AGFA HONG KONG LTD. v. KING DRAGON INDUSTRIAL LTD. & OTHERS

HCA 13016/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 13016 OF 1999

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J U D G M E N T

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The Application

1. By a Notice of Motion dated 11.12.2003 the 2nd Defendant applied for an Order to set aside the Judgment entered for the Plaintiff on 11.1.2002 pursuant to Order 35 Rule 2 of the Rules of the High Court ("RHC"). As the application was made 23 months out of time the 2nd Defendant also applied for extension of time to make such an application.

Decision made

2. I refused the 2nd Defendant's application after the hearing and made the following order:

(a) The 2nd Defendant's application be dismissed.

(b) Cost of and occasioned by the application be to the Plaintiff, to be taxed if not agreed.

I now give my reasons.

Reasons for failure to attend trial and delay in application to set aside

3. The reasons advanced by the 2nd Defendant were that at the time of trial before Deputy Judge Longley on 11.1.2002, the 2nd Defendant was prohibited and restrained by the Taiwan authority from leaving Taiwan as he was involved in a criminal matter. The 2nd Defendant was therefore not able to make 'appropriate application' during, before or after the said trial. The 2nd Defendant contended that he was not given a chance to dispute the Plaintiff's case nor to cross-examine the Plaintiff's witnesses.

4. According to the 2nd Defendant's affirmation in support of the application, he was arrested and detained by the Taiwan authority when he arrived at the Taiwan International Airport on or about 26.11.1998. He was tried and sentenced to 4 years imprisonment on or about 16.4.1999. He appealed against that decision and on 26.7.2001 the appeal court of Taiwan ordered a re-trial. He was not until July 2002 that he was allowed to leave Taiwan. He claimed to be too involved in handling the retrial to instruct lawyers in Hong Kong. The outbreak of SARS in Hong Kong in 2003 further hampered his consideration to return and instruct lawyers. He was eventually allowed to leave Taiwan on or about 25.6.2003. He made the present application after retrieving all court documents and evidence, and instructing his solicitors.

Brief Chronology

5. It is useful here to set out a brief chronology of the events:

26 Nov 1998	2nd Defendant detained by Taiwan authority
Feb 1999	2nd Defendant allowed bail but not permitted to leave Taiwan (Decision at p.123-128 of the Bundle)
16 April 1999	2nd Defendant sentenced to 4 years imprisonment but still allowed bail (Decisions at p.101-119 and 123-128 of the Bundle)
12 Aug 1999	Writ of Summons issued
07 Sep 1999	Joseph S.C. Chan & Co. filed Acknowledgment of Service on behalf of 2nd Defendant.
11 Sep 1999	Plaintiff applied for Order 14 Judgment
Sep - Dec 1999	3rd and 4th Defendants filed affirmation on behalf of all Defendants (including 2nd Defendant)
23-26 Nov 1999	2nd Defendant went to the Philippines from Taiwan and returned to Taiwan (2nd Defendant's affirmation made on 4.12.1999)
06 Dec 1999	Affirmation of the 3rd Defendant exhibiting an affirmation by the 2nd Defendant made in Taiwan on 4.12.1999
14 Dec 1999	Master Christie granted each of the four Defendants leave to defend on condition that the 1st Defendant made payment into court in the sum of $20,000,000, and that all Defendants to file and serve their Defence by 31.1.2000
20 Dec 1999	All Defendants appealed against Master Christie's Order
27 Jan 2000	Cheung J. dismissed 1st Defendant's appeal but allowed the appeal of 2nd to 4th Defendants
23 Feb 2000	Defence filed by 2nd to 4th Defendants
01 Mar 2000	Upon 1st Defendant's failure to make payment into court pursuant to Master Christie's Order, Judgment entered against 1st Defendant
Mar - May 2000	Various stages of proceedings, such as List of Documents, Check List etc. took place
15 May 2001	2nd, 3rd and 4th Defendant each filed a Notice to Act in Person. The 2nd Defendant gave his address for service Room 1007, 10th Floor, Tai Yau Building, No. 181 Johnston Road, Wan Chai, Hong Kong (which was the same as that given by 4th Defendant).
05 Jun 2001	2nd Defendant filed a statement for trial, stating that for personal reasons he could not leave Taiwan and would defend either by writing or via the 4th Defendant
07-10 Jan 2002	Trial before Deputy Judge Longley
11 Jan 2002	Judgment delivered
11 Dec 2003	2nd Defendant's present application

The Law

6. The time limit for making an application under the Order 35 Rule 2(2) is within 7 days after the trial (i.e. on or before 18.1.2002). The present application was made on 11.12.2003, almost 2 years out of time.

7. The principles to be applied in considering whether to grant the extension of time under Order 3 Rule 5 are set out in Chiu Sin-chung v Yu Yan-yan, Angela [1993] 1 HKLR 225. These are (where applicable to the present hearing), in short:

(a) Rules of the court must prima facie be obeyed. There must be material on which the Court can exercise its discretion to justify an extension of time;

(b) Where there is a failure to apply within the time limit and a further delay in applying for an extension of time, a clear statement as to the reasons are required;

(c) A successful party could only be deprived of the judgment in his favour on basis of discretionary balancing exercise;

(d) Factors normally taken into account in the balancing exercise are: (i) length of delay, (ii) reasons for the delay, (iii) chance of the application to set-aside succeeding if an extension of time is granted, (iv) the degree of prejudice to the Plaintiff if the application for extension of time is granted;

(e) Merits will play little part in the balancing exercise if the delay is short and whole excusable, but where the delay is substantial and is not wholly excusable, much more merit is required.

