The Wing on Finance Co. Ltd. v. Stephen Lam Sou Wing
Read the full judgment text of HCA 7516/1985 on BabelCite. This High Court CFI judgment.
1. The plaintiff's claim against the defendant is based on a continuing guarantee dated the 11th December, 1980 signed by the defendant and another, who is not a party to these proceedings, guaranteeing inter alia "all advances and/or credit granted by the plaintiff to Whitehall Finance Limited (hereinafter referred to as 'Whitehall') to the extent at any one time of $5,000,000.00". It seeks to recover from the defendant a sum of $840,568.72, inclusive of interest at the rate of 12.25%, being th
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HCA007516/1985 1985, No. A7516 IN THE SUPREME COURT OF HONG KONG HIGH COURT ------------------ BETWEEN
------------------------------ Coram: Deputy Judge Saied in Court Date of hearing: 10th and 11th January 1989 Date of delivery of judgment: 16th February 1989 ------------------------- J U D G M E N T ------------------------- 1. The plaintiff's claim against the defendant is based on a continuing guarantee dated the 11th December, 1980 signed by the defendant and another, who is not a party to these proceedings, guaranteeing inter alia "all advances and/or credit granted by the plaintiff to Whitehall Finance Limited (hereinafter referred to as 'Whitehall') to the extent at any one time of $5,000,000.00". It seeks to recover from the defendant a sum of $840,568.72, inclusive of interest at the rate of 12.25%, being the unpaid balance of the indebtedness due and owing by Whitehall of an advance made to it of $3,00,000.00, as at the 31st October, 1985, after taking into account the total dividends which the plaintiff had received on the 40,000 shares of Hang Chong Investment, Ltd. pledged by the defendant to the plaintiff as further security for his "due performance" of the guarantee, interest paid by the plaintiff on such dividends at the rate of 12.25% and the proceeds of sale of those shares at $71.00, such payment's being respectively appropriated first towards wiping out the accrued interest on the amount of the advance to Whitehall and the balance towards part payment of the principal amount. In addition the plaintiff also claims further interest accruing on the unpaid balance at the rate of 12.25% per annum. 2. Learned Counsel for the defence abandoned the issue of misrepresentation raised in para. 4 of the amended defence and counter-claim, so that the substantive defence is that Whitehall, having been wound up by Court Order on the 28th January, 1983, by virtue of Clause 7 of the guarantee the defendant was liable to the plaintiff "at most to the extent of $3,006,045.16 which was the amount due and owing by Whitehall to the plaintiff at the date of the winding-up order" -para.5 (v) of the defence. The defendant maintained that as the proceeds of sale of the pledged shares together with the dividends collected by the plaintiff and the interests accrued on the said dividends amounted to $3, 148,197.50, his liability under the guarantee was extinguished. Further, the defendant maintained that there was never any agreement between the parties as to the payment of interest. In his counter-claim the defendant seeks an account and payment of the " amount held by the plaintiff in excess of the amount of liability of Whitehall immediately before its insolvency after the realisation of the pledged shares." 3. In its reply to the defence and counter-claim, the plaintiff maintained that under the terms of the guarantee the defendant's liability included also the payment of interest, which is mentioned in its letter of the 27th November, 1982 and subsequent letters, including the Deed of Pledge. 4. The issues framed by the parites were: first, whether the guarantor is liable for interest accruing after the bankruptcy or insolvency of Whitehall; secondly, whether the rate of interest should have been a flat rate of 12.25% throughout from 4th January, 1983 until now. 5. The consideration for the guarantee is stated thus:
6. In so far as are relevant, the other clauses mentioned in pleadings and argument he fore me are:
7. It is not disputed that on the19th November, 1982 the plaintiff wrote to Whitehall:
8. On 27th November, 1982, the plaintiff wrote to the defendant and the co-guarantor, forwarding a copy of its letter to Whitehall and stated:
9. This without doubt was the first demand that was made of the defendant for repayment of the amount mentioned in the plaintiff's letter to Whitehall, which clearly stated the rate of the interest. 10. On the 28th January, 1983 Whitehall was wound-up, and on the 11th February, 1983 the plaintiff filed its proof of debt in the sum of $3,024,164.38 being the
11. On the 22nd April, 1983 the defendant deposited with the plaintiff, his 40,000 shares in Hang Chong Investment Co. Ltd. with instrument of transfer and bought and sold note(s) thereof in blank duly signed by him and attested as "security for the due performance on the part of LAM to be observed and performed under the said continuing Guarantee"; the pledge of the shares being subject to the terms and conditions set out in the Deed of the Pledge. 12. On the 28th March, 1984 the plaintiff wrote to the defendant concerning the guarantee, advising him that on the 19th March it had received a dividend amounting to $160,000.00 on those shares, the net dividend after deduction of the handling charges being $159,200.00. The letter continued:
