Re: Lai Kwok Man and Ex Parte: The Hongkong and Shanghai Banking Corporation Ltd.
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HCB002318/1999 HCB 2318/1999 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE IN BANKRUPTCY NO. B2318 OF 1999 ____________
____________ Coram: Deputy High Court Judge To in Court Dates of Hearing: 19 and 20 September 2000 Date of Judgment: 16 October 2000 _______________ J U D G M E N T _______________ Background: 1. The Debtor was a director and 5% shareholder of Enfield Construction Company Limited (hereinafter called "Enfield"). His two brothers, Lai Kwok Ying and Lai Kwok Keung were the only other directors and shareholders. Lai Kwok Ying was the majority shareholder. 2. The Debtor first joined Enfield on 4 January 1993 and resigned in 1995. During that period of time, he was a credit manager of the Bank of East Asia. 3. On 15 April 1993, during his first spell of directorship with Enfield, he and his two brothers entered into an unlimited joint and several guarantee (hereinafter called "the 1st Guarantee") with the Petitioner in respect of the debt of Enfield. The guarantee was a continuing security of all moneys owing by Enfield to the Petitioner. This guarantee was signed by the Debtor and his brothers and was further acknowledged by them on a letter dated 12 October 1994 from the Petitioner. In October 1995, presumably upon his resignation from Enfield, he was released from the 1st Guarantee. 4. He re-joined Enfield on 25 May 1996 and became its Finance Director. The Petitioner offered certain banking facilities to Enfield by a facility letter dated 6 December 1996. Under the terms of the offer, the Petitioner demanded the following additional security:
The Debtor duly executed the mortgage and the guarantee (hereinafter called "the 2nd Guarantee"). 5. Since then there have been numerous further facilities granted by the Petitioner to Enfield and its associate company Wing Mou Construction Company Limited (hereinafter called "Wing Mou") and Enfield also guaranteed the debt of Wing Mou. Eventually Enfield was put in liquidation in November 1998. The Petitioner sought to recover Enfield's debt against the guarantors, including the Debtor. A statutory demand for the sum of HK$25,499,851.44 and US$352,576.18 was served on the Debtor on 15 June 1999. The demand has not been complied with nor been set aside. The Petitioner hence petitions for a bankruptcy order against the Debtor. 6. The Debtor does not dispute the debt owing by Enfield or that he had signed the 2nd Guarantee. His defences are that the guarantee was not signed by him on the date appearing on the guarantee, that the nature of the guarantee had not been explained to him by the Petitioner before he signed, that he signed as a result of misrepresentation and undue influence exerted on him by his brother, Lai Kwok Ying, that the Petitioner failed to advise him to seek independent legal advice before entering into the guarantee, and that the guarantee has been discharged by reason of the release by the Petitioner of another co-surety, Lai Kwok Ming. 7. He filed an affirmation from Lai Kwok Ying in support of his defence and he tendered his own written statement at the hearing instead of an affirmation. Mr Shieh for the Petitioner sensibly does not take issue with that. I treat his statement and his defence as if they were both made under oath or affirmation. The test for proof of the debt: 8. It is well established law in bankruptcy cases as in company winding up cases, that a bankruptcy petition would be dismissed in cases where there is a substantial dispute as to the existence of the debt; and the burden of proof rests on the Debtor against whom the petition is made: see Butterworths Hong Kong Bankruptcy Law Handbook, page 46. 9. A bona fide dispute as to the existence of the debt is not a trivial or insubstantial dispute but is based on solid grounds disputable both in law and on the facts of the case. As recognised by Rogers J, as he then was, in Re ICS Computer Distribution Limited, [1963] 3 HKC 440 at 443C-444A, this is a higher standard than that required of a defendant in resisting an Order 14 application. He held at 444:
Thus the Debtor has to show not only that his defence is believable but also that there is precise factual evidence in support of that defence, not just mere assertions. The Debtor's background: 10. The Debtor is now 39 years of age, a person of full age, maturity and understanding. He has demonstrated in court a good knowledge of the English language. He had been a Senior Business Manager of the Bank of East Asia prior to joining Enfield on a full time basis. While working with the Bank of East Asia, he had by his own study passed the necessary examinations and qualified himself as a member of the Association of Chartered Institute of Bankers of the United Kingdom and also became a member of the Association of the Hong Kong Institute of Bankers. He had worked in the credit department analysing financial reports. He had worked in the business development department, serving new clients and handling loan facilities. He alleged that his knowledge of