GUANGDONG NATIVE PRODUCE CO LTD v. TAM TZE YING AND ANOTHER

HCA 11053/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 11053 OF 1999

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J U D G M E N T

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1.  The plaintiff claims from the defendant payment to indemnify some letter of credit facilities allegedly provided by the plaintiff to the defendant for purchases of video cassette recorders (“VCRs”).  The principal of the alleged indebtedness is US$790,000 and the accrued interest was, as at 31 December 1992, at $1,893,726.39, making a total of $2,683,726.36 as at that date.  The plaintiff also claims interest on the sum of US$790,000 from 1 January 1993.

The Pleadings

2.  The plaintiff pleaded in its statement of claim that pursuant to the requests of the defendant, the plaintiff agreed to procure the issue of letters of credit to pay for the defendant’s purchases of Gold Star brand VCRs from South Korea.

3.  The first written request from the defendant was dated 20 April 1988.  By this request, the defendant agreed to pay the plaintiff 1% of the amount in the letter of credit (“LC”) as handling fees.  He also agreed to pay all the bank charges, expenses, interest, storage charges, pilferage and miscellaneous expenses.  In addition, he also promised to pay the plaintiff the full purchase price under the LC within 30 days after the arrival of the VCRs in Hong Kong.

4.  There were three more letters of request from the defendant in 1988.  They were dated 28 April, 29 April and 16 May.  They specifically asked the plaintiff to issue LCs for the defendant to purchase 50,000 sets, 5,000 sets and 9,070 sets of VCRs respectively.  As will be seen later, it is the plaintiff’s case that the total number of VCRs covered by this arrangement was 54,140, though the defendant sought to argue that he was not involved in the last 9,000 sets.

5.  The statement of claim further referred to a letter dated 24 February 1989 from the defendant to the plaintiff which sought indulgence from the plaintiff for repayment of the sum due under the LCs. 

6.  Finally, the statement of claim referred to a confirmation letter dated 19 July 1994 by which the defendant confirmed the outstanding total sum of US$2,683,726.39 as at 31 December 1992.

7.  The defendant pleaded in the amended defence that he was not the purchaser of the VCRs.  He pleaded that he had merely lent the name of his company gratuitously to the Reception Department of the Jiangmen City People’s Government (“the Recep. Dept.”) for it to purchase VCRs with LCs issued by the plaintiff.  He denied any liability under the LCs or any related charges or expenses. 

8.  He pleaded that the Recep. Dept. had to entertain visitors and guests.  It therefore required substantial entertainment expenses.  In March 1988, the department head and deputy head of the Recep. Dept. and the representatives of a few enterprises owned by the Jiangmen Government had some meetings with the plaintiff and the defendant.  These enterprises were the Head Office of the Jiangmen Industry and Communications Materials Company (“JM Industry”), the Jiangmen Industrial Products Import and Export Company (“JM Import”), the Jiangmen Foreign Economic Development Company (“JM Development”) and Sun Kong Trading Company (“Sun Kong”).

9.  He further pleaded that as a result of these meetings, an agreement was made.  By the agreement, the Recep. Dept. would, in the name of the defendant, purchase unassembled parts of VCRs from South Korea for sale in Jiangmen and other provinces in the Mainland.  The plaintiff would procure the necessary LCs to pay the Korean vendor for the VCR parts and it would be paid 1% of the amount of the LCs as its consideration.  The VCR parts would be consigned to the plaintiff in Hong Kong and the plaintiff would arrange them to be delivered to JM Industry and JM Import.  These companies would, in turn, hand over the VCR parts to Sun Kong for assembly into complete VCRs for sale.  (The reason for delivering the VCRs in parts to different companies in Jiangmen appeared to be for the concealment from the Customs of the Mainland that the goods were actually complete VCRs though not assembled yet.  If all the parts were sent to one company in Jiangmen, it would have been easy for the Customs to discover that they were complete but unassembled VCRs and not just spare parts.  That would have resulted in heavier import duty on the VCRs.)  The defendant further pleaded that he lent the name of his company for use by the Recep. Dept., but would not be liable for any debt or liability that might be incurred under the said arrangement.

