RE CMC TRADING CO LTD

HCCW 1370/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 1370 OF 2003

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J U D G M E N T

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1.  This is a creditor’s petition to wind up CMC Trading Limited (“the Company”) presented by Xinyuan Hong Kong Limited (“the petitioner”).  It is alleged in the petition that the Company is indebted to the petitioner in the sum of US$341,075.47, being the price due and payable for aluminium ingots sold and delivered by the petitioner to the Company, for which the petitioner rendered two invoices to the Company as particularised below:

2.  A demand for the above debt was served on the Company under section 178(1)(a) of the Companies Ordinance, Cap. 32 by the petitioner’s solicitors on 12 November 2003.  As no payment was made, the petition herein was presented on 9 December 2003.

3.  After the service of the demand, but before the presentation of the petition, the Company issued a writ against the petitioner on 3 December 2003 in HCA No. 4430 of 2003 (“the High Court Action”), alleging a “joint venture agreement” between the parties, that the petitioner was in breach of the same, and claiming inter alia damages in the sums of US$235,200.00 and US$228,480.00, which exceeded the debt demanded by the petitioner.

4.  The Company opposes the petition on the basis that there is a bona fide dispute of the petitioner’s debt on substantial grounds.  It relies on its case as pleaded in the High Court Action, claiming that the transaction between the parties was not one of the sale and purchase of goods but was a joint venture agreement, and that the petitioner was in breach of the same and there is a cross claim against the petitioner in the amounts mentioned above.

5.  Much evidence has been filed on both sides, with each side making extreme allegations against the other, such as fabrication of some of the documents exhibited, tampering with documentary exhibits, and deposing to untruths in many instances.  In the end, it is quite unnecessary to resolve whether most of these allegations are well founded.  In making an assessment if the grounds raised by the Company in disputing the debt are credible, it is important that I should keep my eyes firmly on the real issues and that I should not be distracted by irrelevant and extravagant allegations.  It is also important to have regard to the substance of the transactions between the parties, whatever are the labels they chose to call the transactions.

The Company’s case

6.  The first affirmation in opposition filed by the Company essentially follows the case as pleaded in the Statement of Claim in the High Court Action.  I set out the material allegations as follows:

(1)     In about August 2000, Li Kaidan (“Mr. Li”) acting on behalf of the petitioner orally agreed with Cheng Siu Ping (“Mr. Cheng”) of the Company to jointly operate a trading business in aluminium ingots to be supplied by manufacturers in the Mainland (“the Joint Venture Agreement”), with, inter alia, the following terms:

(a)    for the purpose of the joint operation, the Company would enter into a yearly supply agreement with Mainland aluminium ingots manufacturers (in the 1^st affirmation of Mr. Cheng filed herein, it is alleged that the Company would enter into such a supply agreement with a specific entity known as Aluminium of First GNP-Gansu Limited (“Gansu”)), to secure the supply of aluminium ingots;

(b)   for the purpose of the joint operation, the Company would enter into sales agreements with purchasers of aluminium ingots;

(c)   for the purpose of the trading business, the petitioner was responsible for the arrangement and issue of all the letters of credit for the benefit of the Mainland manufacturers (in Mr. Cheng’s 1^st affirmation, it is alleged that all the letters of credit were for the benefit of Gansu) necessary for the supply agreements;

(d)   the Company would “reimburse” the petitioner the value for each of the letters of credit issued by the petitioner with an “additional fee” of US$22.00 per metric ton (“the Additional Fee”) of the aluminium ingots supplied;

(e)    the Company would bear its own loss and profits in relation to the sub-sale of the aluminium ingots.

(2)     Since August 2000 and until May 2003, the Company and the petitioner had been operating the joint trading business pursuant to the terms of the Joint Venture Agreement.

(3)     It was the Company’s usual business practice to add a mark up price of US$70.00 per metric ton to the cost price of the aluminium ingots for the Company’s sub-sale of the same to its customers.  The Company would therefore make “a profit of US$70.00 per metric ton of aluminium ingots as well as any increase in the market price of aluminium ingots for their sub-sale by the [Company] to its customers.”

(4)     Pursuant to and in reliance on the Joint Venture Agreement, the Company entered into a supply agreement in January 2003 (“the Supply Agreement”) with Gansu for a period of one year upon, inter alia, the following terms:

(a)    the Company agreed to purchase from Gansu aluminium ingots in the quantity of 120 metric tons to 480 metric tons per month;

(b)   the unit price of the ingots was by reference to the average 10 day price of aluminium as listed on the London Metal Exchange (“LME”) between the 1^st and the 10^th trading day of the month before the month of delivery;

(c)   the delivery date of the ingots was about the 20^th day of each month;

(d)   the payment method was by irrevocable letter of credit.

