Pacific Harbor Advisors Pte Ltd and Another v. Winson Federal Ltd and Others
Read the full judgment text of HCA 1257/2013 on BabelCite. This High Court CFI judgment was delivered on 19 November 2015.
1. This is the plaintiffs’ second summary judgment application in this action (“the 2 nd Summary Judgment Summons”).
Cited by 2 cases · Cites 3 cases
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HCA 1257/2013 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE HIGH COURT ACTION NO 1257 OF 2013 ____________________
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_______________ D E C I S I O N _______________ INTRODUCTION 1.This is the plaintiffs’ second summary judgment application in this action (“the 2nd Summary Judgment Summons”). 2.The plaintiffs (“Ps”), by this action, seek to make recovery in respect of two loans made in 2008, whether by way of repayment from the borrower (D1), or pursuant to security provided by D2 to D7. 3.As to the parties, at the material times:
4.The first summary judgment application was for monetary judgment and was heard and decided in Ps’ favour by DHCJ B. Chu (as she then was) on 10 June 2014 (“the 1st Summary Judgment”). The substance of the order made at that time was for D1 and D2 to pay US$38 million plus interest. No order was sought against Vincent at the 1st Summary Judgment application, but he was served with the summons, he filed evidence on his own behalf and he participated in the hearing with legal representation. 5.On 26 May 2015, Vincent took out a summons for leave to appeal the 1st Summary Judgment out of time. Extension of time was sought on the basis of fresh evidence in the form of a taped telephone conversation on 4 May 2015. The application was dismissed by the Court of Appeal by its judgment dated 21 August 2015 (the “Leave Judgment”). 6.This 2nd Summary Judgment Summons was taken out by Ps on 9 February 2015 against Vincent, D4 (IHAL) and D6 (RIL).
RELEVANT BACKGROUND AND DOCUMENTS 7.The background to this matter, and the defences raised in the 1st Summary Judgment Application, are thoroughly addressed in the 1st Summary Judgment. However, I will briefly address the relevant background facts and documents for the purposes of this application below. 8.On 2 June 2008, Ps and/or one or more of the Ds executed documentation relating to loan facilities totalling US$40 million, including.
9.Carlos died on 14 November 2008. 10.D1 was unable to make repayment of the outstanding loan debt of US$38 million pursuant to the 1st and 2nd Loan Agreements. By two agreements dated 2 June 2009 (albeit signed thereafter), P1 and D1 agreed to amend the terms of the 1st and 2nd Loan Agreements to (1) extend the repayment date (2) vary the interest terms (“the 1st and 2nd Amendment Agreements” respectively). D1 entered the 1st and 2nd Amendment Agreements by its director, Vincent. 11.By solicitors’ letter dated 31 May 2013, Ps stated that an event of default under Clause 7.1 of the Loan Agreements had occurred, demanding immediate repayment of the loans, interest and other amounts apparently accrued under the Loan Agreements. I am not aware of any earlier notice of event of default under Clause 7.2 of the Loan Agreements (in particular, any Clause 7.2 notice prior to the Amendment Agreements). SUMMARY JUDGMENT — RELEVANT PRINCIPLES 12.There was no dispute as to the applicable legal principles.
