YEE FAT DEVELOPMENT LTD v. WINLINE KNITTING FACTORY LTD

CACV 213/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 213 OF 2010

(ON APPEAL FROM DCCJ NO. 447 OF 2007)

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BETWEEN

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REASONS FOR JUDGMENT

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Hon Cheung JA:

1.  I agree with the judgment of Kwan JA.

Hon Yuen JA:

2.  I agree with the judgment of Kwan JA.

Hon Kwan JA:

3.  This is an appeal from the judgment of Deputy District Judge R Pang handed down on 9 July 2010. The plaintiff claimed RMB 864,464.27 being the outstanding price of goods sold and delivered. The defendant denied any amount was owing to the plaintiff, alleging that it was entitled to set off an amount owed by Yee Fat Trading Company (“YFT”) to it in respect of compensation for air freight charges. This entitlement was put on two bases. Firstly, there was an agreement for an account stated between the defendant and the plaintiff, acting by its director and business manager Lau Ying Kwok (“Lau”), thereby permitting the defendant to set off YFT’s liability for air freight charges against the amount owed by the defendant to the plaintiff in the statement of account. Further or alternatively, the business of YFT was transferred to the plaintiff and the plaintiff is rendered liable to the defendant for the debts of YFT by virtue of the Transfer of Businesses (Protection of Creditors) Ordinance, Cap. 49. The Judge found in favour of the defendant on both grounds and dismissed the plaintiff’s claim.

4.  Mr Kwan Tong Lee, who appeared for the plaintiff here and below, took three main points in its appeal. Firstly, he contended that the Judge was in error in holding that Lau had apparent authority to enter into the alleged agreement with the defendant on the plaintiff’s behalf. Secondly, he submitted that the Judge had erred in law in holding the plaintiff liable under Cap. 49. Thirdly, even if he should fail on these two matters, the appeal should nevertheless be allowed to the extent that the defendant is liable to the plaintiff in the sum of $231,215.50.  As no point was taken on appeal on whether an agreement for an account stated was adequately pleaded by the defendant, it is not necessary to deal with this.

5.  At the end of the hearing, we allowed the appeal to the extent of entering judgment for the plaintiff in the sum of $231,215.50. Having heard submissions on costs, we reserved our judgment on this. We now give reasons for allowing the appeal to the extent as stated and give judgment on costs.

The background

6.  The relevant background matters may be stated as follows.

7.  At all material times, Lau was the sole proprietor of YFT. Since about 2003, the defendant had contracted out the processing and packaging steps in the manufacture of garments to YFT.

8.  By an agreement in writing dated 9 December 2004 made between YFT and the defendant, YFT agreed to accept liability to the defendant in the sum of $831,215.50 for air freight charges, due to YFT’s delay in meeting the shipment of goods. It was provided in the agreement that $231,215.50 was to be deducted immediately from the amount owing to YFT, that the balance of $600,000 would be deducted from the processing fees payable to YFT in 2005 at the rate of 10% as and when such fees were payable until the entire amount was discharged.

9.  In early 2005, YFT was in financial difficulties. Lau entered into an agreement in writing dated 7 February 2005 with three investors, one of them being Leung Sau Ching (“Leung”). By this agreement, the investors agreed to inject funds of $1.6 million to the businesses of YFT and Yi Tai Knitting Factory, a factory in the Mainland owned by YFT. In return, the investors would take up 50% shares in a limited company. The parties confirmed the amounts of the accounts receivable and payable in respect of YFT in the accounts annexed to the agreement. It was provided that the investors would not accept liability for any accounts payable not stated in the annexed accounts. The agreement was stated to take effect upon signing in February 2005.

10.  The plaintiff was incorporated on 4 April 2005 pursuant to the above agreement. Shares were allotted to Lau and the three investors, with Lau holding 50% of the shares. All four individuals were appointed directors. “Yee Fat” featured in the trade name of both the plaintiff and YFT. Both shared the same address, telephone and fax numbers. Both used Yi Tai Knitting Factory.

