THE RESIDENT SHIRT CO LTD v. THE DIRECTOR OF TRADE

HEADNOTE

                Judicial Review of administrative action taken by the Director of Trade in respect of The Textiles Export Control System.

                The Director had declined to regard the Applicant and its Holding Company as one economic entity - a consideration of the circumstances when the corporate veil should be pierced.

                Principals which should be adopted by the Director in taking administrative action - whether the breaches of conditions complained of were serious or of a technical nature and whether the forfeiture of quota rights was of a penal nature.

                HELD the Director had observed the Rules of Natural Justice and the application would be dismissed.

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

MISCELLANEOUS PROCEEDINGS

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JUDGMENT

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1. The applicant is seeking the judicial review of a decision of The Director of Trade. On the 1st April 1985 the Director informed the applicant that it was required to surrender on a permanent basis 6,788-5/12 dozen of category 347 quota in respect of the United States of America market, and rendered the applicant ineligible for any furhter quota allocation in respect of these quotas.

2. I do not think that it is necessary for me to go into a detailed explanation of the operation of the quota system by the Director. Mr. Justice Zimmern provided an excellent explanation and summary of the system at p. 149 of In Re Golden Wall Shirts Factory Ltd. ⁽¹⁾ Suffice it to say for the purposes of this application that the Director administers the quota system in Hong Kong with the object of complying with the terms of agreements which have been concluded with various countries such as the United States of America and Members of the European Economic Community. All these countries are concerned to restrict the importation of various categories of garments. One of the functions exercised by the Director is to administer a scheme which ensures that as many textiles as possible are exported to these countries consistent with the agreements which have been concluded.  Obviously the capacity for exporting textiles far exceeds the amounts which can be exported pursuant to the agreements. Accordingly the Director has instituted a sophisticated and complicated system which ensures, so far as this is possible, that a fair scheme exists for the benefit of all exporters in Hong Kong.

3. One of the most important features of the system adopted by the Director is that it is based upon past performance. The allocation of quotas to exporters is based upon their past proven performance. As can be imagined there are many variations on this theme. Where a manufacturer is either unable or unwilling to fulfil its quota allocation there is a facility to transfer the quota right to other parties. Such transfers can be permanent or for the year in question. The transfer of quotas may be a very valuable chose in action depending, upon the demand at any given point of time for the textiles in the category under consideration.

4. At the commencement of his submission to me, Mr Feenstra, who was representing the Director, informed me that his client attached the greatest importance to this application. The Director was concerned that the integrity of the quota allocation system should be maintained because unless this could be demonstrated the most serious repercussions could follow. If Hong Kong's trading partners came to believe that the system was not efficiently administered they might seek to impose their own import controls which would be necessarily beyond any powers which would be exercisable by the Director. He regarded any breach of the conditions he imposed by the holder of a quota as a very serious matter.

5. I think that it may be helpful to quote in full the letter which the Director sent to the applicant on the 13th October, 1984 which started the action which is the subject to this review.

"To : The Resident Shirt Co., Ltd, 702 Castle Peak Road, 4th floor, Block E, Hop Hing Industrial Building, Kowloon.

            I write with reference to the captioned export licences issued to your company in the period of July to October 1982 to cover a total of 6 788-5/12 doz. of men's 100% cotton woven denim jeans/pants in Category 347 for exports to the USA. Details of the export licences were shown on the appendix. Your company appeared on the above export licences as the declared exporter as well as the quota supplier of the goods in question.

 

2.         Investigations conducted into the affairs of your company revealed that you are only the nominal exporter. The actual exporter for the goods in question is Kwong Hing Tai Co., Ltd. For the goods covered by export licences Nos. 2750733, 2751868, 2752608, 2751866, 2751957, 2752568, 2752569, 2770841 and 2770985. Kwong Hing Tai Co., Ltd received payment from the overseas buyer MYC International Ltd and made payment to the manufacturers. For the goods covered by export licences Nos. 2757377, 2757397 and 2764353, the manufacturers received payment direct from MYC International Ltd. Your company has neither received payment from the buyer nor made payment to the manufacturers for the goods in question.

