XINXING COUNTY YUEXINGHUA STAINLESS STEEL PRODUCTS CO LTD v. UNITED PACIFIC TRADING LTD

HCA 505/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 505 OF 2006

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J U D G M E N T

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1.  By this action, the Plaintiff 新興縣粵興華不銹鋼制品有限公司 (which is transliterated as Xinxing County Yuexinghua Stainless Steel Products Company Limited) claims the sum of HK$51,246,726.27 from the Defendant, United Pacific Trading Limited.

2.  There were before the court four applications contained in two summonses issued by the Plaintiff and the Defendant respectively.  These were:-

(1) An application by the Plaintiff for summary judgment;

(2) An application by the Plaintiff to strike out the Defendant’s Defence;

(3) An application by the Plaintiff seeking an interim payment of HK$50 million, as an alternative to their application for summary judgment; and

(4) An application by the Defendant seeking security for costs against the Plaintiff, on the ground that the Plaintiff is a foreign company, and does not have assets within Hong Kong to satisfy any costs order that might be made against it.

3.  The Plaintiff is a Mainland company.  It is a manufacturer of stainless steel kitchenware and cooking accessories.  The Defendant is a Hong Kong company, and was a retailer and exporter of kitchenware.  The Defendant is now in liquidation, having been ordered to be wound up on 11 October 2006 on the presentation of a petition by employees whose wages had not been paid.  These proceedings were commenced on 8 March 2006, prior to the winding up of the Defendant.  On the making of the winding up order, they were automatically stayed.  The Plaintiff invited the provisional liquidators of the Defendant to accept its claim, but they did not do so.  The Plaintiff later obtained leave to proceed with this action, with a view to establishing the Defendant’s liability to it.

4.  It is common ground that the Plaintiff was one of the principal suppliers of kitchenware and cooking accessories to the Defendant.  It also appears that the Defendant had an interest in the Plaintiff, although the extent of that interest is in dispute.

5.  The Defendant has two shareholders, a Mr Liao Zhe and a Mr Ho Man Yee.  They were, prior to its winding up, also its only two directors.  Mr Liao is also a director of the Plaintiff.  It appears that, in about early 2006, Mr Liao and Mr Ho had a falling out.  This resulted in an action (HCA 485/2006) being brought by Mr Ho against Mr Liao and a company called United Pacific Cookware Limited, in which Mr Ho alleges that Mr Liao and other directors of the Plaintiff are interested.  According to Mr Ho, Mr Liao and United Pacific Cookware were diverting the Defendant’s business and enticing away its employees, in breach of Mr Liao’s duties which he owed to the Defendant as one of its directors.

6.  The Plaintiff’s claim is straightforward.  It alleges that as a result of its supply of kitchenware products to the Defendant between 1996 and January 2006, the Defendant owes it the amount claimed in these proceedings.  According to the Plaintiff, the arrangement between itself and the Defendant was that goods manufactured by the Plaintiff would be supplied to the Defendant on credit, on the basis of a running account between them.  As and when goods were supplied, the value of the goods would be added to the balance of the account in the Plaintiff’s favour, and as and when payments were made by the Defendant, the payments would be added to the Defendant’s side of the account, reducing the balance in favour of the Plaintiff.

7.  The Plaintiff also says that at the end of each month, the Defendant would send to the Plaintiff a statement, bearing the chop of the Defendant, showing the opening balance at the beginning of the month, all of the transactions on the account during the month, and the closing balance at the end of the month.  The Plaintiff would check the statement and place its own chop on it to signify its agreement to it.  The Plaintiff put in evidence for the purpose of these applications a number of such statements, including a statement for December each year from 1996 to 2005.  It also produced a full set of statements for 1997, and a statement for January 2006, which was the last month in which goods appear to have been supplied by the Plaintiff to the Defendant.

8.  The statements indicate that between 1996 and 1999, the year end balance increased steadily, from HK$6,346,102.77 in December 1996 to HK$38,168,054.11 in December 1999.  After a drop at the end of 2000, the balance had risen to HK$51,767,981.14 by December 2001.  Thereafter, it fluctuated from year to year, but remained above HK$50 million at each year end.  As at December 2005, the balance was HK$50,910,719.78, rising slightly to HK$51,246,726.27 (the amount claimed) by the end of January 2006.