10.  Regarding the first three lots of VCRs totalling 45,140 sets, the defendant pleaded that he only played the role of a conduit for payment by the Recep. Dept. to the plaintiff and he was never given any reward for the work done.  He further pleaded that all the requests to the plaintiff to open LCs were from the Recep. Dept. or those acting for it and the orders for VCRs were placed by the Recep. Dept.  However, not one of such order has been produced.  He further pleaded that the Recep. Dept. and those acting for it had remitted or deposited money with him and he in turn paid the same to the plaintiff.  However, not a single document has been produced to evidence the remittance or deposit of money by the Recep. Dept. or those acting for it with him.

11.  Regarding the last 9,000 sets of VCRs, he denied any involvement at all.

12.  The defendant also made reference to certain letters written by the plaintiff to the Jiangmen Government seeking repayment of the outstanding sums under the LCs.

13.  Regarding the confirmation letter dated 19 July 1994, the defendant denied having seen it until after this action had been commenced.  He also denied having affixed the chop of his company on this letter or authorised anyone else to do so.

14.  Finally, the amended defence referred to an agreement that the defendant had made with Sun Kong dated 30 May 1988 and another agreement between the plaintiff and Sun Kong dated 4 January 1993, and pleaded that the later agreement was a novation agreement whereby the plaintiff had accepted Sun Kong as the debtor as a substitute for the defendant.

15.  In the reply, the plaintiff reiterated that the defendant was liable for the claim.  It further pleaded that Sun Kong was the defendant’s agent in the Mainland. 

16.  Regarding the agreement dated 4 January 1993 and made between the plaintiff and Sun Kong, the plaintiff pleaded that it did not relieve the defendant from his liability to the plaintiff.

The Documents between the plaintiff and the defendant

17.  The first important document is the written request dated 20 April 1988.  It was written by the defendant to PW1, Mr Liu Wangsi, the then general manager of the plaintiff.  The certified translation reads:

“Mr Liu Wang Si. 

Regarding the purchase of several tens of thousands of video recorder machine cores and a quantity of video recorder mechanical parts, after contact and discussions the following agreement was reached:

1. Our company requested your company to assist in opening LCs for the video recorder machine cores and video recorder mechanical parts in favour of Gold Star Company of South Korea.

2. When the above goods reached Hong Kong, your company will receive the goods.  Sum Chi Company will be responsible to arrange all procedures for transporting the goods from Hong Kong to Jiangmen.

3. After the goods reached Jiangmen, Jiangmen Foreign Economic Development Company shall be responsible for receiving the goods.

4. After the goods have entered Jiangmen warehouse, your company can take safe custody on our behalf.

5. All bank charges, interest, loss and pilferage of merchandise, warehouse rent and miscellaneous expenses shall not be responsible by your esteemed company and instead shall be borne by the said Mainland company or Sun Ying Trading Company (the defendant).

6. The handling fee payable to your company for opening this LC shall be calculated according to 1% of the total amount of the credit so opened.

7. Payment for the goods shall be made upon expiry of 30 days after the said goods having reached Hong Kong.  If there are special circumstances whereby payment is not received by your company punctually, all interest and expenses shall be borne by the said Mainland company or by Sun Ying Trading Company (the defendant).

8. If your company have no objection to the aforesaid agreement, kindly open the letter of credit in favour of Gold Star Company on our behalf.”

18.  The second request dated 28 April 1988 is in the same terms as the first request except that the defendant specifically asked for an LC for the purchase of 50,000 sets of unassembled VCRs at US$215.50 per set and that JM Import was included as one of the purchasers who would be liable to pay the plaintiff. 

19.  The third request, dated 29 April 1988, is in brief terms.  The defendant asked for an LC to cover 5,000 sets of VCRs at a total price of US$1,075,000.  The defendant also undertook to pay the plaintiff the sum in the LC, all interest, charges and 1% of the amount of the LC.  The defendant further confirmed in the letter that it would be responsible for all the risks after the LC was opened.  However, this letter did not refer to any entity or company in Jiangmen which would be liable to pay the plaintiff.

20.  The fourth request dated 16 May 1988 is in the same terms as the third request except that it was for 9,070 sets at US$1,954,585. 

