European Asian Bank Aktiengesellschaft v. Dirk Marinus Brink and Antoher

HCA002769/1979

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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Coram: Penlington, J. in Court

Date of Judgment: 19th February 1981

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JUDGMENT

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1. This is a claim brought by the Plaintiff bank ("The Bank") against the 1st and 2nd Defendants who at all material times were directors and shareholders of a company known as Impact Foundations (H.K.) Ltd.("Impact"). The Bank's claim is based on a guarantee which was signed by the Defendants together with a third director, Mr. Robert Gay, by which the Defendants and Mr. Gay guaranteed re-payment of advances made by the Bank to Impact, together with interest thereon. It is not in dispute that this guarantee was signed by the Defendants and their defence to the action is based entirely on their allegation that when they signed the guarantee it was a blank form in that there had been no words typed onto the form at all and any such words must have been so inserted after they had signed it. They say that it was the common intention of all the parties when the guarantee was signed that their liability should be limited to a principal sum of $150,000.00.

2. Evidence was given for the Bank by Mr. H.E. Wiens who was in 1974 and 1975 Manager and Chief Executive of its Hong Kong Branch. He said that he was introduced to the 2nd Defendant in 1974. The Bank had issued performance bonds in favour of the Public Works Department on behalf of Impact and had provided some overdraft facilities. In late 1974 and early 1975 Mr. Wiens discussed with the officer in charge of the Bank's Loans Department the question of providing long term overdraft facilities for Impact to a limit of HK$150,000.00. Mr. Wiens said that the security for these facilities was to be a guarantee signed by the shareholders. He said that in such cases it was usual to ask for a guarantee unlimited as to amount even though there was a limit on the facilities which were then granted. He said that the Bank tended to treat small companies such as Impact as a partnership and that the effect of the guarantee was to make the shareholders liable in the same manner that they would be if it was a partnership. He also said that in the construction business contractors tended to pay slowly and quite often the customer found that he required more funds than he had anticipated. If the guarantee is unlimited the Bank could then provide such further facilities without the need for new guarantees to be signed or having the embarrassment of returning cheques. Mr. Wiens said that the documentation required for loans would be prepared by the Bank's Loans Department and he himself would probably not see the documents. He said that he himself could not remember the particular guarantee which was signed in this matter. He said, however, that he had never known a case where the Bank had sent out a form of guarantee which was in blank and he could not imagine why it should have been done in this case.

3. Following this original offer of overdraft facilities there was further correspondence between the Bank and Impact. On the 1st September a letter was sent by which the facilities of $150,000.00 were further extended and in that letter for the first time the word 'unlimited' is used in reference to the guarantee signed by the directors. On the 5th January 1976 the facility is increased to $500,000.00 and again the letter from the Bank refers to an "unlimited guarantee". On the 6th October 1976 the facility was reduced to $300,000.00, once again the letter from the Bank refers to an "unlimited guarantee". On the 3rd January 1977 the Bank wrote to the 2nd Defendant referring to his guarantee for an unlimited amount and asked him to advise them if he did not agree that that was the position. No such advice was in fact received. On the 7th October 1977 the overdraft facilities were increased to $500,000.00 plus $100,000.00 for the issue of performance bonds. Again the reference in the letter is to a security in the form of an "unlimited guarantee". On the 26th May 1978 the facilities increased to $1½ million and in this case the Bank said that a first registered debenture stamped for $2 million was required together with the assignment of US$500,000.00 of life insurance from the 2nd Defendant and again reference is made to the "unlimited guarantee" of the 3 directors.