8. The 'general indication' to be taken into account when the Court is asked to set aside a Judgment is set out in the Hong Kong Civil Procedure 2004 (para 35/2/1). Of relevance to the present case are:

(a) Where judgment has been given after a trial it is the explanation for the absence of the absent party that is most important;

(b) Where the setting aside would entail a complete re-trial on matters of facts which have already been investigated by the court the application will not be granted unless there are very strong reasons for doing so;

(c) The Court will not consider setting aside judgment regularly obtained unless the party applying enjoys real prospects of success;

(d) Delay in applying to set aside is relevant;

(e) There is a public interest in there being an end to litigation and in not having two trials.

Consideration & Application of Principles

9. According to the Decision of the Taiwan High Court dated 25.7 [2002] (p. 123-128 of the Bundle) the 2nd Defendant was detained from 26.11 [1998] until early February [1999] when he was 'released on the provision of surety'. The Taiwan court noted that the 2nd Defendant 'appeared in court on time at every hearing thereafter and had never been absent'. He was restricted to leave Taiwan. Although from another Decision dated 16.4 [1999] (p.101-119 of the Bundle) it was said that the 2nd Defendant was sentenced to 4 years imprisonment, there is no indication that he was in fact in prison. The Decision dated 25.7 [2002] indicated that he was allowed bail since early February.

10. It should be noted that in his affirmation dated 4.12.1999, 2nd Defendant mentioned being in Taiwan since November 1998 but that he had travelled to the Philippines on 23.11.1999 and returned to Taiwan on 26.11.1999. This indicates he was actually allowed to leave Taiwan while he was on bail. No mention of this departure was made in the 2nd Defendant's affirmation in support of the present application. His ability to depart from Taiwan in November 1999 is also in direct conflict with his assertion that he was not allowed to leave until July 2002.

11. The Writ was issued when the 2nd Defendant was already in Taiwan (sentenced to 4 years imprisonment but allowed bail with restriction from leaving Taiwan). He filed a Notice of Acknowledgment via his solicitors. He was able to defend himself via his solicitors and he made the aforesaid affirmation dated 4.12.1999 to resist the Order 14 application while in Taiwan. He has never disclosed the real reason why he was not able to come to Hong Kong; instead, he claimed to be 'preoccupied with the recovery and restructuring' of his business in Taiwan so unable to come to Hong Kong to personally deal with the proceedings' (p.95 of the Bundle).

12. After he was granted unconditional leave to defend the 2nd Defendant knew full well that there would be a trial. His solicitors engaged in proceedings such as exchange of List of Documents, Check-list procedures etc. on his behalf.

13. When he filed a Notice to Act in Person, the 2nd Defendant gave a Hong Kong address for service without giving any indication that at the time of serving the Notice he was not physically in Hong Kong. The Notice for trial was sent to the very address he gave for service. As the 4th Defendant used the same address for service and she duly appeared in Court, it would be highly improbable that the 2nd Defendant was not aware of the trial date. The fact that the 4th Defendant applied for an adjournment at the end of the Plaintiff's case before Deputy Judge Longley and the manner of application (p.25 of the Bundle) led me to draw the irresistible inference that the 2nd Defendant was aware of the trial date. Mr. Arthur Yip, counsel for the 2nd Defendant, also conceded that the 2nd Defendant was indeed aware of the trial dates after taking instructions from his instructing solicitors.

14. No attempt was ever made, while the 2nd Defendant was legally represented or acting in person, to apply for an adjournment should the trial take place while he was still detained in Taiwan. Nor was there any application to have his evidence taken by deposition in Taiwan. In fact, the 2nd Defendant in his affirmation dated 9.12.2003 stressed and confirmed that he had never made any application for adjournment either at or prior to the trial (p.40 of the Bundle). There was also no indication that the 2nd Defendant had ever tried to obtain permission to leave Taiwan to attend trial; or that such an application has been refused.

15. One should not forget the fact that the 2nd Defendant has prepared a statement for the trial indicating that he would defend by writing or via the 4th Defendant.

16. While the 2nd Defendant was restrained by the Taiwan Authority from leaving Taiwan, the evidence before me clearly shows that it was not the case that he could not depart had he so-wished (as demonstrated by his trip to the Philippines in November 1999). His overall conduct of the case was such that he was unable to show that his absence at trial was either unavoidable or inevitable.

17. I also echo the very words used by the learned Deputy Judge in his Judgment when refusing an application for adjournment (p. 26 of the Bundle):

'..[e]ven on the account the 4th Defendant had given the court, the 2nd Defendant had been in his current position for a considerable time and yet no attempt had been made on his behalf to bring this matter to the attention of the court.'

18. After the trial was heard, the 2nd Defendant applied to the Taiwan Court for leave to depart from Taiwan. In granting leave the Taiwan Court expressly referred to the need of the 2nd Defendant to come to Hong Kong to deal with matters concerning the Plaintiff (p.123-128 of the Bundle). He was free to travel out of Taiwan from July 2003 to end of December 2003, a period of at least 1/2 year. Yet, the 2nd Defendant then said he was too busy engaging in dealing with the criminal trial still pending in Taiwan.

19. As the 2nd Defendant saw fit to go and seek permission to leave Taiwan, citing the urgent need to go to Hong Kong to attend the matter concerning the Plaintiff, and then decided the criminal matter in Taiwan was more pressing after all, he had made a conscious decision not to pursue the matter relating to the Plaintiff when he clearly had the opportunity to do so. How can he now come before this Court and say that he did not have the opportunity to deal with the matter in an expedient manner?

20. Not only that the 2nd Defendant failed to act promptly to bring his predicament to the Court's notice, his failure to pursue his application in 2002 after he was granted leave to depart from Taiwan further indicated that he had unreasonably delayed the matter.

21. In any event, the 2nd Defendant has initially given his instructions to his solicitors while he was physically in Taiwan (i.e. prior to him giving Notice to Act in Person), and he is legally represented to pursue the present application. Had he really wanted to set aside the judgment he could have done so through his lawyers. There is no need for him to be present for the application (as clearly demonstrated by his absence before this Court during the hearing).

