MAURI GARMENTS CO LTD v. MAURI GARMENTS TRADING AND MARKETING LTD

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JUDGMENT

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1. This appeal from the refusal of the Master to set aside a Default Judgment dated 7th April 1995 is yet another instance of a frequent feature of the commercial litigation life in Hong Kong where banks which were perfectly happy to advance money to a company or a group sought (by way of receiver and in the name of the customer company) after the collapse of that company, to recover money which it claimed had been improperly lost by the company as result of impropriety in the former management of the company. Transactions formerly carried out by the company had to be re-examined and when that examination is done in the course of interlocutory proceedings, either by way of Order 14 or setting aside default judgment applications, the task of the Court is vexed with difficulties by the uncertainties in resolving complicated conflicts of evidence.

2. In this case, I have been much assisted by the able submissions of Mr. Thomas for the Plaintiff and Mr. Stone for the Defendant. But ultimately, the forensic skill of Counsel can only be of limited help and the Court in reaching its judgment must have regard to the basic principle, the Court's overall assessment of the evidence and most importantly of all to its own common sense, not unduly dazzled by the persuasive arguments of Counsel.

HISTORY

3. Mr. Jacques Benichou (hereinafter referred to as "JB"), a French entrepreneur is the main protagonist in this saga. The story started in 1974 when JB's family set up in Paris a French company called MGC Paris to handle the sale of garments to JB's customers. At that time JB's family were importing garments from Mauritius and Morocco. In 1979 JB went to Mauritius to look for sources of supply of shirts manufactured in Mauritius and Duke Haberdasher, a Mauritius manufacturer was found and from about 1981 to 1982, MGC Paris was obtaining its supply of shirts from Duke Haberdasher to enable it to sell to the aforesaid JB customers. Then in 1982, JB set up the Plaintiff in Mauritius to take over the supply of manufacturing of shirts from Duke Haberdasher. From 1982 to 1989. MGC Paris obtained orders from JB customers and MGC Paris then purchased these shirts from the Plaintiff so that MGC Paris could supply the shirts to the JB customers.

4. In or about 1989, Next One another French family company of JB took over from MGC Paris the sale of shirts to customers and the buying of the shirts from the Plaintiff. Then in 1990. Intertextiles SA was formed by JB to take over from Next One in respect of the sale of shirts to customers. In 1991/2 Mauri Garments France took over from Intertextiles SA. The Hong Kong company, namely the Defendant was set up in late 1992 to take over the sales operation from Mauri Garments France.

5. The picture which was built up from the evidence and the submission of the parties is that so far as the selling of shirts were concerned, there was a chain of family companies starting in 1974 which obtained orders from JB customers which orders were filled by these selling companies buying from Mauritius manufacturer and this manufacturer was the Plaintiff from 1982 onwards. From 1982 the Plaintiff was manufacturing and then selling to successive JB family companies (including from late 1992 the Defendant) which in turn were selling to JB customers after obtaining orders from these JB customers.

6. As manufacturer in Mauritius, the Plaintiff being beneficially owned by JB and his family, was financed by Mauritius Commercial Bank Ltd. ("the Bank"). The Bank however was not limited to financing the Plaintiff. It was also financially involved with JB in two other business ventures of JB in the Mauritius, namely a hotel and a mill called Woventex for the production of textile fabrics. These were large investments with the Bank being a partner of JB in these ventures.

7. As result of the Plaintiff finding itself in financial difficulties, in 1992 the Bank took steps to restructure its financing of the Plaintiff. The Bank was looking for a secure supply of orders for the Plaintiff and some sort of security to back up that secure supply of orders. In other words, the Bank was looking for a steady stream of assured income. The secure supply of orders was to be in the form of a contract between the Plaintiff as seller and the Defendant as buyer and the security to back up that contract was to be a bank guarantee from the Defendant's bank. These were done and there was a bank guarantee from Bank Warburg dated 26th November 1992 for FF5,000,000 ("Guarantee") and a contract between the Plaintiff and the Defendant dated 25th November 1992 ("Master Contract") although the Plaintiff at the hearing alleged that the Master Contract was a forgery. There was no dispute by the Plaintiff that the Guarantee was genuine and in fact it was common ground that the Plaintiff cashed in the Guarantee (which the Defendant said was wrongly and improperly done).

