Asg Brokerage Ltd and Another v. Lai Cheuk Kwan Arthur
Read the full judgment text of HCA 3384/2001 on BabelCite. This High Court CFI judgment was delivered on 10 December 2004.
1. This was the trial of two consolidated actions, each of which involved claims by ASG Brokerage Limited (“ASG Brokerage”) and ASG Finance Limited (“ASG Finance”) against Mr Arthur Lai Cheuk Kwan (“Mr Lai”) in respect of guarantees signed by Mr Lai in their favour, by which Mr Lai guaranteed the debts of a company called Bowen Limited (“Bowen”) and an individual by the name of Chan Wan Yu (“Ms Chan”), arising out of margin trading facilities provided to Bowen and Ms Chan by ASG Brokerage and/or
|
HCA 3384/2001 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE ACTION NO. 3384 OF 2001 ____________ BETWEEN
____________ AND HCA 762/2002 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE ACTION NO. 762 OF 2002 ____________ BETWEEN
____________ (Consolidated by Order of Master Lung on 19 February 2003) Before: Hon Barma J in Court Dates of Hearing: 10-13 May 2004 Date of Judgment: 10 December 2004 _______________ J U D G M E N T _______________ Introduction 1.This was the trial of two consolidated actions, each of which involved claims by ASG Brokerage Limited (“ASG Brokerage”) and ASG Finance Limited (“ASG Finance”) against Mr Arthur Lai Cheuk Kwan (“Mr Lai”) in respect of guarantees signed by Mr Lai in their favour, by which Mr Lai guaranteed the debts of a company called Bowen Limited (“Bowen”) and an individual by the name of Chan Wan Yu (“Ms Chan”), arising out of margin trading facilities provided to Bowen and Ms Chan by ASG Brokerage and/or ASG Finance. I shall refer to the two guarantees as the “Bowen Guarantee” and “the Chan Guarantee” respectively. 2.The first action (HCA 3384 of 2001) concerns the Bowen Guarantee. In this action, ASG Brokerage and ASG Finance claim the principal sum of HK$2 million, or alternatively damages, together with interest, either pursuant to the Bowen Guarantee at the rate of 3% above the Hong Kong and Shanghai Banking Corporation Limited (“HSBC”)’s best lending rate (this being the rate of interest payable by Bowen under the facilities granted to it) or pursuant to section 48 of the High Court Ordinance (Cap. 4), and costs on an indemnity basis pursuant to the Bowen Guarantee. The second action (HCA 762 of 2002) concerns the Chan Guarantee. In it, ASG Brokerage and ASG Finance claim the principal sum of HK$349,711.76, or alternatively damages, together with interest and costs on the same bases. 3.Neither of the guarantees is dated, and the Chan Guarantee does not identify the principal debtor whose debts are guaranteed by it. Mr Lai does not dispute signing them, but at trial put forward two defences to each of the claims. The first is that the guarantees are unenforceable because they are unsupported by consideration. The second is that, in any event, there was an oral agreement made between himself and Mr James Hung Jung Kwang (“Mr Hung”) (the chairman of the Plaintiff’s ultimate holding company), binding on the Plaintiffs, by which his liabilities under the guarantees were released as part of an arrangement by which the relationship between himself and the Plaintiffs and other companies associated with them was to be severed. This agreement was said to have been made orally, and to be evidenced by a document that describes itself as a “Disengagement Agreement”, dated 16 January 2001 (“the Disengagement Agreement”). 4.In both actions, Mr Lai counterclaims for various forms of relief against the Plaintiffs and three other parties, Asia Securities Global Limited (“ASG”), ASG Futures Limited (“ASG Futures”) and Arch Asset Management Limited (“Arch”), on the basis of these defences. Thus, there are claims against the Plaintiffs for delivery up of the guarantees for cancellation and for a declaration that the Plaintiffs’ claims are the subject of the alleged oral agreement, alternative claims against all the Defendants to Counterclaim seeking rectification of the Disengagement Agreement so that it matches the terms of the alleged oral agreement (both as to parties and as to the liabilities covered by it) and a declaration that the Plaintiffs’ claims against him are barred by the Disengagement Agreement as rectified, and finally a further alternative claim against ASG for damages for the breach of an alleged warranty made on its behalf by Mr Hung that the ASG group, including the Plaintiffs, would have no claims against Mr Lai. The Parties and Background 5.ASG Brokerage is a Hong Kong company whose business is that of stockbroking. ASG Finance is also a Hong Kong company, whose business is that of money-lending. Both are subsidiaries of ASG. ASG has some six other subsidiaries, one of which is ASG Futures whose main business, as its name suggests, is the provision of brokerage services in respect of futures contracts traded on the Hong Kong Futures Exchange. ASG is itself a subsidiary of a Taiwanese publicly listed company called Asia Securities Inc. (“ASI”). Mr Hung was at all material times the chairman of both ASI and ASG, and the largest single shareholder in ASI. 6.Mr Lai is a corporate advisor, who provides advice on corporate restructuring and business development. It seems that he first met Mr Hung in the mid 1980s, when ASI and the company with which Mr Lai was then involved, Chintung Securities Limited, had a business relationship involving the preparation of research materials by ASI for Chintung Securities Limited. In about 1999, Mr Hung was looking for someone to take over the management of ASI’s Hong Kong operations, i.e. those of ASG and its subsidiaries, which were not doing particularly well. He approached Mr Lai, and it was eventually agreed that Mr Lai should take on this role. In the event, two agreements were entered into between ASG and Arch, which is a company in which Mr Lai is indirectly interested, on 1 July 1999. 