Bangy Co Ltd v. Aik San Realty Ltd and Another

HCA009604/1983

BETWEEN

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BETWEEN

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Coram: Hon. Clough, J.

Dates of Hearing: 16, 17 and 20 February 1984

Date of delivery of Judgment: 6 March 1984

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JUDGMENT

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1. At the conclusion of the applications for summary judgment under Order 14 in both these actions on the 20th of February 1984 I gave unconditional leave to the Defendants to defend in each case. I had heard three days of submissions by leading counsel Mr. Charles Ching for the Plaintiff and Mr. Oswald Cheung for the Defendants. Out of deference to their submissions I reserved my reasons and I now record them in this judgment.

2. My understanding is that the claims in the two actions are virtually identical save that there are different Defendants in each case and I was requested to hear argument by reference to one action only namely High Court action No. 9605 of 1983 on the footing that the decision in the Order 14 application in that action would also apply to the application in High Court action No. 9604 of 1983.

3. In High Court action No. 9605 of 1983 the Plaintiff, Bangy Co. Ltd. ("Bangy") sues the Defendants E. Wah Realty Ltd. ("E. Wah") and Mr. Cheung Kung Hai (Mr. Cheung) for the sum of $21,545,127.55 and interest under a Guarantee ("the Guarantee") under seal dated the 21st of May, 1981. The Guarantee is expressed to be supplemental to a contemporaneous Debenture ("the Debenture Agreement") under which the Banks and other financial institutions ("the Lenders") therein specified undertook to make available credit facilities to the extent of $250,000,000.00 to the Yao Ta Development Co. Ltd. ("the Borrower"). To secure repayment of its borrowings from the Lenders the Borrower executed or procured the execution of a number of instruments referred to in the Debenture Agreement as "Security Documents". All the security documents were contemporaneous in date to the Debenture Agreement and they comprised initially the Guarantee and a number of other instruments described as the Funding Agreemin, the Share Mortgage, and the Subordination Agreement.

4. Under the Guarantee E. Wah and Mr. Cheung guaranteed the repayment of two-ninths of the indebtedness of the Borrower to the Lenders under Debenture Agreement. By a Deed of Assignment and Novation dated the 18th of April 1983 made between (1) the Borrower (2) the Lenders and (3) Bangy and Well Secured Limited ("Well Secured") the Lenders assigned all their interest and obligations in and under the Debenture Agreement, the Guarantee and the other security documents to Bangy as to 60% of that interest and to Well Secured as to the remaining 40% of that interest.

5. It is pleaded in the Re-Amended Statement of Claim of Bangy and not challenged by either of the Defendants that the Borrower has defaulted in making interest payments under the Debenture Agreement and that there has been a default under that instrument giving rise to the liability of all the guarantors to make a payment to Bangy. In the case of each of the Defendants the liability is in the sum of $21,545,127.55 with interest as claimed in the prayer of the Re-Amended Statement of Claim.

6. The defence which the Defendants seek to make in this action is one of confession and avoidance in respect of this acknowledged liability. The factual basis of the proposed defence can only be understood in relation to the background of the Borrower and its affairs. The Borrower is a company which was incorporated on the 23rd of June, 1978 and was at all material times intended to be the corporate vehicle for the development of a site of land in Tsuen Wan by four corporate partners in a consortium whose relationship was governed by Heads of Agreement executed by them on the 16th of April, 1981. The authorised share capital of the Borrower is $100,000 divided into 1,000 shares of $100 each. The members of the consortium, their respective shareholdings in the Borrower and the directors of the Borrower nominated by them were as followings :-

7. Wayson is a wholly-owned subsidiary of Sun Hung Kai Properties Limited ("Sun Hung Kai") and its directors are also directors of Sun Hung Kai. The obligations of the Borrower under the Debenture Agreement were guaranteed as to three-ninths of the Borrower's indebtedness under the Guarantee by Sun Hung Kai and to two-ninths by E. Wah (the 1st Defendant) and Mr. Cheung (the 2nd Defendant). A further two-ninths of the obligations of the Borrower under the Debenture Agreement was guaranteed by Aik San Realty Limited ("Aik San") (the 1st Defendant in H.C.A. No. 9604 of 1983) and Mr. Chung Ming Fai (the 2nd Defendant in H.C.A. No. 9604 of 1983) on behalf of the interest of Man Freshing Estates Limited ("Man Freshing").

