Wardley Ltd and Others v. Aik San Realty Ltd and Another

HCA000379/1984

BETWEEN

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Coram: Hon. Clough, J. in Chambers

Date of Hearing: 10 May 1984

Date of Delivery of Judgment: 21 May 1984

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JUDGMENT

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1. This is an application by the twenty Plaintiffs under Order 14 for summary judgment in an action arising from the alleged default of a company called Vermillion Land Company Limited ("Vermillion") in respect of a syndicated loan for the development of a site at Red Hill off Tai Tam Road, Hong Kong made to Vermillion by the Plaintiffs. The two Defendants are each sued as guarantors of Vermillion in respect of a share of Vermillion's alleged indebtedness. With the consent of the parties the application has been adjourned by the Master for hearing by a judge in Chambers.

2. By their specially indorsed writ issued on the 17th January 1984 the Plaintiffs initially claimed against each of the Defendants as guarantors the sum of $66,421,570.75 with interest in respect of the Defendants' respective 6% shares of Vermillion's alleged continuing indebtedness.

3. On the 30th January 1984 the Defendants gave notice of intention to defend the action and they filed a Defence on the 13th February 1984. The Plaintiffs' summons for judgment under 0.14 was not issued until the 16th February 1984. The fact that the application for summary judgment was made after the Defence was filed did not give rise to any issue on the part of the Defendants at the hearing of the application.

4. Leading counsel for the Plaintiffs, Mr. Charles Ching, contended that the Plaintiffs were not precluded from making the application by the filing of the Defence. He relied on McLardy v. Slateum (1890) 24 Q.B.D. 504 in contending that, provided the Plaintiffs could justify the application by establishing that there was in fact no defence on the merits and that the Defendants' Defence did not accurately set out the effect of the relevant documents, the Plaintiffs were entitled to judgment notwithstanding the delay in making their application. I accept that submission. Indeed it was not challenged by counsel for the Defendants.

5. The course of the hearing of the application was unusual. Both parties by their counsel requested the court to defer judgment until the 21st May 1984 for what Mr. Ching called commercial reasons. I granted that request as it was made by both parties. The other unusual matter was that counsel for the Defendants informed the court that his instructions were to make no submissions but to rely on the contents of the affirmations of Messrs. Kenneth Chung and Anthony Cheung filed on behalf of the 1st and 2nd Defendants respectively.

6. By their Defence the Defendants admitted paragraphs 1 to 15 of the Plaintiffs' Statement of Claim in which the Plaintiffs had pleaded the facts culminating in letters of demand dated the 1st July 1983 being sent to each of the Defendants as guarantors of Vermillion on behalf of the Plaintiffs demanding the payment by each of the Defendants of the total sum of $66,421,570,75 in respect of principal and interest allegedly due and payable by Vermillion up to the 30th June 1983.

7. The following facts were common ground on the pleadings. The sums advanced to Vermillion by the Plaintiffs' syndicate had been secured by a Debenture dated the 13th January 1981 made between Vermillion and the Plaintiffs which incorporated a loan agreement, a mortage and a floating charge. As further security eight Guarantors, including the Defendants, were parties to a Deed of Guarantee and Indemnity dated the 13th January 1981 whereby each Guarantor gave the Plaintiffs a guarantee and indemnity as principal debtor and not merely as a surety in respect of a specified percentage of the liabilities of Vermillion under the Debenture. In the case of the Defendants the relevant percentage was 6% for each Defendant.

8. Substantial sums were advanced to Vermillion by the Plaintiffs. Under clause 18.01 (i) of the Debenture default by Vermillion in paying interest payable under the Debenture constituted an event of default and under clause 18.03 in the event of an event of default occurring the Plaintiffs were entitled to call in, by notice in writing to Vermillion, the aggregate principal amount outstanding under the Debenture and all interest, commitment fee and sums payable thereunder.

