DELCO PARTICIPATION B.V. v. CHIHO - TIANDE GROUP LTD

HCA 3040/2015

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 3040 of 2015

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DECISION

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1. This is an application by the defendant, Chiho-Tiande Group Ltd, made by way of summons dated 26 February 2016, to strike out the Statement of Claim and dismiss the action on the grounds that it is frivolous or vexatious and/or is otherwise an abuse of the process of court.

2. The application is made on the basis that the claim has no prospect of success.  It should be noted at the outset that there is no dispute that the Statement of Claim discloses a valid cause of action, and therefore that if the facts and matters set out in the Statement of Claim are taken as correct for the purposes of a strike out application (which is the normal treatment for such facts and matters) it is inevitable that the plaintiff will recover the full amount of the pleaded claim.

3. However, it is permissible for a defendant to demonstrate by way of affidavit evidence that a plaintiff simply has no factual basis to support the cause of action pleaded in his claim.  If a defendant can demonstrate that then a claim should be struck out.  But inevitably in such circumstances a court must be very careful to ensure that the facts as alleged by the defendant are either entirely uncontroversial or cannot be the subject of any serious dispute.  A court should not allow a strike out simply on the basis that it considers the plaintiff's claim to be unlikely to succeed, or subject to some difficulty in proof.  A plaintiff is entitled to take a matter to trial notwithstanding that his claim may contain weaknesses and difficulties.  In this context it is relevant to note that there is no form of summary judgement available to a defendant in Hong Kong.  That position can be contrasted with the position in, for example, England and Wales where the court rules permit a defendant to seek a summary dismissal of a claim on the grounds that it is unlikely to succeed.

4. Consequently it can be seen that the defendant must demonstrate that there is simply no prospect of the plaintiff making good the factual allegations set out in the Statement of Claim.

5. The Statement of Claim identifies that a company known as Delco Asia Company Limited ("Delco Asia") was owed a sum of HK$57,827,118 ("the Debt") by the defendant arising out of an agreement dated 24 June 2010, known as the Shareholders Loan Assignment and Capitalisation Agreement.  That amount is referred to in various aspects of the correspondence, but there is also some reference to a lower figure of HK$55,501,079.97.  Mr Lo on behalf of the defendant assures me that there is no dispute that this lower figure does in fact represent the Debt, but I have not been able to ascertain with any certainty the precise manner in which the two figures arise, and why there is a difference.  It certainly looks like they might represent the same debt, but I do not consider that it can be said with total confidence that the difference is entirely immaterial.  However, for the purposes of further discussion, I leave that point aside.

6. Beyond that point, the precise details of the way in which the Debt was made up are not particularly material to the issues, but in simple terms, and as alleged in the Statement of Claim, Delco Asia assigned to the defendant its (Delco Asia's) rights in various loans advanced by Delco Asia to subsidiaries of the defendant.  It was agreed that the defendant would issue and allot to Delco Asia various shares in the intended listing of the defendant in satisfaction of part of the consideration for the amounts assigned to the defendant.  In relation to the remainder (HK$57,827,118, known as the Uncapitalised Portion) the defendant would repay that amount out of the proceeds of the listing of the shares of the defendant.  The Debt represents the Uncapitalised Portion.

7. Delco Asia then entered into an agreement (known as the Assets & Liabilities Transfer Agreement) with the plaintiff, a company incorporated in the Netherlands, on or around 3 October 2011, by which Delco Asia transferred various assets of Delco Asia to the plaintiff. The plaintiff says that one of the assets which was transferred was the entitlement to be repaid the Debt.  The defendant says that, on a clear and uncontroversial construction of the Asset & Liabilities Transfer Agreement, the Debt, to the extent that it was still outstanding from the defendant, was not transferred.

8. The defendant has not repaid the Debt to the plaintiff and accordingly the plaintiff claims that amount from the defendant.

