CDC FINANCE & LEASING CORPORATION AND ANOTHER v. THE OWNERS AND/OR DEMISE CHARTERERS OF THE VESSEL M V "KINGDOM CONTAINER"

HCAJ 207/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ADMIRALTY ACTION NO. 207 OF 2003

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J U D G M E N T

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I. Introduction

1. There are 2 applications in each of the 4 abovementioned actions ("the Actions"):-

(1) The Defendants apply by Notices of Motion ("the Notices") dated 25 November 2003 to set aside the 4 in rem writs ("the Writs") in the Actions for want of jurisdiction.

(2) The Plaintiffs apply for summary judgment by Summonses ("the Summary Summonses") dated 23 October 2003.

Save that they relate to different vessels, the Actions are identical in all material respects.

II. Background

2. The first-named Plaintiff ("CDC") is a Taiwanese finance and leasing company. The second-named Plaintiff ("CDC BVI") is a British Virgin Islands company related to CDC. CDC and CDC BVI form part of the China Development Group, a group of Taiwanese financial companies. CDC operates its off-shore banking facilities through CDC BVI which in turn handles CDC's foreign currency transactions.

3. The Defendant, Powick Marine (S) Pte Limited ("Powick") (in liquidation since April 2003), is a Singaporean company which belonged to the Kien Hung Group. The Kien Hung Group was operated by the Shih family before it ran into financial trouble in early 2003. At one time the Kien Hung Group was the owner of 15 container vessels and the charterer of another 15 container vessels. Kien Hung Shipping Co. Ltd of Taipei was the Group's operating arm and head office, Powick its shipowning company, Kien Hung Shipping Co. Ltd SA ("Kien Hung SA") of Panama its receiving and paying agent, and Powick Shipping Limited its Hong Kong representative.

4. Prior to the transactions which form the subject matter of the Actions, the Plaintiffs had entered into at least 2 business transactions with the Kien Hung Group. In May 1997 CDC as seller had entered into a hire purchase agreement with companies in the Kien Hung Group. In January 1999 CDC BVI as seller had entered into a hire purchase agreement with Kien Hung SA.

5. In about September 1998 the Kien Hung Group approached CDC for financing to enable Powick to purchase 4 vessels, "CONVENIENCE CONTAINER", "KINGDOM CONTAINER", "LIBERTY CONTAINER" and "MANDARIN CONTAINER" (collectively, "the Vessels"). CDC having agreed, CDC and Powick entered into a Facility Agreement ("the Facility Agreement") dated 23 January 1999 whereby CDC loaned US$13 million to Powick. The loan was secured (among other respects) by 4 mortgages (collectively, "the Mortgages") on the Vessels. The Mortgages (which were respectively dated 30 March, 4 June, 16 July and 8 October 1999) were all registered in the Singapore Registry of Ships and the Singapore Registry of Companies and Businesses.

6. The loan of US$13 million was advanced by way of 4 tranches to Kien Hung SA. The tranches were paid on 24 March, 2 and 28 June and 28 September 1999. Because the facility was made available in US$ and due to Taiwan's foreign currency law, CDC advanced the loan through CDC BVI. The monies were paid to Kien Hung SA on Powick's instruction.

7. The Facility Agreement provided (among other things) as follows:-

Clause 1. DEFINITIONS

"....

1.1:4

'Deed of Covenants and Assignment' means the deed of covenants and assignment in respect of each of the Vessels to be executed by the Borrower [Powick] in favour of the Lender substantially in the form set out in Appendix 'H' attached hereto, and 'Deeds of Covenants and Assignment' means all of them collectively;

...

1.1.:24

'Securities' include the following:

1.1:24.1 the Deeds of Covenants and Assignment;

1.1:24.2 The Deed of Indemnity and Undertaking;

1.1:24.3 the Guarantee;

1.1:24.4 the Mortgages;

1.1:24.4 the Promissory Notes; and

1.1:24.6

other securities to be given or procured by the Borrower in accordance with the provisions of Clause 10.2 hereof;

..."

Clause 10. CONTINUING SECURITY

"...

10.2

Without prejudice to the securities referred to in Clause 10.1 hereof and without limiting the generality of Clause 21 hereof, the Borrower shall at any time, if and when required by the Lender so to do furnish or procure any additional security in favour of the Lender on such terms and conditions as the Lender shall in its absolute discretion direct and to execute and deliver to or procure in favour of the Lender such security documents on such terms and conditions stipulated by the Lender."

Clause 25 LAW AND JURISDICTION

"25.1

This Agreement shall be governed by and interpreted and construed in accordance with the laws of Singapore.

..."

8. As stipulated by the Facility Agreement, Powick executed Deeds of Covenants and Assignment ("the Deeds") in respect of the Vessels on 30 March, 4 June, 13 July and 8 October 1999 respectively. The Deeds provided (among other things) as follows:-

Clause 1. DEFINITIONS

...

1.1:7

'Outstanding Indebtedness' means all monies (whether in respect of principal sum or interest), costs, fees and expenses whatsoever which are or may from time to time be or become owing or due and payable by the Borrower [Powick] pursuant to the Facility Agreement and Security Documents;

...

1.1:9

'Security Documents' means this Deed, the Deed of Indemnity and Undertaking, the Guarantee, the Statutory Mortgage, the Promissory Notes and any other documents which may at any time be executed as security for the Outstanding Indebtedness;

..."

Clause 5. ASSIGNMENT

"5.1

The Borrower as beneficial owner hereby assigns and agrees to assign absolutely to the Lender [CDC], subject to the First Mortgagee's [Grand Commercial Bank's] security interest as contained in the First Mortgage and/or the First deed of Covenants and Assignment, all its rights, title and interest in and all the benefit of:

...

5.1:4 any and all proceeds of any sale of the Vessel.

..."

Clause 9. EVENTS OF DEFAULT

"9.1	The happening of any of the following occurrence shall constitute an Event of Default for the purposes hereof:

...

