Novatel Communications (Far East) Ltd. v. Canadian Imperial Bank of Commerce and Horst Julius Pudwill (Third Party)
Read the full judgment text of HCA 8052/1999 on BabelCite. This High Court CFI judgment was delivered on 21 October 1999.
1. The Plaintiff has brought this application under Order 14 for final judgment against the Defendant. I shall set out an overview of the arguments before considering the evidence upon which they are based.
Cites 2 cases
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HCA008052/1999 HCA 8052/1999 ______________ H E A D N O T E ______________ Summary judgment - money had and received - whether borrowing company bound by agreement for loan to discharge liability of another company to lender - whether transaction for legitimate corporate purposes of the Plaintiff - whether actual authority from de facto unanimous approval of the shareholders HCA 8052/1999 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE ACTION NO. 8052 OF 1999 ____________
____________ Coram: The Hon. Mr. Justice Ribeiro in Chambers Date of Hearing: 13 October 1999 Date of Judgment: 21 October 1999 ______________ J U D G M E N T ______________ 1. The Plaintiff has brought this application under Order 14 for final judgment against the Defendant. I shall set out an overview of the arguments before considering the evidence upon which they are based. An overview of the parties' arguments 2. The issues between the parties arise in two major stages. At stage one, the Plaintiff alleges that it made a series of payments to the Defendant bank between 16 December 1993 and 31 October 1996 totalling $4,387,160.24, intended as quarterly repayment instalments and interest on a term loan. The Plaintiff says that over two years after having completed the repayments, it discovered that the proceeds of the loan in question had never actually been received by it. It alleges that the sums paid are recoverable as money had and received on the basis that there has been a total failure of consideration for such payments. 3. The Defendant's defence at this first stage of the argument is that the payments were made pursuant to an agreement reached between the parties, such agreement having been made on the Plaintiff's behalf by a Mr. Horst Julius Pudwill ("Mr. Pudwill"), who has been made a Third Party in the proceedings. The Defendant contends that the sums were paid without any misapprehension on the Plaintiff's part as to the purpose of the payments and that they were amply supported by consideration. The Defendant contends that in any event, in the context of Order 14, whether such agreement was made and whether it was supported by consideration are all matters raising triable issues. 4. Stage two of the argument runs as follows. The Plaintiff submits that even if one assumes in the Defendant's favour that Mr. Pudwill did enter into an agreement with the Defendant for the Plaintiff to make the payments for the purposes disclosed in the evidence, such an agreement was plainly beyond his authority as a director and could not bind the Plaintiff. Accordingly, no valid agreement can be relied on by the Defendant as a justification for retaining the amounts paid. 5. The Plaintiff relies on the principles laid down in Rolled Steel Products (Holdings) Ltd. v. British Steel Corporation [1986] 1 Ch. 246 in this connection. Slade L.J. (at pp. 295-6) summarised the principles relevant for present purposes as follows:-
6. Slade L.J. also dealt (at p. 296) with ratification by the shareholders as follows:-
7. Mr. John Bleach S.C., who appears for the Plaintiff, argues that there is no evidence or suggestion by any officer of the Defendant that Mr. Pudwill had actual authority to incur the term loan liability for the relevant purposes. Accordingly, he argues, Mr. Pudwill can only have had ostensible authority, if at all, to act on behalf of the Plaintiff. However, on the evidence (as he puts it in his skeleton argument) "the Defendant was well aware that the 'term loan' was not to be used nor was it ever intended to be used for the benefit of the Plaintiff or for any purpose of the Plaintiff". In other words, "it is absolutely clear that the Defendant knew that this 'loan' was in reality a sham, that it could never have been for the benefit of the Plaintiff and that it was not and could not have been and was never intended to be for the proper purposes of the Plaintiff." Accordingly, the Defendant cannot rely on the ostensible authority of Mr. Pudwill and, on ordinary principles of agency, cannot hold the Plaintiff to any arrangement he allegedly entered into on the Plaintiff's behalf regarding the payments made. 8. The Defendant opposes this second stage argument on several grounds. Mr. Jat Sew Tong, who appears for the Defendant, contends in the first place that the contention that the loan was a sham and known to be so by the Plaintiff represents a departure from the Plaintiff's pleaded case and so cannot form the basis of any summary judgment. 