22. While SARS was a concern to a lot of people, again, had the 2nd Defendant wanted to set aside the Judgment there is no reason why he could not have instructed lawyers to pursue the matter in the early part of 2003.

23. After the 2nd Defendant has come to Hong Kong sometime after June 2003 (I note that he never spelt out when he had actually arrived), he did not lodge the application until 11.12.2003. His explanation was that he had to 'retrieve all court documents and evidence'. I do not find such an explanation acceptable. The 2nd Defendant retains the same firm of solicitors who has represented him before. The solicitors were engaged from the beginning and knew the Defence case well (particularly after a full-hearing on an Order 14 application and an appeal to Cheung J). They were involved, to an extent, in the preparation of the trial until they ceased to act for the 2nd Defendant in May 2001. It would not have taken long to search and retrieve court documents or gather evidence, even if such a need was required. This yet further delay is neither reasonable nor excusable.

Merits of the Defence

24. The Plaintiff claimed against the 1st Defendant for money due under a Credit Agreement, alternatively for price due for printing equipment and chemicals delivered to the 1st Defendant. Its claim against the other Defendants (including the 2nd Defendant) was as guarantors of sums due to the Plaintiff from the 1st Defendant up to a limit of HK$60 Million.

25. The learned Deputy Judge sets out succinctly the Defence in his Judgment as follows (at p. 26 of the Bundle):

(1) that although the relationship between the Plaintiff and the 1st Defendant had originally been that of seller and buyer, that relationship had changed in about January 1997 when it was agreed that the 1st Defendant would simply act as a middleman in selling the Plaintiff's products in China. As a result, the 2nd and 4th Defendant were under no liability under the instruments of guarantee to pay the Plaintiff for goods supplied to 1st defendant later in respect of which the Plaintiff claimed.

(2) Alternatively that the guarantees in the sum of $60 million were only executed in August 1998 and that since the Plaintiff had granted no trade credit to the 1st Defendant thereafter there was no consideration for those guarantees.

26. The 2nd Defendant contended that since the 4th Defendant was not present at the meeting in which the Plaintiff and the 1st Defendant came to an agreement to change their seller-buyer relationship, whereas the 2nd Defendant was the one who did the negotiation, his absence during the trial handicapped the Defendants' case, thus affecting the consideration to be given to the weight of the evidence.

27. The learned Deputy Judge heard oral testimony from witnesses for the Plaintiff and the 4th Defendant. In the statement filed by the 2nd Defendant one of the options he chose was for him to defend via the 4th Defendant. The learned Deputy Judge was fully aware of the defence, which was identical in the case of 2nd and 4th Defendants. He had seen documents indicating the relationship of 'buyer and seller' had continued between the 1st Defendant and the Plaintiff. He found the evidence pointing to the sums owed to the Plaintiff by 1st Defendant as buyer 'overwhelming'. He found that all contemporaneous documentation showed that the relationship between the Plaintiff and the 1st Defendant were seller and buyer. There was no document indicating the contrary. The learned Deputy Judge also found there was consideration for the respective guarantee signed by the 2nd and 4th Defendant.

28. One can readily see the difficulties faced by the defence in trying to adduce evidence in contradiction to those documents in writing. On the information before me, I cannot say that there is a real prospect of success.

Conclusion

29. Applying the applicable principles mentioned earlier, I am not persuaded that I should exercise my discretion to accede to the 2nd Defendant's application for an extension of time. On the evidence before me, I am not persuaded that the Judgment should be set aside either. For these reasons, the 2nd Defendant's application is refused with costs.

Representation:

Mr. Arthur C.H. Yip, instructed by Joseph S.C. Chan & Co for the 2nd Defendant

Mr. Adrian Bell, instructed by Messrs. Robertsons for the Plaintiff

HCA 13016/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 13016 OF 1999

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J U D G M E N T

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1. The Plaintiff, Agfa Hong Kong Limited is a well known manufacturer and supplier of photographic printing equipment and materials. Its claim in these proceedings arises from the supply of very substantial quantities of photographic goods to the 1st Defendant company between July 1997 and July 1998.

2. It alleges that the price of the goods was denominated either in US dollars or Hong Kong dollars and claims the balance of the price of the goods from the 1st Defendant in the sum of US$7,235,958.18 and HK$5,839,069.00.

3. The Plaintiff put its claim either on the basis that the goods were supplied pursuant to a Credit Agreement between the Plaintiff and the 1st Defendant dated 23 October 1995 or alternatively on the basis of goods and services supplied to the 1st Defendant at the 1st Defendant's request.

4. The Plaintiff's claims against the 2nd,3rd and 4th Defendants are based on instruments of guarantee and indemnity signed by them in respect of the liability of the 1st Defendant to the Plaintiff.

5. It is alleged that sometime between October 1995 and October 1996, the 3rd and 4th Defendants executed instruments of guarantee and indemnity to the Plaintiff with a limit of $10 million.

6. It is further alleged that the 2nd, 3rd and 4th Defendants all executed further instruments of guarantee and indemnity to the Plaintiff in respect of the 1st Defendant's obligations with an upper limit of $60 million in the early part of 1998.

7. All these instruments of guarantee and indemnity provided a guarantee and indemnity to the Plaintiff not only in respect of future sums owing by the 1st Defendant to the Plaintiff but also in respect of amounts outstanding at the date of the execution of the instruments.

8. The Plaintiff's claim against the 2nd, 3rd and 4th Defendants is under the instruments of guarantee and indemnity.

9. Judgment was entered against the 1st Defendant on 1 March 2000 in default of payment into court of a sum of HK$20 million ordered by Master Christie on 14 December 1999.

10. The 3rd Defendant was adjudged bankrupt on 1 August 2001. If the Plaintiff was to proceed with its claim against the 3rd Defendant it would require the leave of the court pursuant to section 12(1) Bankruptcy Ordinance Cap. 6. The Plaintiff did not seek such leave but asked for the claim against the 3rd Defendant to be adjourned sine die with liberty to restore. I made the order requested.

