The China State Bank Ltd v. King Pacific International Holdings Ltd and Others
Read the full judgment text of CACV 26/2003 on BabelCite. This Court of Appeal judgment was delivered on 4 March 2004.
1. This is an appeal from a judgment of Deputy High Court Judge Carlson given on 15 November 2002. The application before the judge was an application for summary judgment under Order 14 against the 3rd defendant who had been sued by the plaintiff in respect of liability under a guarantee given in respect of liabilities incurred by the 1st defendant. The judge below had held in favour of the plaintiff. At the conclusion of the hearing judgment was reserved which we now give.
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CACV000026/2003 CACV 26/2003 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF APPEAL CIVIL APPEAL NO. 26 OF 2003 (ON APPEAL FROM HCA NO. 1694 OF 2001) ____________________
(By original Writ and Order carry on) ____________________ Coram: Hon Rogers VP and Le Pichon JA in Court Date of Hearing: 10 February 2004 Date of Handing Down Judgment: 4 March 2004 ____________________ J U D G M E N T ____________________ Hon Rogers VP: 1.This is an appeal from a judgment of Deputy High Court Judge Carlson given on 15 November 2002. The application before the judge was an application for summary judgment under Order 14 against the 3rd defendant who had been sued by the plaintiff in respect of liability under a guarantee given in respect of liabilities incurred by the 1st defendant. The judge below had held in favour of the plaintiff. At the conclusion of the hearing judgment was reserved which we now give. Background 2.The claim against the 1st defendant had been for two separate amounts, namely, US$823,356.59 and HK$89,714.63. These were said to be outstanding from facilities granted by the plaintiff. Although judgment had been obtained against the 1st defendant by consent, since it was in liquidation, clearly there is unlikely to be any recovery from it. 3.The 2nd and 3rd defendants were a director and chairman respectively of the 1st defendant. They were sued as guarantors of the 1st defendant's indebtedness. The 2nd defendant did not appear at the hearing before the judge below and judgment was given against him. Again, it would appear problematic as to whether the plaintiff is likely to recover anything against the 2nd defendant. The first facility letter 4.By letter dated 15 July 1998 from the plaintiff to the 1st defendant, which was countersigned on behalf of the 1st defendant by the 2nd and 3rd defendants, the plaintiff granted the 1st defendant general banking facilities. The relevant parts of that the facility letter, ("the first facility letter") are as follows:
The letter of guarantee 5.Also dated 15 July 1998 was a letter of guarantee signed by both the 2nd and 3rd defendants. The material parts of that guarantee, which is the subject of this action, are as follows (with the parties identified in italics):
The second facility letter 6.As recorded by the judge, by 2 February 2000 the 1st defendant's indebtedness to the plaintiff stood at US$2,822,833.34 and HK$8,645,001.92. Due to the fact that the 1st defendant was experiencing financial difficulties, it was obliged to seek further assistance from the plaintiff. This was forthcoming in the form of a revised facility letter ("the second facility letter"). I set out the terms of that letter below because it forms part of the argument on behalf of the 3rd defendant, to which I shall come, that this was a new facility. The terms of clause 1 were as follows:
7.In my view, the liability of the 3rd defendant under the guarantee is clear. I see no basis whatever for avoiding the unambiguous words of the guarantee. Nevertheless, Ms Eu SC, on behalf of the 3rd defendant took up the same, or a very similar, argument to that which had been argued by other counsel in the court below. In order to understand the argument on behalf of the 3rd defendant, which I have to say I found uncharacteristically abstruse, it is necessary to refer to some other matters. 8.It was argued by Ms Eu that not only were the terms of the two facility letters different but that the second facility letter constituted a totally new facility. In my view, however, the second facility letter merely represented a continuation of the facilities. Such a continuation had, indeed, been envisaged in the original facility letter, see for example clause 11 of the first facility letter. So, although the amount of the overdraft was given in the second facility letter as HK$8 million, it would be noted that in accordance with the terms of the first facility letter, the limit of the overdraft would, in any event, have been reduced to that amount by 25 July 2000. Thus there is no difference in the overdraft limit since, in the first facility letter the overdraft limit was to be reduced by HK$0.5 million every six months. The fact that in the first facility letter one of the alternatives for the interest rate for the overdraft had been said to be 2 percent over the cost of funds and in the second facility letter the final alternative had been expressed in terms of 2 percent over Hong Kong Interbank Offer Rate (commonly referred to as HIBOR) is simply a different form of words to express the same thing. Likewise in respect of the loan of US$1 million, that too was a reducing amount under the terms of the first facility letter. Hence, in the second facility letter the amount of the overdraft is said to be HK$8 million. But that is the figure as of 25 July 2000. It might also be noted that the accounts remained the same after the second facility letter. 9.Likewise Ms Eu attempted with the help of a chart headed "Summary of differences between the two facility letters." to argue that other terms of the two facility letters were different. However, the more one looked at the alleged differences, the more it became obvious that the second facility letter was a continuation of the facilities in the first facility letter. Some point was attempted to be made in respect of the differences in the handling charges which were contained in clause 11 of the first facility letter and clause 5 of the second facility letter. However, again, it is clear that the first facility letter envisaged the renewal of the facilities since the concluding words of clause 11 were "or such other sum as we may notify you upon renewal of the Facilities". 