8. The remaining two-ninths of obligation of the Borrower under the Debenture Agreement was originally guaranteed by Eda Holdings and Mr. Chung Ching Man on behalf of Eda Realty Limited and Eda Investments Limited. Subsequently on the 11th of September 1981, when Sun King Fung Development Limited ("Sun King Fung") acquired the shares of Eda Investments Limited in the Borrower, Sun King Fung itself also guaranteed the relevant two-ninths part of the indebtedness of the Borrower under the Debenture Agreement.

9. The uncontroverted evidence of Mr. Cheung was to the following effect regarding the relationship between Wayson, Bangy and Sun Hung Kai. Sun Hung Kai is the holder of all the shares in Wayson except for one which is held by Mr. Walter Kwok Ping Sheung, a director of Sun Hung Kai. The eight directors of Wayson are also directors of Sun Hung Kai. All the shares in Bangy are held by Sun Hung Kai except for one share which is held by Mr. Walter Kwok Ping Sheung. All the directors of Bangy are also directors of Wayson and Sun Hung Kai.

10. When the Borrower acquired the site in Tsuen Wan which it proposed to develop the permitted user was evidently for industrial and godown purposes. On the 11th of December 1980 the Chief Estate Surveyor indicated on behalf of the Town Manager District Officer Tsuen Wan that the Town Planning Board was then contemplating rezoning the area in which the site is situate to uses other than industrial purposes. Eventually, on the 31st of January 1983 the District Lands Officer informed the Borrower through its then agent Sun Hung Kai Real Estate Agency Limited that he was prepared to permit a surrender and regrant of the site to permit residential/commercial development on payment of a lump sum premium of $129,515,000.

11. Against the above general background the evidence in support of the application for summary judgment made by Bangy in this case is the formal evidence of Mr. Law King Wan in his capacity as a director of Bangy in which, in substance, he verifies the claim as pleaded and affirms that he believes there is no defence to Bangy's claim.

12. The Defendants rely on two affirmations in opposition made by Mr. Cheung and filed on the 6th of October and the 9th of December 1983 respectively. The substance of the material evidence of Mr. Cheung in opposition to the application is as follows.

13. In or about October 1982 E. Wah and Mr. Chung Ming Fai (who controlled Aik San and Man Freshing) were having liquidity problems and endeavouring to negotiate ways and means of selling or retaining on the most favourable terms their interests, inter alia, in a number of joint ventures. In about mid December 1982, according to Mr. Cheung, a meeting was held at which he and Mr. Chung Ming Fai attended together with representatives of Wayson and Sun King Fung. Mr. Cheung affirms that at that meeting Wayson and Sun King Fung offered to purchase the shares of E. Wah and Man Freshing in the Borrower for a nominal consideration. At that stage E. Wah and Man Freshing held out for a price of $4-5,000,000. At the end of December 1982 a similar offer was made on behalf of Wayson and Sun King Fung but this time the offer was to purchase the shares for a nominal consideration of $1. Again E. Wah and Man Freshing refused the offer.