9. The essence of the defendant's proposition, as set out in its skeleton argument, is that the burden of repayment of the Debt was taken up by one Mr Fang An Kong, who is one of the original joint venture partners and was closely involved in the manner in which the Uncapitalised Portion originally arose.  The defendant points to and relies upon the following:

(1) The fact that the audited accounts of the defendant for the year ending 31 December 2010 do not record any amount as due to a related party, which it says would include Delco Asia.

(2) Delco Asia's unsigned Financial Statements for the financial year ending 31 December 2010 ("the 2010 Accounts") show a zero balance as due from Chiho-Tiande (HK) Limited, and do not show any amount as due from the defendant.  Whilst the 2010 Accounts are unsigned there is a board resolution dated 6 September 2011 of Delco Asia in which they are approved.

(3) In respect of the various receivables shown in the 2010 Accounts, the Debt cannot be included in any of the other figures because:

(a) "Loans Receivable" are listed in the amount of HK$13,996,816, so cannot include the larger figure of the Debt.

(b) "Other Receivables" listed in the amount of HK$56,700,599 cannot include the Debt.  The HK$56,700,599 comprises a debt due from Mr Fang in the amount of HK$55,501,079.97, and hence cannot include also the Debt as a different and distinct figure.  The defendant says that this is consistent with the proposition that Mr Fang "absorbed" the Debt (whatever that proposition is intended to mean).

(c) "Amounts due from related Companies" listed at HK$121,473,355 does not include the Debt because the make up of that amount is shown in Note 13 and does not include the Debt.

(4) An unsigned resolution purporting to be a resolution of the shareholders of Delco Asia which shows a zero balance as due from Che (HK) Limited, and does not show any amount as due from the defendant as a related company.

Chiho-Tiand

(5) An audit confirmation request from Delco Asia to Mr Fang dated 15 August 2011, and signed by Mr Fang, which shows that the sum of HK$55,501,079.97 is due from Mr Fang to Delco Asia as at 31 December 2010.

(6) In addition the defendant relies upon an email dated 31 August 2011 from Mr Van Lint acting on behalf of Delco Asia, in which Mr Van Lint seems to accept on behalf of Delco Asia that the sum was a receivable from Mr Fang, and that the account of Delco Asia should reflect the existence of that asset as a receivable from Mr Fang.

10. The defendant relies upon an affirmation of Yu Ming Cheung, dated 26 February 2016, who is the company secretary and Authorised Representative of the defendant. She does not purport to have any personal knowledge of any assignment or extinguishment of the Debt, but she identifies the 2010 Accounts and the draft shareholders resolutions which I have just referred to and continues at paragraphs 17, 18 and 19:

" 17. Based on my professional experience as company secretary of Hong Kong companies, shareholders' resolutions in view of annual general meetings (such as the Shareholders' resolutions) will not be prepared until after the directors and auditors of the relevant company have approved and signed off the annual financial statements. In the circumstances, and in light of paragraph 1 of the unsigned Shareholders' resolutions, I verily believe that the figures under paragraph 3 of the unsigned Shareholders' Resolutions are simply lifted from the audited Financial Statements and Reports of the Directors and Independent Auditors of Delco Asia for the year ended 31 December 2010, which ought to have been verified and approved by the management and auditors of Delco Asia at the material time, in order for the shareholders of Delco Asia to note, confirm, ratify and approve.

18. In the circumstances, I verily believe that any amounts due from the Defendant and/or its subsidiaries under the Shareholders Assignment and Capitalisation Agreement had been cleared as proven by Delco Asia's own records.

19. My belief in this regard is further supported by the Consolidated Financial Statements of the Defendant for the financial year ended 31 December 2010 .... The amount due from the Defendant to Delco Asia as at 31 December 2010 was also zero.".

11. There is also an affidavit from Mr Fang. In that affidavit he produces the audit confirmation which he signed, and he confirms that "I agreed to absorb the amount stated in the audit confirmation as being due from me instead of from the Defendant.".

12. In the light of this evidence the defendant contends that the Debt has in some manner, which is not specified, been novated or assigned across to Mr Fang, and is therefore no longer due from the defendant.

