FOURWAY (HK) LTD v. CHINA NANTONG HARBOUR LOGISTICS LTD

HCA 1618/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1618 OF 2009

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BETWEEN

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D E C I S I O N

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1.  This is an appeal by the defendant against a summary judgment entered by a master and a refusal by the master to admit further evidence. The application to put in further evidence was made five days before the hearing before the master.

Background

2.  The plaintiff sued the defendant for repayment of a loan of US$4,042,800 (or the equivalent at about HK$31.5 million).  The loan was allegedly advanced on 21 November 2006 by two transfers from the plaintiff’s bank account to the defendant’s bank account.  The plaintiff alleged it to be an interest-free and unsecured loan repayable on demand. Demand was made on 8 July 2009.  Apart from the two pages of bank transfer documents, the plaintiff has not produced any more document to support the case that there was this loan.  The director who made the affirmation in support of the application for summary judgment also relied on hearsay evidence that there was this loan as he was not with the plaintiff at the material time.

3.  The defendant opposed the application.  It said that the plaintiff and the defendant were both controlled by one Zhu Ming at the material time.  Zhu directly and indirectly owned 75% of the plaintiff’s shares.  He also owned 55% of the defendant’s shares and another investor owned the remaining 45%.  Despite the two companies were being controlled by Zhu, they were not in the same group and neither held any share of the other. Despite the allegation of the loan, the audited account of the defendant for the relevant period did not show that the defendant was indebted to the plaintiff for the alleged loan or at all. 

4.  The defendant further alleged that in early 2009 when Zhu and his associates left the defendant, they took away most of the defendant’s accounting documents and the defendant could not provide any further explanation on this transaction.

5.  Five days before the hearing below, the defendant sought to produce a further affidavit to explain that the money channelled from the plaintiff’s account to the defendant on 21 November 2006 in fact came from the defendant’s wholly-owned mainland subsidiary. Hence, there was no loan due to the plaintiff.  The scheme as alleged by the defendant was a transfer that could have amounted to a contravention of the mainland’s law of currency control.

Analyses

6.  At the hearing below, the master refused the defendant’s application to admit further evidence as there were no exceptional circumstances as required by Order 32, rule 11(4) of the Rules of the High Court.  The master also placed no weight on the defendant’s audited account. He took the view that since money had been paid to the defendant and the defendant could not discharge the burden by explaining why it was not a loan, then it would be presumed to be a loan repayable on demand (see Seldon v Davidson [1968] 1WLR 1083 and Mak Ka Hing v Pang Ming Chung [2011] 1 HKLRD 347 at para 23).  The master then entered judgment for the plaintiff with costs. 

7.  However, a study of the evidence, in particular the audited account of the defendant for the year ending 31 December 2006, reveals that there are significant features that warrant consideration. The audited account of the defendant was signed off by the chairman of the defendant’s board on 23 July 2007.  At that time, Zhu’s camp was still in control of the defendant’s board and Zhu was the chairman who signed off the account.  Zhu in particular signed the balance sheet of the defendant’s group and the balance sheet of the defendant itself which were parts of the audited account.  Hence, the Zhu camp and, in particular, Zhu himself was aware of the information in the audited account. 

8.  If the plaintiff should have lent US$4,042,800 to the defendant, there was no reason for the loan not to be shown in the defendant’s audited account.  Mr Zhu would also not have signed the account and the balance sheets without the acknowledgement of the debt due to the plaintiff as he directly and indirectly owned 75% of the plaintiff but only 55% of the defendant.

9.  The audited account of the defendant showed no liability to the plaintiff or anyone to the tune of US$4,042,800.  The significant liabilities were a sum of HK$164,168,868 due to its immediate holding company, Nantong Xinda Harbour Investment Limited, and a loan of HK$32,456,015 due to its wholly-owned mainland subsidiary.  There was another liability of ¨other payables and accruals¨ at a small sum of HK$4,033,701 due from a subsidiary of the defendant to an unnamed third party.  This could not have been the loan advanced by the plaintiff.

10.  As pointed out above, the defendant’s audited account has been verified by Zhu’s signature.  If the plaintiff’s case is truthful, then the defendant’s audited account has an anomaly in not showing this liability at US$4,042,800 due to the plaintiff.  But Zhu or his associates have not offered any explanation for this anomaly.  

