CHENG LAI PING ANNIE v. CHUN YU LOGISTICS HOLDINGS LTD AND ANOTHER

HCA 1100/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1100 OF 2012

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BETWEEN

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DECISION

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The application

1. This is the plaintiff’s summons for summary judgment against the 1st defendant under Order 14 of the Rules of the High Court.  The plaintiff had already obtained default judgment against the 2nd defendant.  The 1st defendant opposes this application.

2. Solicitor Pang acts for the plaintiff and Counsel Man acts for the 1st defendant.

The facts

3. This is a case where the 2nd defendant was the former shareholder and director of the 1st defendant and he had caused the 1st defendant to borrow a loan of $3 million from the plaintiff, with himself acting as the guarantor for the loan.  A loan agreement was signed between the plaintiff as the lender and the 1st defendant as the borrower (signed by the 2nd defendant as its director).  The plaintiff relied upon a board minute of the board of directors of the 1st defendant held on 30 September 2010, authorizing the 2nd defendant to sign the loan agreement on its behalf.  The loan of $3 million was paid by the plaintiff’s cheque into the 1st defendant’s HSBC account.

4. Under the loan agreement, the 1st defendant was to repay the loan and the interest at the rate of 12% per annum by 30 equal monthly instalments of $130,000 each month. According to the plaintiff, a total of $2.6 million, being 20 monthly installment repayments had been paid to the plaintiff, leaving 10 monthly installments for the total sum of $1,300,000 outstanding.[1]  The plaintiff now claims against the 1st defendant for the outstanding sum of $1.3 million together with interest.[2]  The 1st defendant has disputed this fact.

5. Ms. Man submits that until June 2012, the 1st defendant had not paid any money to the plaintiff and the 2nd defendant had only repaid a total sum of $80,000 to the plaintiff.[3]  This is clearly inconsistent with the plaintiff’s claim.

6. I have therefore clarified with Ms. Man this morning on this fact and Mr. Pang has told me that the $2.6 million were paid by the 2nd defendant to the plaintiff, not by the 1st defendant.

The legal principles of Order 14

7. The legal principle on Order 14 summary judgment is trite.  Once the plaintiff has established a prima facie case against the defendant, both procedurally and substantively, the burden will be on the defendant to satisfy the court that there is triable issue and summary judgment should not be granted against him.  See §14/4/1 of the Hong Kong Civil Procedure 2013.

8. On the facts above, it seems that the plaintiff has been able to set up a prima facie case against the 1st defendant.

The defence

9. The 1st defendant submits that there is a major dispute as to whether the loan agreement existed or not and whether it is a validly binding agreement upon the  1st defendant, given that it was an agreement entered into by the 2nd defendant and for monies borrowed by the 2nd defendant.  The 1st defendant contends that the alleged loan agreement is not validly binding upon it, given that the 2nd defendant never had the authority to enter into the loan agreement in the 1st defendant’s name.[4]  In particular, the 1st defendant relies upon the following:

a.  Mr. Fong Tin Yu (Fong) acquired the shares of the 1st defendant from its previous shareholders in June 2012 to become a majority shareholder. He was assured by the other shareholders that the 1st defendant had no hidden debts or liability.

b.  The 1st defendant is a cash rich company with no need for loan.

c.  The 1st defendant had never authorized the loan from the plaintiff or had entered into the loan agreement.

d.  The plaintiff’s cheque deposited with the 1st defendant’s account, but the money was drawn out from the 1st defendant’s account (by the 2nd defendant). The 1st defendant had not obtained benefit from the loan.

e.  There was no record of the 1st defendant repaying $130,000 to the plaintiff.

f.  There was no record that the 1st defendant had passed any resolution for the loan and the shareholders and directors of the 1st defendant denied any discussion or approval of the loan; and

g.  There was no record of the loan agreement.[5]

h.  There is a supplemental affirmation by Fong [6] in which he mentioned that the 2nd defendant had made a witness statement[7] where he admitted that he did not have the authority of the other shareholders of the 1st defendant for entering into the loan agreement for the money that he applied for his own use only, not for the company.  Ms. Man submits that that amounts to fraud on the 1st defendant.

10. In essence, the 1st defendant is disputing the authenticity of the loan agreement and the 2nd defendant’s authority of signing the loan agreement for the loan from the plaintiff.

Discussion

11. The 1st defendant has not filed its defence to the plaintiff’s statement of claim.

12. In the 1st defendant’s affidavit evidence, the 1st defendant has put forth the grounds of defence by saying that he had been told that the 1st defendant had no hidden liability; that he had talked to the existing shareholders and directors, who told him that there had not been meeting approving the loan agreement or request for a loan and there was no board resolution approving the loan nor was there any record of the loan agreement.  However, I am unable to find that the 1st defendant was raising the issue of forged documents relating to the board minutes or the loan agreement.

13. Before this hearing, I have therefore asked the plaintiff to bring along the original loan agreement to court so that the 1st defendant may have the opportunity to inspect it. Ms. Man has inspected this document and confirms that she does not have the evidence that it is a forged document.

14. Now the 1st defendant does not challenge the authenticity of the loan agreement, but only argues that the 2nd defendant had no authority from the 1st defendant to enter into the loan agreement, reliance being placed on the fact that in accordance with the Memorandum and Articles of Association of the 1st defendant, amended by Special Resolution as of 23 June 2009, at §22A, the resolution for the loan had to be made in the board meeting in which K&P Holding Company Limited must be present.  But the board minutes which authorized the 2nd defendant to sign the loan agreement did not have K&P Holding Company Limited being present in the meeting.^[8]

15. The plaintiff argues that under section 5A of the Companies Ordinance, Cap. 32, and Article 18 of the 1st defendant’s Articles of Association, the 1st defendant has the power to borrow, for which the board meeting for passing the resolution does not require the presence of K & P Holding Company Limited, one of its directors.^[9]  It is apparent that the resolution of borrowing a loan by the 1st defendant does not require the presence of K & P Holding Company Limited.  Ms. Man argues that in Article 22A of the Articles of Association, it provides that K & P must be present at the board meeting resolving on the creation of loan capital of the 1st defendant. I have invited assistance from the legal representatives before me today the difference between a loan and loan capital.  They are unable to assist me on that.

