Arc Trade Finance Fund v. Tes Group Ltd

DCCJ 2783/2015

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO 2783 OF 2015

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DECISION

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Introduction

1.This is the defendant’s application for setting aside the summary judgment entered against it in its absence by the Registrar on 19 February 2016 (“the summary judgment”).

The factual background

2.The defendant is a Hong Kong trading company. On 9 June 2013, it entered into an Aztec Member Participation Agreement (“the Aztec Agreement”) to become a seller of receivables on online auctions administered by Aztec Exchange Limited (“Aztec”), an Irish limited company.

3.On 7 May 2014, the defendant entered into an agreement with a Canadian buyer, Imperial General Contracting Inc (“Imperial General”), to supply doors to the latter at the consideration of US$103,825 (“the supply agreement”).  On the same day, the defendant lodged the receivables of US$103,825 from Imperial General (“the receivables”) for sale on the online auction.

4.On 17 July 2014, the plaintiff (a Cayman Islands company) also being a member of Aztec, successfully bid for the receivables with a discount.  On 21 July 2014, the plaintiff made a payment of US$83,185 (“the Sum”) (which comprised of an advanced payment of US$83,060 and Aztec’s handling fees of US$125) by way of remittance to the defendant through Aztec’s Deutsche Bank escrow account.  

5.Pausing here, this court is satisfied that the terms and conditions of the Aztec Agreement are applicable to the agreement for the sale and purchase of the receivables entered into between the parties (“the Agreement”) by virtue of section 3.01 of Aztec Agreement which provides that – “Buyers and Sellers may participate in Actions in accordance with the Terms and Conditions[1] and subject to the provisions of this Agreement[2]”.  Despite Mr Ioannis Iliakis, the defendant’s sole director (“Mr Iliakis”) said in his affirmation that he believed that even if there was a contract entered into between the parties, it did not incorporate the terms of the Aztec Agreement[3], Mr Forest Fong, counsel representing the defendant, did not in fact make any submission that there was no agreement entered into the parties in relation to the sale and purchase of the receivables, or that the provisions of the Aztec Agreement did not apply to the Agreement.  On the contrary, Mr Fong’s submission made at the hearing presupposes that the plaintiff can enforce the provisions of the Aztec Agreement against the defendant.

6.On 7 September 2014, Imperial General failed to pay for the receivables to the plaintiff despite its demand.  Aztec has investigated into the matter and in January 2015, Imperial General informed Aztec that the defendant was in breach of the supply agreement since the defendant had delivered the doors not fitting with the contractual description of the underlying sale of goods.

7.On 20 April 2015, the plaintiff through its former solicitors sent a letter to the defendant demanding it, among other things, to repurchase the receivables and to indemnify the plaintiff in accordance with the Aztec Agreement.  On 5 May 2015, Aztec issued an Unwind Notice to the defendant pursuant to section 8.02 of the Aztec’s Agreement (“the Unwind Notice”).

8.On 19 June 2015, the plaintiff commenced this action against the defendant to recover the Sum together with interest and costs.

9.On 6 July 2015, the defendant filed the acknowledgment of service of the Writ (indicating that it intended to contest the proceedings) together with a home-made Defence.

10.On 19 January 2016, the plaintiff took out an Order 14 application.  At the hearing on 19 February 2016, the defendant (who was acting in person at that time) failed to send any representative to attend and the summary judgment in the sum of US$83,060 (together with interest and costs) was entered against the defendant.  Two months later on 27 April 2016, the defendant’s solicitors took out the present summons to set aside the summary judgment (“the defendant’s summons”) pursuant to Order 14 rule 11 of the Rules of District Court (Cap 336H, Sub Leg) (“the RDC”).

Principles for setting aside

11.To succeed in setting aside the summary judgment, the defendant has to demonstrate a defence which has a real prospect of success, not just a merely arguable defence that would justify leave to defend under Order 14 of the RDC.  To do so, the defendant must satisfy the court that its case and supporting evidence as adduced is potentially credible and carries some degree of conviction.  The court must form a provisional view of the probable outcome of the action. (see Hong Kong Civil Procedure 2016, vol 1, paras 14/11/1, 13/9/13 and 13/9/14)

12.There are other considerations which the court would have to take into account, such as the defendant’s reason for its absence at the Order 14 hearing, any delay in setting aside, and any consequent prejudice caused to the plaintiff, etc.  The court’s approach is to conduct a balancing exercise of all relevant factors.  Yet, the merit of the defence is always the crucial factor and the starting point in applications to set aside default judgment.  For, it would be pointless to set aside a default summary judgment where the defence actually shows no real prospect of success. (see Chekiang First Bank Ltd v Ng Chun Hing Benjamin (HCA 3473 of 2000, 12 December 2001) per Ma J (as His Lordship Chief Justice then was) at paras.13 and 14)

Matters on jurisdiction and the applicable law

13.Although section 11.04 of the Aztec Agreement[4] provides that the parties would submit to the exclusive jurisdiction of the courts of the State of New York and the applicable law for resolving the dispute between the parties arising out of the agreement is New York law, Mr Fong made it clear in his skeleton submission that the defendant will not take issue on the questions of jurisdiction and the applicable law for the purpose of this setting aside application despite contrary contentions being made by Mr Iliakis[5] in his supporting affirmation.