(5)     Pursuant to and in reliance on the Joint Venture Agreement, the Company had entered into sale agreements (collectively “the Sub-Sale Agreements”) for the sub-sale of the ingots to be supplied under the Supply Agreement with five customers, and they were Vicky International Limited, Winasia Industries Limited, Kam Yuen Aluminium & Metal Company (“Kam Yuen”), Kind Full Limited (“Kind Full”), and Hoito Metal Manufactory Company Limited.

(6)     The total quantity of ingots to be sold under the Sub-Sale Agreements was 480 metric tons per month for 12 months.

(7)     Wrongfully and in breach of the Joint Venture Agreement, “since the end of June and early July 2003” the petitioner had failed and/or refused to arrange and issue the necessary letters of credit for the purpose of the Supply Agreement.  Until then, the petitioner had been arranging and issuing the letters of credit and the Company “had been paying the [petitioner] the price of the aforesaid letters of credit issued by the [petitioner] for the purpose of the Supply Agreement with the Additional Fee”.

(8)     By reason of the petitioner’s breach, the Company had not been able to perform its obligations under the Supply Agreement and Gansu had refused to supply ingots to the Company thereunder.  Further, the Company had not been able to perform its obligations under the Sub-Sale Agreements as it could not obtain supply under the Supply Agreement.

(9)     The Company claims a declaration that the petitioner should indemnify the Company for any damages or compensation the Company is ordered to pay to Gansu or any sum the Company agrees to pay to Gansu in settlement of any disputes under the Supply Agreement.

(10)   The Company also claims damages in these sums:

(a)    US$235,200.00, being “loss of profits under the Sub-Sale Agreements” from June to December 2003, at US$70.00 per metric ton for 480 metric tons a month over seven months; and

(b)   US$228,480.00, being “loss of gain from the increase in LME price of aluminium ingots” over the same period, at US$68.00 per metric ton for 480 metric tons a month over seven months.

7.  The Company’s case as pleaded does not stand up to closer scrutiny.  Weaknesses and holes are exposed when one examines the Company’s case against the facts and documents not in dispute or cannot be disputed.

Is a debt due by the Company to the petitioner

8.  There is one conspicuous omission in the case of the Company as pleaded in the High Court Action.  No mention is made as to the time within which the Company should “reimburse” the petitioner for the value of each of the letters of credit issued by the petitioner with the Additional Fee of US$22.00 per metric ton of aluminium ingots supplied, by the terms of the Joint Venture Agreement as alleged.  In the two affirmations of Mr. Cheng filed in these proceedings, he is silent on this.

9.  In respect of the two transactions for which the petitioner claims that amounts are due and owing from the Company, whether as the price of goods sold and delivered (on the petitioner’s case) or as reimbursement for the value of the letter of credit arranged by the petitioner for the benefit of Gansu for the Company to fulfil its obligation under the Supply Agreement with the Additional Fee (on the Company’s case), two sets of agreements were signed by the Company and the petitioner in each instance.

10.  The first was headed “Contract” in which the Company was described as the seller of the aluminium ingots and the petitioner as the buyer. Payment of the price was “by sight LC to be allowed transferable through Fortis Bank Asia Hong Kong”.  The second was headed “Contract of Sale” in which the Company was described as the buyer and the petitioner was described as the seller.  The date of the second agreement was the same as the first and covered the same goods, the shipment terms, packing, inspection and insurance were identical to the first agreement.  The only differences were the unit price, which was US$22.00 per metric ton more than the unit price in the first agreement and the payment term, which provided as follows:

“By TT or transfer within fourteen [sic] plus interest from the date of payment by our [i.e. the petitioner’s] banker against the import LC interest will be charged at the rate of 9% p.a.”.

11.  There is no doubt as to what “fourteen” means in the payment term in the second agreement as in each of the invoices issued by the petitioner to the Company, the payment term on the invoice read as follows:

“By TT or transfer within 14 days plus interest 9% p.a.”.

