of credit was made subject to attachment and payment under the master letter of credit was ordered to be withheld.  The preservation order was made in respect of a different transaction involving the Company in which it was alleged there had been fraudulent presentation of documents by the Company which had resulted in payment under another letter of credit. The subsequent application by the petitioner in 2000 to lift the preservation order was rejected by the Intermediate People's Court of Wuhu, on the ground, inter alia, that the petitioner in presenting the bill and documents under the master letter of credit was only acting as collecting bank and there had been no negotiation of the master letter of credit.  The Company's appeal against the judgment of the Intermediate People's Court of Wuhu (by which the Company was ordered to pay compensation of RMB 7 million odd for presentation of fictitious documents under the letter of credit) was likewise unsuccessful.  It was dismissed by the Higher People's Court of Anhui Province on 26 October 2001.

15.  The petitioner brought the High Court Action to recover payment under the master letter of credit from BOC, claiming that the documentary rejection was wrong.  Stone J held in favour of the petitioner that the alleged discrepancy did not constitute a good reason to reject the documents presented but dismissed the petitioner's claim against BOC on two grounds.

16.  Firstly, the petitioner was not acting in the capacity of a negotiating bank but was only acting as a collecting bank as the agent for the beneficiary under the master letter of credit, so it had no locus to bring the claim against BOC.  The petitioner's contention that it was acting as negotiating bank was fundamentally inconsistent with the contemporary documents, in particular the Collection Order issued by the Company to the petitioner on 9 November 1999 and the Debit Advice issued by the petitioner to the Company on 19 November 1999.  The payment of US$1,316,404.63 to SCB, as the negotiating bank under the back-to-back letter of credit, was no more than a payment in fulfilment of the petitioner's pre-existing obligation under that letter of credit.  What happened was upon the security of the master letter of credit issued in favour of the Company, and on the Company's application, the petitioner issued its own credit in favour of Shin Yang and upon making payment under its own credit, the petitioner debited the relevant sum of US$1,316,404.63 to the Company's account, pending the successful collection by the petitioner of US$1.4 million odd under the master letter of credit.  The funds collected would then be deposited into Company's Advance Account and extinguish the debit balance.  The petitioner did not assume the risk of non-payment by BOC under the master letter of credit.  It had only assumed the risk as a lender to the Company of the trade finance loan.

17.  Secondly, BOC was prohibited from making payment on the master letter of credit by virtue of the preservation order as from 23 November 1999.  The proper law of the master letter of credit is Chinese law, it is also the law of the place of performance.  The master letter of credit will not be enforced if its performance is illegal by the governing law or it involves performance which is unlawful according to the law of the place of performance.  So the claim also failed on the ground of illegality.

18.  The Company has opposed this petition on two broad grounds.  It was submitted by Mr Simon Chan on its behalf that the statutory demand is invalid and there is bona fide dispute of the petitioner's debt on substantial grounds.

19.  I will deal with the point about the demand first.  It was contended that there was an overstatement of the debt in the demand, the petitioner's solicitors having conceded that they would only rely on part of the debt in the demand for the purpose of the petition.  It was submitted that this overstatement is fatal to the validity of the demand.  I think this is a bad point.  I have set out in some detail what was contained in the demand.  The Company can be in no doubt of the amounts now said by the petitioner to be undisputed.  It is clearly established that where a creditor can, without serious argument, allege a debt of a specified sum exceeding the statutory limit, he can still rely on section 178(1)(a), notwithstanding that the sum was wrongly stated in the demand (In re a Company [1984] 1 WLR 1090).

20.  The dispute on the Company's liability to pay the trade finance loan is on the following lines.

21.  As held by Stone J, the Company did not negotiate the master letter of credit.  Mr Chan submitted that in failing to negotiate the master letter of credit, the petitioner had wrongfully breached “the agreement for negotiation”, and/or was negligent, and is liable to indemnify the Company for its loss.  Further, the petitioner had held the master letter of credit as security but had wrongfully released the security to BOC and the Company had lost the “right of subrogation”.

22.  I consider these arguments are also without substance.

23.  I have set out in some detail the circumstances regarding the steps taken by various banks in relation to the master letter of credit and the back-to-back letter of credit as found by Stone J.

24.  The situation was that the petitioner thought erroneously, as it transpired, that it was a negotiating bank as regards the master letter of credit.  But regardless of what the petitioner had thought, it was not obliged to do so under the terms of the agreement between the petitioner and the Company, which were found in the GCA and the facility letter.  The petitioner's misconception that it was acting as a negotiating bank cannot amount to an agreement to do so.  What the petitioner actually did was entirely consistent with its obligations in the facility letter and the instructions of the Company.  The Company was clearly advised of the steps taken by the petitioner in the Credit Advice and the Debit Advice and the bills statements on 1 December 1999 and 28 April 2000, and no complaint was made by the Company at any time of the petitioner's failure to negotiate the master letter of credit.

25.  Further, as pointed out by Mr Carolan for the petitioner, in the Company's evidence in opposition, it was not asserted that there was any express agreement to negotiate.  The Company's director, Mr Yu, had only claimed in paragraph 23 of his affirmation that it was an implied condition the petitioner should negotiate the master letter of credit.  I fail to see how such a term could be implied where it would be inconsistent with the express terms.

26.  I agree with Mr Carolan that the nub of the question is whether the petitioner's failure to negotiate the master letter of credit would mean that the Company should be excused from payment of the trade finance loan.  I fail to see any reason why the Company should be excused.

27.  The Company's own rights to claim against BOC under the master letter of credit are not affected by the petitioner's failure to negotiate.  The Company has chosen not to take legal action against BOC.

28.  The contention that the petitioner had wrongfully released the security to BOC and the Company had lost its right of subrogation is misconceived.

29.  Besides, the petitioner is exempted from liability to the Company, even if it were in breach of any duty, by virtue of the provisions in the GCA, namely, clauses B11 and B15.

30.  For the above reasons, I find that the Company has failed to establish any bona fide dispute of the debt regarding the trade finance loan and the interest thereon on substantial grounds.

31.  I therefore make an order to wind up the Company.  The petitioner's costs are to be paid out of the Company's assets.