11.  The defendant was notified of the formation of the plaintiff in April 2005 at the latest. Ever since the incorporation of the plaintiff, the defendant became a major client in that the value of its purchase orders amounted to 70% of the total value of annual production of the plaintiff.  On the evidence of Leung, the defendant had been placing orders with the plaintiff and making payments to the plaintiff instead of to YFT. Although some orders of the defendant still went to YFT, these were during the “handover period”, according to the evidence of the defendant’s managing director, Hsieh Ming Chiu (“Hsieh”). 

12.  By a letter to the accounts department of the defendant dated 15 June 2005 issued on the plaintiff’s letterhead, it was stated that “as our company was re-structured as a limited company” (the original wording in Chinese was “由於敝公司已改組為有限公司”), the defendant was requested to pay the price of goods to the plaintiff and to list out the items of the fees paid with details. The letter was sent by Lau as the business manager and Leung as the finance manager of the plaintiff.

13.  YFT only ceased business on 1 April 2006, about a year after the plaintiff’s incorporation.

14.  Lau had disappeared and was not available to be called by either party at the trial. Hsieh gave evidence that in late 2005 or early 2006, he had a discussion with Lau in which Lau re-affirmed and agreed orally with him, as Lau had told him earlier in April or May 2005, that the plaintiff would allow the air freight charges to be deducted from the processing fees payable by the defendant to the plaintiff. Pursuant to that oral agreement, Hsieh instructed the defendant’s senior account clerk, Miss Luk Kit Yue (“Miss Luk”), to follow up the matter with Lau.

15.  On 25 January 2006, the defendant received a statement of account from the plaintiff by fax. After checking this, Miss Luk faxed it back to the plaintiff with her amendments on 26 January. On 16 February 2006, Lau delivered to Miss Luk for verification the amended accounts with further amendments made by Leung. On 24 February 2006, Lau went to see Miss Luk for further verification of the statement of account and told her that as he had agreed with Hsieh, the air freight charges should be deducted from the processing fees payable to the plaintiff and he would inform the other directors about this. On this occasion, Lau wrote on the statement of accounts the characters “扣飛機” to denote the deduction of the charges.

16.  The Judge noted there was nothing to contradict the above evidence of the defendant that Lau had agreed the statement of account which contained a deduction for air freight charges and accepted that evidence. Hence, the dispute the court was to resolve centred on Lau’s authority to bind the plaintiff to permit the deduction of those charges.

Apparent authority

17.  Mr Kwan submitted that the Judge had erred in fact and in law in holding that Lau had apparent authority.

18.  On the finding of fact, he contended that the Judge was plainly wrong in paragraph 56 of the judgment in stating that there is a contradiction in the evidence as to what, if anything, was said over the telephone between Leung and Hsieh and when that occurred. As stated in paragraph 22 of the judgment, Leung gave evidence that in his telephone call to Hsieh on 25 January, he emphasised that YFT and the plaintiff were different companies, that the air freight charges should not be set off, and he told Hsieh that the plaintiff had never authorised Lau to agree to such set off.

19.  The evidence of Hsieh pertinent to this important telephone conversation, as summarised in paragraph 39 of the judgment, was merely to the effect that Leung had told him that the unilateral deduction of freight charges was not right and wanted to speak to him about it.

20.  Mr Kwan submitted the only conclusion the court should have reached on the evidence was that in the telephone conversation, Leung had told Hsieh that Lau had no authority to agree to the deduction of air freight charges. Having read the relevant parts of the transcript of Hsieh’s testimony and Leung’s testimony referred to by counsel on both sides, I am satisfied that the Judge’s summary of the evidence in paragraphs 39 and 56 of his judgment is entirely correct, and there is no basis to interfere with his finding of fact that the evidence of Leung in his witness statement regarding the telephone conversation should not be accepted. In Hsieh’s evidence in cross-examination, he only agreed to the suggestion put to him that Leung had objected to the unilateral deduction of air freight charges. He had never agreed to the other suggestion that Leung had told him Lau was not duly authorised. When Leung was asked in cross-examination whether he had communicated the information to the defendant that the plaintiff did not authorise Lau to set off the sums, he said this was the plaintiff’s internal matter and it was not he who should communicate this with the defendant.