10.The second facility letter, dated 24 February 2000 required, amongst other things, a signed copy of the duplicate of the letter together with "Board Resolutions (if applicable) indicating your acceptance of the Facilities on terms and conditions set out in this letter". It is by no means clear what was meant by the words "if applicable". Nevertheless, a board resolution was provided. That is, however, was the subject of particular criticism by the 3rd defendant since, although the resolution named the 3rd defendant as the chairman of the meeting, the signature was clearly not that of the 3rd defendant. There is no effective dispute in this case that the signature was that of the 2nd defendant. 11.The 3rd defendant seeks to build on this because it was at about this time that a major dispute erupted between the 2nd and 3rd defendants. The outcome of that dispute was that the 3rd defendant lost his position as chairman of the company, although he retained his position as a director. It is the 3rd defendant's case that those disputes between the 2nd and 3rd defendants and their respective supporters received sufficient publicity that the matter should have come to the attention of the plaintiff. Putting these matters together Ms Eu argued as follows. 12.The plaintiff should have been aware that the 1st defendant was in corporate disarray. As a consequence it should have consulted the 3rd defendant to determine what was the true position with regard to the 1st defendant's affairs. Had it done so it would not have granted any further facilities to the 1st defendant and the facilities would have been called in by the plaintiff or, as an alternative scenario, the 3rd defendant would have been in a position to discharge the 1st defendant's liability to the plaintiff and, under subrogation, seek to recover the amount involved from the 1st defendant. Instead, the 1st defendant was granted the facility of the second facility letter: that was a new facility. Furthermore, in granting the 1st defendant the new facility, the plaintiff failed to take heed of the fact that the minute of the board meeting referred to above was purportedly one where the 3rd defendant had chaired the meeting. Two points are made here. In the first place the 3rd defendant was no longer the chairman of the 1st defendant and in the second place the signature was clearly that of the 2nd defendant and not the 3rd defendant. Following on that, it is said that the granting of the facility enabled the 1st defendant to continue trading and as a consequence its position deteriorated dramatically: the 1st defendant's financial position went from one where it was at least balance sheet solvent to one of clear insolvency and liquidation. 13.It is pertinent to note that it was not sought to be argued that the second facility constituted an event or circumstance that, of itself, discharged the 3rd defendant of his obligations under the guarantee. Rather, it was sought to argue that there was a combination of some sort of duty of care that had arisen. 14.To found her case Ms Eu relied upon the proposition that the plaintiff had done some positive act which prevented it from recovering against the 3rd defendant under the guarantee. The foundation of the argument was based on a passage from the speech of Lord Kingsdown in the case of Black v Ottoman Bank [1862] XV Moore 472 at p.483:
15.The reference to fraud as used by Wood VC was taken up by Denman J, as he then had been, in the case of The Mayor, Aldermen, and Citizens of Durham v Fowler and another [1889] 22 QBD 394 when he said at page 420:
16.Relying on a statement by Bokhary JA, as he then was, in Bank of Credit and Commerce Hong Kong Limited (in liquidation) v Quadrutec Hotel Management and Development Limited and others [1996] 4 HKC 316 at page 325A:
Ms Eu argued that leave to defend should be given because there was, what at the very least was, an embryonic defence. Despite the persuasive advocacy, I regret that I do not see any such defence in this instance. 17.Even if it be assumed that the plaintiff would have noticed that the 1st defendant was in corporate disarray I do not see that it was under any duty to consult the 3rd defendant. The points sought to be made in relation to the board resolution provided in 2000 appear to me to be irrelevant. The fact is that the 1st defendant did not dispute liability and indeed judgment has been entered against the 1st defendant. Whatever duty of care a creditor may owe to a guarantor in relation to obtaining true market value when dealing with assets of a debtor, it is fundamental that the creditor does not have to take any steps as against the debtor. All that can be said in this case is that the plaintiff continued the bank facilities which had previously been there. When stripped to its basics the 3rd defendant's complaint is simply that he, himself, did not step in at a time when he says that he was at loggerheads with the 2nd defendant and seek to discharge the liability of the 1st defendant and recoup himself from assets which he says were there. Whether there were assets of the 1st defendant, which were at the time realisable, does not matter. There can only be suspicion, however, that what was represented as book value was not realisable. 18.In those circumstances I would dismiss this appeal and make an order nisi of costs in favour of the plaintiff. Hon Le Pichon JA: 19.I agree.
Representation: Mr Paul Shieh SC and Mr Thomas Au, instructed by Messrs Wat & Co.,for the Plaintiff/Respondent Ms Audrey Eu SC and Mr Tommy So, instructed by Messrs Simon Siu, Wong,Lam & Chan, for the 3rd Defendant/Appellant | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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