WESTFORD TRADE SERVICES LTD v. NORMET INDUSTRIES LTD

HCCW 408/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING‑UP NO 408 OF 2012

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J U D G M E N T

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1. This was a petition dated 9 November 2012 filed by Westford Trading Services Ltd (“the petitioner”) for the winding up of Normet Industries Limited (“the company”) based on the company’s inability to pay its debts pursuant to section 177(1)(d) of the Companies Ordinance, Cap 32 (“the Ordinance”). At the conclusion of the hearing judgment was reserved which I now give.

The factual background

2. The overall transaction between the parties concerned the export of iron ore.  The parties entered into an arrangement whereby the company would sell iron ore to the petitioner ex works and the petitioner would then arrange for its transport to ports for shipping.  The same iron ore (“the commodity”) would then be resold back to the company.  This back‑to‑back arrangement arises under a purchase agreement and sale agreement both dated 27 May 2011.

3. The purchase price the petitioner would charge the company for the iron ore is governed by clause 4b of the sale agreement which reads:

“ The Purchase Price shall be equal to: cost of commodity plus costs of logistics up to FOB charged by MID‑SHIP Logistics plus $1.35 per metric ton.”

Interest was payable by the company under a loan and security agreement dated 23 March 2011.

4. The parties agree that there was a running account between them.

5. The petitioner’s case is that the company is liable to pay the petitioner US$70,110,709.83 and that the payments made by the company total only US$69,416,026.62.  The difference of US$694,683.21 is the revised petition debt.  The original amount put at US$846,747 has been revised down to due to repayments by Mid‑ship to the petitioner.

6. The company resists the petition on the ground that it has a bona fide dispute as to the debt on substantial grounds and a genuine and serious cross-claim against the petitioner.

The applicable legal principles

7. The relevant principles to be applied are not controversial. They are conveniently summarised in the judgment of Kwan J (as she then was) in Re Sinom (HK) Ltd [2009] 5 HKLRD 487 at §§11‑15 to which reference should b made and which I adopt for the purposes of this judgment.

The company's admissions

8. The company has made unequivocal admissions in various letters and e‑mails concerning its insolvency.  On 24 September 2012, company wrote to advise the petitioner that the company

"  is no longer able to fulfil its contractual and financial obligations in completion of a number of ongoing contracts for iron ore ...  As a result of withdrawal of the original buyer we do not have the financial resources at our disposal to fulfil obligations to pay for ocean freight or to pay [the petitioner] for outstanding invoices relating to interest charges incurred by accepting financial assistance for the cargo from [the petitioner] nor to cover the service charges agreed as due to [the petitioner] for the same."

9. About two weeks later, on 6 October 2012 the petitioner requested the company to confirm "the outstanding debts owed to us ... by [the company] so that we can keep our banks and others advised of the situation and confirmed to them your recognition of the debt which remains outstanding".

10. By e‑mail dated 18 October 2012 sent on behalf of the petitioner to Felipe Carvalho of the company, the company was asked to clarify the following:

“1. Are any funds for either Anton or Hande available without shipment against the current live LC?

2. Are the funds that you committed to both available or have they been both promised the same funds?

3. Exactly how much is locked in BNP and can you please ask BNP to provide evidence of how much they can release if the LC is released back to them?

4. What other sources of funds can you make immediately available whilst we are still working on trying to find the least painful solution for as many of your creditors as possible."

The response from the company on the same day read:

“1. We have absolutely no money. Nothing is available and to LC is cleared. We are bankrupt.

2. Total fund USD 400,000 in BNP. That is all the money available.

3. All of it is available (USD 400,000)

4. None. [The company] and all its subsidiaries are bankrupt."

11. Mr Maurellet counsel for the petitioner relied heavily on the admissions.

Disputed debt

12. It appears to be the petitioner’s case that there was an agreement between the parties that the company would purchase and ship 70,000 MTs of iron ore per month, that pursuant to the agreement, the petitioner had paid transport costs for 70,000 MTs per month on average.  However it is accepted that the company had in fact only shipped out on average 50,000 MTs per month.  That appears from the affirmation of Hande Elmener dated 26 February 2013 filed on behalf of the petitioner:

“ The Petitioner had paid TIP and Mid‑Ship for the Commodity and related transport costs on behalf of the Company. It was agreed between the Petitioner and the Company that the Company would purchase and ship 70,000 MTs of the Commodity per month. Accordingly, the Petitioner had paid for approximately 70,000 MTs of the Commodity per month to be transported by truck from TIP to the Company, but the Company had in fact to be shipped out on average 50,000 MTS per month in breach of this agreement. In calculating the amount that Company should pay the Petitioner, Ms Tsui appears to have assumed that on average 50,000 MTs per month were bought by the Company per month, when in fact approximately 70,000 MTs per month were paid for by the Petitioner on behalf of the Company."

13. On 1 August 2012, Tsui Na (“Ms Tsui”) a director of the company sent the following e‑mail to the petitioner:

“ The balance of the reconciliation … is huge. I think it’s because Midship invoices are based on 60,000-80,000 mts per shipment while the real quantity is around 48,000‑50,000 mts per shipment. Therefore the total amount you paid to MIDSHIP is higher than [the company’s] L/C payments.”

In essence, the company challenges the correctness of the invoices issued by the petitioner because it used a flawed basis calculation the amount due.

