Bcci Finance International Ltd v. Aftab Ahmed and Others
Read the full judgment text of HCA 1937/1988 on BabelCite. This High Court CFI judgment was delivered on 1 February 1991.
1. Yet again bankers have got themselves into a muddle over their security documents. In this case, the issue being whether there was any consideration to support the personal guarantee of the 2nd Defendant.
Cited by 1 case
|
HCA001937/1988 HEADNOTE Banking-guarantee - whether admissible to prove stated consideration not paid - effect of acknowledgement clause - effect of alternative consideration being less than stated - whether any consideration for guarantee.
IN THE SUPREME COURT OF HONG KONG HIGH COURT ______________ BETWEEN
______________ Coram: Kaplan, J. Dates of Hearing: 10 January 1991 Date of Handing down Judgment: 1 February 1991 ______________ JUDGMENT ______________ 1. Yet again bankers have got themselves into a muddle over their security documents. In this case, the issue being whether there was any consideration to support the personal guarantee of the 2nd Defendant. 2. The facts are simple and commonplace. The three Defendants are brothers who appear, at one stage at least, to have had substantial business interests in Pakistan and elsewhere. A Liberian corporation called Pan Indian Ocean Shipping Inc. (Pan Indian) was beneficially owned by these three brothers. Pan Indian wanted to buy a ship and required finance from the Plaintiffs. The 1st Defendant appears to have been the prime mover on behalf of Pan Indian. 3. The Plaintiffs issued a facility letter to Pan Indian dated 28th February 1981 whereby they offered to lend Pan Indian US$750,000 or 70% of the price of the ship whichever was the less. The ship was called 'Todhead'. The security required by the facility letter was essentially a first registered mortgage of the vessel and a personal guarantee of the 1st Defendant. The term of the loan was 3 1/2 years and the interest rate was 2% over 6 months LIBOR with quarterly rests. 4. The loan agreement, prepared by Johnson, Stokes & Master, was executed on 3rd March 1981. It was executed by the 1st Defendant on behalf of himself and on behalf of Pan Indian. Clause 8 contains the 1st Defendant's guarantee. The money was drawn down and the mortgage executed on 26th March 1981. 5. One of the gentlemen dealing with this matter at the Plaintiffs was Mr. Ramon Rao. He was the only witness of fact who gave evidence before me and he told me that he knew the 1st Defendant, who visited the Plaintiffs fairly frequently. He was always in a hurry and wanted his transactions completed instantly. This occasion was no exception. Mr. Rao only met the 2nd and 3rd Defendants on one occasion. 6. Mr. Rao told me that it was the Plaintiffs policy, when lending to a company, that all shareholders should guarantee the advance. Johnson, Stokes & Master were instructed to prepare a guarantee for the 2nd & 3rd Defendants to sign after Mr. Rao had raised with his General Manager the fact that the 2nd & 3rd Defendants had not given any personal guarantees. The General Manager instructed Mr. Rao to proceed to obtain this guarantee. 7. It is crucial to note that Mr. Rao's concern was raised only after the money had been advanced, the guarantee of the 1st Defendant given and the mortgage entered into. 8. Johnson, Stokes & Master prepared a guarantee for the 2nd & 3rd Defendants and this was sent to the Plaintiffs on the 8th of May 1981. It appears that the Bank handed this document over to the 1st Defendant with a request that he obtain the signatures thereon of his brothers, the 2nd & 3rd Defendants. 9. Mr. Rao says that when he physically handed this guarantee to the 1st Defendant he also took HK$10 out of his pocket and handed it to the 1st Defendant in order for him to pass this sum on to the 2nd & 3rd Defendants. Mr. Rao says that he was aware of the doctrine of consideration and had in fact done this before. The guarantee handed to the 1st Defendant on this occasion in Clause 3 provided;
10. Earlier in the guarantee, it is provided that dollars should have the same meaning assigned to it as in the loan agreement and that is US$. The collateral guarantor was the 1st Defendant. 11. Mr. Rao told me that he had not read the guarantee very carefully and missed the fact that dollars meant US$. That is why he gave HK$ to the 1st Defendant who eventually accepted it. 12. To make a short story even shorter, the guarantee was eventually returned, signed by the 2nd & 3rd Defendants. Under the 2nd Defendant's signature, he has written "27/X/81". No date appears in connection with the 3rd Defendant's signature. 13. Default under the loan agreement occurred in January 1988. 14. A Writ was issued in March 1988. 15. An Order 14 summons was heard in October 1988. Judgment was entered against the 1st Defendant and the 2nd & 3rd Defendants were given leave to defend on the basis of an allegation of past consideration. 16. When the matter was called on before me, Mr. Fok for the Plaintiffs applied for leave to re-re-amend the Statement of Claim by adding new paragraphs 4A & B. Paragraph 4A alleged, further or in the alternative, that the Plaintiffs provided consideration to the 2nd & 3rd Defendants in the sum of HK$10 and then some particulars are given. Paragraph 4B asserted that "by virtue of Clause 3 of the guarantee, the receipt of consideration for the guarantee by the 2nd & 3rd Defendants, whether as pleaded in paragraph 4(1)or 4A hereof was acknowledged by them when they signed the guarantee". 