D4 AND D6 13.I can dispose of the applications against D4 and D6 briefly. Each of D4 and D6 have by letters dated 27 August 2015 addressed to the court stated, by reference to the 2nd Summary Judgment Summons, that they do not object to summary judgment and the relief sought against them in the ASOC (which is the relief claimed today). Accordingly, those orders for specific performance will be granted. D3/VINCENT 14.The plaintiffs made an application to amend the prayer of their Amended Statement of Claim, in order to claim specific performance of the IHAL Share Pledge Agreements against Vincent. Although the plaintiffs had pleaded the facts they claimed to be necessary to make a claim against Vincent for specific performance of the IHAL Share Pledges, such a claim was omitted from the prayer. I agree with Mr Edward Chan SC for the plaintiffs, leading Hugh Kam, that this is a technical matter. Counsel for Vincent, Mr Earl Deng leading Au Lut Chi, did not object to the amendment. I accordingly allow an amendment to the prayer as proposed by Mr Chan SC in oral submissions (without a draft amendment being produced) to add the following words to the prayer “AGAINST CARLOS AND/OR VINCENT” before “(2) Specific performance of the IHAL Share Pledge Agreements”. The plaintiffs’ solicitors are directed to effect such amendment. The costs of and incidental to the amendment are to Vincent, to be taxed if not agreed. 15.The evidence filed in support of the 2nd Summary Judgment Summons is the 7th affidavit of Warren Allderige on behalf of the plaintiffs, the 5th affidavit of Vincent in opposition, and the 12th affidavit of Warren Allderige in reply. The evidence suggests that Vincent would be disputing the indebtedness of D1 as primary debtor in order to defend the claims made against him. Such evidence was filed before the Leave Judgment. By the time of the service of the skeleton arguments, it was clear that (in my view, sensibly), Vincent was not disputing the indebtedness of D1 for present purposes. 16.I am satisfied, by virtue of the 1st Summary Judgment, that D1 is indebted to Ps. 17.I am satisfied that Carlos and Vincent provided the LOUs to P1:
18.I am also satisfied that the IHAL Share Pledge Agreements were provided to P1 by Carlos and Vincent as pledgors:
19.Ps, having established the outstanding primary indebtedness of D1, and the obligations of Vincent under the LOUs and the IHAL Share Pledge Agreements (there being no dispute that the relevant demands have been made and notices given), are prima facie entitled to the relief they seek against Vincent. The burden shifts to Vincent to establish an arguable defence. 20.Vincent argues that there should be no specific performance of the LOUs on the following grounds:
21.Vincent argues that there should be no specific performance of the IHAL Share Pledge Agreements on the basis that specific performance is not an appropriate remedy in the circumstances. DISCHARGE OF VINCENT AS GUARANTOR (a) Arguments 22.It is argued on behalf of Vincent that:
23.It is argued on behalf of Ps:
(b) Relevant legal principles 24.Mr Chan SC and Mr Deng were largely agreed as to the applicable legal principles. 25.If obligations under a contract are guaranteed, any variation to the contract must be agreed by the guarantor, or the creditor must reserve his rights against the surety when making the variation agreement, otherwise the guarantor will be discharged: Holme v Brunskill (1878) 3 QBD 495 at 505. 26.The rationale for the general rule as to discharge of the surety is that a variation of the principal contract, for example by way of extension of time or release, interferes with the surety’s right to pay off the debt and sue the principal debtor: Holme v Brunskill at 505. 27.The rationale for the exceptions is as follows:
28.The burden of proof is on the creditor seeking to enforce the guarantee that the guarantor has given consent: O’Donovan & Phillips “The Modern Contract of Guarantee” (English edn) at paras 7‑56. 29.Consent to the variations need not be express; it may be implied eg where the guarantor requests or instigates the variation and/or where the guarantor is a director of the principal debtor company and negotiates with the creditor for the variation: O’Donovan & Phillips at paras 7‑59‑7‑60. 30.Mere knowledge of the variation is an insufficient basis from which to infer consent: O’Donovan & Phillips at para 7‑58. 31.Polak v Everett (1876) 1 QBD 669 at 673 makes clear that if a surety is aware of a proposed variation of the principal contract which might discharge his liability as guarantor, there is no authority for the proposition that he is under a duty to warn the creditor. Mere knowledge of the variation by the surety does not amount to consent to the variation. 32.Where the guarantor is the director of the debtor company negotiating for the variations, it would be unrealistic to make an artificial distinction in terms of his knowledge and consent between the two capacities of guarantor and director of the debtor: Beck Interiors Ltd v Russo [2009] EWHC 3861 (QB) at para 34; Winstone Ltd v Bourne [1978] 1 NZLR 94 at 96 lines 23‑43; German Trade House International Ltd v Lau Wai Ki [1996] 3 HKC 406 at 411H‑412E. 33.As to the impact on a guarantor of the release of a co‑guarantor, Andrews & Millett “The Law of Guarantees” (7th edn), para 9‑040 states that:
34.I was not referred to Commercial Bank of Australia, nor did I hear argument on this area of apparent uncertainty in the law. I do not begin to consider whether the discharge rule does apply in the joint and several liability situation. For present purposes, I assume that there may be discharge in the context of joint and several liabilities and that is not a matter for summary judgment. (c) Discussion 35.It seems to me that the Amendment Agreements would serve to discharge the LOUs unless either of the exceptions are established ie:
36.Vincent, as director of D1 who procured the Amendment Agreements, must be taken to have consented to the variations. Mr Deng sensibly did not dispute this. 37.I have no doubt that if the LOU contained a surety obligation of Vincent alone, then Vincent’s liability as surety would remain intact notwithstanding the Amendment Agreements. 38.Ps rely on Clause 4 of the Amendment Agreements to argue that the LOUs, and the liability of Carlos and Vincent thereunder, remain intact. 39.Clause 4 of the 1st Amendment Agreement provides:
40.Mr Deng on behalf of Vincent argues that the said Clause 4 only applies to security agreements entered into by D1. That certainly seems to be the literal meaning of Clause 4. In other words, Mr Deng argues that Clause 4 of the Amendment Agreement does not apply to the LOUs and need not be considered. 41.Mr Chan SC on behalf of Ps responds that Clause 4 cannot properly be read literally, as to do so robs it of any meaning whatsoever. That is because if one considers the security agreements to be provided under the 1st and 2nd Loan Agreements, none of them were to be entered into by D1, but D1 was obliged to procure that they all be provided. Significantly, Mr Chan SC submits that Clause 4 should be read as substituting the words “entered into” with “provided”. 42.I now consider it necessary to address Ps’ pleaded case and the notice given to Vincent as to Ps’ case on the question of discharge of liability under the LOUs. 43.Contrary to Ps’ submissions, the burden is on the creditor, Ps, to establish an exception to the general rule of discharge upon variation of the principal contract. I note that Ps do not appear to have adequately pleaded their case.
44.However, I do not consider it necessary to decide the construction point because it does not assist me in deciding whether it is arguable that either of the two exceptions to the guarantee discharge rule apply. 45.Firstly, on the consent issue, as Mr Deng argued, Clause 4 of each Amendment Agreement is effective only between those parties who have agreed to it. That must be right.
46.Also on the consent issue, Mr Deng argued that, unlike other documents within the suite of security documentation executed in support of the 1st and 2nd Loan Agreements, the LOUs did not permit Ps and D1 to make any variations to the principal contract without further consent from Carlos and Vincent. Mr Deng referred to Clause 6 of the IHAL Share Pledge Agreements[5] and Clause 2.5 of Carlos’ personal guarantee[6] to make this point good.
47.Secondly, on the issue of reservation of rights: Ps have not persuaded me that Clause 4 of the Amendment Agreement would operate as a reservation of Ps’ rights as against Carlos and Vincent under the LOUs, so as to amount to an exception to the general rule of discharge of the sureties. Indeed there was really only a bare submission on the point, without developed argument.
48.Accordingly, it seems to me to be at least arguable that Carlos was discharged from liability under the LOUs by the Amendment Agreements. 49.What then is the impact on Vincent’s liability under the LOUs? 50.It seems clear that if Carlos and Vincent are jointly liable under the LOUs, then discharge of Carlos’ liability would affect Vincent’s ability to seek a contribution from Carlos and accordingly also discharge Vincent as co‑surety. 51.Mr Chan SC did not suggest that I was in a position to determine whether the LOUs gave rise to joint or joint and several liabilities of Carlos and Vincent. He gamely attempted a hypothetical analysis of the potential ownership structure of the Guangzhou Property by reference to Hong Kong law principles of succession and property law, but I do not find that to be of assistance. 52.It therefore seems to me to be a triable issue as to whether the liabilities of Carlos and Vincent under the LOUs were joint (in which case, the discharge of Carlos would serve to discharge Vincent), or joint and several (in which case, there is an issue of law to be considered as to Vincent’s liability). 53.Mr Chan submitted that it would be wrong for Vincent to benefit from the discharge of Carlos when Vincent consented to the variations on his own behalf and knew that Carlos’ interest was unrepresented. Mr Chan did not cite any authority in support. Indeed his submission seems to run contrary to Polak v Everett. Although Vincent consented on his own behalf, Vincent did not represent Carlos’ interest and it was not Vincent’s duty to warn P1 that without obtaining Carlos’ consent, there was a risk of discharge of the LOUs. 54.Accordingly, I find that Vincent has an arguable defence to Ps’ claim under the LOUs. Insofar as I deal with the availability of specific performance of the LOUs below, I do so for completeness’ sake only. SPECIFIC PERFORMANCE 55.The elements for the relief of specific performance are (1) that there is a complete, binding and valid contract (2) that the contractual terms are sufficiently certain and (3) that damages are not an adequate remedy. See Ma, Equity and Trusts Law in Hong Kong (2014) at para 23‑4. 