14. However, according to Mr. Cheung, there was a subsequent meeting on or about the 3rd or 5th of January 1983 at the office of Manufacturers Hanover Trust Company ("MHT") who was the Lead Manager and Agent constituted under the Debenture Agreement and who was responsible for $55,000,000 out of the $250,000,000 financial facility provided for under that Agreement. The meeting was concerned with the affairs of another joint venture. There was no representative of Wayson or Sun Hung Kai present but, in addition to Mr. Cheung and Mr. Chung Ming Fai, the meeting was attended by a representative of Sun King Fung and by a Mr. Johnson Fu of MHT. At the conclusion of the meeting, according to Mr. Cheung, Mr. Johnson Fu suggested that in view of the financial situation of E. Wah and Aik San it would be for the mutual benefit of all parties concerned that the sale and purchase of their shares in the Borrower be concluded. Again Mr. Chung Ming Fai as the representative of E. Wah and Man Freshing said they would like to get more for the disposal of their shares.

15. At a meeting of the board of the Borrower on the 10th of January 1983 it was resolved, inter alia, that outstanding and prospective payments due to the Borrower from the shareholders should be contributed to the Borrower on or before the 13th of January 1983. The sum of $1,933,552.29 was specified in the minutes as being severally due from E. Wah and Man Freshing.

16. Mr. Cheung affirmed that according to Mr. Frederick Chung Yin Shu, a representative of Man Freshing who attended the board meeting on the 10th of January, 1983, Mr. Chung Yin Shu asked the representatives of Wayson and Sun King Fung at the meeting what their real objective was and received a reply that all they wanted was to purchase the shares of E. Wah and Man Freshing in the Borrower for $1.

17. Accordingly, Mr. Cheung affirmed, a meeting was convened by him and held on the 13th of January 1983 at 10 a.m. which was attended by Mr. Cheung and Mr. Chung Ming Fai on behalf of E. Wah and Man Freshing respectively and by Mr. Raymond Kwok and Mr. Thomas Kwok on behalf of Sun Hung Kai and Wayson and by Mr. Fong Pak Wo on behalf of Sun King Fung. At that meeting, according to Mr. Cheung, after Mr. Chung Ming Fai had stated that E. Wah and Man Freshing would not make any contribution as shareholders to finance the Borrower, it was agreed on behalf of E. Wah and Man Freshing that their entire shareholdings in the company "....... together with all obligations in relation to the development of" the Borrower's land would be sold to Wayson and Sun King Fung for $1.

18. Mr. Cheung alleges that at the conclusion of the agreement the respective representatives shook hands on the agreement and left the meeting. He further affirms that it was agreed that Messrs. Woo, Kwan, Lee & Lo, the solicitors of Wayson and Sun King Fung, should be instructed to work out the details and draft the Agreement to implement the agreement arrived at between the parties at the meeting. Mr. Cheung further affirmed that on or about the 13th of January 1983 E. Wah and Man Freshing informed their own solicitors Messrs. Deacons, that the agreement had been made and that E. Wah and Man Freshing would pass on to Messrs. Deacons a copy of the settlement document then being prepared by Messrs. Woo, Kwan, Lee & Lo, for their comments and advice.

19. In support of his evidence Mr. Cheung exhibited an open letter dated the 18th January 1983 addressed by Messrs. Woo, Kwan, Lee & Lo to Man Freshing enclosing what is described as a first draft of the Agreement relating to the Borrower and inviting comments and approval.

20. Suffice it to say that the first draft is clearly, on the face of it, intended to implement the transfer of the shares of E. Wah and Man Freshing in the Borrower to Wayson and Sun King Fung or their subsidiary companies in the proportion of 60% to Wayson, (or its wholly-owned subsidiary) and 40% to Sun King Fung (or its wholly-owned subsidiary). The agreement is drafted on the basis that there is an overall liability of E. Wah and Man Freshing to the Borrower which is to be assumed by the purchasers. The draft agreement is expressed to be conditional upon the release of inter alia Mr. Cheung, E. Wah, Mr. Chung Ming Fai and Aik San from all liabilities under the Guarantee and the giving of written consent by the Lenders to the transaction within three months. The draft Agreement further contains a provision in clause 3(b) obliging the parties to use their best endeavours to obtain the necessary approvals and consents and obliging Wayson and Sun King Fung to negotiate with the Lenders and offer them security in substitution for that given by E. Wah, Man Freshing, Mr. Chung and Chung Ming Fai under the Guarantee. Recital (6) in the draft agreement recites that E. Wah and Man Freshing have agreed to sell their shares to the purchasers subject to the terms of the Agreement.