12.  The Company had signed the two sets of agreements for each transaction.  No dispute was raised in any of the affirmations filed by the Company or in its case as pleaded in the High Court Action as to the incorporation of the payment term that I have quoted, save for an allegation in paragraph 14 of the 2^nd affirmation of Mr. Cheng that Mr. Li was trying to “set [Mr. Cheng] up” when Mr. Li asked Mr. Cheng to sign the two sets of agreements after they had made the Joint Venture Agreement saying that they were “the formalities”.  I do not accept that the Company had no knowledge of or had not agreed to the payment term.  In the 1^st affirmation of Mr. Li, he produced a schedule of all the transactions entered into between the petitioner and the Company from November 1999 to June 2003 for which written contracts were signed between the parties.  There were altogether 30 such transactions.

13.  Further, in two fax messages from the petitioner to the Company both dated 10 July 2003 in which the petitioner sought payment in respect of the invoice dated 22 May 2003 and another invoice for an earlier transaction in March 2003, clear reference was made to the payment term.  These two fax messages were exhibited to the 1^st affirmation of Mr. Cheng and are not among the fax messages or letters of the petitioner alleged by Mr. Cheng as not received by the Company.  In his letter in reply to the petitioner also dated 10 July 2003, Mr. Cheng did not dispute the payment term.  Instead, he mentioned the financial difficulties suffered by the Company and its customers due to SARS, admitted the delay in making payment, stated that the Company had made part payment of US$150,000.00 recently (not in respect of the last two invoices issued by the petitioner) and that it intended to pay the amount due on the invoice dated 22 May 2003 by the latter part of July 2003.

14.  By the aforesaid payment term, the Company was obliged to pay the amount stated in the second agreement (which was the amount invoiced by the petitioner) within 14 days of the date of payment by the petitioner’s banker of the letter of credit issued in favour of the Company and transferred to Gansu.  There is no dispute that for the transactions covered by the two invoices of the petitioner issued on 22 May 2003 and 26 June 2003 (which made up the petitioning debt), payment was received under the letters of credit arranged by the petitioner.  The due dates of the two invoices were 22 June 2003 and 29 July 2003.  No payment was made by the Company at any time.

15.  In the 1^st affirmation of Amy Sin Yim Man (“Miss Sin”) filed on behalf of the petitioner, she listed in paragraph 5 nine transactions between the petitioner and the Company from May 2002 to May 2003 giving the due dates of the invoices and the dates of actual payment by the Company.  She deposed that the Company had not been making payment to the petitioner on time since May 2002 and that the “repeated delay” of the Company had brought about a lot of inconvenience to the petitioner.  Mr. Cheng did not make any direct answer to this in his affirmation in answer, save to assert that late payment by the Company was due to late payment received from the sub-sales and that the parties understood each other the difficulty with cash flow when doing business.  This would hardly absolve the Company from its contractual obligation to pay the amount invoiced by the petitioner within the time as stipulated.

16.  Thus, even on the Company’s case as alleged, that there was no true transaction for the sale and purchase of aluminium ingots, the Company was under an indisputable obligation to pay the amounts invoiced by the petitioner and the Company has failed to do so within the time specified or at all.  There is no and no bona fide dispute of the petitioning debt.  There is no truth in the allegation of the Company that it had been paying the petitioner the price of the letters of credit issued by the petitioner with the Additional Fee.

Is there a proper basis for the cross claim

17.  The cross claim of the Company is premised on a contractual obligation of the petitioner to arrange for letters of credit in favour of the Company for the latter to meet its obligation under the Supply Agreement with Gansu and that the petitioner was in breach of that obligation.  Before I consider the quantum of the cross claim, it is necessary to see if there is any proper and valid basis giving rise to the alleged liability of the petitioner to compensate the Company in damages.

18.  It is the petitioner’s case that it was under no such contractual obligation and that there was no verbal Joint Venture Agreement as alleged or at all.  Although 30 transactions were entered into with the Company between November 1999 to June 2003, the petitioner asserted that the business transactions were always considered and concluded on a case-by-case basis, and for each of the transactions, the parties had entered into a written contract.  The petitioner has produced documents to show that there were occasions on which offers or proposals were made by the Company to the petitioner and the parties did not reach any deal and no written contract was signed.  There were eight instances between September 2000 to June 2003, according to the documents produced; of these eight instances, two related to aluminium ingots, the others related to other types of aluminium products.  This would appear to go against the Company’s case although I note Mr. Cheng’s explanation that for products other than aluminium ingots the parties would enter into transactions on a case-by-case basis.