13. The manner in which the defendant was required to signify his agreement is stated at the end of the letter as follows:
14. This the defendant did not do and in the plaintiff's next letter of the 12th April, 1984 there is reference to a telephone conversation between the parties as a result of which the plaintiff decided not to apply the net amount of the dividend towards partial settlement of the outstanding indebtedness of Whitehall; instead it decided to exercise its rights under Clause 3(d) of the said Deed to continue to hold the dividend as "further security against the indebtedness of Whitehall Finance Ltd, and/or your liabilities to us under the said joint and several guarantee", without prejudice to its rights to so appropriate the dividend as and when it deemed fit. Again, the defendant was asked to confirm his agreement by signing the following:
15. Again the defendant did not give any such confirmation. 16. On the 25th March, 1984, the defendant filed his proof of debt for $3,006,045.16, attaching a copy of the plaintiff's letter of demand of the 27th November, 1982. The Liquidator advised him to furnish evidence of the discharge of his guarantee and also notice of subrogation form the plaintiff. 17. There the matters rested until the 12th July, 1985 when the plaintiffs solicitors wrote to the defendant, stating Whitehall's indebtedness "due and owing" to the plaintiff as at 1st July, 1985 at HK$3,914,219.19 "together with interest accruing thereon at the rate of $1,006.85 per day being 12.25% per annum". After adverting to the guarantee and the Deed of Pledge, the solicitors demanded repayment of the said amount together with the accruing interest as aforesaid within 14 days, failing which the plaintiff threatened to take legal steps, including but not limited to exercising its right to sell the shares pledged with it. 18. On the 26th September, 1985, the plaintiff's solicitors again wrote to the defendant. This letter is headed "without prejudice" but was disclosed during discovery and is agreed by both sides. It referred to certain meetings between the parties, particularly one on the 2nd August, 1985 at which the defendant was said to have agreed to effect the sale of the shares towards partial settlement of the "current liabilities" of the defendant to the plaintiff. It referred to the defendant seeking the plaintiffs approval to the sale of those shares to a potential buyer @$70.00, and continued:
19. The confirmation of the agreement which the plaintiff sought from the defendant and was given by him the same day, ie. the 26th September, 1985, is set out at the bottom of the letter in the following terms:
20. Those shares were sold by the plaintiff at the rate of $71.00 for a total of $2,840,000.00 of which a sum of $10,202.50 by way of stamp duty was debited to the principal amount of the advance. 21. A sub-accountant of the plaintiff - P.W. 1 - prepared a comprehensive statement of account (EX.P2) of the indebtedness of Whitehall which was for the benefit of the solicitors who had been instructed in the matter. She said that simple interest was charged, and the statement of account prepared on the basis of the common practice of the bank that interest was to be paid before the principal. Ex.P2 indicates that as at 1st October, 1985 the total interest that had accrued since 4th January, 1983 amounted to $1,007,856.18. On 2nd October, an amount of $358,216.96, representing the dividend of $318,400.00 on the shares and interest of $39,816.96 thereon, was credited towards the accrued interest, which was thus reduced to $649,639.22. Furhter interest accrued for the next seventeen days until the 18th October, amounting to $17,116.44, bringing the total accrued interest to $666,755.66. And on the 19th October, the position of the account appearing in Ex.P2 stood as follows:
22. On 2nd November, 1985 the plaintiff's solicitors demanded the balance of the amount of $840,568.73 (which was amended during the hearing to $840,568.72) due and owing by the defendant as at the 1st November 1985, together with interest. 23. On 11th April, 1986 an officer of the plaintiff filed an affirmation in the winding-up proceedings, to the effect that out of the money obtained from the defendant a sum of $2,163,041.84 had been applied towards partial repayment of the principal debt of Whitehall. 24. On 9th July, 1986 the defendant put in an amended proof of debt for the ''guarantee amount plus interest up to the date of winding-up" in the sum of $3,045,308.25. 25. The last document that I should mention is the Liquidator's letter dated 13th August, 1986 to the plaintiff, enclosing a schedule showing the detailed calculations, and informing the plaintiff that its claim "in respect of the Hong Kong Dollar Fixed Deposit with the company dated November 22, 1982 has been admitted to rank as an unsecured debt in the sum of $3,050,184.60 and HK$23,451.23 has been admitted to rank as a deferred debt.