21.  The next document is a letter dated 24 February 1989 from the defendant to the plaintiff.  By this letter, the defendant admitted liability for the sums due under the LCs.  The defendant however referred in the letter to the change of policy by the Guangdong Provincial Government which hampered the sale of VCRs.  The defendant reassured the plaintiff that payment would be made in full and offered the unsold VCRs to the plaintiff if the outstanding sum could not be repaid.

22.  I now come to the documents that dealt with the amount outstanding from time to time.  The first document is a letter faxed from the defendant to the plaintiff on 22 September 1990.  It referred to several entries in the statements of account for June and July 1990 which were problematic.  It sought rectification by the plaintiff.  Attached to the letter were two pages of the defendant’s ledger of the current account between the plaintiff and the defendant for those two months.  The finance department of the plaintiff replied on 26 September 1990 and apologised for the errors.  The reply enclosed the plaintiff’s corrected ledger for the current account between them for the months of June, July and August 1990.

23.  Sometime in October 1990 the defendant’s finance department wrote again to the plaintiff’s finance department and referred to certain entries that required adjustments.  The letter also enclosed the defendant’s ledger of the current account between them from September 1989 to October 1990.

24.  There were also produced many documents evidencing the payments by the defendant by remittance and by other means to the plaintiff.  There were also receipts and acknowledgements by the plaintiff to the defendant. 

25.  There was also an occasion when the defendant had sold the plaintiff some Chinese gum rosin that worth US$132,480 and the plaintiff had to pay this sum to him.  However, the plaintiff applied this sum to offset part of the sum due under the LCs.  The defendant’s entitlement to this sum was evidenced by an invoice dated 20 June 1991 he issued to the plaintiff.  The defendant in his oral evidence confirmed that the rosin was sold by him to the plaintiff.

26.  However, the plaintiff appeared to have applied the setoff too late which resulted in the belated reduction of the defendant’s liability for interest.  The defendant, by a letter of 13 January 1992 to the plaintiff, asked for the bringing forward of the setoff date and hence adjustment of the amount of interest due.  This letter also enclosed a bundle of the defendant’s ledger of the current account between the parties for the period from May 1991 to December 1991 and a copy of the defendant’s invoice for the rosin.

27.  On 25 March 1994, a seven-page document under the letterhead of Sun Kong was faxed from the defendant’s fax machine to the plaintiff.  It contained four tables showing the payments made to the plaintiff. 

28.  The tables showed that in 1988 there were 22 payments totalling US$4,516,915.97.  Except a sum of US$86,003.12, these payments were all made by the defendant.  In 1989 there were 27 payments totalling US$2,318,938.70 which were all made by the plaintiff.  In 1990 there were also 27 payments which totalled US$3,338,101.28.  Save a sum of US$42,199,000, they were all made by the defendant.  Finally, in 1991, there were three payments totalling US$232,916 which were all paid by the defendant.  Of these three payments, the last one for US$132,480 was the price of the rosin that had been treated as a payment to the plaintiff.

29.  Finally, there is the confirmation letter dated 19 July 1994 from the plaintiff to the defendant seeking the defendant’s confirmation of the outstanding indebtedness as claimed in this action.  The letter asked for the defendant’s confirmation by affixing his chop on it, and there is indeed the defendant’s chop mark at the bottom of it.  I have already pointed out above that the defendant has denied having seen this document. 

The plaintiff pursued Sun Kong

30.  Apart from pursuing the defendant, the plaintiff has also pursued Sun Kong for repayment.  The plaintiff had entered into an agreement with Sun Kong dated 4 January 1993.  By this agreement Sun Kong agreed to be responsible for the VCRs originally handled by the defendant.  It agreed to be responsible for the balance of the purchase price at US$4,246,822 as at 31 December 1992.  It further agreed to repay the same in five years commencing 1993.  The plaintiff, however, said that Sun Kong only made one repayment of RMB¥1,687,320 on 15 September 1993 pursuant to this agreement.

