Re Leung Siu Chung Henry
Read the full judgment text of HCB 10379/2002 on BabelCite. This HCB judgment was delivered on 26 November 2002.
1. These are creditor's petitions. The debtors are all shareholders of Health 11Frozen Foods Company Limited ("HF Foods"). The petitioner granted banking and overdraft facilities to HF Foods pursuant to a banking facilities letter dated 19 December 1995 ("the Facilities Letter"). The debtors are guarantors under a personal guarantee dated 27 December 1995 ("the Guarantee"), providing guarantee to the banking and overdraft facilities so advanced to HF Foods by the petitioner. A legal charge in fa
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HCB010379/2002 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE BANKRUPTCY PROCEEDINGS NOS.10375, 10379 AND --------------------- HCB10375/2002
--------------------- HCB10379/2002
--------------------- HCB10380/2002
---------------------- (HEARD TOGETHER) Coram: Deputy High Court Judge Poon in Court Date of Hearing: 19 November 2002 Date of Judgment: 26 November 2002 ----------------------- J U D G M E N T ----------------------- Background 1.These are creditor's petitions. The debtors are all shareholders of Health 11Frozen Foods Company Limited ("HF Foods"). The petitioner granted banking and overdraft facilities to HF Foods pursuant to a banking facilities letter dated 19 December 1995 ("the Facilities Letter"). The debtors are guarantors under a personal guarantee dated 27 December 1995 ("the Guarantee"), providing guarantee to the banking and overdraft facilities so advanced to HF Foods by the petitioner. A legal charge in favour of the petitioner dated 23 January 1996 in respect of a property on Nathan Road was also created as security. As at 25 January 2000, the outstanding balance exceeded HK$5 million. Subsequently, the petitioner obtained vacant possession of the mortgaged property and sold it at HK$1,020,000 on 27 April 2001. The sale proceeds were then utilized to reduce the outstanding overdraft balance. 2.On 12 March 2002, the petitioner served statutory demands dated 11 March 2002 on the debtors. The amount outstanding, according to the statutory demands, was HK$4,333,876.98 with interest accruing until payment. The outstanding amounts of trade finance and overdraft stood at HK$3,291,240.31 and HK$553,364.50 respectively. The demands were not met. In the event, these petitions were filed on 27 May 2002. As they involve the same set of facts and legal issues, I ordered them to be heard together. Defence 3.Initially, the debtors took issue on the amount of the outstanding debt. However, after considering the affirmations filed on behalf of the petitioner, they do not wish to dispute the quantum anymore. 4.The only point they wish to rely on to deny liability is that the Guarantee had been discharged by reason of a material variation of the Facilities Letter without their consent. Evidence 5.Under the Facilities Letter, the petitioner granted banking facilities to HF Foods for :
6. The special conditions pertinent to the trade finance provided :
7. The debtors made virtually identical allegations in their affirmations filed in opposition. Reference to the one filed by Mr Man Kwok Shing in HCB10375 of 2002 on 12 August 2002 is sufficient. After referring to the special terms above, he went on to say :
8. Mr David H.P. Chow is a bank manager of Liu Chong Hing Bank Limited. He is not a party to these proceedings. Nor is he in any way involved in the dispute. He purported to give evidence from his own experience in handling trust receipts and related loans as a trader for five years before joining the bank and as a bank officer for six years thereafter. In his affirmation filed also on 12 August 2002, after referring to the special conditions relating to the trade finance in the Facilities Letter, he had this to say :
9. In her third affirmation filed on 26 September 2002 in reply, Ms Wong Kit Ling, the petitioner's senior officer, denied that the allegations of the debtors set out in paragraph 7 above were true. She referred to the following terms of the Guarantee :