21. Mr. Cheung exhibited to his affidavit further letters from solicitors. One was a letter dated the 22nd January 1983 addressed to Messrs. Woo, Kwan, Lee & Lo by Messrs. Deacons confirming that Mr. Jonathan Cheung of Messrs. Deacons had received from E. Wah and Man Freshing the draft agreement referred to above and that in accordance with an agreement made by Mr. Jonathan Cheung with Mrs. Susana Chow of Messrs. Woo, Kwan, Lee & Lo, Messrs. Deacons would be letting them have their comments as soon as possible.

22. The next letter is dated the 24th January 1983 from Messrs. Woo, Kwan, Lee & Lo enclosing a second draft of the Agreement incorporating amendments evidently suggested by Wayson for the consideration of E. Wah and Man Freshing. This letter confirms that a copy of the draft Agreement has been sent to Mr. Jonathan Cheung of Messrs. Deacons. There follows a letter dated the 2nd February 1983 from Messrs. Deacons to Mrs. Susana Chow of Messrs. Woo, Kwan, Lee & Lo in which Messrs. Deacons raised various points on the draft Agreement, with particular reference to the crystallisation of the obligations and liabilities of their clients at the date of the signing of the Agreement and referred to certain minor amendments which they say their clients would like to make to the Agreement. A reminder, calling for comments on the letter of the 2nd of February was sent to Mrs. Susana Chow on the 9th of February 1983 by Messrs. Deacons.

23. In the meantime, according to Mr. Cheung, on the 2nd of February 1983 Sun Hung Kai Real Estate Agency Limited, who had become the project manager for the Borrower on the 15th of November 1982, sent E. Wah a copy of a letter dated 31st of January 1983 from the District Land Office at Tsuen Wan indicating that Government was demanding no less than $129,515,000 in one lump sum as the premium and administration Fee for a regrant in respect of the Borrower's site to permit a change of user to residential and commercial development. Mr. Cheung exhibits a copy of the letter to his affirmation. Mr. Cheung affirms that on the 22nd of February 1983 Mrs. Susana Chow of Messrs. Woo, Kwan, Lee & Lo informed Mr. Jonathan Cheung of Messrs. Deacons by telephone that she had had no written instructions from her clients since receipt of Messrs. Deacons' letter dated the 9th February 1983. She also said, according to Mr. Cheung, that in view of the substantial amount of the premium in respect of the modification of the permitted user of the Borrower's site her clients were reconsidering the deal and she would inform Mesars. Deacons of any new developments.

24. The rest of Mr. Cheung's first affirmation makes it clear that from now onwards, if there ever was any concluded agreement, as he affirms, Wayson and Sun King Fung had decided to resile from it Mr. Cheung exhibits various documents which thereafter indicate the circumstances which led to the execution of the Deed of Assignment and Novation dated the 18th of April 1983 under which Bangy and Well Secured Limited succeeded to the interest of the Lenders under the Debenture Agreement and the security documents including the Guarantee. Mr. Cheung exhibits, inter alia, the Report and Circular Resolution dated the 19th of March 1983 signed by Mr. Raymond Kwok foreshadowing the subsequent Deed of Assignment and Novation and indicating that Bangy and Well Secured contemplating taking over the interest and liabilities of the Lenders under the Debenture Agreement and ancillary instruments with a view to giving the Borrower a breathing space until the 30th of June, 1983. In practical terms this meant giving E. Wah and Man Freshing the defaulting shareholders of the Borrower a limited breathing space.