7.The first was an agreement by which Arch undertook to provide corporate management services to ASG (“the Management Agreement”). By clause 3 of the Management Agreement arch undertook with ASG that Arch would, during the period of the Management Agreement, provide services as a manager to ASG in its business in stock broking and investment banking in Hong Kong and elsewhere, and use its best endeavours to promote the interests of ASG and “the Affiliate”, a term defined in clause 1.1 as “any company, partnership or other entity which directly or indirectly controls, is controlled by or is under common control of [ASG]”, and which therefore included the Plaintiffs, which were subsidiaries of ASG. By clause 3.2 of the Management Agreement, Arch undertook that it would not during the subsistence of the Management Agreement be directly or indirectly engaged or concerned in the conduct of any other business competing in any material respect with the business for the time being of AGS or its Affiliate. Clause 2 of the Management Agreement provided that its duration was to be for a period of five years from 1 October 1999, with automatic renewal for a further four years thereafter. Arch’s remuneration under the Management Agreement was provided for in clause 8, by which such remuneration was fixed at 20% of ASG’s net profit before tax, payable every six months. This payment would cease to be payable in the event that Arch exercised its option to subscribe for shares in ASG, as provided for by the second agreement entered into between them. 8.The second agreement was described as an Option to Subscribe Agreement (“the Option Agreement”). It contained terms that were largely identical to those of the Management Agreement (including the definition of and references to “Affiliate”), save that in clause 8 of the Option Agreement, instead of providing for the basis of calculating Arch’s remuneration as manager, Arch was given an option to subscribe for up to 20% of the enlarged share capital of ASG, at a price to be calculated by reference to the enlarged net asset value of ASG per share. In order to provide an incentive for Arch to improve ASG’s profitability, a discount to this price was provided for, the size of which would increase as the return on equity achieved by ASG improved. Thus, whereas no discount would be available if the return on equity was less than 10%, discounts of between 10% and 30% were offered depending on whether the return on equity exceeded 10%, 20% or 30%. 9.Mr Lai was nominated by Arch to act as an advisor to ASG in order to enable Arch to carry out its obligations under these agreements. He eventually took up this role on 1 December 1999. In the course of acting as such advisor, Mr Lai recommended that ASG hire a number of senior executives, which ASG did. Arch and Mr Lai continued to act as advisors to ASG until about 16 January 2001, when they ceased to do so and their relationship with ASG was terminated. 10.The termination of the relationship between ASG, Arch and Mr Lai appears to have come about as a result of a decision by ASI and ASG, made towards the end of 2000, to dispose of the businesses of ASG Brokerage and ASG Futures. With this objective in mind, Mr Hung sought a buyer for these businesses. Between about November 2000 and January 2001, the principal party with whom he was in discussions was a group of employees of ASG, headed by a Mr Dean Shek, who were interested in a management buyout of the businesses of these two companies, with the financial backing of an investor named Edward Poon. These negotiations formed the background to the making of the Disengagement Agreement, and the alleged oral agreement relied upon by Mr Lai, and are a matter to which it will be necessary to return below, when considering this aspect of Mr Lai’s defence and his counterclaims. ASG Finance’s claims 11.Before considering the merits of the defences and counterclaims advanced by Mr Lai, it is convenient first to deal with the position of the second Plaintiff, ASG Finance. As I have noted, the Bowen Guarantee was addressed to both ASG Brokerage and ASG Finance. By contrast, the Chan Guarantee was addressed to ASG Brokerage alone. An examination of the monthly statements supplied to Bowen reveals that these statements were initially issued by ASG Finance, whose name appears at the head of the monthly statements. However, on 30 June 2000, the balance on Bowen’s account (account number MM02515), then standing at a debit balance of HK$2,784,428.07, was transferred from ASG Finance to ASG Brokerage, and all statements of account issued to Bowen thereafter were issued by ASG Brokerage. So far as Ms Chan’s account (account number MM02641) is concerned, the first two monthly statements were issued by ASG Brokerage, but the monthly accounts covering the period between 14 February 2000 and 10 July 2000 were issued by ASG Finance. On 10 July 2000, the balance on Ms Chan’s account (which then stood at a debit balance of HK$843,907.29) was transferred once again to ASG Brokerage, which issued all the statements of account sent out after that date. Letters of demand dated 9 March 2001 addressed to Bowen and Ms Chan were both signed on behalf of ASG Brokerage. 12.In these circumstances, I do not consider that ASG Finance can have any claim against Mr Lai in respect of the guarantees. So far as the Chan Guarantee is concerned, it is not addressed to ASG Finance at all, and I can see no basis for ASG Finance to be entitled to claim under it. So far as the Bowen Guarantee is concerned, although it is addressed to both ASG Finance and ASG Brokerage, it seems clear from the history of the dealings between Bowen and the Plaintiffs that, whatever may have been the position prior to 30 June 2000, after that date, Bowen, ASG Brokerage and ASG Finance conducted themselves on the basis that Bowen’s margin trading facilities were provided to it by ASG Brokerage alone. That being so, at no time after 30 June 2000 has ASG Finance regarded Bowen as being indebted to it, and there can accordingly be no basis for it to recover anything from Mr Lai under the Bowen Guarantee. 