CYBERWORKS AUDIO VIDEO TECHNOLOGY LTD (formerly known as MEI AH AUDIO VIDEO TECHNOLOGY LTD) (In Liquidation) v. SILVER KENT TECHNOLOGY LTD

   HCA2780/2006

IN THE HIGH COURT OF THE

   HONG KONG SPECIAL ADMINISTRATIVE REGION

   COURT OF FIRST INSTANCE

   ACTION NO. 2780 OF 2006

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BETWEEN

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JUDGMENT

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Introduction

1.   This is the plaintiff’s application under Order 14 for summary judgment on its claim in this action that the defendant is indebted to it in the sum of $4,675,587.37.

2.   The plaintiff is a company, which was wound up by the court on 15 January 2003. Prior to that it was a company engaged in the production and replication of audio visual products including video compact discs and digital video discs. Both the plaintiff and the defendant were partly owned (both as to 45%) by Mei Ah Entertainment Group Limited (“MAEGL”), a company listed in Hong Kong.

3.   The plaintiff claims that the defendant is indebted to it in the sum of $4,675,587.37 and demanded this sum by way of letters of demand from its provisional liquidators dated 2 February 2004 and 18 February 2004.

4.   The defendant denies it is indebted to the plaintiff. In a letter dated 26 February 2004, it stated :

“We refer to your letter dated 2 February 2004 in respect of the amounts due to [the plaintiff] (‘CAVT’) as at 31 March 2002. Please be informed that we have settled the amounts due to CAVT subsequent to 31 March 2002 through the settlement of liabilities/expenses on behalf of CAVT.”

5.   For their part, the plaintiff’s joint and several liquidators assert that they have not seen any documents or information to establish that the defendant’s indebtedness to the plaintiff has been settled whether in whole or in part.

6.   The defendant says that this assertion is incorrect and misleading because the liquidators have at least seen the defendant’s letter dated 26 February 2004 and also have seen the plaintiff’s Statement of Affairs dated 29 July 2003 filed in Companies Winding-Up Proceedings No. 1113 of 2002 (“HCCW 1113 of 2002”) in which the plaintiff itself stated that the defendant is an unsecured creditor of the plaintiff in the sum of $673,184. Based on the latter document, the defendant counterclaims against the plaintiff for the sum of $673,184.

7.   The plaintiff’s response to this is to aver that the letter of 26 February 2004 does not show that the sum of $4,675,587.37 has been repaid and only contains a contention to that effect, which is not admitted. The veracity of the plaintiff’s Statement of Affairs is not admitted. Insofar as the defendant was shown there as an unsecured creditor of the plaintiff for the sum of $673,184, the plaintiff says that was not a statement made by the plaintiff but rather one made by Mr Ho Po Nin, who was part of the senior management of MAEGL and a director of the plaintiff from 28 July 2000 until its liquidation. The plaintiff further points to the fact that the defendant had not lodged a proof of debt in the plaintiff’s liquidation in respect of the alleged debt of $673,184 (as at the date of the Defence and Counterclaim filed by the defendant, although, as discussed below, this was subsequently done) and has not submitted any particulars of how and when it was incurred or any supporting documents by which it can be substantiated.

8.   The above summary of the parties’ contentions is taken from the Statement of Claim dated 15 December 2006, the defendant’s Defence and Counterclaim filed on 25 January 2007 and the plaintiff’s Reply filed on 8 February 2007.

9.   In Further and Better Particulars of the Defence, filed in answer to requests from the plaintiff for particulars of the payments allegedly made by the defendant to settle the liabilities and expenses on behalf of the plaintiff, the defendant’s standard response was :

“There were numerous occasions when the defendant made such payments and such matters will be clearly seen from and can be left to discovery in order to save costs.”

Proceedings in HCCW 1113 of 2002

10.   The plaintiff was wound up on the petition of Philips Electronics N.V., who filed a proof of debt in the plaintiff’s liquidation in the sum of US$13,225,610.37.

