Topcast Aviation Supplies Co Ltd v. Flightparts Ltd

HCA 1583/2017

[2020] HKCFI 389

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1583 OF 2017

________________________

BETWEEN

_______________________

_________________

J U D G M E N T

_________________

Introduction

1.The present action involves a claim by the plaintiff (P) against the defendant (D) for a total sum of about USD 763,400, said to be made up of 10 tranches of loans totalling just under USD 744,000 and alleged outstanding commission charges of USD 19,600.  The main disputed issue is whether those 10 tranches of payments were loans or capital injections.

2.On 16 May 2019, upon P’s application for summary judgment, Master Hui ordered that, amongst other things, final judgment be entered against D for 9 tranches of the loans, and that D has unconditional leave to defend P’s claims in respect of only the 10^th tranche (USD 35,000) and P’s claim for the commission charges.

3.D issued a Notice of Appeal against the Master’s above decision and further applied for leave to file and serve the proposed amended defence and counterclaim (“AD&C”). P had not cross-appealed.

4.There was no objection at the hearing for the AD&C be considered on de bene esse basis.

Brief background

5.Both P and D are companies incorporated in Hong Kong.

6.P’s main business includes the sale of aviation parts and repairs of aviation components.  Shenzhen Topcast Import and Export Co, Ltd (“Topcast Shenzhen”) is a related company/subsidiary of P’s.  Mr Hung Lap Mou (“LM Hung”) is a director of P.  From the emails between the parties, there appeared to be other persons surnamed “Hung” working in P, namely Thomas Hung, Francis Hung and Philip Hung.

7.D was at the material times a holding company which wholly owned a Mainland company called Flightparts (Xiamen) Component Services Co Ltd (“Flightparts Xiamen”).  Flightparts Xiamen was operated by a Mr Hussein Lookmanjee (“Hussein”) who was its appointed legal representative.  At all material times, Hussein was, and still is, a shareholder and director of D.

8.On or about 13 July 2010, P, Hussein and D entered into a Subscription and Shareholders’ Agreement (“2010 SSA”), pursuant to which P agreed to subscribe for 9,763 out of 19,763 shares issued by D at a consideration of USD 4m.  According to P, the consideration of USD 4m was paid by a cashier order dated 12 July 2010.  There appeared to be an issue as to whether the consideration was paid in full[1]. What was not disputed was that the 9,763 shares were duly allotted to P by D after the signing of the 2010 SSA as a result of which P became a 49.4% shareholder of D (until February 2017).  The other 50.6% shareholder was Hussein (P and Hussein collectively referred to herein as “Shareholders”).

9.It was not really disputed that P’s purpose of acquiring 49.6% interest in D was to invest through D in the business of Flightparts Xiamen which was, as defined in the 2010 SSA, “… of engaging in the maintaining, repairing and overhauling of aircraft and helicopter components, including but not limited to aircraft landing gears[2].

10.It would appear that the 2010 SSA was varied or modified by  a Supplemental Agreement dated 21 November 2013 signed by the parties[3]. The Supplemental Agreement had not been produced by either party and presumably nothing turned on it.

11.According to P’s pleaded case, since about December 2011, P and D entered into a series of loan agreements pursuant to which P had advanced several loans to D, and further on or about 21 November 2013, P, Hussein, and D signed a loan agreement (“2013 Loan Agreement”), pursuant to which P advanced further loans to D. There are altogether 10 tranches/items of the alleged loans (collectively “Loans”).

12.It can be seen essentially the Loans could be divided to those prior to 21 November 2013, namely Items (1) to (4), said to be advanced under a series of loan agreements, and those after 21 November 2013, namely Items (5) to (10), said to be advanced pursuant to the 2013 Loan Agreement.