13.I therefore conclude that ASG Finance’s claims against Mr Lai must be dismissed, and turn to consider the position as between ASG Brokerage and Mr Lai. I shall consider first Mr Lai’s contention that the guarantees are not binding upon him because they were unsupported by consideration. Whether the guarantees were supported by consideration 14.During the time that Mr Lai was carrying out his advisory role, he signed a number of guarantees in favour of ASG Brokerage and ASG Finance. These included the Bowen Guarantee and the Chan Guarantee, as well as guarantees in respect of margin trading facilities granted by ASG Brokerage and/or ASG Finance to Arch and a company called Pinelli Limited (“Pinelli”), which was a shareholder in Arch. The Bowen Guarantee 15.The Bowen Guarantee is undated. The Plaintiff’s case is that it was signed on or about 6 December 1999, or shortly thereafter, at the time when Bowen opened a securities dealing account with ASG Brokerage, and a margin account on a form addressed to both ASG Brokerage and ASG Finance. An internal document of the Plaintiffs, headed “ASG Trading & Credit Facilities Application Form”, which is dated 8 December 1999 in respect of Bowen indicates that an application had been made for trading and credit facilities with a loan limit of HK$2 million and an interest rate of 3% over prime. However, a box on the form which was to be filled in with the name of the guarantor was left blank. 16.Clause 1.01 of the Bowen Guarantee is in the following terms:-
17.Clause 1.02 of the Bowen Guarantee limited the amount payable under it to HK$2 million, excluding any principal consisting of capitalised interest, together with interest, principal consisting of capitalised interest and the amount of (inter alia) legal costs referred to in Clause 1.01. 18.Although the names of both Ms Tong and Mr Lai were inserted in the Bowen Guarantee, it was only signed by Mr Lai. However, no point was taken by Mr Lai as to this. The Bowen Guarantee was apparently witnessed by a Ms Ha Fei, an employee of the ASG group. 19.Bowen’s margin trading account was activated on 22 December 1999, when a deposit of HK$20,000 was made into the account. Trading in shares commenced on 25 January 2000, and continued on and off until 21 November 2000, the last date on which shares were purchased through Bowen’s account. Although the facility application form to which I have referred above referred to a facility or loan limit of HK$2 million, the final account statement issued by ASG Finance (which was dated 30 June 2000) and all the account statements issued by ASG Brokerage (commencing with one also dated 30 June 2000) stated that the loan limit was HK$5 million. After 21 November 2000, the only further activity on Bowen’s account (apart from the accruing of interest) consisted of transfers of the credit balances from the accounts of Arch and Pinelli later in November 2000, so as to slightly reduce the outstanding debit balance on Bowen’s account, and the liquidation of the stocks held in the account in February and March 2001, leaving a debit balance of just under HK$2.2 million outstanding as at 8 March 2001. On 9 March 2001, a demand letter was sent by ASG Brokerage to Bowen, referring to previous requests for payment and demanding repayment of this outstanding balance, and warning that legal proceedings and a claim on the Bowen Guarantee would be made if repayment was not effect. The Chan Guarantee 20.The Chan Guarantee is also undated. The Plaintiff’s case is that it was signed on or about 22 November 2000. One unusual feature of the Chan Guarantee is that it does not identify the principal debtor as Ms Chan, as the space in the printed form of the guarantee in which the name of the principal debtor is intended to be inserted was left blank. Although the point was taken on the pleadings that the Chan Guarantee did not identify the principal whose obligations were to be guaranteed, Mr Ng, who appeared for Mr Lai, did not dispute that this guarantee was in respect of the debts of Ms Chan. Mr Lai admitted in his evidence that he had signed a guarantee in respect of Ms Chan. It was common ground that he had also signed guarantees in respect of Bowen, Arch and Pinelli, and as four guarantees bearing his signature were produced, three of which named Bowen, Arch and Pinelli respectively as the principal debtors, I am satisfied that the guarantee put forward by ASG Brokerage as the Chan Guarantee was in fact a guarantee of the obligations of Ms Chan. The Chan Guarantee was witnessed by a Gray Tong. 21.The terms of the Chan Guarantee appear to be identical to those of the Bowen Guarantee. In particular, Clause 1.01 of the Chan Guarantee is in precisely identical terms to Clause 1.01 of the Bowen Guarantee which I have set out in paragraph 16 above. However, there are some differences in the form of the two documents. First, the Chan Guarantee is, as I have noted above, addressed only to ASG Brokerage, whereas the Bowen Guarantee is address to both ASG Brokerage and ASG Finance. Second, the two documents are in a different type-face. Third, the Chan Guarantee has an additional marginal note or instruction alongside Clause 1.01, requiring the insertion of the guarantor’s full name, identity card or passport number and address - a note which does not appear in the Bowen Guarantee. Finally, there are minor differences in the wording of the notes or instructions on the signature page which explain which part of the signature page is to be completed depending on whether the guarantor is a company or an individual. 22.Ms Chan’s account appears to have been opened sometime in January 2000. The first transactions on her margin account appear to have taken place on 24 or 25 January 2001, and there were thereafter transactions on the account from time to time until 21 November 2000, at which date the remaining shares in the account were sold, the last transactions before such sale having taken place at the beginning of August 2000. After 21 November 2000, there was no further activity on Ms Chan’s account, except for the debiting of interest at the end of each month. On 9 March 2001, a letter of demand was sent to Ms Chan, referring to requests for repayment which had been made after the position on her account had been liquidated and demanding repayment of the then outstanding balance on her account, failing which legal proceedings and a claim on the Chan Guarantee were threatened. The issues that arise in relation to this defence 23.Mr Lai’s position is that both guarantees were signed on or about 22 November 2000. Mr Lai’s argument is that as there was no further activity (at least not in the form of additional purchases of shares for which credit was given by ASG Brokerage) on either Bowen’s or Ms Chan’s account, no consideration was given to support his guarantees in respect of those accounts. 24.This argument gives rise to two sub-issues, as follows:-