 

3.        That being the case, your company has failed to comply with the conditions of quota utilisation as announced in Notice to Exporters : Series 1 (USA) No. 43/81 dated 4 December 1981 which states

'	in supplying quotas in support of a licence application to cover a particular consignment, the company concerned, irrespective of whether it is an exporter or a manufacturer, must satisfy either of the following conditions:-

 

4.        The matter is to be considered by the Director of Trade. Should the Director, upon a consideration of both the allegations referred to and any representations made by or on behalf of your company, be satisfied that your company did fail to comply with the conditions of utilization of quota, he may decide to take administrative action against your company.

 

5.        Such action may require the surrender by your company, on a permanent basis, of 6 788-5/12 doz. of Category 347 quota and in relation to the USA market. Should any such requirement of permanent surrender be made by the Director, your company will be rendered ineligible for any future quota allocation by this Department in respect of the quotas required to be so surrendered. Where your company has no, or insufficient, available quota in the category concerned, the Director may, where permanent surrender of specified quota holdings is required, permit that surrender to be effected by the transfer in, on a permanent basis, from another company, of such quota or the balance thereof as is not available directly from your company's holdings.

 

6.        In the event that the Director does require the permanent surrender of quota by your company he will specify a period within which such surrender must be effected and direct that he will not permit, within that period, any transfer out, on a permanent basis, of any quotas held by it in respect of the USA market. Should your company not, for any reason, effect the permanent surrender within the period so specified the Director may further require :-

 

7.         Should the Director take, against your company, the administrative action outlined in para. 6(a) above, and should your company effect, within the period of 12 months there referred to, the permanent surrender of quota required by the Director, there will be restored to it the facilities referred to in para. 6(a) above except in respect of that quota of which permanent surrender has been made.

 

8.        You are invited to make written representations to the Director in order to :-

9.       Any representations you wish to make to the Director should reach this Department within 14 days of the date of this letter. Representations so made will be considered by the Director -

 

10.      Finally, the action proposed is on the basis of your company's involvement in the shipments referred to in this letter. Should your company be found to have been involved in other attempts to circumvent the quota system, the Director reserves the right to take further action.

Yours faithfully,

(sd.) Mrs. D.W.S. Wai

         for Director of Trade"

6. The applicant responded to this letter by providing a detailed submission which attempted to refute the allegations contained in this letter. The submission was largely based on the matters referred to in the grounds which were lodged in support of this applications It may be useful to refer to these.

                "The grounds upon which the said reliefs are sought are as follows :-

7. The applicant filed an affidavit in support of the application. Mr. TSE Wai-kit, who is the managing director of the applicant, stated that the applicant is a wholly-owned subsidiary of Kwong Hing Tai Co., Ltd. The businesses were in effect a family business which had been in existence for a number of years. The applicant had been an active manufacturer of garments until a fire had occurred on the 6th November 1981. The fire had gutted the factory premises. As a result of this all of the work force of over a hundred workers had been dismissed and manufacturing was discontinued. The reality of the situation was that Kwong Hing Tai Co., Ltd and the applicant were one economic entity and that the spirit of the conditions of the Textiles Export Control System had been complied with.

8. Two senior officers in the Trade Department filed affidavits in reply. Evidence was given that it was often the case that companies and subsidiary companies would each independently have quota allocations. It was imperative for the efficient administration of the system that each company should be treated separately and should comply rigidly to conditions which were imposed.

9. Mr Robert Footman, an Assistant Director of the Department, gave an illustration of the type of problems which could be encountered if the rules were not strictly adhered to. As both Kwong Hing Tai and the applicant were quota holders it was possible for them to gain an advantage if one was able to use the quota of the other. As I have already indicated the allocation of quotas is based on past performance. There is a complicated procedure whereby calculations are made in respect of shipments by manufacturers over a two-year period and they are required to show that they have utilized 50% of the quotas allocated to them. In the shipment under consideration, the applicant, by shipping the goods in their name were able by the shipment to bring their utilization up to the net 50% required for the two years. I accept that the amount involved in this calculation was not very large. Mr. Kaplan for the applicant, argued that this was not an important matter as the applicants even if they had strictly complied with the conditions could easily have acquired from some other sources the necessary quota which would enable them to set the records straight. The fact, however, remains that they did not do this.