4. Mr. Wiens said that in November 1978 he saw an article in a local financial paper which caused him to have doubts as to the financial position of Impact. He went to their offices in Shell House and as he could not find the 2nd Defendant there he went to see the 1st Defendant, who also had offices in the same building, being at that time the local Manager of Deak & Co. Ltd. There is no dispute that the 2nd Defendant, who is a civil engineer, was at all times the person actually running the affairs of Impact. Mr. Wiens said that he asked the 1st Defendant about the article and the 1st Defendant said in fact the editor of the paper had rung and told him about it. He said the 1st Defendant was very upset and said that he did not know what the problem was but that he would contact the 2nd Defendant and find out. From then on during November and December 1978 there were many conversations with the 1st and 2nd Defendants regarding the affairs of Impact and these conversations were directed to either securing a buyer for the company by way of takeover or a fresh cash injection from the existing or any possible new shareholders. On the 10th February 1979 there was a meeting in the Bank's office with the directors when the position of the company was discussed in detail. A provisional balance sheet had been prepared which showed that there had been big losses and it was agreed that further losses would almost certainly occur. Mr. Wiens said that the liability of the directors was also discussed and that it was not in any way disputed that they were each liable for the entire debt to the Bank. All the directors seemed to be very depressed at this meeting.

5. Following this meeting letters dated the 13th of February 1979 were sent by the Bank to each of the directors recalling the facilities granted to Impact with immediate effect and calling on each of them to make settlement of the amount then outstanding, which was over $3 million. These letters refer to the issue of unlimited joint and several guarantees. On the 27th February the Bank wrote to Impact stating that following further discussions and in the light of information which had been provided and in particular negotiations then going on with the firm known as Bilfinger & Berger with a view to a takeover, the overdraft facilities up to an amount of $2½ million would be re-instated provided that a cash loan of not less than $1 million was paid into the account not later than the 6th March 1979. These negotiations fell through and no such amount was in fact paid into the account. On the 25th April 1979 further letters were sent to the company and to the directors calling in the amount then owing which had grown to over $3½ million. Again the letters to the directors refer to an "unlimited joint and several guarantee". A telex was also sent to the 1st Defendant who was in South Africa at the time stating the amount owing by the company and calling on him to pay that amount before the 25th May, failing which legal action against him would be taken. The telex refers to the 1st Defendant's "joint and several unlimited guarantee dated 28th January 1975". The 1st Defendant replied by a telex in which he said that he was not in a position to make re-payment himself of the amount mentioned but that he would make every possible endeavour to see that the Bank was repaid. He said that all he could do at this stage was to ask for understanding and patience so as to enable Impact to settle its obligations in the shortest possible length of time. The Bank replied to this saying that they would extend the deadline to the 29th May. There was a further telex from the 1st Defendant on the 5th June to the Bank in which he again asked for more time and said that he would personally pay the interest on the entire loan for the month of June and would transfer his entire personal shareholding of $150,000.00 to the Bank. Further telexes were sent by the 1st Defendant on the 11th June asking for further time as he was still hopeful of finding a backer on a trip he was about to make to Europe and also stating that he was not in a position to repay the amount owing as he did not have any substantial assets.

6. Mr. Wiens agreed that the Bank had in fact allowed Impact to overdraw its account even before the guarantee was received back from the directors. It seems from the statement of accounts that in fact the amount owing by Impact on the 28th January 1975 was $144,307.00 and that on the day the guarantee appears to have been returned that had risen to $275,254.00. Mr. Wiens was also unable to offer any explanation as to why the latter accompanying the guarantee was dated 25th January 1975 whereas the guarantee itself is dated the 28th January 1975.

