DE CHANG FULFILMENT LTD v. MANLEY TOYS LTD AND ANOTHER

HCA 1161/2009 & HCA 1159/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NOS 1161 OF 2009 AND 1159 OF 2009

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J U D G M E N T

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BACKGROUND

1.  The Plaintiff (“De Chang”) is a Hong Kong company.  It is a subsidiary of a company called Johnson Electric Trading Limited (“JETL”).  JETL is, in turn, a subsidiary of a listed company called Johnson Electric Holdings Limited.

2.  JETL is also the majority shareholder of a company called Easy Reach (“Easy Reach”).  The other shareholder is a business associate of JETL’s. 

3.  The President of JETL at the material time was Mr Simon Wong.  He had a subordinate called Alvin Wai who was responsible for the dealings relevant to this case.  There was another staff called Lorvan Yiu who assisted in the dealings between De Chang and the Defendants.

4.  All three have already left the employment of De Chang (except Lorvan Yiu who remained with De Chang on a part time basis).  All three had been called by De Chang as witnesses.  Indeed they are De Chang’s only witnesses.

5.  Easy Reach has had business dealings with a company called Smart Union (“SU”)since 2006.  By July 2008 SU was indebted to Easy Reach in the amount of around HK$11.5 million. The responsible person at SU was a person called Tony Wu.  SU was a toy manufacturer.

6.  Also, SU was at all material times the manufacturer of you products for the Defendants Manley Toys Limited (“Manley”) and Toy Quest Limited (“Toy Quest”) (collectively “the Defendants”).  Lisa Liu was the managing director of both.  Also featuring in the key events is a gentleman called Gorvan Leung, Director of Sales and Marketing of the Defendants.

7.  On 17^th July 2008 a meeting took place between Tony Wu (for SU) on the one hand and Simon Wong and Alvin Wai (for De Chang) on the other.  De Chang pressed SU for payment during the meeting.  Tony Wu promised that SU would send a few post-dated cheques.

8.  A few days later De Chang did receive 7 post-dated cheques from SU.  The first one was cleared.  But a few days before 8^th September 2008, SU requested De Chang not to present it until further notice.  De Chang became concerned and a meeting took place on 11^th September 2008.

9.  Pausing here, up to this stage of the narrative the Defendants had not seriously challenged De Chang’s evidence and I make findings to the above effect accordingly.

10.  Moving on - De Chang’s case is that at the 11^th September 2008 meeting, Tony Wu told De Chang that SU was in cashflow difficulties because of the change in attitude of banks in extending financial facilities, and there were problems with its “supply chain”.  As a manufacturer, SU depends on its ability to manufacture toys from raw materials.  If it did not have the cashflow to pay the supplier for the materials, it would not be able to fufill the orders which its customers had placed with it.

11.  It was in this context that, according to De Chang, the parties discussed and eventually agreed on certain basic conditions upon which De Chang was to render financial assistance to SU.  This was colloquially referred to as “unclogging the supply chain” in the sense that financial assistance was to be provided to pay SU’s suppliers of materials, so that materials could be supplied to SU to enable SU to complete the orders in hand.

12.  Incidentally, it is De Chang’s case that the idea of De Chang providing financial assistance had indeed been raised by De Chang in the July meeting (mentioned above) but nothing came of it because SU was not too keen then.

13.  It is De Chang’s case that at this meeting certain basic conditions (or “Primary Conditions”) were agreed between SU and De Chang as follows:-

(1) De Chang would play the limited role of a "white knight" and thus it would focus primarily on providing financial support to resolve the cash flow problems with the supply chain (i.e. supply of the components and parts from time to time required by SU to manufacture toy products);

(2) De Chang would not be responsible for the design, quality, delivery or related matters of the products to be or not to be manufactured by SU for its customers, such as Manley and Toy Quest.  SU alone would remain solely responsible for and liable to its customers for all matters related to product and delivery;

(3) upon checking with SU as to the feasibility of manufacturing the toy products as per requirements, SU's customers would have to issue purchase orders via De Chang, who would then pass on and re-issue such purchase orders to SU ("Condition 3");

(4) as a corollary of Condition 3, on shipment, De Chang would invoice the relevant customer of SU and such customer would pay De Chang accordingly, in order for De Chang to split payment for each shipment and pass on SU's share to SU, so as to maintain SU's production line and supply of toy products to its customers.  The payment terms with each customer of SU involved would be sorted out individually in due course;

(5) De Chang would have to meet with SU's customers directly before a purchase order is accepted.  SU shall make all the aforesaid conditions clear to each customer (especially Condition 3) and obtain the customer's acceptance of the conditions, before SU would arrange a formal meeting with De Chang and the customer involved so as to further explore and work out (if at all) the deal with that customer.

14.  According to De Chang, following this 11^th September 2008 meeting, the following events took place:-

(1) meetings took place with different customers of SU.  Specifically on 16^th September 2008 De Chang met with three customers of SU namely Mattel, IDT and Hasbro.  Hasbro refused to participate, whereas Mattel and IDT agreed but subject to a number of outstanding points.  Alvin Wai and Simon Wong attended the first two meetings that day (with Mattel and Hasbro), but Alvin Wai did not attend the third meeting that day (which was with IDT).  Only Simon Wong went to that one;

(2) for Mattel, there were e-mail correspondence from 19^th September to 22^nd September 2008 in which Mattel agreed to the term that De Chang would not be liable or responsible for production and delivery issues and that SU was to be responsible;

(3) on 17^th September 2008 a team of staff from De Chang went up to Dong Guan where SU’s factories were located (one at a place called Zhang Yang and one at a place called Bao Shan).  The purpose of the meeting was for De Chang to inspect SU’s factories in order to verify the situation about materials available to SU.  De Chang also wanted to work out a projection, based on the number of orders in hand, of the cashflow needed in order to fulfill those orders.  During this meeting, Tony Wu suggested to De Chang that another of its customers, namely Manley, should also be brought into this “project”.  Tony Wu also told Alvin Wai that he (Tony) had spoken to the Defendants and they had accepted the Primary Conditions;

(4) on 18^th September 2008 there was another meeting in Dong Guan.  Alvin Wai was informed by Harry of SU that a meeting has been arranged to take place the next day on 19^th September 2008;

(5) there is a curious point about the arrangement for this meeting on 19^th September 2008 (which I raised with Alvin Wai in the course of his cross examination by the Defendants).  In the bundles there is an email dated as early as 16^th September 2008 from Harry of SU to Lisa Liu and Gorvan Leung of the Defendants (and cc to Tony Wu and Alvin Wai), whereby Harry was asking Lisa and Gorvan for a meeting on 19^th September to discussing bouncer business.  I say it is a curious point because it may be said that by this email, the idea of a meeting involving Alvin Wai (De Chang) and the Defendants had already come up on 16^th September, before the 17^th September date that Alvin Wai had suggested in his evidence.  The email was followed by another email from Gorvan Leung dated 17^th September at 2 pm suggesting 11am at Manley’s office on 19^th September, and this also took place before the time when, according to Alvin Wai, Tony Wu first suggested that Manley be brought into the programme;

(6) These emails were briefly raised with Alvin Wai.  He said he did not really recall whether he had received the first email on 16^th but he did see the one with the time and place.  This does not deal with the point about why the email was sent even before Tony Wu was said to have first raised the point about Manley, but the point was not seriously pursued or picked up in submissions as going to the credibility of Alvin’s story and there may well be reasons why Harry of SU had wanted to call a meeting to discuss bouncers in any event.  Since the point was not fully explored, I say no more about it;

(7) coming back to the narrative: a meeting then took place among De Chang, Manley and SU on 19^th September.  The following persons took part:

(a) Alvin Wai;

(b) Lisa Liu;

(c) Gorvan Leung;

(d) Tony Wu;

(8) it was at this meeting that, according to De Chang, the parties entered into an agreement in terms of the Primary Conditions (except (5));

(9) it is De Chang’s case that at the same meeting the parties agreed that the Defendants were to transfer only the purchase orders with shipment dates before end of October 2008 and for purchase orders with shipment dates beyond that, the Plaintiff would have to review and confirm the situation at the end of October 2008 (the "Shipment Date Condition").

15.  On 22^nd September 2008 De Chang collected some purchase orders from the Defendants.  Goods were manufactured and supplied to the Defendant by SU.  This went on until 16^th October 2008 when SU filed for voluntary liquidation.  SU’s factories on the Mainland had in fact ceased to operate shortly before then, and goods had been taken over or seized.  The long and short of the matter is that SU was no longer able to continue the production or supply of goods to the Defendants.

16.  De Chang requested the Defendants to pay for the goods that had been shipped but the Defendants had not effected any payment. De Chang commenced two actions, one against each of the Defendants.  The action were consolidated and consolidated pleadings were filed. 

17.  A large number of witness statements were filed by the parties.  In particular, a large number of witness statements were filed by the Defendants in response to De Chang’s challenge to the authenticity of some of the documents relied upon by the Defendants in support of their counterclaim.  The Defendants had to file witness statements to deal with the challenge. 

18.  When the matter came before me for trial first in November 2011, it soon became very obvious that the trial could not be completed within the time allotted.  I raised with the parties the possibility of making a “split trial” order (none had been made before, but there was nothing to prevent me from making an order half way through the trial as part of case management) because it was also apparent that the “quantum” part of the trial concerning the Defendants’ counterclaim was going to involve a number of witnesses and a number of very detailed issues were going to be involved.  However, following submissions, no “split trial” order was made and so the trial was adjourned part heard to March 2012. Evidence continued to be led. 

19.  Eventually on 3^rd April 2012, the witness statements of eight “authenticity  witnesses” from the Defendants namely:

(1) Colin Yip;

(2) Li Chun Yan;

(3) Chung Wing Yi;

(4) Ng Hon Man;

(5) Eric Lam;

(6) Cheng Chun Man;

(7) Chan Man Chiu;

(8) Tsang Ka Po

were admitted as evidence without the need for their attendance. 

20.  On the quantum issues, because a large number of items were involved and it would have been completely disproportionate for each of them to be ventilated in detail, the sensible course had been adopted whereby cross examination proceeded only on the more important examples (of transactions which were challenged on the same basis) without admitting the veracity or validity of those not cross examined upon (many of the disputed items do not involve disputes of primary facts so as to call for resolution of credibility – they were more in the nature of challenge by way of submissions).  Closing submissions were delivered on 11^th April 2012.

21.  The Defendants defended the claim and also filed a counterclaim.  An extremely wide range of issues were pleaded on paper, but in the end the following issues remained for determination:-

(1) whether De Chang was entitled to claim the price against the Defendants or whether the right to payment remained with SU;

(2) whether any agreement was reached between De Chang and the Defendants that while the purchase orders would be re-issued by the Defendants to De Chang, De Chang would not take up any liability in respect of the goods;

(3) whether De Chang was guilty of misrepresentation by stating to the Defendants in the 19^th September 2008 meeting that De Chang would become a shareholder of SU and would provide financial resources to SU and intended to sustain SU as a going concern;

(4) whether there was a tacit agreement, or an implied term, that De Chang would successfully procure or assist SU to manufacture the products ordered under the re-issued purchase orders;

(5) Whether the Defendants had been subject to economic duress.

(6) Whether the Defendants’ standard terms and conditions at the back of their purchase orders had been incorporated between the parties so that the Defendants were entitled to effect set offs against De Chang.

(7) Whether the re-issue of purchase orders amounted to fraudulent preferences.

(8) Whether the Defendants were entitled to counterclaim against De Chang for failure to deliver goods covered by some of the re-issued purchase orders.

(9) Whether, in that eventuality, the Defendants were entitled to claim losses suffered on orders with delivery dates after October 2008, because (according to De Chang) the parties agreed to the Shipment Date Condition such that even if De Chang was to be liable at all, it was not liable for any purchase orders with delivery dates after October 2008.

PLEADING POINT

22.  A pleading point was taken by the Defendants in their closing submissions from paragraphs 33 to 45.  I called this a “pleading point” because it could be regarded as an objection that the case as now run by De Chang is actually not captured by the language/wording of the pleadings.  I therefore think that I should deal with it at the outset. 

23.  Other parts of the same section in the Defendants’ closing submissions consist of arguments and comments about the way that the pleadings had developed, and as to how certain things were not said initially and were only added later, with a view to showing that certain matters were made up later (or afterthought) (see e.g. closing at paragraph 45 which made this point explicitly).  Insofar as those submissions are “credibility” submissions I will take them into account in assessing the overall credibility of the parties’ respective cases.  But at this juncture in the judgment my focus is on the potential “pleading objection” that one may be able to discern from the closing.