9. On the 16th and 17th June 1983 Vermillion defaulted on its liability to pay interest under the Debenture and, in reliance on that event of default, the Plaintiffs, by a letter dated the 1st July 1983 addressed to Vermillion exercised their rights under clause 18.03 of the Debenture and called in for immediate payment all sums due and payable under the Debenture amounting in aggregate to $1,098,381,832.11 with interest. On the same day the Defendants were each sent the demands referred to above for payment under the Deed of Guarantee and Indemmity of the total sum of $66,421,570.75 by each of them being the respective shares of Vermillion's indebtedness which they had guaranteed.

10. Having admitted all the above facts the Defendants by their Defence seek to raise a defence of confession and avoidaice. They rely on an agreement between the Plaintiffs and Defendants alleged to have been made in the first half of September 1983 and to be contained in or evidenced by two letters. The first letter is dated the 15th September 1983 and was sent to the 1st Plaintiff (who is the Agent for all the Plaintiffs) by the Defendants and is alleged to have been countersigned by the 1st and 2nd Plaintiffs (the Lead Managers). The second letter is dated the 16th September 1983 and was addressed to the Defendants' solicitors by the 1st and 2nd Plaintiffs as Lead Managers on behalf of the Plaintiffs.

11. The Defendants plead the following terms of the alleged agreement in paragraph 3 of their Defence:-

12. The Defendants further rely in paragraph 5 of the Defence on a paragraph of the 1st and 2nd Plaintiffs' letter to the Defendants' solicitors dated the 16th September 1983 in which it is stated that the syndicate had on that date placed the Red Hill site for sale on the market and that the proceeds of the sale, if any, would be applied against Vermillion's debt so as to reduce the Plaintiffs' claim against any of the Guarantors who were still indebted to the Plaintiffs.

13. The Defendants further plead in paragraphs 6 and 7 of their Defence that pursuant to the agreement they have executed a charge of the proceeds of sale of their Xipho shares in favour of the 1st Plaintiff and have deposited the certificates for those shares with the 1st Plaintiff. By paragraph 8 they plead that they are the only Guarantors indebted to the Plaintiffs under the Guarantee and by paragraph 9 and 10 they plead that the Plaintiffs have offered the Red Hill property to the public for sale by tender, that the tenders will close on the 29th February 1984 and that the property is estimated to fetch a tender price of $140,000,000.

14. In reliance on the matters thus pleaded in the Defence and on the true construction of the alleged agreement the Defendants plead -

15. The Defendants go on to plead in paragraph 14 of the Defence that  their acknowledgement of their indebtedness contained in their letter dated the 15th September (which the Plaintiffs relied on in paragraph 16 of the Statement of Claim) is not admitted save in so far as it was made pursuant to and part and parcel of the agreement relied upon by the Defendants. In paragraph 15 of the Defence the Defendants do not admit the allegation in the Statement of Claim that Vermillion has not discharged any part of its indebtedness, but this allegation was verified by the affidavit of Mr. Drummond filed on the 16th February 1904 in support of the Plaintiffs' application. Liability for default interest claimed in paragraph 20 of the Statement of Claim was not admitted in paragraph 20 of the Defence but this was not a live issue at the hearing and counsel agreed to furnish the court before the 21st May 1984 with an agreed statement of the Defendants' liability for interest in the event of the court granting the Plaintiffs' application for summary judgment.

16. Undaunted by the Defendants' Defence filed on the 13th February 1984 the Plaintiffs issued their summons under 0.14 on the 16th of February 1984 and on the same day an affidavit of Mr. Drummond, a manager of the 1st Plaintiff, was filed. Mr. Drummond formally verified the Plaintiffs' claim and asserted that the Defence filed did not disclose any grounds of defence.

17. Evidence in answer was filed on the 28th February 1984 in the form of affirmations of Messrs. Kenneth Chung and Anthony Cheung on behalf of the 1st and 2nd Defendants respectively. Mr. Anthony Cheung formally adopted the evidence of Mr. Kenneth Chung. The latter exhibited inter alia a copy of the Charge dated the 15th September 1983 executed by the Defendants in favour of the 1st Plaintiff of the proceeds of sale (as defined in clause 1(a)) of the Defendants' Xipho shares pursuant to the agreement evidenced by the Defendants' letter dated the 15th September 1983. He also exhibited a letter dated the 16th December 1983 from the Defendants' solicitors to the 1st Plaintiff accompanying the Defendants' Xipho shares certificates deposited with the Plaintiffs. He affirmed inter alia that he was advised that the Defendants had a good defence in the light of the Defence already filed and expressed his belief that  the value of the Red Hill site was at least $140,000,000.