21.  In holding that Lau had apparent authority, the Judge had looked at the inherent probabilities and objective circumstances mentioned in paragraphs 57 to 61 of the judgment. Lau was a director and he was the one who had previously dealt with the defendant throughout their relationship until the later stages. His title was business manager; the word “business” is very wide and would be wide enough to encompass matters such as the giving of discounts and settling of accounts. Leung agreed in evidence that as the business manager, Lau was the ‘face’ of the plaintiff. Hsieh had given evidence that Lau alone negotiated with him on the plaintiff’s behalf and had made various decisions including pricing, payment, amendment of accounts and invoices, and Lau had signed on various documents for the plaintiff. Miss Luk’s evidence was that since about mid 2005, she dealt with Lau on behalf of the plaintiff in the same way as she had dealt with him previously vis-à-vis YFT. On 15 June 2005, Lau issued the letter to the defendant jointly with Leung to inform the defendant about the company restructuring and requesting payment of processing fees to be made to the plaintiff in future.

22.  Other than the above matters mentioned in the judgment, Mr Paul Lam submitted for the defendant there was ample evidence to support the finding of a holding out by conduct that Lau had authority to permit the defendant to deduct air freight charges. On the plaintiff’s own case as pleaded, the responsibilities of Lau included contacting customers for the purpose of securing sales orders and demanding settlement of outstanding amounts, albeit it was averred this should be done “upon Leung’s directions”. Leung said in evidence that the “normal operation” was handled by Lau, that “usually” it was Lau who chased for payments. When Leung was cross-examined if he had communicated to the defendant that Lau was not authorised to permit the deduction of air freight charges, Leung said among other things that Lau was responsible for dealing with the customer. Lau had signed invoices on the plaintiff’s behalf, as well as a letter issued by the defendant dated 15 August 2005 to confirm the plaintiff’s agreement to the pre-payment of $100,000 to YFT and the deduction of this sum from the processing fees payable to the plaintiff.

23.  Mr Kwan did not appear to dispute there was evidence to support a finding of holding out of authority. What he took issue with was the Judge should have held that the defendant could not rely on apparent authority because it had turned a blind eye to the obvious and was being reckless in not ascertaining the true position regarding Lau’s authority and so could not rely on this principle to bind the plaintiff (Akai Holdings Ltd. (in liquidation) v. Thanakharn Kasikorn Thai Chamkat (Manachon) (also known as Kasikornbank Public Co. Ltd. ) [2011] 1 HKC 357, paras. 49 to 62).

24.  I have already dealt with the matter about the telephone conversation alleged by the plaintiff. On the Judge’s finding, which I agree with, this could not be a reason to find that it was imperative for the defendant to make inquiries about Lau’s authority.

25.  Mr Kwan pointed to other matters to support his contention that the defendant’s belief in Lau’s apparent authority was dishonest or irrational. He mentioned that (1) Hsieh was aware all along Lau was wearing two hats in that he was the proprietor of YFT, there was a possible conflict of interest on Lau’s part and the setting off was not to the plaintiff’s benefit; (2) Hsieh was aware Lau was not the managing director of the plaintiff; (3) no notice or debit note was issued by the defendant to the plaintiff regarding the deduction of air freight charges; (4) the air freight charges of $831,215.50 to be deducted would set off a very substantial part of the processing fees of $970,000; (5) the defendant had known in May 2005 that only $600,000 and not $831,215.50 should be deducted for air freight charges; (6) Leung had all along disputed the setting off of air freight charges; (7) it was Leung who verified the accounts with Miss Luk at the later stage; and (8) the defendant was doing business with YFT at the same time and had made at least six payments totalling $610,000 to YFT from 15 August 2005 to 31 December 2005.