24.  The point seems to be that in the Reply in the unconsolidated pleadings, and in the amended Consolidated Statement of Claim, it was only pleaded that at the 19^th September meeting “it was apparent” to the attendees that the Defendant had been “on top of” and had accepted the Primary Conditions (or apparent that they were aware of and accepted the Primary Conditions).  It was not pleaded that it had actually been discussed or agreed at that meeting that De Chang would not take up any responsibilities (one of the Primary Conditions). 

25.  In my judgment this is an unrealistic submission and should be rejected.  It was quite obvious that the parties had all understood perfectly well that the allegation was that the Primary Conditions were discussed and agreed at the meeting and the Defendants in particular had produced two witnesses (Lisa Liu and Gorvan Leung) to deal with and rebut the matter. 

26.  In any event as a matter of language, the language of “it was apparent …” was well capable of covering a scenario whereby the matter “was apparent ….” as a result of what had been discussed at the meeting itself.  Pleadings are not a game, and in a case like the present where the words were wide enough to cover the case as actually run, and when the Defendants have had no difficulty (or prejudice) in dealing with what had been discussed at the meeting, I reject any pleading objection (insofar as it is intended to be mounted).

ASSESSMENT OF CREDIBILITY

27.  It is trite that in assessing credibility of witnesses on primary facts, the Court should take into account the following matters:-

(1) inherent credibility;

(2) such facts and contemporaneous documents as are undisputed or indisputable.

While Courts have cautioned against excessive reliance on demeanour of witnesses, in suitable cases the demeanour of witnesses in the witness box, the manner in which they answered questions and their body language can legitimately be relied upon in assessing credibility.

BRIEF COMMENTS ON WITNESSES

28.  This is perhaps as good a place as any for me to comment briefly on the general manner of giving evidence, and credibility, of the witnesses called by the parties so that my discussion of their evidence can be viewed in proper perspective.

29.  For De Chang the following witnesses were called:-

(1) Simon Wong:-  He was an experienced businessman.  He was articulate and gave his evidence in a careful and well thought out manner.  He was not a participant in the 19^th September meeting.  However, his evidence provided the background facts against which the evidence as to the meeting and its aftermath is to be assessed.  I am impressed by his evidence and have little difficulty in accepting his evidence.  I reject the Defendants’ criticism that he would “slip” things in here and there and make up matters here and there to “package” his case. 

(2) Alvin Wai:-  He was cross examined on the key events in question and he had not been shaken in the process.  I reject the criticism made by the Defendants that he was generally not reliable.  In fact quite the contrary.  He gave his evidence in a straightforward and spontaneous manner.  He was not evasive or defensive.  At times he was ready to provide answers which might even be regarded as slightly against De Chang’ forensic position (e.g. his ready and spontaneous acceptance in the witness box, during cross examination shortly before lunch on 18^th November 2011, that he knew as a matter of common sense that if the Defendants could not ship toy products in time for the Christmas period, they would suffer great loss.  He also acknowledged that the point that De Chang would not take up any liability was a “sensitive” topic and so he had deliberately left it as the last point in his discussion with Lisa Liu).  I accept his evidence on the material events.  In the event of conflict between him and Lisa Liu (and Gorvan Leung) on any matter, I prefer his evidence;

(3) Lorvan Yiu.  At the material time she was the senior manager of JETL.  She was not directly involved in the negotiations in question but she was able to explain the background to the important email of 23^rd September 2008 and also to satisfactorily explain De Chang’s position on quantum.  Insofar as it is helpful for me to so indicate, my distinctive impression having heard and observed her is that she was very careful and meticulous in her evidence.  I have little difficulty in accepting her evidence;

(4) one point about all three witnesses of De Chang is that they were, at the time of the trial, no longer employed by De Chang (save for Lorvan Yiu, currently a law student at the City University, who was paid a fee to help with the documentary aspect of the case) and they had all confirmed that they had no financial benefit to be obtained out of the case.  Even without this element I would have formed the view which I had of their evidence (as described above).  But this factor served to reinforce the positive view and impression I had formed of their evidence (and I emphasize that it was not just their demeanour and manner, but also the substance).

30.  For the Defendants, the following witnesses were called:-

(1) Lisa Liu.  She was a seasoned businesswoman, with years of experience in the toy industry.  It was precisely because of this that I had found her evidence on many material aspects of the case evasive and unsatisfactory, which has seriously dented her credibility.  In particular I find it incredible (as I will explain later) that she would have “swallowed” the representations allegedly made by Tony Wu and Alvin Wai without any meaningful probing.  When pushed into a corner in cross examination, she would resort to repetitions of the same answer (for example that she regarded “SU and De Chang as one”) without any degree of rationalization or reasoned explanation.  Where there is a conflict between her evidence and that of Alvin Wai I prefer the latter;

(2) Gorvan Leung.  He was the Director of Sales and Marketing of the Defendants and took part in the 19^th September meeting.  He was at times argumentative and confrontational towards the questions put to him.  Such an attitude hardly instills confidence in his evidence, in that one is left in some doubt whether the witness was really here to score points and defend his own position rather than give evidence to assist the Court.  Also, because of his particular area of interest within the Defendants (inflatable bouncers), it is not unlikely that once the meeting got past the initial stages (and moved beyond bouncers) he ceased to have any active interest in (and hence ceased paying serious attention to) the contents of the discussion.  Again where his evidence conflicts with that of Alvin Wai I prefer that of Alvin Wai;

(3) Maggie Wong, Fion Cheung and Fenny Ho.  These three witnesses were staff members of the Defendants.  They were not directly involved in the negotiations in question. But some of the emails sent to, or sent by, them were being the subject of scrutiny and some questions arose as to what prompted them to send a particular email or to adopt a particular response (or a non-response) to a piece of communication from De Chang.  It is in this specific context that their evidence became relevant to liability.  I have to say that all three of them gave evidence in a less than satisfactory manner.  All of them were guarded, defensive and at times evasive in their answers.  Fenny Ho (the direct recipient of the 23^rd September email to be discussed below) sometimes took an inordinate amount of time to respond to questions.  The contents and manner of these three witnesses are such that I cannot place much weight on their testimony.

EVIDENCE AS TO THE MEETING

31.  The material fact in issue is whether at the meeting the parties had agreed that while purchase orders were to be issued by the Defendants to De Chang (and De Chang was to be the party entitled to receipt of funds), De Chang would not be liable for any issues concerning the products such as production and delivery.

32.  On this, the parties’ witnesses presented opposing version of events.

33.  On De Chang’s side, the gist of Alvin Wai’s evidence is that at the meeting he “walked through” the Primary Conditions (except that in paragraph 8(5) of the Amended Consolidated Statement of Claim about meeting with customer, since he was already meeting with customers) with Lisa Liu.  Specifically, he mentioned that De Chang would not bear any liability or responsibility, but because he expected that to be a sensitive topic and so he put it as the end.  However, Lisa Liu did not have any strong reaction to that.  In terms of the business arrangement between SU and De Chang, he denied mentioning that De Chang would become a shareholder of De Chang.

34.  He accepted that Lisa Liu did ask during the meeting whether De Chang would acquire SU.  He explained (based upon a model answer that he had learned from Simon Wong during one of the meetings with SU customers on 16^th September) that De Chang was not a toy company and he was not sure if it would engage in toy industry in future.  De Chang’s ultimate parent and SU were both listed companies and any kind of alliance would take a long time to go through the procedures.  He explained that there was a quicker way to help SU to get out of its difficult position.  He had learned from Tony Wu that SU had many orders that were almost completed but still required some funds before they could be completed, and De Chang would supply funds to solve DU’s cash flow problem.  Alvin said he did not mention any “split payment” arrangement between De Chang and SU.   

35.  On the Defendants’ side, it is the evidence of Lisa Liu that she had not been told about the detailed manner in which De Chang would assist SU to unclog the supply chain and had not been told that De Chang would be under no liability.  She thought that De Chang was the “white knight” for SU.  She was told that De Chang would become a shareholder of SU (德昌會入股) and that she regarded the two companies “as one” and there would be a continuous relationship.  She was told that because of internal procedures of the two listed companies, switching the purchase orders to De Chang would be the quickest way of facilitating the arrangements made for the delivery of goods.

36.  She denies having been told about the Shipment Date Condition.  She said if she had been told about it she would have regarded it to be very ambiguous (曖昧).  Any October “cut off date” would have caused huge problems for the Defendants.  The original purpose of the 19^th September meeting was to discuss new products to be manufactured between November and March.  If the October “cut off date” had been mentioned she would not have agreed but would have gone back to her boss for discussion.  Gorvan Leung gave evidence to similar effect.

37.  This, in gist, is the effect of the evidence presented by the parties.  I now proceed to discuss the credibility of these competing versions by reference to the well established guidelines. 

38.  In terms of inherently credibility, Alvin Wai’s story is inherently credible.  De Chang had never been a toy manufacturer and there was no reason for it to want to take on the burden of being a toy manufacturer and be liable for non-delivery or quality problems.. 

39.  As Mr Pao submitted in paragraph 4 of his closing submissions, “it would have been improbable for [De Chang] to assume the risks of liability, which were appreciable and real, when its true objective was to achieve a modest margin on payment to set-off the financial assistance it provided to SU to solve its supply chain problems”.  If it had no intention of taking on any liability, it would have made sense for it to explain and reveal that to SU’s customers who it dealt with.  If it were to “conceal” this in their discussions it would have been a recipe for trouble.

40.  On the other hand, it may be said that it might be important to the Defendants for liability to attach to De Chang if they were to be under a liability to pay De Chang.  Otherwise they would have to pay De Chang but then live with a claim against SU (which might be of dubious liquidity or might actually be insolvent) in case there were issues over production or delivery.

41.  All these mean that the point ultimately boils down to the parties’ assessment of their own position and perspectives as to risk taking.  The existence of possible countervailing commercial considerations does not render De Chang’s version inherently incredible.

42.  One important key to resolving the competing versions of events is that, as Mr Pao submitted in paragraph 11 of De Chang’s closing submissions, there are two competing versions as to how the agreement to “switch” the purchase orders came about: De Chang’s version and the Defendants’ version.  In an adversarial system the Court’s role is to adjudicate between competing versions of fact.  Assessment of credibility is relative in nature.  Where the court is faced with two competing versions of fact namely version A and version B; if version A is inherently credible whereas version B is inherently incredible (or less credible than A), then it is a factor favouring the acceptance of version A. It may be that if the competing versions are version A and version C (the inherent credibility of which are similar) the Court would have to approach the matter differently, and may have to resort to other pointers to resolve the issue of credibility. 

43.  This is illustrated by the present case.  It is NOT the Defendants’ case (whether in cross examination, in their evidence or in their submissions) that (i) Lisa Liu or Gorvan Leung had actually asked specifically about the question of liability for late or non-delivery and (ii) had been told or assured positively that De Chang would be liable for production issues.  I say nothing about how a conflict between De Chang’s version and such a version would have been resolved, because this is not the conflict before me.  The Defendants’ case (I repeat once again) is that Alvin Wai and Tony Wu had represented to Lisa Liu that De Chang was going to become a shareholder of SU (德昌會入股), but because both companies were part of a listed group the relevant procedures would take time and so the quickest way of facilitating delivery of goods was for the Defendants to re-issue the purchase orders naming De Chang instead.  That was it.  Their evidence is that the question of liability was left completely unsaid, and they did not probe or ask.

44.  I find this version of events by the Defendants to be inherently incredible.

45.  To start with, Lisa Liu, the key protagonist for the Defendants, was not a naïve junior staff with no commercial experience. She joined the Defendants in 1976 as a sales supervisor.  She is the managing director of the Defendants.  On all accounts (and from my observation of the manner in which she gave evidence) she was a sophisticated and shrewd businesswoman who was well versed in business and commercial strategies and commercial concepts such as companies with limited liability and the like. This forms an important backdrop for assessing her evidence as to (i) what she had been told by Alvin to be the intended relationship between SU and De Chang and (ii) why she was prepared to go along with Alvin’s explanation without further questioning or probing.