13.The particulars of the alleged Loans are as follows:

Item number	Date	Payment in USD
(1)	28.12.11	250,000
(2)	09.07.12	35,000
(3)	12.09.12	21,000
(4)	08.09.13	32,786.89
(5)	26.11.13	50,000
(6)	26.11.13	50,000
(7)	17.12.13	20,000
(8)	23.12.13	50,000
(9)	07.01.14	200,000
(10)	15.08.14	35,000
Total		743,786.89

14.Further, according to P, on or about 6 June 2013, a customer/purchaser, Mega Global Air Services (Maldives) Pvt Ltd, issued a purchase order to D to purchase 3 landing gears, and the amount stated in the purchase order was USD 392,000.  Part of the purchase was handled by P, and it is P’s case that it was agreed between P and D that P would be entitled to 5% of the total amount received by D, as P’s commission. Notwithstanding such agreement, D had failed to settle the invoice from P for the commission of USD 19,600.

15.In relation to the Loans, D accepts that it had received 10 payments except that Items (4) and (9) were paid by P direct to Hussein or Flgithparts Xiamen.  D’s case is that :

(i) There was no loan agreement relating to the 10 Loans;

(ii) The sums paid by P to D were for capital injections and therefore not recoverable;

(iii) Even if those payments were loans, there has been a global settlement covering these loans.

16.In the latest AD&C, D has pleaded, amongst other things, that pursuant to Clause 6.2 of the 2010 SSA, since the allotment of the 9,763 shares to P, the Shareholders (P and Hussein) had continued to pay further moneys to D in accordance with the “Specified Proportions”, as defined in the 2010 SSA^[4].

17.To support P’s case and to refute D’s case, apart from producing a copy of the 2013 Loan Agreement, P’s director LM Hung had in his 1^st and 2^nd affirmations produced copies of further agreements signed by the parties as follows:

(i) An agreement for the sale and purchase of the 9,763 shares in D dated 26 March 2014 (“2014 SPA”), which sale was not proceeded with;

(ii) Share Purchase Agreement signed by Hussein and P dated 20 February 2017 pursuant to which that P sold its 9,763 shares in D to Hussein for USD 1m (“2017 SPA”);

(iii) Loan Cancellation and Release Agreement dated 20 February 2017 signed by Topcast Shenzhen, Flightparts Xiamen, and Hussein (“Release Agreement”)

(iv) Settlement Agreement dated 20 February 2017 signed by Topcast Shenzhen, Flightparts Xiamen, and P (“Settlement Agreement”).

18.According to D, P ceased to be a shareholder of D after about 20 February 2017 following Hussein’s purchase of P’s shareholding for a consideration of USD1,000,000[5].

19.Counsel Mr Adrian Lai and Mr Raymond Tsang appeared for P at the hearing, and Mr Jeffrey Li appeared for D.

The legal principles

20.An appeal from the master to the judge in chambers is dealt with by way of an actual rehearing of the application which led to the order under appeal, and the judge treats the matter as though it came before the judge for the first time[6].

21.The relevant legal principles in an application for summary judgment by a plaintiff under Order 14 of RHC are well-established[7], and set out by Mr Lai :-

(1) The burden is on the defendant to show that there are triable issues;

(2) The defendant must satisfy the court that he has a real or bona fide defence;

(3) The test is whether the defendant’s assertion is believable;

(4) In applying (3) above, the court is to consider the defendant’s allegations in the light of the evidence before it;

(5) There should not be a mini-trial on affidavits. That said, the court can reject a defence which is “frivolous or practically moonshine”.

(6) Where the summary judgment application is in respect of the whole or part of one of several claims included in the writ, judgment may be given for the claim or part, leaving the residue to be tried.

22.There was no dispute on the above general legal principles.

The alleged Loans

Item (1) – USD 250,000 on 28 December 2011

23.D relies on an email @03:26 pm on 20 December 2011 sent to Hussein by a Thomas Hung (“Thomas”) on behalf of P in support of his case that the amount was a capital injection.  The subject matter of that email was “investment”.  Thomas said in that email as follows:

“Dear Hussein,

We’ll agree to proceed with Option 2 whereby both shareholders will contribute an additional loan of US$250,000 to the venture.  Based on your word that you will have US$250,000 injected in January, we are prepared to deposit our US$250,000 loan to Flightparts HK right away[8] …”

24.Thomas went on to say that in the unlikely event that Hussein’s loan did not materialize in January, P’s loan would be converted into stock equity for additional shares of D at the same rate as P’s initial investment.