25. As Mr. Ching for the Plaintiff submitted, there is much in the subsequent evidence of Mr. Cheung which is arguably inconsistent with the existence of a binding agreement having been made on the 13th of January 1983 as alleged by him. For example it is clear from the minutes of the meetings of the board of the Borrower on the 8th April and on the 15th April 1983 that the directors representing E. Wah and Man Freshing at those meetings said that the companies they represented would not be able to make the payments due from them to the Borrower and said that they wished to consult their solicitors before making any comments regarding the first Deed of Assignment.

26. Furthermore it was not until as late as the 21st of July 1983, after demands had been made for payment under the Guarantee that Messrs. Deacons wrote to the solicitors acting for Bangy informing them that they were instructed that there had been a binding agreement made on the 13th January 1983. Also there were meetings and discussions in July in an attempt to arrive at an overall settlement of six joint venture projects, including the project which this action is concerned.

27. Nevertheless, Mr. Cheung has set out in his affirmations a very full and particularised version of the facts in this case. It is well documented and he tells his story warts and all. For understandable reasons there is no evidence to contradict the evidence of Mr. Cheung. Although, as I have indicated above, there are a number of matters which support Mr. Ching's contention that there could not have been any binding oral agreement as alleged by Mr. Chung, there are nevertheless a number of matters, particularly solicitors' letters, which strongly support his version of the events on the 13th of January 1983. There are the draft agreements which were passed between the solicitors in the course of open and unqualified correspondence followed by the abrupt withdrawal of Wayson and Sun King Fung which their own solicitor admitted was the result of the demand for a premium of upwards of $129,000,000 by Government for the change of user of the Borrower's site.

28. In my judgment the evidence of Mr. Cheung, well documented as it is, is not to be treated as attempting to raise a shadowy or sham defence but as prima facie reliable evidence of an oral agreement made on the 13th of January 1983 between the representatives of the two pairs of companies whereby the non-defaulting companies were agreeing to purchase the rights and obligations of the defaulting companies as shareholders of the Borrower and to assume their liabilities in that capacity, including the liabilities of the defaulting companies under the Guarantee. At the very least the evidence of Mr. Cheung raises a triable issue of fact regarding the existence or otherwise of a conclusive agreement between the relevant parties, followed by the shaking of hands.

29. Mr. Oswald Cheung admitted that he might well have difficulties in establishing the precise terms of the oral agreement allegedly made between the parties on the 13th of January 1983 but I accept his contention that, notwithstanding the complexity of the machinery established by the Debenture Agreement and the security documents there is at least an arguable case for the proposition that the agreement arrived at between the respective parties on the 13th of January 1983 was in substance a simple one and that the formal Agreements which the solicitors were instructed to settle were mere machinery. After all Eda had contrived to assign its interests and liabilities to Sun King Fung at an earlier stage and the Lenders had consented to the transaction on appropriate terms.

30. The apparent necessity for the consent of the Lenders to the alleged oral agreement clearly gives rise to difficulties. However, in my judgment, there is just sufficient in this case to justify giving leave to defend. Firstly Mr. Oswald Cheung is, in my judgment, entitled to rely on the evidence of Mr. Cheung to the effect that Mr. Johnson Fu, the representative of MHT, was actively encouraging the non-defaulting companies to buy out the defaulting companies when he discussed the future of the project on or about the 3rd or the 5th of January 1983, only a few days before the making of the alleged oral agreement. I accept that there was no evidence regarding the scope of Mr. Johnson Fu's authority but, in my judgment, this is a matter which could and should be investigated at a trial.

31. Again, in my judgment, there is an arguable case for Mr. Cheung's contention that even if the consent of the Lenders was requisite to implement the alleged oral agreement of the 13th January, 1983, the situation that now pertains is that Bangy, which has succeeded to the appropriate share of the Lenders' interest under the Guarantee, is no more than the agent or alter ego of Sun Hung Kai its principal company, as is Wayson.