9.  The claim is resisted by the Defendant, acting through its present provisional liquidators.

10.  Initially, prior to the Defendant going into liquidation, Mr Ho had purported to file a defence on its behalf, the thrust of which was to allege that there was an agreement between the Defendant and the Plaintiff that the sum due was to be used as an investment in the Defendant’s factories in the Mainland – namely, the Plaintiff and two other companies which operated factories manufacturing kitchenware for supply to the Defendant.

11.  Thereafter, the former provisional liquidators of the Defendant caused another defence to be filed.  In this defence, it was alleged that:-

(1) The amount claimed, which was recorded in the Defendant’s accounts as an “amount due to subsidiaries” was the subject of an understanding between the Defendant and the Plaintiff that it should not be immediately repayable, but should be applied from time to time as for the purpose of investment in the business of the Defendant and its subsidiaries or associated companies, and should only be repaid on realisation of such investments.

(2) The Plaintiff was liable to the Defendant for conspiracy to injure the Defendant and for wrongfully interfering with its business, in that the Plaintiff had, at the instance of Mr Liao (who was acting in breach of the fiduciary duties which he owed to the Defendant as its director), terminated its dealings with the Defendant and dealing instead with United Pacific Cookware following the falling out between Mr Liao and Mr Ho, thus causing the failure of the Defendant, and the Defendant was entitled to set off the damages recoverable by it against the Plaintiff’s claim.

(3) The claim was an abuse of process, as its purpose was to stifle the bringing of proceedings by the Defendant to seek compensation for the damage caused to it by Mr Liao and the Plaintiff.

12.  At the hearing, Mr Maurellet, who appeared for the present provisional liquidators of the indicated that he did not seek to rely on either of the defences previously filed, but would rely on the matters raised by the present provisional liquidators in the affirmations filed by them in opposition to the summary judgment application.  These were:-

(1) That the evidence filed by the Plaintiff in support of its application, which the Plaintiff relied upon as admissions of the existence and amount of the debt owed to it by the Defendant, was inconsistent and, for various reasons, unreliable, thereby casting doubt on the Plaintiff’s case.

(2) Adverse inferences should be drawn against the Plaintiff as a result of its refusal to produce certain documents on request by the provisional liquidators.

(3) The Defendant was entitled to set off damages or compensation in respect of its counterclaims against the Plaintiff for conspiracy, unlawful interference with trade and dishonestly assisting Liao to breach his fiduciary duties to the Defendant.

(4) The claim was brought against the Defendant without proper authorisation on the part of the Plaintiff, as the Defendant, which was said to be a 58% shareholder in the Plaintiff, had not approved the bringing of the claim.

(5) The Plaintiff was estopped from bringing the claim because of an agreement or understanding between the Plaintiff and the Defendant that the amounts due were not to be repayable, but were long term investments in the Defendant’s subsidiaries and factories.

(6)    As the Plaintiff’s claim related to amounts arising from transactions dating back to 1996, some part of it, at least, must have become statute-barred.

(7) In any event, the circumstances were such that there ought for some other reason to be a trial of the Plaintiff’s claims.

13.  In the event, Mr Maurellet made it clear that the principal matters on which he relied were those set out in paragraphs 12(1) and (2) above.

14.  So far as the first of these points is concerned, it is necessary to consider the documentation that has been put forward by the Plaintiff in support of its claim.  This consisted of a range of documents, mostly emanating from the Defendant, which recorded the existence of a debt owing from the Defendant to the Plaintiff, namely:-

(1) The monthly statements to which I have already referred in paragraphs 7 and 8 above, which were stamped with the chop of each of the Plaintiff and the Defendant.  The final balance on this set of documents, the statement for January 2006, is the amount claimed in these proceedings.

(2) Annual financial statements of the Defendant for the years ended 31 December 1998 through to 31 December 2005, which disclose the existence of amounts due to subsidiaries, in amounts that were the same as, or very close to, the amounts shown in the monthly statements for December of each relevant year.  The financial statements for the years up to 2004 were audited, while the final set of financial statements was unaudited – these recorded a liability to the Defendant of the same amount as was recorded in the monthly statement for December 2005.

(3) A confirmation letter signed by both Mr Ho and Mr Liao dated 26 August 2005, confirming that the balance due to the Plaintiff from the Defendant as at 31 December 2004 was as stated in the audited financial statements as at that date, in an amount very close to that shown in the monthly statement for December 2004.

