Chung Khiaw Bank v. Interading Manufacturing (HK) Ltd and Others

HCA004985/1986

1986 No. A4985

IN THE HIGH COURT OF JUSTICE

HONG KONG

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BETWEEN

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Coram:  Hon. Hunter, J. in Chambers

Date of hearing: 29th December 1986

Date of delivery of judgment: 29th December 1986

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JUDGMENT

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1. This is a claim by a bank against the 1st defendant, its customer and against the 2nd and 3rd defendants as guarantors. On 20th November last Master Jones gave summary judgment against the 1st defendant, and granted the 2nd and 3rd defendants unconditional leave to defend. Both parties appeal from that decision.

2. I will take the case of the customer, the 1st defendant first. Here, what happened emerges fairly plainly from a series of documents and minutes produced in evidence by the defendant. The story goes back to April 1985, when a group of bankers apparently decided not to continue their support of the 1st defendant any further, and to bring about a realisation of the company's assets in the hope of discharging its substantial indebtedness to that group of banks. For the purposes of the present defence, I think the first important document is a letter in early May which is Exh. 3 which was sent by the lead banker, the Hong Kong Bank, to members of the consortium setting out the position. It starts:

"We refer to our recent meeting on 26 April 85 when it was decided to withdraw support from Interading Mfg HK Ltd. and to make formal demand or repayment ........

(That was a reference to the fact that the principal asset of the 1st defendant was its quota. )"

3. That meeting of the banks was held on 10th May. The consortium came to certain agreements about the sale of quota and book debts. They discussed the 1st defendant's proposal for a six months moratorium on debt repayment, and then monthly repayments of $100,000 for five years to be distributed on a pro-rata basis. In consideration, the banks were asked to forego any legal action against the company or guarantors and to release the guarantors from any further liability at the end of the five year period. I will interpose that by saying from another draft deed of arrangement which came into existence later that year, it is apparent that both these defendants had given guarantors to all the banks.

4. The Hong Kong Bank apparently supported the 2nd defendant's proposal. But that support did not persuade BNP or Lloyds with the result the minute records this:

"We have decided that no legal action will be taken for three months at the end of which the banks would be able to assess the results of asset realisation and the 1st defendant's then current financial position and likely ability to repay $100,000 at the end of a further three months. "

5. The first question which arises here, (and this is the 1st defence advanced by this defendant) is that as from that moment he co-operated with the consortium, particularly Hong Kong Bank, in assisting the realisation of the assets and especially the realisation of the quota. He did that in reliance on a promise, said to be made by Hong Kong Bank to him as agent for all the other banks, that they would not take any proceedings against him at any time at all for anything. That was the first allegation in the first affirmation. It has been qualified by a much more recent allegation thus:

"I should mention that at that meeting,(which is the meeting in April) it was also proposed that in addition to the realisation of assets, I would be required to pay an additional sum to the banks after realisation of the assets of the 1st defendant. "

So it was not a promise not to sue him ever; but a promise not to sue him ever if some further sum was paid something quite uncertain.

6. I believe that this case is really a desperate attempt to make bricks without straw, an attempt which was put forward most persuasively by Mr Benjamin Yu who had said everything that can possibly be said. Because in the ultimate, what one sees here is that there was a scheme of arrangement discussed which never went through. The discussions for the scheme of arrangement are said to have given rise to promissory estoppels and various other defences at various stages all the way through. I have never really understood this point in the case and I do not believe that it is remotely good law.

7. First of all, on the evidence before me, plainly no promise of any sort was made other than perhaps the promise that can be said to have been recorded in the minute of the 10th May. The sting of this is that it might have constituted a binding agreement amongst the banks. I very much doubt it constitutes any binding agreement enforceable by the 2nd defendant or anybody else. But that plainly does not constitute any defence to this claim now, because nothing in fact happened during that period of months other than the bringing in and the realisation of assets with certainly the assistance of the 2nd defendant. But such assistance it seems to me impossible to stigmatize as detriment or the doing of anything which made it inequitable for the banks thereafter to sue him for the balance. He was a guarantor of these companies. He was a director of these companies. To say that in all this he was acting to his detriment to trying to realise the company's assets to the best advantage seems to me really quite beyond belief.

8. Then one comes on to the position when the assets were realised. The matter was then considered again. There was another minute of a meeting where this was considered by the banks and that was a meeting of 18th October. This is relied upon particularly by Mr Yu as constituting an agreement, he says, between the plaintiff and the company, that the plaintiff would not sue the company. If it is an agreement, it would in fact also release the personal guarantors from all their guarantees. This seems to me a totally impossible contention. First, this is simply a minute of a discussion between the various bankers as to what they are proposing to do. It is perfectly true that the minute records that all the banks save two were in agreement with this proposal. But two were not. They wanted time to consider it, and later rejected it. It is absolutely essential in this type of arrangement that all the creditors have to agree. It is quite unknown to have any binding agreement at the intermediate stage which does not involve them all.

Secondly, the agreement was to accept $1.5 million: (per the minute)

"$1.5 m to be paid on the signing of the agreement. "

The next stage was that solicitors were duly asked to bring out a proposed deed of arrangement. This was a complicated document which got no further than a draft because the two dissenting bankers never went along with it.

9. When you got a so called agreement in minutes, i.e. that a certain sum of money was to be distributed pro-rata amongst all the bankers, and part of it to be paid on the signing of the agreement, the contention that this can give rise to some intermediate agreement without all or any of those other bankers' consent, without a draft of the agreement or anything at all, seems to be standing the law on its head. It is quite impossible, it seems to me, to assert that any sort of binding agreement existed at that stage at all.

