Lau Chi Kan Michael v. Pang Ching Cheung
Read the full judgment text of HCA 2781/2004 on BabelCite. This High Court CFI judgment.
1. The Plaintiff is suing the Defendant for the sum of $2,158,410.14 by virtue of a guarantee in writing signed by the Defendant in favour of the Plaintiff on 28 January 2004. Although I have had much evidence in the course of the trial, most of that evidence has fallen away and I have been left with a short but crucially important issue to resolve. If the Defendant has that point decided in his favour then the debt to which the guarantee relates will have been extinguished and the Plaintiff w
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HCA 2781/2004 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE ACTION NO. 2781 OF 2004 ____________ BETWEEN
____________ Before: Deputy High Court Judge Carlson in Court Dates of Hearing: 27, 28, 31 July, 1 August and 25 September 2006 Date of Judgment (Handed Down): 25 October 2006 _______________ J U D G M E N T _______________ Introduction 1.The Plaintiff is suing the Defendant for the sum of $2,158,410.14 by virtue of a guarantee in writing signed by the Defendant in favour of the Plaintiff on 28 January 2004. Although I have had much evidence in the course of the trial, most of that evidence has fallen away and I have been left with a short but crucially important issue to resolve. If the Defendant has that point decided in his favour then the debt to which the guarantee relates will have been extinguished and the Plaintiff will have failed in the action. If I rule in the Plaintiff’s favour on the issue then there must be judgment in his favour in the amount claimed, there being no dispute on the calculation of the debt. Parties 2.It would be helpful to say something about these parties given the fact that they have known each other for some years now. They had first met well over 10 years ago. Both were and are involved in the garment industry. Of the two the Plaintiff is in a more substantial way of business. The Plaintiff’s main operating garment companies are Long Art Investment Company Limited (“Long Art”) and Garment Link Manufacturing Limited (“Garment Link”) which was of more recent origin having been incorporated on 31 October 2003. The Defendant’s relevant company is Kingfish Garment Factory Limited (“Kingfish”) which was incorporated on 9 January 2004. The Undisputed Facts 3.As part of the background narrative to this matter, I am able to set out what follows as facts that are not dispute. Having established Kingfish the Defendant, who with his wife Madam Cheung Lai Fong were it only shareholders and directors, approached the Plaintiff for a loan in order to provide the necessary start-up capital to get Kingfish going. He was also hoping to get some orders from the Plaintiff’s companies such as Long Art. Having taken advice, the Plaintiff entered into loan agreement with Kingfish for the amount of $200,000. This appears at page 19 of the documents bundle and is dated 28 January 2004. It is a tri-partite agreement with the Plaintiff as lender, Kingfish as borrower and the Defendant as guarantor of Kingfish’s debt. The Defendant also entered into a formal guarantee in writing on the same date, it being an “all monies” guarantee in respect of Kingfish’s debt to the Plaintiff. He also executed a letter of confirmation in Chinese which stated that he understood his right to seek independent legal advice before entering into these obligations. 4.I ought to briefly extract from the loan agreement the most salient points by way of background, although as the case has now developed nothing really turns on these. Firstly, the initial loan of $200,000 could be varied by agreement from time to time up to $2 million. These increases could be initiated by Kingfish serving a Form of Notice appearing in Schedule 1 to the loan agreement. If Kingfish requested an advance to be paid to a third party such a payment would be deemed to have been advanced to Kingfish. Lastly, the Plaintiff reserved the right, in his absolute discretion, to modify the loan facility. Nothing in the agreement prevented the parties from increasing the loan facility to beyond $2 million. The History of the Loans 5.Having taken the initial $200,000 Kingfish, through the Defendant, then asked for further advances. These can be set out in table form which, for convenience, I gratefully take from Mr Pow SC’s written closing speech:
There then followed further advances from the 1st April 2004 to 8 July 2004 which is the cut-off date for the Defendant’s alleged liability, about which I will have more to say presently. A statement of account appears at page 130 which is an annex to the Plaintiff’s witness statement of 27 July 2006. The advances were as follows:
These amounts have been fully documented and I accept that the total of $5,474,799.22 was lent by the Plaintiff to Kingfish either directly or to its order, all of these at the request of the Defendant on Kingfish’s behalf. The 8July 2004 Watershed 6.The Plaintiff’s evidence is that as Kingfish’s indebtedness grew so did his concerns that he would not be able to secure repayment. Added to this was the further dimension that his company Long Art had sub-contracted orders that it had from its customers to Kingfish. 7.If Kingfish went under there would be the inevitable consequence that Long Art’s orders with it would not be produced which, in turn, would have meant that Long Art would be sued by its own customers. It was this factor in particular that persuaded the Plaintiff to continue advancing money to Kingfish in order to keep it afloat so that it might complete its sub-contracts with Long Art and hopefully trade itself into a position of being able to repay some if not all of its indebtedness. But it became obvious by the early summer of 2004 that the only realistic prospect for Kingfish and for the Defendant himself was for Kingfish to be sold as a going concern. To this more limited extent those further loans might have had the effect of allowing Kingfish to remain a going concern until a buyer could be found. 8.At the start of the trial Mr Pow, who had come into the case late, decided that the claim by the Plaintiff would have to be adjusted very substantially, on a proper appraisal of the evidence, hence the amendment of the statement of claim on the first day of the trial from $5,166,604.70 to $2,158,410.14 for which judgment is now sought. This needs to be explained. 9.The Plaintiff’s case is that on 8 July 2004 he received a letter from the Defendant’s solicitors [see Documents Bundle – 130] which is self-explanatory . Given its importance, I ought to set it out in full. Before I do so I should observe, as appears in the body of the letter that the parties had by then agreed to sell Kingfisher to a third party as a going concern. What is not accepted is that Kingfisher had been handed over to the Plaintiff by the Defendant as from 5 May, about which I will need to say more in a moment. The letter is in these terms: “Re: Demand for repayment of Outstanding Principal and Interest under the loan agreement entered into between Kingfish Garment Factory Limited being the Borrower. Mr Pang Ching Cheung being the Guarantor and Mr Lau Chi Kan Michael being the Lender
10.The Plaintiff’s solicitors replied at length on 21 July 2004 as follows:
11.That is how the battle lines were drawn and it was largely based on the Plaintiff’s solicitors letter of 21 July 2004 that the claim had been originally formulated. The substantial change, in terms of quantum, that has come with the amended statement of claim is based on the Plaintiff’s acceptance that after the receipt of the letter of 8 July, notwithstanding further advances to Kingfish to keep it afloat, such advances were not done at the behest of the Defendant, with the consequence that Kingfish nor the Defendant as its guarantor could be held liable under the loan agreement of 28 January 2004. He accepts that the line must be drawn under 4 July 2004 which is the date of the last advance, as appears in the account set out in paragraph 5 above. Anything after this date is now abandoned by the amended pleading. How the Reduced Claim is Quantified 12.The starting point is the amount of $5,474,799.22 said to be outstanding as at 4 July 2004. I have already observed that all of these amounts have been properly documented and accounted for by the Plaintiff. In this respect it is also worth observing that the Defendant, as he is entitled to, has elected to call no evidence. And so I have nothing from the Defendant to contradict these amounts which, as I have already observed, are all in evidence and amply proved. 13.From this the Plaintiff deducts the sum of $1,000,000 being the consideration paid by the buyers of Kingfish to the Plaintiff on behalf of Kingfish. All that I need to observe is that Kingfish was sold on 16 September 2004 to a Mr Leung Tai Kwong and Mr Leung Siu Kei. Given the matters raised in the Defendant’s solicitors’ letter of 8 July 2004 that control of Kingfisher was handed over to the Plaintiff in May 2004 it should be observed that transfer documents were prepared in escrow in May when a Mr Klaus Lam had shown interest in the purchase of Kingfisher but this fell through once he had investigated Kingfisher’s balance sheet. The Defendant had tried to find a purchaser, as had the Plaintiff through his staff. The best offer that the Defendant could find was a prospective purchaser for no more than $700,000 until the Leung’s offered $1,000,000 which was accepted. I am satisfied that from May until 8 July, when the Defendant says that he would no longer be responsible for any of Kingfisher’s continuing receipt of loans from the Plaintiff that the Defendant remained in control of the reins at Kingfisher. 14.The sale to the Leung’s thereby reduced the Kingfisher’s debt to $4,474,799.22. 15.The next element of the calculation is the deduction of $2,316,389.08 which is what Long Art owed Kingfisher for the goods manufactured on its behalf by Kingfisher. It is this which reduces the final debt to $2,158,410.14, which is now claimed. The documentation to all of this comes from Exhibit P2. This is the vital piece of evidence and now forms the centre piece of the dispute which I must now resolve. 