9.1:3

The Borrower defaults in payment of any instalment of principal or interest under the facility Agreement; or

..."

Clause 10. ENFORCEMENT OF RIGHTS

"10.1

Upon the happening of any Event of Default, the Lender shall, subject to the prior rights of the First Mortgagee as first mortgagee under the First Mortgage and/or the First Deed of Covenants and Assignment, become forthwith entitled as and when it may see fit to declare all or part of the Outstanding Indebtedness to be payable immediately or otherwise in accordance with its demand and/or to put into force and to exercise all or any of the powers possessed by the Lender as second mortgagee of the Vessel by law or under statute or as are herein contained and in particular but without prejudice to the generality of the foregoing (and without in any way derogating from any such right already conferred elsewhere hereunder or under any other Security Documents):

10.1:1

to take possession of the Vessel wherever the same may be without legal process and without being responsible for loss or damage and the Borrower or other person in possession shall forthwith upon demand of the Lender surrender possession of the Vessel to the Lender;

...

10.1:5

to sell the Vessel or any share therein with prior written notice to the Borrower, with or without the benefit of any charter or other contract of employment of the Vessel, by public auction or private contract at any place in the world, with or without advertisement, for cash or on credit and otherwise upon such terms as the Lender in its absolute discretion may determine with power to postpone any such sale and without being answerable for any loss whatsoever occasioned by such sale or resulting from postponement thereof;

..."

Clause 12. APPLICATION OF MONIES

"12.1

Following the occurrence of an Event of Default monies received by or on behalf of the Lender in respect of:

 

12.1:1

a sale of the Vessel or any share therein;...

...

shall be held by the Lender in the first place to pay and retain all costs and expenses whatsoever incurred in or about and incidental to the recovery of such monies, any legal fees, court costs and any other costs, expenses or advances incurred or made by the Lender in the protection of its security, in exercise of its rights and in the pursuance of its remedies hereunder and the balance shall be applied:

12.1:3

in or towards payment or reduction of the Borrower's liabilities secured by the First Mortgage and/or the First Deed of Covenant and Assignment;

12.1:4

in or towards payment or reduction of such amount of the Outstanding Indebtedness as may be then due and payable in the order of application as the Lender may determine and/or in retention of such sums as the Lender may in its absolute discretion determine by way of security for the Outstanding Indebtedness; and

12.1:5

the surplus (if any) shall be paid to the Borrower or such other person as may be entitled thereto."

Clause 20. LAW AND JURISDICTION

"20.1

This deed shall be governed by and interpreted and construed in accordance with the laws of Singapore.

..."

9. The Mortgages provided (among other matters) as follows:-

"Whereas (a) there is an account current between (1) [Powick] ... ('the Mortgagor') on the one hand and (2) [CDC] ... ('the Mortgagee') on the other hand, regulated by a facility agreement dated March 23, 1999 ('the Facility Agreement'), as the same may from time to time be amended varied or supplemented) and a deed of covenants and assignment of even date herewith ('the Deed of Covenants', as the same may from time to time be amended varied or supplemented) and both made between (1) the Mortgagor and (2) the Mortgagee and whereas pursuant to the provisions of the Facility Agreement and/or the Deed of Covenants, the Mortgagor has agreed to execute this Mortgage for the purpose of securing payment to the Mortgagee of all sums for the time being owing to the Mortgagee by the Mortgagor in the manner and at the times set forth in the Facility Agreement and th Deed of Covenants and whereas the amount die at any time given time may be ascertained by reference to the Facility Agreement and the Deed of Covenants and/or to the books of account (or any other accounting records) of the Mortgagee.

Now we the (b) [Powick] in consideration of the premises for ourselves and our successors, covenant with the said (c) [CDC] and (d) its assigns to pay to him or them or it the sums for the time being due on this security, whether by way of principal or interest, at the time and manner aforesaid.

And for the purpose of better securing the said (c) [CDC] the payment of such sums as last aforesaid, we do hereby mortgage to the said (c) [CDC] all 64/64 shares of which we are the Owners in the Ship above particularly described, and in her boats, guns, ammunitions, small arms and appurtenances.

Lastly, we for ourselves and our successors, covenant with the said [CDC] and (d) its assigns that we have power to mortgage in manner aforesaid the above-mentioned shares, and that all the same are free from encumbrances (e) save as appears by the Registry of the said Ship."

10. Eighty post-dated cheques for various amounts were also provided to the CDC by Kien Hung SA as further security for the monies loaned. Other security provided included promissory notes, Chinese mortgages whereby Powick guaranteed Kien Hung SA's due payment of the promissory notes, and 4 undated money orders ("the Money Orders") issued to CDC by Kien Hung SA and Powick jointly.

11. Powick defaulted on the repayment of the loan. It has not made any payments since 2 December 2002.

12. On 24 July 2003 CDC obtained a judgment ("the Taiwan Judgment") in the Taiwan District Court against Shih Wen Kuo, Shih Hsu Yuet Chun, Shih Ming Tuan, Shih Shia Loon, Kien Hung SA and Powick for NT$194,924,200, the sum then outstanding on CDS's loan.

13. The Taiwan Judgment was obtained in respect of unpaid amounts due on the Money Orders. It appears that (following Taiwanese procedure) the Taiwan Judgment was procured on an ex parte basis with the named defendants being afforded an opportunity to apply to set the same aside within 10 days of the District Court's decision. No such application has been made to date. Although the Taiwan Judgment has been pleaded in the Re-Amended Statements of Claim in the Actions since September 2003 and the document itself has been exhibited to the 1st Affirmation of Tsai Ching Shiun filed herein on the Plaintiffs' behalf on 22 September 2003, Powick's liquidators claim never to have received (or been served with) the Taiwan Judgment. The Taiwan Judgment has not been satisfied.

