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Lodhias Ltd v Geoffrey Hughes (Export) Pty Ltd [2004] FJHC 231; HBC0140.2004 (1 August 2004)

IN THE HIGH COURT OF FIJI
AT LAUTOKA
CIVIL JURISDICTION

Action No. HBC0140 of 2004L

Between:

LODHIAS LIMITED
Plaintiff

And:

GEOFFREY HUGHES (EXPORT) PTY. LTD.
Defendant

Dr. Sahu Khan for the Plaintiff
Mr. T. Tuitoga for the Defendant

DECISION ON MOTION TO INJUNCT WINDING UP PROCEEDINGS

This is a motion by the plaintiff to restrain the defendant to commence and prosecute a winding up proceedings against the plaintiff company.

The Law

The law is clear that there is discretion in a court seised of a Winding Up petition, to decline to hear the petition where the debt is contested on substantial grounds. – Offshore Oil N.L. v Investment Corporation of Fiji Ltd. 30 FLR 90 at 101 Justice Barker.

Justice Pathik in Winding up Action 40 of 1996 In the matter of Silimaibau Sunset Express (Fiji) Limited (unreported judgment on page 4 fourth paragraph) said:

“There is a general principle that a petition for winding up with a view to enforcing payment of a disputed debt is an abuse of the process of court and should be dismissed with costs.”

He was of the view that winding up proceedings should not be used to exert improper pressure on a company to resolve disputed debt. If a debt is disputed on substantial grounds, then the petitioner is not a creditor within the provisions of Section 221(a) and Section 222 of the Companies Act. Palmer’s Company Law Volume 3 at paragraph 15.214 explains the meaning of the word “substantial” as follows:

“Substantial means having substance and not frivolous, which disputes the Court should ignore. There must be so much doubt and question about the ability to pay the debt that the Court sees that there is a question to be decided. The onus is on the company to bring forward a prima facie case which satisfied the court that there is something which ought to be tried either before the Court itself or in an action, or by some other proceedings.”

The above proposition of law as expressed by Palmer was applied by Justice Pathik in Fiji Bandang v Vunimoli Sawmills Ltd. Winding Up 3 of 2002 (Labasa High Court).

The granting of an injunction restraining the presentation or prosecution of a winding up petition is exercised under the inherent jurisdiction of the court to prevent abuse of its process. The application before me is invoked under Order 29 and also the inherent jurisdiction of the court. Buckley J in Bryanston Finance v De Vires (No 2) [1976] 2 W.L.R. 41 discussed the abuse of process at some length on page 52 he remarked:

“If it could now be said that, on the available evidence, the presentation by the defendant of such a petition as is described in the injunction would prima facie be an abuse of process, the plaintiff company might claim to have established a right to seek interlocutory relief. Otherwise I do not think it can. If it were demonstrated that such a petition would be bound to fail, it could be said that to present it, or after presentation to seek to prosecute it, would constitute an abuse”: Charles Forte Investments Ltd. v Amanda [1964] Ch. 240.

and later on page 53.

“The right to petition the court for a winding up order in appropriate circumstances is a right conferred by statute. A would be petitioner should not be restrained from exercising it except on clear and persuasive grounds”

even though advertisement of the petition may cause much harm to company’s business and reputation.

Simply because the company has instituted another proceedings against the petitioning creditor is not by itself sufficient to warrant a restraining order. The strength of that claim is a relevant factor. In Re Douglas Griggs Engineering Ltd. 1963 Ch 19 at p.23 Pennycuick J put it as follows:

“It seems to me that the prima facie right of the petitioner creditor to a winding up order is not displaced merely by showing that the company has a disputed claim against the petitioning creditor which is the subject of litigation in other proceedings”.