Relying on these clauses, Ms Wong concluded by saying that she had been advised by the petitioner's solicitors that the debtors were not discharged as alleged or at all. Submissions 10. The nature of a letter of credit and trust receipt, which is not subject of any dispute between the parties, is helpfully summarized by Professor Goode in Commercial Law by Goode, 1995, 2nd edn, at pages 972 and 1029. In essence, a letter of credit is an issuing bank's assurance of payment against presentation of specified documents. The buyer applies to an issuing bank for a credit to be opened for the seller to be the beneficiary of it. A credit may entitle the seller to collect payment on presentation of documents, to present with documents a draft for acceptance and payment at maturity or to sell a draft and/or documents to an authorized bank, which then becomes the beneficiary in place of the seller. A trust receipt is a device by which a buyer undertakes that in consideration of the release of the documents under a letter of credit to him for his disposal, he will use the same to sell the goods as the issuing bank's agent and will hold the goods themselves until sale, and the proceeds after sale, on trust for the issuing bank. That is exactly the obligations assumed by HF Foods under the trust receipt arrangement according to clause 1 of the copy trust receipts exhibited as "WK-7" to Ms Winnie Tam's second affirmation filed on 18 November 2002 with leave. 11. Mr Cheung, counsel for the debtors, submitted that the petitioner did not put forward evidence to contradict that of the debtors and Mr Chow as set out in paragraphs 7 and 8 above. As the petitioner's conduct had varied the nature of the loans advanced under the trust receipt from secured to unsecured, it is a material variation of the principal contract without the debtor's consent. The debtors were exposed to greater risks than they had originally assumed under the Guarantee. They are thus discharged : Holme v. Burnskill (1879) 3 QBD 495 and Bank of Baroda v. Patel [1996] 1 Lloyds Rep 391. He further submitted that the various clauses of the Guarantee referred to by Ms Wong in her third affirmation did not allow the petitioner to make material variations to the Facilities Letter. He argued that clause 3.05 of the Guarantee, by which the debtors assented to time, indulgence or variation by the petitioner to HF Foods, is applicable only if the principal contract should remain within the general purview of the Guarantee : Rowlatt on Principal and Surety, 5th edn, paragraph 4-72 and Bank of Baroda at page 396. 12. Ms Tam, appearing for the petitioner, disagreed. She made essentially three points. First, Mr Chow purported to give evidence as an expert. But the debtors had failed to apply for leave to adduce expert evidence. His evidence therefore could not be admitted. Secondly, the debtors were all aware of the terms of the Facilities Letter. They all signed in their capacity as personal guarantors at the end of the Facilities Letter, acknowledging the terms and conditions thereof. Further, two of them, namely, the debtors in HCB10379 and 10380 of 2002, executed the Facilities Letter as HF Foods' directors. They had all contracted to guarantee the banking facilities advanced to HF Foods. There was simply no material variation as alleged. The sale proceeds remained trust money and the fact that HF Foods was given time to pay did not alter the nature of the trust money. HF Foods was always under a duty to account. Third, even if there was variation, under clause 3.05, such variation was clearly envisaged and covered. The petitioner is entitled to rely on this protective clause. In this connection, she relied on Perry v. National Provincial Bank [1910] 1 Ch 464 and Unigate v. Bentley [1988] CLY 1731. Material variation? 13. It is common ground that HF Foods received the proceeds of sale of goods as trustee of the petitioner. It is only a bare allegation by the debtors that the petitioner had allowed the HF Foods not to account for those proceeds. The debtors had failed to give any particulars or adduced any documentary evidence to prove the allegation. Further, it is flatly contradicted by clause 1 of the trust receipts. In the circumstances, I do not accept the allegation. The mere fact that the petitioner, pursuant to the special conditions of the Facilities Letter, allowed HF Foods to pay over the sale proceeds did not, in my view, alter the nature of the money. They remained trust money and must be accounted for. HF Foods might well have disposed of the sale proceeds in its business operations in breach of the trust. But that does not allow the debtors to mount an attack against the petitioner. 14. Further, I agree with Ms Tam's submissions that Mr Chow did purport to give evidence as an expert. Generally speaking, evidence in creditors' petitions is adduced by way of affidavit, subject to any cross-examination of the deponents as may be ordered by court. If a party seeks to adduce expert evidence, it is incumbent on him to apply for leave for that purpose. In the absence of leave or consent, the expert evidence is not admissible. Mr Chow's evidence is therefore inadmissible. But even if I were to accept his evidence, it would not assist the debtors. I have earlier rejected the debtors' primary case that the petitioner did allow HF Foods not to account for the sale proceeds. Stripped of this very basis, Mr Chow's conclusion that the loans had changed from secured to unsecured cannot stand. 