8. It seems to be reasonably clear that from late 1992 until early 1994, shirts manufactured by the Plaintiff were shipped to these JB customers and that the Plaintiff was invoicing the Defendant for the sale of the shirts by the Plaintiff to the Defendant and the Defendant was invoicing the customers for the shirts sold by the Defendant to the customers and that letters of credit were opened by the customers in favour of the Defendant and it was the Defendant which obtained money under these letters of credit. In dispute however between the Plaintiff and the Defendant at the hearing of the setting aside are a host of factual questions including in particular the following:-

9. In early 1994 when the Bank decided to move in on the Plaintiff and generally on JB and the companies owned or controlled by JB in Mauritius. There was a series of complex manoeuvres and court proceedings in Mauritius and France after the Bank and JB parted company. I will not go into the detailed history of this side of the dispute except when in the course of my Judgment I find that in the interests of clarity or logical analysis, it is necessary to describe a particular aspect of this complicated legal warfare.

10. Between early 1994 and early 1995 there was therefore the battle being waged in the French and Mauritius courts. In Hong Kong the legal activity started in 1995 with a letter of 24th February 1995 from Deacons, Solicitors of the Plaintiff to the Defendant which letter was sent to 903 Ruttonjee House in Central. This is the address of Offshore Incorporations Ltd. ("OIL") which was acting as the company secretary in Hong Kong of the Defendant and whose address was also the registered address of the Defendant under the Hong Kong Companies Ordinance. The Defendant used the services of Fimanor Financial Management AG ("Fimanor") in appointing OIL to act as the Defendant's company secretary in Hong Kong and it was Fimanor which was supposed to pay OIL for the company secretary services rendered by OIL to the Defendant. In late 1994, OIL apparently had already invoiced Fimanor for its fees but was not paid. By February or March 1995 OIL was therefore still looking for payment of its fees in respect of services already performed by OIL for the Defendant. It is against this background that on the 10th March 1995, the Plaintiff issued its Writ of Summons and served it by registered post on the Defendant at the 903 Ruttonjee House registered address. By letter dated 15th March 1995, OIL advised Fimanor of its resignation as company secretary of the Defendant with effect from 18th February 1995. On the 22nd March 1995, JB met Mr. Ted Powell and Miss Ada Cheng of OIL and at this meeting, it is common ground that the Deacons demand letter dated 24th February 1995 ("Deacons Demand Letter") was handed to JB. According to JB, he was not told at that meeting anything about the Hong Kong proceedings but Mr. Powell alleged subsequently that he told JB at the meeting about the Writ but did not give him a copy of the Writ. Following the meeting, JB faxed a copy of the Deacons Demand Letter to the Mauritius lawyers and asked them to inquire into the matter. It should be noted here that the Deacons Demand Letter was very cryptic as to the basis on which it was demanding payment on behalf of the Plaintiff for FF17 million and DM125,000 odd ("sums which you are liable to pay in respect of arrangements made between yourselves and our clients"). On or about 5th April 1995, the Defendant's Mauritius lawyers wrote to the Plaintiff about the Deacons Demand Letter. On the 7th of April 1995, the Plaintiff entered Judgment in default of notice of intention to defend ("Judgment"). On 18th April 1995, the Plaintiff wrote to the Mauritius lawyers of the Defendant and asked them to contact Deacons direct. No mention however was made of the Judgment already obtained in Hong Kong. It would seem that the matter then drifted and the Mauritius lawyers of the Defendant did not get in touch with Deacons. The next thing was that in late July 1995 JB was informed by the Mauritius lawyers of the Defendant that the Plaintiff was attempting to free or attach the Defendant's assets in Mauritius. Things then moved quickly with Hong Kong Solicitors of the Defendant, Ng, Tam, Ko & Chan ("Defendant's Solicitors") writing to Deacons about the Demand Letter and to OIL offering to pay outstanding charges and asking for Hong Kong Court papers to be released. On the 3rd of August 1995, the Defendant's Solicitors paid OIL the outstanding fees and the next day OIL sent the Writ and letter of Deacons enclosing a copy of the Judgment. On the 7th of August 1995, Deacons wrote to the Defendant's Solicitors enclosing a copy of the Writ and the Judgment.