The plaintiff pursued the Jiangmen Government

31.  The plaintiff had also pursued the Jiangmen Government.  Copies of these letters issued by the plaintiff were obtained by the defendant’s Chinese lawyer from the Jiangmen Government.  The plaintiff had not produced any of these letters.  The explanation given by the plaintiff’s witness, PW3, was that these documents were not in the master file and could not be located. 

32.  The first letter produced was addressed to the Recep. Dept. and dated 17 June 1994.  The plaintiff asserted that the Recep. Dept. was indebted to it for the price of the VCRs.  It also said that there had been numerous negotiations for settlement and its holding company had also written to the Jiangmen Government and sent people there for negotiation.  It requested the Recep. Dept. to come up with a repayment plan and promised to assume part of the liability for interest in return.  There appeared to be no response to this letter.

33.  On 18 July 1994, PW1, Mr Liu, wrote to the Deputy Mayor of the Jiangmen Government, Mr Szeto.  He said in the letter that in 1988 he was told by the defendant that the Recep. Dept. had obtained some permits to import VCRs.  The Recep. Dept. hoped to import some VCRs to make some money to subsidise its expenses.  It then asked the defendant to arrange for the import of the VCRs.  However, the defendant was not in a position to procure the LCs.  The defendant in turn asked the plaintiff to assist.  After ascertaining that the Recep. Dept. indeed had the permit and the VCRs were to be received by JM Import, JM Development and another company under both the Recep. Dept. and the Foreign Economic Development Commission of Jiangmen, the plaintiff agreed to procure the LCs.  Since the Recep. Dept. was a government department and could not engage in business, it could not provide any guarantee to the plaintiff.  However, the plaintiff still arranged the LCs despite the lack of any guarantee because of its trust in the Recep. Dept.  The VCRs were then imported in separate lots into Jiangmen.  Unfortunately, as a result of the change of policy, some of the VCRs could not be sold and the debt due to the plaintiff could not be repaid.  Mr Liu also referred to his visit on 19 May 1994 to the office of the Deputy Mayor, but was unable to meet him.  The Deputy Mayor did not reply to this letter.

34.  Mr Liu wrote again on 19 December 1994 to the Mayor and Deputy Party Secretary of Jiangmen.  The content of this letter was quite similar to the last one except that it also referred to a visit by a party of the plaintiff’s holding company to Jiangmen in November 1994 to deal with various debts due to the plaintiff’s group including the VCR debt, but to no avail.  There was again no reply. 

35.  Mr Liu wrote to the Deputy Mayor again on 22 February 1995 repeating the plaintiff’s demand.  The letter also referred to certain information provided by a few persons who were said to be aware of what happened.  The information purportedly provided by these people were however not produced.  There was still no response by the Jiangmen Government. 

36.  Mr Liu wrote his last letter on 30 August 1995 which was addressed to the Party Secretary, the Deputy Party Secretary, the Mayor and the Deputy Mayor.  After writing this letter, Mr Liu retired from the plaintiff and returned to Guangzhou.

37.  The Jiangmen City People’s Government eventually replied to the plaintiff’s holding company on 23 April 1996.  The reply enclosed two statements by two directors of the Recep. Dept., Mr Lin Yan Guang and Mr Wu Min Hu.  The Jiangmen Government denied liability for the purchase of the VCRs.  It stated in the letter that the idea of importing VCRs came from the defendant in 1988, who promised that profits from the sale of imported VCRs could be used to subsidise the expenditure of the Recep. Dept.  The then key leadership of the Jiangmen Government agreed that the commercial entities of the Government, namely: JM Import and JM Development, would handle the import and Customs procedures for the VCRs.  The then leadership also requested a retired mayor, a Mr Lee, to use his connections to procure from the provincial authorities the necessary import permit.  The export of the VCRs from Hong Kong was handled by companies designated by the defendant.  These companies entered into contracts with JM Import and JM Development so as to facilitate the import of the VCRs into Jiangmen.  There were altogether 50,000-odd sets of VCRs imported into Jiangmen.  After Customs clearance, Sun Kong took delivery of them all.  There were, however, 9,000 sets which were, at one time, stuck in the Jiangmen Customs.  The Jiangmen Government, in 1992, assisted in the negotiation with the Customs and these 9,000 were then withdrawn by Sun Kong.  The Jiangmen Government maintained that the plaintiff had only provided LC facilities to the defendant and that had nothing to do with the Jiangmen Government.  The Jiangmen Government also denied any joint venture or partnership with the defendant in the import and sale of the VCRs.  It further stated that neither the subsidy given to the Recep. Dept. nor the Jiangmen Government’s help to clear the 9,000 sets from the Customs could have made the Jiangmen Government liable to the plaintiff.