the law of guarantee had faded away. He disputed that he had worked as a credit manager of the Bank of East Asia as alleged by Karen Wong in her affirmation. Be that as it may, he is nevertheless a person of intelligence and with business exposure. The credibility of his defence and statement has to be adjudged against this background of his. When was the 2nd Guarantee signed: 11. The guarantee was dated 24 February 1997, so too was the deed of mortgage in respect of his property. While the Debtor does not dispute that he had signed the guarantee, he took great pains arguing that he did not sign the guarantee at the end of December 1996 or on the date as shown on the document, but some time after the Chinese New Year in 1997. That must be some time around 24 February 1997. He said he and his brothers and their wives went to the office of Johnson Stokes and Master to sign the mortgage deed on 21 February. He could not say when he signed the guarantee but alleged that the date thereon had been altered. 12. According to Karen Wong, the Relationship Manager of the Petitioner, the usual practice was that the facility letter together with the guarantee would be left in the branch office of the bank for collection by the staff of Enfield on about the date of the facility letter, i.e. 6 December 1996. The date chop on the letter indicates that it was returned to the bank on 23 December. She said that the guarantees would have been signed but undated and when she was informed that the mortgage documents were signed and in order, the guarantee and the mortgage documents etc would then be dated with the same date; which in this case was 24 February 1997. 13. The Debtor gave an account of how he came to discover that the address of the Lai Kwok Ming's property had been mis-described on the facility letter and guarantee as a "Flat G" unit in Sun Tuen Mun Centre and he drew that to Lai Kwok Ying's attention. He submitted that the address of Lai Kwok Ming's property in the facility letter was then amended to "Flat H" as it should be but the address in the guarantee had not been similarly amended. There is no evidence as to the correct address of the property. The mortgage document of Lai Kwok Ming's property was not produced. It was possible that the address in facility letter had been properly typed and nothing eventful had occurred so that Karen Wong had no recollection, and that the address in the guarantee was a mis-type, as the keys for letter "G" and "H" are adjacent to one another on the keyboard. But whether the event occurred as the Debtor alleged or otherwise is neither here nor there. 14. In my view, nothing significant, whether in law or in fact, turned on the date of the guarantee. The Debtor's signature on the guarantee was not disputed. The guarantee was made under seal and the question of past consideration does not arise. If at all the Debtor's account serves any purpose, it only tends to affect the credibility of Karen Wong. Having considered the totality of the evidence, I do not find Karen Wong's credibility impugned. She has honestly described the practice she adopted, i.e. dating the guarantee with the same date as the mortgage documents when everything was in order. There was nothing dubious with this sort of practice. Nor was that an act of dishonesty. Code of Banking Practice, guidelines and manuals: 15. The Debtor referred to the Code of Banking Practice 1997 issued by the Hong Kong Association of Banks and The DTC Association. These codes have no force of law but sets the minimum standard which banks should follow. He referred in particular to Article 20, which is concerned with guarantees and third party securities. This Article provides that a bank should give to an individual proposing to grant a guarantee or third party security a copy or summary of the contract evidencing the obligations to be guaranteed or secured. It should advise that individual in writing that he might become liable instead of or as well as the party being guranteed; whether the guarantee or third party security includes an "all monies clause" or is unlimited as to amount; whether the liabilities are payable on demand; the circumstances under which the surety would be called upon to honour the obligations; the circumstances under which and the timing within which it would be possible for the surety to extinguish the liability and that the surety should seek independent legal advice before entering into the guarantee or providing third party security. The Code also provides that clear and prominent notice regarding these matters should be included in or attached to the guarantees and other third party security documentation; that the surety should be provided with a copy of any formal demand for overdue payment sent to the borrower. The Debtor submitted that this practice has not been observed by the Petitioner. 16. The Debtor has not shown when the Code became applicable, nor does the Petitioner seek to argue that this code has been observed. Be that as it may, while non compliance is prima facie evidence of failure to comply with good banking practice, the essential question remains whether the Debtor understood the nature and legal effect of the guarantee he was entering into. Of course, compliance with the code or otherwise may assist the court in resolving this issue. 