10. Mr Footman also referred in his affidavit two other incidents involving the applicants. One involved its failure to fulfil quota utilization conditions in respect of an export licence issued inn 1981. Administrative action had been taken and this resulted in the permanent forfeiture of 150 dozens of Category 348 (ladies' trousers) quota far the United States market. There was another incident in 1983.   A Mr HO Tak-fun, an authorized signatory for both the applicant and Kwong Hing Tai, made a false statement in relation to a shipment of 131,465 pieces of Category 21 items to the United Kingdom which resulted in action being taken against him. In an affidavit filed shortly before the hearing, Mr Tse claimed that the applicant had not been guilty in this latter case as Mr Ho had acted on his own initiative.

11. At the commencement of the hearing, Mr Kaplan informed me that he had been in communication with Mr Feenstra prior to the hearing and he had been permitted to have access to the records in the Trade Department including internal minutes and memoranda. He referred me to a minute on one of the files written by an official in the Department which read as follows :

               "                                                         M.12

PQU

M.11.

2.    On the strength of para. 4-6 of M.11, I think we have sufficient justifications to take the standard administrative action against the offender - The Resident Shirt Co., Ltd.

 

3.    I think there is clear evidence to show that Residence is a front company of Kwong Hing Tai, and its existence is merely to facilitate circumventing the quota control rules by the latter. And, to quote the Crown Counsel in M.2 of the attached file, both companies 'are not babies fresh out of the woods - both companies have misbehaved, in a substantial and serious way, in the past.'

 

4.    I agree letter of decision on standard administrative action can issue.

 

Mr Kaplan took grave exception to this minute. He submitted that on the available facts, it was most unjust to characterize the applicant as being merely a front to facilitate circumventing the quota control rules by Kwong Hing Tai. He also complained that it had not been established that both companies had misbehaved in the past in a substantial and serious way. It is necessary to give some consideration to these complaints. Mr Footman, in his affidavit, made reference in a general way to various abuses which were practiced in relation to textile quotas. A number of companies dealt in transferring quotas for a valuable consideration to their advantage even where they were not themselves the manufacturers of the articles. Speculation in quota transfers could be highly detrimental to the interests of businessmen in the Colony as people overseas in Hong Kong's markets could get the impression that the scheme was not efficiently administered and thus provide ammunition to those in favour of protective trade practices being adopted. This sort of practice in Hong Kong was known as quota farming. Mr Kaplan argued that there was no evidence whatever that the applicant was a quota farmer. I agree that this is right. However it must be borne in mind that the applicant has not itself beer a manufacturer of garments since the fire in November 1981 and it may not have been completely unreasonable for the Director to draw unfavourable inferences.

12. I do not think that there is any substance to the complaint that reference was made to past misbehaviour. The applicant may or may not have known about Mr Ho's misconduct. It would not appear to be unreasonable for the Director to assume that the applicant was in some way implicated bearing in mind the fact that Mr Ho was their authorized representative. There can be no doubt that the applicants were aware of the other misconduct I have referred to as administrative action was taken against them.

13. I have attempted to outline all of the relevant facts to this application. I will now consider the law and in particular the duties and obligations of the Director when he dealt with this matter and decided to take administrative action against the applicant. The law is best encapsulated in the speech of Lord Diplock at p.1196 of C. C. S. U. v. Minister for Civil Service ⁽²⁾

"My Lords, I see no reason why simply because a decision-making power is derived from a common law and not a statutory source, it should for that reason only be immune from judicial review. Judicial review has I think developed to a stage today when without reiterating any analysis of the steps by Which the development has come about, one can conveniently classify under three heads the grounds upon which administrative action is subject to control by judicial review. The first ground I would call 'illegality', the second 'irrationality' and the third 'procedural impropriety'.  That is not to say that further development on a case by case basis may not in course of time add further grounds. I have in mind particularly the possible adoption in the future of the principle of 'proportionality' which is recognised in the administrative law of several of our fellow members of the European Economic Community; but to dispose of the instant case the three already well-established heads that I have mentioned will suffice.

 

By 'illegality' as a ground for judicial review I mean that the decision-maker must understand correctly the law that regulates his decision-making power and must give effect to it. Whether he has or not is par excellence a justiciable question to be decided, in the event of dispute, by those persons, the judges, by whom the judicial power of the state is exercisable.

