VIROTEX LTD v. MR K Y CHAN

bjbj HCA001180/1981 IN THE HIGH COURT 1981, No. 1180 BETWEEN VIROTEX LIMITED Plaintiff and MR. K.Y. CHAN Defendant --------- IN THE HIGH COURT 1981, No. 1540 BETWEEN VIROTEX LIMITED Plaintiff and CHAN KING YEE 1st Defendant BECOPA MANUFACTURERS LIMITED 2nd Defendant ----------- Coram: Penlington, J. Date: 6th July, 1982. ___________ JUDGMENT ___________ These claims were consolidated because clearly much of the evidence was common to both and it was convenient that they should be heard together. They are, however, separate causes of action and I will deal with No. 1180/81 first. This is a simple claim based on a cheque for $245,000 drawn by the defendant. It was not in dispute that when the cheque was presented it was not met because payment had been stopped on his instructions. The cheque was issued in conjunction with the 1st defendant signing a letter of indemnity in respect of possible claims which might be made by overseas buyers over possible defects in a large amount of knitwear. This knitwear was to be shipped on behalf of the plaintiff by Becopa Manufacturers Ltd. ("Becopa") the second defendant in H.C. 1540 of which the defendant was managing director and a substantial shareholder. The letter of indemnity is dated 23rd September 1980. The defences to this claim, as originally filed, were that firstly the letter of indemnity and the cheque given pursuant to it had been superseded by a subsequent agreement in writing dated the 1st October 1980 between the plaintiff, a Mr. Buxani, the other main shareholder of Becopa, and the defendant. That was an agreement for the sale of Mr. Buxani's shares in Becopa to the defendant. Clause 10A of that agreement provides that the defendant should pay the plaintiff the sum of $280,000 as a premium in respect of certain export quotas owned by Becopa. The plaintiff should at the end of June 1981 pay that sum to another company called Virotex Industries Limited or the balance, if any, remaining after deducting the amount of any claim made against the plaintiff up to that date in respect of merchandise purchased by the plaintiff from Becopa. Clause 16 of the same agreement went on to provide that it should constitute the entire understanding of the parties and should supersede all prior understandings, transactions and communications whatever between the parties relating to the subject matter hereof. The other defence raised was that so far as was then known to the defendant no claim had been made by the foreign buyers under the contracts set out in the letter of indemnity It was therefore the defendant's case that there had been a total failure of consideration for the amount of the cheque. I do not consider that either of these defences has been made out. Evidence was given by Mr. Buxani and by Mr. P.R. Nicholls, his Solicitor, that the agreement dated the 1st October was in fact executed well before that date. Mr. Nichells put that date as either the 12th or the 17th of September 1980. Mr. Buxani says it was the 12th. I am quite satisfied that the document was completed at the latest on the 17th of September 1980 and one has only to look at various terms in that agreement to see that it could not possibly have been executed on the day it was dated. Indeed the defendant himself, when he gave evidence, put the date of the agreement as about the 25th of September. I am quite satisfied that it was prior to that and in any event before the 23rd. This must mean that the defendant is not able to avail himself of the clauses of the agreement as being an arrangement which superseded the letter of indemnity. The other defence that the defendant did not know of any claims lodged by foreign buyers is also not made out. It has been submitted by Counsel for the defendant that there has been a lack of documentary evidence relating to such claims. There is some merit in that and one might perhaps have expected to have seen survey reports from Germany. Mr. Buxani has given evidence that there were such claims which were originally for US$75,000 but were brought down to the amount of US$50,000. The cheque payable to a Germany firm, Terra Handels Gmbh, has been produced. The evidence, and the letter of indemnity itself, seemed to indicate that clearly there were flaws in these garments and that claims were expected. In a letter to the defendant's solicitors dated 21st January 1981 they say that their clients have had to meet claims from one of the consignees of the goods for US$50,000. It is true that there was a letter in reply from those solicitors stating that they were not acting for the defendant on any matter apart from the purchase of certain property by the defendant from the plaintiff. But there was a further letter to the defendant himself dated the 26th January 1981 again informing him that a claim of US$50,000.00 had been met. Some samples of the knitwear were producted by Mr. Buxani which he said he had brought back from the buyer in Germany. These samples certainly seemed to have substantial defects which would have made them unacceptable to an ultimate purchaser. After the hearing of this matter had started and certain evidence had been given by Mr. Buxani the defendant applied for leave to file a rejoinder on the grounds that certain documents had not been discovered by the plaintiff and that it was only then that he was in a position to raise a further defence to the action. This was that the contract between the plaintiff and the defendant for the sale of the knitwear was illegal in that the goods were in fact not to be sent direct to Germany but they were to go first of all to Japan and then to the German buyers. This made the contract illegal as being an attempt to evade the quota restrictions imposed by the German authorities and agreed to by the Hong Kong Government. I gave leave and such rejoinder was duly filed. Again however I do not think that defence has been made out. I am first of all quite satisfied that the defendant knew perfectly well that the goods were in fact to be sent to Germany via Japan. He was asked to alter the shipping marks on the