25.Thomas’s email was in fact in response to an earlier email sent by Hussein to Thomas in which it was indicated that Hussein was able to contribute an additional USD 250,000 but he also indicated that he had a challenge on the timing, and that Hussein was asking Thomas whether it was possible for P to extend the loan to D first and then funds be transferred to Flightparts Xiamen as D would need roughly 18 days to process the funds before they could be used.

26.It can further be seen in Hussein’s email @2.37pm on 26 December 2011[9] that by then, D had provided roughly RMB 5.2m and P had a roughly RMB 500,000 balance to fulfil from the first 2 rounds of additional financing.  Hussein then explained that their respective loans were recorded as “accounts payables as opposed to loans” as it helped to improve D’s financial statements for the purposes of presenting them to local banks for a loan.

27.As seen from the above email, the amount of USD250,000 was for transfer to D by P, for the purpose of D’s transfer to Flightparts Xiamen to fulfil D’s registered capital requirements of Flightparts Xiamen.

28.As seen also from the above emails, prior to 26 December 2011, there had already been 2 rounds of additional financing which were by way of loans from the Shareholders (P and Hussein), and recorded as “accounts payables” in D’s financial statements.  The only Financial Statements produced presently before this Court were those for the year ended 31 December 2012, and there were no “accounts payables” recorded but only “amounts due to a shareholder/a director”.  It seems clear that parties’ additional financing was regarded as loans and due from D to the shareholder/director.

29.Counsel Mr Li had on behalf of D referred to an email sent by Hussein on 5 July 2012 @3:44pm to Thomas[10], setting out the Shareholders’ respective “investment balance” as of that date to be:

Hussein: $285,550 USD

P: $250,000 USD

30.The 5 July 2012 email was some 6 months after the December 2011 emails.  As seen in the email, Hussein requested for a transfer of USD 35,550 by P to make up the difference between the amount paid by Hussein and the amount said by P.  This would indicate that the payments by each side was meant to be equal.

31.Even though words such as “contribute” or “injected” had been used by Thomas in the 20 December 2011 email, and that “investment balance” was used in the 5 July 2012 email by Hussein and even though there was no security/collateral or repayment timeline or rate of interest discussed or agreed, the July 2012 emails followed up on the December 2011 emails, which in my view clearly showed that the Shareholders had agreed to regard their respective payments as a loan. 

32.If the payment was to be regarded as a capital injection, one would have thought that it should be injected in accordance with the Shareholders’ respective shareholding, and in fact in the AD&C, it was pleaded by D that since the allotment of the Subscription Shares, P and Hussein had continued to pay further moneys to D in accordance with the said “Specified Proportions”.  However, as seen in the December 2011 emails, the amount of the loan was USD 250,000 each, and not in the proportions of Hussein 50.6% and P 49.4%, or the “Specified Proportions”.

33.In D’s Financial Statements for the year ended 31 December 2012, it was recorded that for the year 2011, an amount of USD 250,000 was due to a shareholder, and for the year 2012, an amount of USD 306,000 was due to a shareholder (an increase of USD 56,000 from 2011) and an amount of USD 300,100 was due to a director.  According to Note 8 of the Notes to the Financial Statements, the amount due to a shareholder/director was unsecured, interest free and had no fixed term of repayments.  The Financial Statements thus accorded with P’s case that the amounts paid by P were recorded as loans to a shareholder.

Item (2) – USD 35,550 on 9 July 2012

34.P relies on the above mentioned July 2012 emails to support this alleged loan.  As said earlier, the payment was requested by Hussein to “balance the contributions between the two groups”, and thus it was argued on behalf of D it could not have been a loan.

35.However, as Hussein was clearly seeking the difference between what he had paid, namely USD 285,550, and the USD 250,000 paid by P pursuant to the December 2011 emails so that the amount paid would be equal, as the USD 250,000 was regarded to be a loan, then the difference of USD 35,550 must be also a loan.

Item (3) – US$21,000 on 12 September 2012

36.P relies on two emails on 12 September 2012[11], one of which was sent by Thomas to P’s accountant, Pauline Chan (“Pauline”).  It is argued on behalf of D that as these were internal emails without involving D or Hussein and the internal reference to the payment being a loan or a “further loan” could not have been sufficient evidence, and that D never acknowledged this being a loan.