9. Secondly, Mr. Jat argues that on a proper appreciation of the evidence filed, it is at least strongly arguable that Mr. Pudwill's alleged agreement with the Defendant was for the Plaintiff's corporate benefit and not known or believed by the Plaintiff to be otherwise. Accordingly, on the Rolled Steel principles, Mr. Pudwill had ostensible authority to bind, and did bind, the Plaintiff to the arrangement under which the payments were made. 10. Thirdly, even if (which the Defendant denies) the arrangement entered into by Mr. Pudwill on the Plaintiff's behalf was for other than its corporate purposes, it is at least arguable that it was entered into by Mr. Pudwill within the scope of his actual authority, in that this was done with the unanimous consent of all the Plaintiff's shareholders (such a financing arrangement being within the Plaintiff's corporate capacity). 11. Fourthly, Mr. Jat submits that in the circumstances of the present case, the importance of the evidence in the Third Party proceedings against Mr. Pudwill to the Action as a whole is such that in the interests of justice, those Third Party proceedings should be tried at the same time as the Action, providing a cogent "other reason" for trial. Additionally, further evidence on how the Defendant's decision to grant credit facilities to the Plaintiff was reached needs to be investigated before the issue of corporate purpose can be determined. The evidence and stage one 12. It is accepted by Mr. Bleach that a number of triable issues do arise in relation to stage one of the argument. These are issues bearing on the question of whether an agreement on the terms relied upon by the Defendant was ever made. He relies of course on his stage two argument that, given the nature of the agreement set up by the Defendant, any such agreement falls foul of the Rolled Steel principles and so cannot bind the Plaintiff. It is nonetheless necessary to consider the evidence relevant to stage one to enable the stage two arguments to be assessed. 13. The Plaintiff contends that any legal entitlement of the Defendant to retain the payments must rest upon it having previously advanced to the Plaintiff the funds promised under a term loan forming part of a facility agreement made or evidenced by the Defendant's letter dated 6 July 1993, countersigned by the Plaintiff on 9 July 1993 ("the facility agreement"). 14. By the facility agreement, the Defendant promised to make available to the Plaintiff a trade finance facility of up to $25 million ("the trade facility") and a term loan in one drawing of up to $3.9 million ("the term loan"). The purpose of the term loan was stated in the letter to be "to finance the medium term capital requirement of the [Plaintiff] as agreed to between Mr. Horst Pudwill and [the Defendant]". It was repayable by 12 equal quarterly instalments of $325,000 each, the first falling due 3 months after draw down, with interest on the outstanding balance at HIBOR +2.75%, payable in arrears. The security for both the trade facility and the term loan included guarantees to be provided by the Plaintiff's two shareholders, namely, a Digicom Cellular International Co. Ltd. ("Digicom" which Mr. Pudwill controlled as a 72% shareholder) and Mr. Pudwill personally. Part of the security also required hypothecation or a pledge of a $3 million cash deposit made by Mr. Pudwill. Additionally, an undertaking was to be given that shareholders' funds in the Plaintiff were to reach a minimum level of $20 million by the end of the year. 15. By a letter signed on 9 July 1993 by Mr. Pudwill purportedly as Chairman on the Plaintiff's behalf, the Plaintiff requested that the term loan be draw down. It also authorised the Defendant "to apply the proceeds in accordance with the arrangements agreed between your Bank and myself, respectively." In a memo dated 23 August 1993, prepared by Mr. Peter Leung ("Mr. Leung") and Mr P.H. Mak ("Mr. Mak"), two of the Defendant's officers who dealt directly with Mr. Pudwill, they recorded that they understood this to mean that the $3.9 million term loan proceeds and the Plaintiff's instalment repayments should be dealt with in the manner described below. The Defendant naturally relies on this letter and this memo as evidence showing that it is triable whether an agreement of the sort alleged by it came into being. 16. On 16 September 1993, the Defendant sent to the Plaintiff a confirmation in respect of the $3.9 million loan ("the 1st loan confirmation"). This indicated that the term loan was (or was treated as having been) effected on that date. Presumably because the facility agreement provided for repayment of the first instalment and interest three months after draw down, the 1st loan confirmation stated that the $3.9 million loan was to mature three months later, on 16 December 1993, with interest payable for that period at the rate 6.125% p.a., amounting to the sum of $59,555.14. However, the 1st loan confirmation did not disclose how the proceeds of the loan were to be disbursed, stating merely that payment at value date would be made "as per instructions given". 