XCHRX SHENZHEN SPECIAL ECONOMIC ZONE DEVELOPMENT FINANCE CO. v. HONG KONG SUN WAH FINANCE HOLDINGS LTD.

HCA 15128/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 15128 OF 1999

____________

_______________

J U D G M E N T

_______________

Introduction

1. This is the defendant's appeal against the order of the master made on 31 October 2000 whereby, upon the plaintiff's application for summary judgment, she gave the defendant leave to defend on the condition that the defendant do make payment into court within 21 days the entire sum claimed, namely, $5,030,311.66. The defendant says it is entitled to unconditional leave to defend.

2. The circumstances giving rise to the present dispute are largely not in dispute. They may be summarized as follows:

(1) Under a Chinese agreement for allotment of shares dated 24 March 1995 ("the 1995 Agreement"), the plaintiff agreed to make capital investment in the defendant and subscribe its shares. The number of shares to be subscribed and the related procedure would be further agreed.

(2) On 4 April 1995, the plaintiff paid a sum of $5 million to the defendant.

(3) In a Chinese letter of 3 November 1996 ("the Letter"), the defendant acknowledged that it had received from the plaintiff the capital investment of $5 million and confirmed to the plaintiff what the projected return for its investment would be. For present purposes, it is not necessary to set out the projection in detail.

(4) On 1 May 1998, the authorized share capital of the defendant was increased to $50,002 by the creation of 49,998 shares of $1 each. The issued share capital was 50,002 shares. No shares, however, had ever been allotted to the plaintiff.

(5) On 17 December 1998, the plaintiff, by its solicitors' letter to the defendant, alleged that the defendant had failed to perform the 1995 Agreement, accepted its repudiation and demanded the return of $5 million.

(6) According to a Chinese confirmation notice dated 18 January 1999 ("the Confirmation Notice"), the defendant agreed to treat the plaintiff's capital investment as loan and would repay the plaintiff the sum of $5,030,311.66 by three installments. Presumably, that represented the $5 million payment with interest. Details of the purported repayment schedule was contained in a Chinese document entitled "還款計劃書" dated 12 February 1999 issued by the defendant to the plaintiff.

(7) In the end, the defendant had not repaid the plaintiff the said sum of $5,030,311.66.

3. The plaintiff therefore commenced proceedings on 22 September 1999. The defence was filed on 22 October 1999 in which the defendant alleged that the sum claimed was for the purpose of capital investment and it had already formed part of its share capital. Returning it to the plaintiff would reduce its capital thus contravening the Companies Ordinance.

4. Almost one year later on 7 September 2000, the plaintiff took out the application for summary judgment before the learned master.

The defendant's complaints

5. Mr Yeung for the defendant made a number of complaints before the learned master. He repeats the same before me. I will deal with them in turn below.

(1) Delay

6. Firstly, Mr Yeung submits, there was delay in commencement of the proceedings and there was a further lapse of nearly one year since the commencement of proceedings before the present application was taken out. The plaintiff did not give any explanation. Mr Yeung, however, accepts that delay is by itself not fatal. In light of this concession, I do not think it is necessary to dwell on this complaint any further. Suffice it to say that Mr Law, counsel for the plaintiff, has explained to me the apparent lapses of time and I accept his explanation.

(2) Defects in supporting affidavits

7. Mr Yeung's second complaint is in connection with the plaintiff's supporting affirmations. There are altogether three affirmations filed by the handling solicitor, Mr Cheung, on behalf of the plaintiff. Mr Yeung submits that they should be made by an officer of the plaintiff as there are serious disputes of facts. He further submits that in any event Mr Cheung's affirmations fail to satisfy the requirements of Order 14 rule 2(1) in that the sources of his information and grounds of belief are not stated.