46.  In this connection I reject with no hesitation the suggestion by the Defendants in their closing submissions that the Defendants were somehow “unsuspecting working bees”.  Both sides were seasoned businesspeople, well capable of looking after themselves, of asking any pertinent questions they deem necessary, and of working out and balancing the risks and benefit implications of a business deal.

47.  Against this background I now explain why the inherent probabilities are against Lisa Liu’s evidence:

(1) first of all, the prospect that De Chang would become a shareholder of SU (even if this had been stated to Lisa Liu) does not mean that SU could necessarily be able to trade out of its difficulties.  It must depend on the detailed arrangements between the parties (for example, the extent of shareholding, whether there was going to be any commitment to provide financial support, etc).  However, according to Lisa Liu, she did not even ask about the extent of shareholding that De Chang was going to take in SU.

(2) a shareholder is not obliged to provide financial support to a company in the long run.  Yet Lisa Liu said that she did not think in such long term.

(3) Also, if De Chang were truly to become a shareholder of SU (and if it were to inject funds into SU as a supportive shareholder), there was no need for any switching of purchase orders to the name of De Chang.  The orders could very well remain in the name of SU (which would be in a position to fulfill them because of whatever financial support that De Chang was going to provide).  Yet Lisa Liu did not ask about how the mechanics of how the transaction and assistance was going to work out.  

(4) she was completely unable to explain why she had not probed or asked about the necessity of switching the purchase orders to De Chang, save to repeat that she had been given the message that SU and De Chang “were one” and that things appeared positive to her.  For someone as experienced and seasoned as Lisa Liu, I regard it as unbelievable that she would just operate on such a vague and “wishy washy” impression without asking for further specific details.  She could not have been too shy or embarrassed to ask, given that this is a serious commercial deal and there was no “compulsion” for her to agree to anything on the spot (as I shall discuss later, no one uttered any threats at the meeting).  As things turned out, she was unable to explain her own internal train of thought as to how the assistance would operate;

(5) one of the constant themes of Lisa Liu’s evidence is that the party who was entitled to payment should take up responsibilities for the goods too.  If that were what she had in mind, then it was all the more important to specifically ask and address this issue (namely who would be the party entitled to payment) when the question of switching of purchase orders was discussed.  Yet this is an issue which, on her own evidence, she did not specifically ask or raise;

(6) the Defendants now appears to accept that on the face of the PO De Chang had a right to be paid. But that is only after Lisa Liu had given evidence;

48.  This was a significant issue in the parties’ dispute and I paid particular attention to the content and manner of Lisa Liu’s evidence and explanation.  I had the distinct impression (both from the content and manner of her evidence) that she was being extremely evasive on the point. All she did was, with respect, to cling on to the oft repeated stonewalling statement that she regarded SU and De Chang “as one”.  I have already explained why this does not even begin to provide a rational basis of why Lisa Liu would agree to switch over the purchase orders.

49.  On the Defendants’ side there is an additional witness who testified on the events of 19^th September and that was Gorvan Leung.  Assessment of credibility of witness testimony is not a “numbers game” and the existence of one more witness does not necessarily make a party’s case stronger.  Gorvan Leung’s evidence as to the discussions on 19^th September (especially as to the things said, or not said) is largely the same as that deposed to by Lisa Liu, materially:

(1) they were told that De Chang would become a shareholder of SU;

(2) they were told that because both were listed companies,  in order to solve the shipment problem within the shortest period of time the purchase orders had to be switched;

(3) there was no explanation as to how the switching of purchase orders would assist;

(4) no question was asked as to the extent of shareholding that De Chang would take in SU;

(5) no question was asked about timing of acquisition of shares;

(6) no question was asked about De Chang’s role and responsibility after becoming a shareholder of SU;

(7) nothing about legal liability was mentioned.

50.  Gorvan Leung also said that Alvin Wai had not mentioned the Shipment Date Condition and that had he mentioned it, he would have rejected it because bouncer toys were supposed to be sent to the warehouse between October and end of March the next year.  If the Shipment Date Condition had been mentioned it would mean that the meeting was useless. 

51.  All the criticisms I had made earlier about the inherent probabilities of Lisa Liu’s evidence apply equally to that of Gorvan Leung.  Specifically, he had great difficulties, under cross examination, in explaining how (in his mind) (i) De Chang becoming a shareholder in SU could be linked to (ii) the need to switch the recipient of purchase orders to help the delivery of goods.  

52.  When pressed on what he understood to be the attributes of being a shareholder, he resorted to rather unhelpful answers (delivered in a rather “grumpy” fashion) such as “that was why I am unsuccessful” (when asked about his previous experience as a shareholder in a company) and “I do not have experience” (when asked on an example involving buying HSBC listed shares in the context of his evidence that a shareholder had to follow his commitment).  Such “confrontational” attitude hardly instills confidence in the veracity and genuineness of his evidence. 

53.  Both counsel cross examined the other side’s witnesses at some length about such detailed matters as the locations where respective individuals were seated at the meeting (and Alvin Wai produced exhibit P1 in the course of his evidence setting out his recollection of where various persons were seated), the order in which various things were said and done (such as the timing of small talk, introduction and exchange of namecards), and whether (on the Defendants’ case) it was Tony Wu, or Alvin Wai, or both of them, who had expressly mentioned the point that De Chang would become a shareholder of SU.  Submissions were also made (and cross examination conducted) about supposed internal inconsistencies in, or departures from, the pleadings or one’s witness statement (e.g. paragraph 51 of the Defendants’ closing submissions; paragraph 41 of the Plaintiff’s closing submissions; also the cross examination of Alvin Wai as to the inconsistency between his witness statement and oral evidence as to whether he had told Lisa Liu that payment would be “split” between De Chang and SU).  Each case depends on its own merits, and while in some cases departure from pleadings or witness statements could well dent credibility to a great extent in the specific context of this case, I regard those inconsistencies and deviations from witness statements by either side’s witnesses as being relatively insignificant in the overall scheme of things.  I have taken them into account but am of the view that they do not add to or detract from, my views on credibility based on the other considerations I have mentioned. 

54.  Much was made by the Defendants about a “Memorandum” prepared by Simon Wong dated 15^th September 2008 and a “plan” prepared by Paul Yue of De Chang dated 14^th September 2008. But I do not see how these help the Defendants in terms of damaging the credibility of De Chang’s evidence as to the arrangements between De Chang and SU, and as to what transpired at the meeting.  The Paul Yue email was an idea early on in the sequence of events.  It then evolved into the Memorandum.  Then a Master Agreement dated 18^th September 2008 was signed between De Chang and SU.  The nature of the arrangement as between SU and De Chang, as explained by Simon Wong and which I accept, was simply this – of the money received or collected by De Chang from SU’s customers, De Chang was entitled to keep 8% essentially as its “profit” in the deal (this 8% was not mentioned on the face of the Master Agreement but was mentioned in the Memorandum).  De Chang was supposed to pass the remaining 92% to SU but under the Master Agreement De Chang had a further right to set off any amount owed by SU to De Chang or De Chang’s associates.  By reason of this set off mechanism, De Chang could recoup whatever outlay it had paid out to “unclog the supply chain” and also because of the reference to “associate” in clause 8, the debt owed by SU to Easy Reach could also be set off.  I do not see how these documents can assist the Defendants in attacking the credibility of De Chang’s evidence as to what was agreed on 19^th September as between Defendants and De Chang.

CONTEMPORANEOUS DOCUMENTS

55.  In terms of contemporaneous documents, there are a number of pointers against the Defendants.

The 23^rd September 2008 email

56.  First, there was an e-mail dated 23^rd September 20008 sent by Samuel Sham of De Chang to Fenny Ho of Manley, and copied to Lisa Liu and Fion Cheung.  The email reads as follows:-

“Fenny,

We hereby confirm received Manley's PO. We are proceeding it with Smart Union accordingly.

Please note that as there is no time to go through all the Terms and Conditions which state on Manley's PO and then to be negotiated between your esteemed company and De Chang. As Smart Union has already agreed to take up all the responsibilities and liabilities regarding the products made to fulfill Manley's order to De Chang. We suggest that Smart Union will take up the Terms and Conditions towards Manley and we De Chang will focus on the supply chain effort only.

As were we not to step in to help, and if Smart Union were to continue the shipment, it would have been Smart Union to take up the responsibilities and liabilities anyway. Thus, no material impact is made towards Manley.

Besides, the order shipment out of the period from Sep to Oct is subject to further confirmation.

Samuel

Johnson Electric Trading Limited” 

57.  None of the recipients on the Defendants’ side had responded to or refuted the suggestion that:-

“Smart Union will take up the Terms and Conditions towards Manley and we De Chang will focus on the supply chain effort only.”

58.  The origin of this email can be shortly explained.  The email was sent not because Alvin wanted to “put on record” the contents of the meeting he had on 19^th September 2008. Rather, the origin of the email was that on 23^rd September 2008 Lorvan Yiu (who was not a participant in the 19^th September meeting) saw preprinted terms and conditions in Manley’s purchase orders in the course of going through them.  She raised it with Simon Wong who reacted strongly to that.  A meeting was held within De Chang during which Simon Wong projected a draft email onto a screen and colleagues were told to use the draft email to inform customers about De Chang’s terms, like a template.  

59.  Even though the email was not worded as a “put on record” type of email, the significance of the email is that insofar as it indicated that De Chang would not be under any liability in respect of the goods, it was consistent with De Chang’s case as to what happened at the meeting and inconsistent with the Defendants’ case.  Therefore if there was indeed no discussion during the meeting as suggested by De Chang, one would have expected the Defendants to protest about the contents of this email.  The absence of any protest could therefore be taken as evidence that the Defendants saw nothing objectionable in the email because through Lisa Liu they already knew (from the 19^th September meeting) that De Chang would take on no liability.

60.  The sender of the email, Samuel Sham, was not someone who took part in any negotiations; nor was he a witness.  He was Alvin’s subordinate.  He was helping Alvin and was in a position to write to customers.  However, Alvin Wai had never introduced Samuel Sham to Lisa Liu.  Lisa Liu had not introduced Fenny Ho to Samuel Sham. The sender of the email would therefore not have been familiar to the recipients. 

61.  I have borne the above in mind when assessing the evidential value of the lack of response to this email.  But even allowing for the fact that the sender was someone not familiar to the recipients, I am still of the view that the absence of response or rebuttal to this email is a factor of significant force which I am entitled to – and which I do – take into account against the Defendants.

(1) Lisa Liu at one time said she had no recollection of reading this email.  Elsewhere in her evidence she said she might have merely skimmed through it.  She did not positively say that she had not seen this before.  Either way, the thrust of her evidence was that it was not an email which left any deep impression on her.  I am aware of the fact that businesspeople with a busy schedule sometimes may not pay full attention to every email that was “cc”ed to them, especially in this day and age when it takes very little effort to add a name to the “cc” list and there is a good deal of indiscriminate copying of email in the business world.  However, that does not mean that I am bound to accept any suggestion that an email to a “cc” recipient was not read or not concentrated on.  It all depends on the subject matter and nature of the email.  For the particular email in question, it was relatively short.  The subject matter was something well within Lisa Liu’s area of interest.  She was at the meeting on 19^th September, and a cursory look at the email would have revealed that its contents are inconsistent with her understanding of the effect of the 19^th September meeting.  It was something that was difficult to miss.  I therefore reject any suggestion that, for whatever reason, Lisa Liu could have missed this email or the impact of this email;

(2) Fenny Ho, the recipient of this email, said that she did not recall whether she told Lisa Liu about this email but, with the benefit of hindsight, if the email had been received today she would have reported it to Lisa Liu.  There is nothing to suggest why the situation today is any different from that in 2008.  Insofar as is necessary I find that Fenny Ho had also informed Lisa Liu of this;

(3) Fion Cheung, the other recipient of the email, said that she ignored it and expected others to deal with it.  In this regard I accept her evidence because the email talked about terms and conditions which were not part of her duties.  But by my earlier findings, Lisa Liu would still have been aware of the contents of this email by her own reading of it and (insofar as is necessary) by Fenny Ho mentioning it to her.

62.  The Defendants’ closing submissions addressed this email at paragraphs 58 to 68.  Points were made about, for example, the wording and language used.  However, those paragraphs do not detract from the evidentiary force of the email.  The stark fact remains that the arrangement proposed in the email was inconsistent with the Defendants’ case and it had remained uncontradicted.