11. On the 16th August 1995, the Summons to set aside the Judgment was issued. The Summons after considerable delay was eventually heard on the 21st June 1996 and Master Jones dismissed the application to set aside. Notice of Appeal was immediately lodged and various stay of execution orders were given and the hearing of the appeal was expedited and I eventually heard the appeal on 4 days in late August and September 1996.

12. In the course of the bitterly contested hearing of the appeal, two main issues were argued, namely:-

13. I will consider the second question first because it seems to me that in this sort of heavily contested setting aside application, if I am not satisfied of the Defendant's account of failure to defend, then that will materially affect the exercise of my discretion notwithstanding that defence on the merits is shown.

ACCOUNT OF FAILURE TO DEFEND

14. The case of the Defendant on its failure to defend is simply that it did not know that the Writ had been issued and served in Hong Kong and that was the reason why Judgment in default was entered. The Plaintiff does not accept this evidence and sought to rely on the alleged knowledge of JB of the proceedings at the meeting of 22nd March 1995 in which, Powell of OIL alleged subsequently that, he had informed JB of the Hong Kong Writ. Notwithstanding everything persuasively said by Mr. Thomas and the evidence he sought to rely on what Powell alleged of JB being told about the Hong Kong Writ, I prefer the case of the Defendant on this aspect.

15. The meeting of the 22nd March 1995 is crucial and this is against a background where the OIL had resigned as company secretary and where OIL was not willing to be involved because of not being paid its fees. At that meeting, JB was given the Deacons Demand Letter but not the Writ but Powell said he told JB of the Writ. If Powell was in possession of the Writ, then it would be obvious to Powell that the Writ had overtaken the Deacons Demand Letter and that it was far more important to give JB the Writ rather than the Deacons Demand Letter. Therefore to give to JB the Deacons Demand Letter and yet not the Writ but to inform him about the Writ seemed to make no sense. It could make sense if the evidence is that Powell was not giving JB the Writ in order to use that as a means to extract payment from JB the outstanding charges owing by the Defendant to OIL. But that is not the evidence. The fact that Powell had repeated the assertions several times on different occasions about his having informed JB in March 1995 of the Writ does not make it more likely that it is true. It seems to me that having regard to the serious consequences of the Judgment, Powell has every reason to protect himself and OIL by his assertion of information given to JB at the March meeting. The subsequent action of the Defendant seems to me to suggest that the Defendant was not aware of the Writ and was acting accordingly. Why else would the Defendant waste its money asking its Mauritius lawyer to write to inquire about the Demand Letter of Deacons. There would be no point in doing that as the Writ had overtaken the Demand Letter. Mr. Thomas suggested that the Defendant had deliberately decided not to take any action on the Hong Kong proceedings after JB was told of it in March 1995 and pointed to the causal reaction of the Defendant to the Deacons Demand Letter as showing an intention to ignore the claim. I do not accept that argument. A demand letter is very different from a Writ and the inherent probability is that people do regard a Writ seriously and having regard to the history of the litigation on so many fronts between the Bank and JB in France and Mauritius, it is simply against character for JB to deliberately allow the Hong Kong proceedings to go by default. On the basis of the material before me I am quite satisfied that the Defendant has given a credible account or explanation as to why the Judgment in default was entered.

DEFENCE ON THE MERITS

16. The claim of the Plaintiff against the Defendant although variously framed in restitution, constructive trust and interference with contract, rests ultimately on the contention that some FF17 million were profited by the Defendant and should be repaid to the Plaintiff because of what the Plaintiff called the reinvoicing operation. The heart of the Plaintiff's case is that the sales contract to the customers were those of the Plaintiff and not of the Defendant, that the customers were customers of the Plaintiff and not of the Defendant and that there was no genuine contract of sale and purchase between the Plaintiff and the Defendant in November 1992.