17. Mr. Smith for the 2nd Defendant opposed the amendment, but having indicated to me that if it was granted he would not seek an adjournment I granted leave to amend subject to the usual costs order. I reserved the question whether the Defendant should have all the costs of the action up to the date of the amendment until I had decided the case. This was to guard against the possibility that the Plaintiffs might lose on their pleaded case, but win only on the basis of the amendment which I allowed at the commencement of the trial. As the 2nd Defendant was neither present nor represented, I adjourned the case against him. It may well be that the Plaintiffs will accept that if the 2nd Defendant wins, then there would be no point in going on against the 3rd Defendant. Similarly, if the 2nd Defendant loses, the 3rd Defendant may well reconsider his position. There is no difference in the cases against the 2nd & 3rd Defendants. Their position is identical. This action therefore continued solely against the 2nd Defendant. 18. A Mr. Linneman of the Plaintiffs proved that the sum due as of the 10th January 1991 was US$647,690.56. This was not disputed. 19. Mr. Rao was the only other witness called and he confirmed the matters I have set out above. He was cross-examined by Mr. Smith and said that to the best of his knowledge US$10 had not been paid to the 2nd & 3rd Defendants. No documentary evidence to support such payment was produced and there were no attendance notes or diary entries. He was adamant that he handed HK$10 to the 1st Defendant in May for onward transmission to the 2nd & 3rd Defendants to provide consideration for the guarantee. He had no knowledge as to whether they ever received it. Findings 20. Although Mr. Rao's assertion that he paid the 1st Defendant HK$10 came very late in the day (it not having been adverted to in the Order 14 proceedings), I am prepared to accept that he did, in fact, hand over such sum to the 1st Defendant. 21. Mr. Fok says that I should be satisfied that the 1st Defendant, in fact, handed over HK$10 to the 2nd & 3rd Defendants because (a) he was asked to do so, and (b) the guarantees did come back duly signed by 2nd & 3rd Defendants, and there was, after all, an acknowledgement in Clause 3 albeit for US$10. Mr. Fok made no suggestion that the 1st Defendant was, in some way, the agent of the 2nd & 3rd Defendants for the purposes of receiving the money, in fact he accepted that the 1st Defendant was the agent of the Plaintiffs for that purpose. 22. I cannot accept that the 1st Defendant handed over HK$10 to the 2nd & 3rd Defendants. On Mr. Rao's evidence, the 1st Defendant appeared not to want to take the HK$10 probably because of its nominal nature and possibly because it came out of Mr. Rao's own pocket. I find it impossible to believe that when the 1st Defendant eventually returned to Karachi and handed over the guarantee for signature by the 2nd & 3rd Defendants, he also handed over the HK$10 to one or other of them or split it between them if he had small change in HK currency. As far as I can tell from the evidence, the Defendants were in a substantial way of business on an international scale, and I cannot believe that the 1st Defendant would ever have remembered he had HK$10 in his pocket, if in fact he still did, when he returned to Karachi. 23. I also find that US$10 was not paid to the 2nd & 3rd Defendants either directly or through the 1st Defendant, for had this been done, it would seem unnecessary from Mr. Rao to have paid the HK$10 as well. In any event, Mr. Rao accepted that to his knowledge, US$10 had not been paid. Conclusion 24. I think it is clear law that it is admissible to adduce evidence in order to establish that a consideration stated in a contract was not, in fact, paid. Chitty on Contracts Vol. 1, paragraph 858 puts it thus;
25. Two cases referred to in the footnotes to paragraph 858 were cited to me. In Abbott v. Hendricks [1840] 1 Man & G 791, an action was brought on a promisory note in which the consideration was expressed to be for commission due to the Plaintiff for business transacted for the Defendant'. The Defendant pleaded that the real consideration for the note was services to be thereafter rendered by the Plaintiff which had never been performed. It was held that evidence in support of this defence was admissible. Tindal, C.J. having said that when an action is brought on a promisory note or bill of exchange, the Defendant is not entitled to set up a different contract from that expressed in the instrument, went on to make clear that the Defendant may show either that there was no consideration for the contract or that it has failed. He said this;
The other three judges expressed similar views. 26. In Goldshede v. Swan [1847] 1 Ex 154, 154 ER 65, an action was brought on a guarantee which stated;
