In Re Ics Computer Distribution Ltd. (Formerly Known As Cheflink Ltd.)
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CACV000095/1996 IN THE COURT OF APPEAL 1996, No. 95
---------------------- Coram : Hon. Nazareth, V.-P., Godfrey and Ching, JJ.A. Date of hearing : 8 October 1996 Date of handing down reasons of judgment : 8 November 1996 ---------------------- J U D G M E N T ---------------------- Ching, J.A. : 1. This was an appeal against an order winding up the appellant company, ICS Computer Distribution Limited formerly known as Cheflink Limited. We dismissed the appeal on 8th October, 1996, and said that we would hand down our reasons. Those reasons now follow. 2. The appellant was incorporated in Hong Kong and at all material times had an issued and fully paid up capital of HK$2,000,000. Its managing director and general manager was Mr. Lam Chi Man. Another director was his wife, Chan Hau Li, Kelly. Although neither was registered as a shareholder it is clear that Lam Chi Man ran the company. Madam Chan describes herself in an affirmation as being "mainly responsible for supervising the accounts of the Company". It was a company that was in the business of buying and reselling computers and related equipment. Among its suppliers was the petitioner, Compaq Computer Hong Kong Limited and, to a lesser extent, one of the petitioner's related companies Compaq Technologies (China) Co., Ltd., referred to as CCT. 3. The petitioner is also a Hong Kong company but its parent company, referred to as U.S. headquarters, was in the United States of America. So far as the appellant was concerned the petitioner supplied its goods from Singapore. It claimed that its relationship with the appellant was that of a supplier and a distributor under the terms of an agreement in writing effective as from 16th August, 1993. It was an agreement for a period of 12 months but which would be automatically renewed for another 12 months unless a specified notice were given. The appointment of the appellant was as a distributor in specified parts of the People's Republic of China and it was expressly stated that the appointment was non-exclusive, the petitioner reserving the right to market or to sell its products within the designated territory either directly or indirectly without obligation or liability to the appellant. By clause 9.2 it was provided that apart from the initial order,
Any purchase order which did not contain a requested shipping date was to be deemed to have a requested shipping date of 60 days. By clause 9.3 it was provided that special orders were those placed less than 60 days before the requested shipping date as to which the petitioner was to use reasonable efforts to ship subject to availability. Clause 9.6 provided in part that
By clause 12.5 it was provided, inter alia, that at the petitioner's discretion products could be delivered to the appellant F.O.B. a location outside Hong Kong. By clause 13 title was to pass to the appellant upon delivery by the petitioner to the appointed freight forwarder or a common carrier at the designated shipping location. By clause 15 risk was to be the appellant's while the goods were in transit or while they were in the possession of the appellant. There was no real challenge put forward by the appellant that the Distribution Agreement was binding but it asserted that there had been subsequent oral agreements. 4. It is common ground that the petitioner sold and delivered to the appellant goods to the value of more than US$70,000,000. It is also common ground that a large part of that sum was not paid. It is the appellant's case that it had cross claims against the petitioner which amount to as much as or more than the sum which the petitioner now claims. These cross claims were eventually put forward in the evidence before the Court without regard as to whether they were set-offs or counterclaims or to any difference to the outcome in either case. However that may be, there were clearly discussions on the indebtedness between the parties. Those discussions generated admissions in writing from the appellant but at no time before the petitioner served the statutory notice under section 178 of the Companies Ordinance, Cap.32, did the appellant put forward those cross claims in writing. The evidence of Lam Chi Man was that he had often put the appellant's complaints to the petitioner but that in or about early 1994 the former dealer sales manager of the petitioner, Mr. Peter Wong, had asked him and his wife not to do so in writing because they would then be circulated to the management of the petitioner. Since that time Lam Chi Man had only made complaints orally. Having regard to the sums involved and the documents that came into being, that evidence was truly astonishing as a brief review will show. When the cross claims of the appellant were eventually quantified and put into an affirmation they amounted to no less than US$37,652,364.42 without taking into account claims for general damages. 5. By a letter dated 25th September, 1994, and signed by Lam Chi Man it was represented that because the petitioner had announced that there was going to be a price reduction for its products the appellant's customers were delaying their purchases. Account receivable collection had also been slow for the past two months. It continued,