14. The Writs were issued on 7 July 2003 against each of the Vessels for the sums due to the Plaintiffs. The Writs appear to have been duly served on 19 August 2003 at the latest. No acknowledgment of service having been filed, on 10 September 2003 the Plaintiffs took out Notices of Motion for default judgment in respect of each of the Vessels. Powick filed an acknowledgment of service on 19 September 2003. By Summonses ("the Time Summonses") dated 6 October 2003 Powick applied for an extension of time for filing Defences. The Plaintiffs filed the Summary Summonses on 23 October 2003.

15. At a hearing on 4 November 2003 Waung J gave directions for the disposal of the Summary Summonses. Waung J noted that, since Powick had acknowledged service, the issue of costs apart, the Plaintiffs' applications for default judgment had effectively been superseded. Waung J also pointed out that by reason of RHC Order 18 r. 2(2) it was unnecessary, pending a decision on the Summary Summonses, to extend time for the filing of Powick's Defences. At the hearing Powick's solicitors expressly foreshadowed the possibility of applications under RHC Order 12, r. 8 to set aside the Writs. Waung J consequently estimated a whole day for determination of both the Summary Summonses and Powick's then anticipated applications to set aside the Writs. On 25 November 2003 Powick issued the Notices as its solicitors had presaged.

16. At the hearing before me the parties made their submissions in relation to the Notices. This was done on the footing that the Summary Summonses would be dealt with at a later other date, to the extent necessary, depending on my decision on whether or not the Writs should be set aside. I note that the Vessels, arrested, have long since been sold and their proceeds paid into Court.

III. Discussion

A. A preliminary point

17. Mr Jat SC (appearing for the Plaintiffs) took the preliminary point that Powick was no longer entitled to set aside the Writs. Mr Jat said that this was because Powick:-

(1) had failed to issue the Notices "within the time limited for service of a defence"; and,

(2) in any event, had taken a step in the Actions and submitted to the Hong Kong Court by agreeing (without reserving Powick's position on jurisdiction) to Waung J giving directions for the disposal of the Summary Summonses.

18. I believe that Mr Jat's preliminary objection to the Notices is unfounded. I have listened to the Court recording of the hearing before Waung J on 4 November 2003. At that hearing the parties accepted that there was no need for the Court to deal with the Time Summonses as the filing of the Summary Summonses by the Plaintiffs had rendered the time for the filing of Defences at large. It follows that the Notices were not filed outside the time limited for the filing of Powick's Defences. Further, by alerting the judge to an upcoming challenge to the Writs under RHC Order 12 Rule 8, Powick made its non-acceptance of the Hong Kong Court's in rem jurisdiction sufficiently clear. In my judgment it would be wrong and unfair to Powick in all the circumstances if the Court were now to find that Powick had submitted to the Hong Kong Court's jurisdiction on 4 November 2003.

B. Powick's challenge to jurisdiction

19. The challenge to jurisdiction advanced by Mr Smith SC for Powick may be summarised as follows:-

(1) At the time of the US$13 million loan CDC lacked capacity under Taiwanese law, specifically Article 15 ("Article 15") of the Company Law of Taiwan and Articles 26 and 71 (respectively, "Article 26" and "Article 71") of the Taiwanese Civil Code, to lend money to Powick.

(2) As a result the Facility Agreement must have been void from the outset.

(3) If the Facility Agreement is void, the Mortgages which were intended to secure monies advanced pursuant to the Facility Agreement must be ineffective.

(4) Since Admiralty jurisdiction in rem in this case can only be founded on High Court Ordinance (Cap. 4) s. 12A(2)(c)¹, there can be no in rem claim if the Mortgages are ineffective.

20. At the time when the Facility Agreement was executed, Article 15 provided as follows (in translation):-

"A company shall not engage in any business outside the scope of businesses for which it has registered.

The capital funds of the company shall not be lent to its shareholders or any other person except where it is necessary for financing business transactions between itself and other companies.

A responsible person of the company who has violated the above two provisions shall be punished by way of term imprisonment for a period of not more than 1 year detention, or in lieu thereof or in addition thereto a fine of not more than NT$150,000, and shall compensate the company for any loss it has suffered."

Article 15 was amended on 12 November 2001 to make the borrower jointly and severally liable, with the responsible person who has caused the company to lend money in contravention of Article 15, for the repayment of the money advanced.

21. For the purposes of comparison, both Mr Smith and Mr Jat referred to Article 16 ("Article 16") of the Company Law of Taiwan. It is convenient to set out Article 16 at this stage. In its 1999 version, Article 16 stated (in translation):-

"A company shall not act as guarantor of any nature, unless otherwise permitted by any other law or by the articles of incorporation of the company.

The responsible person who has violated the provision set out in the preceding paragraph shall take up the suretyship on his own and shall be punished with a fine of not more than NT$60,000 and shall be liable for the damages, if any, to the company resulting therefrom."

22. CDC's registered scope of business lists the following activities (in translation):-

" (1) Leasing and sale of mechanical equipment ...

(2) Leasing and sale of transportation equipment (excluding leasing of taxi) ...

(3) Sale and purchase of vessels.

(4) Sale of textiles, plastic raw materials, spare parts, rubber materials, video equipment, measure equipment, steel.

(5) Sale of electrical and electronic equipment, small metallic equipment, dyeing material (except toxic and controlled material unless licensed).

(6) Sale of water treatment equipment ...

(7) ...

(8) Sale, leasing and building of commercial and residential buildings and factories.

(9) Tendering for import and export business etc.

(10) Import and export business (except those requiring special licence).

(11) Finance consultancy service (except accounting service and investment consultancy service).

(12) Purchase of book debts (except where foreign business is involved)."

It will be seen that the lending of money for financing the purchase of ships by third parties does not feature among CDC's registered businesses.