37.Mr Li also argued that as Thomas’s internal email was addressed to an accountant, and whether this was indeed a “loan” in the strict sense of the word, or some “accounting jargon” should be something for which evidence should be heard and the veracity of which to be determined at trial.

38.The subject matter of the two emails of 12 September 2012 was stated to be “Further Loan to Flightparts HK” and although the email sent at 11:14 am by Thomas to Pauline was an internal email, Pauline then sent an email at 1:08pm to Hussein cc Thomas, and forwarding the earlier email from Thomas.  Pauline’s email to Hussein was not an “internal” email.  In any event, the subject matter clearly referred to a further loan to D, and there was no evidence that Hussein had responded to dispute this, or to put on record that it was not a loan but a capital injection.

Item (4) – USD32,786.89, equivalent to RMB200,000 paid on 8 September 2013

39.It was LM Hung’s evidence in his 2^nd affirmation that the funds of RMB 200,000 were physically handed to Hussein, and LM Hung recalled that at the time Hussein told P that Flightparts Xiamen urgently needed funds for operation, and as D did not maintain any RMB account, P agreed to provide RMB200,000 through P’s office in Shenzhen, and gave the same to Hussein.

40.Hussein has in his affirmation stated that he recalled having received RMB200,000 from P on 8 September 2013 but that was for settlement of services rendered by him to P and was not related to D.  It was Hussein’s evidence that as P, he, Topcast Shenzhen and Flightparts Xiamen had business relationships and carried out numerous financial transactions with one another, it was not impossible that he had personally received funds from P from time to time, but this had nothing to do with D.

41.LM Hung had in his 2^nd affirmation (which was filed in reply) denied what was alleged by Hussein, and stressed that there were no commercial dealings between P and Hussein except for D.  Hussein did not give any particulars as to what services he was referring to, and no supporting evidence was produced by him in relation to the alleged services.

Items (5) and (6) – 2 sums of US$50,000 on 26 November 2013

42.P relies on an email Pauline sent on 26 November 2013 @3:29pm to Hussein[12] stating that P had transferred USD 100,000 as loan to D and this was followed by another email @ 3:59 pm that day by another staff at P to Hussein, Pauline, Thomas, and others at P asking Hussein to act and release the salary to his staff asap without delay.  The subject matter of both emails was “Re: USD 100,000- LOAN”.

43.There was no response from Hussein.  Although there was no email showing Hussein had requested for the loan or acknowledged receipt of the amount, as pointed out by Mr Lai, it was not D’s case that the amounts were not received.

Item (7) – USD 20,000 on 17 December 2013

44.P’s case is that it made this payment pursuant to the 2013 Loan Agreement.  P further relies on an email sent by Hussein to Pauline @11:51am on 16 December 2013 forwarding his emails with a customer, to show that funds were required to process a payment to the customer[13].

45.It was argued on behalf of D that all Hussein did was asking P to “process a payment” and not requesting a loan.  D also relies on Clause 2.4 of the 2013 Loan Agreement which sets out exhaustively the purposes and budget for which loans could be advanced under the 2013 Loan Agreement, and as the payment was for purchase of a “landing gear”, it was D’s case that it would be at least arguable as to whether the payment fell within the category set out in Clause 2.4.  Mr Lai submitted that it would fail within 2.4.4 as “Equipment purchased through Lender from overseas” or 2.4.5 as operating expenses as originally the seller was chasing D for return of the “landing gear” units “lent” to D as D had failed to pay outstanding invoices and Hussein then decided to purchase the “landing gear” outright.

Item (8) – USD50,000 on 23 December 2013

46.As with the above item, D’s argument is that there was no indication that this payment was made under the 2013 Loan Agreement, as P had not stated which category under Clause 2.4 of the 2013 Loan Agreement it fell within.  Further, D only asked Pauline to “process” the payment and was not seeking a loan. 

47.However, what Pauline said in her email of 23 December 2013 to Hussein was “due to insufficient funding loan from Topcast Aviation USD50,000”[14]. There was no email produced by D that Hussein had denied that it was a loan.