Lam Chi Man's evidence was that he had drafted a letter which was then amended by a Mr. Bingley Ngai, former general manager of the petitioner's PRC division, which he signed with a view to maintaining a good business relationship with the petitioner. He claims to have retrieved his own draft from his computer. The draft contains the sentence,
and a paragraph,
However that may be, it remains that Lam Chi Man signed the actual letter which clearly shows indebtedness, difficulties in making payment and promises to pay. 6. On 22nd December, 1994, Lam Chi Man signed a personal guarantee to a limit of US$6,000,000 for credit facilities from the petitioner in favour of the appellant. The petitioner's evidence was that it came about because of the apparent difficulty being faced by the appellant in making payments as evidenced by the letter of 25th September, 1994. This evidence was simply not dealt with at all by Lam Chi Man. 7. On 8th May, 1995, the petitioner's auditors, Messrs. Price Waterhouse, sent a request to the appellant asking for confirmation that as at 30th April, 1995, it owed the petitioner US$35,354,160.72. That indebtedness was in fact confirmed by the appellant. This was dealt with by Madam Chan who says that she was pressed by officers of the petitioner to make the confirmation because, so they are alleged to have said, otherwise "not only would the petitioner be in great trouble, the global auditing work of Compaq Computer Corporation would also be hindered." She therefore signed and returned it "in order to maintain a smooth business relationship" on 23rd June, 1995, but, the day before that, she wrote a letter which simply said,
Clearly this alleges that the accuracy of the sum could not be checked because payments were made from China where the books were. There is no mention of any cross claim. Indeed, in her affidavit Madam Chan says that she
Those paragraphs contained Lam Chi Man's explanation for not making complaints in writing as dealt with earlier in this judgment. In the end Madam Chan was acknowledging a very large debt on the part of the appellant which she must have known would be relied upon by the petitioner and which she must have known would come to the attention of the management of the petitioner and its parent company. She deliberately did not mention cross claims in her letter for reasons that defy belief. 8. The next event occurred in August, 1995. There was evidence from Mr. Andrew Robinson, the petitioner's solicitor, that the petitioner had sent to the appellant a letter dated 8th August, 1995, demanding that it should reduce its debt by US$23,400,000 by paying five monthly instalments between August and December that year in accordance with a schedule enclosed. That repayment was agreed by Lam Chi Man in writing the same day. Lam Chi Man does not dispute these facts but he says that the managing director of the petitioner, Mr. T.C. Hsi, had represented to him that he was being hard pressed by U.S. headquarters to obtain settlement of the outstanding amount and he wanted something in writing so that he could demonstrate to them that he had effectively dealt with the matter, for otherwise his own position would be jeopardised. Lam Chi Man says that T.C. Hsi assured him that the petitioner would not rely upon the agreement against the appellant and that in return he would help the appellant to obtain a renewal or extension of the Distributor Agreement. Lam Chi Man claims he therefore signed the letter as a favour to T.C. Hsi. He alleges that the sum included an amount owing to CCT, not the petitioner, and asserts that it was a fictitious debt. When the petitioner later gave evidence that the appellant in fact owed the sum to CCT Lam Chi Man gave no further answer. Here then was a businessman acknowledging indebtedness of his company in the sum of US$23,400,000 on a promise that it would not be relied upon against the appellant even though it was to be used to satisfy U.S. headquarters. This was said to have been done as a favour. This is wholly unbelievable. 9. By a letter dated 27th September 1995, the petitioner's solicitors called upon Lam Chi Man to pay US$6,000,000 under his personal guarantee for the reason that the appellant had defaulted in payment under the 8th August, 1995, agreement. Lam Chi Man did not pay and separate proceedings have been instituted against him. 10. On 14th November, 1995, the appellant's own auditors sent to the petitioner a request for confirmation that as at 31st March, 1995, the appellant owed it US$37,274,722.72 and HK$3,541,347.50 and that the petitioner owned the appellant nothing. This was confirmed by the appellant. Madam Chan and Lam Chi Man say that they had never seen the document before it was put in evidence by the petitioner. Madam Chan says that the appellant's books do not, as a matter of accounting practice, record claims by the appellant against others. How she thinks a proper audit can be performed without the auditors being given full information is not apparent. The rest of her affirmation on this point consists of hearsay in defiance of the rules of evidence. 