23. Article 26 on the corporate capacity of legal persons provides (in translation):-

"Within the limits prescribed by law and ordinance, a juristic person is able to enjoy rights and assume obligations with the exception of those rights and obligations which are exclusively appertaining to natural persons."

The expression "rights and obligations exclusively appertaining to natural persons" refers to rights and obligations which a natural person alone can exercise or assume. For example, only a natural person can marry and undertake the obligations incidental to a marriage.

24. Article 71 on the effect of violating prohibitory legislation states (in translation):-

"A juristic act which is contrary to an imperative or prohibitive provision is void. The exception to the aforesaid is where it is prescribed that the act shall not be void for such reason."

25. I propose to examine Mr Smith's argument by considering the following questions:-

(1) Is Taiwanese law relevant at all?

(2) If Taiwanese law is relevant, did CDC have capacity to lend to Powick under Taiwanese law?

(3) If CDC lacked capacity to lend to Powick under Taiwanese law, did that render the Facility Agreement void?

(4) If the Facility Agreement was void, are the Mortgages in turn avoided or ineffective?

(5) If the Mortgages are ineffective, should the Writs be set aside?

B.1 Is Taiwanese law relevant?

26. Mr Jat submits that Taiwanese law is not relevant at all. He points to Facility Agreement cl. 25.1 which expressly stipulates that Singaporean law is the proper law of the Facility Agreement. Mr Jat says that this must mean that the parties to the Facility Agreement chose the substantive law of Singapore, excluding any renvoi or transmission to Taiwanese law under Singaporean conflict of law rules, as the body of law whereby their mutual rights are to be ascertained. Accordingly, Taiwanese law simply does not enter into the picture. Mr Jat cites Lord Diplock in Amin Rasheed Corporation v. Kuwait Insurance Co. [1984] 1 AC 50 (at 61H-62A) in support of this proposition.

27. Mr Jat further submits that, even if recourse to Singaporean conflict of law rules were permissible, the evidence shows that in applying such rules the Singapore Court would ignore Taiwanese law. The Singapore Court would simply treat Article 15 as a prohibition against certain types of lending and would not characterise Article 15 as a law concerning a company's capacity to lend.

28. I disagree with Mr Jat that it is unnecessary to look at Taiwanese law. Regardless of the proper law of a contract, insofar as there is a question over a person's capacity to enter into such contract, Dicey and Morris on the Conflict of Laws Rule 154 is applicable. That states:-

"(1) The capacity of a corporation to enter into any legal transaction is governed both by the constitution of the corporation and by the law of the country which governs the transaction in question.

(2) All matters concerning the constitution of a corporation are governed by the law of the place of incorporation."

29. The commentary to Rule 154 explains:-

"Capacity. The power or capacity of a corporation is limited in a two-fold manner.

(1) Its capacity may be limited by its constitution. A corporation, for example, which by its constitution (as interpreted by the law of its place of incorporation) cannot enter into a transaction for the acquisition of land, has no power to effect a purchase of land in any country; for the corporation exists as such only by virtue of its constitution, and any acts done on its behalf in contravention of such provisions of the constitution as declare these acts invalid are ultra vires and are not the acts of the corporation.

(2) Its capacity may be limited by the law of the country which governs the transaction in question. A corporation may in this respect be likened to a natural person, in that its capacity to effect acts in law is determinable by the system of law governing the transaction in issue (which may not be the lex domicilii); thus a foreign corporation authorised by its constitution to acquire and hold land could not hold land in England in contravention of the Mortmain Acts (since repealed). However, whereas the lex causae may endow an individual with a greater capacity than he possesses under his lex domicilii, it follows from the other limb of Rule 154(1) that in the case of a corporation it can have only a limiting effect, for a legal person cannot anywhere exercise any greater power than is given to it by the legal system to which it owes its existence. Thus a corporation by its constitution from the purchase of land cannot hold land in any country even though the lex situs permits of corporate ownership."

Thus, even if under the substantive law of Singapore (that is, Singaporean law excluding its conflict rules) the Facility Agreement is valid, the Court must still examine whether as a matter of the law of Taiwan, the place of CDC's incorporation, CDC had capacity to lend US$13 million to Powick by the Facility Agreement in 1999.

B.2 Did CDC have capacity to lend to Powick under Taiwanese law?

30. Not every prohibition gives rise to an incapacity. For example, most legal systems forbid the killing of others. But it would be an odd use of language to say that, under such legal systems, a person lacked the capacity to kill. The initial question to consider on this issue therefore is whether the prohibition against certain types of corporate lending in Article 15 should be characterised as a matter involving capacity. Here I think that it is for Hong Kong law as the lex fori to determine the characterisation to be given to the prohibition in Article 15.

31. Mr Jat contends that Article 15 has nothing to do with capacity. It is (Mr Jat says) merely a provision which affects the validity or invalidity of corporate acts.

32. In support of his argument, Mr Jat relies in particular on the judgment of Taiwan High Court in Case No. 20 of 2000. In that case 3 brothers decided to divide the assets of Company R (the respondent) among themselves. Brother A (the appellant) caused his Company A1 to purchase R's inventory. At the time there remained an outstanding loan between R and the Bank. The brothers agreed that A1 could make use of the loan monies, but would be responsible for repayment of the loan to the Bank. The question was whether R had made a loan to A or A1. If there was a loan to A, A claimed that it was void as contravening Article 15. The Court held (in translation):-

"Paragraph 2 of Article 15 of the Company Law expressly states that '[t]he funds of a company shall not be lent to a shareholder or any other persons, except as necessitated for lending money as a result of business transactions between companies'. Further Article 71 of the Civil Code expressly states: 'A juridical act which violates an imperative or prohibitive provision of the act is void except when avoidance is not implied in the provision.' But it is a general principle that a company has the power (capacity) to lend money. Therefore paragraph 2 of Article 15 of Company Law is only imposing conditions on the lending of money [to other persons], i.e. not to lend funds to shareholders or any other persons. This provision should be regarded as a 'banning' provision and not a 'validity' provision. To preserve the validity of the transaction, a violation of such provision will not lead to the invalidity of the transaction, but will only lead to the responsible person of the company having to compensate the company for its losses and [being] liable for criminal penalties. Therefore the argument raised by the appellant that the lending transaction was void and unenforceable, etc. is groundless and not accepted ..."