Item (9) – US$200,000 on 27 January 2014

48.This payment was made directly to Flightparts Xiamen, on behalf of D for D’s capital injection into Flightparts Xiamen.  

49.D relies on the emails on 10 February 2014 with subject matter “Increase of registered capital”, in particular the email sent at 17:09 by a Philip Hung on behalf of P[15] to a Sophia Zhong, cc to Hussein, which referred to the sum of USD200,000 remitted was for the increase of registered capital, and thus the emails showed that the sum was clearly for capital injection.  It was argued on behalf of D that as P, in buying into D, was in effect buying into Flightparts Xiamen, it was wholly artificial to say it was D’s sole responsibility to provide funding to Flightparts Xiamen D and Flightparts Xiamen are the same business. In any event, it was submitted by Mr Li that “capital injection” is beyond the ambit of Clause 2.4 of the 2013 Loan Agreement.

50.However, as pointed out on behalf of P, as P had no direct shareholding in Flightparts Xiamen, the payment was of similar nature as Item (1) and the payment was a loan to D for D’s increase of capital injection to Flightparts Xiamen.  Further this item added up with the other items to more or less the same amount of loans acknowledged by D and Hussein in the 2014 SPA.

Item (10) – US$35,000 on 15 August 2014

51.On this item of alleged loan, D was given unconditional leave to defend, and is thus not a subject matter of the present appeal.  However, Mr Li has also made submissions in relation to this item.

52.P’s case is that from time to time, D had to borrow funds from P to pay salaries to its staff or the staff of Flightparts Xiamen, and that this payment was for D to pay its staff.

53.D referred to the emails of 11 August 2014 between Philip Hung on behalf of P and Hussein[16], in which Hussein had stated as follows:

“Attached is the expat salaries to be processed today. Please confirm if you will do the expat salaries going forward or if I should continue to do it…”

54.Mr Li argued that it could not be clearer that as the parties were discussing who were to settle salaries going forward, it could only be on the basis that as equal shareholders, they bore equal financial responsibilities.

55.However, P and Hussein were not equal shareholders.  In any event, as said earlier, D has been given unconditional leave to defend this item of claim, and no submissions were put forward on behalf of P on this item.

Discussion

56.There are mainly two defences, namely (1) “Capital Contribution Defence” and (2) “Global Settlement Defence”.

Capital Contribution Defence

57.P had produced a copy of its cashier order for the payment of USD 4m to D, which showed that the consideration under the 2010 SSA had been paid in full by P.  It is not quite clear why D would be under a belief that the subscription price had never been paid to D in full, or that D would not be sure of this, as pleaded in its AD&C.

58.Also as said earlier, it is D’s case in the AD&C that, since the alloment of shares to P, the Shareholders, namely P and Hussein, had continued to pay further moneys to D in accordance with the “Specified Proportions”.  This would mean on D’s case that the further “capital injection” as alleged by him should be in the proportions of their respectively shareholding of P, 49.4%, and Hussein, 50.6%.

59.Clause 6.1 of the 2010 SSA clearly states that no shareholder (except as agreed by them pursuant to Clause 7.3(c)) shall be required to make any additional funding available to the “Group” (defined as “D and its subsidiaries” in the 2010 SSA and includes Flightparts Xiamen) or to provide any guarantee or indemnity for any obligations or liability of any “Group Companies” (as defined and includes D and Flightparts Xiamen). 

60.Under (xviii) of Clause 7.3(c), a decision relating to any matters set out therein shall require the prior written approval of each of the “Shareholders” (as defined), and this includes entering into any transaction (including the lending of money or provision of financial assistance) with any Shareholder, director or their respective associated persons[17].

61.The burden is on D to show a believable defence and that there are triable issues, and to adduce evidence of any alleged agreement of the Shareholders to provide further equity funding to, or capital injection into D pursuant to Clause 7.3 (c).  No such agreement has been produced by D, and further, as mentioned above, on Hussein’s evidence, the further payments into D were clearly not in accordance or commensurate with the “Specified Proportions”, or the respectively shareholdings of Hussein of 50.6% and P of 49.4%. 

62.On the other hand, it was submitted by Mr Li on behalf of D that no applicable loan agreements in relation to the Loans exist either.