 

By 'irrationality' I mean what can by now be succinctly referred to as 'Wednesbury unreasonableness' (Associated Provincial Picture Houses Ltd. v. Wednesbury Corporation ⁽³⁾) It applies to a decision Which is so outrageous in its defiance of logic or of accepted moral standards that no sensible person who had applied his mind to the question to be decided could have arrived at it. Whether a decision falls within this category is a question that judges by their training and experience should be well equipped to answer, or else there would be something badly wrong with our judicial system. To justify the court's exercise of this role, resort I think is today no longer needed to Viscount Radcliffe's ingenious explanation in Edwards v. Bairstow ⁽⁴⁾ of irrationality as a ground for a court's reversal of a decision by ascribing it to an inferred though unidentifiable mistake of law by the decision-maker. 'Irrationality' by now can stand upon its own feet as an accepted ground on which a decision may be attacked by judicial review.

Mr Kaplan argued that the Director was wrong in law in not treating Kwong Hing Tai and the applicant as one economic entity. The Director should have been prepared to pierce the corporate veil. Mr Kaplan referred me to some passages in Chapter 6 of the 4th Edition of Gower's Principes of Modern Company Law. He also particularly referred me to the judgment of Lord Denning in DHN v. Borough of Tower Hamlets. ⁽⁵⁾ I regret that I do not agree with Mr Kaplan's contention in this connection. My reading of the cases referred to would indicate that every situation must be considered in its own light. There are no rules of universal application.

14. If regard is to be had to the present situation it will be noted from what I have said earlier that both holding and subsidiary companies can have quotas allocated to them. If it were possible to consider holding and subsidiary companies as one economic entity, it would mean that the conditions imposed by the Director could be circumvented in a number of different ways. It is only necessary to refer to the present case and the observations made by Mr Footman in his affidavit which I have already referred to to come to this conclusion. If Mr. Kaplan is right in his contention that the Director misunderstood the law, it would mean that the rules of the Textiles Export Control System would have to be substantially redrafted. I cannot think that this is correct. I am satisfied that the Director correctly applied the law in reaching a determination that the applicant had been in breach of the conditions he imposed.

15. The next matter I will consider is whether the Director has been irrational by the standards applied in the Wednesbury Corporation case. Mr Kaplan claimed that if there had been a breach of the Director's conditions, it was only a technical breach. If the rules were read as a whole, it was evident that the applicants had conformed with the spirit and intent of the rules. I do not think that this is right. It must be obvious to any businessman dealing with quotas that it is necessary for there to be strict adherence to the conditions which are imposed. It is common knowledge that quotas confer valuable rights and if conditions are breached, the consequences are likely to be serious. It is worth noting the warning which is given to manufacturers in this connection.

I do not think that it can be argued that the Director was 'irrational' on the basis of the material which laid before him.

16. The only matter that remains outstanding is Mr Kaplan's complaint that the penalty or sanction which was imposed by the Director was totally disproportionate to the seriousness of the contravention. He referred to Mr Tse's latest affidavit where he stated that it would cost something in the order of 2.78 million dollars to purchase, in, on a permanent basis, quotas to replace those forfeited. I accept that the consequences of the Director's administrative action are serious to the applicant. I think, however, that the approach adopted by Barker, J. at p.152 of Re Golden Wall Shirts Factory Ltd. ⁽¹⁾ is the correct one,

"It was argued that what the Director has done is to punish the applicant, and that only the courts can do this consequent upon a successful prosecution. But this is not correct. The Director had various objects in taking the course he did, namely (a) to ensure so far as he could that those manufacturers and traders who had abided by the quota system should not lose by the applicant's failure to do so; (b) to ensure that the applicant did not profit by his wrongdoing and (c) to deter the applicant from repeating his misdeeds. His object was not, in my view, to punish. Moreover, although he may have been advised that there might be evidential difficulties in the way of securing a conviction, there was before him ample material from which he could and did conclude that the applicant had deliberately circumvented the scheme on many occasions.  It was his conclusion, arrived at bona fide which matters, not whether this court would have arrived at a different one, though for my part I agree with it.'

This ground has not been made out.

                Although I have not dealt with each and every ground separately and independently I am satisfied that none of them can be maintained. The Director has complied with the rules of natural justice and this application must fail. The Director will have his costs.

(Simon Mayo)
Judge of the High Court

(1) [1981] HKLR 144

(2) [1984] 3 WLR 1174

(3) [1984] 1 K.B. 223

(4) [1956] A. C. 14

(5) [1976] 3 All ER 462