Mr Jat submits that the words "a general principle that a company has the power (capacity) to lend money" mean that under Taiwanese law any company has the capacity to lend. All that Article 15 does is to forbid a company from lending in specific situations.

33. Mr Jat also refers to the expert evidence of Mr John Chen on Taiwanese law filed on the Plaintiffs' behalf. Mr Chen, who is the President of the National Bar Association of the Republic of China, states in his 1st Affirmation (at §33):-

"Paragraph 1 of Article 15 of the Company Law specifies that a company shall not conduct any business outside its registered scope of business. The so-called 'business' in general concept refers to repeated activities of the same kind to make profits. As stated in the 2nd Affirmation of Tsai Ching Shiun, the main business of the 1st Plaintiff is hire-purchasing and leasing. Therefore, the 1st Plaintiff's one-off lending does not fall within the meaning of 'business' although the transaction itself is still a 'business transaction'. For example, a company not in a business of investing in real estates may still purchase an office property for its own use or for investment purposes. The purchase of the office property would constitute a 'business transaction' but not a 'business'. If only a bank or finance company may lend money to other parties, it would not be necessary to have Article 15 to b included in Chapter 1 of the Company Law as general principles applicable to all companies in the first place."

One should not (Mr Jat says) read the prohibition against engaging in activities outside the scope of a company's registered businesses in the 1st paragraph of Article 15 as restricting lending to the making of loans solely for the purposes of one's registered businesses. Article 15, paragraph 2 allows lending for "business transactions". Such "business transactions" need not be within a company's registered businesses, since according to Mr John Chen's evidence a "business transaction" which is only a one-off lending is permitted by Article 15, paragraph 2.

34. Mr Jat cites a number of Taiwanese judgments where:-

(1) loans have been upheld even though it is unlikely that the different trading companies involved were expressly empowered by their articles of incorporation to lend; and,

(2) the Taiwan courts have not referred at all to Article 26 and incapacity.

Mr Jat points out that, among all the Taiwanese judgments exhibited in evidence, only one refers to Article 26. That was a District Court case (No. 325/90) involving a claim against the plaintiff company's financial manager who had caused corporate funds to be lent to third parties. The judgment dated 5 March 2002 states:-

"According to Article 26 of the Civil Code, a company can only enjoy rights and bear obligations to the extent as permitted by statutes and regulations. Therefore, if the company lends money to its shareholders or any third party, such an act exceeds the limit of the corporate capacity of the company as provided under the Company Law and should be void ..."

The case (Mr Jat suggests) should be treated with caution as any reliable guide to Taiwanese law. Even though (in common with many civil law jurisdiction) there is no strict doctrine of stare decisis and precedent in Taiwanese law, a District Court decision should be regarded as less persuasive than a High Court authority. In any event, the case concerned a complaint against a company officer who was a wrongdoer. It is not the situation of a claim against a borrower for repayment of monies loaned. It is precisely the situation where a company should be entitled to treat the loan as void insofar as its officer asserts the contrary. Mr Jat concludes by submitting that the absence of references to Article 26 in the other decisions cited by both parties before me shows that Case No. 325/90 is out of line with general thinking on Article 15 as a provision which does not relate to capacity.

35. I am not persuaded by Mr Jat. I am unable to deduce from the single, possibly throw-away, reference to a "general principle" in Case No. 20 of 2000 that the Court meant that a Taiwanese company can engage in a one-off lending for a purpose which is outside its registered scope. I can understand a general principle enabling a company to lend money to carry out one or more of its registered businesses. But I do not see how it is possible to read the references to "business" and "business transactions" in the 1st and 2nd paragraphs of Article 15 as unrelated to each other. If a Taiwanese company can always lend money as a one-off transaction unconnected with its registered businesses as Mr Jat contends, there would be a contradiction with the express prohibition in the 1st paragraph 1 of Article 15 against engaging in business outside one's registered scope.

36. Nor do I follow Mr John Chen's reasoning. Take the example given by him of a company buying an office even though the company is not in the business of investing in real property. In such situation, the purchase of office land is incidental to the carrying out of the company's business. Without an office, the company presumably cannot carry on its registered businesses. Therefore, in buying the office, the company would be engaging in a transaction which furthered its registered businesses. The purchase of the office would not be an end in itself. In contrast, the lending of money to Powick was intended by CDC to be an end in itself. It was that lending which would generate income and, hopefully, profit to CDC. The lending could not have been regarded as incidental to any of CDC's registered businesses, but must instead have been viewed as the carrying out of a business in itself. Mr John Chen fails to distinguish between engaging in a transaction as an income-generating business in its own right and carrying out a business which incidentally requires that one engage in some intermediate transaction such as lending.

37. I do not think that I can infer from the solitary reference among the cases cited to me that Article 26 did not form part of the legal debate in Taiwan over the nature and effect of Article 15. It is apparent from the use of the words "power" and "capacity" in Case No. 20 of 2000 that the Taiwanese Courts regard Article 15 as involving a question of "capacity". The reference to Article 26 in Case No. 325/90 merely confirms this.

38. Further, I cannot ignore the Taiwanese law evidence filed on Powick's behalf wherein corporate acts in contravention of Article 15 are described as "ultra vires". See, for example, the 1st Affirmation of Wen-Yeu Wang (Professor of Law and Director of the Economic and Financial Research Centre at the College of Law, National Taiwan University) (at §3(1)):-

"Taiwanese Company Law still adopts the ultra vires doctrine. As indicated above, the Law specifically prohibits general corporations from engaging in certain actions. This stands in contrast to the company laws of many Company Law countries (e.g., the U.S. and the U.K.), where the doctrine is largely obsolete.

