Elscint (Asia-pacific) Ltd v. Commercial Bank of Korea Ltd

1994, No. CL-7

----------------------

H E A D N O T E

----------------------

The Plaintiff claimed for payment under a letter of credit – the defendant was a bank incorporated in Korea but not registered under the Companies Ordinance – it had a representative office in Hong Kong – the write was served at this office – the defendant applied to set aside the service of the writ.

The defendant’s representative office only carried on promotional activities and no banking facilities – another subsidiary of the defendant which was registered in Hong Kong provided banking facilities at the same office – some common officers.

Definition of “place of business” under Section 338 and 341 of the Companies Ordinance – amended in 1984 to exclude “a place not used by the company to transact any business which creates legal obligation” – different from UK provision and English cases not strictly applicable.

Effect to be given to the purpose and intention of the amendment – a broad common sense approach should be adopted – necessary to examine the main activities of the office and not each and every activity to see whether such activities create legal obligation – if the main activities of the office do not create legal obligation, it is excluded from s.338 and 341 – National Bank of Canada v. The Commercial Bank of Korea Limited, unreported, CL-23 of 1992 not followed.

Activities at the representative office purely promotional – not a place of business in Hong Kong within the definition in s.338 and 341 – the writ could not be validly served at that office – service of the writ set aside.

1994, No. CL-7

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

COMMERCIAL LIST

---------------------

BETWEEN

----------------------

Coram: Hon. Patrick Chan, J. in Chambers

Dates of hearing : 31^st March 1994

Date of handing down decision : 22^nd April 1994

-------------------------

D E C I S I O N

-------------------------

1. This is an application by the defendant for an order declaring that the writ of summons had not been validly served on it.

2. The plaintiff claims against the defendant for payment under an irrevocable letter of credit.  The writ was served on the defendant at an office at 4004 Jardine House, One Connaught Place.  The defendant is a bank incorporated in Korea.  It has not been registered in Hong Kong under the provisions of the Companies Ordinance, Cap. 32.  The writ was served pursuant to s.338 of the Ordinance which permits service of court documents on a foreign company at its place of business in Hong Kong.  It is alleged that the defendant had no place of business in Hong Kong and therefore the service of the writ at the said office was not valid.  The present application turns on the interpretation of “place of business” in s.338 and s.341 of the Ordinance.

3. It is not disputed that the office in question was a well-furnished office of about 2,500 sq.ft. in area.  It was a place where Korea Commercial Finance Limited carried on business but also bore a signboard stating that it was the representative office of the defendant in Hong Kong.  The Korea Commercial Finance Limited was not set up in the traditional banking institution manner and there was no teller counter and no advertising brochure displayed.  An investigator employed by the plaintiff attended the office and asked to meet someone concerning banking between London, Hong Kong and Seoul.  He was met by a Mr Young-Ki Yoon who was the manager of Korea Commercial Finance Limited and also the assistant representative of the defendant.  He said that he was told by Mr Yoon that the office was the representative office of the defendant in Hong Kong, that the defendant dealt mainly in commercial banking and that the majority of its clients were in the import and export business.  It was alleged by the plaintiff that the investigator was also informed that the Hong Kong representative office offered general banking facilities such as deposits and transfer of monies.  He asked a female staff whether he could transfer money through this office to a branch of the defendant in Korea and was told that he could deposit the money at the Hong Kong office or an account with the Citibank which was in the name of Korea Commercial Finance Limited.  This was disputed by Mr Yoon.  It was however accepted that the investigator requested for and was provided with an annual report of the defendant for the year 1991.  The plaintiff also exhibited certain annual report of the Commissioner of Banking setting out the limitations on the activities of foreign banks opening representative offices in Hong Kong and that the defendant had indeed a representative office here.