11.   Following service of the Defence and Counterclaim, the plaintiff’s solicitors queried whether leave had been obtained under s. 186 of the Companies Ordinance (Cap. 32) for the defendant to bring the counterclaim against the plaintiff.

12.   The defendant’s response, through its solicitors, was that it would submit a proof of debt in respect of its claim for $673,184 on or before 16 February 2007. If the proof of debt was not admitted by the liquidators, the defendant indicated its intention to seek leave to pursue the counterclaim against the plaintiff.

13.   The defendant submitted its proof of debt in respect of the sum of $673,184 on 16 February 2007. It alleged that this debt arose as a result of payments made by Mei Ah (Hong Kong) Company Limited (“MAHK”) to various third party creditors on behalf of the plaintiff. The proof of debt did not contain any particulars or supporting documents as to how the debt was made up, although it was stated that supporting documents would be provided later.

14.   On 30 March 2007, the defendant applied by summons under s. 186 of the Companies Ordinance for leave to proceed with its counterclaim against the plaintiff. That summons was adjourned by the Master sine die on 12 April 2007 with liberty to restore pending the provision by the defendant of the supporting documents to prove the debt of $673,184.

15.   After a hiatus in which the defendant provided certain documents, the plaintiff’s liquidators remained unsatisfied that the documents supported the existence of the debt claimed by the defendant. Eventually, on 23 July 2008, the plaintiff’s liquidators notified the defendant’s solicitors that they rejected the defendant’s proof of debt.

16.   On 13 August 2008, the defendant applied for an extension of time in which to appeal against the liquidators’ adjudication. Having been granted an extension, the defendant duly made an application under rule 95 of the Companies (Winding-up) Rules for an order that the liquidators’ adjudication be varied or reverse and the hearing of the appeal was fixed to be heard on 21 January 2009.

17.   By letter dated 9 January 2009, the defendant’s solicitors informed the plaintiff’s solicitors that the defendant intended to withdraw and discontinue the appeal against the liquidator’s adjudication. The appeal was therefore dismissed and costs were awarded to the liquidators.

The plaintiff’s application for summary judgment

18.   As will be apparent from the description above of the pleadings filed in this action to date, the pleadings had closed on 22 February 2007. Following the dismissal of the defendant’s appeal against the liquidators’ rejection of the defendant’s proof of debt in HCCW 1113 of 2002, the plaintiff’s solicitors filed a notice of intention to proceed with this action, which had not been proceeded with whilst the defendant was pursuing its proof of debt in the liquidation.

19.   The Order 14 summons was thus issued on 24 March 2009.

The defendant’s case

20.   Mr Clifford Smith SC (appearing with Mr Jonathan Chang), counsel for the defendant, advanced two main points in his skeleton argument in resisting this application for summary judgment. First, he submitted that there are doubts or suspicions in the plaintiff’s claim. Secondly, he submitted that any indebtedness on the part of the defendant to the plaintiff has been fully paid off through payments made by a third party to the plaintiff after 31 March 2002 as part of an intra-group company arrangement that had been in operation since April 2000, as well as payments made directly by the defendant and through another accounting exercise.

21.   As to the doubts or suspicions in the plaintiff’s claim, the defendant refers to the fact that the plaintiff’s claim is based solely on :

(1) The entry in its audited accounts for the year ended 31 March 2002 for “Amounts due from fellow subsidiaries” in the sum of $5,957,3315; and

(2) A letter dated 1 November 2003 from the plaintiff’s auditors, Albert Lam & Co., to the liquidators asserting that the above sum was made up of two amounts being (a) $4,675,587.37 due from the defendant and (b) $1,281,728 due from another subsidiary of MAEGL, Link Tech Optical Disc Ltd.