63.  I should deal with one point mentioned in the Defendants’ closing (paragraph 66) and put in the course of cross examination. As I have said above, the email was not worded as a “put on record” form of email in the sense of referring to the 19^th September meeting and post-recording what had been agreed.  The email was sent as a result of some discussions in a meeting in the morning of 23^rd September when Lorvan Yiu reported to Simon Wong and Alvin Wai about the existence of terms and conditions at the back of the purchase orders.  Alvin Wai was asked in cross examination why in this meeting he did not also mention the additional point that it had already been agreed on 19^th September that De Chang would not take up any liability in respect of the goods.  Alvin Wai answered that he had already reported the matter to Simon Wong on 19^th September, and also on 23^rd September Simon had already as President given his instructions to those below him (I take this to mean an instruction to those below him to inform customers that De Chang would not take responsibility). 

64.  I find nothing unusual or incredible about this approach.  Someone who is always keen to “put on record” might have repeated this to his boss and asked for this extra point to be mentioned in an email. But given he said he had already reported to Simon on 19^th September and Simon had already instructed that customers be told that De Chang would take up no liability (which was to same effect as that said to have been agreed on 19^th September anyway) I do not find the omission to expressly remind Simon about it (or mention it in the 23^rd September email) was something that affects or dents Alvin Wai’s credibility.  

Chasers issued by De Chang

65.  Another class of contemporaneous documents are various chasers issued by De Chang for payment and Manley’s responses thereto (such as an email chain culminating in an email by Alvin Wai to Lisa Liu dated 12^th November 2008, an email from Maggie Wong to Alvin Wai dated 13^th November 2008, a reminder email dated 25^th November 2008 from Mike Lo of De Chang to Winnie Yip and Marvin Chow of Manley, another series of emails between Alvin Wai and Maggie Wong which culminated in an email from Maggie Wong to Alvin Wai dated 2^nd December 2008,  solicitors’ letter of demand dated 6^th January 2009, and email exchange between Alvin Wai and Maggie Wong dated 10^th March 2009 and 30^th March 2009).  I have been taken through them in cross examination and they have been addressed in the parties’ respective closing submissions.  The short point that emerged from them is that in none of these exchanges had the Defendants ever mentioned that De Chang was liable for non-delivery of goods or that the Defendants had a counterclaim that they would seek to set up to set off against any claim by De Chang .  

66.  The first time that any counterclaim was mentioned was in a letter from Messrs WK To & To dated 23^rd April 2009 in response to De Chang’s solicitors’ letter of demand dated 6^th January 2009.

67.  Significantly, in the email exchange between Maggie Wong and Alvin Wai, the only point put forward by the Defendants to justify the delay in payment was that the provisional liquidator of SU had suggested that the Defendants should “hold all outstanding payments”.  That was in the context of a supposed concern over “double payments”.  In an email dated 13^th November 2008 Maggie Wong said:- “Once the liquidator finished the auditing and confirm we should pay De Chang, we will settle payments without delay”. 

68.  The fact, however, remains that though the liquidator of SU had not formally written to “confirm” that the Defendants should pay De Chang, the liquidator had not made any claim either.  Yet the Defendants had still not made any payment.

69.  When confronted with these communications, the Defendants’ witnesses were unable to satisfactorily explain why the simple point about (i) De Chang being liable for non-delivery of goods and (ii) the Defendants had a counterclaim, had not been put forward contemporaneously. 

70.  The explanation given by Lisa Liu was that it was likely that she had asked the more junior staff (such as Maggie Wong) to “hold” the payments, that when she received Alvin Wai’s chaser dated 12^th November 2008 she forwarded it to Maggie Wong for handling, that she had asked Maggie Wong to speak to the liquidator and that she had also told Maggie Wong that there was a need to verify the sums.  She also said that at the earlier stages of the correspondence the Defendants were not yet ready with the figures because the Defendants were busy.  She also said that she had never thought of using emails as the basis for pushing anything further, that she did not expect matters to go to court and so was not meticulous about use of words.  She also said that she received many emails and so when she was busy she would forward to Maggie Wong to reply and in a number of matters Maggie Wong was not clear. 

71.  I am unimpressed by any of these explanations and I reject them.  The point about a potential set off is not a difficult or particularly sophisticated point that one would have to wait for legal advice or do a lot of calculations before knowing how to put forward.  In fact the Defendants’ witnesses were all familiar with the concept of “對數” and that if there is a counterclaim against a claiming party, that can be put forward to reduce the amount to be paid.  It was something that could easily have been relayed and instructed by Lisa Liu to Maggie Wong.

72.  I do not accept the suggestion that being “busy” (and so not being ready with the figures of the counterclaim) could prevent her from giving instructions at least to state, as a matter of principle, that De Chang should be liable for non-delivery and the quantum of the counterclaim had yet to be worked out. 

73.  In any event, as Maggie Wong subsequently acknowledged, it would not have taken more than a month to perform the calculations. 

74.  Maggie Wong had no involvement in the meeting or negotiations of 19^th September 2008.  Her evidence was that Lisa Liu forwarded Alvin Wai’s 12^th November email to her and asked her to call the liquidator of SU to ascertain whether payments should be made to SU or De Chang.  Significantly, according to her, Lisa Liu did not mention to her the possibility of any claim for loss of profits or any deductions which might have to be made from the sums claimed by De Chang.  All these lend weight to the argument that the parties had agreed that De Chang was to be under no liability in respect of the goods, for otherwise Lisa Liu ought naturally to have instructed Maggie Wong to assert a claim.

75.  Maggie Wong tried to put a gloss on the email which she sent on 13^th November, where she concluded by saying:- “Once the liquidator finished the auditing and confirm we should pay De Chang, we will settle payments without delay”.  The gloss that she placed on this concluding sentence is that in her mind, she had in mind possible deductions that ought to be made against the claimed sum.  She elaborated upon this by saying, in effect, that if one has a claim against a manufacturer then the claim should be deducted before money was handed over – otherwise one would not expect the other side to write a cheque back.  That was her concept of “setting payments”.

76.  The point may turn out to be a bit of a red herring because her evidence is NOT that she was aware of any such a cross claim which had to be deducted – her evidence was that Lisa Liu did not tell her.  But purely as a matter of language, I would reject her gloss over her use of the phrase “settle payments” anyway.  “Settle payments”, read in the context of the whole email (when the tenor was about not suffering double payments) clearly meant make payment by the Defendants.  If the cross claim exceeds the claim by the other side, then the Defendants would have no payments to make (or “settle”).  In these circumstances I regard Maggie Wong’s attempt to explain “settle payments” as meaning “fully consider and check with everything in order to decide whether at the end any payment ought to be made to [De Chang]” (witness statement paragraph 33) as being artificial and contrived and I reject it.

77.  Lastly, in none of the contemporaneous responses is there any complaint that De Chang had misled the Defendants that it would become a shareholder of SU and this discredits the evidence that such a representation was made. 

78.  In the Defendants’ closing submissions the point was made (paragraph 6) that De Chang made and termed those communications “as one eyeing on enforcement”.  Insofar as this is intended to mean that De Chang sent those communications for the purpose of chasing for payment, that of course is true but there is nothing sinister or wrong about it. But insofar as it is intended to mean that the various communications from De Chang were sent with a view to paving the way to make an invalid claim (and that somehow I should not place weight on those communications and the manner in which the Defendants responded to them) then I reject any such suggestion.  I need only refer to the oft-cited observations of Kaplan J in Eu Asia Engineering Ltd. v. Wing Hong Contractors, HCCT 16/1990, 23/12/1999 at page 11:-

“In construction cases, as in most other cases, I attach great significance to the contemporaneous documents. These are usually prepared in good faith before a dispute has arisen or at any rate crystallised. It is a particularly devious contractor, employer or sub-contractor who systematically manufactures documents to assist in a future dispute. Fortunately, such instances are rare. I accept that once a dispute has been identified it is necessary to pay careful attention to the documents created after that time because it is only natural that parties will reflect their grievances and justification for actions taken in those documents. I am quite satisfied that all the contemporaneous documents until just before the crucial events can be relied upon. I will have to look harder at the other documents prepared once the dispute existed.”

79.  If there had been anything incorrect or invalid in any of the communications sent from De Chang then it was very much open to the Defendants to refute or rebut, or to ask for further information.  I reject any suggestion that somehow the Defendants were “working bees” with limited knowledge or understanding (suggested in paragraph 6 of the Defendants’ closing).  I also reject any suggestion that the Defendants were naïve corporations which did not know how to protect themselves by asserting their position in documents.

Correspondence whereby the Defendants pursued SU instead of De Chang

80.  Another “cluster” of relevant correspondence which cast light on credibility is a series of correspondence whereby the Defendants chose to pursue SU over production and delivery issues.

81.  The key example is that relating to a product called “Pug Dog”.  To cut a long story short, there were issues of late delivery concerning such product ordered by the Defendants.  In an email dated 30^th September 2008 from Fion Cheung (of Manley) to Ivan Ho of SU (copied to Lisa Liu), Fion Cheung sought to place the liability for penalties, charges, order cancellation and reduction at the shoulders of SU. 

82.  Another example relates to an order concerning “Discovery Channel”.  Again there were issues concerning production and delivery and, in an email dated 13^th October 2008 from Fion Cheung to Ivan Ho of SU and Alvin Wai, she stated that “We will claim back SU if customer needs Manley to bear any losses”.  This email was not copied to Lisa Liu.

83.  These emails showed that when problems arose, staff of the Defendants regarded SU (and not De Chang) as being the entity responsible for delivery and production issues.  This is consistent with De Chang’s case that it had been agreed that De Chang would not be responsible for those matters, and inconsistent with the Defendants’ position that De Chang was responsible.

84.  Both were put to Lisa Liu during cross examination.  She was unable to explain the attempt to hold SU liable except by saying that there were many emails and she did not have time and responsibility to pay attention to each and every word used.  However, I do not think it is a matter of paying attention to the details of the words used.  The message in the emails was clear enough.  She might not have been copied into the “Discovery Channel” email but she was copied into the “Pug Dog” email.  Yet she had not intervened to point out that Fion Cheung had placed the liability on the wrong entity.   

85.  I should point out that Lisa Liu in cross examination also sought to suggest that Fion Cheung had addressed the “Discovery Channel” email to both SU and De Chang because Fion Cheung had an understanding or impression that the two were one.  However, this was her speculation as to the state of mind or understanding of Fion Cheung.  I do not believe that her evidence is helpful on that. 

86.  I now turn to the evidence of Fion Cheung, the sender of the emails, as to why she addressed the emails in the way she did.  She said (in respect of the “Pug Dog” email) that she was asked by Lisa Liu to follow up with SU on the order but also to chase one more person Alvin Wai, but nothing more was said. 

87.  In terms of the “Discovery Channel” order, Fion Cheung had actually sent a series of email before the 13^th October email. Specifically there was an email dated 26^th September 2008 (the heading was “We really need your help”) where she wrote to Alvin Wai asking him to help push SU for delivery.  In cross examination she agreed that Alvin’s role was that of a facilitator, liaising with SU to push production forward.  

88.  In connection of both clusters of emails (Pug Dog and Discovery Channel) there was no evidence that she thought, or that anyone had told her, that following the switching of the purchase orders there was any change in the identity of the entity which was to be responsible for delayed or non delivery.

89.  Fion Cheung’s emails discussed above are therefore consistent with and supportive of De Chang’s case that it had been agreed that SU was to be liable for production and delivery issues but not De Chang.

90.  In closing, the Defendants referred to an email sent by Alvin Wai dated 13^th October 2008 in reply to Fion Cheung’s “Discovery Channel” email dated the same day. It reads as follows:-

“Fion,

Let’s treat this as a personal input.

When a company like SU is dying everyday, what else you can claim from it?

If it is compensated from Johnson from payment, I’ll say it will be a dangerous act.

That’s why I advise you to monitor the deliveries on a daily basis with SU personnel to protect your company interests. Other guys are exactly doing this at site beginning from 6^th.

I and my boss are now meeting with the local government officials to fix a critical issue.

Alvin”

91.  The Defendants argued, based on this email from Alvin Wai, that even though Fion Cheung’s email of 13^th October only mentioned a claim against SU, Alvin Wai responded as if a claim was made against Johnson (De Chang’s parent) as well.  And the Defendants argued that Alvin Wai resorted to threats (“dangerous act”) rather than refer to the 19^th September agreement whereby De Chang would not take up any liability.