17. It is at the heart of the Plaintiff's case that it never received the $3.9 million in question. Although Mr. Jat advanced the argument (somewhat faintly) that the subsequent credit entries in the Plaintiff's current account arguably constituted receipt of the loan proceeds, I do not think that there is any dispute concerning the fact that no funds representing the proceeds of the term loan were released to the Plaintiff in September 1993. 18. What the Defendant appears to have done was to treat the $3.9 million as having been made available to the Plaintiff by crediting that sum to a special account created for such purpose. That account was referred to as a "cash collateral account" created in the Plaintiff's name but with the funds standing to its credit apparently held as collateral security for the indebtedness to the Defendant of a Hong Kong company called International Consumer Brands Limited ("ICB"). 19. At the end of that first three month period, on 16 December 1993, the Defendant was sent a another loan confirmation ("the 2nd loan confirmation"). This confirmed a fresh loan, this time in the sum of $3,575,000, with a value date of 16 December 1993 and maturing three months later on 16 March 1994. The 2nd loan confirmation specified an interest rate of 6.5% p.a. and that interest in the sum of $57,297.95 was payable over the ensuing three month period. This time, the document stated that payment of the fresh loan at value date was to be made by crediting the Plaintiff's current account and that repayment of that loan at maturity was to be by debiting the same account. 20. It is clear that the Defendant's intention was to replace the original $3.9 million loan confirmed by the 1st loan confirmation with a loan reduced by the sum of the $325,000 instalment payable on 16 December as confirmed by the 2nd loan confirmation. 21. Thus, the resultant bank statement shows that on 16 December 1993, the current account was debited for $3,959,555.14, a sum evidently made up of the original $3.9 million loan amount plus the stipulated interest of $59,555.14. It was then credited with $3,575,000.00 being the fresh loan amount referred to in the 2nd loan confirmation. The effect of this was that on 16 December 1993, the Plaintiff incurred a net debit in the sum of $384,555.14, equivalent to the first repayment instalment ($325,000) plus interest ($59,555.14). The cash collateral account was then debited in the like sum and ICB's loan account credited therewith, reducing pro tanto the amount owing by ICB to the Defendant. 22. By repeating this procedure, ICB's indebtedness to the Defendant was progressively reduced until the whole of the Plaintiff's term loan was paid off. 23. The Plaintiff's claim for money had and received is made in respect of the sums so debited. It complains that since the proceeds of the original $3.9 million term loan had never been received by it (but were apparently held in the cash collateral account), there was no consideration for the repayments made through the subsequent series of net debits to its current account. 24. I should now dispose of Mr. Jat's suggestion that, by such accounting entries, the Plaintiff arguably received the funds. I am unable to accept that argument. In my view, it is not reasonably arguable on the evidence which I have set out above. Such evidence shows that the Plaintiff was never credited with free funds representing the proceeds of the term loan and that the effect of the subsequent entries in its current account was to debit the Plaintiff with each instalment and interest payment in question. 25. I also pause to note in passing that the Plaintiff has decided to proceed on the footing that such debits may be treated as payments to the Defendant rather than unauthorised debits to its account. For present purposes, I shall assume, without deciding, that nothing turns on this. It is also apparent that in alleging that there has been a total failure of consideration in relation to the payments, the Plaintiff is treating the term loan as wholly severable from the trade facility since it is clear from the evidence that such trade facility was in fact heavily used and that there is no question of a failure of consideration in that connection. Again, I shall assume, without deciding, that the term loan is properly treated as so severable. 26. As Mr. Bleach submitted, the Defendant's defence to this restitutionary claim involves a confession and avoidance. Subject to Mr. Jat's argument which I have rejected, the Defendant admits that it treated the term loan proceeds in the way I have described. In other words, the Defendant accepts that the Plaintiff was debited for the instalments and interest that those funds were used, via the mechanisms described, to pay off about 60% of ICB's indebtedness to the Defendant. 