22.   The defendant points out that the plaintiff’s audited accounts had no breakdown for the entry “Amounts due from fellow subsidiaries”. Further, the accounts were qualified by the auditors who stated that they were unable to form an opinion as to whether the audited financial statements gave a true and fair view of the state of the defendant’s affairs as at 31 March 2002. The defendant also notes that the auditor’s assertion that the amount of $4,675,587.37 said to be due from the defendant to the plaintiff was not supported by any documents and none have been adduced in support of this application. The assertion has not been supported by any statement on affidavit by the auditors, who instead have confirmed that all the working papers relating to the plaintiff have either been destroyed or lost.

23.   On this basis, the defendant contends that there was no basis for the liquidators to assert that they verily believe in the accuracy of the auditors’ bare assertion that the sum of $4,675,587.37 was indeed due and owing from the defendant, which the defendant says is a necessary pre-requisite for any Order 14 application.

24.   The second main argument advanced by the defendant is that the debt claimed by the plaintiff has in fact been discharged.

25.   The defendant’s case is that, since 1 April 2000 when the defendant commenced business, an intra-group company arrangement existed between the plaintiff, the defendant and MAHK, another member of the MAEGL group. That arrangement was as follows. First, MAHK would order audiovisual products from the defendant. Secondly, the defendant would place orders for those products with the plaintiff, who would manufacture and supply the products to the defendant, who would in turn then supply them to MAHK. Thirdly, MAHK, as sub-buyer, would pay the plaintiff directly for the products, thereby settling both MAHK’s indebtedness to the defendant and in turn the defendant’s indebtedness to the plaintiff.

26.   It is the defendant’s case that MAHK paid a total sum of $5,292,000 to the plaintiff directly after 31 March 2002 under the arrangement described in the preceding paragraph covering invoices issued in the period July to October 2001. This sum being greater than the debt said to be due from the defendant to the plaintiff as at 31 March 2002, the defendant contends that nothing now remains due from it to the plaintiff.

The relevant principles

27.   On an application for summary judgment, unless the court dismisses the application, the burden rests on the defendant to satisfy the court that there is an issue or question in dispute which ought to be tried or that there ought for some other reason to be a trial of the claim.

28.   It is also trite that the underlying policy of the summary procedure under Order 14 is to prevent a defendant from delaying a plaintiff from obtaining judgment in a case in which the defendant clearly has no defence to the plaintiff’s claim : see Hong Kong Civil Procedure 2009 (Vol.1) at Note 14/4/1 (p. 190).

29.   On the other hand, unless it is obvious that the defence put forward by the defendant is frivolous and practically moonshine, Order 14 ought not to be applied. Order 14 is for clear cases, that is, cases in which there is no serious material factual dispute and, if a legal issue, then no more than a crisp legal question as well decided summarily as otherwise : see Hong Kong Civil Procedure 2009 (Vol.1) at Note 14/4/9 (p. 192).

30.   The following passages in Note 14/4/9 of Hong Kong Civil Procedure 2009 (Vol.1) at pp. 192 and 193 are helpful in setting out the approach to evaluating an asserted defence :

“As Bokhary JA said in Re Safe Rich Industries Ltd [1994] HKLY 183 :

‘The test at the summary stage is indeed as simple as whether the defendant’s assertions are believable. But it must be recognized—because failure to recognize it would create a debt-dodger’s charter—that whether the defendant’s assertions are believable is a question to be answered not by taking those assertions in isolation but rather by taking them in the context of so much of the background as [is] either undisputed or beyond reasonable dispute.’