26. It is not disputed that this was a continuing guarantee, which is expressed to be a guarantee for the whole of the principal debtor's obligations, followed by Clause 2 limiting the defendant's liability to a named sum in addition to interest and other bank charges. 27. It it trite that the extent of a surety's liability under a guarantee is essentially a matter of contractual interpretation, and where the provisions of the document under consideration are clear, effect will be given to those provisions. 28. It is also recognised that in certain cases, a surety may be discharged by an alteration in his position or the position of the principal debtor that is caused by operation of law, but the right of a surety to receive a discharge, whether or not by way of the release of the principal debtor, may be precluded by the express terms of the guarantee itself. Thus in Perry v. National Provincial Bank of England, (1910) 1 Ch. 468, Sir Cozens-Hardy, M.R. said at p.471:
29. It follows therefore that where the change in position is of a sort that must have been in the contemplation of the parties, there will be no discharge. Thus, a surety may agree in advance to remain liable though the debt of the principal debtor be discharged by other means than payment as, for example, by composition or insolvency. 30. Learned Counsel for the defendant, relying principally on Clause 7 of the guarantee, submitted that the defendant's liability crystallised or was discharged immediately before the bankruptcy or insolvency of the principal debtor. He argued that his liability was discharged on the 31st December, 1982, that being the date on which the petition of winding-up was gazetted, on which basis the amount outstanding was $3,000,000.00 which was due on the 16th November, 1982, plus interest form that date for 45 days to the 31st December amounting to $45,308.25 as set to in the defendant's amended proof of debt. Mr Allan submitted that as such the defendant had in fact overpaid. 31. For the plaintiff, Mr Suffiad said that the defendant was relying on a part only of Clause 7. He pointed out that whereas Clause 1 referred to thus making a clear distinction between all sums of money lent as principal and interest, Clause 7 spoke of "all monies due" to the plaintiff. He submitted that once notice of the presentation of the petition was given, it effectively stopped further advances to Whitehall, thus preserving the situation up to the winding-up order; and interest accrued thereafter not because of anything done by the plaintiff but because of non-payment by the defendant. He relied on the case of In Re FitzGeorge, (1905) 1 K.B. 462. Mr Allan, however, said that he was unable to see how this authority could be distinguished from the latter case of In Re Moss, ex parte Hallet, (1905) 2 K.B. 307 in which, according to him, the wording of the document was the same as in the instant case. 32. Although it was not specifically mentioned during submissions, I may refer to s.32(4) of the Bankruptcy Ordinance (Cap. 6) which expressly provides that the discharge of a bankrupt does not affect the liability of any person who at the date of the receiving order was a surety for him. The reason for this is stated in the Modern Contract of Guarantee by James O'Donovan (1985 edn.) at P.232 as follows:
33. This general principle regarding discharge in bankruptcy or liquidation is subject to the effect of particular provisions in the guarantee. As already seen, the defendant guaranteed "repayment" on demand of " And as I read Clause 7, it is clear that it is in an endeavour to provide that the surety's liability was not to be affected by the principal's insolvency, but such liability was to continue "in full force and effect" until the plaintiff was repaid all monies due to it immediately before the insolvency of the principal; in other words, until the amount of the principal together with the interest as was due to the plaintiff immediately before Whitehall's insolvency was repaid. The interpretation sought by the defendant would freeze or crystallize his liability to such amount as was due immediately before Whitehall's insolvency but with great respect, it ignores the import of the words " but such liability shall continue in full force and effect", which clearly included his liability to interest, until the whole of the indebtedness as it was immediately before the principal debtor's insolvency was repaid. 34. In In re FitzGeorge; Ex parte Robson (supra), the guarantee was for the regular payment of the interest in respect of a debenture until repayment by the company of the principal sum. The company having been wound up and dissolved, it was held that the fact that the debtor had ceased to exist did not release the guarantor form liability for interest, apparently on the ground that he had promised to pay interest until repayment of the principal sum. 35. In In re Moss; Ex parte Hallet, (supra), a guarantor, who did not guarantee repayment of the principal debt, joined with the debtor in giving a joint and several covenant to pay interest so long as any principal money remained due. The debtor became bankrupt and the creditor proved in the bankruptcy for the principal sum. It was held that the fact of a receiving order having been made in bankruptcy prevented any principal money form being any longer due from the debtor, and that therefore the guarantor came under no liability to pay interest as from the date of the receiving order; and so could not prove in respect of any such liability. In so far as reliance is placed by the defendant on this case, I may refer to the Australian case of Gutherie And Another v. Motor Credits Ltd. (1963) 37 A.L.J.R. 167 where a similar submission was made, Kitto J. said at p.168:
36. With respect this decision commends itself to me. Likewise I find the case of Bank of Adelaide v. Lorden, (1979) 45 A.L.J.R. 49 of great presuasive value. It dealt with the liability of a surety under a clause reserving the rights of the creditor in the event of composition by the debtor. At p.57 Walsh, J. elucidates the position of the surety in simple terms which, with due respect, is capable of being adapted and applied to that of the defendant in the instant case as follows. In so far as this guarantee was not merely a promise to pay upon demand whatever amount should be at the time of the demand due and payable by Whitehall, the promise extending (subject to the limit aforesaid) to all the company's debts and interest on them until repayment, Clause 7 had the effect that as between him and the plaintiff, the defendant continued to have the same liability to the plaintiff as he would have had if Whitehall had not been wound up. This would mean that he would be liable not only in respect of what was due by Whitehall when the order for its winding up was made, but also what would have become due by Whitehall for interest after that date if the winding up order had not been made. 37. Learned Counsel for the defendant further sought to rely on the proof of debt filed by the plaintiff to the extend that, because there the plaintiff had restricted its claim for interest up to the date of the winding up order and not thereafter, this relieved the guarantor form any subsequent liability for interest. With respect I find this argument supurious in view of s.71(1) of the Bankruptcy Ordinance. In any case, it is elementary as already stated that the extent of a surety's liability under a guarantee being essentially a matter of contractual interpretation, the proof of debt filed under the provisions of the relevant law cannot properly form the basis of such contractual rights and obligations. 38. It was argued for the defendant that in giving confirmation of his agreement to the various matters set out in the "without prejudice" letter of the plaintiff's solicitors dated the 26th September, 1985, the defendant had not agreed to pay further interest that accrued at the rate of 12.25% on any balance that remained unpaid after the disposition of the shares. Even if I were to hold in the defendant's favour on this issue, I do not see how such lack of his agreement to paragraph 6 of that letter would supersede or nullify his express contractual agreement under the terms of the guarantee to pay such interest as the plaintiff would raise by virtue of Clause 1 of the guarantee. 39. As I view Clause 7, there the surety had himself contracted that the rights under the guarantee should not be affected by any bankruptcy or insolvency of Whitehall and, for the reasons I have attempted to give, in view of such reservation of rights by the plaintiff, the defendant will remain bound and liable to the plaintiff until repayment in terms he had bargained for. 40. My answer to the first issue is in the affirmative. 41. For the second issue, it is clear that in Clause 1 st plaintiff was permitted to raise such interest as it may in the course of its business as bankers charge against Whitehall. The defendant was made aware of the rate of interest which the plaintiff had so charged in its first demand made of the defendant, and thereafter in the various subsequent communications as quoted above. There is nothing to indicate that the defendant had ever at any time objected to or remonstrated upon the interest so charged at the rate of 12.25%. I have no hesitation in reaching the conclusion that in all the circumstancses the defendant had acquiesced and indeed accepted that rate of interest. The plaintiff has throughout proceeded on the basis of charging simple interest on a daily basis on so much of the principal amount as remained unpaid; and in my judgment the plaintiff is entitled to such interest at the rate of 12.25% as claimed. 42. My answer to the second issue is also in the affirmative. 43. There will be judgment for the plaintiff in $840,568.72 with accrued interest thereon at the rate of 12.25% from 4th January, 1983 until repayment, with costs. The defendant's counterclaim is dismissed with costs to the plaintiff.
Representation: Mr. A.R. Suffiad instructed by T.S. Tong & Co. for the Plaintiff Mr. William Allan instructed by Victor Ng & Co. for the Defendant | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||