When was the Bowen Guarantee signed? 25.Dealing first with the question of when the Bowen Guarantee was signed, evidence relevant to this point (both in the form of witness statements and oral evidence at trial) was given by Mr Hung and Mr Wang Jhy, an internal auditor of ASI, on behalf of the Plaintiffs, and by Mr Lai and Ms Tong Mei Mei, who had been Mr Lai’s personal assistant when he was acting as advisor to ASG, for Mr Lai. 26.Mr Hung said that he became aware of a number of problem accounts in around November 2000, when he had decided that ASG should seek a buyer for ASG Brokerage and ASG Futures. With the sale of these two companies in mind, he felt that it was desirable to tidy up the books and records of the various ASG subsidiaries. He said that one matter that had to be cleared up was to distinguish clearly between loans made by ASG Brokerage (which was one of the companies to be sold) and loans made by ASG Finance (which was not to be sold). In the course of doing so, he came to learn that there were a number of accounts where the loan limits for the accounts had been exceeded, or where the account and security documentation was incomplete. He says that he gave instructions to staff in Hong Kong to follow up on all such accounts by ensuring that all necessary documentation, including guarantees, were in place. Mr Hung said that this was something that was to be done in relation to all accounts where documentation was incomplete, and not just in relation to accounts which were in some way related to Mr Lai. So far as the accounts of Ms Chan and Bowen were concerned, Mr Hung accepted that one of the accounts for which a guarantee was needed was Ms Chan’s account. In relation to Bowen, he accepted that he was aware that the balance on its account had exceeded the loan limit and was undersecured, but said that he left it to staff in Hong Kong to see what further documentation was required. He disagreed with Mr Ng’s suggestion that he personally had asked Mr Lai to sign any guarantees, whether in respect of Ms Chan’s or Bowen’s accounts. 27.Mr Wang’s evidence concerned a number of audits that he had carried out, on behalf of ASI’s internal audit department, of which he was a part, of the activities and procedures of ASG’s subsidiaries in Hong Kong, including ASG Brokerage. In the course of this work, he produced a number of internal audit reports, in which he identified weaknesses or deficiencies in the manner in which such subsidiaries carried on their business, and made recommendations for improvement. He identified the reports which he had made, and confirmed their contents. One such report related to an audit which he had carried out between 12 and 14 June 2000, in which he identified a number of matters which caused him concern in relation to certain accounts maintained by customers of ASG Brokerage. These matters included the failure in some cases to adhere to requirements for guarantees to be obtained, and an observation that there appeared to be certain accounts, which he identified (by their account numbers) as those of Arch, Bowen and Pinelli, for which the guarantor was the same. Various documents were attached to this report, including copies of the signature pages of such guarantees, one of which appears to be identical to that for the Bowen Guarantee. Although Mr Wang was cross-examined on various aspects of his reports, no challenge was made in respect of this observation, or the signature pages of the guarantees in question which were appended to his report. 28.Mr Lai’s evidence at the trial was that he could not remember precisely when the guarantees were signed. He thought that they were signed sometime between about September and November 2000, and said that to the best of his recollection, he signed guarantees not just for Bowen’s and Ms Chan’s accounts, but also in respect of Arch’s and Pinelli’s accounts, and that the guarantees were signed on two separate occasions a few days apart. This evidence contrasted with an affirmation which he had made on 9 April 2002 in opposition to a summary judgment application, in which he did not indicate any particular time frame when the Bowen Guarantee was signed. It also was at variance with Mr Lai’s Amended Defence, where it was pleaded that the Bowen Guarantee was signed on 22 November 2000. Mr Lai was asked about some of these differences in cross-examination, and responded that he did not have a very clear recollection as to the exact date on which the guarantees had been signed, but that he had told his legal advisers that if they felt able to put forward a particular date, he would go along with that - an approach to giving evidence which I am bound to say strikes me as being rather casual. 29.Ms Tong said that she was also known as Gray Tong, and her evidence was that she had made the arrangements for the opening of the Bowen, Arch and Pinelli accounts. She said that at the time that the accounts were opened, no one from the staff of ASG Brokerage or ASG Finance had mentioned the need for guarantees to be given. She went on to say that she was given three or four guarantees between late November and early December 2000 and was asked to have them signed by Mr Lai. She says that she asked Mr Lai why they were required, but that he said that there was no problem and signed them. She stated also that the guarantees had not been witnessed when she returned them to ASG Brokerage. 30.Mr Ng submitted that I should find that the Bowen Guarantee was signed on or after 22 November 2000 having regard to:-
