SAVE POWER LTD. v. LUP KEE TSE , ARTHUR

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

( ACTION No. 9115/1995 )

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J U D G M E N T

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Master Jones :

1. This is an assessment following interlocutory judgement for damages against the defendant. The plaintiff alleges that loss arose from the defendant's breach of his fiduciary duty as a director of the plaintiff by failing to disclose personal interests conflicting with those of the plaintiff. The defendant did not enter appearance to defend and did not attend the hearing of this assessment.

2. The damages to be assessed fall under two heads. The first of these concerns the loss to the plaintiff of US$1.3 million by the procurement in the name of the plaintiff of a Letter of Credit in that sum for the benefit of a trade customer of the plaintiff, Pursuit Athletic Footware Inc (PAF). The LC was said to be for the purchase of goods by the plaintiff from PAF, when in reality it was for the purchase of a one-third share in Riddell Athletic Footware Inc, of which PAF was at all material times a wholly owned subsidiary. At page 8 of the bundle is an invoice from Riddell to the plaintiff for the purchase of goods to the value of US$1.3 million, including freight.

3. Mr. Charles Chan testified as the Financial Controller of the plaintiff that the purchase transaction for which the LC was purportedly issued was in fact false. He said that payment of the LC was triggered by the Cargo Receipt (page 4 of the bundle), however he was unable to find a relevant Bill of Lading or Airway Bill. Moreover he was unable to trace any receipt of the goods by the plaintiff company. It should be noted that the present controlling interests in the plaintiff were acquired only in December 1994 and the present management took over in May 1995. The LC was however issued in or about July 1992, when the defendant was a director of the plaintiff company. It is also pleaded that the application for the LC was by the defendant's father, Tse Hei, and that the defendant agreed to subscribe for and purchase 9,000,000 shares of Riddell Athletic Footware Inc, amounting to one-third of its equity.

4. Page 4A of the bundle is a letter to the issuing bank from its Los Angeles branch giving instructions as to payment of the LC. It discloses PAF as the beneficiary. Page 7 of the bundle refers to the LC, and to the plaintiff as the issuer and PAF as the beneficiary. It contains instructions, purporting to be irrevocable, as to the payment of the LC. It appears to be signed by Jeffrey M. Mattich, whom Mr. Chan describes as the Chief Financial Officer of PAF. I understand from Mr. Chan that the LC itself is unavailable as evidence.

5. I am satisfied from the evidence of Mr. Chan and from the documents referred to that the LC was issued by the plaintiff, that PAF was the beneficiary and received payment thereunder, that the transaction for which the LC was purportedly issued did not exist, and that the plaintiff was damaged to the extent of the value of the LC. The sum of US$ 1.3 million is therefore awarded to the plaintiff under this head.

6. The second head of damage is based on a pleaded series of agreements which allowed PAF to borrow both from the plaintiff and from a USA company named Heller financial Inc. (Heller). The plaintiff's right to repayment was however subordinated to that of Heller, whose debt was described as "senior debt".

7. Mr. Chan testified that he had prepared the charts at pages 83 and 84 of the bundle as extracts from the plaintiff's monthly accounts for the period April 1994 to 5th December 1995. According to Mr. Chan the increase in PAF's debt to the plaintiff were caused firstly by shipments of goods on credit from the plaintiff to PAF, and secondly by direct cash advances from the plaintiff to PAF. Under the agreements, repayment of PAF's debt to the plaintiff remained under the control of Heller in its capacity as senior creditor, and were effected only when Heller's own dues had been satisfied.

8. These arrangements are reflected month by month in the columns headed "shipment", "cash advance to PAF", and "paid by Heller" on pages 83 and 84 of the bundle. The last named shows the bracketed amount as contributing to the monthly reduction in debt, the balance of which is brought forward in the first column on the page, headed "Balance b/f". It is apparent from the figures that the arrangements served to reduce PAF's debt to the plaintiff for the early period of its operation, but after July 1994 this increased steadily to the figure of US$32,059,351 by the end of the period under consideration, which is the date of interlocutory judgement.

9. It is the plaintiff's pleaded case that the increase in PAF's indebtedness arising during this intervening period is the amount of its damage suffered as a result of entering into these agreements. PAF's indebtedness to Heller would receive priority under the subordination agreement, and the plaintiff would be paid by Heller only the surplus available after Heller's debts from PAF had been paid.

10. I accept that without these arrangements the plaintiff would have been free to sell its goods elsewhere, and would in the normal course of business have been paid for them. The plaintiff would have been unlikely, had it been at arms length with PAF, to have shipped goods on credit when PAF was a substantial debtor, and when the payment for those goods was subordinated to the competing debt of another party. The plaintiff would have been equally unlikely to have made cash advances to a customer who already owed it around US$24 million. This situation arose when the defendant was both a director of the plaintiff and had an undisclosed interest in Riddell Athletic Footware Inc, which in turn wholly owned PAF. In the circumstances the defendant should be responsible for the ensuing loss.

11. By way of quantifying this loss the plaintiff relies for its starting figure on the sum of US$23 million rather than that of US$24,474,822, which appears at the commencement of the chart on page 83 of the bundle. This latter figure also appears in Mr. Chan's affidavit evidence, but was corrected in his oral evidence to the figure of US$23 million which the plaintiff now relies upon. The calculations at subparagraph 6.10 and paragraph 7 of Mr. Chan's affidavit, which give the total claimed under this head, were also corrected by Mr. Chan in his oral evidence to reflect the amended figure of US$23 million.

12. This figure of US$23 million is to be deducted from the total amount of the debt at the end of the period covered by the chart on pages 83 and 84 to give the intervening increase in that debt, which the plaintiff claims as its damages. The relevant period ends at 5th December 1995, which is the date of the interlocutory judgement. The US$23 million is pleaded in the statement of claim as the amount of PAF's indebtedness to the plaintiff prior to these agreements, and is derived from the "Finance and Security" agreement between the plaintiff and PAF appearing at page 62 of the bundle.

13. This agreement is dated 15th February 1994 and stipulates US$23 million as the amount then owed by PAF to the plaintiff. A third company, Extravest Holdings Ltd of Nevada, is also a party to the agreement, however Ms. Felicity Anne Porter, who is described as special counsel to the plaintiff, testified that this company was wholly owned by the plaintiff and was used merely as a conduit for payments between the plaintiff and PAF. In the circumstances described I accept that US$23 million is the correct figure to establish the debt of PAF to the plaintiff at the commencement of the agreements giving rise to this head of the plaintiff's damages.

14. The plaintiff's damages awarded under this second head are therefore represented by the intervening increase in the debt of PAF from 15th February 1994 to 5th December 1995. This amounts to US$(32,059,391 - 23,000,000) = US$9,059,391. To this figure is added US$1,300,000 awarded under the first head to give a total award of US$10,359,391.

15. Interest will run on that amount at the judgement rate from the date of interlocutory judgement to payment, and the plaintiff is awarded its costs with a certificate for counsel.

(N.L.R. Jones)

Master of High Court