10. Therefore, in my judgment, there is simply no shadow of defence shown by this company by reason of the fact that its director in his own interest co-operated with the banks to try to realise the assets to the best advantage, in the hope that at the end of it all, the banks would come to an agreement which would have let him and his wife off the hook of their personal guarantees. Unfortunately to him, the banks did not go along with that, and the deed of release was never entered into or executed. In my judgment, the Master was quite right to grant summary judgment against the 1st defendant.

11. Then I consider the question under the personal guarantees. What has clearly happened here is this. In September 1981, this bank granted facilities to the company upto a maximum of $14 m. and then for the first time on the evidence asked for personal guarantees from the 2nd and 3rd defendants. It was a condition of the facilities that they should have a joint and several guarantee for $14 m. That I take from a letter of 15th September 1981. The next thing that happened was that in 1982, the company wanted an increased facility and were offering additional security. At the time of the first facility, the security then offered was thought to be worth the $14 m. In 1982, further security was offered which was then thought to be worth an additional $9.5 m., so the total security was then going up to $20 m. At that time the letter says that "the joint and several guarantee from the 2nd and 3rd defendants is required up to a maximum of $20 m. but until that happens, the guarantee of 18th September 1981 was to remain in force." The last variation came in November of that year when the second of the two properties was released and it was a term of that release and the restructuring of the facilities down to just over $13 m., that the existing guarantee for $20 m. signed by the 2nd and 3rd defendants should remain in force, and those terms were specifically accepted by an endorsement on this letter by both the 2nd and 3rd defendants.

12. This is, therefore, on the fact of it, a very simple story of directors of a company entering into personal guarantees to secure their company's business over and above the security offered by the company itself the value of which on both occasions was thought to exceed the facilities being provided.

13. What is said here by the 2nd defendant is that at the time of the first guarantee, the bank manager asked for this guarantee and the affirmation goes on: "We asked why we had to sign a guarantee and was assured by the manager that if the security was up to value, the plaintiff would not seek to rely on the guarantee". That seems to me to be a very plain statement of the obvious, in that the bank were asking for a guarantee but they were not going to rely upon it if the security was sufficient to meet the debt. Then there was a sentence which I need not read because it is not persued. It is tantamount to a defence of undue influence. Then the affirmation goes on:

"He represented to us that the signing of the guarantee was a mere formality, that everything was alright and further to show his intention of not seeking to rely on the guarantee, he said he would not stamp or register the guarantee. "

14. There are two possible readings of that sentence. The first is that it is simply a reinforcement of what has been said before, that the guarantee would not be enforced if the security was up to value. The second reading is that it flatly contradicts what went before. That the guarantee would not be enforced even if the security on the property fell short. It is very significant that that is not expressly so alleged at all, because that was tantamount to saying that the document was in fact a total sham, and would never be enforced regardless of what happened to the security. This would be a very remarkable thing for a bank to do, and I do not find it at all easy to give that extended meaning to the second sentence in contradiction to the first.

15. It is even more difficult when one goes on to see the next paragraph in the affirmation, which deals with the 1982 guarantee and which contains this:

"When we expressed concern, the manager again assured us not to worry as the plaintiff had more security for its loan. "

That is apparently saying: "He said the same thing to us when we signed the second guarantee; again assured us; and this time the assurance is simply this that of course if the properties are worth what we think they are, we will not rely upon the guarantee. "

16. What is now suggested is that this gives rise to an argueable defence, that the first guarantee was a mere formality; if the first guarantee was a mere formality, the same can be said of the second guarantee; and that this gives rise to an argueable defence in the circumstances of this case. I regret to say I am quite unable to accept that. First of all I do not think that the matter is properly and sufficiently raised in the very first paragraph of the affirmation for the reasons I have already given. Secondly if it is, it relates only to the first guarantee which was for $11m. It is not raised in respect of the second guarantee. The law as to continuing representation only operates until the representation is acted upon when the agreement is made. There is no reason for extending it from one guarantee to another in this case. Such an extension makes an absolute nonsense of the letters which were written; the increase in the value of the guarantee from $14 m. to $20 m.; the express terms of the letter of February 1982; and again the express terms of the letter of November 1982.

17. Really this is no more than someone now seeking to persuade the Court that he has an argueable defence by saying "I have given two guarantees for large sums of money in the ordinary course of business. I now want to assert that this was all a sham, window dressing and a formality. " I am bound to say I found myself attracted by the observations of Ackner, L.J. in a very similar context in B.N.P. v. Costa de Naray⁽¹⁾ where he says this:

"It also trite law that the mere assertion in an affidavit of a given situation which is said to be the basis of defence does not, ipso facto, provide leave to defend. The Court must look at the whole situation and ask itself whether the defendant had satisfied the Court there is a fair or reasonable probability of the defendant having a real or bona fide defence. "

Putting that question to myself in this case, for the reasons that I have given, in my judgment, the answer is no.

18. Therefore, I think in this respect that the Master was wrong. He should on the facts in this case, have given summary judgment against all three defendants for the sum claimed, which is $8,724,550.24 with interest at the rate of 8% per annum from the 2nd September 1986.

(1) [1984]1 Lloyds Rep. 21 at p. 23

Representation:

Mr Warren Chan inst'd by M/S Deacons for the plaintiff

Mr Benjamin Yu inst'd by M/S Chow, Griffith & Chan for all defendants