26.  In my view, none of the above matters, whether taken separately or cumulatively, were sufficient to cause the defendant to suspect there must be something wrong in its understanding of Lau’s authority so that in refraining from making inquiries whether he was indeed authorised to act, the defendant must have been dishonest or reckless.

27.  The matters relied on by counsel must be examined against the background mentioned earlier. Of particular relevance are the circumstances in which the plaintiff was set up, the history of the defendant’s dealings with YFT and the plaintiff, the plaintiff’s request to the defendant by the letter dated 15 June 2005 to pay processing fees to the plaintiff in future, and Lau’s confirmation on the plaintiff’s behalf (which was not challenged) in the letter dated 15 August 2005 that the $100,000 pre-paid to YFT could be deducted from the processing fees payable to the plaintiff. Viewed in this light and with commercial common sense, there was nothing untoward or remarkable about using YFT’s liability for air freight charges to set off the plaintiff’s processing fees. The past dealings indicated clearly that payments were requested to be made to the plaintiff instead of YFT and there was the evidence of Leung that the defendant had been placing orders with the plaintiff and making payments to the plaintiff instead of to YFT. There was also this previous occasion in which the liability of YFT was used to set off against the processing fees of the plaintiff. The defendant’s knowledge in May 2005 of the correct amount to be deducted for air freight charges is immaterial, so is the late involvement of Leung in the verification of the accounts. 

Transfer of business

28.  I turn to consider the plaintiff’s arguments on the liability imposed under Cap. 49 due to the transfer of business. The Judge found on the evidence there was a gradual transfer of business from YFT to the plaintiff and that this was a transfer of business to found liability under the ordinance.

29.  Mr Kwan took three main points on appeal. Firstly, he contended there was no evidence that the gradual transfer of business was completed before 24 February 2006, the date on which the final statement of account was agreed. As the transfer of business was not completed, the plaintiff could not have assumed liability for the debts of YFT under the ordinance on 24 February. Secondly, there was no evidence that all the assets of YFT were transferred to the plaintiff. Thirdly, the mischief which the statute seeks to address is to prevent a company from secretly divesting itself of assets to put them beyond the reach of creditors. What YFT and the plaintiff did in this instance was not done in secret, and the creditors of YFT were not deprived of recourse to YFT’s assets.

30.  There is no basis to disturb the Judge’s finding that there was a transfer of business within the meaning of the ordinance. The background matters that I have summarised speak sufficiently for themselves. I reject the contention there must be a transfer of all the assets of YFT for the statutory liability to be imposed on the transferee. As submitted by Mr Lam, the word “business” is defined in section 2(1) to mean “a business, or any part thereof” and under section 3(1) it is not a requirement that the transferor should divest all of its assets and cease business before the transferee shall become liable for all the debts and obligations arising out of the carrying on of the business by the transferor. The contention that YFT was still trading for some time and in possession of some assets to which its creditors might have recourse is just irrelevant.

31.  It is not provided in section 3 that the transfer of business must be completed for liability to be imposed on the transferee. As pointed out by Mr Lam, section 3 does not refer to the “date of transfer” at all. The “date of transfer” may be relevant if the validity of a notice of transfer given under section 4 is in issue, which is simply not the situation here. Furthermore, the “date of transfer”, as defined in section 2(1), is “the date on which a transfer takes effect or is intended to take effect”. The words “takes effect” would mean “producing the desired effect” (Dominion Square Corporation v. Aluminium Co. of Canada [1942] 2 DLR 189 at 194). In the agreement for the transfer of business to a limited company dated 7 February 2005, it was provided that the agreement was to take effect upon signing in February 2005. Last but not least, the date of 24 February 2006 is immaterial for present purpose. Once there was a transfer of business from YFT to the plaintiff, as the Judge had found, under section 3(1) the plaintiff was liable for all the debts and obligations of YFT arising out of the carrying on of the business by YFT, which must include the liability for the air freight charges.