11. The 2nd Defendant did not attend the trial. A notice of trial had been sent to the address for service given by him in the Notice to Act in Person filed by him on or about 15 May 2001 but was returned to the court marked "moved to address unknown". It appeared from an affirmation dated 7 January 2002 filed by Mr Wellington Chao, solicitor for the Plaintiff, that the 2nd Defendant was now resident in Taiwan and had been for some time, but that nonetheless he was aware of the trial date. In the circumstances, I gave leave to the Plaintiff to proceed against the 2nd Defendant in his absence. After the conclusion of the case for the Plaintiff, the 4th Defendant, who was the only defendant to attend the trial, informed the court that she had received the telephone call from the 2nd Defendant during the course of the preceding day in which he had said that he wanted to attend the trial but was currently prevented from doing so by an order of a court in Taiwan. I refused an application for an adjournment of the trial. There was no documentary evidence to support the 4th Defendant's assertion. Even on the account the 4th Defendant had given the court, the 2nd Defendant had been in his current position for a considerable period of time and yet no attempt had been made on his behalf to bring this matter to the attention of the court.

12. The Defence of the 2nd and 4th Defendants was essentially two fold:

(1) that although the relationship between the Plaintiff and the 1st Defendant had originally been that of seller and buyer, that relationship had changed in about January 1997 when it was agreed that the 1st Defendant would simply act as a middleman in selling the Plaintiff's products in China. As a result, the 2nd and 4th Defendants were under no liability under the instruments of guarantee to pay the Plaintiff for goods supplied to 1st Defendant later in respect of which the Plaintiff now claims.

(2) Alternatively that the guarantees in the sum of $60 million were only executed in August 1998 and that since the Plaintiff had granted no trade credit to the 1st Defendant thereafter there was no consideration for those guarantees.

In addition, insofar as the 4th Defendant is concerned, she denied at trial that she had signed the earlier instrument of guarantee and indemnity in the sum of $10 million. This was not however a matter that had been pleaded in her amended defence.

13. No issue was taken as to the evidence of the calculations of the amounts allegedly owing by the 1st Defendant to the Plaintiff, if the Plaintiff succeeded in establishing that the relationship between them was one of buyer and seller.

The evidence

14. The Plaintiff called two oral witnesses, Miss Rebecca Au, who at the material time was the General Manager of Electronic Data Processing/Accounting and Credit Control of the Plaintiff and one of whose duties was to monitor accounts receivable of all of Agfa's customers, and Mr Andrew Wong Kwan Wah who was and is General Manager of the Plaintiff's Graphic Systems Department and whose responsibilities included the development and management of Agfa's business relating to graphic products.

15. In addition the Plaintiff adduced the statements of George Kwok Chuen and the annexures thereto under section 47 of the Evidence Ordinance Cap. 8. He had formerly been Credit Controller and later Credit Control Manager of Agfa. It appeared from a second affirmation of Mr Wellington Chao of 8 January 2002 put before the court that Mr Kwok was avoiding service of a writ of subpoena requiring him to attend the trial.

16. The evidence of Miss Rebecca Au and Mr Andrew Wong amounted to this: That the 1st Defendant had opened an account with the Plaintiff in October 1995. Initially it had bought goods from the Plaintiff on the basis of cash on delivery. Subsequently it had been granted credit terms which had become progressively more generous.

17. Although the Plaintiff's business with the 1st Defendant had rapidly increased, the relationship between the two had always been that of buyer and seller. Andrew Wong admitted that there had been a proposal on behalf of the 1st Defendant that in view of the scale of the Chinese market, its role be changed to that of middleman. Andrew Wong said that the proposal had been refused. He admitted that it had been referred to a meeting attended by the 4th Defendant at a restaurant in Wanchai in January 1997, but he said he had not agreed to the proposal and had said that it was not the company's practice to carry on business in this way.

18. The Plaintiff's witnesses produced or referred to documents evidencing the buyer and seller relationship in respect of the period in question including purchase orders issued by the 1st Defendant, order confirmations issued by the Plaintiff, invoices issued by the Plaintiff and monthly statements issued by the Plaintiff to the 1st Defendant setting out the amounts it owed.

19. In addition other documents were produced indicating that the relationship of buyer and seller between the 1st Defendant and the Plaintiff had continued. These included an accountant's report dated 2 March 1998 prepared by Vincent L S Wong and Company, Certified Public Accountants indicating that the Plaintiff was a trade creditor of the 1st Defendant for $44,635,368.14 for the period ended 31 October 1997, a confirmation for audit purposes sent by the 1st Defendant's own accountants to the Plaintiff seeking confirmation that as at 31 March 1998, the 1st Defendant owed the Plaintiff $64,437,239.97, a settlement agreement executed by the 3rd Defendant on behalf of the 1st Defendant confirming that the 1st Defendant owed Agfa in excess of HK$65 million as at 23 November 1998 and other documents emanating from the 1st Defendant indicating that the relationship continued to be that of buyer and seller.

20. The witnesses also gave evidence of meetings on 20 July 1998, 3 September 1998 and 23 November 1998 attended by the 2nd and 3rd Defendants on behalf of the 1st Defendant at which the 2nd and 3rd Defendants admitted the 1st Defendant's liability for the debts to Agfa, and a similar meeting on 4 May 1999, at which the 4th Defendant had been present with the 3rd Defendant. It is apparent from the minutes of the latter meeting that a letter faxed by the Plaintiff's solicitors the same day to the 1st Defendant demanding the sum of $63,121,295.00, being money owed by the 1st Defendant to the Plaintiff, had been the subject to discussion and that neither the 4th nor the 3rd Defendants had denied the indebtedness of the 1st Defendant.