Submissions

With these preliminary remarks on law I shall now look at the submissions of the parties. Dr. Sahu Khan submitted that there were two matters of substantial dispute between the parties and which warranted a trial on oral evidence to distil the truth. First issue he submitted was what was the nature of the arrangement between the parties. The plaintiff’s case he said rested on the proposition that it was to purchase letters of credit from the defendant for imports of goods plaintiff purchased from Murray Goulburn Co-operative Limited (MGCL). The defendant’s position on the other hand is that it purchased goods from MGCL and resold them to the plaintiff. The plaintiff submits that documents exhibited show that the plaintiff is the consignee of the goods.

The second issue he submitted is that of law. He submitted that the arrangement between the parties whereby the plaintiff was to purchase letters of credit from the defendant contravened the provisions of the Exchange Control Act in that anyone resident in Fiji cannot purchase Letters of Credit in Australia without Minister’s consent.

The defendant says that there was no question of purchasing of letters of credit. The defendant is not a lending institution but a trading company. Mr. Tuitoga submitted that there were 11 transactions in all between the parties spanning a period of one year and the plaintiff paid for 7 transactions and is only complaining about four later transactions in an attempt to delay payment or avoid it altogether. He further submitted that section 35 of Exchange Control Act excluded bills of exchange from the provisions of the Act.

Issue – whether purchase of Letters of Credit or trading transaction

The relationship between the parties was established on or about 1st April 2003 on lodging of a form and which is annexure F to Chandu Lodhia’s affidavit dated 28th June 2004. Of significance is the heading to the form which reads: “Application for Commercial Credit Account” not loan or purchase of Letters of Credit. The credit limit according to the form is $200,000.00.

The affidavit of Rashmi Shah sworn on 12th July 2004 has annexed to it (annexure L) the reverse side of the form containing Standard term and conditions which refer to supply of goods and services in condition 4 and title to goods in condition 8. Chandu Lodhia in his affidavit dated 27th July 2004 denies that the form he signed contained annexure ‘L’. Since the original is not before the court, I shall ignore annexure ‘L’ for purposes of this decision and make no use of it.

A typical transaction is explained in Rashmi Shah’s affidavit paragraphs 26 to 34. She says the defendant placed export orders with MGCL, and made payment to MGCL. The order is annexure E being Export order Number 46224-01. The buyer she said was the defendant. She attached a typical invoice – (annexure G) to show that the defendant was the buyer of goods. Annexure G shows that Exporter/Shipper is MGCL and the buyer is Geoffrey Hughes (Export) Pty. Ltd., the defendant not the plaintiff. Interestingly it also shows “notify party/forwarding agent” as the defendant. This annexure originating as it does from an entity independent of the parties clearly shows that the buyer was the defendant and not the plaintiff. Their order for goods was paid for by the defendant by letters of credit being annexure F1 & F2 to the affidavit. F1 refers clearly to order number 46224-01. Having bought the goods the defendant then sold the goods to the plaintiff –see annexure H which is a commercial invoice raised by the defendant and the consignee is the plaintiff. The defendant then sent the commercial invoice, together with a consignment letter, shipping documents and bills of exchange to plaintiff’s bank, Bank of Baroda through defendant’s bank HSBC.

The plaintiff accepted the Bills of Exchange and signed them. Confirmation of such acceptance was sent by Bank of Baroda (plaintiff’s bank) to defendant’s bank – annexure K. On seven previous occasions a similar method of transaction was carried out and paid for. The fact that on annexure G, Rashmi Shah “affidavit consignee is shown as “To shipper’s order” does not assist the plaintiff. I have also seen the annexures to Chandu Lodhia’s affidavit dated 27th July 2004 where the plaintiff is shown as consignee in three of them. These are health certificates to assist the plaintiff to clear goods from customs when they land in Fiji.

Bill of Exchange

The signing of the Bill of Exchange is fatal to plaintiff’s assertion. It is an admission of debt. Section 54 of the Bills of Exchange Act (Cap 227) provides that:

“The acceptor of a bill, by accepting it -

(a) engages that he will pay it according to the tenor of his acceptance....”