27. The central plank of the Defence at stage one is that this entire arrangement was agreed to by Mr. Pudwill acting on the Plaintiff's behalf. The Defendant says that ICB is the wholly-owned subsidiary of International Consumer Brands Inc. ("ICB Inc."), a Delaware corporation in which Mr. Pudwill has an 8.5% shareholding and in which he plays an active role. It alleges that it was Mr. Pudwill who introduced ICB to the Defendant as a customer so that, when ICB defaulted on its debts to the Defendant, Mr. Pudwill felt morally obliged first to help the Defendant maximise its recovery and then to help discharge part of the outstanding indebtedness through the Plaintiff, a company which he controlled absolutely. 28. The Defendant points to an internal memo dated 16 January 1992 by a credit manager referring to ICB's financial problems. It states that the ICB account was referred to the Defendant by Mr. Pudwill and that, as early as January 1992, he was "working closely with the Hong Kong CBC to ensure the Bank's recovery is maximized." 29. Another internal memo, dated 8 January 1993, prepared by Mr. Mak and Mr. Leung to the Defendant's Executive Vice President Asia, recorded as follows: "Mr. Horst Pudwill has agreed to use B & H Electronics (HK) Ltd., one of his private operating vehicles, to obtain a medium term loan of US$600,000 from us. The loan proceeds will be applied to settle up to US$600,000.00 the ICB liability." 30. On 14 April 1993, a memo was apparently sent by one of the Defendant's General Managers, a Mr. Douglas Paterson ("Mr. Paterson"), to Mr. Mak and Mr. Leung, asking for an update on Mr. Pudwill's proposed use of B & H Electronics (HK) Ltd. to arrange a loan to settle a portion of the ICB liability. On the memo, a handwritten note, possibly by Mr. Leung, dated 15 April 1993, stated, inter alia, that "the B&H arrangement is now off and working on a different arrangement to coincide with the financial planning of Pudwill in relation to his NovAtel business." 31. Next in the series exhibited is a memo dated 2 July 1993 from Mr. Paterson to a Ms. Benita McCourt, a Manager, Special Loans. He reports that Mr. Pudwill had bought NovAtel from the Alberta Government and had set up the Plaintiff in Hong Kong for which the Defendant was "setting up a trading line for this entity". The memo continues as follows:-
32. Mr. Mak, who in 1993, was the Defendant's General Manager, Corporate Bank, Hong Kong and China, but now no longer works for the Defendant, has provided a signed but unsworn witness statement annexing and discussing the abovementioned memos. This statement is an exhibit to an affidavit sworn by an officer of the Defendant who has no personal knowledge of events in 1993. 33. Mr. Bleach has invited me to disregard the witness statement as evidence because it has not been sworn. I decline that invitation. In my view, that statement and the documents that it annexes are potentially admissible as documentary hearsay. Moreover, in the context of an Order 14 application, the willingness of a former employee to provide a signed witness statement indicates that he may potentially be available as a witness to give viva voce evidence should the matter proceed to trial. I therefore consider it essential to take into account any potentially relevant evidence that such a witness might give in deciding overall whether the case is appropriate for summary judgment. I would also note that notwithstanding his submission, Mr. Bleach himself referred to that statement and sought to rely on some of its contents for a few of the points he was advancing. 34. Returning to Mr. Mak's witness statement, he states at first hand that Mr. Pudwill introduced ICB to the Defendant, resulting in ICB being granted a trade finance facility of US$3 million, and leading eventually to the Defendant writing off an ICB debt of US$830,551 in September 1992. He also explains at first hand how, as reflected in the memos discussed above, Mr. Pudwill was continuously expressing his willingness, through a company controlled by him, to help the Defendant recover part of the ICB debt. 35. Mr. Mak then explains that in 1993, Mr. Pudwill was in negotiations with the Defendant in relation to his funding requirements for the Plaintiff company. He states, again apparently with personal knowledge, as follows : -
36. The inclusion of the term loan alongside the trade facility was duly reflected as one element of the credit proposal for the Plaintiff prepared by Mr. Mak and Mr. Leung on 23 June 1993. This document was addressed to the Defendant's Executive Vice President Asia. It stated that the purpose of the term loan was "to finance general working capital on term basis" adding in parentheses: "Loan proceeds will be given to CIBC for recovering up to about 60% of the loan losses of" ICB. It said that repayment of the term loan would be by the Plaintiff out of its own resources by instalments and supported by the securities discussed above. The then net worth of the Plaintiff, which had only started business in September 1992, was said to be $3,281,000. It was however projected that its business would rapidly grow. 37. In the section containing the recommendations, the document stated as follows:-