21. Insofar as the instruments of guarantee are concerned, the evidence of George Kwok (whose statement was admitted in evidence) was that the instruments with a limit of $10 million were executed sometime in 1996, and that the instruments with the limit of $60 million were executed sometime before Chinese New Year in 1998. Rebecca Au gave evidence that guarantees with a limit of $10 million must have been signed before 24 October 1996 when the Plaintiff changed its name from Agfa Gevaert (Hong Kong) Limited to Agfa Hong Kong Limited and that the guarantees with a limit of $60 million must have been signed before an audit team from Agfa's Headquarters visited Hong Kong in or about May 1998.

22. The 4th Defendant gave evidence but called no witnesses. She was the Assistant General Manager of the Mainland Region of the 1st Defendant and a director of the 1st Defendant at the relevant time. She was aware that the relationship between the Plaintiff and the 1st Defendant had originally been that of buyer and seller, but maintained that the relationship had changed.

23. She admitted that she had not taken part in any negotiations which resulted in the change of relationship (which she said would have involved the 2nd and 3rd Defendants) but she had been told by the 2nd Defendant that there was such a change.

24. She had, however, been present at the dinner attended by the 2nd Defendant and Mr Andrew Wong Kwan Wah in the restaurant in Wanchai in early 1997 (around January) when the 2nd Defendant had pointed out the risks to the 1st Defendant in expanding its business in China and when he had asked whether the Plaintiff would change the role of the 1st Defendant to one of middleman. She said Andrew Wong had said that there was no precedent for the Plaintiff adopting such a course but they would study it further. Nothing more was said about the matter. This evidence does not differ significantly from that of Andrew Wong.

25. The 4th Defendant's evidence was that because of subsequent events known to her, she believed that there had been a change in relationship commencing shortly after the meeting at the restaurant in January 1997. She pointed out the very rapid increase in credit granted by the Plaintiff to the 1st Defendant month by month and the relatively small amounts paid to the Plaintiff by the 1st Defendant. She said that there was no reason why a company such as the Plaintiff would increase the 1st Defendant's credit to such levels unless there was a very special relationship. She said these increases in credit were inconsistent with a relationship of buyer and seller, even though she conceded that the transactions were entered into the 1st Defendant's books as "goods bought" and the documentation of the transactions was to similar effect.

26. She suggested, as I understand it, that a reason why the transactions might have been entered into the 1st Defendant's book as "goods bought" was that it was necessary for the purpose of avoiding foreign exchange restrictions in China and to ensure that money could subsequently be remitted to Hong Kong, that there be a notional sale of the goods from the 1st Defendant to its subsidiary. To record the transactions between the Plaintiff and the 1st Defendant as "goods bought" would be consistent with this. She suggested that the reasons why the books were made up this way was because the books would "go to the Government". It appears she was also suggesting as a reason why the transactions might have been recorded as "goods bought" was that the 1st Defendant's accounting staff had simply carried on recording the transactions as they had done before.

27. The 4th Defendant further suggested that the fact that the Plaintiff had appointed a firm of accountants to audit the 1st Defendant's books indicated that the relationship between the Plaintiff and the 1st Defendant was not that of seller and buyer. She said that if it had been then the 1st Defendant would not have allowed the inspection of its books.

28. She also pointed to other matters which she suggested pointed to a different relationship between the Plaintiff and the 1st Defendant to that which had prevailed earlier.

(1) She had been instructed that at trade fairs in China contacts with customers had to be done in the name of the Plaintiff.

(2) Employees of the Plaintiff would always take part in product seminars and promotional activities.

(3) Copies of contracts between the 1st Defendant and its subsidiaries had to be given to the Plaintiff, and that from time to time sales reports had to be sent to the Plaintiff.

(4) That whenever regional sales meetings were held by the Beijing, Shanghai or Guangzhou offices, a representative of the Plaintiff was invited to attend.

29. Insofar as the instruments of guarantee and indemnity are concerned, she denied that it was her signature appearing on the first such document with a limit of $10 million.

30. Insofar as the second instrument is concerned with the $60 million limit, she alleged that she had signed it before she went to the United States of America on 4 July 1998, but had only authorized the handing over of the document to the Plaintiff on her return to Hong Kong at the end of August 1998 after having been told that otherwise the Plaintiff would not continue to supply goods to the Plaintiff and after being shown a certificate (Exhibit D1(2)) appointing a subsidiary of the 1st Defendant as "Printing Arts Products China Agent" for a further year.

31. At one stage during the trial, it appeared that the 4th Defendant might have been suggesting that the certificate (Exhibit D1(2)) and other similar certificates (Exhibit D1) were evidence of a change of relationship between the Plaintiff and the 1st Defendant. In cross-examination however she accepted that these certificates were simply to show that the recipient was authorized to deal in the Plaintiff's products.

Assessment of the evidence

32. The evidence pointing to the sums owing to Agfa being debts owed by the 1st Defendant as buyer of those goods can only be described as overwhelming.

33. All the contemporaneous documentation showed that the goods in question were purchased by the 1st Defendant from the Plaintiff and that the relationship between them was simply that of buyer and seller. All the contemporaneous documentation also showed that those acting on behalf of the 1st Defendant accepted that this was the situation. There were no documents indicating the contrary.

34. It is significant that the 4th Defendant herself concedes that she herself cannot give direct evidence of any agreement with the Plaintiff as to a change in the relationship with the 1st Defendant as she was mainly resident in China at the material time and negotiations would have been conducted by the 2nd and 3rd Defendants.

35. The circumstances, to which the 4th Defendant points as indicating a change of relationship, in particular the very considerable increase in credit granted to the 1st Defendant, the involvement of the Plaintiff in the promotion of its products in China and its desire to be informed of the 1st Defendant's activities in relation to its product, are all explicable on the basis that the Plaintiff had a common interest with the 1st Defendant in penetrating the huge market represented by the Mainland. Both Andrew Wong and Rebecca Au accepted that the 1st Defendant was not looked upon as a normal customer but one with a particular ability to achieve this end. In any event, the Plaintiff had started on the path of regularly allowing the 1st Defendant increases in credit well before January 1997.