56.I understood Mr Deng to dispute Ps’ entitlement to specific performance on the basis that damages would be an adequate remedy. In the context of the IHAL Share Pledge Agreements, Mr Deng also argued that there was no need for an order of specific performance in light of the factual circumstances (considered further below). 57.There has been a growing tendency by the courts not to treat the adequacy of damages as a necessary threshold to surpass, but rather to ask the ultimate question of whether it would be more just to grant specific performance than to award damages. See Spry, The Principles of Equitable Remedies (2014) at 62‑63. 58.If the subject-matter of the contract is shares of a company, and if it would be problematic and difficult to assess the value of the shares at the present stage, and thus the damages which might be awarded, then damages would not be an adequate remedy and specific performance should be ordered. See Advertasia Street Furniture Ltd v China Outdoor Media Investment (Hong Kong) Co Ltd (HCCL 145/1999, 8 October 2004) at paras 57‑58 (Stone J); and Evans Marshall & Co Ltd v Bertola SA [1973] 1 WLR 349 (EWCA) at 380C (Sachs LJ). 59.Where there is a risk that the defendant will be unable to satisfy an order for damages (eg the defendant has an unknown financial status), that would in and of itself be enough to justify the conclusion that damages are inadequate. See Evans Marshall & Co Ltd v Bertola SA (1973) at 380H‑381B (Sachs LJ). 60.As to the LOUs, there is at present no evidence of the value or nature of the Guangzhou Property. Ps’ written submissions asserted that Vincent, inter alia, would not be able to repay the loan debts, so that he would not be good for damages. Mr Deng did not, I think, dispute this. 61.As to the IHAL Share Pledge Agreements, Mr Deng argued that the court should not make an order that would serve no purpose. He submitted that where D2 owned 95% of the IHAL shares, and Vincent owned 5%, and receivers had been appointed to manage D2’s IHAL shares, then Ps could recover their debt from the 95% interest, and specific performance of the pledge over Vincent’s 5% would only be more trouble for the court (in terms of directions and supervision), and be superfluous. I am unable to accept that submission. As Mr Chan SC responded, the 5% interest must necessarily have value of its own. Indeed, one can see that a realisation of 100% of a private company may well be more attractive than the 95% stake, with a sitting 5% minority shareholder. 62.I see no reason why there should not be an order for specific performance of the IHAL Share Pledge Agreements. ORDER 63.Accordingly, I order as follows:
64.As to costs:
Mr Edward Chan SC and Mr Hugh Kam, instructed by Oldham Li & Nie, for the 1st and 2nd plaintiffs Mr Earl Deng and Mr Au Lut Chi, instructed by Tsang, Chan & Woo, for the 3rd defendant The 4th defendant was not represented and did not appear The 6th defendant was not represented and did not appear [1] This submission does not sit easily with Mr Chan’s submission (correct as it seems to me) that the LOU only creates a limited liability to apply the sale proceeds of the Guangzhou Property to D1’s debt, rather than a complete guarantee of D1’s liability — if Vincent owned the whole of the Guangzhou Property, he would be paying 100% of the sale proceeds rather than his share. [2] Implicit in this submission is the acceptance that Vincent would be prejudiced if the successor to Carlos’ several interest was discharged from liability under the LOUs. [3] Clause 4 of the 2nd Amendment Agreement is in identical terms save that it refers to the 2nd Loan Agreement. [4] Warren Allderige’s 12th affidavit para 32 incorrectly set out Clause 4 of the Amendment Agreements, transposing the words “security arrangements” for the correct words “security agreements”. Ps’ construction argument would be more attractive had the correct wording of Clause 4 been “security arrangements”. [5] Clause 6 provides: “Pledgee’s Unfettered Rights. The Pledgee shall have complete liberty to vary the Loan or any related documents, to enforce or refrain from enforcing any of its rights thereunder, to release or compromise with the Pledgors thereunder, to take additional security and otherwise to do anything under or in connection with the Loan or related documents without affecting or prejudicing any of its rights hereunder.” [6] Clause 2.5 provides: “The liabilities of the Guarantor under this Guarantee shall not be affected or discharged by: (i) the granting of any time or indulgence to the Borrower by the Lender; or (ii) any variation to or modification of the Loan Agreement, Loan Documents or any other document referred to therein.” |
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