18. However, as appears from the affidavits of Mr. Drummond filed on the 5th April 1984 and on the day of the hearing, Receivers of the Red Hill site had been appointed by the Plaintiffs on the 9th March 1984 under the Debenture and on the 14th March 1984 they sold the Red Hill site to Mightyton Limited for $55,000,000. Mr. Drummond exhibited a letter dated the 16th March 1984 from the firm of Jones Lang Wootton giving their reasons for advising that the price of 55,000,000 was the best price which could reasonably be obtained. Mr. Drummond deposed that the Plaintiffs would give credit to the Defendants in respect of the net proceeds of sale of the Red Hill site amounting to $54,669,120 so as to reduce the claim against each Defendant by $27,334,560.

19. Faced with the supervening sale the Defendants adduced further evidence in the form of Mr. Kenneth Chung's affirmation filed on the 8th May 1984 which was adopted on behalf of the 2nd Defendant by Mr. Anthony Cheung's affirmation filed on the same date. Mr. Kenneth Chung advances two proposed grounds of defence in support of his contention that the 1st Defendant is "still not liable to make payment to the Plaintiffs".

20. The first ground is that the Defendants' Xipho shares have become the primary security for the Plaintiffs' claim and that the Plaintiffs must first resort to a sale of those shares before they can sue the Defendants on the shortfall, if any, This result is claimed by Mr. Chung to follow from the agreement contained in or evidenced by the letters of the 15th and 16th September 1983 and the performance of their obligations thereunder by the Defendants who executed the Charge dated the 15th September 1983 of the proceeds of sale of their Xipho shares and deposited the relevant shares certificates with the lst Plaintiff under cover of their solicitors' letter dated the 16th December 1983. According to Mr. Chung the Defendants' Xipho shares are worth an estimated $90,652,046.67 and so the proceeds of sale of these shares would be more than adequate to cover any shortfall due from the Defendants to the Plaintiffs.

21. The second proposed ground of defence raised by Mr. Chung is that for two reasons the Plaintiffs have not exercised due care or complied with their fiduciary duty towards the Defendants in the sale of the Red Hill property. The first reason given by Mr. Chung is that the sale was not effected by public tender and that this was admitted to Vermillion in a letter dated the 9th March 1984 from the 1st Plaintiff when the sale was contemplated after the proposed appointment of Receivers under the Debenture. The second reason given by Mr. Chung is that the approved building plans for the Red Hill project were not sold together with the site and that if the plans had been sold with the site an enhanced price would have been obtained.

22. In the light of the relevant documents before the court I have been unable to conclude for the purposes of 0.14 rule 3(1) that the Defendants have by their Defence or their evidence or otherwise raised any issue or question which ought to be tried or that there ought for some other reason to be a trial of the Plaintiffs' claim to be entitled to payment of the sums claimed by them against each Defendant after giving credit for the amount recovered on the sale of the Red Hill property. There are no relevant issues of fact and the relevant documents are unambiguous.

23. Thus the letter dated the 15th September 1983 from the Defendants to the 1st Plaintiff categorically states that the consideration therein mentioned is the agreement of the Plaintiffs not to sue the Defendants on the Guarantee "for a period of 90 days from the date hereof". Clause 4 of the letter states inter alia:-

"4.    At the end of the 90-day period and subject to Clause 5 below, you shall be entitled to exercise all your rights against us in respect of our said respective indebtedness unless you agree with us to extend the 90-day period."

24. Clause 4 is expressed to be "subject to clause 5 below" but that Clause merely states that "If there shall be any sale of the property ..... at the Red Hill site during the 90-day period (or during any agreed entension (sic) of such period), you shall apply the proceeds of sale .... in reduction ....".