17. The Debtor suggested that Karen Wong was hiding the truth when she said the Petitioner had no manuals or guidelines to its staff for dealing with third party surety. It is common ground that the Debtor's signature on the guarantee had not been witnessed by the Petitioner's staff and that neither Karen Wong nor her staff had explained the contents and legal effect of the guarantee to the Debtor. Under such circumstances, whether there were manuals or guidelines has faded into insignificance. The worst scenario for the Petitioner is that there were manuals and guidelines prescribing certain procedures and requiring certain explanation to be given to the proposing guarantor but that these have not been followed. However, the real issue is, as submitted by Mr Shieh, whether at the time he signed the Debtor understood the guarantee he was signing and its legal effect. 18. The Debtor is a mature businessman with strong banking background. His knowledge of the law relating to banking may, as he alleged, have faded because of time, but not his common sense and intelligence. He said he was not the Finance Controller as he was not qualified in accountancy. However, he was the Finance Director of Enfield. He and his other two brothers were in the driving seat of Enfield. He made some important business decisions. He re-structured the company. Though some of these events took place after the date of the guarantee, the fact remains that he is a very experienced banking officer and businessman and is thoroughly conversant with the English language. It is likely that he knew and understood the nature of the 2nd Guarantee which he entered into, despite that the Code had not been observed. Being the Finance Director, he must have up to date information of Enfield's indebtedness, extent of its liability and demand for overdue payment etc. even though these have not been supplied to him separately as guarantor. Release of co-guarantor: 19. The Debtor alleged that on 6 January 2000 the Petitioner withdrew its petition for bankruptcy against Lai Kwok Ming and proposed to deal privately with Lai kwok Ming about the surrender of his own property. He suspected that there were other private and secret deals between the Petitioner and Lai Kwok Ming. Relying on the authority of Mercantile Bank of Sydney v. Taylor, [1893] AC 317, he submitted that by reason of the release of a co-surety, the Petitioner is precluded from recovering against him. 20. No evidence has been adduced by the Debtor in support of the alleged release. On the other hand, Mr Shieh for the Petitioner submitted that what happened in the petition against Lai Kwok Ming was that the Petitioner withdrew the statutory demand against Lai kwok Ming only and is still pursuing against him by way of court proceedings. He further submitted that in any event, in accordance of Clause 3.03 the Petitioner is entitled to deal with or release any guarantor without affecting the liability of the others. Clause 3 of the 2nd Guarantee provides as follows:
In view of Clause 3.03, this defence must also fail. Misrepresentation: 21. The Debtor alleged that he signed the 2nd Guarantee as a result of misrepresentation made to him by both Karen Wong and his brother Lai Kwok Ying. His case is that since signing the mortgage of his flat, he was told in late February 1997 by Karen Wong that the names of Lai Kwok Keung and himself had to be added to the guarantee, increasing the number of guarantors to four and that it was a "routine procedure" as the Debtor had already signed the mortgage and the guarantee was simply to safeguard the mortgage. When he asked Lai Kwok Ying, he was also told that it was a routine procedure required by the Petitioner and that since the value of the property mortgaged far exceeded the loan, the Debtor need not worry. Then a few days later, a member of his staff gave him a pile of documents, presumably including the 2nd Guarantee, which he signed without reading. 22. In his affirmation in support of the Debtor's case, Lai Kwok Ying affirmed that when the negotiation was finalised Karen Wong never mentioned the need to increase the number of guarantors to four and that when he was asked by the Debtor about having to furnish the 2nd Guarantee, he told the Debtor that the risk undertaken by the Debtor was limited to the value of the property and not all debts owed by Enfield. 23. I have no difficulties in dismissing his allegation about Karen Wong requesting to increase the number of guarantors to four in February 1997. His allegation is utterly incredible and contradicted by the facility letter. This letter was dated 6 December 1996 and was acknowledged by Lai Kwok Ying and returned to the Petitioner on 23 December 1996. Item (C) on page 3 of the letter specifically required as an additional security a fresh unlimited joint and several guarantee from Lai Kwok Ying, Lai Kwok Keung, Lai Kwok Man and Lai Kwok Ming to replace the existing one dated 19 October 1995 from Lai Kwok Ying and Lai Kwok Keung. This requirement to have four guarantors including the Debtor did not come about suddenly in February 1997, it had been clearly spelt out in the facility letter in December 1996. That must be clear in the mind of Karen Wong. The Debtor's and Lai Kwok Ying's allegation about Karen Wong requiring the number of guarantors to be increased to four in late February 1997 is therefore wholly incredible. 