13. In what appears to be a secondary argument in its skeleton argument, the defendant also relies upon the terms of the Assets & Liabilities Transfer Agreement which at clause 2 confirms that the assets and liabilities acquired by the plaintiff are "the assets and liabilities mentioned in the adopted financial statements of the Company". The defendant suggests that the adopted financial statements of the company (Delco Asia) are the 2010 Accounts, and because they do not reflect the Debt it cannot have been acquired by the plaintiff.  The defendant suggests that this proposition is consistent with the proposition that the Debt has been absorbed by Mr Fang.

14. During the course of oral argument Mr Lo identified that in fact he considered the starting point for the discussion to be the Asset & Liabilities Transfer Agreement.  He said that once it was recognised that the adopted financial statements are the 2010 Accounts, and once they are properly understood (in the manner set out in paragraph 9(3) above) it is clear that the plaintiff did not have the Debt assigned to it, and hence it cannot sue.

15. Mr Lo also accepted, rightly in my view, that he was unable to satisfy the high hurdle necessary on a strike out of this nature, in respect of the assignment and extinguishment of the Debt.  In other words, he accepted that whilst his case remained that the burden of the Debt was in some manner novated from the defendant to Mr Fang, he accepted that he could not prove this beyond any argument.  Mr Lo was correct in this respect, because it is trite that the burden of a debt can only be passed to a third party with the consent of all parties.  Whilst there may be some evidence of consent from the defendant and Mr Fang, and there is some evidence to suggest that over time Delco Asia might have accepted the assignment, it cannot be said that this is so clear as to be a legitimate foundation for a strike out.  At best for the defendant, it has to rely upon an email from Mr Van Lint.  But Mr Van Lint is not even a director of Delco Asia, and his authority to agree to such an assignment has not been demonstrated.  His affirmation confirms that at the material time he was a partner of a tax and accounting firm, and he was a tax and strategic advisor to the plaintiff and Delco Alsia.

16. As a consequence of this it seems to me that the defendant's application must stand or fall on the Assets & Liabilities Transfer Agreement.  However, in the discussion below I will also address the assignment and extinguishment arguments.

17. The plaintiff suggests that this case is very far removed from the type of case which could be struck out on the ground that the facts alleged are obviously wrong.  It points out that the burden of the Debt cannot be passed to a third party other than with the consent of all parties.  It contends that there is no evidence of any agreement by Delco Asia to the assignment or extinguishment of the Debt and in the circumstances says it is inappropriate to embark upon a mini trial in order to ascertain whether in fact the Debt was either assigned to Mr Fang or otherwise extinguished.

18. The plaintiff also points to various emails between Mr Van Lint, and Mr Hoi Li of Morrison Heng, the then auditor of Delco Asia, in which there is a debate as to whether or not the Debt should be set off against other debts owed to Mr Fang.  The plaintiff suggests that this demonstrates that there was in fact no consent and consequently the claim remains valid.  The plaintiff acknowledges that Mr Fang suggested that the Debt should be set off against the amount which Delco Asia owed to him, but says that in contemporaneous comments on the draft financial statements this suggestion was obviously not accepted by Delco Asia.

19. In all the circumstances the plaintiff says that this matter ought to go to trial.

Discussion

20. I am satisfied that this action should not be struck out.

21. Dealing first with the alleged novation of the Debt.  I am satisfied that it is at least arguable on behalf of the plaintiff that there has been no assignment or extinguishment.  The only evidence that the Debt has in some way been passed to Mr Fang is in Mr Fang's own affirmation were all he says is that he "absorbed" the debt.  That does not demonstrate that the plaintiff agreed to it.  Further the email evidence to which I have been referred does indicate that there was some debate within those advising Delco Asia as to what was to happen to the Debt.  Mr Lo says that the email dated 31 August 2011 from Mr Van Lint shows that Delco Asia has accepted that the account receivable should be recorded as due from Mr Fang.  However, there is no suggestion that Mr Van Lint was a director of the plaintiff, or was in any way authorised to bind Delco Asia to any such novation.  It simply cannot be said that the evidence is incontrovertible.  As I have pointed out, Mr Lo rightly accepted that he could not overcome the high hurdle for a strike out on this ground.