92.  The problem with this submission was that this email is not an occasion to raise the point about the 19^th September meeting.  On its face Fion was merely mentioning a claim against SU and not against De Chang.  The Defendants say that Alvin Wai seemed to take that as being a claim against De Chang as well (because the name of Johnson, the parent, was mentioned).  But Alvin Wai had not been cross examined on this point as to what he meant by that, and there could very well be other nuances/meanings that Alvin had intended to convey.  For example as Mr Pao suggested it could very well mean that Johnson had some funds that would otherwise be deployed to support SU (e.g. towards paying the suppliers and hence unclogging the supply chain) which might be thought to be useable instead to pay SU’s liability towards the Defendants, and Alvin was simply cautioning Fion against such a thought.  The short point is that the issue has not been explored with Alvin Wai and not much can be derived out of it in the face of the clear wording of Fion’s clear indication that her intended claim was against SU.   

93.  What is clear is that when Fion Cheung was cross examined on this email, she said that her understanding was that even if she mentioned a claim in her email, it would be useless.  What she did not say was that by her emails she had meant to make a claim against De Chang as well or that she regarded Alvin Wai’s email as “defending” a claim made against De Chang.  She regarded Alvin as giving her advice by himself.  I do not think, in the context of such evidence, much can be made out of this email by the Defendants.

94.  The Defendants pointed out that in an email dated 30^th September 2008 from Alvin Wai to Fion Cheung, it was clear that De Chang was involved in the production by SU and the word “we” was used in the email “I am afraid that we could only commit to deliver 10,000 units ….”.   (my emphasis)

95.  The same applies to another email sent by Alvin Wai to Fion Cheung at around the same time. 

96.  However, that could really be a case of loose use of language because commercially De Chang was indeed helping SU and it can be understood why the word “we” had been used.  It cannot be extrapolated to support the Defendants’ contention that Alvin had conveyed the impression to Lisa during the 19^th September that the two would be one, or that De Chang would become a shareholder of SU.  

97.  Alvin Wai was cross examined on a few other emails with a view to showing that Alvin Wai had not raised the point about the agreement on 19^th September when he ought to have.  One topic concerned what had been called the issue concerning “hijack charges”.  Put shortly some goods had been held by a transportation company because of non-payment of transport charges.  The transportation company was originally engaged by SU.  The Defendants had to pay the transportation company to secure release of the goods, and they then sought to debit this against De Chang. 

98.  Alvin Wai was cross examined on two emails (one from Howard Man of De Chang to Cheong Siu of Manley dated 20^th October 2008 and another from him to a number of people in the Defendants’ side dated 10^th November 2008).  In these emails the stance taken on behalf of De Chang was that De Chang was not liable for the debt owed by SU to the transportation company and the Defendants should follow up with the liquidators.  The criticism made of Alvin Wai is that he had not mentioned (or asked Howard Man to mention) the agreement on 19^th September to resist the attempt to debit the transportation charges. 

99.  In this regard Alvin Wai explained (in respect of the email by Howard Man) that the email was sent only shortly after SU’s liquidation and it was still unclear as to whether there would be any development in the matter and so he told Howard Man that it was enough to present the matter that way.  In respect of the email sent by him, in re-examination he explained that at that time his mind was focused on SU’s liquidation and hence the reference to SU’s liquidator.  I accept his explanations.  In any event the basic stance is clear, i.e. De Chang would not pay.  This is to be contrasted with the contemporaneous response by the Defendants when chased – either no denial at all, or a response that one the double payment issue had been resolved then the payments would be settled. 

100.  The other document cross examined upon is an email from Alvin Wai to Maggie Wong dated 3^rd December 2008 in connection with a debit note TF081345 issued by Manley to De Chang in the amount of HK$51,605.10.  Again De Chang’s stance was a refusal to take up liability for what it regarded to be SU’s responsibility. 

101.  Alvin was questioned as to why he had not mentioned the 19^th September agreement.  Alvin explained that he did not think that it would have helped eve if he were to draft the email in a “more beautiful” way because by that time it was the fourth reminder already, and the last sentence of the email (“It is understood these charges are only valid and would be considered by us if you treat us as your supplier on this deal”) was included just to strengthen the tone.

102.  I appreciate that the “fourth reminder” relates to De Chang’s attempt to get paid, and the immediate point goes to De Chang’s refusal to be debited.  However, the broad point remains valid, namely that by that stage of the correspondence the parties’ position had become quite entrenched - De Chang had already previously taken the line that it was not liable for what it had called “SU liabilities” and the Defendants had not paid (for reasons they had given).  I can well understand why De Chang had not re-iterated the 19^th September agreement. 

103.  In any event, in the overall scheme of things, it is a matter of standing back and looking at the totality of the contemporaneous evidence that both sides rely on.  The points made by De Chang in its documents are ones that are simple and straightforward, and are ones that readily struck one as calling for a simple, direct and contrary response from the Defendants if there had been an answer.  The points made by the Defendants depended on more contrived reasoning and, at times, slightly nitpicking.

104.  One point that was debated before me was whether it was open to the Defendants to pursue SU on the delivery issues.  It was suggested before me by the Defendants that at the meeting the parties agreed that the purchase orders by SU would be “cancelled” (see also paragraph 70(c) of the Defendants’ written closing) and so unless De Chang was liable, the Defendants would have no recourse against anyone for quality or delivery issues. 

105.  But this is not the effect of De Chang’s version of the meeting/agreement.  De Chang’s case/evidence does not involve any “cancelling” of the SU purchase orders and if I accept De Chang’s evidence (which I do), no question of cancellation of SU’s purchase orders arise.  Of course the purchase orders were re-issued naming the Defendants as the addressee instead of SU, but that is different from cancelling SU’s liability in respect of the goods.  The agreement (which was a tripartite one) involved, by way of documentation, re-issuing of purchase orders but as far as rights/liabilities are concerned, it was as contended by De Chang.  De Chang would be entitled to payment but SU would remain liable for delivery and production issues. Insofar as any point on “consideration” is taken, the consideration supplied by De Chang was obvious: it was the provision of finances to SU for the purposes of unclogging the supply chain to enable products to be produced.

THE AUDIT CONFIRMATION

106.  De Chang relied on an Audit confirmation sent by Toyquest’s auditors.  It asked the recipient (De Chang) to confirm the amount of debt recorded therein as due and owing by Toyquest.  In the course of her evidence Maggie Wong produced the underlying document (exhibit D1) which formed the basis upon which the Audit Confirmation was prepared.  After adjusting for an amount representing sums due to SU invoices, as accepted by Maggie Wong, an amount of US$180,000 odd was shown as due as owing by Toyquest to De Chang, which was very close to the amount claimed by De Chang against Toyquest in this action.

107.  The evidentiary significance of this Audit confirmation is twofold.  First it undermines any defence to the effect that Toyquest owed money to SU but not De Chang.  Second there was no hint in the Audit confirmation, or the underlying document D1, of any possible deductions due to a counterclaim for loss of profits.  No witness, and no evidence, has been produced by the Defendants to explain why, had it been thought or genuinely believed that there was a valid counterclaim against De Chang, the materials and calculations underpinning such counterclaim would not have been prepared in good time and supplied to the auditors for the purpose of their work.  I accept the Audit confirmation and exhibit D1 evidence against the credibility of the Defendants’ case. 

THE RECORDING

108.  Lastly De Chang relied on the transcript of a telephone recording between Simon Wong and Tony Wu on 10^th November 2008.  The gist of the conversation was that Simon Wong put to Tony Wu that the manner of their co-operation was that De Chang would be doing it by way of “trading” and that it had been made clear to Mattel that responsibility and liability would remain with SU.  Tony Wu was recorded to have made some affirmative indications and he also said something to the effect that in the document signed between SU and De Chang the point about “trading” was mentioned. 

109.  In my judgment the probative value of this recording is not great for the purpose of the dispute before me.  First it was specifically in the context of mentioning to Mattel.  Secondly even though Simon Wong explicitly mentioned the notion of “liability and responsibility remaining with SU”, in Tony Wu’s verbal response he did not repeat this but referred to the concept of trading instead.  In the absence of Tony Wu as a witness to explain what he meant, I do not think I can place too much weight on this document as contended by De Chang.

110.  To conclude, having regard to such matters as inherent probabilities, contemporaneous documents and undisputed facts and witness performance, I accept De Chang’s witnesses’ evidence as to the events and discussions (with SU) which led to the 19^th September, the events during the 19^th September meeting and the discussions concerning the switching of purchase orders and the issue of De Chang’s liability.  Specifically I accept their evidence concerning the Primary Conditions (except (5) which was not engaged), subject to the modification by Alvin Wai’s oral evidence during trial that he had not mentioned how the proceeds would be “split” with SU.

THE SHIPMENT DATE CONDITION

111.  This logically is a point relevant to the Defendants’ counterclaim but since it relates to what was discussed during the 19^th September meeting I think it is convenient to deal with it here.

112.  By amendment, De Chang introduced the Shipment Date Condition in paragraph 12A of the amended Statement of Claim.  In any event even without the amendment, De Chang’s case as to the Shipment Date Condition been flagged in its witness statements and the Defendants knew what case they had to meet.

113.  The point only arose in the event that the Defendants succeed in their counterclaim (i.e. that De Chang was to be liable for non delivery of products).  The question is then as to which particular purchase orders De Chang should be liable for.  If De Chang’s case is accepted, then its liability does not extend to purchase orders with a due date of delivery after October 2008. If the Defendant’s case is accepted, then its liability covers purchase orders with a due date after October 2008.

114.  I have already summarized the gist of the parties’ evidence on this point above.

115.  In assessing the credibility of the parties’ witnesses on this issue, I shall do so by reference to the matters I referred to above namely inherent credibility, contemporaneous documents and undisputed facts, and (to a lesser extent) demeanour and manner of giving evidence.  Also I bear in mind two things:

(1) I must consider the evidence about the meeting in its entirety;

(2) that said, it is possible for a witness’s evidence to be accepted in one respect and rejected in another.  My rejection of Lisa Liu’s evidence in one aspect does not mean that I must reject her evidence in this respect as well. 

116.  In terms of inherently credibility, I can well understand why De Chang might want to keep its option open and to adopt a wait and see approach.  However I can also understand that from the Defendants’ perspective they might prefer a long term commitment beyond October.  But again this simply means that there is no inherent improbability either way.  It is a matter of negotiations.  If the Defendants treasured the advantage of De Chang’s unclogging the supply chain, then it is not inconceivable that they would agree to the Shipment Date Condition. 

117.  I reject any evidence (e.g. that of Gorvan Leung) or submission that the Shipment Date Condition would render the meeting meaningless because bouncer toys were supposed to be shipped from October to March.  As Mr Pao submitted, the relevant orders for De Chang were not bouncer toys.  In any event, as I have said above, while there was no certainty in respect of orders with delivery date after October, there would be assurance in respect of orders up to October and it is entirely a matter of commercial balancing.  I would not regard this factor as rendering the Shipment Date Condition inherently incredible. 

118.  In terms of contemporaneous documents, De Chang relied on two emails. 

119.  First De Chang relied on an email dated 19^th September 2008 (which was a Friday) from Alvin Wai to Fion Cheung (cc to Lisa Liu) in which it was stated:

“Dear Fion,

As per our visit and meeting with Lisa in this afternoon, thank you for your quick action. We would await your P/Os on next Monday.

Dear Lisa, thank you for your time and I think we have a good meeting at your office in this afternoon. Regarding to your question on the sustainability between JE and Smart Union, I have conveyed your concern to our President Mr. Simon Wong. As long as it makes business sense, JE is happy to continue the role to bridge your esteem company with SU”.

120.  As a matter of timing, after the 19^th September meeting, Alvin Wai received an email from Fion Cheung on the same day enclosing details of all outstanding orders in the form of an Excel spreadsheet, and where Fion Cheung stated that all revised purchase orders would be sent to De Chang no later than Monday (22^nd September).  The above email was sent in response to Fion Cheung’s said email.  According to Alvin Wai, the sentence about “sustainability” and “concern” was a reference to the continuation (if at all) of the arrangement beyond October 2008 which was discussed in the 19^th September meeting. 

121.  Second, De Chang relies on the same email dated 23^rd September which had already been discussed earlier.  The email ended with the sentence:

“Besides, the order shipment out of the period from Sept to Oct is subject to further confirmation”.