The common law position of bills of exchange was dealt in Cebora SNC v Sip (Industrial Products) Ltd. 1976 1 Lloyds Rep 271 where Sir Eric Sachs stressed the significance of a bill of exchange in international trade. At page 278 he stated that:

“Any erosion of the certainties of the application by our Courts of the law merchant relating to bills of exchange is likely to work to the detriment of this country, which depends on international trade to a degree that needs no emphasis. For some generations one of those certainties has been that the bona fide holder for value of a bill of exchange is entitled, save in truly exceptional circumstances, on its maturity to have it treated as cash, so that in an action upon it the Court will refuse to regard either as a defence or as grounds for a stay of execution any set off, legal or equitable, or any counterclaim, whether arising on the particular transaction upon which the bill of exchange came into existence, or, a fortiori, arising in any other way. This rule of practice is thus, in effect, pay up on the bill of exchange first and pursue claims later....

In my judgment, the Courts should be really careful not to whittle away the rule of practice by introducing unnecessary exceptions to it under the influence of sympathy-evoking stories, and should have due regard to the maxim that hard cases make bad law. Indeed, in these days of international interdependence and increasing need to foster liquidity of resources, the rule may be said to be of special import to the business community. Pleas to leave in Court large sums to deteriorate in value while official referee proceedings are fought out may well to that community seem rather divorced from business realities, and should perhaps be examined with considerable caution.”

Further the House of Lords in Nova (Jersey) Knit Ltd. v Kammgarn Spinnerei Gmbh (1976) 2 Lloyds Rep 155 had before it a dispute between the English plaintiffs and the German defendants. The defendants were resisting immediate payment of dishonoured bills of exchange on the grounds that arbitration proceedings were pending in Germany regarding the entire issue in dispute. The Court of Appeal granted stay. The House of Lords by majority reversed the decision. Lord Wilberforce summarised the position as follows:

“I fear that the Court of Appeal’s decision if it had been allowed to stand, would have made a very substantial inroad upon the commercial principle in which the bills of exchange have always rested.”

and later on

“Unless they are treated as unconditionally payable instruments...which the seller can negotiate for cash, the seller might as well give credit. And it is for this reason that English law (and German law appears to be no different) does not allow cross claims, or defences, except such limited defences as those based on fraud, invalidity, or failure of consideration, to be made.”

It appears therefore that the English view is that restraining persons whose claims are based on bills of exchange from enforcing their right in courts would have wide and undesirable consequences for the commercial world because it undermines the cash equivalent rule in bills of exchange.

It appears that New Zealand has gone down the same road. Barker J in Begley Industries Ltd. v Cramp 1977 2 N.Z.L.R. 207 at 212 accepted the principles as expressed by Sir Eric Sachs in Cebora as being also relevant to New Zealand. The head note of the case reads:

“Assuming (but without deciding) that the transactions were money lending ones, a bona fide holder for value of a bill of exchange is entitled, save in truly exceptional circumstances, on its maturity to have it treated as cash, so that in an action upon it the court will refuse to regard either as a defence or as grounds for a stay of execution any set off, legal or equitable, or any counterclaim, whether arising on the particular transaction upon which the bill of exchange came into existence, or, a fortiori, arising in any other way. The fact that the transaction behind the bill is a money lending one is not such an exceptional circumstance.”

The issue of Exchange Control Act – Section 3 does not arise as affidavits show that the transaction between the plaintiff and the defendant was one of goods sold and delivered and that is the conclusion I have reached.

There is additionally annexure ‘A’ to Rashmi Shah’s affidavit where the plaintiff stated it was sending $18,600.00 Australia by telegraphic transfer but never did.

I am of the view on strength of affidavits that the plaintiff was not purchasing letters of credit from the defendant but the transaction was a credit account for goods. The plaintiff had accepted Bills of Exchange. It is bound to honour them. It would not be fair to the defendant to prevent it from pursuing its statutory right by presenting a winding up petition. The application is therefore dismissed with costs which are to be taxed if not agreed.

[ Jiten Singh ]
Judge

AT Lautoka this day of August 2004.