31.Mr Ng also referred to the statements in Mr Wang’s internal audit report to the effect that the ASG group companies in Hong Kong did not always obtain the necessary documentation when opening accounts and granting facilities to customers, and suggested that this also tended to support Mr Lai’s version of events. 32.Mr Ng also drew attention to the fact that while the debit balance on Bowen’s account prior to November 2000 did from time to time exceed the loan limit (whether HK$2 million or HK$5 million), there were at all times shares in Bowen’s account which were available as security for the amounts owing. While accepting that the value of such shares assigned to them for security purposes was insufficient to cover the outstanding amounts (as the shares were valued at between 10 and 60 per cent of their market value for security purposes), Mr Ng pointed out that the actual market value of the shares held in Bowen’s account throughout this period was in excess of the outstanding amount. It was not until November 2000 that the market value of such shares fell, for the first time, below the outstanding amount. This, Mr Ng submitted, also supported Mr Lai’s case, since it was only at this point that there was an actual shortfall in terms of security, and it therefore made sense that a guarantee should be sought at this time and not earlier. 33.These submissions overlook the evidence of Mr Wang, and the contents of his internal audit report in respect of his audit carried out between 12 and 14 June 2000 (although the report itself states that it covers a period described as 12 June 89 to 14 June 89, it was common ground that the year “89" was based on the Taiwanese calendar, and was in fact the year 2000). As I have noted, that report made a number of criticisms of the business practices and procedures of ASG and its subsidiaries in Hong Kong. One of the purposes of this internal audit was stated to be “to examine whether there was guarantor and whether there was a witness present on the opening of corporate accounts”. The report states that spot checks were carried out on six accounts, which included those of Bowen (account no. MM2515), Arch (account no. MM2685) and Pinelli (account no. MM2856). So far as guarantees are concerned, the report noted the absence of guarantors in respect of two accounts, neither of which was that of Bowen, Arch or Pinelli, and the absence of a witness to the guarantor’s signature in relation to two other accounts, one of which was Pinelli’s. The report also noted that each of Bowen’s, Arch’s and Pinelli’s accounts was guaranteed by the same person, Mr Lai. As I have also noted, documents relating to the Bowen account were attached to the report, which included a copy of the signature page of a guarantee, bearing the signature of Mr Lai as guarantor, and witnessed by Ms Ha, which appears to be identical to the signature page of the Bowen Guarantee. 34.In his witness statement, Mr Wang explained the nature of his duties, and identified and described four audits that he carried out during 2000, including that carried out between 12 and 14 June 2000. He explained that after each audit, he compiled a report stating his findings and recommendations, and that he would annex relevant documents, photocopied from documents in the offices of ASG and its subsidiaries, to such report. He drew attention to the similarities which he had noted during the course of the 12-14 June 2000 audit in respect of the accounts of Bowen, Arch and Pinelli, including the fact that Mr Lai was the guarantor for each of those accounts, and stated that the copies of the guarantee signature pages annexed to his report in respect of that audit were copied from guarantees in respect of these accounts which were in the files of ASG Finance on ASG Brokerage. 35.Mr Wang also gave oral evidence at the trial. His evidence was given in a straightforward manner, and I have no hesitation in accepting it. Importantly, it was never suggested to him that there were any inaccuracies in his reports, or that no guarantee in fact existed in respect of the Bowen account in June 2000. 36.The purpose of Mr Wang’s audit and his report was to draw attention to deficiencies in the practices and procedures of ASG and its subsidiaries. One of his criticisms or concerns related to the existence of Mr Lai as the common guarantor for the accounts of Bowen, Arch and Pinelli. There would have been no basis for him to have made this criticism if he had not had sight of the guarantees in question. 37.Moreover, the audit and report were carried out and prepared at a time well before Mr Hung had thought of selling ASG Brokerage and ASG Futures, or became aware of the problems in relation to the Bowen and Chan accounts. At the time, the relationship between Mr Lai and the ASG companies would appear to have been reasonably good, and there would not seem to have been any reason to expect litigation to arise in respect of the guarantees. There can therefore be no basis for thinking that Mr Wang’s report was made with an eye to these proceedings. 38.Thus, Mr Wang’s evidence, the contents of his report and the documents annexed to it clearly demonstrate that there was in existence a guarantee in respect of the Bowen account, signed by Mr Lai, by June 2000, a date well before 22 November 2000. Although only the signature page of this guarantee was annexed to his report, it appears identical to that of the Bowen Guarantee relied on in these proceedings. 39.Apart from Mr Wang’s evidence, it seems to me that the differences between the forms of the Bowen and Chan Guarantees also tend to suggest that the Bowen Guarantee was signed before the Chan Guarantee, as it seems unlikely that there would have been in existence two forms of guarantee at the same time. Although Mr Ng suggested that different forms might have been used for guarantees of individual and corporate accounts, this does not appear to be borne out by the form of the two guarantees, each of which is apt for use in both cases. 