4. Mr Dae-Jin Kim who was a deputy managing director of the defendant was also the deputy representative in Hong Kong.  In his affirmation, he said that the defendant had no bank account in Hong Kong, had no teller and did not offer any banking facilities here or accept any cash over the counter.  He further said that the defendant did not pay any tax in Hong Kong.  All the business of the defendant in Hong Kong was in fact conducted by Korea Commercial Finance Limited.  The defendant had three officers and a few staff in this representative office.  Although Mr Young-Ki Yoon was an assistant representative of the defendant in Hong Kong, he was also the manager of Korea Commercial Finance Limited.  He said that the activities of the defendant in Hong Kong were purely promotional and of a non-business nature.  His colleague Mr Chong Ho One explained in his affirmation that the defendant’s activities here included researches, promotion and making contacts with foreign banks in Hong Kong on behalf of the defendant, participating in meetings and seminars concerning international banking and the dissemination of information about foreign banks and activities that might be useful to the defendant in future business dealings outside Hong Kong.  It was said that the Korean Foreign Exchange Management Regulations imposed restrictions on the operation of Korean banks so that the prior approval of the Minister of Finance would be required for setting up an overseas branch.  The defendant had obtained approval to open only a representative office in Hong Kong but not to engage in banking business and that was exactly what was done in this case.  Failure to comply with such regulations would incur criminal liability in Korea.  That was why the representative office did not carry on any banking business in Hong Kong.

5. During the arguments, counsel for the plaintiff indicated that if necessary he would make an application, which he later did, under O.12, r.8(5) for directions for the determination of a preliminary issue as to whether on the day of service of the writ on the defendant, it was carrying on business in Hong Kong.  I accept that the court has the power to give directions in relation to such a determination under O.12, r.8(5) but this is rarely done.  In the present case, I do not think it is appropriate to do so.  The evidence adduced from both sides was by and large similar and undisputed.  It would not be too difficult to verify the fact that the defendant had not paid tax and had not obtained any business registration.  Furthermore, there is no evidence before me of any bank account of the defendant or any other types of activities conducted by the defendant in Hong Kong.  It is unlikely that the defendant would have concealed any bank account here if it really had or other types of activities if they were actually conducted in Hong Kong.  The only matter which was in serious dispute was what was alleged to have been said by Mr Yoon to the plaintiff’s investigator as to whether the defendant had, through the representative office in Hong Kong, offered any banking facilities.  It is important to note that the defendant had registered a representative office with the Commissioner for Banking and had a wholly own subsidiary, Korea Commercial Finance Limited to conduct banking business in Hong Kong.  In these circumstances, I do not think it is worthwhile to make any order for directions or to have a trial of a preliminary issue.  I would exercise my discretion and refuse the application.

6. Counsel for the defendant submitted that the onus of proof was on the plaintiff to show that the defendant had a place of business in Hong Kong at the material time, i.e., the date of service of the writ.  He submitted that in the normal case, the civil standard would suffice.  However, in the present case, the allegation of the plaintiff that the defendant had carried on business in Hong Kong would imply that the defendant had committed a criminal offence under s.340 of the Companies Ordinance or against the Korean Foreign Exchange Management Regulations.  That being the case, counsel submitted, a higher standard of proof was required and that the proof to be adduced by the plaintiff must be weighty.  With respect, I do not agree.  I am asked to decide whether the defendant falls within s.338 and s.341 of the Companies Ordinance, i.e., whether it had at the material time a place of business in Hong Kong for the purpose of service.  Having a place of business within the meaning of these two sections may not necessarily mean that the defendant must have committed an offence under Hong Kong law or Korean law.  I do not think the higher standard of proof is applicable in the interpretation of these two sections of the Companies Ordinance.

