XCHRX PACIFIC FOUNDATION FINANCE LTD. v. FAIRYOUNG HOLDINGS LTD.

HCA4029/98

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 4029 OF 1998

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J U D G M E N T

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1. This is an appeal by way of rehearing against Master Bharwaney's decision in giving summary judgment on 16 September 1998 for the Plaintiff against the Defendant in the sum of $15 million together with interest.

Background

2. The Defendant is a public company and one Mr John Chan is the Defendant's Managing Director. Mr Chan is also the Director and sole beneficial owner of Angklong Limited, which was a controlling shareholder of the Defendant. In September 1994, Angklong had a margin account facility with the Plaintiff. By the end of the year 1996, the Defendant was indebted to Angklong in the sum of $108,630,000.00 as a shareholder's loan. In or about January 1998, Angklong owed the Plaintiff the sum of $54,302,841.54.

3. On 22 January 1998, at a meeting of the Board of Directors of the Defendant, it was resolved that the Defendant would enter into a loan agreement with the Plaintiff whereby the Plaintiff would make available to the Defendant a loan facility of $25 million. The meeting was chaired by John Chan and the other director attending was Mr Peter Chan, his elder brother. The minutes recorded that at the meeting, a draft loan agreement prepared by the Defendant was presented for approval. The Directors at the meeting resolved that it was for the commercial benefit of the Defendant to enter into the Loan Agreement and it was further resolved that any one director of the Defendant be authorised to execute the said Agreement.

4. On 26 January, the Loan Agreement was executed by John Chan and was forwarded to the Plaintiff for the Plaintiff's execution. It is not in dispute that copies of the Defendant's Memorandum of Association and New Bye-laws and the Minutes of the Meeting of the Directors on 22 January were sent to the Plaintiff together with the Agreement. The Loan Agreement was executed by Henry Fung and Benson Lo on behalf of the Plaintiff.

5. By a Notice of Drawing dated 26 January 1998, the Defendant gave notice to the Plaintiff that the Defendant intended to draw the sum of $25 million under the Loan Agreement on the following day. The instruction contained therein was :

"Please disburse the proceeds by crediting the account of Angklong Limited with Pacific Foundation Finance Limited."

The Notice was signed by John Chan. On the following day, the Plaintiff, in accordance with the instruction of the Notice of Drawing, credited the sum of $25 million to Angklong's account and on 12 February 1998, debited the Defendant's account with the same amount. There is no documentary evidence to suggest that the sum of $25 million was ever credited into the Defendant's bank account.

6. On 4 March 1998, shares in the Defendant were suspended from trading. On 11 March, the Plaintiff issued proceedings against Angklong Limited to recover the sum of $30,396,741.45. Subsequently on 5 March 1998, the Plaintiff declared that the loan facility to the Defendant had terminated and demanded repayment of $25,310,445.21. The present proceedings against the Defendant was instituted on 14 March 1998. On 3 August 1998, Angklong paid the Plaintiff the sum of $10 million. On 15 September 1998, the Defendant's solicitors wrote to the Plaintiff's solicitors, asking for confirmation that the Plaintiff "would only be proceeding with the balance" of its claim at the hearing of the Order 14 application in the light of Angklong's payment of $10 million.

The Defendant's Case

7. The Defendant resisted the Plaintiff's application on two broad fronts the first of which is that the Loan Agreement was a sham agreement. The purpose of the Agreement was to obtain money from the Defendant to settle Angklong's indebtedness to the Plaintiff. Mr Ismail for the Defendant submitted that the circumstances were highly suggestive of irregularities in both the Plaintiff and Defendant companies as the Loan Agreement was prepared by the Defendant and it was not amended in any way by the Plaintiff. It was also pointed out to this court that no security or a director's guarantee was required under the Loan Agreement. As the sum of $25 million went to Angklong and did not go through the accounts of the Defendant, the Defendant never benefited from the agreement. The possibility that the Loan Agreement was a sham agreement, it was said, would give the Defendant in these proceedings a bona fide defence.

8. Further, it was submitted that the Plaintiff knew or should have been put on enquiry that John Chan did not have any authority to enter into the Loan Agreement with the Plaintiff. Mr Ismail relied on a passage in paragraph 95.0168 in Volume 6, Halsbury's Laws of Hong Kong :

"Where an agreement entered into by a director is unusual, a person contracting with the company through that director is put upon enquiry as to whether the necessary power has been delegated to that director."

9. Mr Ismail submitted that this is a case where the Plaintiff should have been put on enquiry as to the validity and the bona fides of the Loan Agreement. His reasons are these : Mr John Chan was interested in the Loan Agreement by reason of his position as the Defendant's Managing Director and also as the beneficial owner of Angklong Limited. On that basis, the resolutions passed in the Meeting on 22 January 1998 were invalid because had John Chan disclosed his interest in the proposed Loan Agreement, he would have to disqualify himself from the meeting. Without Mr John Chan's attendance, the meeting would have been inquorate thereby rendering all resolutions passed at the meeting invalid.

The Law

10. In my view, this appeal can be disposed of effectively on two grounds. Even if, as was submitted by Mr Ismail, that John Chan should have disclosed his interest in the Loan Agreement and thereby disqualifying himself at the meeting, the Plaintiff is nevertheless entitled to rely in the rule in the case of Royal British Bank v. Turquand (1856) 6 E&B 327. The essence of the rule is that while those dealing with companies are affected with constructive notice of its publicly registered documents, they are not affected by any irregularities in the company's management. Those dealing with the company are entitled to assume that the internal procedures of a company, both at directors and shareholders meetings, have been regularly conducted in the absence of actual notice to the contrary. This case is no exception.

11. In Order 14 proceedings, the Defendant has to show an arguable case that the Plaintiff had actual notice of John Chan's lack of authority. They have not managed to do so.

12. One of the points taken by the Defendant is that the Loan Agreement is invalid because monies were never paid into the Defendant's bank account. However, there remains the written instruction contained in the Notice signed by John Chan directing that the amount is to be paid into the account of Angklong. The Plaintiff was entitled to act on John Chan's instructions and was under no obligation to question the bona fides of the resolutions and the subsequent instruction. The Plaintiff is also under no obligation to examine whether or not the Defendant obtained any benefit from the loan. On the ground that the Plaintiff must have known that John Chan had no authority because he had often socialised with one Albert Lo and Henry Fung of the Plaintiff's company, in my view, are no more than vague allegations which do not assist the Plaintiff's case at all. The Turquand rule aside, the Defendant had, in their letters dated 10 March 1998 and 15 September 1998, effectively admitted their indebtedness to the Plaintiff. The former letter was addressed to the Plaintiff's solicitors in response to their demand for immediate repayment of the loan. There was not the remotest suggestion that the Loan Agreement was a sham nor that its validity was being challenged. The letter dated 15 September 1998 was issued by Messrs Lovell White Durrant and was addressed to Messrs Stevenson, Wong & Lai, the Plaintiff's solicitors. The main paragraph of the letter reads :

"We understand from our client that on 3 August 1998, your client received the sum of HK$10 million from Angklong Limited in partial settlement of your client's claim herein. Please therefore confirm by return that you will only be proceeding with the balance of your client's claim, i.e. the sum of HK$15 million at tomorrow's hearing." (emphasis added)

By this letter, the Defendant has effectively admitted that it was indebted to the Plaintiff under the Loan Agreement.

13. In view of the Turquand rule and the admissions of the Defendant, I have come to the conclusion that the assertions by the Defendant are not believable.

14. For the reasons given, the appeal is dismissed.

15. The costs of this appeal and the costs in the appearance before Master Bharwaney be to the Plaintiff.