19.  The petitioner also produced documents to show that the petitioner had on some occasions after August 2000 (the commencement of the alleged Joint Venture Agreement) bought aluminium ingots from the Company and had sub-sold the same to other entities.  According to the documents produced, there were three such transactions between August 2000 to December 2002.  The Company’s allegation that it was the Company that had sub-sold the ingots supplied by Gansu is not borne out in these instances.  Mr. Cheng did not explain why the sub-sales were made by the petitioner, contrary to the Joint Venture Agreement as alleged.

20.  Furthermore, according to other documents produced by the petitioner, there were three instances between September 2000 to February 2001 where the “additional fee” paid by the Company to the petitioner for a transaction for which a letter of credit was arranged by the petitioner and transferred for the benefit of the Company’s supplier was not US$22.00 per metric ton of the aluminium ingots supplied.  The amount was US$25.00 per metric ton in one instance, and US$20.00 in the other two instances.  Again, Mr. Cheng did not explain why these amounts were different from the Additional Fee in the Joint Venture Agreement as alleged.

21.  The allegation of the Company that since August 2000 until May 2003 the petitioner had been arranging and issuing letters of credit for the monthly supply of aluminium ingots pursuant to the Joint Venture Agreement is not borne out by the undisputed record of past transactions exhibited to Mr. Li’s affirmation.  According to the schedule, for the period of August 2000 to June 2003, there were some months in which no contracts for aluminium ingots were made between the petitioner and the Company and they were as follows:

(1)     in 2000: October

(2)     in 2001: January, February, June, August, September, November, December

(3)     in 2002: April, June, August, October, December

(4)     in 2003: April

22.  In view of all the above contradictions of the Company’s allegations for which there is no or no satisfactory explanation from the Company, it is doubtful to say the least if the parties had ever entered into a verbal Joint Venture Agreement with the terms as alleged.

23.  Besides, even if I were to assume in favour of the Company that there was a Joint Venture Agreement and that the petitioner was under a contractual obligation to arrange the issue of letters of credit for the monthly supply of aluminium obtained by the Company, this would still not avail the Company.  As I have mentioned earlier, the Company was in breach of the Joint Venture Agreement in June and July 2003 in failing to make payment of the amounts invoiced by the petitioner in May and June 2003.  The petitioner was pressing for payment from June to September 2003, and there was no waiver of the breach of the Company.  As the Company was in breach of the Joint Venture Agreement in failing to make payment, the petitioner would have been entitled to regard itself as discharged from its obligation to arrange letters of credit for the Company for new transactions (if the petitioner had been under any such obligation).  The Company could not insist on the petitioner’s further performance of the Joint Venture Agreement when it was not ready and willing to perform its own obligations under that agreement.

24.  The contemporaneous letters written by the Company are telling.  In the letter of Mr. Cheng to the petitioner dated 10 July 2003, which I have already mentioned, apart from making a promise to pay the petitioner the amount due on the invoice issued in May 2003 by the latter part of July 2003, Mr. Cheng asked the petitioner to “consider” arranging a letter of credit for a shipment of 120 metric tons of aluminium ingots, there was no mention of any obligation on the part of the petitioner to do so.

25.  In a subsequent letter of Mr. Cheng to the petitioner dated 12 August 2003, he stated that the Company was arranging for payment of the two outstanding sums and he expected to pay the petitioner by the following week; he further expressed the hope that after payment was received by the petitioner, the petitioner would revive their former co-operation in business and arrange the issue of a letter of credit for 120 metric tons of aluminium ingots.  Mr. Cheng in his 1^st affirmation sought to explain this letter, which is apparently damaging to the Company’s case, by alleging that it was sent after he had a meeting with Miss Sin on 11 August 2003 and as a result of an oral agreement they had reached (this is denied by the petitioner).  However, in an earlier letter of the Company’s solicitors to the petitioner’s solicitors dated 10 December 2003, it was alleged that the agreement of 11 August 2003 was reached between Mr. Cheng and Mr. Li instead.

26.  In a further letter to the petitioner dated 5 September 2003, Mr. Cheng again acknowledged the two outstanding sums, assured the petitioner of the Company’s efforts to settle the debts, asked the petitioner to give a little more time for payment, stated the intention to pay by the following week in one or two instalments, and once again expressed the hope that the business co-operation with the petitioner might continue and develop.  In yet another letter of the Company to the petitioner dated 16 September 2003, Mr. Cheng stated that the Company would pay the invoice in May 2003 within the week and the invoice in June 2003 by the following week.

27.  From the above undisputed letters written by Mr. Cheng, it is reasonably clear that the Company knew and accepted that no letter of credit would be arranged by the petitioner for any further transaction until the outstanding sums were settled.