63.Apart from the 2013 Loan Agreement, there were no other written loan agreements relied on by P.  P relied on the various contemporaneous emails mentioned earlier, and also the documents mentioned below.

64.As said earlier, the only Financial Statements of D available before the Court were those for the year ended 31 December 2012 and those statements appeared to be signed by Hussein as Chairman of the Board on 23 July 2013, and in any event, they would have been approved by the Board of which Hussein was/is a director.  The total payments by P of USD 250,000 in 2011 and USD 306,000 in 2012 were recorded as “Amount due to a shareholder”, and the total payments by Hussein of USD 300,100 in 2012 was recorded as “Amount due to a director”.  The total amounts recorded therein as due to P tallied with the amounts paid by P to D in 2011 and 2012.  

65.Whether those amounts were unsecured, interest free or had any fixed term of repayment, it is clear those amounts paid by P were recorded as loans from a shareholder and the Board of D had approved of the same.   

66.Clause 9.1 of the 2013 Loan Agreement stated that both P and Hussein had extended financing to D in support of its operations, but the total amount extended and to be extended under the 2013 Loan Agreement was much more than that by Hussein[18].  Although the total amount of the financing extended by P was not stated, it was clear that the parties accepted that the amounts extended prior to the 2013 Loan Agreement were “financing” and there was no mention that those amounts were capital injections.

67.Although the 2014 SPA was not implemented, and the sale of P’s shares only took place pursuant to the 2017 SPA, the 2014 SPA was signed by D and Hussein.  Schedule 1 of the 2014 SPA has set out details of “Vendor’s Loans”, namely various loan agreements, one of which was the 2013 Loan Agreement between P, Hussein and D.  The “Vendor” of the 2014 SPA was P and in the Schedule 1, P’s loans to D was stated to be USD 708,786.69 as of 11 March 2014, which again tallied with the aggregate sum of the Items (1) – (9) of the Loans (with only USD 0.2 clerical error). 

68.Items (5) and (6) of the Loans were clearly for staff salaries, or operating expenses under Clause 2.4.5 of the 2013 Loan Agreement.  Item (7) of the Loans should also fall within Clause 2.4.5 as operating expenses.  As for Item (8) of the Loans, although it was not made clear as to which category under Clause 2.4, the payment was requested by Hussein for payment of an outstanding invoice and it was not refused by Hussein that it was a loan as mentioned in Pauline’s email.  Although Item (9) was said to be for capital verification for increase of capital, it was to be released soonest for payment of salaries once verification was completed.  It my view, it would fall within Clause 2.4.5.  It was also in the nature of Items (1) and (2).

69.Having considered the above, I do not find that D’s case that those payments in Items (1) – (9) were not loans is believable or that D had raised triable issues on those items.

Global Settlement Defence

70.It is also D’s alternative defence that even if the advances made by P were loans, they were settled under the global settlement reached on 20 February 2017 as evidenced by 3 documents, namely the 2017 SPA, the Release Agreement and the Settlement Agreement (“Global Settlement”).

71.However, firstly, D was not a party to the 3 agreements dated 20 February 2017.  Secondly, the Release Agreement and the Settlement Agreement only concerned the loans between Topcast Shenzhen and Flightparts Xiamen, the respective subsidiaries of P and D, none of which was in relation to the Loans.  Thirdly, as submitted by Mr Lai, which I accept, the parties had the practice of separating the loans between the subsidiaries and the loans between P and D and if the parties had intended that D be released from its indebtedness to P, this would be specifically included.  Lastly, the provisions in the Settlement Agreement concerning the “Released Claims” did not include those between P and D.   

72.Having considered the above, in my view, D’s alternative defence has not been made out.

Conclusion

73.In light of the above, D has not been able to raise any triable issues in its defence in the AD&C.  Thus, D’s appeal must fail.  I dismiss the appeal, and order D to pay P’s costs, to be taxed if not agreed.

Mr Adrian Lai and Mr Raymond Tsang, instructed by Chak & Associates LLP, for the plaintiff

Mr Jeffrey Li, instructed by Lee & Yik Lawyers, for the defendant