11.  If there was such a loan advanced by the plaintiff to the defendant, the auditors of the plaintiff in the course of auditing the plaintiff’s account would have asked for a written acknowledgement by the defendant to confirm the existence of the loan.  Since the defendant was under the control of Zhu’s camp up to 22 December 2008 when two of Zhu’s associates resigned from the defendant’s board, if there was indeed such a loan and that an acknowledgement had been asked for by the plaintiff’s auditors, there was no reason why the defendant would have failed or refused to provide the acknowledgement.  Hence, if there was indeed this loan, it would have been confirmed by the defendant in an acknowledgement and then recorded in the plaintiff’s audited account covering the date in question.  The loan may appear in the audited account of the plaintiff as a loan due from the defendant or an unnamed third party or as part of some loans due from third parties to the plaintiff and totalling more than US$4,042,800, but the plaintiff has not produced its relevant audited account or the acknowledgement by the defendant to prove the loan.  The situation remained even after the defendant had produced its own audited account covering the relevant date and showing that there was no such loan.  I think this is surprising.

12.  When the defendant borrowed loans from a bank, there was a resolution by the defendant´s board which had been produced by the plaintiff.  There was, however, no copy of any resolution of the board of the plaintiff which approved the loan of US$4,042,800 to be advanced to the defendant on terms of interest-free, unsecured and repayable on demand.  The plaintiff and the defendant were not in the same group though they were both in the control of Zhu.  I see no reason for the plaintiff’s board not to make a resolution to authorise the advancement of this loan.

13.  There is also no explanation why the plaintiff, not being the holding company or subsidiary or in the same group of the defendant, would have agreed to advance so much money to the defendant on terms of no security, interest-free and repayable only on demand and not recorded in any loan documentation.

14.  Furthermore, the alleged loan has been outstanding from 21 November 2006 to 8 July 2009 (2 years and 229 days) interest-free.  Even a 5% per annum interest rate on the loan would have produced interest at US$531,102.08 (or the equivalent in HK$4,042,596.22).  The rate of 5% per annum is lower than the best lending rate of HSBC at all times since 2006.  The best lending rate is normally available only to clients of good standing and with good security provided to the bank. There is no explanation why the plaintiff should have been so generous to the defendant and exposed itself to such risk by advancing the huge sum interest-free and unsecured to the plaintiff.  I think this appears odd.

15.  Furthermore, note No. 11 of the notes to the audited account of the defendant at page 460 of the bundle shows a loan at HK$32,456,015 which was unsecured and interest-free and had no fixed term of repayment, and that was due from the defendant to its wholly-owned mainland subsidiary.  This sum is quite close to the amount of the alleged loan.

16.  There is no dispute that US$4,042,800 has indeed gone from the plaintiff’s bank account to the defendant’s bank account, but that might or might not have been payment by the plaintiff in its own right to the defendant as a matter of accounting.  The audited account of the defendant showed that the defendant was indebted to its holding company and its wholly-owned subsidiary, but not to the plaintiff.  The plaintiff might have paid money in its own right to the defendant or it might have paid the money on behalf of the defendant’s holding company or wholly-owned subsidiary instead of out of its own resources. 

Decision

17.  The plaintiff is seeking payment of US$4,042,800 on the strength of two transfer documents plus the verbal assertion of an affirmant who has no first-hand information on the matter.  I think the matters discussed above are significant matters that warrant investigation before the plaintiff should be given judgment for this huge sum. 

18.  If payment of this huge sum should now be made to the plaintiff pursuant to the judgment, there is a real possibility that the defendant, its holding company or wholly-owned subsidiary might be defrauded. I therefore allow the appeal on the judgment and set aside the judgment.  I also give the defendant unconditional leave to defend.

19.  Regarding the defendant’s application for admission of further evidence, the defendant has not said a word on why it suddenly saw the need and wisdom to go to its mainland subsidiary to investigate the matter there and then found the answer to the problem.  I do not think any exceptional circumstances have been shown to justify the admission of evidence at that late stage.  I therefore dismiss that part of the appeal in relation to the master’s refusal to admit evidence.

Costs order nisi

20.  I now make a costs order nisi.  I order the plaintiff to pay the defendant the costs of the appeal for setting aside the judgment; the costs of the hearing below for summary judgment be in the cause; and the defendant do pay the plaintiff the costs of the part of the appeal in relation to the admission of further evidence and the hearing below for this.  I also direct the parties to fix a 9:30 am appointment outside the next 21 days for summary assessment of these costs unless an application shall have been made within the next 14 days for variation of the costs order nisi.