28.  I am mindful of the fact that apart from these undisputed letters, Mr. Cheng produced six other letters as written by him to the petitioner between June to October 2003, in which he stated inter alia that the petitioner had breached its contractual obligation to arrange for a letter of credit for the shipment of 120 metric tons of the goods and held the petitioner fully responsible for all the financial loss suffered by the Company.  The petitioner has disputed these letters as not having been received by it.  If the Company had indeed sent these disputed letters to the petitioner, it is most unlikely that the petitioner did not respond to any of them in writing.  Besides, the tenor of these disputed letters is in sharp contrast with the conciliatory tone in the letters written by Mr. Cheng that are not in dispute.  They are also inconsistent with the undisputed letters, which made no mention of any condition for the Company to settle the outstanding sums.

29.  I consider that the Company has failed to establish on credible evidence that it has a proper and valid basis for its alleged cross claim against the petitioner.

The amount of the cross claim

30.  The doubts I entertain as to whether there is a genuine cross claim are compounded when I examine the evidence adduced to support the contention that the cross claim is of an amount in excess of the petitioning debt.

31.  I look first at the claim for loss of profits under the Sub-Sale Agreements in the amount of US$235,200.00, made up of US$70.00 per metric ton for 480 metric tons a month over seven months.  This is premised on the allegation that the Sub-Sale Agreements made between the Company with the five customers were for the sale of aluminium ingots in the quantity of 480 metric tons a month for the period of twelve months in 2003.  No such Sub-Sale Agreements with the five customers were adduced, nor were the particulars of the agreements with each of these customers provided.  Only one agreement for sub-sale was produced by the Company, this was an agreement dated 7 June 2003 between the Company and Kind Full, for the sale of 1,440 metric tons of aluminium ingots to be delivered at the rate of 240 metric tons a month for six months, from July to December 2003.  It would also appear from the Statement of Claim of an action brought by Kam Yuen against the Company in the District Court in December 2003 that Kam Yuen had made two agreements with the Company to purchase aluminium ingots from the Company.  The first was in April 2003 for the supply of 200 metric tons, the second was in May 2003 for the supply of 100 metric tons.  The particulars of the sub-sale transactions as disclosed in the documents produced do not add up to the quantity of 480 metric tons a month to be supplied to the Company’s customers over the period of seven months from June to December 2003 or that there were past transactions in which 480 metric tons were supplied each month from January to May 2003.  Mr. Cheng’s reply was that the Company would not want to disclose the Sub-Sale Agreements “as they are sensitive and confidential and has nothing to do with the joint venture agreement entered into with the Petitioner”.  This is wholly unacceptable.  The onus is on the Company to adduce sufficiently precise factual evidence to satisfy the court that it has a valid and genuine cross claim for the amount alleged.

32.  The other quantified claim is for US$228,480.00, being the “loss of gain from the increase in LME price of aluminium ingots” over the same seven-month period, at the rate of US$68.00 per metric ton for 480 metric tons a month, in addition to the loss of profits of US$70.00 per metric ton already claimed.  I have the greatest difficulty in understanding the basis for this head of claim, assuming that liability were established and assuming further there were indeed the Sub-Sale Agreements as alleged.  According to the Supply Agreement, the unit price at which Gansu sold aluminium ingots to the Company was by reference to the average 10 day price of aluminium as listed on the LME between the 1^st and the 10^th trading day of the month before the month of delivery.  According to the only agreement for sub-sale produced, being the agreement with Kind Full, the unit price was by reference to the “average” trading price of aluminium ingots at the LME (without specifying over what period the average was to be taken) 30 days before shipment, plus US$95.00 per metric ton.  If the formula for taking the average trading price at the LME in the sub-sale transaction were the same as in the Supply Agreement, there is no basis for claiming “the loss of gain from the increase in LME price of aluminium ingots”.  If the formula for taking the average trading price at the LME in the sub-sale transaction were different from that in the Supply Agreement, the material particulars are missing in the only agreement for sub-sale produced by the Company.

33.  For the above reasons, there is no credible evidence to support the Company’s contention that the amount of its cross claim is in excess of the petitioning debt.

Conclusion

34.  The Company has failed to establish a bona fide dispute of the petitioning debt on substantial grounds or that it has a genuine cross claim against the petitioner in an amount not less than the petitioning debt.  I

order the Company to be wound up.  The petitioner’s costs are to be paid out of the Company’s assets.