7. Dr. Mangold gave evidence and said that he was in charge of the Bank's Loans Department at the time the original overdraft facilities were granted to Impact. He said that he dictated the letter dated the 25th January 1975 and that he would have prepared the guarantee and hypothecation forms. He said that the contents of the guarantee would be in accordance with the instructions he gave to his then secretary, Gladys Lo, who had since married and is now Gladys Wong. He said that he did not know why the dates on the letter and the guarantee were different but that he at all times had in mind that the guarantee would be unlimited. He said that Gladys Lo was at all times his secretary and that she had hereown typewriter which, as far as he was aware, nobody else used. He said that he did not send the documents to other departments for typing. Each secretary was provided with her own typewriter. He said he was not aware of a single occasion when a form of guarantee was sent out in blank other than occasions when a form was required by a customer as a specimen i.e. to show to legal advisors. Dr. Mangold said that he could not remember specifically seeing the guarantee which is the subject of this action but he said that he would normally look at the forms which were going to be sent out for such things as spelling mistakes. He said that Impact was allowed overdraft facilities even though the guarantee had not returned because it had been authorised by Mr. Wiens and the 2nd Defendant was well known in the Bank and was trusted. He did not know why there had been the long delay in the return of the guarantee to the Bank.

8. Evidence was also given for the Plaintiff by a Mr. Renshaw, who is a forensic document examiner, and he stated that having carried out detailed examination of the guarantee form and also three Olympia electric typewriters in the Bank's premises he was satisfied that the machine used to type the form was one of those machines. He also produced a report. In this report Mr. Renshaw is quite satisfied that the first page of the guarantee was all typed at the one time which means that the word 'unlimited' was typed in at the same time as the names of the guarantors and the name of the account holder. It is pointed put by Counsel for the Plaintiff that in the original Defences the allegation is that the amount of the maximum liability as regards principal and interest were left blank whereas in their amended Defences, filed after the Plaintiff had obtained leave to call an expert witness, the allegation is considerably widened. It is now said that all the spaces on the guarantee form were blank and that not even the names of the guarantors or the company was inserted before execution.

9. Mrs. Wong said that she was employed by the Plaintiff in 1974 and was secretary to Dr. Mangold. She seldom used any other machine apart from her own and conversely other typist would very seldom use hers except if she was away on holiday and had to be replaced. She said that there was only one typewriter in the Bank with the sort of type that hers had and that one was in the Internal Department. She said that she typed documents relating to loans at the instructions of Dr. Mangold and she identified her initials at the topoof the letter of the 25th January 1975. She said that she could not be sure that she typed the guarantee but she could say it was typed on a machine with her sort of type. She said that she did a great number of documents such as this and she could not now remember this particular one. She said that she could not remember ever sending out a blank form of guarantee for signature and she could not remember ever being asked to fill in gaps in a blank form which had already been executed. She was unable to offer any explanation for the difference in dates between the letter of the 25th January and the guarantee dated the 28th January.

10. Evidence was given by both the 1st and 2nd Defendants. The 1st Defendant said that he had known the 2nd Defendant for some 18 years and that they were good friends. He knew the 2nd Defendant had worked for Intrusion Prepakt, a well-known civil engineering firm in Hong Kong. When the 2nd Defendant left that company and founded his own company, Impact, he agreed to invest sum of $150,000.00 in this new company, as did Mr. Robert Gay. The 2nd Defendant himself invested $200,000.00. He said that he was a non-Executive Director at all times. In 1975 the 2nd Defendant told him that Impact required more funds and this could be obtained from the Plaintiff Bank. He was told that about $150,000.00 was required and he informed the 2nd Defendant that that would be the maximum he would guarantee. The 1st Defendant then left Hong Kong and when he came back in April or May of 1975 the 2nd Defendant said he would have to sign the guarantee. The 2nd Defendant showed him two documents which were completely blank apart from the printed words. When he asked the 2nd Defendant why they were blank he was shown the letter of the 25th January which said the amount of the loan was $150,000.00. The 1st Defendant said that his prime concern was that his personal liability should not exceed the amount of his investment, namely $150,000.00, and that he thought the Bank would fill in the blanks accordingly. He said that after signing the guarantee he did not receive any communication whatever from the Bank concerning the guarantee.