24. Secondly, the Debtor's allegation that Karen Wong told him that the 2nd Guarantee was simply to safeguard the mortgage does not make any sense. So too is Lai Kwok Ying's allegation that he got the impression from Karen Wong that the risk undertaken by the guarantor was limited to the value of the property but not all debts owed by Enfield. Very simply, if the guarantee was required for the purposes as alleged by the Debtor and Lai Kwok Ying, the guarantee is superfluous. The purpose of having an additional guarantee must be to secure the company's indebtedness when the mortgage over the properties proves to be inadequate for whatever reason, including the fall in the value of the properties. If the risk undertaken by the guarantor was limited to the value of the property he mortgaged, there is no need for the guarantee. 25. Furthermore, Item (C) of the facility letter referred to above specifies the guarantee as "a fresh unlimited joint and several guarantee". This puts it beyond dispute that Karen Wong knew the risk covered by guarantee was not limited to the value of the property. It is unlikely that she would deliberately misrepresent that fact to the Debtor. That letter also negatives Lai Kwok Ying's allegation that he was under such an impression. 26. Similarly, in the 2nd Guarantee itself, "guaranteed moneys" is defined to mean all moneys owing by Enfield. Again, this shows that it is incredible that the Debtor and Lai Kwok Ying could be under the impression that the risk covered by the guarantee was limited to the value of the property mortgaged. 27. For all of the above reasons, the allegations of the Debtor and Lai Kwok Ying do not make common sense, let alone banking sense. Their allegations are unbelievable. Applying the test in Re ICS Computer Distribution Limited, the Debtor has failed to raise a bona fide dispute as to the existence of the debt by reason of the misrepresentation by Karen Wong and Lai Kwok Ying. In so far as the alleged misrepresentation by the latter is concerned, that defence must also fail as there is no evidence that Lai Kwok Ying made the misrepresentation, even if he had done so, as agent of the Petitioner. Undue influence: 28. In his submission, the Debtor described the close relation between him and his brother Lai Kwok Ying who offered twice to support his education in the United Kingdom. In effect, he painted a picture that Lai Kwok Ying led him into the field of business by his hand like a toddler. He said he placed full trust on Lai Kwok Ying and did as he was told. He then submitted on the authority of Barclay's Bank Plc v. O'Brien and Another, [1994] 1 AC 180, that Karen Wong knew he was the youngest brother of Lai Kwok Ying and had recently joined the company as a director and that he was subject to presumed undue influence by Lai Kwok Ying. 29. In Barclay's Bank Plc v. O'Brien, Lord Browne-Wilkinson held at p. 189:
30. The Debtor submitted that his case falls within Class 2(B) above. His relationship with his brother is not one which gives rise to any presumed undue influence. His assertion of reposing trust or confidence in Lai Kwok Ying, was totally devoid of content. His case is that he was being led by the hand like a toddler. He was an experienced senior bank manager with professional qualification in banking and business exposure. On his own statement, he was the company's Finance Director and was responsible for re-structuring the company. It is not clear from what he said in his unsworn statement what influence was exerted. It is doubtful that a man of his intelligence, business and commercial exposure particularly to banking practice would be induced to sign a guarantee without first understanding the liability he was assuming or the legal effect. His allegation that he acted like a dummy signing the guarantee as influenced by Lai Kwok Ying is hardly incredible. His statement put at its highest was that he signed the guarantee among a pile of documents given to him for signature by his staff without reading it. That could not be undue influence. 31. Further, in providing this third party guarantee, he was not really a third party, in the sense of a dis-interested party. He was a 5% shareholder and director of the company. The banking facilities provided working capital for his company and through his shareholding in the company he would benefit from the loan. To an experienced bank manager, a company director signing a guarantee when its company borrows from a bank is just like night following the day. It is a very common practice, so common that it is almost a matter of course. Further, he was not a nominal director, but also the company's Finance Director, knowledgeable about the company's financial affairs. He must know what risk the company was exposed to and hence his risk under the 2nd Guarantee. Had things worked well, he would personally benefit through his shareholding and his employment with the company from the loan he was guaranteeing. Under these circumstances, it is incredible that he signed the guarantee under undue influence of his brother, Lai Kwok Ying. 32. A further obstacle for him is that undue influence could only set aside a transaction as against the wrongdoer, i.e. his brother and not the Petitioner, unless the Petitioner has notice of the undue influence. In Barclay's Bank Plc v. O'Brien, Lord Browne-Wilkinson held at p. 191:
33. Applying this dicta to the present case, even if the Debtor were able to show undue influence under Class 2(B), there is no evidence that Lai Kwok Ying acted as agent of the Petitioner when exerting undue influence on him. While Karen Wong probably knew the Debtor and Lai Kwok Ying were brothers, that is far from saying that she and through her the Petitioner had actual or constructive notice of the undue influence. In my view, the Debtor failed to raise a bona fide dispute by reason of undue influence. Legal advice: 34. The Debtor said that the Petitioner failed to provide or advise him to seek independent legal advice before entering into the 2nd Guarantee. I dismiss that as a possible defence as there is in law no such duty on the part of the Petitioner. Variation of Enfield's liability: 35. The Debtor argued that the Petitioner had increased his liability under the 2nd Guarantee by increasing the facilities to Enfield and to allow Enfield to guarantee the debt of Wing Mou. This defence must also fail because Clause 9 of the guarantee expressly allows the Petitioner to enter into such agreement or arrangement with Enfield and preserves the Debtor's liability. This clause provides as follows:
The Petitioner is therefore free to provide further facilities to Enfield and to take a guarantee from Enfield in respect of the indebtedness of Wing Mou. 36. In addition, the Debtor was in the driving seat of Enfield in respect of finance management. He has full knowledge of the financial arrangement of Enfield including the increase in facilities arrangement with the Petitioner and its guarantee of Wing Mou's debt. Indeed on 4 August 1997, he wrote to Karen Wong requesting a review of the credit facilities and specifically he applied for additional leasing facilities for $3.6 million to accommodate Enfield's purchase of a lot of pipelining equipment. He had notice of all these transactions and variations and cannot now complain that he had no knowledge of the increase of his own risk as a guarantor. Signing without knowledge of the content of the 2nd Guarantee: 37. The Debtor said that he did not know when he signed the 2nd Guarantee and that probably he signed it among some other documents presented to him for signature by his staff. He therefore obliquely suggested that he did not know the content of the guarantee that he signed. Be that as he may, he was deeply involved in the finance management of Enfield as its Finance Director and had full knowledge of the facilities granted to Enfield and must appreciate the risk undertaken by his guarantee. He signed the board resolution when the facility letter dated 6 December 1996 from the Petitioner was tabled before the board. He must know that he was required to furnish a fresh, unlimited guarantee in addition to mortgaging his property as a security. He said the resolution was prepared by Karen Wong as part of the documents requiring his signature. Such paper resolution is not uncommon. Even if that was the case, it does not mean the resolution so passed by a paper board was null and void. Further, he is, as I have found, not a genuine third party, but an interested director holding 5% of the share of the company. He must have full knowledge of the guarantee, its content and legal effect. It is not credible that he knew nothing about this guarantee. For a man of his experience and background to say that he signed a guarantee without reading or appreciating its content is defiance of common sense. The document was headed in capital and bold prints "JOINT AND SEVERAL GUARANTEE BY INDIVIDUALS OR PARTNERS IN A FIRM" and signed by him against the words "executed under seal by the guarantor" with the impression of the letters "L.S." inside a circle. For a man of his background and knowledge of banking law, he must appreciate the significance of these words and the seal. Public policy would also require that a person competent with the language of the document he signed may not shake himself free from responsibility by saying that he signed without reading the document. Conclusion: 38. For the above reasons, I find that the Debtor has utterly failed to show that he has a substantial dispute as to the existence of the debt. I therefore make a Bankruptcy Order against the Debtor with costs from his estate.
Representation: Mr Paul Shieh, instructed by Messrs Johnson Stokes & Master, for the Petitioner Debtor in person |
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