11. On 18th November, 1995, the petitioner served upon the appellant its statutory notice demanding payment of the then outstanding amount in excess of US$32,000,000. The appellant refused to pay. Its solicitors wrote a letter on 4th December, 1995, which denied liability for that sum or any part thereof on the grounds that between 30th April, 1994, and 31st October, 1995, the goods delivered were "substantially defective and/or not of merchantable quality." The petition was then presented on 15th December, 1995, claiming a debt of about US$30,000,000. On 19th December, 1995, Lam Chi Man wrote to Mr. Eckard Pfeiffer, the President and Chief Executive Officer of Compaq Computer Corporation in America. He expressed the hope of settling "our dispute as far as possible" and points out,
There is no explanation why the appellant was paying the petitioner anything if it had massive cross claims. After making complaints about the attitude of the petitioner's staff it continued,
He went on to say that the appellant had numerous pending claims against the petitioner for instance for "(a) short shipments (b) wrong delivery (c) missing parts (d) manufacturing problems (e) maintenance problems (f) price protections (g) marketing fund ..... etc." The appellant put in evidence that it was another director of the appellant who had written and signed the letter after having received instructions from Lam Chi Man over the telephone. Be that as it may, the appellant's complaints were unparticularised while clearly the letter as a whole admits indebtedness and seeks the indulgence of time to pay. 12. On 20th December, 1995, the appellant's solicitors wrote a further letter. This challenged the validity of the statutory notice on the grounds that the petition was based upon a claim of some US$2,000,000 less. No more need to be said of that challenge. It went on to allege that the fact that the petition was based upon a different sum, so that the petitioner was making different claims at different times, also explained why the appellant had refused to entertain what was described as the purported statutory demand. It continued,
The appellant threatened to apply to strike out the petition. 13. That threat was made good by a Notice of Motion dated 31st January, 1996. For that purpose the appellant filed 11 affidavits or affirmations, one of them being after the hearing of the motion had commenced. They included an affirmation of Madam Chan and four affirmations of Lam Chi Man. The first hearing of the petition had been called on on 29th January, 1996, at which time the appellant had filed only one affidavit being that of its solicitor who simply exhibited the two letters of 4th and 20th December, 1995, without anyone swearing to the truth of their contents. The appellant sought and was given more time. The Judge, Rogers, J., was willing to give only 14 days and warned that if the appellant did not satisfy him that there was a defence by that time it would be wound up. On 12th February, 1996, the appellant was given time to answer the petitioner's evidence. The motion to strike out was called on for hearing on 16th March, 1996, and ran for no less than seven days with a judgment dismissing it thereafter on 2nd April, 1996. It is to be noted that payment under Lam Chi Man's personal guarantee had been demanded on 27th September, 1995. Anyone receiving such a demand would surely have looked first to the liability of the primary obligor, that is to say the appellant. Preparation of the defence should surely therefore have begun shortly after the receipt of that letter. Again, if as Lam Chi Man alleges, he was constantly making complaints one would assume that he would have kept records of them together with a calculation of the amount of loss suffered, especially when that loss is said to have amounted to over US$37,652,364.42 before taking into account general damages. Finally, in an affirmation of Lam Chi Man filed subsequently on the hearing of the petition he said that the appellant "had in fact been actively and positively preparing its case since late November 1995 prior to receipt of the Petition." This preparation was to such effect that the Operation Supervisor of the appellant, Ho Kam Hung, had prepared documents comprising more than 40 box files. By the time that the motion to strike out came on for hearing on 16th March, 1996, one would have expected that the appellant would be fully prepared to give a coherent and fully particularised