Grandrich Holidings Ltd v. Cathness Investments Ltd and Others

Case No.HCA 2343/1977

Court

High Court CFI

Date—

Judge—

Case Document

100%Judiciary

HCA002343/1977

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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ACTION NO. 2343 OF 1977

BETWEEN
	GRANDRICH HOLIDINGS LIMITED	Plaintiff
	and
	CATHNESS INVESTMENTS LIMITED	1st Defendant
	and
	DAVID WYNDHAM GOUGH	2nd Defendant
	and
	HARRY HANDLEY CLOUTLER	3rd Defendant
	and
	JOHN IAWSON LEATHAM	4th Defendant

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CORAM: Li, J.

Date of Judgment: 9th March, 1978.

A. Dicks (Wilkinson & Gmist) for Appellant

K. Bokhary (J.S.M.) for Respondent

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JUDGMENT

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1. This is an appeal from the Registrar's decision giving the defendants unconditional leave to defend the action for the recovery of a loan. The facts as disclosed in Mr. Briggs' and Mr. Whyte's affidavits, solicitors for the plaintiff and the defendants respectively, are undisputed and are as follows:-

On the 14th of May 1976 the plaintiff lent one Interbarge Limited a sum of $988,000. The purpose of this loan was to enable Interbarge to buy 988,000 shares of nominal value of $1.00 each of the Gulfspan Limited. This sum of money in turn would enable the Gulfspan Limited to charter four vessels, namely, two tugs and two barges from one Asiatic Navigation Limited for operation round the Middle East area. Perhaps I should add that Asiatic Navigation Limited is an associate of the plaintiff company. The vessels were at that time in Singapore. However, the contemplated port of delivery and redelivery by the Charterparty would be in Port Jeddah. By Clause 2 of the Loan Agreement between the plaintiff and Interbarge Limited, it was agreed that the loan should be in the form of a promissory note. Also provided in that Loan Agreement Interbarge Limited was prepared to pledge the 988,000 Gulfspan Limited shares after their acquisition as security to the plaintiff. As soon as the promissory note was issued to Interbarge Limited, the latter endorsed it on the same day to Gulfspan Limited and Gulfspan Limited in turn endorsed it in favour of Asiatic Navigation Limited. On the 8th of September 1976, some four months after the original Loan Agreement, the port of delivery for the Charterparty was changed from Port Jeddah to Singapore. Thus, there was no necessity for Gulfspan to incur delivery or redelivery expenses between Singapore and Jeddah. That was precisely what the cash was required for or the promissory note was required for by Gulfspan in order to cover such expenses. In the outset the loan between the plaintiff company and Interbarge Limited was reduced from $988,000 to $691,600. On the 11th of December, however, a Novation Agreement took place between the plaintiff and the 1st defendant whereby the 1st defendant acknowledging in the recital of the original Loan Agreement agreed to take over all the liabilities of the Interbarge Limited in this Novation Agreement plus certain other terms to which I shall refer. On the same date a separate agreement was entered between the plaintiff and 2nd, 3rd and 4th defendants acknowledging and reciting the Novation Agreement as well as the original Agreement whereby the 2nd, 3rd and 4th defendants undertake to be guarantors of the 1st defendant for its performance of all the obligations under the Novation Agreement. The liability of such a guarantee was joint and several. The Novation Agreement contemplated there and then delivery and redelivery expenses as well. However, that was no longer required. It is further provided in clause 3 to which I shall refer at a later stage an inducement fee of some US$26,000. The vessels were then chartered to Gulfspan Limited which was put into operation but they were never delivered to Singapore. The 1st defendant then failed to repay the plaintiff either the debt of $691,600 or the US$26,000 upon demand. The plaintiff in the process also gave notice to the 2nd, 3rd and 4th defendants of the 1st defendant's failure to honour their obligations. On the 19th of September 1977 the Gulfspan Limited and its parent company were both placed under receivership and in fact the parent company of Gulfspan Limited went into liquidation. That was why probably the reason the plaintiff demanded payment from the 1st defendant and the other defendants because by that time the value of Gulfspan shares were practically nil.

2. For their defence, the defendants argued and contended that there's a total failure of consideration because the whole loan was to enable Gulfspan to satisfy Asiatic Navigation Limited as to Gulfspan Limited's obligation to redeliver the vessels to Singapore. Since the port of delivery and redelivery had been changed to take place in Singapore, such expenses were never necessary and the promissory note that was eventually endorsed in favour of Asiatic Navigation Limited had never been presented for payment though for that reason it was contended that the plaintiff was never out of pocket and that there was never any consideration. In his ingenious argument Mr. Bokhary, counsel for the defendants contended that as the plaintiff and Asiatic Navigation Limited were associated companies and therefore in one camp so that the whole purpose of the loan, the so-called loan, depended on whether there was any consideration to be performed on the part of Asiatic Navigation Limited and the plaintiff as if the two companies were such one person. Since the delivery and redelivery expenses were no longer required, that would be the end of the purpose of the loan and there was no consideration for the loan whatsoever. However, I must observe that in so far as the promissory note is concerned, it was equivalent to money that was provided for not only in the ordinary proposition of law because a promissory note was a negotiable instrument but also that in clause 2 of the original Loan Agreement as well as in the recitals - acknowledged in the recitals of the Novation Agreement and the Guarantee Agreement. Secondly, the plaintiff and Asiatic Navigation Limited, although associated companies, were in fact separate persons. Unless one can lift the veil of separate corporate entities, there is no way to merge the two together and treat them as one company. The money lent to Interbarge initially in fact by the Agreement was to purchase shares in Gulfspan Limited. Whatever purpose that Gulfspan Limited would choose to use the money is a different matter. In any event, even if there is a failure of consideration between Gulfspan Limited and Asiatic Navigation Limited, it is totally irrelevant to the issue between the plaintiff and the 1st defendant which has taken over the liability of Interbarge Limited. The basic fact is that the note has not been returned. The note is still in the hands of Asiatic Navigation Limited which is a separate legal entity and there is nothing to bar Asiatic Navigation Limited instead of returning the note to the plaintiff further endorsing it in favour of a complete stranger. It is no answer for the defendants to say that the promissory note had not been presented for payment in that event or that there is a complete failure of consideration vis-a-vis Gulfspan Limited and the Asiatic Navigation Limited.