36. Although, the 1st Defendant was granting unusual credit facilities to the 1st Defendant, it did take steps to protect itself by requiring the signing of the personal guarantees by the directors of the 1st Defendant. It was also reasonable in view of the large credit it was giving to its customer (1st Defendant), to insist on the 1st Defendant's books being audited.

37. There were aspects of the evidence of the 4th Defendant concerning which I consider that she was being less than frank. I do not believe she was being frank when she attempted to explain the way that the 1st Defendant entered the transactions in its books by saying that she had consulted accountancy firms about the manner in which the entries should be made and they had been unable to assist. Nor did I believe her evidence that Vincent L S Wong & Company who compiled the report on the 1st Defendant's financial affairs for the period 1 April 1997 to 31 October 1997 had known that the relationship between the Plaintiff and the 1st Defendant was not that of buyer and seller. I disbelieved her account of the meeting on 4 May 1999 with Agfa's representatives; in particular that she was unaware of what was being discussed because she did not speak English. There would have been no point in her being present if she was not aware of what was being discussed.

38. I find the tripartite distribution agreement of 29 May 1997 involving the Plaintiff, the China National Printing Materials Corporation and a subsidiary of the 1st Defendant , which the 4th Defendant suggested pointed to the Plaintiff being the direct supplier of the goods to the Mainland market, in fact supports the Plaintiff's contention for by Clause 2(1) it provides that the Plaintiff and the China National Printing Materials Corporation acknowledge that the 1st Defendant's subsidiary was the sole supplier of the Plaintiff's goods to the China National Printing Materials Corporation.

39. In considering the evidence, I have borne in mind the evidence of Andrew Wong as to the price the Plaintiff charged the 1st Defendant for its film, the customs tax that would normally be payable thereon in China and the maximum price recommended by the Plaintiff that the 1st Defendant should charge its customers. These figures would tend suggest that if there was indeed a sale by the Plaintiff to the 1st Defendant then the 1st Defendant would have been unable to make a profit unless it negotiated a special tax rate or adopted less official means to import its goods into the Mainland. The evidence from Mr Andrew Wong was essentially that being the purchaser, the question of taxation was a matter for the 1st Defendant and he was unaware of the 1st Defendant's arrangements. It is not for this court to comment on what appears to be the Plaintiff's stance in this matter in the absence of any plea of illegality, but solely to consider whether this evidence might tend to suggest that the relationship between the Plaintiff and the Defendant was not that of buyer and seller. I am satisfied that notwithstanding this evidence, that the evidence that the relationship between the Plaintiff and the 1st Defendant was that of seller and buyer remains overwhelming.

40. In my view, the 4th Defendant was clutching at straws in her attempt to demonstrate any change in relationship between the Plaintiff and the 1st Defendant.

41. I find that the sums claimed by the Plaintiff were sums owed by the 1st Defendant as purchaser of the Plaintiff's goods.

42. Insofar as the instruments of guarantee are concerned, I find that the instrument with a limit of $10 million was signed by the 4th Defendant before 24 October 1996 when the Plaintiff changed its name.

43. I consider that on the balance of probabilities, the 4th Defendant is incorrect in saying that she did not sign this document. She admitted that the signature looked like hers but she said that she knew it was not hers because when she signed a document she would look at it. She also said that Agfa would have had no reason to ask for a guarantee at that stage. However, even on her own evidence Agfa was granting credit to the 1st Defendant in 1996. It must follow from her evidence that she was suggesting that the document was forged. If that was her evidence I consider it likely that the solicitors who were then instructed by her would have said as much in her amended defence. Moreover the solicitors would have served notice denying the authenticity of the document. They did neither. I consider it highly unlikely that anyone in Agfa would have forged her signature on this document. In any event, in light of my finding regarding the later deeds of guarantee with the limit of $60 million, I consider the validity of this first instrument is academic.

44. In my view the only reasonable construction of the guarantees with the limit of $60 million is that they were intended to supersede the earlier guarantees, not be complementary to them.

45. I am satisfied that the later guarantees with the limit of $60 million were executed by the 2nd, 3rd and 4th Defendants and delivered to the Plaintiff well before August 1998 as the 4th Defendant now alleges. I believe that this is another example of the 4th Defendant being less than frank with the court.

46. I have no reason to doubt George Kwok's statement (para. 15) that the 3 guarantees were signed before Chinese New Year 1998. I accept that it was the existence of these guarantees which led to Agfa requiring the 3 insurance policies on the lives of the 1st Defendant's directors, the proposals for which were made on 20 May 1998. I also accept Rebecca Au's evidence that she had been concerned that these guarantees were executed before the arrival of the audit team from Agfa's Headquarters in about May 1998. I am also persuaded by her reasoning that in view of the amounts owed by the 1st Defendant, if the guarantee had been required in August 1998 it would have had a limit of $70 million not $60 million.

47. Even if I had been satisfied that the guarantees were only executed in August 1998, I would still have found that there was consideration for them. Although the Plaintiff may not have supplied further goods to the 1st Defendant, it continued to grant the 1st Defendant credit by forbearing from taking legal proceedings until a year later on 12 August 1999. That in the circumstances of this case was sufficient to amount to consideration.

48. As Lord MacNaghten said in Fullerton v Provincial Bank of Ireland [1903] AC 309 at 313:

"..... It is not necessary that there should be an arrangement for forbearance for any definite or particular time. It is quite enough if you can infer from the surrounding circumstances that there was an implied request for forbearance for a time and that forbearance for a reasonable time was in fact extended to the person who asked for it."

49. This in my view was a case where such an inference could have been drawn. I am satisfied that the Plaintiff would not have forborne from taking legal proceedings until a year later if the personal guarantees were not in place.