7. Counsel for the plaintiff submitted that the present case was similar to, if not the same as, the case of National Bank of Canada v. The Commercial Bank of Korea Limited, unreported, CL-23 of 1992.  In that case, the learned Deputy Judge held that the defendant there, which was the defendant in the present case, had a place of business.  Counsel argued that the factual situation was the same and that the learned judge was right in so holding.  Furthermore, counsel submitted that even if the defendant was only carrying out promotion activities in Hong Kong, if a customer who had received introduction from the staff in the Hong Kong representative office subsequently, in say six months’ time, entered into contractual relationshipswith the defendant in Seoul, that would be transacting business which creates legal obligations.  It was argued that what the staff of the defendant’s representative office were doing in Hong Kong could be regarded as ultimately resulting in business creating legal obligations.  If that was the correct analysis, then the defendant no doubt fell within the ambit of s.341.

8. The defendant submitted that there was no evidence showing what the defendant was doing in Hong Kong amounted to transacting business which would create legal obligations.  Counsel argued that it was Korea Commercial Finance Limited who was doing business in Hong Kong but was not the defendant.  Counsel submitted that the case of National Bank of Canada v. The Commercial Bank of Korea Limited was decided on different evidence and different service at a different time.  He said that the decision was not binding and in any event was wrong.  He further submitted that the definition of “place of business” in s.341 of the Companies Ordinance was expressly amended in 1984 to the present form.  Prior to that, the definition was the same as that in England. Counsel submitted that the learned judge in the previous case had adopted a wrong approach.  The English authorities dealt with a different definition and could not be relied on in the interpretation of the Hong Kong section.

9. Section 338 of the Companies Ordinance permits service of court documents on a foreign company if it has established a place of business in Hong Kong.  Prior to 1984, “place of business” in s.341 of the Companies Ordinance was the same as in s.415 of the Companies Act 1948. It was defined to include a share transfer or share registration office.  This was dealt with by the Court of Appeal in Actiesselskabet Dampskib”Hercules” v. Grand Trunk Pacific Railway Co.[1912]1 K.B.222.  Buckley L.J. said at pp.227 to 228 :

“We have only to see whether the corporation is ‘here’; if it is, it can be served. There are authorities as to the circumstances in which a foreign company can and cannot be  said to be ‘here’; the best test is to ascertain whether the business is carried on here and at a defined place.  In the present case the company has a paramount, and also a subsidiary, object: its paramount object is to make and run a railway in Canada, to do which a great many things must first happen; it has a subsidiary object, namely, the raising of money to carry out its paramount object …  The raising of this loan capital is part of the company’s business, and it is done here by a London Committee constituted of the directors resident in England.”

10. The Court of Appeal in South India Shipping Corporation v. Bank of Korea [1985]1 W.L.R.585 also dealt with this issue.  Ackner L.J. said at p.592 :

“In my judgment the facts in this appeal are clear.  The defendant bank is an import-export bank, not a High Street bank. It has both premises and staff within the jurisdiction.  It conducts external relation with other banks and financial institutions.  It carries out preliminary work in relation to granting or obtaining loans. It seeks to give publicity to the foreign bank and encourage trade between Korea and the United Kingdom, and it consults with other banks and financial institutions on the usual operating matters.  It has therefore established a place of business within Great Britain and it matters not that it does not conclude within the jurisdiction any banking transactions or have banking dealings with the general public as opposed to other banks or financial institutions.”

11. It seems that in dealing the phrase “place of business” in s.415 of the Companies Act 1948 (our previous s.341 of the Companies Ordinance), the authorities suggest that the court should look not only at the paramount but also the subsidiary object of the foreign company in conducting what it did within the jurisdiction.  It also appears that preliminary work and activities seeking to give publicity to the foreign company would fall within the ambit of that section.  The establishment of an office within the jurisdiction where activities connected with its subsidiary object and incidental to the main business are conducted would be sufficient to constitute the office a “place of business” within that provision.

12. In 1984, s.341 of Companies Ordinance was amended so far as the meaning of “place of business” was concerned.  It now reads as follows :

“’place of business’ includes a share transfer or share registration office and any place used for the manufacture or warehousing of any goods, but does not include a place not used by the company to transact any business which creates legal obligation.”