14.This is a sensible approach for Mr Fong to take.  For, it appears that the defendant has prima facie submitted to the jurisdiction of the District Court of the HKSAR.  First, not only that the defendant had not applied within time pursuant to Order 12 rule 8(2) of the RDC to dispute this court’s jurisdiction, in its home-made Defence it also disputed the plaintiff’s claim on merits by setting out his own substantive reasons[6].  Second, no court’s leave has so far been given to allow the defendant to withdraw its acknowledgment of service of the Writ, and according to Order 12 rule 8(7), such acknowledgment would be treated as the defendant’s submission to the jurisdiction of the District Court in the present proceedings.

15.As for the applicable law, given the fact that the defendant has adduced no expert evidence on New York law and in further light of Mr Fong’s clarification as mentioned in paragraph 13 above, this court can generally assume that the content of the foreign law on any relevant issues here is the same as the Hong Kong law and would apply the Hong Kong law accordingly to resolve the relevant issues. (Hong Kong Civil Procedure 2017, vo1 1, para 11/1/10V)

The Greek version of Aztec Agreement and the emails in Greek

16.Mr Fong also informed this court at the hearing that the defendant would not take issue on the differences between the Greek version and English version of the Aztec Agreement as alleged by Mr Iliakis in his affirmation[7]. Both parties’ counsel agreed to argue their respective clients’ cases basing on the English version of Aztec Agreement for the purpose of this application.  Mr Fong also asked this court to simply disregard all those emails in Greek as produced by his client in the hearing bundle.

The defendant’s grounds for setting aside

17.Mr Fong advanced five grounds of setting aside: four as set out in his skeleton submission dated 1 August 2016 as supplemented by his supplemental skeleton submission of 4 August 2016, and the last one challenging the locus standi of the plaintiff as stated in his Further Note handed up to the court at the hearing on 5 August 2016 and elaborated by way of his further written submission lodged with the court after the hearing on 26 August 2016. 

18.Bearing in mind the principles as referred to in paragraphs 11 and 12 above, I would deal with the setting aside grounds in turn.

Any violation of Money Lenders Ordinance (Cap 163)?

19.Mr Fong argues that the receivables were in substance a loan as governed by the Money Lenders Ordinance (Cap163) (“the MLO”).  The plaintiff was an unlicensed moneylender, and did not comply with the formalities requirement in respect of granting such loan.  Hence the ‘loan agreement’ between the plaintiff and the defendant was unenforceable (“the MLO ground”).  Mr Fong submitted that the profit made by the plaintiff from the purchase of the receivables at discount is akin to interest to the tune of 21.3% per annum. 

20.In this court’s view, the resolution of this issue is a matter of legal categorization of the subject transaction.  After surveying the essential features of the subject transaction in light of the terms of the Aztec Agreement, I am satisfied that the Agreement was is in legal substance and effect an agreement for the sale and purchase of receivables rather than a loan, which may be caught by the MLO notwithstanding the subject transaction also appears to represent a method of providing finance, which may be indistinguishable in economic effect from a loan repayable with interest (see Secretary for Justice v Global Merchant Funding Ltd (2016) 19 HKCFAR 192, paras 12-22, particularly, paras 19 and 21).

21.Mr Fong draw this court’s attention to section 11.01 of the Aztec Agreement and submitted that it contemplated that the Agreement could be characterized by the court as a secured loan.  With respect, Mr Fong was quoting section 11.01 in isolation without referring to the earlier section 2.04, which spelt out in clear terms that the purchase is intended by the parties to constitute a final conveyance of the receivables from the seller (ie the defendant) to the buyer (ie the plaintiff).  And following the purchase, the seller will have no right to modify the terms of the purchase, nor will it have any control over the purchased receivables. Even the earlier part of section 11.01 also made it clear that the parties intended that each purchase shall convey to each buyer an undivided ownership interest in the receivables, and that such transaction shall constitute a sale and purchase.  It is only if the transaction was re-characterised (supposedly by any local court) as a secured loan and not a sale, then the parties would agree in that event the agreement shall constitute a security agreement under the applicable law.

22.It is also not in dispute that the assignment notice of the receivables had been duly given to Imperial General.[8]  Not only that there is no term restricting the plaintiff from further assigning the receivables down the line to any other third party.  To the contrary, section 2.03 also expressly provides that the plaintiff may at its discretion resell the receivables to any third party purchaser for value.  The fact that the plaintiff can freely dispose of the receivables is inconsistent with the transaction being construed in substance as a secured loan.  This court also see no equity of redemption in respect of the subject debt being created in favour of the defendant by way of the arrangement under the terms of the Aztec Agreement (see Global Merchant Funding case (supra), per Ribeiro PJ at paras 61-63).

23.Mr Fong however sought to argue that the defendant’s use of the ‘proceeds’ was restricted.  He resorted to section 5.02(f) of the Aztec Agreement in purported support of his argument.  But section 5.02(f) provided that no proceeds of any purchase will be used to acquire any security in any transaction that is subject to sections 13 and 14 of the Exchange Act.  Yet Mr Fong could not inform this court what sections 13 and 14 of the Exchange Act is about, nor its purpose or relevance here.  It would be futile for Mr Fong to ask this court to take into account some incomprehensible term of the Agreement in the exercise of categorisation.  Practically speaking, Mr Iliakis has not indicated in his affirmation that the defendant was in any way being restricted over its use of the sales proceeds of the receivables.