The court held that the instrument was sufficiently ambiguous to admit of evidence to show that the advance was not a past one, but was made simultaneously with the execution of the guarantee. 27. In this case, the Plaintiffs pleaded two alternative considerations. Paragraph 4(1) of the re-re-amended Statement of Claim pleads the consideration in the sums of US$10 and the acknowledgement of receipt. Paragraph 4A pleads the consideration of HK$10. Paragraph 4B pleads the receipt and acknowledgement of consideration of the 2nd & 3rd Defendants, whether as pleaded in 4(1) or 4A. 28. However admissible evidence has been adduced as to the consideration. I have accepted Mr. Rao's evidence that he has no knowledge of payment of the US$10 and no record has been provided to support it. I am satisfied that the US$10 was not paid and the claim based on that consideration must fail. 29. As to the May payment of HK$10, I accept it was paid to the 1st Defendant. There is no evidence whatsoever that it was ever received by the 2nd or 3rd Defendants, and I am not satisfied on the balance of probabilities that the 2nd and 3rd Defendants did ever receive that consideration. The claim based on the consideration of HK$10 must also fail. 30. In my judgment, the evidence of non-payment of the US$10, and the complete lack of evidence of payment of the HK$10 overrides the standard form of acknowledgement clause upon which the Plaintiffs rely. 31. Although originally before the Master, the case was defended on the basis of past consideration, it has in effect proceeded before me on the basis of no consideration which is the conclusion at which I have arrived. 32. Mr. Fok in dealing with a possible argument on past consideration cited National Westminister Bank v. Cullinane [1982] The Times L.R. 27th October 1982 in which the Court of Appeal stated that in determining whether consideration was past, the courts were not bound to apply a strictly chronological test. "If the giving of the consideration and the making of the promise was substantially one transaction, their exact order of occurrence was not decisive... This was one transaction." 33. Mr. Fox also relied upon a well-known passage in Pao On v. Lau Yiu Long [1980] A.C. 614. 34. I ought to mention that Mr. Smith submitted that the Plaintiffs, although being permitted to prove a larger consideration than that specified in the guarantee, were not permitted to prove a smaller one. As I am satisfied that neither sum was paid, I do not have to go into this point. 35. The simple facts of this case illustrate that this was not one transaction nor do the Plaintiffs have anyone to blame but themselves. They were rushed into a transaction by a good customer or a customer with whom they hoped to do future business. Initially, all the cards were in their hands. They agreed to lend the money to Pan Indian on the security, inter alia, of the 1st Defendant's guarantee and the ship mortgage. All that took place within a few days in late February or early March 1981. At no time until May, well after the draw down and the execution of all the security documents did the Plaintiffs think of attempting to get personal guarantees from the 1st & 2nd Defendants. They handed a guarantee to the 1st Defendant in May and heard nothing further until November when they received the signed guarantee back. The Plaintiffs have never pleaded that the consideration for the guarantee was the loan facility to Pan Indian. This guarantee recites a monetary consideration and alternatively, they rely upon the HK$10 handed to the 1st Defendant in May. 36. These guarantees were an afterthought. If it is the policy of a financial institution not to lend to a company without personal guarantees from all shareholders, then they should insist on this taken place before or at the same time as lending the money. If Pan Indian/The Defendants were desperate for the Plaintiffs money, they would in all probability have supplied the security requested. To try to cobble together a claim on a guarantee not under seal based on a nominal consideration which was not paid, is asking for trouble which is precisely what the Plaintiffs have got. Further the giving, of the HK$10 to the 1st Defendant in May is a fairly strong indication that Mr. Rao knew (as he fully admitted before me) that no US$10 had been paid. To give the 1st Defendant HK$10 was, I regret to say, a slapdash way to proceed because there was no way in which the Plaintiffs would ever know whether he carried out this mission on their behalf. In the particular circumstances in which the Plaintiffs found themselves, namely having no legal means of compelling the 2nd & 3rd Defendants to sign the guarantee, they should have been most careful to ensure that any consideration provided to the 2nd & 3rd Defendants was properly documented and thus provable. 37. Personal guarantees are very serious banking documents which can have catastrophic effects on individuals who give them. In those circumstances, I think it behoves all lending institutions to ensure that the documentation relating to them should be carried out scrupulously especially when dealing with people with whom they had no direct contact as in this case. 38. Nothing I have said in this judgment applies to the more common case where the guarantor requests the advance to his company and where the consideration for the guarantee is expressed to be and is that advance. This was not that case. 39. I, therefore, dismiss the Plaintiffs' claim against the 2nd Defendant and I make a costs order nisi in favour of the 2nd Defendant.
Representation: Mr. J. Fok instructed by Johnson, Stokes & Master for the Plaintiffs. Mr. C. Smith instructed by John Massie & Co. for the 2nd Defendant. |
Other judgments that cite this case