Seibu Max Ltd v. Shinwa Max Ltd

DCCJ 5640 OF 2007

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 5640 OF 2007

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BWTWEEN

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Coram: H. H. Judge YUNG, District Judge 

Dates of Hearing: 7^th – 9^th January and 11^th March of 2009

Date of Handing

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J U D G M E N T

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Two Japanese Companies: (SEPC and SCL)

1.Seibu Electronics Parts Corporation (“SEPC”) and Shinwa Company Limited (“SCL”) are companies incorporated in Japan. Before the present dispute, they were business partners.

The Defendant and its Parent Company, SCL, in Financial Difficulty

2.SCL was the parent company of the Defendant holding 99.99% of its shares. There were two lines of the business of the Defendant. One  was for the manufacture of aluminium roller shafts for printing use in facsimile machines, photocopiers, and the like.  The other was purely for trading in electronic component parts and materials.

3.In about May 2004, SCL was in financial difficulty and a bankruptcy protection order was made in Japan. As a result SCL could only conduct its business transactions in cash.    To continue its business in Japan SCL would find the steady supply of electronic parts and materials useful. However the Defendant, the Hong Kong company it controlled, was also short of funds, hence having difficulty to pay its own suppliers or the electronic parts and materials.

SCL Restructuring the Business of the Defendant

4.SCL restructured the business of the Defendant.  The manufacturing line was operating at a profit and was retained by the Defendant. The trading line was losing money. The Defendant transferred it to the Plaintiff which was incorporated to take over this trading line of business.

5.The shareholding in the Plaintiff was split 60% and 40% between SEPC and the Defendant respectively.  In May 2007, the Defendant sold to the Plaintiff all its shares in the Plaintiff.  At the same time Mr. Shibutani (PW1) resigned from D. However PW1 continued to work for the Plaintiff.  Before that he had been working both for the Plaintiff and the Defendant and was actively involved supervising the management and accounting of both companies. In fact he was authorised to sign cheques for them. 

The Plaintiff’s Claim and the Defence

6.At the time of the transfer of the trading business to the Plaintiff, there were payments to the suppliers yet to be settled by the Defendant. Over a period of time after the transfer, the Plaintiff allegedly paid off  invoices  issued to the Defendant for the goods supplied to the Defendant. By these proceedings the Plaintiff is claiming the re-imbursement of such amount of invoices it had settled on the Defendant’s behalf that it had not yet recovered from the Defendant.

7.Mr. Leung, counsel for the Defendant has made it clear that the Defendant does not admit or concede that the Plaintiff has paid the suppliers for the invoices issued to the Defendant as alleged or at all. The main contention of the Defendant is that in any event it was the Plaintiff’s responsibility under the terms of transfer of business to pay for the invoices.

Evidence and Findings

8.PW1 is the person directly involved in the transfer agreement. The other person who could have given evidence to contradict PW1 was not called to give evidence.  The Defendant sought to admit his statement in evidence and the application was refused for reasons already given at the trial.

9.I have every sympathy for Mr. Leung, the Defendant being unable to adduce evidence to contradict the Plaintiff’s.  Understandably Mr. Leung had to cross-examine PW1 at length testing his credibility which he did.  The other tactic he had to adopt, which he also did, is to criticise the state of documentary evidence adduced by the Plaintiff.

10.Mr. Leung stresses the point that PW1 wavered on the date of the oral agreement.  I find  nothing sinister.  The confusion about the date of oral agreement is more apparent than real.  The parties had negotiated in March 2004 for the transfer of trading business out of the Defendant.  That negotiation began before the incorporation of the Plaintiff. The taking over of the business commenced in May 2004. The Defendant pleads and contends that the oral agreement was in May after the incorporation of the Plaintiff.

11.The agreement was carried out or purported to be carried out after the incorporation. .  It could not be in dispute that there was an agreement between the Plaintiff and Defendant with regard to the transfer of business from the latter to the former.  What was in dispute as to its terms, specifically the party responsible for the settlement of invoices prior to the transfer, the Plaintiff or the Defendant. Therefore whether or not PW1 believed that the agreement was reached in March or May should not affect his credibility. 