…

It is trite law that the mere assertion in an affidavit of a given situation does not, ipso facto, provide leave to defend, since the defendant must satisfy the court that he has a fair or reasonable probability of showing a real or bona fide defence, i.e. that his evidence is reasonably capable of belief…

…

… if the evidence of the defendant is incredible in any material respect, it cannot be said that there is a fair or reasonable probability that the defendant has a real or bona fide defence and judgment will be given to the plaintiff…”

Application of the principles to this case

31.   I consider first the defendant’s contention that there are doubts or suspicions in the plaintiff’s case.

32.   If this were the only point advanced by the defendant in resisting the Order 14 application, I would not have been persuaded that it was sufficient to defeat the plaintiff’s application for judgment. This is because it seems to me that the plaintiff is entitled to point to the entry in the audited accounts and the letter from the auditors specifying the amount of the debt due from the defendant to the plaintiff as at 31 March 2002 as prima facie evidence of the existence and amount of the debt. Furthermore, at no time since the plaintiff first demanded repayment of the debt from the defendant has it been suggested by the defendant that the debt did not exist. Instead, the defendant’s position, as reflected in the correspondence and now in its submissions, is that the debt has been discharged.

33.   To be fair to Mr Smith, he did not press this argument in his oral submissions and concentrated instead on the second main argument summarised above, to which I now turn.

34.   It is not disputed by the plaintiff that payments of $5,292,000 were made by MAHK to the plaintiff. On the basis of the asserted defence, those payments would be more than sufficient to discharge the defendant’s indebtedness to the plaintiff if they were made in settlement of that debt. The question is whether that was the purpose and effect of those payments by MAHK to the plaintiff. Mr Law Kwok Leung (“Mr Law”), a director of the defendant, has stated in his affidavit in opposition to the summary judgment application that the intra-group payment arrangement existed and has exhibited statements which he says confirm the payment arrangement between the plaintiff, the defendant and MAHK. He has also exhibited transfer vouchers and pay in slips showing that sums were paid by MAHK to the plaintiff purportedly in reduction of MAHK’s indebtedness to the defendant and, in turn, the defendant’s indebtedness to the plaintiff.

35.   Mr Andrew Sheppard, counsel for the plaintiff, strongly argued that the purported defence was “practically moonshine” and was not capable of belief. He argued that there is no evidence of the alleged intra-group company arrangement. He pointed to the fact that, apart from internal transfer vouchers of the defendant and deposit slips in respect of the payments made by MAHK, none of the usual commercial documentation one might expect to find in such an arrangement such as purchase orders, delivery orders and delivery receipts have been produced by the defendant. He submitted that, if, as the defendant maintained, goods were sold by it to the defendant and then by the defendant to MAHK, one would expect to see commercial documents evidencing these transactions, yet there were none. Instead, the defendant claimed it had lost its commercial documents when it moved offices. This, submitted Mr Sheppard, was a highly suspicious claim. The plaintiff’s liquidators first requested documentation in support of the claimed defence in their letter to the defendant dated 2 February 2004. Despite numerous further requests over a number of years, no documentation had been provided.

36.   Mr Sheppard also submitted it was highly suspicious that the auditors of the plaintiff and the defendant, Albert Lam & Co., had apparently lost all their working papers in respect of the two companies. It was also highly suspicious, he submitted, that the defendant commenced business on 1 April 2000, at about the time when MAEGL’s auditors, PricewaterhouseCoopers, noted that the group was arranging its affairs in order to retain a minimal amount of assets within the plaintiff so as to minimize the risk of the plaintiff being sued by Philips Electronics N.V. for royalties due.

37.   In addition, Mr Sheppard pointed to the fact that the plaintiff’s audited accounts for the year ended 31 March 2002 show that interest expenses were paid by the plaintiff to MAHK at prime rate plus 1.5%. This, he submitted, showed that the payments made by MAHK to the plaintiff must have been loans to the plaintiff and not payments made by MAHK to discharge its indebtedness to the defendant and, in turn, the defendant’s indebtedness to the plaintiff.