122.  This sentence was not in the draft template of email prepared by Simon Wong (which concerned the subject matter of whether De Chang would take up liability in respect of the goods).  According to Alvin Wai, in the afternoon of Monday 22^nd September, he and Samuel Sham collected the purchase orders from Manley and after going back to the office they discovered that some of the purchase orders provided for shipment dates beyond October 2008.  He asked his team to put aside and ignore those orders until further notice.  According to Alvin Wai this last sentence in the 23^rd September 2008 email reflected what he had instructed his team (including Samuel Sham) on 22^nd September. 

123.  On the Defendants’ side they refuted De Chang’s reliance on these two emails (Defendants’ written closing at paragraphs 97-99) by arguing that they were far from a clear reference to the cut off date (in one case) and clearly bad English and difficult to comprehend (in the other case).  In the case of the “sustainability” email it was further contended it even amounted to a positive answer to Lisa Liu’s concern about whether purchase orders beyond October would be accepted.

124.  The Defendants further contended, by reference to De Chang’s lack of protests or negative responses to a number of emails from Manley which contained reference to purchase orders with post October delivery dates, that had there really been the Shipment Date Condition then one would have expected that to be mentioned in response, or by way of protest. 

125.  In my view all such contemporaneous correspondence must be read as a whole.  They are not contracts to be “construed”.  Rather, they form the undisputed documentary materials against which the credibility of assertions is to be tested and therefore one must not take each of them in isolation.

126.  Viewed in this light, I regard them as lending support to De Chang’s case as De Chang contended.

127.  The email dated 19^th September 2008 may, on its face alone, be slightly ambivalent.  However, viewed in conjunction with the 23^rd September 2008 I think the underlying idea/intention is reasonably clear.  Purchase orders with delivery dates after October 2008 were subject to confirmation by De Chang. The corollary must be that if they were not confirmed then they would not be part of the programme among SU, De Chang and the Defendants.  In this regard I reject Fenny Ho’s rather contrived interpretation of the 23^rd September email as referring to purchase orders with delivery dates in September/October (at one time in her evidence) or with delivery dates before September/October (at some other place in her evidence).  Such an interpretation made little sense. 

128.  As to Lisa Liu (cc recipient of the email) I have already discussed her evidence as to her receipt of the 23^rd September email and I shall not repeat the same discussion or my conclusion here.  Had she regarded that there was anything wrong with the last paragraph one would have expected her to voice it out.

129.  I do not think that the matters referred to by the Defendants in their closing at paragraphs 87-96 (in particular the supposed absence of any positive “protestations” to the emails relied on by the Defendants) detracts from the credibility of the Defendants’ case.  The language of the 23^rd September email is clear enough.

ECONOMIC DURESS, MISREPRESENTATION, EASY REACH INVOICES AND TERMS AND CONDITIONS ON THE BACK

130.  These are four miscellaneous defences that I would deal with at this juncture.  In my view none of them have merits.  I shall deal with them shortly in order not to lengthen what is already a very long judgment.

131.  For the avoidance of doubt insofar as there remains any slight trace of the defence that the Defendants were only liable to SU but not De Chang, I reject that.  This follows from my findings of fact in respect of what transpired at the 19^th September meeting.

132.  First, duress.  None of the witnesses referred to any threats being uttered by anyone on De Chang’s behalf against the Defendant.  No one deposed to any overbearing of the will.  The 19^th September meeting was an arm’s length meeting among seasoned businesspeople who were all well capable of forming their own commercial judgment as to where they stand.  I reject any suggestion that the Defendants had been subject to any duress.

133.  Then, misrepresentation.  The gist of the misrepresentation was that De Chang would become a shareholder of SU (and provide financial resources to SU consistent with its capacity as an investor acquiring a beneficial interest in SU) and that De Chang intended to sustain SU as a going concern.

134.  As I have said above, this representation formed part and parcel of the Defendants’ explanation as to the reason for why they had agreed to the scheme of re-issuance of the purchase orders.  In that context I have already discussed the parties’ respective evidence as the making (and denial of making) of such representation.  For the reasons I have discussed above, I reject (as a fact) the contention that any misrepresentation had been made as contended by the Defendants.

135.  In short (and at the risk of repetition), the bare fact of becoming a shareholder bears no connection with whether or not continuous financial support would be given to SU to keep it afloat.  Much depends on the precise arrangements such as the extent of shareholding and the nature of any financial assistance.  Yet the Defendants’ evidence was that nothing was explored on those issues at all and Lisa Liu was content to act on such nebulous notion as “the two companies would be one”.  This is utterly un-commercial and I refuse to believe that such statement could have been made to Lisa Liu at all or (if made) Lisa Liu would have been so naïve to have acted upon it without questioning.  In my event, the representation was so ambiguous and open-ended that even if it had been made, I refuse to accept that the Defendants had placed any reliance on it.

136.  Next, Easy Reach invoices.

137.  The underlying facts are these:

(1) after re-issuing of the purchase orders, the Defendants would pay the purchase price to De Chang instead of SU; 

(2) the proceeds were then supposed to be passed on by De Chang to SU after De Chang had taken its “cut” (agreed at 8%); 

(3) but according to the Master Agreement between De Chang and SU, De Chang was entitled to exercise a set off from the proceeds of sale received from customers (after deducting the 8% “cut”) in respect of debts owed by SU to Easy Reach; 

(4) to that end, a documentary mechanism was devised whereby SU issued invoices to Easy Reach (by altering invoices originally addressed to De Chang).  A debt was therefore created in favour of SU and owed by Easy Reach, on paper;

(5) however, no sales documentation (e.g. invoices) has been produced me to evidence the “onward” leg between Easy Reach and De Chang (for example showing a “sale” of goods from Easy Reach to De Chang and a debt owed by De Chang to Easy Reach).  

138.  There is some ambiguity in the evidence of Alvin Wai and Lorvan Yiu as to whether there were in fact any real “sales” between De Chang and Easy Reach and whether sale documentation does exist.  One said yes and the other said no.  But even assuming for the sake of argument that such documentation does not actually exist, and that there was no arms length “sale” between De Chang and Easy Reach, this does not avail the Defendants and does not provide a defence.  I have expressed provisional views on this during the course of the evidence and I have heard no submissions which persuaded me otherwise.

139.  In short, the agreement by the Defendants (which I had found to be proved) is to pay De Chang.  The Defendants had no relationship with Easy Reach.  It is obvious that the documentary arrangement among SU, Easy Reach and De Chang of altering the invoices was for the purpose of effecting the set off for the debt previously owed by SU to Easy Reach.  One would not expect there to be any “sale” between Easy Reach and De Chang in the sense of a negotiated deal, payment of purchase price and delivery of goods by one to the other.  The presence or absence of any contractual relationship between Easy Reach and De Chang has nothing to do with the Defendants.  It does not nullify the effect of the agreement reached on 19^th September. 

140.  Lastly I deal with the point about incorporation of the Defendants’ standard terms and conditions (paragraphs 101-105).  In my judgment they have not been incorporated.  In the 19^th September meeting it has been agreed that De Chang would not take up any liability in respect of the goods.  The 23^rd September email has made it quite clear that De Chang was not agreeing to any terms and conditions and it was not taking up any liability.  By continuing to deal with each other following (i) the 19^th September meeting (with the agreement reached therein), (ii) the supply of the purchase orders on 22^nd September and (iii) the sending of the 23^rd September email, the parties must have agreed and confirmed that De Chang was under no liability for the goods and not subject to the Defendants’ terms and conditions.   

FRAUDULENT PREFERENCE

141.  The Defendants argued that all the re-issued purchase orders were liable to be invalidated because they amounted to fraudulent preferences.

142.  The relevant provisions relating to fraudulent preference are as follows:-

Companies Ordinance (Cap.32) - Section 266 Fraudulent Preference

(1) any conveyance, mortgage, delivery of goods, payment, execution or other act relating to property made or done by or against a company within 6 months before the commencement of its winding up which, had it been made or done by or against an individual within 6 months before the presentation of a bankruptcy petition on which he is adjudged bankrupt, would be deemed in his bankruptcy a fraudulent preference, shall in the event of the company being wound up be deemed a fraudulent preference of its creditors and be invalid accordingly:

Provided that, in relation to things made or done before the commencement* of the Companies (Amendment) Ordinance 1984 (6 of 1984), this subsection shall have effect with the substitution, for references to 6 months, of references to 3 months;

(2) any conveyance or assignment by a company of all its property to trustees for the benefit of all its creditors shall be void to all intents.

Companies Ordinance (Cap.32) - Section 266A Liabilities and rights of certain fraudulently preferred persons

(1) where anything made or done after the commencement* of the Companies (Amendment) Ordinance 1984 (6 of 1984) is void under section 266 as a fraudulent preference of a person interested in property mortgaged or charged to secure the company's debt, then (without prejudice to any rights or liabilities arising apart from this provision) the person preferred shall be subject to the same liabilities, and shall have the same rights, as if he had undertaken to be personally liable as surety for the debt to the extent of the charge on the property or the value of his interest, whichever is the less;

(2) the value of the said person's interest shall be determined as at the date of the transaction constituting the fraudulent preference, and shall be determined as if the interest were free of all incumbrances other than those to which the charge for the company's debt was then subject;

(3) on any application made to the court with respect to any payment on the ground that the payment was a fraudulent preference of a surety or guarantor, the court shall have jurisdiction to determine any questions with respect to the payment arising between the person to whom payment was made and the surety or guarantor and to grant relief in respect thereof, notwithstanding that it is not necessary so to do for the purposes of the winding up and for that purpose may give leave to bring in the surety or guarantor as a third party as in the case of an action for the recovery of the sum paid;

(4) subsection (3) shall apply, with the necessary modifications, in relation to transactions other than the payment of money as it applies in relation to payments.

Bankruptcy Ordinance (Cap. 6) - Section 50. Unfair preferences

(1) subject to this section and sections 51 and 51A, where a debtor is adjudged bankrupt and he has at a relevant time (defined in section 51) given an unfair preference to any person, the trustee may apply to the court for an order under this section;

(2) the court shall, on such an application, make such order as it thinks fit for restoring the position to what it would have been if that debtor had not given that unfair preference;

(3) for the purposes of this section and sections 51 and 51A, a debtor gives an unfair preference to a person if-

(a) that person is one of the debtor's creditors or a surety or guarantor for any of his debts or other liabilities; and

(b) the debtor does anything or suffers anything to be done which (in either case) has the effect of putting that person into a position which, in the event of the debtor's bankruptcy, will be better than the position he would have been in if that thing had not been done.

(4) the court shall not make an order under this section in respect of an unfair preference given to any person unless the debtor who gave the unfair preference was influenced in deciding to give it by a desire to produce in relation to that person the effect mentioned in subsection (3)(b);

(5) a debtor who has given an unfair preference to a person who, at the time the unfair preference was given, was an associate of his (otherwise than by reason only of being his employee) is presumed, unless the contrary is shown, to have been influenced in deciding to give it by such a desire as is mentioned in subsection (4);

(6) the fact that something has been done in pursuance of the order of a court does not, without more, prevent the doing or suffering of that thing from constituting the giving of an unfair preference.

Bankruptcy Ordinance (Cap. 6) - Section 51. "Relevant time" under sections 49 and 50

(1) subject to subsections (2) and (3), the time at which a debtor enters into a transaction at an undervalue or gives an unfair preference is a relevant time if the transaction is entered into or the unfair preference given-

(a) in the case of a transaction at an undervalue, at a time in the period of 5 years ending with the day of the presentation of the bankruptcy petition on which the debtor is adjudged bankrupt;

(b) in the case of an unfair preference which is not a transaction at an undervalue and is given to a person who is an associate of the debtor (otherwise than by reason only of being his employee), at a time in the period of 2 years ending with that day; and

(c) in any other case of an unfair preference which is not a transaction at an undervalue, at a time in the period of 6 months ending with that day.

(2) where a debtor enters into a transaction at an undervalue or gives an unfair preference at a time mentioned in subsection (1)(a), (b) or (c) (not being, in the case of a transaction at an undervalue, a time less than 2 years before the end of the period mentioned in subsection (1)(a)), that time is not a relevant time for the purposes of sections 49 and 50 unless the debtor-

(a) is insolvent at that time; or

(b) becomes insolvent in consequence of the transaction or preference,

 but the requirements of this subsection are presumed to be satisfied, unless the contrary is shown, in relation to any transaction at an undervalue which is entered into by a debtor with a person who is an associate of his (otherwise than by reason only of being his employee).