38.  The statement by Mr Lin more or less reflected the contents of the letter by the Jiangmen Government.  He also denied that he had, in the capacity of a director of the Recep. Dept., requested the plaintiff to assist the Jiangmen Government by reducing the amount of interest charged.  He said he only made this plea for the defendant in 1991 when he was on official business in Hong Kong, and he did so out of his sympathy for the defendant.  He also said that prior to this occasion in 1991 when he came here, he did not even know that the defendant was using the plaintiff’s money to purchase the VCRs.  He also said he did not know PW1, Mr Liu, of the plaintiff.

39.  The other director, Mr Wu, also related in his statement how the idea of importing VCRs came from the defendant.  He also said that the defendant had asked the Jiangmen Government to assist in procuring the import permit and he duly sought the approval to do this from the then mayor.  He also said he did not know PW1, Mr Liu, of the plaintiff and had not asked the plaintiff to procure any LC for the purchase of VCRs. 

40.  Mr. Wu also said that after large numbers of VCRs had been imported into Jiangmen, the defendant paid the Recep. Dept. HK$300,000 in Hong Kong and instructed Sun Kong to pay the Recep. Dept. RMB¥400,000 in Jiangmen.  Mr. Wu also accounted for how these monies were spent.  Of the RMB¥400,000, RMB¥60,000 were shared by 12 persons of the Recep. Dept., which included the other director, Mr Lin.  Each of them was given RMB¥5,000 to repair their houses.  Another RMB¥30,000 were paid as bonus to those involved in this matter.  Another RMB¥20,000 were paid to a company under the Recep. Dept. which had assisted in importing the VCRs.  Another RMB¥30,000 was given to the retired mayor, Mr Lee, who had used his connections to procure the import permit.  Another RMB¥60,000 was used for buying gifts for others and for subsidising benefits.  The remaining RMB¥200,000 was used to purchase some vehicles for a tourism company which could be under the Recep. Dept.

41.  Regarding the HK$300,000, HK$160,000 were used to purchase a brand new private car.  The remaining $140,000 were used to organise a Hong Kong tour for all the staff of the Recep. Dept. and an overseas tour for some deputy directors.  For whatever that remained, Mr Wu used them as his expenses for coming to Hong Kong and for buying gifts for others.

42.  It thus appeared that at least half of these moneys were not used to subsidise the expenses of the Recep. Dept., but were paid to and used by the persons involved in procuring the import permit and in arranging the import and Customs clearance of the VCRs. 

Who controlled Sun Kong?

43.  There is no dispute that after the VCRs had passed through the Jiangmen Customs, they were all collected by Sun Kong which then assembled and sold them.  There is, however, a dispute as to who was behind and in control of Sun Kong.  Both the plaintiff and the Jiangmen Government regarded Sun Kong as a company owned and/or controlled by the defendant but the defendant asserted that Sun Kong belonged to the Jiangmen Government.

44.  From the documents, it can be seen that Sun Kong was registered on 7 April 1988 as a company belonging to JM Industry.  The defendant relies on this document to say that Sun Kong belonged to the Jiangmen Government.  However, the document approving the registration also stipulated that Sun Kong was subject to collective ownership; it had to raise its own capital; it should have its own set of accounts; it was to operate by itself; it would make profit for itself and bear its own loss; and it also had to pay its own tax.  Furthermore, the registered legal representative of Sun Kong, one Tam Tung Ting, was a nephew of the defendant (son of the defendant’s elder sister).  The registered chief of the accounting department was one Lui Kit, another nephew of the defendant (son of the elder sister of the defendant’s wife). 