account of its defence. If it was genuinely still unprepared it should have sought further time notwithstanding the strong view taken by Rogers, J. No such further adjournment was sought. It is not alleged that the appellant had not had a fair hearing either upon the motion or upon the hearing of the petition. During the hearing of the motion Mr. Benjamin Yu, Q.C., then acting for the appellant commented that the case bad been badly prepared. It may or may not have been. If it was, it is not apparent whether it resulted from incompetence of the lawyers, failure of the appellant to give proper instructions or the fact that the so called defence was no more than an exercise of imaginative obfuscation. The appeal before us was not against the refusal to strike out but against the making of the winding-up order. Nevertheless, Mr. Warren Chan, Q.C., who appeared for the appellant attempted to resurrect the comment of Mr. Yu to excuse the short-comings in the appellant's evidence. That was hopeless. 14. The first two affirmations of Lam Chi Man listed 12 items of cross claims as follows :-
The contrast between these complaints and those in the letters of 4th and 20th December, 1995, are too obvious to need comment. 15. Rogers, J., refused to strike out mainly upon the ground that the major cross claim was based on the allegation of the delay in delivery of the goods. He found that at that stage the defence had not been made out. There was then a period between the delivery of his judgment, 2nd April, 1996, to the commencement of the hearing of the petition on 29th April, 1996, when the appellant had the opportunity to file and did file further evidence. This consisted of four affirmations including a fifth affirmation of Lam Chi Man. When the petition came on for hearing, and in this Court, the appellant restricted its arguments on cross-claims to three matters. They were delay in delivery, parallel imports and unmarketable goods. 16. The alleged delays in delivery arose because, on the petitioner's case, purchase orders were not accompanied by letters of credit. In his fifth affirmation Lam Chi Man alleged that the petition had never required the appellant to abide by some of the terms of the Distributor Agreement including clauses 9.2 and 9.6. He claimed that both before and after the signing of the Distributor Agreement, Bingley Ngai and Peter Wong had promised or assured him that the petitioner would deliver the goods in Hong Kong in less than 30 days from the date of the purchase order and that this was not conditional upon any letter of credit accompanying those orders. Letters of credit were to be provided later although he does not say when. He says that the agent entrusted with delivery from Singapore, Concord Express, was the petitioner's and not the appellant's agent. He claims that goods were mostly ordered and delivered on an "open account" basis and that the petitioner's invoices did not mean what they said. It is to be noted that in none of his previous four affirmations did Lam Chi Man allege this agreement, notwithstanding that his first affirmation ran 20 pages and his third ran 24 and notwithstanding that the alleged delay in delivery constituted by far the largest cross-claim. It is also to be noted that this evidence is wholly contrary to the letters of 4th and 20th December, 1995, which he seeks to explain by saying that as to the first he gave only brief instructions to the appellant's solicitors and that as to the second he instructed Ho Kam Hung to give instructions. The latter says that Lam Chi Man was to deal with the question of delay. It was upon this alleged agreement that the appellant relied to show that goods had been delivered in Hong Kong well after the 30-day limit and to show that any lack of a letter of credit was no good reason for the petitioner to delay shipment. The Judge below, rightly in our view, held that by the Distributor Agreement it was not provided that delivery should be made in Hong Kong. He found also, again rightly in our view, that Concord to whom the goods were delivered was the agent of the appellant in Singapore. There were numerous fax messages passing between the appellant and Concord which can only be explained on that basis. 17. The claim in relation to parallel imports arises in the following way. It is alleged that the petitioner was selling the same goods to other persons in the P.R.C. sometimes at a price lower than that at which they had been sold to the appellant. This naturally caused the appellant difficulty in selling the goods, with consequent loss. In his first affirmation, Lam Chi Man alleged that