(3) For the purposes of subsection (2), a debtor is insolvent if-

(a) he is unable to pay his debts as they fall due; or

(b) the value of his assets is less than the amount of his liabilities, taking into account his contingent and prospective liabilities.

143.  The Defendants’ case in respect of fraudulent preference is set out in paragraphs 111 to 115 of their closing.  In gist (and some of these had been mentioned above):-

(1) SU owed Easy Reach about HK$11.5m and was unable to honour a post dated cheque in September 2008;

(2) under the relevant arrangements among SU, Easy Reach and De Chang (as encapsulated in the Memorandum and the Master Agreement), of the monies received from the Defendants De Chang was entitled to exercise a set off (in respect of debts owed by SU to Easy Reach).

(3) by 8^th October 2008 De Chang was aware that certain banks might apply to appoint a provisional liquidator shortly in respect of SU;

(4) a large number of invoices issued by SU in respect of the goods (forming the subject matter of this dispute) to De Chang were altered by SU by crossing out the name of the original addressee (De Chang) and re-addressed to Easy Reach. The total amount of these altered invoices amounted to US$340,730.95 (about HK$2,640,664.86 at an exchange rate of US$1 to HK$7.75).  There is however no actual “sale” from Easy Reach to De Chang;

(5) therefore debts originally owed by De Chang to SU became debts owed by De Chang to Easy Reach. Easy Reach could then use these debts to set off against the debt of HK$11.5 million initially owed by SU to it;

(6) upon SU’s winding up, had it not been for the alteration, Easy Reach would have to wait in line with other general creditors of SU to obtain repayment of the HK$11.5m debt while De Chang would have to pay the provisional liquidators of SU the sum of HK$2.6m odd.  After the alteration, part of Easy Reach’s old debt to the tune of around HK$2.6m odd was immediately repaid to it by way of set off.  In this way Easy Reach was preferred to the extent of HK$2.6m odd.

(7) it was akin to an assignment of receivables from SU to De Chang, thereby enabling De Chang and Easy Reach to set off the old debt owed by SU to Easy Reach where De Chang would purportedly be entitled to sue (in the stead of SU) customers for the price of those re-issued purchase orders.

144.  There are a number of difficulties with the argument on fraudulent preference and, upon anxious consideration of the point, I have decided to reject it.

145.  First, what is being sued upon is the Defendants’ liability to De Chang.  The transaction that is said to be a fraudulent preference relates to what happened after money has received by De Chang (in effect, the creation of documents showing a debt owed by Easy Reach to SU which would be set off against the initial debt owed by SU to Easy Reach).  But that has nothing to do with the Defendants’ liability to De Chang.

146.  Put in another way, on the Defendants’ case Easy Reach was the creditor that was preferred.  Let us assume that the repayment (by SU) to Easy Reach is invalid and is somehow reversed, that would at most mean that Easy Reach had to disgorge money back in favour of SU to be shared among the general creditors.  That does not mean that the Defendants did not have to pay De Chang.

147.  A further point is that SU has not been joined as a party to these proceedings and no application has been taken out by SU under section 266 of the Companies Ordinance.  Section 50 of the Bankruptcy Ordinance (to which section 266B(1)(a) referred for the purpose of defining the relevant “preference” – the Companies Ordinance used the phrase fraudulent preference and the Bankruptcy Ordinance used the language of unfair preference) expressly referred to an application made by the trustee in bankruptcy to the Court for an order under the section.  The procedure contemplated by the Bankruptcy Ordinance for impugning an unfair preference is therefore by way of an application by the trustee in bankruptcy.

148.  The Companies Ordinance does not contain its own “procedural code” for impugning a fraudulent preference.  However, as Barma J observed in Re Smartmart Garment Works Ltd [2008] 2 HKLRD 92 at 96 §5, the effect of sections 266-266B of the Companies Ordinance is to apply the unfair preference provisions contained in sections 50-51B of the Bankruptcy Ordinance to companies in liquidation, with the necessary modifications.  And it is highly arguable that by importing the definition of “unfair preference” into the company insolvency context, the Ordinance has also incorporated the applicable procedural regime namely that the transaction is to be impugned by an application made by the liquidator for the benefit of the creditors as a whole (Willmot v London Celluloid Company (1887) LR 31 CdD 425 at 434 per Bacon VC). 

149.  I am aware of the apparently contrary views of Reyes J in Kong Mou Holdings Ltd. v Cheung Shuen Lung (HCCW 391/1999) at §11 and 12.  In view of the other reasons for rejecting the Defendants’ argument (which I have given and am about to give), it is strictly speaking not necessary for me to make a definitive ruling on the point as to who has the necessary standing to take the point.  However, Reyes J’s comments are just by way of obiter and I have some doubts as to their correctness.  But I need say no more.

150.  Even assuming for the sake of argument that a creditor of the company in liquidation has a right to make an application to recover monies paid out as a fraudulent preference, such an application must be one that is made for the benefit of the creditors as a whole and not (for example) for his own benefit (see Re Yagerphone Limited [1935] Ch 392 at 395 per Bennett J).  

151.  Yet this is not what is happening in this action.  None of the Defendants are creditors of SU and, more importantly, they are not seeking to invoke the doctrine of fraudulent preference in order to claw back payments made preferentially so that they can be shared among all creditors. They are invoking the doctrine for their own benefit in a private litigation to avoid payment.  SU is not a party and so cannot derive any benefit from it; Easy Reach (the preferred creditor) is not a party either.  It is a most curious configuration for a claim to challenge a fraudulent preference made by SU in favour of Easy Reach.

152.  In any event, on the facts and evidence the essential ingredients of fraudulent preference are simply not made out. 

153.  The key to the point is to understand the requirement of “influenced in deciding to give [the preference] ... by a desire” in section 50(4) of the Bankruptcy Ordinance and how it compares with the old test of a “dominant intention to prefer”.  In Sweetmart supra at §14-15, Barma J quoted from two decisions which explained the point which warrants citation again:-

“14. In Re MC Bacon Limited, Millett J explained the difference between the old test of “dominant intention to prefer” and the new test of “influenced by the requisite desire” as follows (at 335e to 336d):-

‘This is a completely different test. It involves at least two radical departures from the old law. It is no longer necessary to establish a dominant intention to prefer. It is sufficient that the decision was influenced by the requisite desire. That is the first change. The second is that it is no longer sufficient to establish an intention to prefer. There must be a desire to produce the effect mentioned in the subsection.

The second change is made necessary by the first, for without it it would be virtually impossible to uphold the validity of a security taken in exchange for the injection of fresh funds into a company in financial difficulties. A man is taken to intend the necessary consequences of his actions, so that an intention to grant a security to a creditor necessarily involves an intention to prefer that creditor in the event of insolvency. The need to establish that such intention was dominant was essential under the old law to prevent perfectly proper transactions from being struck down. With the abolition of that requirement intention could not remain the relevant test. Desire has been substituted. That is a very different matter. Intention is objective, desire is subjective. A man can choose the lesser of two evils without desiring either.

It is not, however, sufficient to establish a desire to make the payment or grant the security which it is sought to avoid. There must have been a desire to produce the effect mentioned in the subsection, that is to say, to improve the creditor’s position in the event of an insolvent liquidation. A man is not to be taken as desiring all the necessary consequences of his actions. Some consequences may be of advantage to him and be desired by him; others may not affect him and be matters of indifference to him; while still others may be positively disadvantageous to him and not be desired by him, but be regarded by him as the unavoidable price of obtaining the desired advantages. It will still be possible to provide assistance to a company in financial difficulties provided that the company is actuated only by proper commercial considerations. Under the new regime a transaction will not be set aside as a voidable preference unless the company positively wished to improve the creditor’s position in the event of its own insolvent liquidation.

There is, of course, no need for there to be direct evidence of the requisite desire. Its existence may be inferred from the circumstances of the case just as the dominant intention could be inferred under the old law. But the mere presence of the requisite desire will not be sufficient by itself. It must have influenced the decision to enter into the transaction. It was submitted on behalf of the bank that it must have been the factor which ‘tipped the scales’. I disagree. That is not what [subsection (4)] says; it requires only that the desire should have influenced the decision. That requirement is satisfied if it was one of the factors which operated on the minds of those who made the decision. It need not have been the only factor or even the decisive one. In my judgment, it is not necessary to prove that, if the requisite desire had not been present, the company would not have entered into the transaction. That would be too high a test.’

15. In Re Phantom Records, Kwan J had this to say at paragraphs 86 and 87 of her judgment:-

‘86. In relation to [the need for the company to have been influenced by the desire to produce the requisite effect], two elements are required to be established: a desire to produce the effect of improving the creditor’s position in an insolvent liquidation, and such desire had influenced the decision to enter into the transaction.

87. A desire of improving the creditor’s position in an insolvent liquidation is a subjective state of mind. Desire is different from intention.  Whereas intention is objective in that a person is taken to intend the necessary consequences of his actions, a person is not to be taken as desiring all the necessary consequences of his actions and one can choose the lesser of two evils without desiring either (Re MC Bacon Limited [1990] BCLC 324 at 335f to 336a; Re Hau Po Man Stanley [[2005] 2 HKC 227] at 233C).  There is often no direct evidence of the requisite desire and the existence of this state of mind may be inferred from all the relevant circumstances, even ‘contrary to the denials of those whose state of mind is inquired into to determine what state of mind is attributed to the company making the decision’ (Re Fairway Magazines Limited [1993] BCLC 643 at 649f).’ ”

154.  Put very shortly, the changes in the law on preferences (and the current definition) relaxed the old test in one aspect (intention no need to be “dominant”) but that was counterbalanced by tightening of the test in another aspect (requirement of subjective “desire” to bring about the preference). 

155.  On the facts of this case:

(1) fresh money (“fresh” in the sense of being in addition to the old debt owed to Easy Reach) was injected by De Chang by way of supply of funds by De Chang to “unclog the supply chain”. In the process, De Chang expected to make a profit for itself and also wished to settle the old debt owed by SU to Easy Reach;

(2) commercial entities are not charities and of course in supplying funds they would expect to obtain benefits in turn (to them and their associates/affiliates).  In principle this is not much different from a creditor advancing new funds and taking a new security in return;

(3) Mr Chan for the Defendants emphasized, in his submissions, the detailed protection in the documentation and the retention of title clause.  But these do not detract from the fact that proper commercial considerations existed for SU to enter into the relevant arrangements. It is not a case where, say, the debtor gratuitously entered into an arrangement with the effect of preferring a creditor for no reason at all;

(4) there is no evidence to show why SU would positively wish to improve the position of Easy Reach in the event of its insolvency.  Rather, if any “desire” was to be found, it was to result in a “win win win” situation whereby SU solves its supply chain problem, De Chang takes a profit margin, and the original debt owed to Easy Reach was set off.  None of this had anything to do with improving Easy Reach’s position in the event of SU’s insolvency. 

(5) I therefore find as a fact that the entering into of the relevant arrangements (said by the Defendants to constitute fraudulent preference) was not influenced by a desire to place Easy Reach in a better position than if the arrangements had not been made.

156.  Lastly, one essential ingredient of fraudulent preference is that the debtor (in this case SU) must be insolvent at the time of the transaction.  However, because SU had not been joined as a party and there is no evidence from SU, I am not persuaded that I am in a position to make any findings as to the solvency of SU.  Insofar as is necessary I find that the Defendants had not discharged their burden of proving SU’s insolvency at the time of the transactions.  They pointed to SU’s inability to pay one cheque but that could be due to a number of reasons and I do not think that this fact sufficed to prove insolvency at the material time.  I understand that one part of the statutory test of insolvency was inability to pay debts as they fell due but I do not think that that was proved simply by pointing to the incident about one cheque.  But I must stress that even without this point (and even assuming the insolvency of SU at the time), the other points I had mentioned are sufficient to dispose of the argument of fraudulent preference.

157.  Much has been made about the failure to call Tony Wu as a witness and as to the drawing of adverse inferences arising out of a party’s failure to call a material witness. I do not think that it is a factor I should place any weight on (whether on the issue of what took place during the meeting on 19^th September, or as to SU’s state of mind in the context of fraudulent preference). 

