Feng v Bomani [1994] FJHC 136; Hbc0510j.93s (4 October 1994)

IN THE HIGH COURT OF FIJI
At Suva
Civil Jurisdiction

CIVIL ACTION NO. 510 OF 1993

Between:

1. MAQI FENG
2. CITIC DEVELOPMENT INC. LTD.
Plaintiffs

- and -

1. ELIKI BOMANI
2. RESORT CONDOMINIUM INTERNATIONAL (FIJI) LTD.
Defendants

Mr. S. Maharaj for Plaintiffs
Mr. D. Jamnadas for Defendants

JUDGMENT

This is an opposed application by the 1st defendant ONLY seeking to set aside a default judgment entered against him on the 27th of October 1993 in the following terms:

"... that the first defendant do pay the plaintiff the sum of $13,000 (THIRTEEN THOUSAND DOLLARS) and both the defendants do pay the sum of $115,000.00 (ONE HUNDRED AND FIFTEEN THOUSAND DOLLARS) and interest at the rate of $15.00 per centum per annum on the sum of $100,000 from 24th day of July, 1993 to date of judgment together with costs of this action."

A copy of the default judgment was served on the first defendant on the 11th of January 1994 and on the 14th of January 1994 a 'Writ of Fieri Facias' was issued out of the High Court Registry.

On 29th March 1994 the present application was brought and all execution was stayed until further order. The application is supported by a short affidavit of the first defendant in which he deposed inter alia:

"3. ... I had caused my solicitors to enter an appearance on the 20th of September 1993 which specified that I had intended to contest the proceedings.

4. ... I had instructed my solicitors to file a defence in the matter upon which my solicitors requested details of my dealings with the plaintiffs; and
   
5. That prior to me providing the details of my defence to my solicitors, the plaintiffs unbeknown to me had obtained judgment in default against me and the second defendant on the 27th day of October, 1993."
   

There is also annexed to the 1st defendant's affidavit a copy of his proposed Statement of Defence in which he denies personally borrowing from or owing any money to the plaintiffs. More particularly the 1st defendant claims:

"8. ... That all or any monies advanced by the plaintiffs in this matter were advanced to the 2nd defendant company for which the 2nd defendant mortgaged its property described in C.T. 27561 to the 1st plaintiff."

He however admits giving the plaintiffs two cheques totalling $15,000 "... on the understanding that the cheques would not be presented until monies were given to the 1st defendant by the 2nd defendant to cover the value of the cheques".

Quite plainly the "good defence" which the first defendant seeks to raise against the plaintiffs claim is based or founded on the fundamental doctrine or principle expounded in the famous case of Salomon v. Salomon & Co. Ltd. (1897) A.C. 22 in which the House of Lords explained and emphasised the separate and independent corporate existence and legal personality of a company as distinct from its members or shareholders.

In passing I note that the first defendant has been extremely tardy in these proceedings. In the first place he allowed a month to lapse after filing an 'acknowledgement of service' and even after default judgment was served upon him a further 2 months passed before the present application was brought. Needless to say the 'excuse' provided in his affidavit for this inordinate delay is not entirely clear but in any event is quite unacceptable. As learned counsel for the plaintiffs cynically observed: "It doesn't need too much organising to say 'I am not the recipient of funds nor privy to the contract'."

There can be no doubting that default judgment was regularly entered in this instance against the first defendant. Certainly no challenge has been raised on that score by learned defence counsel. In these circumstances the law is clear that such a judgment will only be set aside if the defendant is able to produce to the Court evidence that he has a good defence on the merits or raises an arguable or triable issue.

In this latter regard the submission of learned counsel for the first defendant is a relatively simple seemingly straightforward one. He says: "In essence the first defendant denies borrowing any money from the plaintiff personally. The money was advanced to the first defendant's company and the company gave a second mortgage over its land. No money was advanced to the first defendant personally. No consideration passed and there was no privity of contract between the first defendant and the plaintiff so as to make the first defendant personally liable." This raises in counsel's submission a 'triable issue' for which leave to defend ought to be granted.