16.Exhibit P2 comprises a front sheet which lists out the invoices for the value of work done by Kingfish for Long Art, totalling $4,524,966.83. The supporting paper work is attached to the exhibit. There are then five items totalling $2,208,577.75 relating to goods manufactured by Kingfish to Long Art’s order which were returned by US Customs because of defective supporting documentation which failed to show that the goods in question were produced in China. It is said that this documentation (such as certificates of origin) needed to be provided by Kingfish as the manufacturer. It did not and the US Customs returned these, hence the deduction. Before I consider this further I propose to set out here the front sheet to Exhibit P2 for the purpose of identifying the particular transactions which demonstrates how the total is arrived at by the Plaintiff:
The Only Issue in the Case 17.The Plaintiff’s counsel and solicitors had come to court expecting to have to strictly prove the case on the loans and how these loans were caught by the loan agreement and the guarantee. The defence were expecting to meet the case as pleaded against them. On the first day Mr Pow applied to amend the statement of claim to restrict his claim to indebtedness up to 8 July 2004. This caused the loss of the first day of the trial. On its resumption it had appeared that the case was largely to follow the originally expected course with Miss Gwilt, on behalf of the Defendant, questioning various aspects of the quantification of the indebtedness. The Defendant then elected not to give evidence. As is apparent from Mr Pow’s note to his final speech which had to be adjourned to a date beyond the original estimate for the trial, he has concentrated on the various aspects of quantification but now that she has come to address the matter on the Defendant’s behalf Miss Gwilt has contented herself to a very limited submission on the validity of the deduction of the five items in Exhibit P2 which total $2,208,577.75. She says that there is no justification for this deduction and if she is right about that then on a proper mathematical basis the Defendant must succeed because he would be entitled to set off the entire value of the invoices in respect of goods manufactured for Long Art by Kingfish which, as Exhibit P2’s front sheet shows come to $4,524,966.83 which would then completely extinguish Kingfish’s debt to Long Art and thereby to the Plaintiff. All of this is correct. The matter therefore appears to reduce itself into this narrow dispute as to whether it was Kingfish’s responsibility to produce the supporting documents for inspection by the US Customs. She submits that as Kingfish’s responsibility was to supply the goods on a FOB basis no responsibility could have been cast on Kingfish to produce such documentation. The point appears to have escaped Mr Pow’s attention because he had not addressed it in his note to his final speech and I am now being asked by Miss Gwilt to decide this case on a matter that has not been pleaded by her let alone on a basis that no evidence in support of such a point has been called. She has sought to make her own criticisms of the Plaintiff for not dealing with these returned goods in the witness statements of his witnesses but, for my part, I am satisfied on the evidence that the Plaintiff, who has called Miss Szeto to explain the contents of the account as set out in Exhibit P2 has done more than enough to prove the accounting record and as a consequence Kingfish’s indebtedness. The Defendant who heard this evidence has elected to remain silent. He could have, if he wished, come to the witness box and explained the matter which Miss Gwilt has sought to advance in her speech but without any proper evidential foundation. I am in no doubt that, where Miss Szeto has been able to provide a satisfactory explanation as to how Exhibit P2 and its supporting invoices have come into existence and why the five deductions have been made, the Defendant must be adjudged to be indebted to the Plaintiff in the outstanding balance of $2,158,410.14 by virtue of his obligations under the loan agreement and his guarantee in writing. There will therefore be judgment to the Plaintiff in this amount together with interest. As to the rate and period of interest I will ask the parties to address me briefly in writing within 14 days of the date of the judgment. Because the statement of claim has been amended late in the day it may well be that this will ultimately affect the period of interest, at all events, the Defendant not learning of the precise amount claimed against him until the first day of the trial. 18.As a result of the judgment on the claim, the counterclaim must, inevitably, stand dismissed. The Defendant will pay the Plaintiff’s costs of the claim and the counterclaim on a party and party basis. This will be an order nisi.
Jason Pow, SC, and Kenneth Lam, instructed by Messrs Anthony Siu & Co., for the Plaintiff Angela Gwilt, instructed by Messrs Quan & Co., for the Defendant | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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