25. In my judgment it is therefore unarguable as a matter of interpretation of the letter dated the 15th September 1983(read alone or in conjunction with the letter dated the 16th September 1983 from the 1st and 2nd Plaintiffs referring to the syndicate's intention to reduce the indebtedness of Vermillion and the Guarantors by the amount to be realised on a sale, "if any" of the Red Hill property), that the Plaintiffs agreed to defer suing the Defendants for "at least 90 days" as pleaded in paragraph 3(i) of the Defence.

26. As to the contention pleaded in paragraph 11 of the Defence that the Plaintiffs were not entitled to sue the Defendants under the Guarantee unless and until the Red Hill property had been sold, I agree with Mr. Ching's submission that this contention is not sustainable because it ignores the vital word "If" in Clause 5 of the letter dated the 15th September which is reinforced by the words "sale, if any" in the third paragraph of the letter dated the 16th September 1983.

27. In my judgment the Plaintiffs agreed to do no more than give credit for any sale of the Red Hill property if that property were sold during the 90 day period or any extension thereof. No such sale took place during that period and there is no evidence that the 90 day period was ever extended. A sale did take place on the 14th March 1984 after this action began and well after the expiration of the 90 day period and the Plaintiffs have rightly conceded that, as pleaded in paragraph 12 of the Defence, they are now obliged to reduce their claim against the Defendants to the amount of the shortfall after giving credit for the net proceeds of sale of the property.

28. Then there is the proposed defence, advanced in paragraph 13 of the Defence and elaborated in Mr. Kenneth Chung's affirmation filed on the 8th May 1984, that the effect of the agreement contained in or evidenced by the letters dated the 15th and 16th September is that the terms of the Guarantee have been varied to the extent that the Defendants have become liable only collaterally (and not as principals) to indemnify the Plaintiffs for Vermillion's indebtedness and that the Defendants' primary security for the Plaintiffs' claim is the Defendants' Xipho shares or their proceeds of sale.

29. In my judgment the relevant documents demonstrate that such a defence can have no genuine arguable foundation. Clause 4 of the letter dated the 15th September 1983 from the Defendants clearly states that at the end of the 90 day period or any agreed extension thereof the Plaintiffs are to be entitled to exercise all their rights against the Defendants subject, in effect, to a reduction of the Defendants' liability to the extent of the amount realised on any sale of the Red Hill property during the 90 day period or any agreed extension thereof. Bearing in mind the Defendants' acknowledgement, in Clause 1 of the letter of their continuing obligation under the Agreement and Guarantee it is, in my judgment, abundantly clear that under the agreement contained in or evidenced by the letters dated the 15th and 16th September 1983 the Defendants were obtaining the forbearance of the Plaintiffs to sue the Defendants under the Guarantee for a stipulated period and the consideration moving from the Defendants was the additional security provided for in the letter dated the 15th September 1983.

30. Moreover, the letter dated the 15th September 1983 expressly provided, in clause 2, that nothing in that "paragraph" was to be construed as giving a right to the Agent (the 1st Plaintiff) to sell the Defendants' shares. Furthermore the terms of the Charge also dated the 15th September 1983 of the proceeds of sale of the Defendants' Xipho shares executed by the Defendants in favour of the 1st Plaintiff (as Agent for the Plaintiffs) pursuant to the letter dated the 15th September 1983 contains no power of sale and makes it clear in unequivocal terms in clause 8 that the security constituted by the Charge is in addition to and not in substitution for any other security which the Agent or Lenders may at any time take or hold for the payment of all of any of the indebtedness of the Defendants acknowledged by them under the letter dated the 15th September 1983 and may be enforced without first having recourse to such other security.

31. There is no evidence that the Plaintiffs have ever subsequently acquired a power of sale of the relevant shares or that the charge of the shares referred to in clause 3 of the letter dated the 15th September 1983 has ever been executed. Indeed when the relevant shares certificates were sent to the 1st Plaintiff by the Defendants' solicitors the latter's covering letter dated the 16th December 1983 made it clear that the certificates were sent

"........ against your undertaking that the same are only to be held by you for safe custody purposes and as a sort of confirmation to the syndicate that such shares are at present free from all encumbrances and will be available for the purposes of creating a charge .... pursuant to the letter dated the 15th day of September 1983 .....".