14. The first question is whether the documents support there being an agreement by the company to purchase and ship 70,000 mts per month.

15. The purchase agreement provides little assistance since it only states the minimum quantity to be sold to the petitioner: clause 4a refers to the company selling “a minimum of 30,000 metric tons” of the commodity to the petitioner, recognizing that the petitioner had entered into certain logistics contracts with third parties based on the minimum monthly amount and would suffer financial harm in the event of the company’s failure to deliver the minimum amount.  While the petitioner attached importance to clause 5 which stated that at the date of the agreement (May 2011), the petitioner forecast that its requirement for the commodity would be 70,000 mts on a monthly basis, they were no more than “non‑binding, rolling forecasts of the petitioner’s anticipated requirement for the iron ore each month”.

16. The purchase and sale agreements do not support the view that the company was obligated to sell 70,000 mts per month to the petitioner and to be charged for transporting that amount per month.  Mr Elmener’s affirmation in this regard would not appear to have any evidential basis.

17. According to the company’s calculations, it was liable to make payments totalling US$69,348,411.54 only.  Since the parties agree that the company has paid the petitioner US$69,416,026.62, that amount in fact exceeds the petitioner’s claim by US$67,615.08.

18. I have reviewed the invoices received by the company from the petitioner which form exhibit TN 8 to Ms Tsui’s affirmation.  The tonnage and the unit price per metric ton for transporting the commodity are specified in each of the invoices.  The unit price charged was USD 57.16 per metric ton until June 2012 when it was increased to USD 59.16 per metric ton.

19. These invoices cover the period between 15 July 2011 and 4 September 2012.  While apparently what has been exhibited is not a full set of invoices, each of the invoices relating to freight or transport charges shows the actual tonnage shipped and the applicable unit charge.  The tonnage varied between approximately 24,000 mts and 75,000 mts.  But what is very clear is that the amount charged in each case was strictly by reference to the quantity of iron ore transported.  What this shows very clearly is that notwithstanding Mr Elmener’s affirmation and Ms Tsui’s assertion, the petitioner did not charge the company on the basis of 70,000 mts for each shipment.

20. The ineluctable consequence is the absence of any support for the company's explanation for the discrepancy and renders its case on there being a bona fide dispute no more than a bare assertion.

21. As regards invoices 10711 and 10712 for the sums of US$173,463.87 and US$76,747.50, totalling approximately US$250,000, the company disputes them on additional grounds.  They relate to sales that did not materialize due to the company’s default.  The company relies on clause 4c of the sale agreement which provides that:

“ [the petitioner] shall be paid for the commodity upon receipt of a bill of lading from the owner of the vessel.”

22. Mr Chan submitted that since the shipment never materialized, there could have been no bill of lading.  As that was a condition precedent to payment, the sum claimed in invoice 10711 is not payable.  In so far as the company was responsible for the breach, it may be liable for damages from breach of contract but a winding up petition is not the correct route when it is a question of damages.

23. The same argument was raised in relation to invoice 10712.  Again, it was a transaction that did not materialize because of the company’s default.  While that transaction was governed by a new agreement, the effect of clauses 7 and 8 of the new agreement also made a bill of lading a pre‑requisite to payment.

24. Assuming, for present purposes, that there is merit in Mr Chan’s point, it pertains to no more than US$250,000 which is considerably less than the shortfall of approximately US$695,000 which is the debt founding the petition.

The cross-claim

25. The company raises a cross-claim against the petitioner in the sum of US$679,428.50 relating to the purchase by the petitioner from the company of 71,518.789 mts of the commodity in August 2012.

26. The petitioner’s response is that the sum has already been paid by taking it into account in its running account.  Mr Chan does not accept that they have been taken into account because it was said that nowhere in the petitioner’s running account is there a reference to that sum.

27. As already noted, the purchase agreement and the sale agreement were back to back arrangements in that under the sale agreement, the company was obliged to buy 100% of what the petitioner has bought from it (or, more accurately and in reality from TIP the owner of the mine) pursuant to the purchase agreement.  As I understand it, it was the petitioner who financed the cost of the commodity plus shipping charges and it would be paid the same plus commission and interest (if any) once the bill of lading was provided to the company.

28. There are difficulties with the cross‑claim.  First, given the arrangement described in the preceding paragraph, it is difficult to see why the petitioner would be making any payment to the company when the company had to pay back to the petitioner that amount plus shipping charges, commission and interest.  In other words, the purchase from the company (or TIP) by the petitioner was only one‑half of the transaction.  Second, the company has not referred to other instances of payment made by the petitioner to the company nor to any invoice issued by the company.  By way of contrast, there is ample evidence of the purchaser making payment to the petitioner under the sale agreement.

29. It is in this context that the admissions assume relevance.  If indeed the petitioner were indebted to the company in respect of the commodity purchased in August, why would the company have made the admissions it did in September and October?  Why was the cross-claim not mentioned until January 2013?  Why has no explanation be given as to why the admissions were made?

Conclusion

30. In the light of those unanswered questions, I have grave reservations as to the genuineness of the cross-claim.  In the circumstances, I do not consider it to be credible.

31. For all those reasons, I conclude that there is no bona fide disputed debt on substantial grounds and no genuine and serious cross-claim.  Accordingly, I will make the usual winding-up order in respect of the company.