32. I accept that, as Mr. Ching argued on behalf of Bangy, the general rule to be applied by the courts in accordance with Salomon v. Salomon & Co. Ltd. [1897] A.C. 22 (H.L.), is that the ordinary rules of company law are applicable to members of a group of companies and in relation to transactions between them and with other persons as though no special relationship existed : see Pennington at page 650; e.f. the conclusion at page 137 of Gower to the following effect :-

"3. In general the courts regard themselves as precluded by Salomon's case from treating a company as the "alias, agent, trustee or nominee" of its members, and this is so whether they are interpreting a statute or dealing with judge-made law."

33. I also agree that, apart from statue the situations in which the courts have been more inclined to lift or pierce the corporate veil have been those where the revenue has been involved or where a group of companies has been regarded as one entity for purposes of awarding compensation for disturbance in the case of the compulsory purchase of land : see for example Firestone Tyre & Rubber Co. v. Lewellin (1957) 1 W.L.R. 464 (H.L.) (Revenue) and Smith, Stone & Knight v. Birmingham Corporation (1939) 4 All E.R. 116 and D.H.N. Ltd. v. Tower Hamlets (1976) 1 W.L.R. 852 (C.A.) (Compulsory Purchase).

34. However the courts have undoubtedly made inroads into the principle of Salomon v. Salomon and the authorities cited in both Pennington and Gower indicate clearly that on occasions the courts will imply that a company has been acting as an agent or alter ego of its shareholder or shareholders. They are more disposed to do so where the controlling shareholder is another company and not an individual but the law on this difficult subject is clearly unsettled : see Pennington at page 51 and Gower at page 137. For my part I do not consider that I have heard sufficiently full argument on the application or otherwise of the Salomon v. Salomon principle in the present case to justify my concluding that a clear issue has been raised and fully argued in accordance with the prinsiples enunciated by Robert Goff L.J. in European Bank v. Punjab Bank (No.2) (1983) 1 W.L.R. 643 (C.A.) at page 654 B - E in relation to the practice under Order 14.

35. Furthermore there being a clear issue of fact raised by the evidence of Mr. Cheung regarding the alleged oral agreement of the 13th of January 1983 whereby it is contended by the Defendants that the non-defaulting shareholders in the Borrower or their nominees were to step into the shoes of the defaulting shareholders, I consider that for the purposes of Order 14 where an arguable defence and not an unanswerable defence is required to be raised by a defendant, the Defendants have done sufficient in the present case to justify a trial.

36. As Mr. Oswald Cheung himself accepted, there are clearly difficulties in the way of the Defendants in defending this action but a defence which I regard as genuine has manifested itself since the 6th of October 1983 when Mr. Cheung filed his first very full affirmation. The defence has to be considered against the fabric of a complicated background of written instruments and having fully understood, with the able assistance of leading counsel on both sides, the issues raised by the defence, both as to fact and law I consider that the legal implications and issues raised by the defence are difficult and unsuitable for decision under Order 14.

37. Accordingly having due regard to the warning recently issued by the English Court of Appeal in J. Heyes v. Lord Derby reported in the "Times" of the 19th of January 1984 I granted the Defendants unconditional leave to defend.

38. I add that I have not embarked on detailed consideration of a number of helpful arguments advanced on both sides regarding the scope of "other reasons" for the purposes of Order 14 because my primary reasons for granting unconditional leave in this case are as stated above. However I conclude by emphasising that I do not regard the observations of Cairns L.J. in Bank Fur Gemeinwirtschaft Aktiengesellschaft v. City of London Garages Ltd. (1971) 1 W.L.R. 149 at page 158 F - H as being or intended to be exhaustive regarding the nature of "other reasons" for the purposes of Order 14.

Representation:

Mr. Charles Ching Q.C. with Mr. Robert Ribeiro instructed by Messrs. Johnson, Stokes & Master for the Plaintiff.

Mr. Oswald Cheung Q.C. with Mr. Patrick Fung instructed by Messrs. Oscar Lai & Ho for the Defendants.