11. In 1978 the 1st Defendant said that the 2nd Defendant told him that he wanted to join in with a bigger company and that a Dr. Droese was coming from Germany. He also gave the 1st Defendant the names of other companies who might be interested in becoming a shareholder in Impact. In November of 1978, however, he read the financial newspaper "Target" and the article concerning the financial affairs of Impact. He said he saw Dr. Wiens and they headed a discussion but that he was not worried about the financial position of Impact. He said the question of his guarantee was never mentioned at this discussion. Efforts were made to try to resolve Impact's financial problems but eventually in February 1977 he was handed a letter which is at page 34 of Bundle 2. This letter refers to the amount owing by Impact, namely just over 3 million dollars, and also refers to the unlimited joint and several guarantee executed by the Directors, including himself. This letter was handed to him in his office by Mr. Wiens. He did not however at that stage dispute or make any comment on the question of the extent of his guarantee.

12. Eventually he was also served with the letter dated the 25th April 1979. He was surprised to receive that letter which called on him to indemnify the bank according to his guarantee. He thought that the matter had been settled and he therefore went to see the 2nd Defendant who assured him that there were no real problems.

13. He gave evidence relating to the various telexes which were then sent between him and the Bank relating to the amount owing by Impact and the guarantee. His explanation why at no stage in the course of this telex communication did he in any way dispute the amount of his guarantee was that he was totally concerned in both trying to save Impact and also to protect the Bank. He said he did not receive the registered letter dated 6th June 1979 but he agreed that until his solicitors wrote on the 9th January 1979 to the solicitors for the Bank no mention was ever made in any of the correspondence or in any of the conversation which took place that his liability under the guarantee was limited to $150,000.00. He said that he did not know until the trial started that there would be forensic evidence called by the Plaintiffs concerning the manner in which the guarantee had been completed.

14. The 2nd Defendant gave evidence along similar lines. He said he came to Asia in 1967 and eventually set up Impact together with Mr. Robert Gay. The 2nd Defendant is a mechanical engineer, as is Mr. Gay, and initially business was very good. The 1st Defendant lived in the same block of flats and agreed to invest his money in Impact and he also introduced a Mr. Saejono, who also invested a substantial amount. He in fact eventually became the largest shareholder. He said that in late 1974 he approached Dr. Mangold to obtain permanent overdraft facilities as the Company was expanding. He said that he thought at this stage they required up up to $150,000.00 and the Bank said that they would be prepared to lend that money on the basis of a guarantee signed by all the Directors. He said there was no discussion concerning an unlimited guarantee.

15. He said he called the 1st Defendant and Mr. Gay and they executed the guarantee in his office. The guarantee was returned to the bank in May but he is unable to offer any explanation as to why there was this delay. He said that the Bank did not request the return of the documents and that it did not seem to be any urgency about it. In the meantime they were granted the overdraft facilities that they sought and it seems in fact they were granted considerably more than $150,000.00. He said that the form of guarantee was entirely blank and that he thought that the Bank would fill it in so as to cover the amount of the loan of $150,000.00. He said he did not consider there was any chance that there may be a mistake when the Bank filled in the name of the company whose account was to be guaranteed, the names of the guarantors or the amount of principal.

16. He said that he did see the word "unlimited" mentioned in subsequent letters from the Bank but as he was satisfied that the limit was in fact $150,000.00 he did not become alarmed.

17. In 1978 Impact had cash flow problems and more money was needed to keep it going. He had many discussions with Mr. Wiens regarding this overdraft situation but that at no stage was the amount of his guarantee ever mentioned.

18. He said that the reason for the late amendment to his defence was that he had a consultation with his solicitors at a late stage in the proceedings and that he said he did not know that the 1st Defendant would amend his defence until the beginning of the trial. He said that it was accidental that both amended their defences in the same way.

19. The 2nd Defendant said that when he saw the words "unlimited guarantee" mentioned in the correspondence coming from the Bank he took this to mean that the guarantee was unlimited as to the period of time the guarantee was to cover not as to the amount. On reading the letters, such as are at Bundle 2 pages 18, 22, 24, 25 and 26, where there is a specific paragraph referring to the time during which the facilities would be available. I find that evidence extremely difficult to accept.