24.Another important feature is that the plaintiff has generally assumed the credit risk of the debtor (ie Imperial General as in this case) under the terms of the Aztec Agreement.  That is to say, the plaintiff would have no recourse against the defendant if the debtor’s subsequent failure to pay the plaintiff is owing to it becoming bankrupt or otherwise resulting from its financial inability to pay. [9]

25.This court is on the other hand aware that plaintiff can seek indemnity in respect of its loss from the defendant under certain defined scenarios specified in section 10.01 of the Aztec Agreement. It seems that these defined events are there to protect the buyer from certain incidents which might derogate the buyer’s interests in the receivables.  One of them is where the debtor refuses payment owing to its dispute with the defendant over the sale of the underlying goods (see section 10.01(v)). However, the amount to be indemnified by the defendant is expressly stated to be excluded to such extent resulting from (i) the gross negligence or willful misconduct of the plaintiff, or (ii) the failure to collect which is owing to the discharge of the debtor under the applicable bankruptcy law or otherwise resulting from his financial inability to pay (“the said two provisos”). 

26.In this light, the presence of the indemnity provisions under section 10.01 would reflect the allocation of risks prima facie freely agreed between the parties at the time of entering into the Agreement to address the position where the essential contractual arrangement, viz the collection of payment of the receivables from the debtor, would fail under certain defined scenarios.  However, this should not distract this court from properly categorizing the central mechanism, ie the sale and purchase of the receivables, as a true sale rather than as a loan in light of the essential features as identified above.

27.In Global Merchant Funding, Ribeiro PJ when dealing with certain fallback provisions imposing liability on the seller of receivables, viz a credit card debt in that case, made the following observation at paras 72 to 74 of the judgment:-

“72.  The abovementioned provisions address the position where the essential contractual arrangement has failed. The vital feature of the deal involves the sale and purchase of the merchant’s credit card receivables effected by the equitable assignment to GMF of a percentage of future debts, to be paid off in tranches by the Processor until the Purchased Amount is collected by GMF in full. It is to the Processor that GMF looks as the primary obligor in respect of the payment of Split Settlements. This is how GMF actually recovered the Purchased Amount in full in all three of the transactions relied on by the prosecution. These are the core characteristics of the contract upon which categorisation of the transaction must be based. It is only if the central mechanism fails that GMF may need to have recourse to the provisions regarding claims against the merchant. To categorise the MCA Contract on the basis of such contingent, fall-back provisions while ignoring the vital features of the contract would present the spectacle of the tail wagging the dog.

73.  As Sir Nicholas Browne-Wilkinson VC pointed out in Welsh Development Agency v Export Finance Co:-

“The fact that the ‘purchaser’ of, for example, book debts has a right of recourse against the ‘seller’ of the debts in the event of the debtor's nonpayment is not in itself inconsistent with the transaction being one of sale.  In many cases (see, for example, Olds Discount Co Ltd v John Playfair Ltd [1938] 3 All ER 275) a transaction has been upheld as a sale notwithstanding a personal obligation on the vendor of book debts to make good to the purchaser any default in payment by the debtors.”

74.  It is true that many such contracts will provide for such recourse where the debtor of the assigned debt defaults in making payment whereas in the present case, clause 11 operates where the Processor is not in default but where (by virtue of low credit card takings) payment received by GMF does not achieve the contractually agreed threshold.  In our view, this is a distinction which does not make a difference for categorisation purposes.  Recourse to the merchant under clause 11 is triggered by non-receipt of a contractually agreed amount.  It provides a contingent fall-back mechanism which is not inconsistent with the essential contract being one for the sale and purchase of receivables rather than a loan.” (emphasis added)

28.Leaving aside the question of characterization of the subject transaction (which is in my view a true sale rather than a loan as may be caught by MLO), Mr Chow also pointed out that the paid up share capital of the defendant is HK$3 million as shown in the company search record.[10]  I agree to Mr Chow’s fall back submission that, even if the sale and purchase of the receivables were to be construed as a loan, it would nonetheless be an exempted loan to a company which has a paid up capital more than HK$1 million (the statutory threshold) as per paragraph 12(b) of Part 2 of Schedule 1 to the MLO.  Hence, the plaintiff would not be qualified as a money lender under MLO[11].  Mr Fong did not seek to rebuke that the paid up share capital of the defendant was not HK$3 million or otherwise less than HK$1 million at the time of the entering into the Agreement.

29.In light of the aforesaid, with respect, the MLO ground is clearly misconceived.

Was the Unwind Notice wrongly issued?

30.The defendant then contends that the plaintiff’s claim is rooted in the Unwind Notice, but it was wrongly issued. (“the Unwind Notice ground”)

31.Section 8.02 of the Aztec Agreement provides an agreed mechanism allowing Aztec to unwind the transaction upon any breach or default in connection with the Aztec Agreement by a member.  The relevant part of section 8.02 is set out below:-

“Upon any breach or default in connection with this Agreement by a Member, if such breach or default continues for ten (10) business days, Aztec may, upon consultation with the performing Member, issued an Unwind Notice, and notify the debtor if applicable ...”

32.“Unwind Notice” is defined under section 1.01 to mean ‘certain notice delivered in accordance with section 8.02, in relation to unwinding a Purchase’.

33.It is not in dispute between the parties that Aztec has the power to issue an Unwind Notice upon the breach or default of the defendant or that Aztec issued the Unwind Notice with respect to the receivables on 5 May 2015[12].