(4) Statements of affairs signed by Mr Ho and Mr Liao respectively, which indicated that at the time of the Defendant’s winding up, there were substantial balances owing by the Defendant to the Plaintiff, although in amounts that differed from that claimed in these proceedings.

(5) A written request for confirmation of balance issued by the Defendant’s auditors on 3 April 2008 which also disclosed the existence of a debt owed by the Defendant to the Plaintiff of an amount close to that claimed.

15.  Mr Maurellet submitted that given the existence of the differences between the amount shown as due from the Defendant to the Plaintiff in these various documents, it should be concluded that there was substantial doubt as to the amount (if any) actually owing, so that the Plaintiff should not be awarded summary judgment.

16.  With respect, however, this seems to me to be putting the position too high.  It is, I think, important to bear in mind that there has never been any dispute as to the existence of the course of dealings relied upon by the Plaintiff in support of its claim.  Nor has there ever been any real dispute as to the amount of the claim.  Even in the two defences that had been filed on behalf of the Defendant by Mr Ho and its former provisional liquidators respectively, no issue was taken as to the existence of a debt in the amount claimed, owed by the Defendant to the Plaintiff.  Rather, what was there said was that the amount claimed is not presently recoverable, as the result of what has variously been termed an agreement, or understanding, between the Defendant and the Plaintiff.

17.  Further, it must be borne in mind that the existence of the course of dealings and of substantial balances in the Plaintiff’s favour has been consistently confirmed throughout the period from 1998 until 2005, during which time Mr Ho and Mr Liao were, it would seem, still on good terms with one another, before the breakdown in the relationship between them in early 2006.

18.  It is notable that the amount shown as due in the (admittedly unaudited) 2005 financial statements the net amount due to the Plaintiff (after netting off the temporary advances by the Defendant to the Plaintiff with the current liability of the Defendant to the Plaintiff) matched the amounts shown in the monthly statement for December 2005.  When the figures for January 2006 are factored in, this gives rise to a debt of the amount claimed in these proceedings.

19.  In these circumstances, where the Defendant is unable (through no fault of the provisional liquidators) unable to suggest that there is in fact some other amount, differing from that claimed, due from the Defendant to the Plaintiff, it seems to me that the best evidence of the amount due is to be found in the monthly statements which have been put forward, and which appear to have been acknowledged as accurate by both parties.

20.  Mr Maurellet also submitted that reliance should not be placed on the financial statements of the Defendant.  In relation to the audited financial statements, he relied on the qualification of the audit report by the auditor.  In each of the financial statements relied on, there had been a qualification by the auditor by reason of a lack of evidence as to the financial position of four subsidiaries or associated companies of the Defendant, one of which was the Plaintiff.  However, it is clear from the terms of the qualification that the uncertainty that the auditors had in mind related not to the balance due from the Defendant to the Plaintiff, but to the value of the Defendant’s investment in the Plaintiff (and the other subsidiaries or associated companies).  I do not think, therefore, that this provides a reason to doubt the Plaintiff’s claim.

21.  Thus, on the basis of the material which the Plaintiff has put forward, I would accept that the Plaintiff has demonstrated that the Defendant is liable to it in the amount claimed.

22.  I turn next to consider Mr Maurellet’s argument that an adverse inference should be drawn against the Plaintiff by reason of its failure to supply further information as requested by the provisional liquidators.  I do not consider this argument to be well-founded – it is for the Plaintiff to put forward such evidence as it considers necessary to make good its claim to summary judgment, and for the reasons which I have already given, it is my view that the material put forward by the Plaintiff suffices for this purpose.  Mr Maurellet referred in this context to rule 82 of the Companies (Winding Up) Rules, which entitles a liquidator to call for further documentation or evidence in connection with any proof of debt that has been filed – however, it does not seem to me that this rule has any application to a claim for summary judgment in proceedings between the claimant and the company in liquidation.  Where, as here, the provisional liquidators have indicated that they are not prepared to accept the Plaintiff’s claim and admit it to proof in due course, so as to require the Plaintiff to establish that claim in separate proceedings against the company, it seems to me that there is no reason to require more of the Plaintiff than would be required of any other plaintiff in ordinary proceedings, simply because the Defendant is a company in liquidation.

23.  So far as the other arguments put forward by Mr Maurellet are concerned, these can be disposed of relatively shortly.