158.  In my view Tony Wu is a party who is open to both sides to call.

159.  To start with, Tony Wu was known to both parties at the time of the relevant transactions.  It is not as if he was a stranger to one, and well known to the other.  In terms of relationship at the time of trial, there is no evidence from either side that their relations with Tony On had become strained.  On the side of the Defendants, Lisa Liu had deposed to recent contacts with Tony Wu.  On the side of De Chang Simon Wong was able to call Tony Wu and he produced a recording of that conversation as evidence in this case.  I do not think that the law on adverse inferences is such as to compel me, in a case such as the present, to make a finding as to the relative ease of calling a witness and then draw an adverse inference one way or another.  In my view the omission by the parties to call Tony Wu is a neutral factor as far as adverse inferences are concerned.  

CONCLUSION ON LIABILITY

160.  For all the above reasons I find that De Chang had proved its case against the Defendants and I reject the Defendants’ defences both on the law and on the facts.

161.  The parties have placed before me very full submissions on the evidence, both in writing and orally.  I have considered them all when preparing this judgment.  If I have not referred to or dealt with any particular arguments (many of which, as I have said above, turned on niceties of comparing what a witness had said orally with his/her witness statement, and with what other people had said, and with the pleadings) it is because in the overall scheme of things they do not impact on my assessment of the issues or fact or law that I have to decide and I do not wish to unnecessarily lengthen an already very long judgment.

QUANTUM OF DE CHANG’S CLAIM

162.  In terms of quantum of De Chang’s claim, in its closing submissions at paragraphs 69-72, De Chang claimed against Manley for US$327,176.51 and against Toy Quest for US$185,640.48 (having taken into account the agreed CFS deduction of US$19,600.04 and US$2,625.10 respectively).

163.  The Defendants (closing submissions paragraphs 147-149) submitted that I should make certain deductions because (i) for some of the invoices the goods were shipped before the “cut off date” of 22^nd September and (ii) for some goods no purchase orders had been received by De Chang but where SU had invoiced De Chang.  I am not prepared to accept the Defendants’ submissions on the “delivery before 22^nd September” point.  It is not part of the parties’ agreement that the Defendants’ liability to De Chang was confined to those shipped before 22^nd September.  I also reject the Defendants’ submissions on the point about the need for a purchase order re-issued by the Defendants to De Chang.  In this regard I accept De Chang’s submissions in paragraph 73 of its closing.

164.  Paragraph 150 of the Defendants’ closing raised a point about the altered Easy Reach invoices.  For reasons I have discussed above, I do not accept that the alteration of some of the invoices to the name has any impact on the Defendants’ liability.  I reject that paragraph.

DEDUCTIONS

165.  Apart from the above, the Defendants had asked me to make other items of deductions from De Chang’s claim.  The relevant deductions are set out in the Consolidated amended Defence and Counterclaim in Schedule D1 (deductions by Manley) and Schedule D2 (deductions by Toy Quest). Lorvan Yiu for De Chang dealt with the deductions by attachment 11 of her supplemental witness statement and De Chang’s closing addressed the major items at paragraph 77.  The Defendants dealt with the disputed items in paragraphs 155 to 180 of their written closing.

166.  I have considered the parties’ submissions together with the evidence referred to therein.  The Defendants’ reliance on the said deductions in paragraph 31 of the amended Consolidated Defence and Counterclaim is said to be “by reason of the matters pleaded above…”  But I have already held (i) that the nature of the agreement on 19^th September 2008 was such that De Chang would take up no liability and responsibility for the goods (which would remain with SU) and (ii) the standard terms and conditions on the Defendants’ purchase orders were not incorporated.  Therefore De Chang could be under no liability vis-à-vis the Defendants for such liabilities to be deducted or set off in the first place.  But in case I am wrong, and as a matter of completeness I should express my views on the deductions. 

167.  I would not lengthen this judgment by going into the details of the various items of deductions debated before me.  Suffice it to say that with the exceptions I would outline below, I would accede to the objections by De Chang for the reasons provided by Lorvan Yiu and those in De Chang’s closing submissions.  The parties will be familiar with the landscape of the debate that had taken place before me and the lines of challenge put in submission and in cross examination.  

168.  Specifically:-

(1) for the advertising costs for the lost mate’s receipt, despite the late evidence of Maggie Wong I am still not satisfied that De Chang should shoulder the responsibility for this item, in the absence of more detailed explanation as to how the liability came about and why it was De Chang who should shoulder it;

(2) for the US$500 mentioned in Defendants’ closing at paragraph 156 I accept De Chang’s submissions that the inspection ought to have taken place earlier;

(3) in paragraph 155 of their closing the Defendants indicated that liabilities incurred prior to 22^nd September would not be pursued.  The same reasoning should apply to other purchase orders the shipment date of which was already due when they were re-issued.  It should make no difference whether the shipment date was notified to De Chang by excel spreadsheet or by email.  I reject the Defendants’ submissions in paragraphs 158, 169-170 of their closing.

169.  The exceptions are:-

(1) the quality claim for US$3,934 in Schedule D2 item 1.  As pointed out in the Defendants’ closing submissions paragraph 172, Lorvan Yiu had no comments;

(2) the US$787.84 claim in item 3 of Schedule D2 (Defendants’ closing submissions paragraphs 173-176). Despite Lorvan Yiu’s query and Mr Pao’s oral submissions in closing, I accept Maggie Wong’s evidence (based on what she had been told by way of hearsay) on the linkage between the last three items in Jet Global’s invoice 20945 [F/85] and the relevant purchase order. 

170.  In terms of interest, De Chang claimed 1.5% per month based on a stipulation in its invoices.  However, I accept the Defendants’ submissions that the invoices were not contractual documents.  I would, instead, order interest at the rate of prime + 1% from the date of first demand namely 27^th October 2008.

171.  The parties (and their legal advisors) are urged to work together and produce an agreed version of a Judgment, failing which the parties are to have liberty to restore the matter to me to argue the terms of the Judgment.  As to costs, I make a costs order nisi that De Chang is to have its costs of the action to be taxed if not agreed.

THE COUNTERCLAIM FOR LOSS OF PROFITS AND MOULDS

172.  In case this matter shall proceed further and in the event I am held to be wrong on my findings on liability above, I should briefly discuss and make some findings relevant to the counterclaim. 

173.  First, frustration.  This is a defence run by De Chang against the counterclaim by the Defendants.  The thrust of the argument is that even if the purchase orders re-issued to De Chang involved contractual obligations on De Chang’s part to deliver goods, they were frustrated by SU going into liquidation and being unable to further produce the goods.

174.  The difficulty with dealing with frustration in the present context is that I am dealing with it by way of a fallback.  On my primary finding there is no liability on the part of De Chang.  But the law on frustration requires me to make findings as to (for example) what the parties could have reasonably contemplated at the time of the agreement.  Therefore in making a finding on frustration, I have to make inferential findings on the basis of a hypothetical state of affairs.  Doing the best I can, I have come to the conclusion that the defence of frustration is not made out.

175.  If, contrary to my finding findings, De Chang was liable for non-delivery of the goods, it would have been because in receiving the re-issued purchase orders it took up not only the entitlement to payment but also liability in respect of the goods.  Its position would be akin to a seller.  In a normal case of sale where the identity of the manufacturer is not a term of the contract, the demise of the manufacturer (or inability by the manufacturer to manufacture the goods) would not be a frustrating event.  The contractual seller simply has to go elsewhere to procure the goods.  As the Defendants had pointed out at paragraph 140(f) of their closing submissions, point 6 of the Memorandum (admittedly not signed, but it provides a glimpse into the contemplation of De Chang) provides that “In case SU failed to produce the Products, JETL-DC reserves the right to take out the consigned materials and get outside suppliers to fulfill the production, with unconditional support from SU in providing all needed toolings, molds and technical support”.  

176.  If one were to analyse the matter in terms of allocation of risks, there is nothing in this case which can show that the parties had agreed that the risk of the demise of SU was to be borne by the Defendants. 

177.  For the avoidance of doubt, nothing in this section on “frustration” involves any finding that the parties contemplated the insolvency of SU or that anything they did at that time was with a view to catering for what would happen in the event of SU’s insolvency.  Nothing that was said above should be interpreted, or misinterpreted, as impacting upon the discussion on fraudulent preference.

178.  I now deal with the quantum of the loss of profits claim.

179.  Instead of performing detailed calculations in this judgment I propose to make findings on the controversy between the parties as a matter of principle, and then leave it to the parties (if the occasion were to arise) to work out the numerical ramifications of my findings.

180.  First I should rule on authenticity of the documents that De Chang had challenged.  I find, as invited by the Defendants at paragraph 188 of their closing submissions, that the Defendants had proved the authenticity of the documents which De Chang had challenged.

181.  Next I should rule on a discrete point concerning whether certain purchase orders had been received by Mr Howard Man, a staff member of De Chang (who had since left De Chang).  In De Chang’s closing submissions at paragraph 109 I was asked to find that they had not been received by De Chang; in Defendants’ closing submissions at paragraphs 194 to 199 they asked me to find that the purchase orders had been received. 

182.  To start with, Howard Man was the person designated by an email dated 30^th September 2008 from Samuel Sham to receive purchase orders.  Copies of the relevant emails said to have been sent to Howard Man had been produced before me.  De Chang relied on oral inquiries made with Howard Man to support its case that Howard Man had not received the emails but that is unsatisfactory because Howard Man had left the company.  It is not clear how keen Howard Man was to help, or how clear his recollection would have been when he was phoned.  Lorvan Yiu of De Chang accepted De Chang’s computer system had not been checked with a view to searching the incoming emails for Howard Man. Maggie Wong, on the other hand, had checked with the cc recipients and they had confirmed receipt.  In these circumstances and on a balance of probabilities I find as a fact that the relevant purchase orders had been received by Howard Man.

183.  Maggie Wong had accepted in her evidence that for the purpose of calculating loss of profits, the unit prices in the Defendants’ original schedules E1 and E2 should be revised to the “higher” unit prices as shown in the re-issued purchase orders received by De Chang.  The resultant figures are set out in a Revised Schedule E1 attached to the Defendants’ closing submissions.  De Chang had also put before me a coloured version of Schedule E1 marked as exhibit P4.  For present purpose I propose to adopt the Defendants’ version as the starting point.

184.  By reason of my ruling on the October cut-off date, any purchase orders with delivery dates after October 2008 are to be excluded from calculation of damages.

185.  However, I reject De Chang’s invitation for me to exclude claims on purchase orders where the delivery date was already due when the purchase orders were re-issued.  We are here concerned with a claim for damages for non-delivery, not for late delivery.  Whatever may be the treatment of such “already due” purchase orders in the context of late shipment penalties, I do not see why the fact that delivery was already due could justify non-delivery.   

186.  Likewise I reject De Chang’s attempt to “carve out” those purchase orders with delivery dates between 22^nd and 30^th September 2008.

187.  For the counterclaim of Toyquest, De Chang also asked me to carve out purchase orders where the delivery dates were already due.  I reject that, for the same reason given above.

188.  Therefore of De Chang’s attempt in paragraphs 103 and 104 of its closing to “carve out” categories of purchase orders for the loss of profits claim, I accede to that in paragraph 103(2) and carve those out (i.e. no loss of profits awarded for those) but reject the rest.

189.  Finally I come to deal with the costs of moulds.  Put shortly the Defendants’ case (paragraphs 201-204) is that in an attempt to mitigate, they procured new moulds to be made for the purpose of production.  They claim the cost of the moulds.

190.  I accept the submissions of De Chang that quite apart from being used to fulfill the purchase orders relevant to this case, the new moulds could have been used over a long period of time for other purposes and contracts.  It is not as if the costs of new moulds were some sort of wasted expenditure.  No submission or evidence had been placed before me as to how one could “apportion” the value of the moulds for the purpose of mitigation. Therefore to allow recoupment of the costs of such new moulds would amount to a windfall to the Defendants.

191.  I also reject the alternative claim for loss of profits in case the costs of the moulds are disallowed.  The fact is that on the relevant purchase orders there had in fact been no loss because damages had been mitigated.  I cannot “deem” damages not to have been mitigated.  The Defendants’ position about these moulds seems to be that one way or another they should recover something – either costs of moulds or loss of profits.  But in my view they are entitled to neither: they have got the moulds themselves and they have not suffered loss of profit.

CONCLUSION

192.  I therefore enter judgment as indicated above and dismissed the Defendants’ counterclaim.