15. For the sake of completeness, I next consider the position if I am wrong in concluding that there was no material variation. For this purpose, I would have to accept the debtors' allegations and Mr Chow's evidence as set out in paragraphs 7 and 8 above. Parties had referred me to various authorities. I do not think I need to go into detailed discussion of any of those cases. It is, I believe, trite that if there is a material variation of the principal contract made without the guarantor's consent, the guarantee is discharged. The creditor is entitled to rely on a protective clause like Clause 3.05 only if the principal contract, despite the variation, remains within its general purview. The court has to consider all the circumstances of the case before it. In particular, the court needs to construe the relevant terms of the principal contract and the guarantee and to examine the conduct complained of to see if there is any material variation. The court also needs to consider if any protective clause against material variation is applicable. 16. In my view, had there been any variation as alleged, the petitioner would be entitled to invoke clause 3.05. Clause 3.05 is couched in very wide terms. On a proper reading, the clause allows the petitioner not to exercise any right under the Facilities Letter. This would include not asking HF Foods to account for the sale proceeds as trust money. The petitioner is also entitled to vary the facilities. This would allow the petitioner to require HF Foods to pay the outstanding loan advanced for trade finance within the 90 days period as prescribed. The alleged variation was envisaged by the parties to the Guarantee and therefore within its general purview. This was the bargain and the risks the debtors assumed. And they are clearly bound by it. 17. Assuming further that I am wrong in coming to the conclusion that I did in paragraph 16 above and that there had been material variation of the Facilities Letter insofar as the part relating to trust receipt is concerned and Clause 3.05 is inapplicable, the debtors' opposition would still fail. Mr Cheung submitted that the banking facilities and overdraft facilities should be considered together as a single transaction. Thus, any material variation on the trust receipt would also taint the overdraft. The Guarantee as a whole is discharged. With respect, I do not subscribe to this submission. In my view, the trust receipt and overdraft are separate and distinct. The natures of the facilities are altogether different. So are the respective amounts. The risk relating to the overdraft facility is in no way affected by any material variation of the trust receipts. Even if the part relating to trust receipt is to be discharged, it does not affect the enforceability of the part relating to overdraft. 18. As a fall back position, Mr Cheung then offered to pay the outstanding amount of the overdraft facilities within 30 days from order. In effect, he sought to pray in aid section 6D(3) of the Bankruptcy Ordinance, Cap.6. Ms Tam refused to accept it. On the materials before me, this is the first time the debtors made any offer to pay since the commencement of the present proceedings and indeed since the occurrence of the dispute in January 2000. Other than the offer made by counsel, the debtors had not adduced any evidence that they are good for it and will be able to discharge the outstanding overdraft with interest in full within 30 days. Nor did Mr Cheung elaborate on the details. In the circumstances, I do not think the offer is a reasonable one and the petitioner's refusal is justified. Accordingly, even on the debtors' inability to pay the outstanding overdraft alone, the petitioner is entitled to the relief sought. Conclusion 19. For the foregoing reasons, I am not satisfied that the debtors have raised a bona fide dispute on substantial grounds to the entire debt supporting the petition or alternatively to the overdraft alone. I will therefore make a bankruptcy order against each of them. I will also make an order nisi that the petitioner shall have the costs of the each of the petitions against the corresponding debtor including any costs reserved, to be taxed if not agreed. The costs order nisi will be made absolute 14 days after handing down.
Representation: Ms W. Tam of Messrs Simmons & Simmons, for the Petitioner Mr Ivan Cheung, instructed by Messrs Francis Kong & Co., for the Debtors Official Receiver : excused from attendance | |||||||||||||||||||||||||||||||||||||||||||||||||