8. Unless there is some very good reason not to do so, affidavits in connection with an Order 14 application should be made by the parties themselves rather than by their solicitors: see Mutual Luck Investment Ltd v Chiu Yim Man & ors [1999] 3 HKC 399 at 404. Mr Law, counsel for the plaintiff, submits that as the plaintiff is a PRC company with its principal place of business in Shenzhen, it can be readily inferred that the plaintiff has no personnel here to make the affirmations. It is therefore appropriate for Mr Cheung to make the affirmations. Further, counsel submits that the matters dealt with by Mr Cheung are not so much in serious dispute. Leaving aside the question whether there is serious dispute of facts, I am of the view that where a foreign party with no personnel in Hong Kong is involved, as I am prepared to accept that is the case for the plaintiff here, it is not unusual for the handling solicitors to make the affirmations on its behalf. It is legitimate so to do provided that the requirements under the rules for the affidavits are fully satisfied. To this I now turn.

9. In Mr Cheung's first affirmation of 6 September 2000, he did not state his sources of information and grounds of belief. He simply deposed that the defendant was in debt to the plaintiff in the sum as claimed and verily believed that there was no defence. Mr Law does not dispute this. He argues that the matters dealt with by Mr Cheung are not serious dispute of facts. What Mr Cheung did was to state the outstanding debt, the figure of which is not in dispute. The defendant merely says that it was capital investment. Mr Cheung then produces the confirmation notice and repayment schedule. The defendant does not dispute its authenticity but put forward its own reasons for issuing these documents. With respect, whether there is serious dispute of facts is beside the point. The requirements under Order 14 rule 2(1) must be fully complied with in all cases, failing which the affidavit is simply inadmissible: see Mutual Luck Investment Ltd v Chiu Yim Man & ors, ibid. Had the matter ended there, Mr Chueng's 1st affirmation would have been inadmissible.

10. In his second affirmation of 18 October 2000 filed in reply to the defendant's affirmation, Mr Cheung stated the sources of information and grounds of belief. In paragraph 3, he said:

"I was informed by Mr Wu Fei Lin, vice general manager of the Plaintiff and verily believe that:-"

11. He then set out the plaintiff's case in greater details. Mr Yeung submits that Mr Wu himself had failed to state his sources of information or grounds of belief. That I do not accept. Mr Wu is the vice general manager. There is no evidence to suggest that he does not have first hand knowledge of the matters in question. In the circumstances, I would hold that the defect in Mr Cheung's first affirmation is cured by his second affirmation.

12. Mr Cheung's third affirmation of 28 October 2000 addressed a mistake in his 2nd affirmation. He had mistakenly stated that both the plaintiff and the defendant had signed on the Confirmation Notice. It is not in dispute that it was signed by the defendant only. Consequently, I do not think anything turns on this corrective affirmation.

13. In the circumstances, I would hold that Mr Cheung's affirmations are admissible. This objection therefore fails.

(3) Merits

14. Mr Yeung's third complaint relates to the merits of the defence.

15. The defendant relies on the affirmation of 20 September 2000 made by Mr Jin Peng, the general manager and director of the defendant. In summary, he said this. The payment of $5 million by the plaintiff was for the purpose of capital investment in the defendant, a Hong Kong company. However, the plaintiff, being a PRC company, had to obtain the prior approval of the Bank of China for so doing. Otherwise, it would be penalized and its operating licence would be revoked. The defendant had all along been willing to issue the shares to the plaintiff but the allotment was withheld pending the plaintiff's obtaining the requisite approval. In the meantime, the defendant had suffered huge loss because of the economy crisis and downfall in property market. The plaintiff then requested the payment be turned into a loan, which was rejected. In 1998, the plaintiff was investigated by the Bank of China. A Mr Hung, an attorney of the plaintiff, requested a Mr Mo, a former director of the defendant, to issue the Confirmation Notice so that the plaintiff could explain the whereabouts of the $5 million to Bank of China. Mr Mo consented to this but expressly told Mr Hung that the reason for doing so was to assist the plaintiff. According to Mr Jin, the defendant is in possession of the original of the Confirmation Notice. Mr Jin went on to deal with the reduction of capital. As the defendant is not relying on this point any further, I will not set out this part of his evidence here.

16. Mr Yeung submits that although the plaintiff disputes that the subscription of the defendant's shares required the approval of the Bank of China, it has not explained why the defendant was allowed to keep the money for about 4 years. He also contends that the plaintiff has not adduced any evidence on the circumstances under which the Confirmation Notice was made. Having said all these, Mr Yeung concedes that the defence is less than probable. But he submits that it is more than shadowy. Unconditional leave should therefore be given: Man Earn Ltd v Wing Ting Fong [1996] 1 HKC 225, CA.