50. In the light of the above, I find that the 2nd and the 4th Defendants are liable under the deeds of guarantees signed by them.

51. I therefore give judgment against the 2nd and 4th Defendants in the sum of $60 million. I order that the Defendants pay interest at judgment rate from the date of issue of the writ until payment.

Representation:

Mr Adrian Bell, instructed by Messrs Robertsons, for the Plaintiff

The 2nd Defendant, Lin Chia Hsing, in person, absent

The 3rd Defendant, Yeung Ngon Chung, in person, absent

The 4th Defendant, Chou Shu Yen, in person, present

HCA 13016/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.13016 OF 1999

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J U D G M E N T

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Appeal against condition

1. This is the defendants' appeal against the master's decision granting conditional leave to the defendants to defend the action.

2. The plaintiff's claim against the defendants is for the sum of US$7,235,958.18 and HK$7,203,461. The master ordered the 1st defendant to pay into court on or before 31 January 2000 the sum of HK$20 million as the condition for all the defendants defending the action. The plaintiff accepted that the defendants should be given leave to defend, the only issue is on the condition. The defendants' case is that no condition should be imposed.

Facts

3. The plaintiff is a manufacturer and distributor of printing equipment and chemicals. The 2nd-4th defendants are directors of the 1st defendant. The plaintiff's cause of action against the 1st defendant is pursuant to a credit agreement dated 23 October 1997 alternatively 23 October 1995. The plaintiff further relies on an alternative cause of action on goods sold and delivered by it to the 1st defendant. The claim against the 2nd-4th defendants are based on the guarantees signed by them which were undated.

The defence

4. The 1st defendant's defence is that since 1995, the plaintiff had supplied goods to the 1st defendant on "cash on delivery" basis. In July 1996, the plaintiff and the 1st defendant agreed that the 1st defendant could have 90 days credit to pay for the plaintiff's goods.

5. The 1st defendant sold the goods to customers in the Mainland. In January 1997, the parties agreed that the 1st defendant would act as the middleman for the plaintiff in the selling of the plaintiff's products in the Mainland ("the distribution agreement"). At that time, the plaintiff wanted to expand the Mainland market. Under this agreement, the 1st defendant would not have to bear any risk in sales fluctuation or bad debts from the Mainland customers. The 1st defendant's duties were to distribute the plaintiff's products in the Mainland and to collect proceeds of sale from these customers. The 1st defendant would be remunerated for its service.

6. The plaintiff encouraged the 1st defendant to extend further credit to these customers to speed up the expansion in the Mainland market. As a result, the 1st defendant increased the credit limit to the customers to HK$30 million in July 1997. By the end of 1997, it was HK$45 million. By early 1998, the limit was HK$60 million. The credit period was extended to 120 days. At the same time, the 1st defendant had continued to make payment for its earlier purchase from the plaintiff and had repaid the outstanding credits. The 1st defendant said that it is not liable to the plaintiff because the amounts claimed are due from the Mainland customers and not from it personally.

Date of the credit agreement

7. There were initially some disputes on the date of the credit agreement. The plaintiff's case is not that there are two agreements signed by the 1st defendant but rather the year on the agreement should read as "1995" instead of "1997". The original of the credit agreement was produced in court and the year appeared to be "1995" instead of "1997". In any event, the 1st defendant accepted in the affirmations that the credit agreement was executed in October 1995. It said that the document is only an account opening form rather than a credit agreement. It is not necessary for me to dwell on the credit agreement because even if there are triable issues on this agreement, the plaintiff relies on the alternative claim of goods sold and delivered.

Goods sold and delivered

8. The plaintiff's case on goods sold and delivered is clearly supported by documents, such as delivery notes, invoices and monthly statements. It is not disputed that the amounts set out in the monthly statements are due.

Distribution agreement

9. The 1st defendant stated that it has raised a bona fide defence on the distribution agreement. Its work in the Mainland was closely monitored by the plaintiff. On many occasions the plaintiff's representative was present when the 1st defendant's sales representative met the Mainland customers. The 1st defendant was instructed to supply list of the Mainland customers to the plaintiff. The plaintiff used the list to verify whether the customers were genuine or not, and whether goods were sold to them. The 1st defendant was required to submit to the plaintiff reports and estimates of sales of the plaintiff's products. The plaintiff had also sent a firm of accountant to check on the 1st defendant's account in late 1997. The 1st defendant also produced a distribution agreement made between the plaintiff, the 1st defendant and a Mainland company in which it was stated that the plaintiff was responsible for prompt supply and ultimate liability of the quality of the goods.

Shadowy defence

10. Conditions can be imposed in an Order 14 application where the defence is shadowy. Recognizing what the 1st defendant has said, in my view, the defence is still a shadowy one. The most glaring feature of the so-called distribution agreement between the plaintiff and the 1st defendant is the complete lack of details and written documents evidencing the agreement. The distribution agreement with the Mainland customer is not the distribution agreement in issue.

11. The 1st defendant's case is that the plaintiff wanted it to increase its investment in the Mainland with the ultimate goal of doubling the sales of the plaintiff's products in the Mainland. At the end of 1996, the credit balance of the 1st defendant was maintained at $15 million. This was increased manifold in the next two years. For such an important task as assigning the 1st defendant to be the plaintiff's agent in the Mainland market where the credit level to the customers was at the beginning of 1998 in the region of HK$60 million, common sense and business sense dictated the requirement of a written document setting out the rights and obligations of the parties. For example, what was the duration of this agreement? How was it to be determined? How was the 1st defendant to be remunerated for what it had done? Even if the 1st defendant was not responsible for the bad debts of the customers, who should pursue them in the first place? As a matter of fact, the 1st defendant did not even say in its defence or affirmations on how the remuneration was to be calculated.