38. Then listed as such considerations, were the following: (i) the prospect of the Plaintiff taking over a lucrative contract, (ii) Mr. Pudwill's proven management skill in other ventures, (iii) Mr. Pudwill's personal guarantee and his fortification thereof with a hypothecated $3 million cash deposit, (iv) Mr. Pudwill's personal wealth, (v) the prospect of enhancing the relationship of the Defendant with the Pudwill group of companies by extending to the Defendant the trade facility at the take-off stage and, the following comment:-
39. These arrangements were evidently approved and the facility agreement covering the trade facility and the term loan on terms already described came into being. 40. Other internal bank documents have also been exhibited which suggest that the Plaintiff's continuing punctual repayments of the term loan instalments over the next three years, progressively reducing the ICB debt, weighed heavily in favour of Mr. Pudwill and of what were called "Pudwill related companies", including the Plaintiff. 41. This is indicated in a memo dated 7 April 1994 from Mr. Paterson, (now designated as General Manager, Credit Risk Management Asia) to the Chief Executive Officer at the Defendant's Head Office, marked for the attention of a Mr. Ian Irving (Executive Vice President, Credit Risk Management). The memo states that the Plaintiff was then enjoying an authorized credit limit of $42.9 million. It also lists four other companies described as "Pudwill related companies" with authorized credits together totalling an additional HK$160 million. The continued repayments are given prominence as evidence of Mr. Pudwill's "character". 42. When the facilities, then totalling HK$27,275,000, came up for renewal, Mr. Mak and Mr. Leung prepared another application dated 16 March 1995. They reported that although the Plaintiff's turnover (from marketing cellular telephones) had substantially increased, it was not proving very profitable. The Plaintiff posted a net profit of $0.6 million for the 6 months ended 31 March 1993 declining to $0.32 million for the 9 months ended 31 December 1993. For 1995, it was anticipated that while turnover would reach $300 million, net profits would be $8 million. The Plaintiff was described as gradually building up its market presence and finances and was said to be involved in a process of restructuring its shareholdings. Some concern as to the Plaintiff's position was expressed but renewal of the facilities was recommended in the following terms:-
43. This application also indicates that the Defendant believed that Mr. Pudwill had assumed a liability to reimburse the Plaintiff for its discharging of the term loan (and hence the ICB debt). Mr. Mak and Mr. Leung reported that:-
44. This was evidently based on the Plaintiff's audited accounts (although these recorded his debt as $4.023 million due at 31 December 1993). As Mr. Jat pointed out, it is not clear whether Mr. Pudwill signed off those accounts as a director, but he might well be expected to have done so. Is this a case for summary judgment? (i) The Plaintiff's stage two case 45. Stage two of the argument turns on whether, on the evidence described, it is arguable that the payments were for the legitimate corporate purposes of the Plaintiff. 46. Mr. Bleach submitted that on such evidence it is clear that the term loan was not for the Plaintiff's proper purposes or in its interests and that the Defendant was fully aware of this. He accused the Defendant of lying about its true purpose when saying, in the facility agreement and elsewhere, that it was to finance the medium term capital requirement of the Plaintiff. He submitted that there is no evidential basis for any argument that the Defendant's provision of trade financing was conditional on or even influenced by the Plaintiff agreeing to pay off part of ICB's debt. He argued that when Mr. Mak's statement is closely examined, he can be seen to have been saying nothing to the contrary. Indeed, no one on the Defendant's behalf was suggesting that there was any linkage between the trade facility and the term loan. According to Mr. Bleach, the evidence shows that it was solely Mr. Pudwill's decision, allegedly out of a sense of moral obligation towards the Defendant, that the Plaintiff should undertake the liability. The assuaging of Mr. Pudwill's personal moral feelings was not a corporate purpose of the Plaintiff and he was not entitled to pursue that aim at the Plaintiff's expense. Indeed, Mr. Bleach submitted that insofar as Mr. Pudwill saw fit to help himself to the Plaintiff's assets for such an improper purpose, this constituted a fraud (although not in the Derry v. Peek sense) on the Plaintiff. 