38.   I have carefully considered Mr Sheppard’s submissions to the effect that the defendant’s asserted defence is not capable of belief, that being the applicable threshold he must overcome if judgment is to be entered for the plaintiff. Notwithstanding his submissions, I am not persuaded that summary judgment is appropriate in this case. The fact of the payments from MAHK not being in dispute, the issue remains as to what was their true effect. I do not consider that the defendant’s evidence as to the existence of the intra-group payment arrangement can be rejected as not being capable of belief and the effect of the payments is, therefore, a triable issue in the action. It will be a matter for the trial judge, of course, to determine that issue in due course and I do not propose to express any view on the merits of the parties’ respective contentions on that particular issue. For present purposes, it is enough for me to conclude that I cannot reject the defendant’s evidence as being incapable of belief.

39.   I should add that, on the defendant’s case as to the purpose of the payments made by MAHK to the plaintiff, the plaintiff’s argument that this was an impermissible set-off of debts does not arise. Nor does the plaintiff’s argument that the arrangement amounted to an unfair preference of MAHK in the plaintiff’s liquidation. Whether or not these issues will be relevant at the trial may depend on the findings of fact in relation to the alleged payment arrangement and remains to be determined.

40.   For the above reasons, I decline to enter summary judgment.

Disposition of the Order 14 application and costs

41.   I have reflected on whether this is a case where it would be appropriate to make leave to defend conditional upon a payment into court, either of the sum claimed or some other sum. Ultimately, I do not think this would be appropriate. Although the letter from MAHK confirming the existence of the payment arrangement, being dated 23 September 2008, might give rise to a question of whether the asserted defence was an afterthought, the underlying documents relied upon by the defendant to demonstrate the actual application of the payment arrangement are apparently contemporaneous. In the circumstances, without expressing a view on the merits of the underlying issue, I do not think I should regard the defence relied upon as being inherently suspicious or shadowy.

42.   Mr Smith argues that, if I were to conclude that there is a triable issue in relation to the payments made by MAHK to the plaintiff, then I should dismiss the Order 14 application rather than grant unconditional leave to defend. He says this because this issue was made known to the liquidators in the course of HCCW 1113 of 2002. Accordingly, he submits that the provisions of Order 14, rule 7 apply, namely that the court should dismiss the application with costs since the plaintiff knew that the defendant relied on a contention which would entitle it to unconditional leave to defend when it made its application for summary judgment.

43.   I do not accede to Mr Smith’s invitation to dismiss the summons with costs. The provisions of Order 14, rule 7 are not mandatory. Under that rule, the court may (rather than must) dismiss the summons and award costs to a defendant where a plaintiff has issued his application having been made aware of the contention which would be relied upon in defence to the claim. In the exercise of my discretion, I decline to dismiss the summons. The Defence filed does not condescend to detail as to the alleged intra-group payment arrangement relied upon by the defendant. The defendant’s Further and Better Particulars dated 11 April 2007 wholly failed to address the questions raised by the plaintiff. Although the documents relied upon by the defendant in respect of the various payments by MAHK to the plaintiff had been provided in the course of HCCW 1113 of 2002, it was not unreasonable for the plaintiff to proceed with the summary judgment application in the absence of an explanation in the context of this action of the details of the alleged defence, which was not forthcoming until Mr Law’s affidavit sworn on 13 May 2009.

44.   I therefore grant unconditional leave to the defendant to defend this action.

45.   In the circumstances, I order that costs be in the cause. For the avoidance of doubt, I decline to award a certificate for two counsel.

Further directions

46.   In order to avoid any further delay in the prosecution of this action, I make the following directions as part of my order, namely :

(1) the defendant do provide Further and Better Particulars responding to the requests raised by the plaintiff in the request dated 19 March 2007 within 21 days hereof;

(2) the parties do file lists of documents within 21 days hereof;

(3) there be inspection of documents within 7 days thereafter;

(4) the parties do exchange witness statements of fact within 60 days after the lists of documents are filed, such statements to stand as the witnesses’ evidence-in-chief unless otherwise directed by the trial judge; and

(5) a Case Management Conference be fixed, without consultation with counsel’s diaries, within 14 days of the exchange of witness statements of fact.