34.Mr Fong submitted the Unwind Notice was wrongly issued because there was in fact no breach or default on the defendant’s part. As the defendant contends, the dispute now raised by Imperial General over the underlying goods was basing on a packing list and an email purportedly issued by Mr Iliakis, but both documents were forged documents.

35.In my view, whether the alleged packing list and email were indeed forged documents is not a real matter of concern for the purpose of determining this application.  In this case, there is no evidence to implicate Aztec or the plaintiff that any of them was involved in any scheme of fraud.  There is no clear or sufficient evidence before this court to decide one way or the other whether the underlying goods were indeed non-conforming, or that the packing list and email in question were indeed forged. In my view, under the circumstances of this case, what really matters here is whether according to the proper construction of the indemnity provision under section 10.01, any defined event of indemnification had in fact arisen, and if so whether the defendant had failed to discharge its obligation under section 10.01 accordingly so as to give rise to a breach or default on its part enabling Aztec to invoke the unwinding procedure under section 8.02.

36.The relevant part of section 10.01 and subsection (v) thereof read thus:-

“...Without limiting any other rights that any Indemnified Party may have hereunder or under applicable law, and whether or not any of the transactions contemplated hereby are consummated, the Seller hereby agrees to indemnify each Indemnified Party from and against, and hold each thereof harmless from, any and all claims, losses, liabilities, costs and expenses of any kind whatsoever (including, without limitation, reasonable attorneys’ fees and expenses) (all of the foregoing being collectively referred to as “Indemnified Amounts”) arising out of, or resulting from, in whole or in part, one or more of the following: (a) this Agreement or any other agreement or document delivered or to be delivered in connection with this Agreement; (b) the use of proceeds of any Purchase; (c) the interest of any Buyer in any Receivable, any Contract or any Related Security; or (d) any transaction contemplated by this Agreement or any other agreement or document delivered or to be delivered in connection with this Agreement; excluding, however, Indemnified Amounts to be extent resulting from either (x) the gross negligence or willful misconduct on the part of such Indemnified Party, or (y) the failure to collect amounts in respect of Receivables, to the extent such failure results from a discharge of the Debtor with respect thereto in a proceeding in respect of such Debtor under applicable bankruptcy laws or otherwise results from the Debtor’s financial inability to pay such amounts.  Without limiting or being limited by the foregoing and whether or not any of the transactions contemplated hereby are consummated, the Seller shall pay on demand to each Indemnified Party and all amounts necessary to indemnify such Indemnified Party from and against any and all Indemnified Amounts which relate to or result from, or which would not have occurred but for, one or more of the following:

...

(v)  any dispute, claim, offset or defense (other than discharge in bankruptcy of the Debtor) of any Debtor to the payment of any Receivables in (including, without limitation, any defense based on the fact or allegation that such Receivables or the related Contract is not a legal, valid and binding obligation of such Debtor enforceable against it in accordance with its terms), or any other claim resulting from the sale of the goods or services related to such Receivables or the furnishing or failure to furnish such goods or services;” (emphasis added)

37.According to the natural and ordinary meaning of section 10.01 and its subsection (v), the defendant’s obligation to indemnify the plaintiff against its loss could arise so long as a dispute or claim is raised by Imperial General (being the debtor) over the underlying goods to refuse payment as per section 10.01(v).  In such a case, the defendant would also be obliged to pay upon demand to the plaintiff such amount as necessary to indemnify the latter’s loss, which would prima facie cover the money the plaintiff had earlier paid for the purchase of the receivables (ie the Sum as referred to in paragraph 4 above).  In other words, the plaintiff is not required to prove that such dispute or claim as raised by Imperial General can indeed be substantiated before it can demand the defendant to pay for its loss, which the defendant had agreed to indemnify it under section 10.01.  This is the bargain as agreed between the parties according to the ordinary sense of section 10.01(v) as discussed above.

38.Mr Fong further argued that the issuance of the Unwind Notice by Aztec was premised on the plaintiff’s allegation that the debt in question was not eligible receivables at the time the defendant sold the invoice.  However, Imperial General only raised the dispute over the underlying goods in January 2015.  In other words, no dispute over the underlying goods existed when the plaintiff purchased the receivables in July 2014, and so the receivables still satisfies the definition of eligible receivables under the Aztec Agreement.

39.Yet it is observed that apart from taking issue that the receivables are not eligible receivables, the plaintiff’s former solicitors also expressly quoted subsection (v) of section 10.01 of the Aztec Agreement in their letter of demand of 20 April 2015, and demanded the defendant, among other things, either to remedy the breach of the underlying sale of goods contract as alleged by Imperial General (ie to deliver up the wooden armoured doors which Imperial General claimed that the defendant should have delivered but failed to deliver to them according to the contractual description of the underlying sale) or to repurchase the receivables.[13]  It is also undisputed that ten business days had lapsed after the letter of demand before Aztec issued the Unwind Notice to the defendant on 5 May 2015.

40.In my view, such letter of demand issued on 20 April 2015 did in substance and effect constitute a demand of the plaintiff upon the defendant to pay for its loss under the agreed indemnity owing to Imperial General disputing its liability to pay as caught by section 10.01(v). As pointed out above, the indemnified amount as necessary to indemnify the plaintiff’s loss in such a circumstance would prima facie cover the refund of the purchase price of the receivables and the aforesaid Aztec’s handling fees. The defendant was in breach of section 10.01 by refusing to pay for any part of such loss of the plaintiff as demanded under the letter of 20 April 2015.