Learned counsel for the plaintiffs on the other hand made an equally simple submission that the defence was a "sham" based on the 'veil of incorporation' which when lifted reveals the true nature of the dealings between the parties. Counsel submitted that the 1st defendant was merely using the 'corporate veil' to avoid liability for a loan of which he was the sole and ultimate beneficiary. Reference was also made to various annexures to the plaintiff's affidavit in support of the submission and which I shall be dealing with in more detail later.

That the 'corporate veil' is not impregnable and can and will be lifted in exceptional circumstances can no longer be doubted. See: Palmers 'Company Law' (24th edn) para. 18-22 and 23 and Gower's 'Principles of Modern Company Law' (5th edn) at p.130 to 134.

In Littlewoods Mail Order Stores v. I.R.C. (1969) 1 W.L.R. 1241 Lord Denning M.R. in rejecting the 'separate and independent entity' argument in that case said at p.1254:

"The doctrine laid down in Salomon v. Salomon & Co. (1897) A.C. 22, has to be watched very carefully. It has often been supposed to cast a veil over the personality of a limited company through which the courts cannot see. But that is not true. The courts can and often do draw aside the veil. They can and often do, pull off the mask. They look to see what really lies behind. The legislature has shown the way with group accounts and the rest. And the court should follow."

Even more relevant in the context of the present interlocutory application is the judgment of Russell J. in Jones v. Lipman (1962) 1 W.L.R. 832 where the learned judge in giving summary judgment under Order 14 against the defendants and refusing leave to defend said at p.836:

"The defendant company is the creature of the first defendant, a device and a sham, a mask which he holds before his face in an attempt to avoid recognition by the eye of equity ..."

Finally the learned author of Gower's Principles of Modern Company Law (ibid at p.133) identifies 3 circumstances in which the courts are clearly willing to look behind the 'veil of incorporation'. These are:

"(1) When the court is construing a statute, contract or other document;

(2) When the court is satisfied that a company is a "mere facade" concealing the true facts; and

(3) When it can be established that the company is an authorised agent of its controllers or its members, corporate or human."

Before dealing with the affidavits it should be noted that learned defence counsel declined the court's invitation to address it on the question of "lifting the veil of incorporation".

What then are the undisputed 'exceptional circumstances' in the present case upon which learned counsel for the plaintiffs urges the court to lift the 'corporate veil'? These are as follows:

(1) The fact that the first defendant personally received the money from the 1st plaintiff's attorney and signed a receipt therefor in his personal capacity whilst recognising the agency of the attorney;

(2) The fact that the first defendant is a director of the second defendant company and holds 99 out of 100 shares issued by it - the other share being held by a namesake living with the first defendant;

(3) The fact that the first defendant alone executed the two agreements between the two plaintiffs separately and the second defendant company - the latter being without the company seal albeit in his capacity as a director;

(4) The fact that the first defendant issued two (2) personal cash cheques to the plaintiffs for a total sum of $13,000 which together with a cash payment of $2,000 made up the first 'interest payment' of $15,000 due under the second defendant company's contract; and

(5) The undenied assertion of the 1st plaintiff's attorney that "the first defendant always purported to deal in his personal capacity relating to all the advances ...".

Learned defence counsel in reply asserts that in both agreements entered into with the second defendant company the first defendant is no-where named either as a party, borrower or registered proprietor of any of the land offered as security. He also doubted the enforceability of the second agreement which he described as an "after-thought".

I am however satisfied that this is a case which falls fairly and squarely within all three categories of cases enumerated above in which the court would be willing to lift the 'corporate veil' and in doing so I am satisfied that the first defendant has 'no defence' to the claim and accordingly the application is dismissed with costs to the plaintiffs to be taxed if not agreed.

(D.V. Fatiaki)
JUDGE

At Suva,
4th October, 1994.

HBC0510J.93S