32.  All the points taken by the plaintiff under this head are without merit.

The amount of $231,215.50

33.  The contentions here may be stated shortly. As stated in the agreement between YFT and the defendant dated 9 December 2004, $231,215.50 was to be deducted forthwith, leaving a balance of $600,000 to be deducted from processing fees in future. In the re-amended defence, it was acknowledged that the outstanding freight charges liability, as defined, was only $600,000. The defendant’s witnesses, Hsieh and Miss Luk, both accepted that only $600,000 should be deducted, not the figure of $831,215.50 in the statement of account agreed on 24 February 2006.

34.  Mr Lam accepted there should be judgment for the plaintiff in the sum of $231,215.50 if the defendant succeeds only on the ground under Cap. 49. He argued that if the defendant succeeds also on the ground there was agreement for an account stated by which the defendant was to pay and had paid the net balance of $146,051.36, the plaintiff should not be entitled to the sum of $231,215.50, albeit this was wrongly deducted. The only issue taken by the plaintiff to resist the case of account stated was the apparent liability of Lau to bind the plaintiff. The plaintiff did not plead mistake on which reliance may be placed to re-open the account stated (Firm Bishun Chand v. Seth Girdhari Lal (1934) 50 TLR 465 at 468). I consider this a wholly technical argument. It was raised and pleaded by the defendant that the outstanding freight charges liability was only $600,000. This was admitted by the plaintiff in reply, although the plaintiff contended that a further sum should be deducted from the $600,000 as the accounts payable of YFT.

35.  In finding for the defendant there was an agreement for an account stated, the Judge was in error in holding that no sum was due from the defendant. Judgment should be entered for the plaintiff in the sum of $231,215.50 which was wrongly deducted in the statement of accounts.

Costs

36.  This leaves the question of costs below and on appeal. The Judge made an order nisi for the plaintiff to pay the defendant’s costs of this action. There was no variation of the order nisi.

37.  We note from the notice of sanctioned payment that on 28 September 2009, pursuant to Order 22 rule 11 of the Rules of the District Court, the defendant made a payment into court of $324,000 in respect of the whole of the plaintiff’s claim, taking into account the set off of $600,000 being the freight charges liability pleaded in the re-amended defence filed in March 2008. The sanctioned payment was not accepted by the plaintiff. The trial of the action took place in early 2010 and judgment was handed down on 9 July 2010 dismissing the whole of the plaintiff’s claim. We were informed that on 26 July 2010, the defendant withdrew the money paid into court as sanctioned payment. The plaintiff applied for leave to appeal on 5 August 2010. No sanctioned offer or payment or without prejudice offer was made by the defendant in respect of the appeal to protect its position on costs.

38.  The plaintiff has failed to obtain a judgment better than the sanctioned payment. We are mindful of the consequences which may follow from a sanctioned payment in this situation, as provided in Order 22 rule 23. We decline to disturb the costs order below, taking into account that the payment was made at a relatively late stage of the proceedings. Pursuant to the powers of the court under rule 23(2), we disallow interest on the judgment sum of $231,215.50 for the period from 28 days after 28 September 2009 (the latest date on which the payment could have been accepted without leave of the court) up to 26 July 2010 (the date when the defendant withdrew the payment into court).

39.  As for the costs of this appeal, the plaintiff had to bring this appeal to obtain judgment for a sum which was wrongly deducted from the statement of account. It has however failed on all the arguments which took up most of the time and preparation for the appeal. In the circumstances, we think it just to deprive the plaintiff of half of its costs of this appeal and we so order.