12. The response of the 1st defendant to the absence of written agreement is that there was likewise no written agreement when the payment term between the parties was changed from "cash on delivery" to "credit" basis. The plaintiff is not even sure about the date when the credit agreement was signed. There is also no document recording the increase of the credit level granted by the plaintiff to the 1st defendant.

13. In my view, it is not correct that there is no written document recording the granting of the credit to the 1st defendant. The 1st defendant accepted that it signed the credit application form in 1995. In later years, the plaintiff had increased the credit limit but it remained to be part of the existing credit arrangement of the parties. By contrast, the distribution agreement would drastically change the nature of the existing relationship between the parties when the plaintiff would ultimately be responsible for the risk of not recovering the price of the goods sold by the 1st defendant on its behalf.

14. In my view, even just for the reasons I have stated earlier, conditions should be imposed when leave was granted to the 1st defendant to defend the action.

Accountant report

15. There are other shadowy features of this case which justify the condition to be imposed. The contemporary documents all point to the relationship of a buyer and seller. The accountant's report of 2 March 1998 stated that the report was based on the books and records of the 1st defendant. Under the entry on current liabilities, the plaintiff was stated to be the trade creditor of the 1st defendant. The report was supplied to the 1st defendant and was produced by it as an exhibit. No challenge was made by the 1st defendant on the accuracy of the report. If the 1st defendant was merely acting as an agent for the plaintiff, why should the plaintiff be described as its trade creditor?

Minutes of meeting

16. On 4 May 1999, a meeting was held between the plaintiff and the 1st defendant. Two of the directors of the 1st defendant were present at this meeting, namely, the 3rd and 4th defendants. The minutes of this meeting recorded that the demand letter from the plaintiff's lawyers was discussed. The minutes recorded that the 3rd and 4th defendants in response merely referred to the financial difficulties of the 1st defendant. There was no denial by them that the 1st defendant was not liable at all for the debts.

17. All that the defendants now said about the minutes is at paragraph 8 of the affirmation of the 3rd defendant :

"I had never seen the said minutes before the same was shown to me by my solicitors. In the related meeting, apart from the transfer of the Guangzhou properties, the parties failed to make any other agreements. In fact, the said meeting ended in rather unfriendly atmosphere."

There was no challenge on the accuracy of the minutes.

Transfer of property

18. The plaintiff's case is that the 1st defendant had proposed to settle part of the debt by transferring a property in Guangzhou to the plaintiff. The 1st defendant's case is that the property in fact belonged to the customer in the Mainland. It was at the plaintiff's request that the property was transferred to the 4th defendant first. No documents were produced by the defendants on the transfer.

Settlement agreement

19. The plaintiff produced a letter from the 2nd defendant, written on the letterhead of the 1st defendant, enclosing a settlement agreement in which the 1st defendant acknowledged that the plaintiff had sold goods to it, and that the balance of the price of the goods owing by the 1st defendant at 23 November 1998 was at HK$65,866,170.83. The 1st defendant promised to pay part of the debt at HK$21,500,000 by 14 monthly installments commencing on 30 November 1998, and the balance before 30 December 1999. The signature of the 2nd defendant appeared on the signature column of the 1st defendant.

20. It is accepted that the plaintiff did not deal with the circumstances in which it received the two documents from the 1st defendant. However, the defendants' response to these two documents is indeed surprising. All that the 2nd and the 3rd defendants said about these documents is simply that they had not seen these documents before. The 2nd defendant's affirmation was exhibited to the 3rd defendant's affirmation and not filed as a separate document. One would expect that the defendants should at least disclose whether they had ascertained if anyone from the 1st defendant had indeed prepared the letter and the agreement or sent them to the plaintiff. After all, the letter actually contained a reference number of the 1st defendant. There was not even a denial that the signature that appeared in the agreement was that of the 2nd defendant.

The counterclaim

21. The 1st defendant counterclaimed for breach of the distribution agreement. No particulars were given as to the damages. Furthermore it is not connected to the claim itself.

Condition correctly imposed against the 1st defendant

22. In my view, the condition was correctly imposed against the 1st defendant and its appeal is accordingly dismissed.

Position of 2nd-4th defendants

23. Regarding the 2nd-4th defendants, I have difficulties in accepting that in principle the right of a defendant to defend is conditional upon someone else fulfilling the condition. The 1st defendant is after all a separate entity from the other defendants. Mr Bell, counsel for the plaintiff, accepted my view but urged conditions should be imposed on the 2nd-4th defendants separately. In my view, no condition should be imposed against the 2nd-4th defendants. There clearly is a triable issue as to whether there was consideration for the guarantees. The guarantees were undated. Mr Pang of the plaintiff said that he believed that the guarantees were provided in January 1998. On the other hand, the 2nd-4th defendants stated that the guarantees were signed in August 1998. There was no credit given to the 1st defendant after August 1998. Forbearance to sue is, of course, a form of consideration, but there was no express promise on the plaintiff's part. The issue whether there was an implied promise is clearly not a matter that can be resolved at an Order 14 application. Furthermore, the 2nd-4th defendants' liability would depend on whether the amount was personally owed by the 1st defendant.

24. Accordingly, I will allow the appeal of the 2nd-4th defendants.

Costs

25. The master ordered that the costs of the Order 14 application be paid by the defendants to the plaintiff in any event.

26. I will vary this order. As the defendants had been given leave to defend by the master, the appropriate order for costs before the master should be costs in the cause, with an additional order that in the event that the 1st defendant does not comply with the condition and judgment is entered against it, then the costs of the action relating to the 1st defendant should be borne by it.

27. In relation to the costs of the appeal, as the 1st defendant failed in its appeal, the plaintiff is entitled to have the costs of the appeal against the 1st defendant. The 2nd-4th defendants are entitled to their costs of the appeal because they are successful in removing the condition imposed against them.

28. The apportionment of the costs of the appeal is that the 1st defendant should be responsible for three quarters of the costs of the appeal while the plaintiff is liable to the 2nd-4th defendants one quarter of the costs.