47. If Mr. Bleach is correct in submitting that the payments fell outside the Plaintiff's legitimate purposes and that the contrary is not reasonably arguable, then the evidence would seem to be that the Defendant was on notice of this. Certainly, the evidence described above indicates that the purpose of the arrangement as known to and applauded by the Defendant, was for the Plaintiff's funds to be used to pay off the ICB debt. It was in the sense that the term loan proceeds were never intended to be released to the Plaintiff but instead were to be used for this allegedly improper purpose that led to Mr. Bleach describing the loan as "a sham". (ii) The pleadings point 48. As stated above, this suggestion of "sham" led Mr. Jat to submit that the case as argued had materially departed from the Plaintiff's pleaded case so that such argument could not provide the basis for summary judgment. Mr. Jat relied on the unreported decision of the Court of Appeal in Super Electric Motor Limited v. Pai Chung Ying, Civ. App. No. 225 of 1994 in which Bokhary J.A., as he then was, stated that the judgment given by the Master under Order 14 in that case could only be justified "if it is clear that there is no real defence to the plaintiff's pleaded case of its entitlement to that sum from the 1st defendant." His Lordship added (at p. 2):-
49. Mr. Jat submitted that in our case, the Statement of Claim was premised on the term loan agreement being valid. The Plaintiff was however now arguing that it was not binding at all and was "a sham". 50. In my judgment, the Plaintiff's argument does not succumb to this objection. Its pleaded cause of action depends on the absence of any consideration for the payments made. That remains the Plaintiff's case as argued on this summons. The crucial complaint is that the loan proceeds were never received. This is why consideration is said to have totally failed. It is also the basis of the Rolled Steel argument. Because the loan proceeds were not received, incurring and discharging the term loan liability are said to fall outside the Plaintiff's corporate purposes. It is true that the Rolled Steel point is not pleaded in the Statement of Claim. However, it is a point which one would normally expect to emerge in the Reply, as a riposte to the Defendant's reliance in the Defence on an agreement providing the necessary consideration. (iii) Corporate purpose 51. Despite the attractive arguments skilfully deployed by Mr. Bleach to the contrary, I have come firmly to the conclusion that on the evidence filed, it is reasonably arguable that the payments were made for the Plaintiff's legitimate purposes and accordingly that the application for summary judgment must fail. 52. The following discussion of the matters which have led me to this conclusion is intended to show why I consider the point arguable and must not be understood to represent any finding of fact or any indication that I consider any of the points discussed either established or even likely to succeed. 53. In my view, the evidence has to be viewed both objectively and subjectively, that is, taking into account the motivations of Mr. Pudwill and officers of the Defendant when assessing the purpose of the term loan arrangement. 54. In the first place, looking at the evidence objectively and ignoring such motivations for the moment, it is in my view reasonably arguable that the Plaintiff's incurring of the term loan liabilities for the purpose of discharging part of ICB's debt to the Defendant may significantly have helped the Plaintiff to secure the trade facility of $25 million and to secure subsequent renewals of and increases that facility. 55. As a matter of commercial common sense, it seems at least arguable that in July 1993 the Plaintiff was not prima facie a company to which could expect to secure a $25 million credit facility on the terms of the facility agreement. It then had hardly any track record, having begun business less than a year previously. Its then net worth was only $3.28 million and the tangible security offered for the $25 million facility was only a cash deposit of $3 million. It was therefore asking for a credit line 71/2 times the value of its then net worth and over 8 times the value of the tangible security offered. In such circumstances, I consider it plainly arguable that the "sweetener" of the Plaintiff taking on part of ICB's debt may have been a significant factor in the Plaintiff obtaining the trade facility. 56. Secondly, taking in some of the subjective elements, I consider (contrary to Mr. Bleach's argument) that the contemporaneous documents make it reasonably arguable that Mr. Mak and Mr. Leung did consider the undertaking of the liability an important consideration in support of extending the credit sought. 57. Thus, the Defendant's internal memoranda referred to above tend to indicate that in a long course of negotiations with the Defendant, Mr. Pudwill consistently put forward his willingness, through one or other of the companies that he controlled, to shoulder some of the ICB debt as part of the financing arrangements under negotiation. It was offered and quite arguably viewed by all concerned as an integral part of the financing package. 