45.  There was also a demand letter dated 25 March 1992 written by JM Development, a company owned by the Jiangmen Government, to Sun Kong for payment of business debt at RMB¥2,351,916.02.  JM Development alleged that the debt arose out of its assistance to Sun Kong to import VCRs, chargeable batteries, colour monitors and blank VCR tapes through the defendant in Hong Kong into Jiangmen.  The letter in fact began by saying that Sun Kong was the defendant’s office in Jiangmen and the defendant was responsible for it. 

46.  The next document relating to Sun Kong is an agreement dated 17 December 1994 and made between JM Industry and one Sunion Telecom Development Company (“Sunion Telecom”).  Sunion Telecom was represented by the defendant’s nephew, Lui Kit.  The agreement provided that the registration of Sun Kong would be cancelled and all its liabilities would be assumed by Sunion Telecom.  Sunion Telecom would come under the leadership of JM Industry, but it would operate in the same manner as Sun Kong, namely, to raise its own capital, to make its own profit and bear its own loss.

47.  The registration record of Sunion Telecom showed that it was also subject to collective ownership and its registered legal representative was one Leung Chun-ying, who was also a nephew of the defendant (son of the elder brother of the defendant’s wife).  The premises occupied by Sunion Telecom in Jiangmen were owned by the defendant as proved by a tenancy agreement made between the defendant and Sunion Telecom dated 30 December 1999.  There was also the unchallenged evidence from PW2, Tsui Kin-king, that Leung Chun-ying was also known as Leung Chun and was the manager of the defendant’s company in Hong Kong.

48.  There is also a Sunion Telecom International Limited (“Sunion Intl”), which is a company registered in Hong Kong.  Its registered office is at the defendant’s office in Hong Kong.  The Companies Registry records show that it has issued and allotted 150 shares, of which 140 shares were registered in the name of Sunion Telecom, and the remaining 10 shares were split between the defendant and his wife. 

49.  From these documents it is clear that despite both Sun Kong and Sunion Telecom being registered to be under the leadership of JM Industry, they were subject to the control of the defendant through his nephews.

50.  There was also the evidence of PW3, Mr Liu Baiyue, that it was common in the Mainland for people with good connections to local governments to register their companies as part of a State enterprise as in the case of Sun Kong.  It was very common in the late 80’s.  Such company would, by virtue of its relationship with a State enterprise, have a better reputation which would facilitate its business.  Mr Liu also said that a business entity subject to collective ownership was similar to a partnership in Hong Kong.  I accept Mr Liu’s evidence on this.  It was also not challenged by the defendant.

THE WITNESSES

PW1

51.  PW1, Mr Liu Wangsi, was firm that it was the defendant that had asked the plaintiff to issue the LCs for purchase of the VCRs.  He agreed that the Recep. Dept. would benefit as the defendant would give some of his profits to the Recep. Dept. to subsidise the Department’s expenditure.  But he denied that the Recep. Dept. had requested the plaintiff to issue the LCs.  He did not agree that the defendant was merely lending his name for use by the Recep. Dept..  He was firm that the terms of issuing the LCs had been agreed between him and the defendant before the defendant provided the plaintiff with the letters of request in April and May 1988. 

52.  On the agreement dated 4 January 1993 whereby Sun Kong agreed to repay the plaintiff the debt owed by the defendant within five years, Mr Liu denied that that was a novation agreement whereby Sun Kong had replaced the defendant as the debtor.

53.  Regarding the demand letters that he had sent the Jiangmen Government, he said he did so at the suggestion of the defendant, who told him that the Jiangmen Government had decided to allocate a piece of land to the plaintiff for settlement of the debt.  He explained that in order to persuade the Jiangmen Government to provide the land for the settlement, he had asserted that the LCs were issued at the request of the Recep. Dept. and the defendant was a mere middleman.  However, he admitted that these were lies.  He was firm that he pursued the Jiangmen Government at the suggestion of the defendant, and with the approval of his senior in the holding company, PW3.

54.  He was also adamant that in pursuing the Jiangmen Government, the plaintiff did not intend to release the defendant from his liability to the plaintiff.  He therefore wanted the defendant to confirm the indebtedness by affixing his chop on a confirmation letter.  The defendant initially made excuses on the calculations and did not affix his chop.  However, after PW3 had given a direction that there would be litigation failing the defendant’s confirmation, the plaintiff soon received the confirmation letter with the defendant’s chop mark.