16. Even if the 1st defendant is able to rely upon the irregularity of the board meeting by the absence of K & P Holding Company Limited, the question will turn on a legal issue as to whether the plaintiff is able to rely upon the protection for a bona fide party in dealing with the 1st defendant under the rule in Turquand’s case.  The plaintiff relies upon Hong Kong Company Law 11^th edition at §11.1, in which it reads:

“The rule in Turquand’s case protects a person dealing with a company bona fide and without notice of the fact that the company’s internal management requirements have not been followed. He is not required to investigate to ensure that all internal regulations have been complied with. In the absence of facts putting him on inquiry, he is entitled to assume that all matters of internal management and procedure required by the articles have been complied with. Hence, the rule is sometimes called the indoor management rule…”

17. Ms. Man refers to Jetcom Enterprises Limited v. Dragon Victory Trading Limited & Others HCA3512/2003 by Recorder K. Kwok S.C. delivered on 24 November 2004.  In this case, the plaintiff as the purchaser claimed against the 1st defendant as the vendor for the purchaser of a landed property.  The provisional agreement for sale and purchase was signed by the 2nd defendant as a director of the 1st defendant. The 1st defendant refused to sell, pleading that the 2nd defendant did not have the authority to enter into the provisional agreement for sale and purchase.  The court found that the plaintiff did not have evidence to show that the 2nd defendant had the authority to sign the provisional agreement.  There was not even a board minute to support the 2nd defendant’s authority.  The plaintiff had only relied upon a tenancy agreement previously signed by the 2nd defendant on behalf of the 1st defendant.  The court finally found it as fact that the 2nd defendant had no authority from the 1st defendant to sign the provisional agreement on behalf of the 1st defendant.[10]  The facts of this case are clearly different from the present case where the plaintiff had the board minutes of the 1st defendant to support the 2nd defendant’s authority to sign the loan agreement.

18. Ms. Man has also placed heavy reliance on the case of Hua Rong Finance Ltd. CACV1086 of 2000 delivered on 20 November 2001 by Rogers V.P..  She submits that the facts of that case are similar to this case in that money paid into the company’s account was quickly withdrawn by the director, who had acted against the interest of the company.[11]

19. I agree that there is such similarity in both cases.  However, the legal bases of Hua Rong and this case are somewhat different.

20. In Hua Rong case, the court had found that it was a fraud by the director and the relevant documents produced to the solicitor including the board minutes, the request for the loan were all forged documents and, because of that, the plaintiff could not rely upon Turquand’s rule:

‘17. There is no doubt that the relevant documents produced by the 2^nd defendant to the solicitors were forgeries. The first copy of the board resolution, that which the 2^nd defendant had signed, was clearly on its face not a copy of a valid resolution. Apart from anything else there was no date or other indication as to when or where a resolution had been passed. More importantly, there never had been such a resolution. Any document signed by the 2^nd defendant purporting to indicate that there had been such a board resolution was clearly only an instrument of fraud. The version of the resolution which was produced with the forged signatures of the two other directors was obviously also a forgery.

18.  Turning to the requests which the 2^nd defendant had purportedly made on behalf of the 1^st defendant for loans, these were also false.  The 2^nd defendant had no power to borrow or request a loan on behalf of the 1^st defendant without the authority of the other directors. …

19  In those circumstances, in the court below it disavowed any ability to rely on the rule in Turquand’s case.  In the light of the difficulties, the plaintiff put its case on the basis of apparent or ostensible authority. 

The arguments on the appeal

20.      On the appeal the plaintiff did not resile from the position it took in the court below that it could not rely upon the “internal management rule”.  …’

21. However, this case is complicated by the 2nd defendant’s admission in his witness statement that he had no authority from the 1st defendant to enter into the loan agreement and knowing that he needed the other shareholders’ consent, he did not get their consent for entering into the loan agreement.  I have asked Mr. Pang’s assistance on this legal issue as to the difference between a forged minutes situation as in Hua Rong case and this situation where the 2nd defendant knew that he had no authority to convene the board meeting and pass the resolution.  Mr. Pang submits that he agrees that if it was a forged document situation, Turquand rule does not apply.  But here, it is a director in breach of trust against the other shareholders, there is no authority on this situation. He submits that Turquand rule should therefore apply.

22. I have difficulty in accepting Mr. Pang’s suggestion.  In item 4 of the authority he submits, viz. Hong Kong Company Law, 11^th Edition  at page 265 where the learned author states:

“The rule in Turquand’s case does not, however, apply to a forgery, it applies only to irregularities which otherwise might affect a genuine transaction.”

23. It is at least arguable that the transaction, that is, the loan agreement between the plaintiff and the 1st defendant was not a genuine transaction.  As such, the Turquand rule should not apply.

24. The plaintiff is therefore not entitled to rely upon Turquand’s rule and the 2nd defendant had no authority to enter into the loan agreement.

25. I will therefore give leave to the 1st defendant to defend.  As usual, the costs should be in the cause of the action, with a counsel’s certificate for today’s hearing.

26. I shall now make an order in terms of paragraph 25 and shall also give direction as follows:

By consent, the 1st defendant shall file and serve the Defence within 28 days from the date hereof.