3. After all these are said as to the legal position, the factual position is that one may ask the rhetoric question whether the vessels are now redelivered to Singapore. As far as Mr. Briggs' affidavit is concerned, the vessels are now lying one in the Middle East, some in the Mediterranean Ports or Asiatic Ports. As such Asiatic Navigation Limited is still entitled to keep the promissory note as security for its charterparty charges and redelivery fees. That is neither here nor there. It is merely a factual question. For this reason, obviously Asiatic Navigation Limited would be reluctant to release the promissory note.

4. Besides all of these, the 1st defendant entered into the bargain, namely, the Novation Agreement with the facts to their full knowledge, that is, that the port of delivery had been changed to that of Singapore and that if there was any total failure of consideration, it occurred in September, 1976, but the Novation Agreement was not signed until the 11th of December, 1976.

5. Taking all these into consideration, I find that as far as the plaintiff and the defendants are concerned, there is no answer to the plaintiff's action for the recovery of the loan for the sum of $691,600. As I understand the procedure and the law properly in an Order 14 summons, leave to defend is only granted where there is a possible defence or a prima facie defence or some defence in this matter. As far as I can see in this action, there is no possibility of any valid defence to an action to recover this loan for $691,600.

6. Now I come to the other claim of the US$26,000. This has been incorporated in the Novation Agreement in clause 3. The first subclause reads this:-

"3.01 In consideration of the agreement on the part of CIL ...

that is the 1st defendant,

... in Clause 3.02 below but always conditional upon CIL providing or procuring a third party acceptable to Grandrich ...

which is the plaintiff,

... and Asiatic to provide security on or before the 31st March 1977 to Asiatic for the payment by Gulfspan of all hire due and payable under the charters of the Vessels, such security to be in a form entirely satisfactory to Asiatic and to be worth not less than United States Dollars One Hundred and Forty Thousand (US$140,000.00) Grandrich shall discharge CIL from all obligations under the Loan Agreement shall subject as provided in Clause 3.02 below discharge and release any option granted or any charge created by CIL in favour of Grandrich in respect of or over CIL's shares in the capital of Gulfspan."

3.02 reads:-

"As an inducement to Grandrich to release it from its obligations under the Loan Agreement and in particular from the repayment of the Loan CIL shall pay to Grandrich the sum of US$26,000.00 by thirteen (13) instalments of US$2,000.00 each on the first (1st) day of each month commencing with effect from 1st April 1977, and as security therefor shall leave charge to Grandrich a total of 156,000 Gulfspan shares to be released 12,000 shares at a time against the due receipt by Grandrich of an instalment as aforesaid and CIL shall if so required by Grandrich forthwith exercise in favour of Grandrich such form of charge document in respect of the said shares as Grandrich may require."

Reading this Clause 3 as a whole, there is possibly an argument that the payment of the US$26,000 was as part an additional inducement apart from the CIL releasing the 1st defendant or Interbarge from liability and releasing it if the CIL, the 1st defendant, could provide a substitute to give security. As such, no matter how great a consideration for how little in return, there is no answer to say that, After all, it may be argued that the plaintiff's obligation, as far as this is concerned, is to see to that Asiatic Navigation Limited are paid. However, if a substitute to give security has been found, there is no reason why there should be any additional inducement. That is a matter for the parties. On the other hand, it may be argued that because the plaintiff has not released the 1st defendant of its liability to furnish such security and has not even contemplated returning the shares because the 1st defendant had failed to find a substitute that is satisfactory and in fact, in the circumstances, the 1st defendant refused to find a substitute person or company to give security because there has been a failure of consideration. In fact, this clause may not come into operation at all. It is only for this reason that I am reluctant to say that the 1st defendant or indeed the other defendants have absolutely no defence. It depends on the construction of this clause and the document as a whole and at this moment I am not concerned with the construction of the contract in such detailed manner and the defence may say that they have a defence in this argument in detail. I am not prepared to say that there is no possibility of any defence to this part of the plaintiff's claim. For this reason the appeal is allowed to the extent that there should be summary judgment to the plaintiff in respect of the sum of HK$691,600 but the unconditional leave to defend the claim in respect of US$26,000 will be affirmed.

7. The summary judgment to plaintiff is in terms of paragraph (a) of the Prayer in the statement of claim. Stay of execution, 14 days or pending disposal of the issue on appeal whichever is later. Costs of this appeal and costs before the Registrar to the plaintiff to the extent of three quarters of the costs. Certificate for counsel. Directions vis-a-vis the claim for US$26,000 to be adjourned before the Commercial Judge.

Representation:

A. Dicks (Wilkinson & Gmist) for Appellant

K. Bokhary (J.S.M.) for Respondent