41.In these circumstances, this court is satisfied that a breach of the defendant had indeed occurred to trigger Aztec’s power to issue the Unwind Notice, and Aztec also exercised such power properly.

42.In the premises, this court likewise reject the Unwind Notice ground.

The implied term argument

43.The defendant then sought to contend that it should be implied into section 10.01 of the Aztec Agreement that the defendant’s obligation to indemnify the plaintiff is subject to the condition precedent that the ‘Indemnified Amounts’ shall be proven to have been caused by the fault(s) of the seller and not caused by the fraudulent act(s) of anyone other than the seller.

44.With specific reference to subsection (v) of section 10.01, the plaintiff also contends for another implied term that the defendant’s obligation to indemnify the plaintiff under section 10.01(v) is similarly subject to the condition precedent that such dispute, claim, offset or defense as raised by Imperial General shall be proven to be substantially true and did not involve fraudulent act(s) of anyone other than the seller.

45.As I see it, the defendant’s attempt to imply the aforesaid alleged terms was skillfully made in a bid to escape from its obligation to indemnify and pay the plaintiff’s loss as clearly spelt out under section (v) of section 10.01 when Imperial General disputed liability to pay for the underlying goods as discussed above.  Further, section 10.01 has already expressly limited the ‘Indemnified Amounts’ by excluding it from such extent resulting from the incidents specified under the said two provisos[14].  And there is no evidence that any of the aforesaid two provisos was engaged here. 

46.In light of the aforesaid, if this court acceded to the defendant’s contention to imply the alleged terms, it would be tantamount to rewriting the bargain of the parties which is an impermissible course to take.

47.Mr Fong also attempted to argue that to give effect to business efficacy, if these alleged terms are not implied, all normal business activities of the defendant would have to cease since any or all normal business activities may be caught by section 10.01.  With respect, I cannot accept such argument either. 

48.Mr Fong could not properly articulate why any or all normal business activities would have necessarily ceased by the mere fact of the defendant abiding by such clause.  One has to be issue-specific here, and according to the ordinary sense of section 10.01 (v), if the debtor disputed liability to pay because the underlying goods did not conform with the contract description, the amount that the defendant needs to indemnify and pay the plaintiff under such sub-section (v) would only be confined to the refund of the purchase price of the receivable, the said Aztec’s handling fees (and the incidental costs of recovery of these sums), rather than exposing the defendant to an indefinite extent of liability as Mr Fong tried to argue.

49.Having due regard to the relevant contextual background against which the parties entered into the Agreement, and upon the reasonable construction of the Aztec Agreement as a whole, this court do not accept that the alleged terms as contended for by the defendant should be implied into section 10.01 or subsection (v) thereof.  The Agreement can be effective without the alleged implied terms.  Neither is it necessary to imply the alleged terms to give effect to the reasonable expectation of the parties in such sense expounded by the Court of Appeal in Tadjudin Sunny v Bank of America, National Association (CACV 12 of 2015, 20 May 2016), paras 37-41.  (see also: Kensland Realty Ltd v Whale View Investment Ltd & Anor [2001] 4 HKCFAR 381, per Bokhary PJ at para 59; Attonery General of Belize v Belize Telecom Ltd [2009] 1 WLR 1988, Lord Hoffmann’s comment at paras 22-23, which was recited in the judgment of Tadjudin Sunny at para 40)

Assumption of risk

50.Mr Fong tried as a last resort to contend that by participating on Aztec’s online platform, the plaintiff confirmed under section 2.03 of the Aztec Agreement that it has sufficient knowledge and experience to evaluate the merits and risks in the purchase of the receivables.  As such, the plaintiff assumed the risks as to the prospect of getting paid.

51.With respect, such contention is neither here nor there.  If the court finds that, upon the proper construction of section 10.01, the defendant is liable to indemnify and pay the plaintiff’s loss resulting from the mere fact of the debtor’s dispute over its liability to pay for the underlying goods (other than owing to the discharge in bankruptcy of the debtor or his financial inability to pay), it would be of no avail for the defendant to refer to section 2.03, which basically reminds the member, ie referring to both buyer member as well as seller member of the receivables, to independently assess the merits and risks of the transaction (as per the terms of the Aztec Agreement) before he or she decides to join as a member or participate in the auctions. 

52.And it is clear to this court that after surveying the bargain between the parties as per the provisions of the Aztec Agreement (to which the Agreement was also subject), it is the plaintiff who would take up the credit risk of the debtor (ie Imperial General in this case), and save for such credit risk as defined under the Aztec Agreement, so long as the debtor disputes its liability to pay for the underlying goods as per section 10.01(v), the defendant would need to indemnify and pay the plaintiff’s loss as discussed above.  As said, it is a matter of allocation of risks between the parties with respect to their respective rights and obligations under the Agreement, which this court see no legitimate reason to disturb in this case.