20. It seems to me highly unlikely that any businessman would execute a guarantee in favour of a bank in which the amount of the guarantee and even the name of the account which is being guaranteed should be left blank at the time of execution. In this case according to the Defendants' evidence there was clear agreement that the amount of the guarantee was to be $150,000.00. There was also no question as to whose account was being guaranteed. There was therefore no reason whatever why these particulars should not have been typed on the form by the Bank before it was sent or if for any reason they were not, they could very easily have been filled in by the Defendants themselves.

21. So far as the 1st Defendant is concerned I accept the evidence of Mr. Wiens and Dr. Mangold that the discussion arising between them when Impact was clearly in financial difficulty were carried out on the basis that the 1st Defendant had signed an unlimited guarantee of the company overdraft. This is, I think, confirmed beyond the slightest doubt by the telexes sent by the 1st Defendant in which there is no reference whatever to his guarantee liability being other than unlimited. I do not accept the evidence of the 2nd Defendant that he mistook the word "unlimited" in the corres-pondence between him and the Bank as meaning the time during which the guarantee would be enforced and not as to the amount thereof. I am quite satisfied from the correspondence that he must have been well awares of the guarantee was unlimited. I am also satisfied from the evidence given by the Plaintiff's witnesses that, although they cannot remember this particular guarantee, they would not send out forms in blank and have never done so for the purpose of them being executed.

22. I am satisfied beyond any doubt whatever that when the Defendants executed the guarantee form it was completed in the manner which it is now. The Plaintiff is therefore entitled to judgment against both the 1st and 2nd Defendants.

23. I am however in some difficulty as to the amount to which the Plaintiff is entitled to judgment.

24. The guarantee sets out that the guarantors - "jointly and severally guarantee payment on demand upon us of all money and liability whether certain or contingent now or hereafter owing or incurred to you from or by the customer(s) on any current or other account or in any manner whatever whether as principle or surety and whether alone or jointly with another person and in whatever name, style or firm." It would therefore seem that the amount to which the Plaintiff is entitled is the amount owing when demand was made on the respective defendants. This however does not resolve the matter because there were in fact two demands made. The first demand was that made on the 13th February at which time the amount owing was $3,049,261.06 plus interest from the 31st January 1979 to that date. There were then some further negotiations and the Bank did not stop the account but further money were lent and a second demand was made dated the 25th April 1979 at which time the amount owing was $3,576,902.24.

25. If, as the Defendants argue, the relevant date is the date of the first demand, i.e. 13th February 1979, this would mean that after that demand the guarantee ceased to have any effect as to future loans. I do not think that can be the case. Further advances seemed to have been made at the request of Impact in order that it might be kept going and liquidation avoided. There is certainly nothing in the correspondence to suggest that either defendants informed the Bank that their liability should be terminated as at the date of the first demand. The guarantee formed itself seemed to indicate that liability could only be discharged by written notification to the Bank. Clause 8(2) of the guarantee states that it shall be "applicable to the ultimate balance that may be come due to you from the customer." I am therefore of the opinion that the relevant date is the date of the second demand i.e. the 25th April 1979 and that the amount due jointly and severally from the Defendants is $3,576,802.00 together with interest from that date to the date of payment at 12% per annum.

26. The Plaintiff is entitled to its costs.

27. Mr. Bunting on behalf of the 2nd Defendant said that the 2nd Defendant may be entitled to credit for any amount received by the Bank from the liquidator in excess of the Bank's claim and this was agreed by Counsel for the Plaintiff. That is undoubtedly the correct position. Clearly the Bank cannot recover more than it has lent, together with interest.

Representation:

Mr. Patrick Yu and Miss Susan Kwan instructed by Deacoms for the Plaintiff.

Mr. Robert Tang instructed by J.S.M. for the 1st Defendant.

Mr. Michael Bunting instructed by Denton, Hall & Burgin for 2nd Defendant.