cartons and he agreed that he in fact did so. This alteration involved, inter alia, the deletion of the word 'Hamburg'. Mrs. Buxani, who attended to shipping matters on behalf of the plaintiff, said that she informed the defendant that the goods were to go to Japan. I accept her evidence and I do not accept the evidence of the defendant that he was not told. If the eventual contract with the German buyer was illegal as being an attempt to avoid quota restrictions I am in no doubt that the 1st defendant was well aware of what was proposed. It is, however, argued for the defendant defendant that if the contract was illegal because of the attempt to evade the quota restrictions, any payment made to the German buyers by the plaintiff as a result of claims for defective goods was a voluntary payment as it was not legally obliged to make it. I think that defence fails. Firstly, I am not satisfied that the contract was in fact illegal and the evidence given on this falls short of establishing that illegality. There was evidence given by an officer of the Trade, Industry & Customs Department relating to the question of the transhipping of goods in order to avoid quota restrictions. There was, however, no evidence as to what, if any, quota restrictions exist between Japan and Germany. It may well be perfectly legal so far as Germany is concerned for goods to be sent to Japan to consignees there and then sent on to Germany. If that is not the case I have no evidence to show to the contrary. Furthermore even if the contracts were illegal in the sense that they were contrary to the quota restrictions agreed to between the German and Hong Kong Governments, if in fact there were defects in the goods, and I am satisfied that there were, then it seems to me that the letter of indemnity allows the plaintiffs to pay a reasonable amount in respect of such claims even if the claims were not strictly legally enforceable. I agree with Counsel for the defendant that such claims must be reasonable and the defendant cannot simply pay any claim at all and rely on the letter of indemnity. I do not, however, consider that he is obliged, in order to protect the defendant, to refuse to pay reasonable claims on the basis of a defence which, even if it was successful, would have the effect of probably terminating his commercial relationship with the claimants. I am, therefore, satisfied that the defendant has not made out a defence to the action based on the cheque and there will be judgment for the plaintiff for the sum of $245,000.00 together with interest at 15% on that amount from the 21st of January 1981 to today. The claim in High Court Action 1540 of 1981 is based on a clause in the agreement dated the 1st October 1980. I have already said I am satisfied it was in fact executed prior to that and at the latest by the 17th September 1980. This clause is 10B which simply says that 'The Purchaser shall procure the transfer to Virotex Limited the 1981 export quota (category 5) for West Germany within 15 days of allocation thereof to the Company'. The "Purchaser" is the 1st defendant and the "Company" is the 2nd defendant. It is alleged that the 1st defendant was acting as agent for the 2nd defendant when he signed the agreement and that both the 1st and 2nd defendants are liable under that clause because the category 5 quota was not in fact transferred to Virotex Limited. It is not in dispute that the Trade, Industry & Customs Department offered the 2nd defendant a quota of 23,427 pieces in that category on the 13th December 1980 and that quota was accepted by the 1st defendant, acting on behalf of the 2nd defendant, on the 20th December 1980. On the 20th March 1981 the Department made its final offer, which superseded t?? previous one, of 23,754 pieces. The claim is however only in respect of the preliminary quota of 23,427. So far as the 1st defendant is concerned the terms of the agreement seem to create a clear liability to procure the transfer to the plaintiff of the 1981 export quota. There is no question of making his best efforts to see that it was so transferred; it is simply an obligation to procure such a transfer. At the time of the execution of the agreement and the subsequent transfer of Mr. Buxani's share to the 1st defendant he was undoubtedly in a position to see that the quotas were duly transferred. The fact that he had seen fit to transfer the shares in the company to other persons who did not wish to do so does not in my opinion relieve him of liability. It seems to me that he was under a clear duty to inform any new shareholder that he had undertaken to transfer the 1981 Category 5 quota to the plaintiff. If he failed to do so then the liability must fall on him. The amended Defence of the 1st defendant says that the 6,000 shares transferred from Mr. Buxani were in fact not transferred to the 1st defendant or his wife but to a company called Comealong Limited, a "shelf" company which he purchased. The Statement of Defence also says that the 1st defendant and his wife held 44% of the issued share capital of Comealong Limited. This 44% plus their 40% of Becopa were transferred on the 10th January 1981 to one Chan Kar Luke. This, however, was well after the category had been offered to Becopa and had been accepted. That the 1st defendant was in the position to transfer the quota if he had so wished, is further demonstrated by his signing on behalf of Becopa the two letters to the Director of Trade, Industry & Customs dated the 31st December 1980 and the 8th February 1981, requesting such a transfer. The first one was, however, out of date by the time it was sent to the plaintiff; the second one was cancelled by the 1st defendant as soon as it was made. I am quite satisfied that, as at the 31st December 1980, not only was the 1st defendant liable to procure the transfer he was in a position to do so if he had so wished. I hold therefore that the construction which the 1st defendant seeks to place on the words of Clause 10B is not correct. The words are clear and unambiguous. The 1st defendant entered into a liability to procure the transfer