58. As set out in detail above, in the credit application dated 23 June 1993, Mr. Mak and Mr. Leung referred to the "risks associated with the extension of credit to a newly established business" such as the Plaintiff and then expressly balanced against those risks a number of considerations, one of which was the willingness of Mr. Pudwill, through the Plaintiff, to take on part of the ICB debt. 59. Similarly, when the trade facility came up for review in 1995, the fact that the Plaintiff had continued to pay the term loan instalments featured prominently as a factor supporting their recommendation that it be renewed, "despite the lacklustre financial performance of NovAtel to date". 60. Mr. Bleach sought to argue that on a close analysis of Mr. Mak's witness statement, he should be understood to be saying that there was no linkage between the grant of the trade facility and the term loan arrangements. I cannot agree. The contrary reading is clearly arguable. Moreover, in my view, Mr. Bleach put the test too high when he occasionally suggested that the term loan arrangement could not be viewed as falling within the Plaintiff's corporate purposes unless they were actually a condition imposed by the bank as a pre-requisite for the granting of the trade facility. In my view, in the Order 14 context, it suffices if, by agreeing to those arrangements, the Plaintiff arguably facilitated or influenced the securing of the trade facility. 61. Thirdly, in my judgment, whether or not the payments were for the Plaintiff's benefit should be approached looking at the whole period spanned by such payments and not solely at the moment when the Plaintiff entered into the facility agreement. So viewed, the increase in the Plaintiff's authorized level of credit to $42.9 million by April 1994 and the recommendation in 1995 to renew the facility without reduction, notwithstanding the Plaintiff's disappointing financial performance, are decisions which arguably may have been significantly influenced by the Plaintiff's continued discharge of the ICB debt. 62. Fourthly, the evidence, in my view, tends to show that the Defendant's decision to grant the trade facility (and later on to increase or continue it) was not made, or solely made, by Messrs. Mak and Leung. Thus, in the internal documents I have referred to, these gentlemen were making recommendations to their superiors, including Mr. Paterson, who in turn, was seeking authorization from officers in the Defendant's Head Office in Canada. He appears, for instance, to have discussed the facilities with Ms. Benita McCourt and Mr. Ian Irving, and possibly others. 63. In these communications, the recipient was being invited to authorize credit to the Plaintiff taking into account factors which prominently included the fact that the Plaintiff had undertaken and was faithfully honouring Mr. Pudwill's promise to reduce ICB's indebtedness. In such circumstances, without having heard evidence as to how precisely the relevant decisions were taken, it would be wrong summarily to exclude the finding that the Plaintiff's acceptance of the term loan arrangement significantly influenced the decision-makers to authorize the facilities. 64. It is worthwhile remembering that in Rolled Steel itself, the determination that the loan, guarantee and debenture under attack did not serve any of the plaintiff's corporate purposes, was a determination arrived at only after a 19 day trial (see[1986] 1 Ch. 246 at 261 ). An extensive investigation was made into the circumstances which led to the transactions under attack. As Slade L.J. held, it was important to consider the directors' motives (at p. 281) :-
65. Lower down the same page, his Lordship indicated the sorts of questions that might be investigated in evidence :-
66. The trial judge and the Court of Appeal in Rolled Steel in fact both proceeded on the basis of a positive finding, put by Slade L.J. in the following terms :-
67. In my judgment, without the benefit of similar investigations at trial, no determination can safely be made in the present case that the term loan and ICB arrangements fell outside the Plaintiff's legitimate purposes. Although Mr. Pudwill filed a somewhat Delphic affidavit on his own behalf (even though he was not a party to the application and was only represented by a solicitor on a watching brief), neither side placed any reliance on it. The Court has therefore not had the benefit of examining Mr. Pudwill's motivations for causing the Plaintiff to take on the liability. Nor has the basis on which the Defendant's officers decided to extend and continue giving credit to the Plaintiff been adequately investigated. 