Admittedly, it is widely recognized that the doctrine may sometimes defeat legitimate expectations. In view of this potential problem, the trend of the Company Law is to gradually restrict its availability. On example is article 15 of the Company Law, which used to provide that 'The funds of a company shall not be lent to any shareholders of the company or any other persons, except for the necessity of lending funds due to business transactions between companies.'

To further liberalize the restriction, the new article 15, as amended in 2001, provides that 'corporate funds shall not be lent to a shareholder or any other persons, except for (i) those made between companies or firms having business transactions; or (ii) money advanced for short term need between companies or firms, provided total money advanced does not exceed 40% of the net value of the company.' The amended article illustrates the legislative intent to restrict the availability of the ultra vires doctrine, but not to eliminate this doctrine from the Company Law entirely."

39. Mr Jat himself has adduced an excerpt from a legal textbook by Tseng Su-Yu which refers to various legal theories on the effect of lending in contravention of Article 15. According to the excerpt, on one school of thought:-

"A legal person can act with corporate capacity as permitted under the law (Civil Code 26). The act of lending is in excess of the limitation, therefore the company has no corporate capacity to do so. The purpose of this legislation is to maintain corporate capital and to avoid affecting the capital funds and other creditors interests, the borrower of the funds should know the limitation as provided by the law and has benefitted, therefore there is no reason for protection. ..."

Although neither Mr Jat nor Mr John Chen espouse this way of thinking about Article 15, the passage is significant because it shows that Article 26 and the issue of capacity forms part of the scholarly debate in Taiwan as to the nature and consequences of Article 15.

40. How then should I characterise Article 15? Article 15 read as a whole seems analogous to the doctrine of "ultra vires" in Hong Kong law. Under Hong Kong law a company would not normally be permitted to engage in activities which fall outside its objects clause (see Companies Ordinance (Cap. 32) ss. 5A and 5B). A Hong Kong Court would regard transactions falling outside a company's objects clause as outside a company's capacity or ultra vires. Consequently, in my judgment, it would be natural and appropriate to treat Article 15 analogously as dealing with corporate capacity.

41. Given that conclusion and since the lending by CDC to Powick was outside CDC's registered scope of businesses and cannot be regarded as merely incidental to the carrying out of any of CDC's registered businesses, it follows that in lending money to Powick CDC acted in excess of its corporate capacity.

B.3 Did CDC's lack of capacity make the Facility Agreement void?

42. In Taiwan (as in many civil law countries), doctrine or the opinion of legal scholars carries relatively more weight than in common law jurisdictions. The unanimous opinion of academics will often be decisive in the determination of a legal question. Where there is no unanimous view but only a clear majority, that majority opinion will normally be adopted by the Taiwanese Courts. On the other hand, there are occasions when even minority views have been preferred.

43. What weight is to be given to Taiwanese judgments? At the apex of the Taiwanese judiciary is the Supreme Court. That has 20 chambers and it is not uncommon for different chambers to disagree on issues of law. Below the Supreme Court there are 5 High Courts with a total of over 100 different chambers. Below the High Courts are the District Courts. However, in Taiwan the decisions of higher courts do not have binding force on lower courts. There is no precise equivalent to the common law concept of "stare decisis".

44. Taiwanese law indeed has its "precedents". But only in a limited sense. According to Grand Justice Wang Tzeh-Chien's General Principles of Civil Law, following careful discussion in "Precedent Conferences", the Supreme Court periodically chooses a number of "model cases" from among leading judgments of previous years to serve as precedents. Extracts from these model cases are compiled in a "Summary of Precedent". The latter is then submitted to the Judicial Yuan for approval and publication. The term "precedents" is understood by the Taiwanese legal community to refer to the case extracts featuring in the Summary of Precedents as approved by the Judicial Yuan. If a lower court's decision departs from principles established in a "precedent" so approved but the Supreme Court nonetheless regards the lower court's reasoning as correct, the Supreme Court may revise the "precedent" accordingly. In practice, lower courts will normally defer to Supreme Court precedents. This is because Supreme Court judges are regarded as more experienced and knowledgeable in the law, having worked in the 3 levels of the judicial hierarchy.

45. Taiwanese lawyers and academics were divided as to the effect of a contravention of Article 15 as it stood in 1999. Some held that a breach of Article 15 led to a loan agreement being void. Others believed that the loan agreement remained enforceable. There was no unanimous view.

46. Powick's expert, Mr Colin Chen, president of the Taiwan Bar Association and lecturer at Tamkang University in Taipei, fairly alludes to the debate over Article 15 in the course of arguing for the former view. His 1st Affirmation states (at §§10-11):-

"... Some decisions hold that the loan agreement is void and unenforceable because it violates Article 26 of the Civil Code as well as Article 15 of the Company Law. Article 15 is enacted to preserve the corporate fund so that shareholder's, creditors' and other stakeholders' interests are safeguarded. Other decisions however consider that notwithstanding the lack of capacity of the lender, the loan agreement is still enforceable because interests of the other party transacting with the company need special protection to enhance transaction safety. However, the concerns appearing in the court decisions are not present in this case. Further, Article 16 of the Company Law prohibits a company from providing guarantee for others. The Supreme Court consistently holds the guarantee provided in contrary to the article is void. Making loans erodes corporate funds no less seriously than providing guarantee. They shall be treated with the same legal effect. If money has been advanced under the loan agreement, the borrower will be bound to return the money under the principle of 'unjust enrichment'. All the money will be repayable immediately notwithstanding any terms under the loan agreement (which is void). Interest is payable at the statutory rate of 5% p.a. No terms of the loan agreement enforceable.