of the quota to Virotex. It was not sufficient even if he used his best endeavours to procure such a transfer. Even if I am wrong in that I am satisfied that in fact he did not do so. The 1st defendant also raises the defence that the agreement was in contravention of section 48 of the Companies Ordinance in that it amounted to Becopa granting financial assistance to the 1st defendant in order to purchase its own shares. The 1st defendant in effect says that if the quota was to remain as part of Becopa's asset then the 1st defendant would have had to pay more to purchase the shares than he did. Therefore by agreeing to transfer the quota from Becopa to the plaintiff the 1st defendant was in effect receiving financial assistance from Becopa in order to purchase its shares from Mr. Buxani. Attractive though at first sight this argument seems, I am satisfied it is not correct. Section 48 is clearly aimed at preventing companies advancing money for the purchase of their own shares. Here we simply have an agreement made between the principal shareholders of the company whereby in conjunction with the transfer of the shares from Buxani to the 1st defendant, the company should purchase a property from the plaintiff and should, at some time in future when the 1981 quotas had been allocated, transfer such quotas to the plaintiff. It seems to be nothing here to indicate that there was a loan or any other such arrangement between Becopa and the 1st defendant which would enable him to buy the shares. The clause relating to the transfer of the quotas was simply one of several terms and conditions relating to the purchase by the 1st defendant of Mr. Buxani's shares in Becopa. I do not consider that section 48 of the Companies Ordinance is relevant to the particular facts of this case and that they fall outside its provisions. It seems to me that to rule otherwise would be to make void any contract whereby one shareholder bought another's shares in a company, thus obtaining control but at the same time the vendor retained some of the company's assets. I do not consider Section 48 has that effect. I turn now to the question of the liability of the 2nd defendant, Becopa. The plaintiff claims that when the 1st defendant signed the agreement dated 1st October 1980 he was not only binding himself to comply with its terms, he was also committing Becopa, as its agent, to comply with those terms. There is no dispute that at the time of the signing of the agreement the only substantial shareholders in Becopa were Mr. Buxani and the 1st defendant. The 1st defendant was then and at all material times managing director of Becopa. I am satisfied that at the time the agreement was executed for the sale of Mr. Buxani's shares to the 1st defendant all the parties regarded Becopa and the 1st defendant as virtually the same entity and I have no doubt whatever that at that time he had complete control of the company. I have no doubt that it was within the authority of the 1st defendant to transfer quotas on behalf of Becopa. I also have no doubt that Becopa, as a company acting through its directors, was aware of the intention to transfer the quotas to the plaintiff. There have been produced copies of two resolutions passed by Becopa on the 30th January 1981 and the 18th February 1981. On the first occasion the Chairman was Mr. K. Endo, acting on behalf of Comealong Ltd., which had been purchased by the 1st defendant, and in which he and his wife held 44% of the shares, the balance by a nominee company owned by a firm of accountants. This minute says that the request by the 1st defendant to transfer the Category 5 quota to the plaintiff was "not acceptable". No reference is made to the fact that by the letter of 31st December the 1st defendant had already purported to make such a transfer; no resolution was passed in any way repudiating that transfer of which the 1st defendant was obviously fully aware. The second resolution was passed on the 18th of February. Again the 1st defendant was present, this time as Chairman and the other director was R.J. Nominees Ltd. representing Comealong Ltd. Again the resolution makes no reference to the letter of 31st December. I regard both resolutions as clumsy efforts by Becopa to try to evade its contractural liabilities. I am quite satisfied that when the 1st defendant signed the agreement for the sale and purchase of Mr. Buxani's Becopa shares he was acting both on his own account and also as agent for Becopa, of which he was becoming the sole proprietor. This is, I think, further demonstrated by the fact that the letter of 31st December to the Director of Trade, Industry and Customs was sent to the plaintiff's solicitors on the 3rd of February, 4 days after the passing of the first resolution. There will therefore be a declaration that the 1st and 2nd defendants are jointly and severally liable to the plaintiff to transfer the 1981 Category 5 quota to the plaintiff within 15 days of its being allocated, i.e. the 20th of December 1980. As that quota no longer exists the plaintiff is entitled to damages in lieu of specific performance. There was evidence from a Mr. Wong Ching Tak, a quota broker, who said that in January 1981 permanent quota for Category 5 to Germany was selling at approximately $300 per dozen. In February 1981 it was down to just over $200 and later got even cheaper. The plaintiff claims damages at the rate of $250 per dozen and the evidence given by Mr. Wong appears to support that claim. It is not refuted by any evidence called by the defendant. The plaintiff is therefore entitled to judgment against the 1st and 2nd defendants in respect of 23,427 pieces at the rate of $250 per dozen. The plaintiff is entitled to interest at 15% from the 4th of January 1981 to today. The plaintiff is to have its costs in both actions. (R.G. Penlington) Judge of the High Court Representation: Patrick Fung, Esq. (John Ip & Co.) for the plaintiff. Raymond Faulkner, Esq. (Hastings & Co.) for the 1st defendant. Petrus Chan, Esq. (Ip, Ku & Stoppa) for the 2nd defendant. 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