China Merchants Bank v. Minvest International Ltd. & Another

CACV002960/2001

CACV 2960/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 2960 OF 2001

(ON APPEAL FROM HCA NO. 9070 OF 2000)

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Coram: Hon Rogers VP and Hartmann J in Court

Date of Hearing: 10 January 2002

Date of Handing Down of Judgment: 18 January 2002

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J U D G M E N T

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Hon Rogers VP:

1.This is an appeal from a judgment of Madam Justice Chu given on 25 September 2001. The application before the judge was an appeal from the Master. The judge allowed the plaintiff's appeal and gave summary judgment in favour of the plaintiff for the sum of US$4,477,950.86 with interest on US$1,677,000.00 at 10.75 per cent per annum from 25 August 2000 until final payment. At the hearing of this appeal, this court said that it would give its decision in writing which we now do.

Background

2.The background of the matter is set out in the judgment of Madam Justice Chu. Since the facts have been succinctly stated by the judge in paragraphs 2 to 10 of her judgment and there has been no challenge to the accuracy of what is stated, no purpose would be served in setting out the facts other than to adopt those paragraphs in this judgment.

"2. The plaintiff is a bank incorporated and carries on business in the Mainland of the People's Republic of China ("PRC") and the 1st defendant is one of its customers.

3. By a Chinese loan agreement dated 1 July 1996 executed by the plaintiff and the 1st defendant in Shenzhen ("the Loan Agreement"), the plaintiff extended to the 1st defendant a term loan of US$50 million ("the Loan"). The Loan was guaranteed by a PRC entity called 國家物資儲備調節中心 under an undated Chinese guarantee. As at 21 June 1997, the 1st defendant's indebtedness under the Loan Agreement was US$12,432,000.

4. It is common ground that the 1st defendant defaulted under the Loan Agreement in July 1997. The 1st defendant's case is that it had lent part of the Loan to a Zhuzhou Smelter Factory ("the Factory") and as a result of the Factory's failure in making repayments, the 1st defendant was unable to repay the plaintiff.

5. By 20 December 1998, the 1st defendant owed the plaintiff US$12,332,000. On 30 December 1998, the plaintiff, the 1st defendant and one Seapower International Holdings Limited ("Seapower") entered into a Loan Assumption Deed whereby Seapower agreed to assume US$6 million of the 1st defendant's debt. As a result of this and as a result of three sums paid by the 1st defendant, the 1st defendant's indebtedness was reduced to US$5,332,000 (excluding interest) by the end of May 1999.

6. On 23 June 1999, the 1st defendant and the Factory entered into a Chinese Repayment Agreement ("the Repayment Agreement"), under which the Factory agreed to repay US$2,922,820 by six monthly instalments to be paid into the 1st defendant's account with the plaintiff, commencing July 1999. The last instalment was to be made on or before 25 December 1999.

7. On 2 July 1999, the 2nd defendant executed a Chinese guarantee in favour of the plaintiff ("the Guarantee"). On the same day, the 2nd defendant also signed a Chinese Confirmation Letter ("the Confirmation Letter") in respect of the Guarantee.

8. On 5 July 1999, the plaintiff, the 1st defendant and the Factory entered into a Chinese tripartite agreement ("the Tripartite Agreement") whereby the Factory and the 1st defendant agreed that the repayments to be made by the Factory under the Repayment Agreement and paid into the 1st defendant's account with the plaintiff were to be applied towards the repayment of the debt owed by the 1st defendant to the plaintiff.

9. On 27 October 1999, the 1st defendant created a debenture over its assets in favour of the plaintiff ("the Debenture"). In the meantime, the 1st defendant had in July 1999 paid two sums totalling US$727,000 to the plaintiff. Between July and December 1999, the Factory also paid to the plaintiff a total sum of US$2,922,820 pursuant to the Repayment Agreement and the Tripartite Agreement.

10. By two letters dated 30 August 2000 addressed separately to the defendants, the plaintiff through its solicitors demanded payment of the sum of US$4,477,950.86, being the balance of the 1st defendant's indebtedness as at 24 August 2000, together with interest. No payment was made. The plaintiff therefore issued these proceedings on 19 September 2000."

The action

3.The plaintiff's claim against the 1st defendant is on the original loan agreement. As against the 2nd defendant it is based upon the guarantee which was executed on 2 July 1999.

4.The defendants filed their defence on 31 October 2000. Very sensibly two of the matters which were argued in the court below have not been pursued in this court. The matters which were pursued on behalf of the defendants in this court were as follows:

1. It was said that there was a binding settlement agreement between the plaintiff, the 1st defendant and the Factory whereby the 1st defendant's liabilities under the loan agreement had been extinguished.

2. It was said that the 2nd defendant's guarantee was not made under seal and there was no consideration given for it. In the circumstances it was said that it was unenforceable.