The academic view is divided. Some opine that a company making loan in violation of Article 15 is still binding because the other party with which the company makes the lending will be hurt by not recognizing the transaction. Some leading scholars have the following reasons to regard the loan void and unenforceable. Firstly, Article 26 of the Civil Code grants a legal person powers only to the extent that they are not restricted by statutes or regulations. As Article 15 of the Company Law prohibits a company from making the violation thereof render the loan void and unenforceable according to Article 71 of the Civil Code, which states 'A juristic act which is contrary to an imperative or prohibitive provision of law is void, unless nullity is not necessarily implied.' Article 16 of the Company Law prohibits a company from providing guarantee. Violation of which makes the guarantee void and unenforceable. The courts and the academic both agree on this position. For the purpose of preserving corporate fund, prohibition on providing guarantee and making loan have the same effect and shall be treated the same way. In a case where no person needs to be protected, the safeguard of the preserving corporate fund principle shall have the top priority."

47. Powick's argument is that a lending contrary to Article 15 brings Article 71 into play. Accordingly, a loan agreement in breach of Article 15 being a juristic act contrary to a statutory prohibition, the loan must be void in the absence of any statute prescribing otherwise.

48. Mr John Chen says that the matter is not so simple. The Taiwanese Courts distinguish between 2 types of prohibitions: "validity provisions" and "banning provisions". He states in his 1st Affirmation (at §§35-6):-

"If the legislative intent of the prohibition is to prevent some persons from doing certain acts and the breach thereof will lead to punishment of the relevant persons, this type of provision would generally be regarded as 'banning provision'. A violation of this kind of provision would not render the transaction void or unenforceable. If a provision is aimed at regulating the effect or validity of certain types of transactions, such kind of provision would be considered as 'validity provision' the breach of which will lead to invalidity of the transaction. In this regard, Paragraph 3 of Article 15 [1999 version] has provided for the penalty for the violation, i.e the responsible person shall be punished with imprisonment for a period of not more than one year, detention or in lieu thereof or in addition thereto a fine not more than NT$150,000. Article 15 is therefore a banning provision, the violation of which will not render he Loan transaction void. The judgment of Taiwan High Court of no. 824 of 1994 referred to in paragraphs 19 & 20 herein has confirmed this point.

Additional analysis of the interaction between Article 15 of the Company Law and Article 71 can be found in the judgment of Taiwan High Court Case No. 20 of 2000 referred to in paragraph 23 herein (see pages 34-41). The Taiwan High Court expressly stated that Article 15 is a banning provision in the context of Article 71 of the Civil Code. Therefore a violation of Article 15 would not affect the validity of a lending transaction."

49. Mr Jat refers to a line of Taiwanese case law supporting Mr John Chen's view that Article 15 is only a "banning" provision which does not attract invalidity under Article 71. The decisions relied on include a Taiwan Supreme Court judgment in Case No. 1138 of 2001. That states (in translation):-

"The act of lending by the respondent [lender company] to the appellant was obviously in violation of Paragraphs 2 and 3 of Article 15 of the Company Law. But it is only a question of the criminal liability of the responsible person of the company. It is difficult to say that the act was invalid. The defences raised by the appellant that he had not borrowed from the respondent or even if the respondent did lend the appellant money but such lending act was in breach of the prohibition provision of the law and therefore invalid are not accepted."

50. I note that there was no evidence before me that the decisions cited by the parties on the operation of Article 15 form part of any Summary of Precedent approved by the Judicial Yuan. Following the principles summarised earlier, the case law on which each side relies is therefore to be regarded as persuasive rather than binding.

51. In my judgment, the key to determining the effect of a violation of Article 15 lies in an examination of the underlying rationale behind the two schools of thinking. The question to ask is: Which line of reasoning makes better sense?

52. There is no dispute that the legislative purpose behind the lending restriction in Article 15 is the protection of the company's assets. The prohibition was intended for the protection of the interests of the lending company and its shareholders. This purpose has consistently been recognised by the Taiwanese Courts. See, for example, Taiwan High Court Case No. 824 of 1994 (discussed further below).

53. How does the school of thought that regards a violation of Article 15 as resulting in the avoidance of a loan agreement justify its conclusion? It may be thought that, as a remedy, avoidance of a loan leads to a lender being worse off since it can no longer claim repayment under the agreement. Mr Smith suggests that the benefit to the lender is two-fold. First, the lending company can claim the monies illegally from the 3rd party borrower at a statutory rate of interest pursuant to the Taiwanese law of restitution. Second, the lending company need not be prevented from getting back its money by provisions in the loan agreement stipulating for repayment only after a given period. The lender's right to restitution arises immediately. It will not be constrained by provisions in the loan agreement imposing an obligation to repay in instalments or only after the passage of an agreed time.

54. Mr Jat is critical of Mr Smith's reasoning. Mr Jat points out that the situation where a lender is most likely to invoke the Court's help in respect of a loan agreement is where a borrower has defaulted. In such situation (as evidenced by the Taiwanese cases exhibited to the Court), the borrower (as here) typically attempts to escape liability by alleging that the lending agreement is void. Why in those circumstances should the law treat a loan as void and leave the lender to exercise a merely personal restitutionary right against a defaulting (and likely impecunious) borrower? What value would the restitutionary right have in practice? Worse, treating the loan agreement as void would have repercussions on security provided by a borrower. At the moment when the lending company would want to resort to its security rights, the law (if Mr Smith is right) avoids not just the loan agreement but also any security provided by the borrower ancillary to the loan. That does not make sense (Mr Jat submits) given Article 15's acknowledged objective of preserving a company's assets.