55.  I think PW1, Mr Liu, must have been on good terms with the defendant.  In 1995, when he was winding down the business of the plaintiff and laying off his staff, he introduced PW2, Madam Tsui Kin-king, to work for the defendant and the defendant duly appointed Madam Tsui as his accountant.  If Mr Liu was not on good terms with the defendant, I doubt if he would have made the introduction.

PW2, the confirmation letter and who owned Sun Kong

56.  PW2, Madam Tsui Kin King, was the plaintiff’s deputy accounting manager from 1992 to 1995.  She gave very clear evidence that she had prepared the final draft of the confirmation letter and had personally delivered it to the defendant’s office.  Though she did not personally hand the letter to the defendant, she had asked the defendant, over his mobile phone, to affix his chop on the letter for confirmation.  She also repeated that the defendant had told her that he had to check the figures before confirming the correctness.  However, after PW3, Mr Liu Baiyue, had directed that there would be litigation if the defendant did not confirm the debt, the confirmation letter, bearing the defendant’s chop mark, soon appeared on her desk.  She had also received a call from a female staff of the defendant who sought her confirmation of her receipt of the letter bearing the defendant’s chop mark.

57.  After the plaintiff’s business had been wound down in 1995, she, upon the introduction of PW1, joined the defendant.  The defendant had been very kind to her.  When she resigned in January 1998 for health reasons, the defendant gave her two extra months’ salary for which she was grateful.  She said clearly in court that she had only come to tell the truth and she would not lie against the defendant as she would not repay his kindness with harm.

58.  I find PW2 a truthful witness.  She was straightforward.  Although her evidence on the calculations in the confirmation letter did not sound too logical, the calculations were merely provided to justify a compromise whereby the plaintiff had made a concession of over a million US dollars.  The calculations were not supposed to show the actual indebtedness of over US$3.7 million, as the parties now agree.  I therefore accept the evidence of PW2 and find that the defendant had indeed returned the confirmation letter, duly chopped, about two months after she had sent it over to the defendant’s office.

59.  PW2 also said that the defendant’s company name, Sun Ying Trading Company, was subsequently changed to Sunion Intl.  However, save the change of name, everything else remained the same.  On this evidence and on the documentary evidence and the evidence of PW3 on registration of companies in the Mainland, I hold that Sun Ying Trading Company and Sunion Intl in Hong Kong, as well as Sunion Telecom and Sun Kong in Jiangmen were all controlled and owned by the defendant, possibly together with his wife.

PW1, the confirmation letter and who requested for LCs

60.  Since the evidence of PW1 is corroborated by PW2 on the confirmation letter, I would also accept the evidence of PW1 on this aspect. 

61.  I also accept the evidence of PW1 that the request to issue LCs indeed came from the defendant and that was after he had agreed with the defendant on the terms for the issue.  If the defendant had not made the request and was not liable, I see no reason why the defendant should have written the five letters referred to in the statement of claim.  I do not accept the defendant’s evidence that the statements of assumption of liability in the letters of request were written by his staff at the insistence of the plaintiff’s deputy manager, Mr Leung Din Wing, when the defendant was not in Hong Kong.  The purchase of VCRs involved millions of US dollars.  I do not think any of the defendant’s staff would have dared to do so without his approval.  Even if the staff should have written the letter without his approval, he would have corrected it later upon discovery.  He had not done so.  Furthermore, his staff had repeatedly checked the amount of indebtedness shown in the plaintiff’s ledger.  He had also kept a ledger of his current account with the plaintiff, which was only on the VCRs.  If he was not indebted to the plaintiff, I see no reason why he would have kept the ledger for the current account and his staff would have spent the time checking the plaintiff’s ledger.

62.  The defendant had also allowed US$132,480 for the sale of his rosin to the plaintiff to be used for setoff of part of the sum due.  If he was not liable to the plaintiff, I cannot imagine that he would have allowed it to be done. 