40.Moreover, the limitation of the amount guaranteed under the Bowen Guarantee to HK$2 million is consistent with the initial facility applied for by Bowen, and inconsistent with the size of the facility that was apparently available later, from at least the end of June 2000 onwards, when the account statements show that the facility was for HK$5 million. Had the Bowen Guarantee been obtained in November 2000, as Mr Lai suggests, it is surprising that it should have been limited only to HK$2 million when the facility was then for HK$5 million. 41.Mr Ng submitted that I should have regard to the evidence of all the witnesses, and conclude in the light of the evidence of Mr Hung, Mr Lai and Ms Tong that the Bowen Guarantee was in fact signed on or after 22 November 2000, notwithstanding the evidence of Mr Wang and his internal audit report. With respect, I see no reason to do so. Mr Wang’s evidence was clear and unequivocal, and supported by the documents attached to his report, and I therefore accept his evidence, from which it follows that the Bowen Guarantee was signed well before November 2000. 42.So far as Mr Hung’s evidence is concerned, it would appear that while he was aware of Bowen’s account being operated in excess of its credit limit by about November 2000, and while he was also aware generally that there were deficiencies in relation to documentation for various accounts (although not specifically that of Bowen), he left it to ASG’s staff in Hong Kong to take such steps as were necessary to deal with the deficiencies. Mr Hung did not appear to me to have detailed knowledge of the position in relation to each potentially problematic account, and I do not regard his evidence as being contradictory to that of Mr Wang so far as the date of signing of the Bowen Guarantee is concerned. Even if it were contradictory, I would prefer the evidence of Mr Wang to that of Mr Hung in this respect. 43.As for Mr Lai’s evidence, he was unable to state with any degree of precision when it was that he signed the Bowen Guarantee, and I did not find his evidence as to this matter of much assistance, particularly in the light of the inconsistences in his evidence to which I have referred in paragraph 28 above. 44.So far as Ms Tong is concerned, her statement was made very late in these proceedings, being tendered shortly before the trial, some three and a half years after the events in question. I note also that although Ms Tong said that the three or four guarantees that she handled were returned by her to staff of ASG unwitnessed, the Chan guarantee was in fact witnessed by Ms Tong herself. In these circumstances, I have reservations about accepting her evidence on this matter, and do not accept that the Bowen Guarantee was signed, as she suggests, in November or December 2000. 45.None of the other points which Mr Ng made are such as to lead me to the conclusion that Mr Wang’s evidence as to the existence of a guarantee in respect of the Bowen account signed by Mr Lai in June 2000 should be rejected. I therefore conclude that the Bowen Guarantee was in place by at latest June 2000. Although it is not possible to be certain as to the precise date on which it might have been signed, it does not seem to me that this is critical, since there is no doubt that Bowen was permitted to continue trading on its account after June 2000, so that consideration was provided for the Bowen Guarantee. Was there consideration for the Chan Guarantee? 46.Having regard to my conclusion as to when the Bowen Guarantee was signed, the second sub-issue to which I have referred does not arise in relation to the Bowen Guarantee. It does, however, arise in relation to the Chan Guarantee, and I now turn to deal with it in that context. 47.As I noted in paragraph 21 above, Clause 1.01 of the Chan Guarantee is in identical terms to Clause 1.01 of the Bowen Guarantee which is set out in paragraph 16 above. It is clear that it was intended to be a guarantee of both past and future debts. However, insofar as the guarantee related to debts already incurred, those debts (or ASG Brokerage’s conduct in permitting such debts to be incurred) constituted consideration that was past, and therefore not good consideration for the giving of the guarantee. 48.Mr Zimmern, appearing for the Plaintiffs, submitted first that there was good consideration given for the Chan Guarantee because, under that guarantee, ASG Brokerage promised to grant or continue to grant credit to Ms Chan. However, the stated consideration for the guarantee was ASG Brokerage’s “granting or continuing to make available credit facilities or other financial accommodation” to Ms Chan. This wording makes no reference to a promise or agreement. While in some cases, the consideration for a guarantee may consist of the promise to do certain acts (in this case the granting of credit facilities or other financial accommodation, or continuing to make such credit facilities or other financial accommodation available), in others the consideration will be the actual performance of those acts. In each case, it is a question of construction whether actual performance of the acts is required. This requires consideration of the terms of the guarantee, and in this case the terms of the Chan Guarantee were, I think, such as to require ASG Brokerage actually to do one or other of these things. Had it been intended that the consideration for the Chan Guarantee was to consist of a promise by ASG Brokerage to do the acts stated, the Chan Guarantee would no doubt have stated that it was given in consideration of ASG Brokerage agreeing to grant credit facilities or to continue to make them available. This is not what the Chan Guarantee provides. Even if there had been some room for doubt in this respect, I would have resolved any such doubts against ASG Brokerage, having regard to the fact that the Chan Guarantee was in a standard form prepared by ASG Brokerage, so that any ambiguities should be resolved in favour of Mr Lai. 49.In my view, it was therefore necessary for ASG Brokerage to give consideration for the Chan Guarantee either by granting credit facilities to Ms Chan, or by continuing to make available credit facilities (or other financial accommodation) that had already been granted to her. Did ASG Brokerage do either of these things? 