13. The effect of that change was dealt with by the learned Judge in the case of National Bank of Canada v. The Commercial Bank of Korea Limited, unreported, CL-23 of 1992.  In fact it involved that same defendant as in the present case.  I must make clear at the outset that there is no question of issue estoppel or res judicata since the parties in the two actions are different and the facts, although quite similar, are not necessarily exactly the same.  I am simply referring to part of that decision by the learned judge in considering the proper interpretation I should give to the amended section.  The learned judge in that case when dealing with the same issue said at p.3 :

“There are, it seems, no Hong Kong cases in point.  English cases on the interpretation of the phrase ‘establish a place of business’ were cited to me, and those cases are useful.  The cases of greatest significance are the  South India case, and Cleveland Museum of Art v. Capricorn Art International S.A.& anor [1991] 2 Lloyds 166.  However, the Hong Kong legislation in this area goes further than the corresponding English provisions by defining ‘place of business’, in s.341.  The definition is not an all-inclusive definition, but it is in two parts: that which is included, and that which is not.  The Defendant takes encouragement from that which is not included, namely, a ‘place not used by the company to transact any business which creates legal obligation’.  The Defendant argues that its activities in Hong Kong create no legal obligations.

The phrase ‘any business which creates legal obligations’ is problematical.  It may appear to imply that there is one class of business which creates legal obligations, and another class of business which does not – but if that were the intention, it would create a misnomer, because a business (in the commercial sense) which did not create legal obligations would be no business at all.  Perhaps the intention was to distinguish ‘business’ in its sense of ‘trade, commercial transactions or engagements’ (taken from the Shorter Oxford Dictionary) from its more general senses of  ‘activity’, ‘concern’ or ’matter’.  In the context, one is obliged to accept the word ‘business’ in its commercial sense, and so the words ‘which creates legal obligations’ do not really add anything which is not already inherent in the word ‘business’.

In the light of that interpretation, the second limb of the definition of ‘place of business’ offers not much more assistance than is already available from the English cases.  However, the definition would be successful, in my view, in excluding from ‘place of business’ such activities as the provision of a vacation home for staff holidays abroad, or the holding of a cocktail party for a visiting company dignitary. (In both examples, I assume the absence of any other activity within the jurisdiction.)

In my view, the Defendant in the present case had an undisguisedly commercial purpose in pursuing its activities in Hong Kong.  It did not have a merely passive presence, but was aggressively promotional, taking close to equal billing with its subsidiary on the business signboard and on the namecard of its former Chief Representative.  It has maintained a fixed address and office for some years.  Some, at least, of its activities must have involved it in the creation of contractual or other legal obligations, as when, for example, it participated in international seminars for the furtherance of the Defendant’s banking business.

Accordingly, I find that the defendant is an oversea company and that it has been properly served within this jurisdiction.”

14. It seems that the learned judge was of the view that the words “which creates legal obligations” were mere surplusage and that the meaning of  “place of business” was exactly the same as it was without the amendment in 1984.  With respect, I do not agree.  There must be a purpose for the amendment and the court should give effect to it.  The amendment has added an inclusive as well as an exclusive part to the meaning of “place of business”. In my view, it is intended to include places at which certain types of activities are carried on and to exclude places at which some other types of activities are conducted. Places which are excluded are those not used by the company to transact business which creates legal obligations. “Business”, as the learned judge quite rightly pointed out, may refer in the narrow sense to commercial transactions or in the more general sense to activities. While business in the commercial sense would almost inevitably result in the creation of legal obligations, business in the general sense may not always have such effect. It is when “business” is interpreted in the general sense that there can be business which creates legal obligations and business which does not. Further, not every foreign company is a commercial enterprise and conducts business transactions. If “business” in s.341 is to be interpreted in the commercial sense, then a non-commercial foreign company having an office in Hong Kong would, whether or not its activities would create legal obligations, fall outside that provision and it would follow that the company cannot be validly served here. I do not think this is correct. In my view, therefore, in order to give effect to the intention of the amendment, “business” should be interpreted in the general sense. In considering the meaning of “place of business”, the purpose and intention of the amendment cannot, with respect, be ignored. I am of the view that what is intended to be excluded from the phrase “place of business” are places that are not used to conduct activities which create legal obligations. A place which is used to carry out activities which do not create legal obligations would not fall within the definition.