12.The other alleged confusion in PW1’s evidence urged upon me by Mr. Leung is unmeritorious and there was no wonder that Mr. Chung was quite upset about that. I cannot blame Mr. Leung entirely for the confusion. If the pleading was clearer, it might not cause Mr. Leung to make this point.  Mr. Leung had in mind all the time only one oral agreement, the one resulting in the transfer of business, be it concluded in March or in May.   PW1 gave evidence that it was the Defendant’s responsibility to pay for the invoices and that this the Defendant had done until July when the Defendant could not pay the invoices. Then he alleged that the Defendant requested the Plaintiff to settle the invoices for them and promised to pay them back. This event is covered by the words “and/or at the request of the Defendant” in paragraph 2 of the Statement of Claim, albeit not so clearly. The distinction between agreement before the transfer and the agreement for the Plaintiff to pay for the Defendant invoices must be properly understood or confusion might arise.  When PW1 referred to the agreement in July, he referred to the agreement to pay out of the Plaintiff’s money, not to the agreement who was responsible for payment of invoices. Without the request of the Defendant in July for the Plaintiff to pay the invoices, the Plaintiff would not have any cause of action.

13.When the parties agreed to transfer the business to the Plaintiff, Mr. Leung submits, the Plaintiff obtained the goodwill of the Defendant for nothing, the Defendant must therefore extract certain benefit. He argues  that if the Defendant had to pay its invoices after transfer, it would do better to close it.  This is an over-simplified way of looking at the matter and without any evidence in support.  It was to the advantage of SCL to maintain a steady supply of electronic parts. This was made possible through transferring the business to the Plaintiff. 

14.Mr. Leung said it was most unlikely that no agreement, as alleged by PW1, had been reached as to account receivables of the Defendant. Therefore PW1 was not a reliable witness. This is not the fairest way of interpreting the evidence of PW1, in so far as it seeks to impute that the parties entered into transfer agreement without regard to the accounts of the trading line of business.  What PW1 really meant in the circumstances was that the Plaintiff had not agreed to be responsible for the invoices. In the absence of an agreement, the Defendant would be responsible for paying its own debt. There was no need for the agreement so long as it was the responsibility of the Defendant to pay for them. When negotiating for the transfer of the business both sides must have some idea of the amount of accounts payable and receivable.  There was nothing inherently improbable for the transfer of business in the way as alleged by the PW1.  If the history of the two Japanese partners, the activities of the Plaintiff and the Defendant, and the employment history of PW1 were taken into consideration, the PW1’s claim that it was the responsibility of the Defendant to pay those invoices is more than likely.

15.The Defendant adduced no evidence to directly refute the claim by the Plaintiff that the payments in questions were in fact payment for invoices issued to the Defendant. Mr. Leung criticised that certain invoices, and accounts of the Plaintiff should have been produced to corroborate its claim.  He argues that PW1 had something to hide. There was no evidence to suggest that. PW1 was not given an adequate opportunity to explain  the alleged lack of documentary evidence.  I do not think any adverse inference could be drawn. 

16.More importantly, it was recorded, in an audited financial statement of the Defendant signed by the  Chairman of the Defendant, a debt in the amount claimed by the Plaintiff.  This Chairman was the counterpart of PW1 when negotiating for the transfer of business.  The Defendant did not make any suggestion why such debt was recorded.  Mr. Leung might have insinuated that PW1 was guilty of serious misconduct.  If he did, he adduced no evidence to support such serious allegation.  Putting his point at the highest, PW1 might have the opportunity of committing false accounting, falsifying a record of payment to a supplier when such payment was never made or made for a different purpose, and the like.  I do not find this scenario likely.  The Chairman of the Defendant must have known very well the state of money transactions between the Plaintiff and the Defendant. No explanation was suggested, or argument put forward, how he could have failed to appreciate the falsehood of this entry or such conspicuous error in an audited financial statement.  Further, in the audited but unsigned financial statement of the subsequent year no correction was made.

17.Looking at all the evidence, I accept the evidence of the Plaintiff. I find the Plaintiff proved its claim.   There be judgment for the Plaintiff for the amount and interest thereof as claimed. There be also a costs order nisi in favour of the Plaintiff with Certificate for Counsel.

Mr. Hylas CHUNG, instructed by M/S Gary Lau & Partners for the Plaintiff.

Mr. Kelvin LEUNG instructed by M/S Tam, Pun & Yipp for the Defendant.