50.In my judgment, it did not. It is quite clear that no new facilities were granted to Ms Chan after the obtaining of the guarantee on or after 22 November 2000. As I have observed, the last purchases of securities through Ms Chan’s account took place in August 2000. Thereafter, securities were sold, with the last securities in the account being disposed of on 21 November 2000. Following such disposal, no new purchases took place. Accordingly, no credit facilities or other financial accommodation would appear to have been granted after that date. 51.Nor do I think that ASG Brokerage can be regarded as having continued to make available existing credit facilities or financial accommodation to Ms Chan. I say this because ASG’s demand letter of 9 March 2001 states that “After your position is liquidated, we have already served reasonable notice and allowed reasonable times for your repayment. However, you have not take any response and any action for our claim”. This makes it clear that Ms Chan’s position had been “liquidated”. This must be a reference to the sales of shares from her account after August 2003, culminating in the sale of the remaining shares in her account on 21 November 2003. The letter goes on to make it clear that demands for repayment were made following this, although it does not state precisely when such demands were made. It therefore appears to me that following the closing out of Ms Chan’s position (whether by ASG Brokerage or by Ms Chan voluntarily), ASG Brokerage sought repayment of the outstanding amount standing to the debit of Ms Chan’s account. In these circumstances, I do not think that it can be said that ASG Brokerage continued to make the existing credit facilities, consisting of a margin credit facility of HK$500,000, available to Ms Chan. On the contrary, her position having been closed out, demands for repayment, which are inconsistent with the continued making available of the credit facility, were made. 52.Mr Zimmern acknowledged that no further trading had taken place on Ms Chan’s account after 22 November 2000. I did not understand him to suggest that there was any realistic prospect that such trading would have been permitted. He was constrained to argue that the failure to immediately demand repayment, or to take legal proceedings, constituted good consideration for the giving of the Chan Guarantee. With respect, I do not think that this argument can be sustained on the facts. According to ASG Brokerage’s letter of 9 March 2001, demands or requests for repayment were made after the liquidation of Ms Chan’s position. ASG Brokerage did not adduce any of such demand letters in evidence, and therefore cannot show that time was in fact given. It does not seem to me that the lapse of time between the making of an initial demand for repayment and the final demand and subsequent legal proceedings can sensibly be regarded as the granting or continued grant of financial accommodation, particularly in the absence of some basis (which is lacking here) for thinking that the delay might be of some benefit to the party against whom the demand is made, as might be the case, for example, if there were still shares held in the account which might appreciate in value during the period of inaction, so as to reduce or eliminate the debt due. 53.I therefore conclude that ASG Brokerage neither granted nor continued to grant credit facilities or other financial accommodation to Ms Chan after Mr Lai signed the Chan Guarantee on about 22 November 2000, and that in these circumstances, it gave no good consideration for that guarantee, which is accordingly unenforceable against Mr Lai. It follows that ASG Brokerage’s claim based on the Chan Guarantee must be dismissed. The alleged oral agreement 54.I turn finally to consider the second limb of Mr Lai’s defence, which is based on the alleged oral agreement made between himself and Mr Hung, allegedly acting on behalf of the Plaintiffs, to the effect that all liabilities of Mr Lai to any of ASG or its subsidiaries would be released in consideration of Arch agreeing to a termination of the Management and Option Agreements, pursuant to which it was providing consultancy services (through the person of Mr Lai) to ASG. 55.As I have noted, ASG, Arch and Mr Lai entered into a “Disengagement Agreement” dated 16 January 2001. This recited that ASG and Arch mutually agreed to terminate the agreement which they had signed on 1 July 1999. In fact, ASG and Arch had entered into two agreements on 1 July 1999 - the Management Agreement and the Option Agreement. No point was taken on this, it being the position of both parties that both such agreements were intended to be dealt with by the Disengagement Agreement. The Disengagement Agreement went on to recite that ASG, Arch and Mr Lai mutually agreed to a separation that was respectful and permanent. The key term of the Disengagement Agreement is paragraph 1, which states that it was agreed that:-
56.Mr Lai’s position was that, whatever other liabilities were released by it, this agreement operated as a release of ASG Brokerage’s claims against him under the Bowen and Chan Guarantees. His fall back position was that if the Disengagement Agreement did not have this effect, it should be rectified so as to give it this effect, because that was what was in fact agreed between himself and Mr Hung, acting on behalf of ASG and ASG Brokerage. As a further fall back position, Mr Lai contended that Mr Hung, acting on behalf of ASG, had represented or warranted to him that ASG Brokerage would not pursue any claims it might have under the guarantees against him. 57.Dealing with the argument that the Disengagement Agreement, as it stands, operates as a release of Mr Lai’s liabilities to ASG Brokerage under the Bowen and Chan Guarantees, I am bound to say that I see no basis for so construing the Disengagement Agreement. 