17. Mr Law first submits that Mr Jin had failed to identify the sources of information and the grounds of belief in connection with his evidence on how the Confirmation Notice was issued. This part of his evidence should not be admissible. That, in my view, is a valid complaint. Mr Yeung does not seriously dispute this.

18. Alternatively, Mr Law submits, even if such evidence were admissible, it would only tend to contradict the defendant's case. The Confirmation Notice was meant to mislead the Bank of China that the payment of $5 million was a loan. However, it clearly referred to the matters relating to capital investment by the plaintiff, thus defeating its very purpose. Further, the original of the Confirmation Notice is with the plaintiff, which has been produced to me for inspection during the course of the hearing.

19. Lastly, Mr Law submits under the 1995 Agreement, the plaintiff would have been entitled to yearly return of its investment. The plaintiff allowed the defendant to keep the money as it was anticipating the return of its investment as stipulated there.

20. In my view, the defence is clearly contradicted by the contemporaneous documents. The evidence in relation to how the Confirmation Notice was issued, if admissible, only tends to contradict the defendant's case further. I also note that apart from the bare allegation that approval from the Bank of China was refused for the allotment of shares, which obligation is denied, the defendant has not adduced any evidence in this respect. In the circumstances, the learned master is perfectly entitled to conclude that the defence is shadowy. For my part, I would so conclude as well.

21. Accordingly, this complaint also fails.

(4) Inability to pay

22. Lastly, even if the defence is shadowy and condition could be imposed, Mr Yeung submits, the defendant does not have the means to pay the full sum as claimed. In this respect, the evidence comes from the second affirmation of Mr Jin of 20 November 2000. It was not before the learned master.

23. In this affirmation, Mr Jin referred to a number of matters. First, the defendant has cash flow problems and is basically dormant as a result. In or about 1998, it dismissed most of its employees due to lack of working capital. The employees lodged a claim with the Labour Tribunal and an award of nearly $1 million was awarded. The defendant had only paid about one third of the award and has been allowed by the employees to pay the balance until the end of 2000. The defendant has only retained two employees. It rents its office from one company with which the defendant has previous business dealings at a nominal monthly rent of $2. Mr Jin also said that it was the defendant's intention to adduce further documentary evidence about its current financial status. In the end, nothing further has been produced before me.

24. Mr Yeung submits that the second affirmation is the best evidence available as to the defendant's means. And it is not possible to go beyond this in the absence of other evidence. In this connection, he relies on Wu Cho Mei trading as Mui Far Chung Restaurant v Wang Siau Yu [1994] 1 HKC 188, CA. He submits the condition imposed by learned master is beyond the defendant's means. Accordingly, no condition should have been imposed.

25. But there is other evidence. Mr Law refers to the audited report of the defendant for the year ended 31 December 1998 exhibited to Mr Jin's first affirmation. The report dated 8 June 2000 was prepared by a certified accountant. According to this report, the defendant owned substantial landed property outside Hong Kong. The value was said to be HK$273,480,000. The defendant has not explained what has become of these properties. Indeed, Mr Jin has not made any reference to them at all in his second affirmation. It is true that according to this report, the defendant's current liabilities as at 31 December 1998 were said to be over HK$320 million and that the directors were satisfied that provided that further equity or long term finance could be obtained, the defendant would be able to meet its financial obligations as they fell due. But the overall profits carried forward were said to be more than $38 million. Mr Law also refers to certain observations by the auditors in connection with lack of sufficient information when preparing the report.

26. In my view, the burden lies on the defendant to show that it does not have the means to comply with the condition. Accordingly, Mr Jin ought to have dealt with the above matters arising from the audited report in his second affirmation. Failing that, the defendant has not satisfied me that it is unable to comply with the condition imposed by the learned master.

Conclusion

27. By reason of the foregoing, I would dismiss the appeal. I would also make an order nisi that the plaintiff do have the costs of the

appeal to be taxed if not agreed, to be made absolute within 14 days after handing down.