32. Accordingly there is, in my judgment , no doubt but that the Plaintiffs have acquired additional security under the letter and the Charge of the proceeds of sale of the Defendants' Xipho shares dated the 15th September 1983 together with the deposit of the relevant share certificates but the Defendants remain liable as principals under the terms of the Guarantee and the Plaintiffs are not obliged to resort to the abovementioned additional security before suing the Defendants under the Guarantee. The relevant documents speak for themselves.

33. Again, the relevant documents demonstrate that there is no triable issue raised by the Defendants regarding the alleged breach of fiduciary duty by the Plaintiffs when selling the Red Hill property. As to the allegation that the sale should have been effected by public tender and not by private sale, the evidence adduced by Mr. Drummond's affidavits filed on the 5th April and on the day of the hearing establishes that the sale was effected by Receivers appointed by the 1st Plaintiff as Agent under clause 20 of the Debenture. The appointment dated the 9th March 1984 was expressed to appoint the Receivers to be receivers of the Red Hill site (described in the same terms as the definition of "Property" in clause 1.01 of the Debenture) and did not include any additional assets of Vermillion.

34. Under the Appointment the Receivers are expressly given all the powers conferred upon a receiver by clause 20.01 of the Debenture and, by virtue of clause 20.01(iii) of tae Debenture, the Receivers were therefore empowered to sell the Red Hill property (i.e. "the Property" as defined in the Debenture) by public auction or private contract. It follows that the Receivers had the power to sell the Red Hill property by private contract and there can be no triable issue regarding the alleged breach of duty in adopting that mode of sale. Furthermore there is in any event no allegation that the price was too low by reason of the mode of sale adopted. However, in my judgment, the mode of sale was fully within the powers of the Receivers.

35. As to the allegation that if the approved building plans had been sold together with the Red Hill property an enhanced price would have been obtained, the definition of the "Property" in the Debenture does not include such plans. As indicated above the Receivers were duly appointed under the Appointment dated the 9th March 1984 to be receivers of the Red Hill property and nothing more. The power of sale conferred upon them under the combined effect of clause 20.01(iii) of the Debenture and the Appointment did not therefore extend to the approved building plans and the Receivers cannot therefore be faulted for not selling the plans with the Red Hill property.

36. Mr. Ching also relied on the contents of the last sentence of Clause 1 of the letter dated the 15th September 1983 from the Defendants indicating that Vermillion's architects were then owed outstanding fees so that they would have a lien on the approved building plans. He also relied on the absence of any evidence as to the amount by which the price of the Red Hill property would allegedly have been enhanced if the property had been sold together with the plans. These were cogent points but, in my judgment, the unanswerable point for 0.14 purposes is that the Receivers could not be faulted for failing to sell the plans when exercising a power to sell which extended only to the sale of the Red Hill property itself.

37. Accordingly I conclude that no triable issues have been raised by the Defendants either in their Defence or in their evidence or otherwise and that judgment should be given to the Plaintiffs against the Defendants under 0.14 for the principal amounts claimed against each of the Defendants in the prayer of the Plaintiffs' Statement of Claim less the appropriate deduction by reason of the credit to be given in respect of the net amount recovered on the sale of the Red Hill property, together with interest.

38. I have not received from the parties' solicitors by the 21st May 1984 an agreed statement of the principal and interest outstanding at that date and of the interest payable after judgment. I will accordingly hand down this judgment to-day on the footing that judgment is to be given to the Plaintiffs with costs and that the quantum of principal and interest is to be determined when this matter has been restored at the earliest convenient date.

Representation:

Mr. Charles Ching Q.C. with Mr. William Stone instructed by M/s. Johnson, Stokes & Master for the Plaintiffs.

Mr. Patrick Fung instructed by M/s. Oscar Lai & Ho for the Defendants.