The plaintiff’s locus standi to sue

53.It was not until Mr. Fong finished his oral submission in reply on the aforesaid four purported setting aside grounds at the hearing (and it was close to 1 pm by then[15]), he then drew this court’s attention to his Further Note[16] and submitted that there is a discrepancy of the name of the assignee of the receivables (ie the plaintiff) as appeared in the assignment notice issued on 17 July 2014 (“the Assignment Notice”)[17]. In the Assignment Notice, the new creditor’s name printed on Schedule 3 thereto was ‘ARC Trade Finance’, and so the last word of the plaintiff’s name - “Fund” - is missing.  Mr Fong submits that ‘ARC Trade Finance Fund’ and ‘ARC Trade Finance’ might not be the same entity, and hence there is a defect in the plaintiff’s locus standi to sue the defendant. (“the locus standi point”)

54.Mr Chow submits that the plaintiff was taken by surprise by the defendant in raising the locus standi point belatedly.  He sought leave for his client to file and serve further affidavit to deal with the aforesaid discrepancy.  After hearing the parties’ submission on this matter in the afternoon session, this court granted leave to the plaintiff to do so, and directed the parties to exchange further written submission within 28 days after the hearing to further address the court on the locus standi point. 

55.Ms Pollyanna Wan, the plaintiff’s handling staff (“Ms Wan”), filed her 4^th affirmation on 23 August 2016 to deal with the locus standi point accordingly.  Further written submissions were lodged by the respective parties’ counsel on 26 August 2016. 

56.Ms Wan in her 4^th affirmation confirmed that the name of “ARC Finance Trade” as appeared in the Assignment Notice as well as Aztec’s Auction Purchase Notice of 17 July 2014[18] (“the Auction Purchase Notice”) were both referring to the plaintiff, and the missing of the word “Fund” is merely a typo.  Ms Wan further deposed that the plaintiff is one of the subsidiaries of Centurion Group Limited.  There is no other entity held by and/or connected with Centurion Group Limited that has the company name of “ARC Trade Finance” or any name that is similar to the plaintiff’s.  According to her best knowledge information and belief there is no entity outside Centurion Group Limited that is called “ARC Trade Finance”.  She had also conducted enquiries with Aztec and was informed that the plaintiff’s name with the word ‘Fund’ missing as appeared in the relevant Aztec’s documents may due to a character criteria restriction for the relevant field populated in the IT system adopted by Aztec at the time.  In this regard, she exhibited in her 4^th affirmation her email of enquiry of 16 August 2016, and Aztec’s email in reply of 17 August 2016 sent out by one Ms Louise Murray, the Senior Settlement Associate of Aztec.

57.Apart from the aforesaid, Mr Chow in his further written submission referred this court to the new creditor’s address as stated in Schedule 3 to the Assignment Notice: “Floor 4, Willow House, Cricket Square, PO Box 268, Grand Cayman, Cayman Islands”[19]. This address is exactly the same as the plaintiff’s address appeared in the Writ for this action.  Further, the auction reference number no AZA 00028826 printed on the Auction Purchase Notice also appeared in the plaintiff’s bank statement dated 31 July 2014[20] at the withdrawal entry (21 July 2014) corresponding to a ‘SWIFT payment of U$83,185’.  This figure of US$83,185 fully matches with the total of the advanced payment of US$83,060 and Aztec’s handling fees of US$125 as mentioned in paragraph 4 above.  According to the Auction Purchase Notice, the purchase advance payment date was also set at 21 July 2014.

58.On the other hand, the defendant could produce no positive evidence to show that there in fact existed another entity called “ARC Trade Finance” at the relevant time, and it was such entity rather than the plaintiff who had actually purchased the receivables from the defendant instead.  Mr Fong in effect only created some peripheral ‘doubts’ about the identity of the party who purchased the receivables from the defendant.  But these doubts are in this court’s view illusory rather than substantial upon a closer look. 

59.First, Mr Fong submits that the plaintiff’s address appeared in its bank statement is not that as stated in the Writ and the Assignment Notice.  Such submission is neither here nor there as a company can legitimately use different addresses for different purposes.  It is the aforesaid matching information as shown in the plaintiff’s bank statement that counts. 

60.Second, Mr Fong criticized Ms Wan’s evidence by submitting that it is not good enough for her to say she believed there is no entity by the name “ARC Trade Finance”.  With respect, I think Mr Fong quoted Ms Wan’s evidence out of context.  As pointed out above, she did clarify with this court that there is no such entity held by and/or connected to Centurion Group Limited that is called “ARC Trade Finance”, and outside Centurion Group Limited, there is also no such company to her best knowledge information and belief.  In fact, according to para 83 of Mr Iliakis’ affirmation, even Mr Iliakis himself believed that the plaintiff is part of a group called ‘Centurion Fund Managers’.  And, according to copies of the two downloaded webpages exhibited to his affirmation, ‘Centurion Fund Managers’ is also stated to be part of the ‘Centurion Group’.^[21]  And, the website address: ‘www.groupcenturion.com’ as contained in the hyperlink beside the said two words of ‘Centurion Group’ also appeared at the end of Ms Wan’s email.  It is also noteworthy that Ms Wan’s email address (as shown in her email of enquiry sent to Aztec) is also “[email protected]”.  Taking a fair view of the materials before me as a whole, there is simply nothing to suggest the name of “ARC Trade Finance” as appeared in the Assignment Notice, the Auction Purchase Notice as well as the Unwind Notice was referring to any company outside the ‘Centurion Group’.