The part or parts of the Distributor Agreement from which this obligation is said to have arisen was not identified. There are no such provisions in the Distributor Agreement. Indeed by clause 2.1 the petitioner reserved the right to sell to others in the P.R.C. and by clause 2.3 it was expressly stated that the appointment of the appellant as a distributor was non-exclusive. When it came to putting in further evidence for the substantive hearing of the petition, Lam Chi Man's fifth affirmation alleged that in late 1993 or early 1994 Bingley Ngai represented to him and assured him that the petitioner would take a very serious attitude towards parallel imports and that it would reduce its prices to help to curb them. He alleges that it was agreed that whenever the appellant had to compete with parallel imports the appellant would inform the petitioner of the prices at which those imports were being sold. Then, with the petitioner's "verbal" consent the appellant would reduce its prices and the petitioner would later credit or reimburse the appellant for any financial losses. The petitioner did not so credit or reimburse. This agreement was never mentioned before Lam Chi Man's fifth affirmation. No details as to the date, time and place of the agreement are given It is not said when or if Lam Chi Man ever informed the petitioner of the prices at which parallel imports were being sold and whether the petitioner agreed to reductions. 18. In his first affirmation, Lam Chi Man alleged that because there had been a delay in the delivery of goods they had all become outdated by the time they arrived in the P.R.C. with the result that a substantial part of them became unmarketable. On the face of it, this would appear to be a partial duplication of the claim for delay in delivery. Lam Chi Man produced a schedule showing the amounts of the outdated goods which could not be sold. However, neither the schedule nor the evidence discloses when the goods were ordered or when they arrived in the P.R.C. Lam Chi Man goes so far as to say that in an attempt to solve this problem the appellant caused three containers full of unmarketable goods to be returned from the P.R.C. to Hong Kong in September, 1995, intending to return them to the petitioner. However, he goes on to say that,
It appears never to have occurred to him to have them surveyed. Nor does it appear why it was necessary to abandon the attempt to return the goods or to send them back to Ningpo. 19. This was a creditor's petition. It is elementary that the petitioner needed to show that it was in fact a creditor. In the event the debt was admitted subject to set-offs and counter-claims. It was therefore for the appellant to show that it had bona fide cross-claims upon substantial grounds equal to or exceeding the debt and, insofar as the cross-claims consisted of counter-claims, to persuade the Judge to exercise his discretion in its favour. It would serve no purpose to try to define the words "bona fide dispute on substantial grounds" for they mean what they say and are well understood. The Judge below was not conducting a trial on affidavit. He was determining whether the appellant had shown such disputes. He found that it had not. On the evidence traversed above he cannot be faulted in coming to that decision. Indeed, there is clearly no other decision to which he could have come. 20. It is equally elementary that the petitioner was required to show that the appellant was unable to pay its debts as they felt due. The broken promises to pay speak eloquently as to that. In addition, section 178(1)(a) deems a company to be unable to pay its debts if it has neglected to pay the sum demanded in a statutory notice within three weeks. Once it was found that the cross-claims were not made out there was nothing to displace that deeming provision. There was therefore at least prima facie evidence of an inability to pay debts. The appellant did not say that it could pay its debts and put forward no accounts of any sort. 21. At the beginning of the hearing the petitioner applied to put in evidence the Statement of Affairs of the appellant. This was allowed notwithstanding objection. It was signed by Madam Chan. We were told from the bar that she had been pressed by the Official Receiver and so she had gone to a friend (unnamed) who was an accountant and it was he who had drawn it up. Why she did not go to the appellant's solicitors was not explained. We were told that the Statement of Affairs was not accurate. Nevertheless she signed it and submitted no affidavit to explain why. It showed that the appellant was indebted to the petitioner in a sum of over HK$73,000,000. While that was not nearly the sum upon which the petition was based it was another clear admission of liability. Nor did it list any stock of unmerchantable goods or any claim against the petitioner for delays in shipments or for parallel imports. It clearly showed that the appellant was grossly insolvent and was unable to pay its debts. 