17. Heavy emphasis was placed by the Plaintiff as to what it suggested was the illicit operation from late 1992 to about March 1994 when the Defendant was involved with the shirts and the customers. But it seems to me that past history before late 1992 is also significant as there is no denying that for some 10 years since 1982, various JB companies and not the Plaintiff had been selling to the JB customers and in turn these JB companies were buying from the Plaintiff manufacturer. This being the case, it seemed to follow that there was nothing exceptional about the Defendant in late 1992 taking over the role of earlier JB companies of selling the shirts and buying from the Plaintiff. The Plaintiff was doing no more than what it had always been doing, namely selling to these JB companies but from late 1992 it was to the Defendant. The burden is therefore on the Plaintiff to show that in late 1992 there was a totally radical change whereby it was arranged to eliminate the JB company as a buyer but instead to sell directly to the JB customers. But this is not what happened and the four party banking arrangement in November 1992 (four parties being the Plaintiff, the Defendant, the Plaintiff's banker, the Bank and the Defendant's banker, Warburg) made it clear that the Defendant agreed to buy from the Plaintiff and that to guarantee the Defendant's purchase from the Plaintiff, the Defendant's bank Warburg furnished to the Bank the Guarantee in the amount of FF5 million. The Bank knew, approved and insisted on the Guarantee as part of its agreement to restructure the Plaintiff's loan. This is what the Guarantee, addressed to the Bank said:-

"Your customer Mauri Garments concluded a contract with Mauri Garments Trading and Marketing on 25.11.1992 for the supply of garments. As security for the payment of the merchandise, an indemnity by a bank shall be furnished."

There was the clearest reference in the Guarantee to the contract between the Plaintiff and the Defendant for the supply of garments and this contract is the Master Contract. I have therefore no difficulty whatsoever in accepting that the Master Contract was a genuine document made in late November 1992 regulating the relationship of sale of garments by the Plaintiff to the Defendant to be backed up by a bank guarantee of FF5 million, namely the Guarantee. The Plaintiff wishes to attack the Master Contract as a forgery for all the various reasons suggested in the Plaintiff's Affidavits and Mr. Thomas' skilful submissions, but for my part this is a matter for the trial and neither forgery nor fraud is something which the Plaintiff can even begin to establish on an interlocutory basis.

18. It seems to me that once it is accepted that the Defendant has a good arguable case that the Master Contract was genuine and that there was in existence to the knowledge of the Plaintiff a contract of sale between the Plaintiff and the Defendant (even though the Bank might not have seen in November 1992 the Master Contract) then all the various forensic points made by the Plaintiff (such as reinvoicing, secrecy etc.) are really matters which go to whether there was a genuine purchase contract between the Plaintiff and the Defendant. It seems to me very plain by applying a great deal of common sense to all the masses of material put before the Court that the Defendant has plainly shown that it has a defence which has a real prospect of success.

19. I of course accept that the evidence shows that there were also direct invoicing by the Plaintiff to the JB customers just as there were situations where the Defendant sold to the JB customers but did not buy the goods so sold from the Plaintiff but from Vietnam manufacturers. But these details do not detract or change the general picture that the Plaintiff since 1982 was not in the business of soliciting orders from JB customers or selling directly to JB customers. The trial evidence might even show that in mid 1993, the Plaintiff was also selling directly to end customers (as indicated in the Accountants' Report) but that does not mean that the Plaintiff's sales to the Defendant (referred to in that Report) were not genuine and they were certainly not done clandestinely (as could be seen in the Report and in the Bank's fax to the Plaintiff dated 18th December 1992).

20. I also recognise that there is a great deal of adverse material put forward by the Plaintiff against the Defendant including those from former or present employees of the Plaintiff done mostly through the capable medium of the accountant receiver who of course had no personal first hand knowledge of the matters stated by him. There is of course evidence from the Bank but I regret I do not regard the evidence of Mr. Forget favourable (e.g. the last sentence of paragraph 4 of Forget's Affidavit). I regret that this is one of those cases where the facts are complicated, the documents are not conclusive, there is serious doubts as to who is lying and who is telling the truth, with conflict of evidence everywhere. This is not a case where an easy and firm determination can be made on an interlocutory hearing. But at the end of the day, stripped away from the case much of the arguments and prejudice, I do accept that there is a prospect of success for the Defendant at the trial. In my view, a judge with a good deal of common sense might well find for the Defendant at the trial. In the circumstances, I have come to the conclusion that the default Judgment should be set aside and the appeal from the Master is therefore allowed. I make a costs order nisi that the Plaintiff is to have the costs of the whole application before the Master but the Plaintiff is to pay to the Defendant the costs of the appeal.