The tripartite agreement

5.The crux of the defendant's allegation in respect of this agreement is contained in paragraph 19 of the affirmation of the 2nd defendant made on 4 January 2001. The wording of the material part is identical to that of the defence, save one of the figures which was altered in the re-amended defence. The nub of the allegations were as follows:

1. The Factory would repay a sum of US$2,922,820 to the 1st defendant in full and final satisfaction of the Factory's loan from the 1st defendant. The 2nd defendant's evidence was that the amount outstanding on that loan was more than US$8 million. The repayment of the loan would be made in six monthly installments commencing July 1999 and finishing on 25 December 1999. They would be transferred each month from the Factory's bank account to the 1st defendant's bank account held with the plaintiff. The 1st defendant would authorise the plaintiff to withdraw the installments from the defendant's account. The 1st defendant would also pay another sum of US$727,000 to the plaintiff forthwith.

2. "The plaintiff would accept the 1st Defendant's payment of the said sum of US$2,922,820 and the said sum of US$727,000.00 in full and final satisfaction of the outstanding part of the Facility owed by the 1st Defendant to the Plaintiff. Upon receipt of the 1st Defendant's said payment, the Plaintiff would not take any legal proceedings against the 1st Defendant for any remaining balance of the Facility."

6.The judge held that this allegation was unbelievable. She did so on the basis of the documents which had been produced. These were the 4 documents referred to in paragraphs 6 to 9 respectively of the judge's judgment quoted above. None of these documents reflected, in any way, the suggestion that there would be a discharge of any outstanding balance of the amount owed by the 1st defendant to the plaintiff.

7.In my view, the judge was correct in her approach and I see no ground for criticising either the conclusion which she reached or the basis of her reasoning. As she pointed out, it is recited in the 2nd defendant's guarantee that the 1st defendant owed the plaintiff US$5,105,000. It is, particularly, surprising that in the tripartite agreement executed three days thereafter, which provided that the repayments would be made by the Factory to the 1st defendant's account and applied thereafter towards the repayment of the debt, there is no reference to the discharge of the balance owing to the plaintiff should the various payments be duly completed as set out in the agreement. For that reason and the other reasons set out in paragraphs 33 to 39 of the judge's judgment, I concur with the judge's finding that the defence based upon the alleged settlement agreement was plainly incredible.

The 2nd defendant's guarantee

8.In view of the dispute as to whether the 2nd defendant's guarantee executed on 2 July was executed as a deed, the judge considered whether there was consideration for the guarantee. Mr Xia Jing Qing, who filed an affirmation on behalf of the plaintiff, stated at paragraph 7 that at the repeated requests of the 1st and 2nd defendants the plaintiff agreed to withhold legal proceedings against the PRC Guarantor in respect of the monies "owed by the 1st Defendant for so long as the Plaintiff might deem fit on condition that the 1st Defendant executed a debenture in favour of the Plaintiff and the 2nd Defendant executed a personal guarantee in favour of the Plaintiff as security for the indebtedness owed by the 1st Defendant."

9.The judge referred to this and to the fact that the 2nd defendant said in his affidavit that there had been discussions, in which he took part, between the 1st defendant and the plaintiff about the possible consequence or effect if the plaintiff commenced legal proceedings against the PRC Guarantor. The judge came to the conclusion that whereas the 2nd defendant stated at paragraph 22 of his affirmation that the plaintiff was worried that the Factory would not make the payments it had undertaken to, the defendant's denial was no more than a bare denial.

10.Mr Lam, who appeared on behalf of the plaintiff, did not seek to avoid the point that the terms of the debenture which was executed in October 1999 did not contain reference to any forbearance on behalf of the plaintiff from taking suit. Despite this, in my view, it was open to the judge to accept Mr Xia's evidence, in particular, in the light of the surrounding fact that there had been actual forbearance to take proceedings against the PRC Guarantor.

11.The judge went on to refer the cases of Fullerton v Provincial Bank of Ireland [1903] AC 309 at 313 and Glegg v Bromley [1912] 3 KB 474, 486 to 7 and 491. As was said by Fletcher Moulton LJ and Parker J in the latter case if there has been pressure from a creditor and in response to that pressure further security is given that suffices to show that there has been consideration. Indeed, Fletcher Moulton LJ went further and said that the court will, "if it possibly can" give effect to the probability that the extra security given led the creditor to forbear from taking action. In my view, the judge's approach to the question of consideration in respect of the 2nd defendant's guarantee was wholly justified and I would not disturb her finding in this respect.

12.In my view, this appeal falls to be dismissed and there should be an order nisi for costs in favour of the plaintiff.

Hon Hartmann J:

13.I concur.

Representation:

Mr Paul Lam, instructed by Messrs Koo & Partners, for the Plaintiff/Respondent

Ms Jennifer Ng, instructed by Messrs Tong Chan & Co., for the 1st & 2nd Defendants/Appellants