55. In my view, Mr Jat is right. I do not understand how the existence of a restitutionary right justifies avoidance of a loan agreement (and any collateral provided) as Mr Smith has argued. To the contrary, there is strong support for Mr Jat's contention in the reasoning in Taiwan High Court Case No. 824 of 1994. The Court stated:-

"Paragraph 2 of Article 15 of the Company Law of Taiwan reads 'The funds of a company shall not be lent to a shareholder or any other persons, except as necessitated for lending money as a result of business transactions between companies.' This Article was intended for the protection of interest of the [lending] company and its shareholders, and should thus be interpreted as a non-mandatory prohibition. Thus, transactions made in breach of this Article are not void. The only result of such breach is only that the responsible person of the [lending] company should be penalized and should compensate the [lending] company for loss suffered by the [lending] company. Where, in breach of this Article, the responsible person of the [lending] company lends money to a third party, if this Article was interpreted as rendering such loan agreement void, the [lending company could only demand repayment on the basis of 'unjust enrichment'. If the loan attracted interest, or if the loan was secured by a guarantee (including personal guarantee or chattel/ real estate guarantee), such interest would be lost and the guarantee avoided. When the debtor is unable to repay, the [lending] company could only demand repayment from the responsible person [of the lending company]. This is harmful to either the [lending] company or its shareholders. If this Article was interpreted so that such loan agreement is valid, then the [lending] company can both demand repayment of principal and interest [from the borrowing company] according to the terms of the loan agreement, and also exercise its rights under the guarantee. If the debtor is unable to repay, the [lending company] can demand repayment from the responsible person [of the lending company]. This is beneficial to both the [lending] company and its shareholders, and corresponds with the legislative intent of this Article. The appellant's plea that the loan made to him by a company is void as a result of breach of the above mentioned provision [of paragraph 2 of Article 15] is unfounded and unacceptable."

It will be seen that in characterising Article 15 as a non-mandatory prohibition or "banning" provision the High Court was acutely aware of the potentially grave harm to a lender's assets if security provided by a debtor were to be invalidated as a result of the loan agreement being void. This is precisely the rationale which Mr Jat has pressed on the Court.

56. Finally, on this issue I briefly deal with 2 arguments which Mr Smith advanced.

57. First, there is no dispute among the parties that Article 16 is a "validity" provision under Taiwanese law. This means that a guarantee made in connection with a transaction outside a company's registered businesses is void. Mr Smith suggests that, since the penalties imposed by Article 16 on a responsible person are significantly less than those imposed by Article 15, then a fortiori a contravention of Article 15 must be the more serious offence and should merit a similar invalidity. I am not persuaded by this submission. A guarantee imposes a liability on a company. Avoiding the guarantee frees the company from the liability and thereby preserves its assets. A loan imposes a liability on a third party. Avoiding the loan and ancillary security poses a risk to the lending company's assets. There is a distinction between the situations covered by Articles 15 and 16. So it cannot be supposed that the remedies called for in one scenario are appropriate in the other.

58. Second, whatever the academic debate over the version of Article 15 in effect in 1999, there is no dispute that, following the 2001 amendment of Article 15, a loan contravening the provision would now be void. According to Taiwanese lawyers, this is because the 2001 amendment expressly states that the responsible person and the borrower are jointly liable for repayment of the monies illegally loan. There would be no need to provide for the borrower to be so liable unless the loan agreement were avoided. Mr Smith suggests that the 2001 amendment has merely clarified the law. If Article 15 was obscure prior to 2001, it is now apparent that the avoidance theorists were right all along. Again I am not persuaded by this submission. It often happens that, as a result of a line of cases treating a provision as having a certain result, the legislature amends the provision to bring about a different outcome. It seems to me that the amendment is at best neutral as to the proper interpretation of Article 15 before 2001.

59. For the above reasons, I conclude that although CDC's lending to Powick contravened Article 15, such breach did not avoid the Facility Agreement as a matter of Taiwanese law.

B.4 Are the Mortgages void?

60. It follows from Section III.B.3 on the validity of the Facility Agreement that the Mortgages are not void.

61. In the course of the hearing before me I invited submissions on whether, regardless of the validity or invalidity of the Facility Agreement under Taiwanese law, the Mortgages might still be valid. In this respect, I was particularly troubled by the Taiwan Judgment. This not having been set aside to date, there remains extant a judgment, valid on its face, awarding CDC a sum of money on the basis of security (the Money Orders) provided in support of the Facility Agreement and the Deeds. The Mortgages expressly cover all sums due and owing "in the manner and at the times set forth" in the Facility Agreement and Deeds. Even if the Facility Agreement were void as a matter of Taiwanese law, it may be arguable that by reason of the Taiwan Judgment in relation to the Money Orders there would remain sums due and owing pursuant to the Deeds which would be covered by the Mortgages. Since the Deeds are promises under seal, failure of the loan consideration through contravention of Taiwanese law may not mean that the Deeds are likewise void and ineffective. If the Deeds remain, Powick's contention could not succeed as the Mortgages would not be wholly inoperative.

62. Given my conclusion on the validity of the Facility Agreement, it is unnecessary for me to resolve the concerns which I have just voiced. It is enough for me to record here a caution against too ready an assumption that the avoidance of the Facility Agreement automatically renders the Mortgages ineffective.

B.5 Should the Writs be set aside?

63. It follows from the validity of the Facility Agreement that the Mortgages are operative. There is consequently no basis to set aside the Writs.

IV. Conclusion

64. The Notices are dismissed. The Plaintiffs have libery to restore the Summary Summonses to be dealt with as appropriate on a date to be fixed. There will be an Order Nisi that Powick is to pay the Plaintiffs' costs in respect of the Notices (including the hearing before me on 9 March 2004), such costs to be taxed if not agreed.

1 Section 12A provides as follows: "(1) The Admiralty jurisdiction of the Court of First Instance shall consist of: (a) jurisdiction to hear and determine any of the questions and claims mentioned in subsection (2); ... (2) The questions and claims referred to in subsection (1)(a) are: ... (c) any claim in respect of a mortgage of or charge on a ship or any share therein; ..." Section 12B(2) provides that an action in rem may be brought against a ship in respect of (among others) claims mentioned in s. 12A(2)(c).