63.  Furthermore, he also alleged that he was a mere conduit of payment, but he produced no document to substantiate any receipt of money by him from any government department in Jiangmen or any State enterprise in that city, despite the fact that he had paid to the plaintiff more than US$10 million.

PW3

64.  PW3, Mr Liu Baiyue, came to the scene only in the early 1990’s.  He was in charge of the recovery of this indebtedness.  He was a straightforward witness.  I accept his evidence that he had never agreed to release the defendant from liability though he was happy to accept repayment or settlement from any other party.  It was on this basis that he accepted Sun Kong’s agreement and the defendant’s suggestion to pursue the Jiangmen Government.  It was also his idea that if the defendant did not confirm the indebtedness in the confirmation letter, he would sue the defendant. 

Was there novation?

65.  I do not accept the defendant’s argument of novation by the agreement dated 4 January 1993.  It was the defendant’s evidence that he did not know that the plaintiff would make this agreement with Sun Kong; he only learned about it afterwards.  He also said that he had nothing to do with this agreement.  Furthermore, if he should have been released by the novation agreement, I do not think he would have affixed his chop on the confirmation letter.  The wording of the agreement and the circumstances leading to its making also do not suggest a novation.  The terms do not suggest a replacement of debtor or the release of the defendant.  Sun Kong was also not providing any security for the payment to be made by it within five years.  The defendant was residing in Hong Kong but Sun Kong was an entity in Jiangmen.  It was a lot more convenient to sue the defendant in Hong Kong than to go to Jiangmen to sue Sun Kong.  I see no reason why the plaintiff would have accepted Sun Kong as a replacement for the defendant.

Calculation of interest relevant?

66.  The defendant also argued that the calculations of interests in the confirmation letter were unreasonable and no reasonable debtor in his right mind would have accepted it.  However, the amount of indebtedness in this letter was below the actual indebtedness by more than US$1 million.  The calculations might have been illogical and wrong, but they were used to justify a compromise.  It was substantially in favour of the debtor and there was every reason for the debtor to accept it, despite the wrong calculations.

Judgment

67.  In the premises, I hold that the defendant is liable to the plaintiff for the sum and interest as claimed.  I also order the defendant to pay the plaintiff interest at judgment rate on US$790,000 from 1 January 1993 until payment.  I further order the defendant to pay the plaintiff the costs of this action which include all costs previously reserved in this action.

Postscript

68.  Finally, I note that the defendant’s first and second letters of request to the plaintiff for procuring LCs did say that some Jiangmen Government enterprises would also be responsible for the repayment.  But for the change in provincial policy, the profit to be made from the purchases and sales of the VCRs would have been very substantial and in terms of tens of millions of RMB.  It was possible that certain department of the Jiangmen Government was also a party to this project.  I say this because the whole project would not have been possible without the import permit and the efforts of the Jiangmen State enterprises in superintending the goods through the import and Customs procedures.  The subsidies given, at RMB¥400,000 and HK$300,000, might be too small a share for the relevant Jiangmen Government department.  However, as the Jiangmen Government was not represented in this action, I would not make any finding here. 

69.  Nevertheless, on the admission by Mr Wu, a director of the Recep. Dept., it is clear that various officials, including a retired mayor, had used their connections to assist the defendant to import over 50,000 sets of VCRs into Jiangmen.  In return, these officials had personally enjoyed substantial benefits in cash and in kind.  That is a classic case of corruption.  The fact that the arrangement had been approved by the then mayor did not make it any less undesirable.  It was the use of connections by officials to favour an individual.  In return, the individual repaid these officials through the government department.

70.  However, the defendant could not have achieved what he did simply with his connections with the Jiangmen Government.  He also had good financial connection in Hong Kong.  He was obviously on good terms with PW1, Mr Liu.  Otherwise, he would not have been able to obtain the LC facilities.  He provided no security to the plaintiff for the issuance of the LCs.  The grant of such LC facilities by the plaintiff to the defendant in the way that it did would make a banker shiver.  There appeared to be very poor financial control in the plaintiff back in the late 1980’s. 

71.  I just hope that all these dealings, which were clinched by connections or guanxi “關係”, are matters of history.