61.Third, Mr Fong’s submission that it is most surprising that the counterpart Aztec Agreement signed by the plaintiff is not produced by the plaintiff to show that it is the contracting party.  But the proper question for this court to ask is whether it is satisfied that the plaintiff has already produced sufficient materials to show that it was in truth the entity that purchased the receivables from the defendant.  If this court is so satisfied, it would not necessarily draw adverse inference against the plaintiff in not producing some other document which might as well throw light on the matter in dispute.  

62.Fourth, Mr Fong further attacks the reason given by Louise Murray of Aztec to account for the subject typo by submitting that the name of “Imperial General Contracting Inc.” as appeared in the relevant Aztec’s documents contained even more characters than that for “ARC Finance Trade”. But still, such name could be fully printed out in the corresponding documents.  However, in this court’s view, whether Ms Murray could correctly identify the exact reason for the typo is not decisive of the issue.  Ms Murray already made it clear in her email that she could not confirm the exact reason for the name discrepancy because Aztec has already moved to a new platform, and it was only her belief that it may due to the character criteria restriction that the typo occurred.  On the other hand, what is remarkable is that Ms Murray did acknowledge there was indeed a typo made in respect of the plaintiff’s name.  If there were indeed a different entity in the name of “ARC Finance Trade” (as opposed to “ARC Finance Trade Fund”) which purchased the receivables from the defendant according to Aztec’s records, Ms Murray could simply have pointed this out to Ms Wan straight away instead.

63.Furthermore, even assuming the name of “ARC Trade Finance” so appeared in the documents issued by Aztec were actually not owing to the relevant field character criteria restriction, this does not per se follow that there was a different entity so called rather than the plaintiff who purchased the receivables.  It is observed that there is no simply evidence to suggest that the plaintiff would deliberately use a wrong name to enter into the Agreement with the defendant either.  And it would also be absurd to suggest so in the circumstances.

64.Upon carefully considering the relevant evidence adduced by the parties in the round, I am satisfied that the plaintiff has provided sufficient evidence to address the locus standi point, particularly bearing in mind the aforesaid closely matching evidence linking the plaintiff with the purchase of the receivables from the defendant.  This court is satisfied that on balance of probabilities that it is more likely than not the plaintiff “ARC Trade Finance Fund” was actually the entity who entered into the Agreement with the defendant to purchase the receivables from the latter, and as such the name of “ARC Trade Finance” was wrongly stated by mistake on the relevant documents issued by Aztec. 

65.I am therefore satisfied that even if the locus standi point is to be ventilated before a trial judge basing on the available evidence, the trial judge may well come to similar view as this court.  The subject name discrepancy is a matter that is rectifiable and, insofar as may be necessary, can be properly addressed by an order of rectification.  In other words, the locus standi point would likewise have no real prospect of success before a trial judge.

Conclusion

66.In the premises, this court come the conclusion that the defendant cannot demonstrate real prospect of success in respect of the different purported grounds of setting aside, be each of them considered alone or collectively.

67.Given my aforesaid view on merits, it would be unnecessary for me to consider those other matters which otherwise might be relevant to the setting aside of default summary judgment.  However, purely for completeness sake, I should mention that after considering both counsel’s submission on those factors other than merits, I accept the explanation offered by Mr Iliakis in his affirmation for his absence of the Order 14 hearing, and the defendant had acted promptly to engage his present lawyer for legal advice and take out the setting aside application after he had become aware of the summary judgment around 3 March 2016.  I do not think there was contumelious delay on the defendant’s part, and the interim time lapse after the summary judgment was still within reasonable bound.  I also see no real prejudice caused to the plaintiff in the circumstances. As such, apart from the crucial factor of merits, I see no other factors that tilt the balance against setting aside the summary judgment.  But as pointed out in paragraph 12 above, any further discussion of these other considerations are academic as it would be pointless to set aside the summary judgment when the defence shows no real prospect of success. (see: Chekiang First Bank Ltd case (supra), at para 31)

68.By reason of the foregoing, the defendant’s summons should be dismissed.

Costs

69.Costs should normally follow the event. However, Mr Chow urged this court to award costs against the defendant on full indemnity basis.  Mr Fong objected and submitted that there is no special or unusual feature in this case to justify an indemnity costs order.  Mr Fong even went further to submit that it is the plaintiff who should pay the defendant’s costs in relation to the locus standi issue.  Save for that, Mr Fong did not dispute his client should pay the plaintiff’s costs in relation to the defendant’s present application.

70.In advancing his costs submission, Mr Chow referred this court to section 10.01 of the Aztec Agreement which provided that the defendant would indemnify the plaintiff, among other things, all the costs and expenses of the plaintiff (including the reasonable attorneys’ fees and expenses).[22] Mr Chow underscored the word ‘all’ in the phrase of “all ... costs and expense of any kind whatsoever (including, without limitation, reasonable attorneys’ fees and expenses)” as appeared in section 10.01.  Mr Chow submitted that the parties’ agreement as to how costs should be dealt with provides the starting point for the discretionary exercise.  In this regard, Mr. Fong cited in support of his argument Bank of China (Hong Kong) Ltd v Twin Profit Ltd (2012) 15 HKCFAR 560; and China Citic Bank International Limited v Durrant Simon Patrick Michael (CACV 127 of 2014, 23 June 2016) at para 38.