68. I note in passing that the Court of Appeal in Pacific Foundation Finance Ltd. v. Fairyoung Holdings Ltd. [1999] 3 HKLRD 153 (a report which came to my notice only after the hearing) recently considered an argument that a loan was beyond the authority of a director and controlling shareholder. In that case, it was the lender who was seeking Order 14 judgment for the outstanding balance of a loan and the borrowing company which was raising a defence along the lines of Rolled Steel. The Court held that it was for the Defendant, that is, the borrower, to condescend to particulars and to provide evidence of lack of corporate benefit and of the lender's actual or constructive notice of irregularity. It held that on the evidence, the borrower had not shown an arguable case of actual or constructive notice and that, in any event, the evidence indicated that the loan had been incurred to pay off part of the Defendant's existing debts and so fell within its corporate purposes. While, in my view, this decision has no immediate application to the present case, it does tend to show that Rolled Steel corporate purpose allegations are assessed by investigating the evidence of the actual and intended purposes of the impugned transaction. (iv) Actual authority 69. In the light of my foregoing decision, it is unnecessary for any detailed discussion of this additional ground relied on by the Defendant for resisting summary judgment. As I understand it, Mr. Jat's argument, relying on Re Duomatic Ltd. [1969] 2 Ch. 365, depends on the contention that when making the facility agreement, Mr. Pudwill had absolute control over 100% of the Plaintiff's issued shares, then being the registered owner one of the two issued shares and being the 72% controlling shareholder in Digicom, which held the other issued share. 70. In Re Duomatic, one of the issues raised by liquidators was whether salaries which had been paid to the directors without having been approved in general meeting (as required by s.191 of the Companies Act 1948) could be recovered. Buckley J. held (at p. 373) that:-
71. His Lordship held on the facts of that case as follows (ibid.) :-
72. As mentioned earlier, it was recognized in Rolled Steel that any act that falls within the corporate capacity of a company, even if done for other than its corporate purposes, will bind it if it is done with the unanimous consent of all the shareholders or if it is subsequently ratified by such consent so that the act becomes one within the directors' actual authority. Mr. Jat argues that since Mr. Pudwill personified the entirety of the Plaintiff's shareholders and since he obviously assented to the term loan for the purpose of paying off the ICB debt, his assent should be treated as tantamount to a resolution of a general meeting of the company authorizing or ratifying the term loan arrangements. 73. In my judgment, whether such an approach can be justified in the present case must depend on Mr. Pudwill's evidence and a consideration, for instance, as to the extent to which he applied his mind to approving the term loan arrangement and the purpose thereof. In the present context, I consider this argument also to raise a triable issue and to present an additional reason for refusing summary judgment. The Order 74. At the end of the argument, Mr. Jat invited me (in the event that summary judgment was refused) to dismiss the application with costs. He submitted that after 16 April 1999, when Messrs. Allen & Overy wrote setting out in some detail the Defendant's position, it ought to have been clear to the Plaintiff that there were no prospects of securing summary judgment. 75. I have since re-read that letter. It explains with admirable clarity and conciseness the facts relating to the implementation of the term loan via entries in the cash collateral and current accounts, asserting that Mr. Pudwill was fully aware of these arrangements. However, perhaps because no one had at that stage focussed on the Rolled Steel issues, the letter does not discuss any matters bearing on whether the arrangements were for the Plaintiff's benefit. It therefore, in my view, cannot be said to have put the Plaintiff on notice that an application along the lines argued before me was likely to fail. 76. When Messrs. Barlow Lyde & Gilbert replied on 17 April 1999, they in fact raised the argument (among others) that the alleged agreement, even if it existed, was "outside the authority of the directors ....... there being clearly no corporate benefit to [the Plaintiff]". So far as I can see, the documents in the hearing bundle do not reveal whether this was taken up further in correspondence. There accordingly does not appear to be any basis for suggesting that the summons should be dismissed on the ground that it was launched knowing that the Defendant had an arguable defence: see White Book, 14/7/4. 77. I have therefore come to the conclusion that the proper Order is for the Defendant to have unconditional leave to defend with costs in cause. As I have not had full argument on the costs issue, I make the Order for costs in cause as an order nisi.
Representation: Mr. John Bleach S.C. inst'd by M/s. Barlow Lyde & Gilbert for the Plaintiff Mr. Jat Sew Tong inst'd by M/s. Allen & Overy for the Defendant Mr. Frederick Tai of M/s. Munro Claypole & Reeves for the Third Party (on watching brief) |
Cases cited in this judgment
Further hearings and rulings under HCA 8052/1999