24.  As to the supposed set off, it does not seem to me that this can operate to provide a defence to the claim by the Plaintiff.  Leaving aside the fact that the provisional liquidators have put forward no evidence in support of such claims other than the evidence filed by Mr Ho in his claim against Mr Liao and United Pacific Cookware (which has not yet been tested in any trial), it seems to me that even if it were possible to extrapolate from that evidence a viable claim against the Defendant on any of the bases suggested, such a claim would not provide a defence to the Plaintiff’s claim, as it would not be sufficiently closely connected with the Plaintiff’s claim so as to give rise to a defence of set off.

25.  Mr Maurellet suggested that since the Defendant was in liquidation, the relevant set off to be considered was that which arises in liquidations and bankruptcies, where all mutual claims are capable of being set off against each other.  However, I see no good reason why this would apply in the context of an ordinary action such as this.  It seems to me that the appropriate course would be to give judgment to the Plaintiff in the absence of a valid defence of set off, and to leave it to the Defendant to establish its alleged claim for damages against the Plaintiff by proceedings in the normal way, after which any damages awarded to it could be set off against the Plaintiff’s judgment when determining whether and for what amount the Plaintiff should be admitted to proof as a creditor of the Defendant.  If the Defendant were to fail to establish its claim to damages, there would appear to be little scope for any reduction of the amount for which the Plaintiff would be entitled to prove in its liquidation.

26.  Mr Maurellet did not really press the argument based on lack of authority for the Plaintiff’s proceedings.  I do not think it gives rise to a defence.  First, authority for bringing proceedings on the Plaintiff’s behalf would appear to rest with its board of directors, and there is simply no basis on which the Defendant appears able to suggest that such authority was lacking or has not been exercised.  The Defendant’s case appears to rest on its allegation that it has a 58% interest in the Plaintiff, but that does not detract from the authority of the directors to conduct the Plaintiff’s business, including by bringing proceedings such as these.  Further, the evidence as to the extent of the Defendant’s interest in the Plaintiff is in any case unclear, as there was before the court other evidence and documentation which suggested that the Defendant’s interest in the Plaintiff was much less than 50%.

27.  So far as the alleged agreement or estoppel is concerned, it does not seem to me that this provides a good defence either.  It is founded on the assertions of Mr Ho in the defence filed by him at an early stage of these proceedings (on which Mr Maurellet did not seek to rely).  There is, moreover, little evidence in support of it.  Mr Chong, who appeared for the Plaintiff, pointed out that there was something improbable about an “investment” that fluctuated over time, as the balance on the running account between the parties did.

28.  The most that can, I think, be said for this point is that it reflects the statement in the notes to the Defendant’s financial statements that the balance owing to the Plaintiff was a long-term interest free loan with no fixed terms of repayment.  However, this does not mean that the loan or advance should never be repaid.  Moreover, even if the balance on the running account had been intended as a form of loan capital, it seems to me that on the winding up of the Defendant, there would no longer be any reason for it to remain non-repayable.  Whatever may be the merits of an argument that a loan of that nature should not be repayable so long as the Defendant were continuing in business, there would seem to be no justification for maintaining that position once it had ceased to operate, so as to prevent the lender from ever recovering or proving for the loan.

29.  Finally, the point as to limitation was not pressed by Mr Maurellet, in my view rightly, since, given that the amount due arose on a running account in respect of which there were both debits and credits from time to time, it seems overwhelmingly likely that the debt on that account arose within the limitation period of six years – even if the earliest advances might have taken place before that, given the movements on the account, those early advances would have been repaid relatively early on, to be replaced by fresh advances which would form the basis of the balance remaining due.

30.  For all of these reasons, I am satisfied that the Defendant has not demonstrated the existence of an arguable defence to the Plaintiff’s claim.  Nor does it seem to me that this is a case in which it can be said that there ought for some other reason to be a trial.  I shall therefore give judgment in the Plaintiff’s favour for the sum claimed, together with interest at 1% over HSBC’s prime rate from the date of the writ until judgment.

31.  In these circumstances, it is unnecessary to make any order in respect of the other parts of the Plaintiff’s summons by which it sought to strike out the Defendant’s defence, or sought (as an alternative) an interim payment.  It also follows that the Defendant’s summons for security for costs falls to be dismissed.

32.  So far as costs are concerned, I shall make an order nisi that the costs of both summonses are to be paid by the Defendant to the Plaintiff, to be taxed on the party and party basis in default of agreement.