71.In Bank of China (Hong Kong) Ltd v Twin Profit Ltd (2012) 15 HKCFAR 560, the Court of Final Appeal did not disturb the majority of the Court of Appeal’s approach on costs. Ribeiro PJ made the following observation at paras 18, 19 and 21 of the judgment:-

“18. In a separate ruling, the majority of the Court of Appeal (as had Fok J) awarded costs against the defendants on an indemnity basis, taking account of the fact that this had been expressly agreed to in the mortgage documents.

19. Referring to Gomba Holdings (UK) Ltd v Minories Finance Ltd,^[23] and Chekiang First Bank v Fong Siu Kin,^[24] Yuen JA set out the majority’s approach as follows:

“Where parties have entered into a commercial transaction on a certain basis, the court should be slow to disturb the parties’ agreement, unless the circumstances are such as to cause the court in the exercise of its discretion to intervene.  For instance, the court may well consider intervention in the situation referred to in Gomba where the mortgagor is required to pay charges of an unreasonable amount or charges unreasonably incurred, but it is not suggested by the Defendants that that would be the case here.”

...

21. That is not an apt question for the grant of leave. As with all questions of costs, the Court has a discretion which it exercises judicially. No one suggests that the discretion is fettered, Yuen JA having expressly noted the contrary. The parties’ agreement as to how costs should be dealt with provides the starting point for the discretionary exercise. No change is warranted. It would be counter-productive, were it possible, to try to lay down any less flexible “legal principles” as invited by the formulated question.” (emphasis added)

72.Here, this court would also respectfully adopt the majority’s approach on costs in the Court of Appeal’s decision in Twin Profit case. 

73.Further, there also appears to be clear weight of contemporary English authorities to support the proposition that the reference to ‘all costs’ in an agreement would mean all costs unless they are unreasonable in amount or have been unreasonably incurred, which is the equivalent to costs on indemnity basis. (see: Deutsche Bank (Sussie) SA v Gulzar Ahmed Khan & Anor [2013] EWHC 1020 (Comm), per Hamblen J at para 19-24).

74.In Tele-Art Inc (in liquidation) v Bank of China (Hong Kong) Limited (HCA 2443 of 2008, 30 November 2011), Barma J (as His Lordship then was) also endorsed such legal position after reviewing a line of English authorities cited under para 55-10 of Fisher and Lightwood’s Law of Mortgage (11^th ed).[25]  His Lordship at para 53 of the judgment said:-

“53. In my view, the clear weight of authority in England points towards the interpretation of the phrase “all costs ...” as importing a taxation on an indemnity basis when actual assessment of the costs recoverable is in issue. For my part, I think that this is the appropriate construction to be placed on the phrase, since as a matter of ordinary language, “all costs” means simply that – that all costs incurred are to be recoverable. While costs that are unreasonably incurred or unreasonable in amount will not be recoverable despite these words, as pointed out by Chadwick LJ in Fairview Investments, this exclusion would seem to rest more on the basis of public policy than language.”

75.Bearing in mind the above authorities, and upon proper construction of section 10.01 here, this court is also of the view that the plaintiff is entitled under such clause to recover all of its costs incurred in the present proceedings on the indemnity basis of taxation.

76.As for Mr Fong’s submission on costs, I cannot agree with him that the plaintiff should pay the defendant’s costs on the locus standi issue.  In gist, Mr Fong submitted that the plaintiff’s legal representatives were not able to confirm with this court whether the two different names in question were referring to the same entity and this led to further round of submission and further affirmation to be filed to deal with the name discrepancy issue. 

77.In my view, if the defendant wanted to launch a challenge to the plaintiff’s locus to standi to sue, Mr Ilikas should have pointed this out in his supporting affirmation. (see Hong Kong Civil Procedure 2017, vol 1, para.13/9/21; Tong Yi Sang & Anor v Fung Law & Ng & Ors [1993] 2 HKC 665, per Kaplan J at p 672B-E)  If that was not done, and such point was not even taken in Mr Fong’s first and supplemental skeleton submissions lodged with the court before the hearing, the defendant could not blame the plaintiff for not providing sufficient materials at the hearing to answer the locus standi point while the defendant itself had failed to keep its own house in order.  Spotting out this point belatedly by its legal representatives (even assuming this was not done deliberately) would likewise not serve as a legitimate reason for the defendant to shift the blame to the other party.  A fortiori, not only the defendant had not raised the locus standi point before the hearing, it had in fact all along admitted in its own pre-litigation correspondences as well as in its home-made Defence that the plaintiff was the buyer of the receivables.  In these circumstances, I do not think the plaintiff should be penalized on costs for the name discrepancy matter, which can be properly accounted for by way of the available materials as discussed above.  On the contrary, the defendant had raised a point that was rejected by this court, it is therefore just and fair for the defendant to bear the ensuing costs consequence.

78.All in all, I do not see there is any features in this case which warrant this court to disturb the agreement between the parties on the aspect of costs recovery provided under clause 10.01 as discussed above.  In these circumstances, this Court see it appropriate to order the defendant to pay the costs of its present application to the plaintiff on a full indemnity basis.

Order

79.For the above reasons, I dismiss the defendant’s summons.  I also order that the defendant do pay the costs of the defendant’s summons to the plaintiff forthwith, with certificate for counsel, to be taxed if not agreed on full indemnity basis.

80.Lastly, it remains for me to thank counsel for their assistance.

Mr Leonard Chow, instructed by Stephenson Harwood, for the plaintiff

Mr Forest Fong, instructed by Yung, Yu, Yuen & Co, for the defendant