22. It is also clear that the amount which was said to have been "absorbed" by Mr Fang is different to the amount Debt.  There is no adequate explanation for this difference.

23. As to the shareholders resolution relied upon by the defendant I do not accept that this is evidence which cannot be in any sense controverted.  It is unsigned and therefore actually represents little more than words on a piece of paper.  It does not demonstrate the agreement of those matters by the shareholders of Delco Asia.

24. In relation to the 2010 Accounts the highest that can be said is that they do not appear on their face to record the Debt. There is no mention of the defendant anywhere in those financial statements. There is mention of Chiho-Tiande (HK) Ltd, and the fact that there is a zero balance due from that company, but that is not the defendant.  Whilst the original debt from that company to Delco Asia appears to have made up at least some portion of the Uncapitalised Portion it is not at all clear to me that the mere record of a zero balance due from that company as at 31 December 2010 represents a zero balance due from the defendant.  To the contrary, the two companies are different and under the terms of the Shareholders Loan Assignment and Capitalisation Agreement the Uncapitalised Portion was due from the defendant and not from Chiho-Tiande (HK) Ltd.

25. I understand Mr Lo's point about a proper analysis showing that there is no record of the Debt from the defendant within the 2010 Accounts because of the make up of the figures they record as receivables.  He may well have a good proposition in this respect.  But there is a logical difficulty in the argument at this point.  If the court cannot strike out on the ground that the Debt has been novated, it must follow that there is a prospect of the plaintiff showing that the Debt was not novated to Mr Fang and is still due from the defendant.  On that basis, for the purposes of the strike out, the court must assume that it has not been novated. The consequence of such an assumption is that either:

(1) The 2010 Accounts, which purport to represent a true and fair picture of the financial affairs of the plaintiff as at 31 December 2010, must include the Debt notwithstanding that Mr Lo cannot find it; or

(2) The 2010 Accounts are not correct, because wrongly they have failed to record the Debt.

26. If the first of those two propositions is correct, then it cannot be said that the Assets & Liabilities Transfer Agreement did not assign the Debt.  On the defendant's construction of that agreement, it purports to assign all debts in the 2010 Accounts.

27. If the second of the propositions is correct, then there is a difficulty between clauses 1 and 2 of the Assets & Labilities Transfer Agreement:

(1) Clause 1 purports to transfer all assets and liabilities.

(2) Clause 2 purports to record that the assets and liabilities which are in fact transferred are those recorded in the 2010 Accounts.

28. If the 2010 Accounts are incorrect in that they do not in fact record all assets and liabilities, then it will be necessary for the court to construe that agreement so as to ascertain the true intention of the parties at the time it was entered into, and to assess what the words used actually mean.  Does it mean that all assets and liabilities are transferred as per clause 1 or does it mean that only those assets and liabilities recorded in the 2010 Accounts were transferred as per clause 2?  That is likely to involve a factual enquiry which cannot be undertaken on a strike out application.

29. Mr Lo suggests that there is no evidence that the parties to the Assets & Liabilities Transfer Agreement intended to assign anything other than what was contained in the 2010 Accounts.  In one sense he is correct.  That may support his argument at trial, but it seems to me that there is a perfectly reasonable argument that the very issuance of the writ is evidence that the plaintiff believed that the Debt had indeed been assigned.  I cannot ignore that at the strike out stage.  From that it would appear that either the plaintiff believed that the Debt was included within the 2010 Accounts, or it was assigned in any event by way of clause 1 of the Assets & Liabilities Transfer Agreement.

Disposition

30. In all the circumstances I dismiss the application to strike out.

31. The parties agree that there is no reason why the costs should not follow the event, save that Mr Lo suggests that the case does not warrant a senior counsel, and a high ranking junior would have been sufficient.

32. I order that the defendant shall pay the costs of the plaintiff, to be taxed if not agreed.  I do not accept that the engagement of senior counsel was inappropriate.  The application was a serious application to strike out a claim of over HK$57,000,000.  It warranted a free choice as to representation.