15. In deciding whether a foreign company’s office in Hong Kong can be regarded as a place of business within s.341, I think a broad common sense approach should be adopted. If one is to examine each and every of its activities, it would mean that almost all such offices would fall within the section. For, the running of an office inevitably involves transactions such as renting premises, employing staff or acquiring stationery. All these would create legal obligations. For the purpose of s.341, I think it is necessary to consider the office’s main activities here in the light of the company’s paramount and subsidiary objects and see whether such activities create legal obligations. If they do not, the office is excluded from s.341.

16. The activities of the defendant’s representative office are in the nature of promotion or public relations. The object of such activities is certainly to promote the main banking business of the defendant and hence that is a purpose subsidiary to the defendant’s main object of conducting banking business. The representative office may, therefore, fall within the meaning of “place of business” within the previous s.341 of the Companies Ordinance and the criterion adopted by the English authorities. However, under the amended s.341, I do not think it does.

17. The promotional activities are no doubt aimed at promoting the image of the defendant in Hong Kong and carried out with a view of getting more banking business for the defendant. However, the fact that a potential customer, after having talked to a staff of the defendant’s representative office in Hong Kong, may be persuaded to enter into business relationship (in the commercial sense) with the defendant in Seoul or to receive banking facilities from the defendant does not, in my view, affect the nature of its activities in Hong Kong and change them into activities which create legal obligations if they do not. The representative office of the defendant in Hong Kong hand out promotional materials, give interviews or even persuade potential customers to do business with the defendant. But such promotion, interview or persuasion, do not in themselves create any legal obligations between the people receiving the promotional materials, interviews and persuasion and the Hong Kong representative office. The possibility that the defendant in Seoul may at a later stage do business with these potential customers should not change the situation. These people may or may not subsequently bank with the defendant in Seoul.

18. For the purpose of s.338 and s.341 of the Companies Ordinance, it is the activities in Hong Kong which are to be looked at in deciding whether the defendant through its representative office here is doing business which creates legal obligations. Assume, therefore, that there is a promotion campaign in Hong Kong and this is followed by a interview given by the representative to a person making enquiries and the person then opens and account with the defendant in Seoul or actually with Korea Commercial Finance Limited (which is a wholly owned subsidiary of the defendant but a separate entity). The promotion, interview and persuasion are no doubt instrumental to the opening of the bank account at a later stage, whether with the defendant in Seoul or with this Korea Commercial Finance Limited in Hong Kong. But can it really be said that such promotion, interview and persuasion can be regarded as creating any legal obligations? In my view, it cannot. If it were the case, would such activities still be regarded as creating legal obligations if the person who had been interviewed decided not to bank with the defendant? If so, what sort of legal obligations can they be? Would such activities be regarded as creating legal obligations if he only decided to do banking business with the defendant later, say in a few years time?

19. In conclusion, I am of the opinion that what the representative office in Hong Kong is doing does not constitute the office in Jardine House a “place of business” within the meaning as specified in s.338 and s.341. It is not such a place. It follows that the writ cannot be served at that office. I would therefore declare that the service was invalid and set it aside. I would also make an order nisi for costs in favour of the defendant.

Mr William Stone, inst’d by Messrs Stephenson Harwood & Co., for Plaintiff

Mr Russell Coleman, inst’d by Messrs Victor Chu & Co., Defendant