22. There is no doubt that the Judge was right to wind up the appellant. Godfrey, J.A. : Introduction 23. This is an appeal from an order made by Rogers J. on 13 May 1996 for the compulsory winding-up of ICS Computer Distribution Ltd, formerly known as Cheflink Ltd ("the company"). This order was made on the petition of Compaq Computer Hong Kong Ltd ("the petitioning creditor") presented to the court on 15 December 1995. No supporting or opposing creditor appeared on the hearing of the petition. The petition was based on an alleged debt of approximately HK$30m. The company set up cross-claims against the petitioning creditor which in total exceeded the alleged debt. The most important of these claims were (1) a claim for damages for alleged delays in the shipment of goods of the petitioning creditor to the company; (2) a similar claim in respect of goods shipped but said to be unmarketable; and (3) a claim for damages allegedly caused by parallel imports of similar goods. These claims totalled over $25m. The parties appear to have agreed (and the judge to have accepted) that, so far as the company's cross claims were concerned, the judge should confine himself to the issue of the substance and bona fides of these three claims. At the conclusion of the hearing, the judge expressed himself dissatisfied as to the substance and bona fides of these claims; pointed out that that anyway there was a large proportion of the debt owing to the petitioner that was uncovered; and held that the company was unable to pay its debts as they became due. He therefore granted the petition and made the order under appeal. The company's statement of affairs 24. After the making of the order a director of Chinese World Investment Ltd (itself a director of the company) made on 11 July 1996 an affirmation verifying the Statement of Affairs called for by section 190 of the Companies Ordinance, c.32. This showed that the company owed the petitioning creditor some $73m. It revealed no cross-claim against the petitioning creditor (at any rate, no cross-claim of which account had not already been taken in arriving at the above-mentioned figure of $73m). It revealed a massive deficiency of liabilities over assets. The appeal 25. At the hearing of the appeal on 8 October 1996 we received the company's Statement of Affairs made, as stated, on 11 July 1996. The company applied for an adjournment of the hearing of the appeal to allow it to put in evidence by the director who had verified the Statement of Affairs; by the accountant who (it is said) assisted her in its preparation; and by the solicitor who had acted for the company in relation both to the petition and the appeal, all this evidence to be used, apparently, in an attempt to explain away the failure (or so it is said) of the Statement of Affairs to reflect the true position. We refused that application and Mr. Warren Chan Q.C., who appeared for the company, found himself compelled to present the appeal in the face not only of the judge's dissatisfaction as to the bona fides of the company's case but of its silence upon the whole matter in the Statement of Affairs made by a director of the company two months after the judge's decision and three months before the hearing of the appeal. As one would expect, he said all that could possibly be said in support of the appeal. The company's case 26. The company says that on the evidence before him (which we were asked to review) the judge should have held that the cross-claims of the company against the petitioning creditor were based on substantial grounds and advanced bona fide and so should have dismissed the petition. The petitioning creditor's case 27. The petitioning creditor says that on the evidence before him the judge was entitled to hold that the cross-claims of the company were not based on substantial grounds and were not advanced bona fide; that the company is anyway substantially indebted to the petitioning creditor and is unable to pay its debts as they fall due; that the Statement of Affairs referred to above fully supports the petitioning creditor's case; and that the judge's decision to wind-up the company should be affirmed. Conclusion 28. The company has completely failed to satisfy me that we should interfere with the judge's order. He had a discretion to exercise whether or not to make such an order and he exercised his discretion in favour of making it. His evaluation of the evidence was challenged by Mr. Warren Chan Q.C. for the company but for my part I do not consider we need to entertain that challenge at all in the face of the subsequent Statement of Affairs which shows the company to be substantially indebted to the petitioning creditor and unable to pay its debts as they fall due. The result 29. It was for these reasons that I concurred in the dismissal of this appeal by this court at the conclusion of the hearing of this appeal. Nazareth, V.-P. : 30. The reasons for which I concurred in the dismissal of the appeal are fully set out in the judgment of Ching, J.A.
Representation: Mr. Warren C.H. Chan, Q.C. & Mr. Paul Wu (M/s. Wong & Partners) for Appellant Mr. Winston Poon, Q.C. & Mr. Winckless (M/s. Baker & McKenzie) for Respondent Mr. M.K. Tam of the Official Receiver |
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