58.First, the Disengagement Agreement is made between ASG, Arch and Mr Lai. ASG Brokerage is not a party to it. Paragraph 1 of the Disengagement Agreement, to which I have referred above, makes reference only to a release of liabilities being granted by ASG alone. There is nothing in paragraph 1 to suggest that any other member of the ASG Group, such as ASG Brokerage, was releasing Arch or Mr Lai from any obligations which they may have owed it. Moreover, there is nothing to suggest that ASG entered into the Disengagement Agreement as agent for any of its subsidiaries. On the face of it, therefore, ASG Brokerage was not a party to the Disengagement Agreement, and nothing in that agreement could affect its rights against Mr Lai. 59.Mr Ng contended that the Disengagement Agreement should be construed as having been entered into by ASG not just on its own behalf, but on behalf of ASG Brokerage as well, because Arch’s obligations under the Management and Option Agreements (and the activities of Mr Lai as the adviser to ASG appointed by it pursuant to those agreements) extended to the affairs of ASG Brokerage as well, by virtue of the fact that ASG Brokerage was an Affiliate of ASG as defined in those agreements, so that Arch (and Mr Lai as its representative) was obliged to promote the interests of ASG Brokerage pursuant to Clause 3.1(c) and to refrain from being engaged in any business in competition with that of ASG Brokerage pursuant to Clause 3.2. While this is certainly the effect of Clauses 3.1(c) and 3.2 of the Management Agreement and the Option Agreement, it remains the case that these agreements were entered into by ASG and Arch alone, and there is nothing to show that in entering into these agreements, ASG was doing so on behalf of ASG Brokerage or any other of its subsidiaries, so as to render them parties to the agreements as well. It is not uncommon for companies to enter into agreements which may impact on the affairs of their subsidiaries or associate companies. Where such contracts are made, the subsidiaries or associates will have no directly enforceable rights against the other parties to them if they are not themselves parties to the agreements. They will have to rely on the party to the agreement with whom they are associated to look out for their interests, and enforce the agreement for their benefit if necessary. Having regard to the terms of the Management Agreement and Option Agreement, it seems to me that this was the case here. Thus, as ASG Brokerage was not a party to either of these agreements, they provide no basis for construing the Disengagement Agreement entered into with a view to terminating those agreements as if ASG Brokerage were a party to it so as to be capable of being bound by it. 60.I am therefore of the view that there is nothing in the Disengagement Agreement as it stands to prevent ASG Brokerage from seeking to enforce its claims against Mr Lai under the Bowen Guarantee (nor would the Disengagement Agreement have been an impediment to the claims under the Chan Guarantee had that guarantee otherwise been binding on Mr Lai). 61.So far as the claim for rectification is concerned, this can only succeed if Mr Lai is able to establish the existence of the oral agreement which he has alleged. Evidence as to this was given at the trial by Mr Lai, Mr Dean Shek, and Mr Hung. The background to the entering into of the Disengagement Agreement, and the alleged oral agreement which Mr Lai contended was intended to be recorded by the Disengagement Agreement was not particularly controversial. All the witnesses were agreed that towards about November 2000, Mr Hung was minded to dispose of ASG’s interests in ASG Brokerage and ASG Futures, and that he told Mr Lai of his desire to do so. It was also common ground that the main party with whom Mr Hung had negotiations concerning the sale of these subsidiaries was a group headed by Mr Dean Shek, an employee of ASG in Hong Kong, who had been brought into ASG by Mr Lai. Although Mr Hung appears initially to have thought that Mr Lai was part of the group of persons interested in acquiring ASG Brokerage and ASG Futures, he accepted that this may not in fact have been the case. Mr Hung also accepted that this group was being financed by a third party, whom Mr Shek identified as Mr Edward Poon. 62.All the witnesses agreed that there were a number of meetings and discussions concerning the proposed sale of ASG Brokerage and ASG Futures to Mr Shek’s group, some of which were attended by Mr Lai. Although there were different views expressed as to the reasons why the proposed sale did not go through in the end, both Mr Hung and Mr Shek accepted that the deal did fall through around or just after mid-January 2001. 63.As far as the severing of the relationship between Arch and Mr Lai on the one hand and ASG on the other was concerned, Mr Hung said that this subject was first raised by Mr Lai. Mr Lai did not make it clear who first raised this subject, saying that owing to the lapse of time since the events in question, he was not able to recollect much of the detail of what was said, and what matters were raised by whom. He said, however, that it was almost a must that the Management Agreement had to be dealt with, and that this meant that there had to be a global settlement between himself and Mr Hung, involving a clean break in their relationship. Although he could not recollect the precise terms of any agreement, and said that there was no spelling out of what each side owed or might be liable for to the other, he maintained that the spirit of what had to be done was clear - that there had to be what he described as a “global clean settlement”. 64.Mr Shek said that it was the intention of his group to retain Mr Lai as an adviser, and that in order to do this, it was essential for the Management and Option Agreements to be terminated. Mr Shek also said that he had promised Mr Lai that after his group had acquired control of ASG Brokerage and ASG Futures, they would not seek to enforce the guarantees against Mr Lai, and that he told Mr Hung about this. Mr Shek said in a witness statement filed shortly before the trial that he understood that Mr Hung orally represented on behalf of ASG and its subsidiaries that ASG would discharge Arch and Mr Lai from all their liabilities to them if they signed a severance agreement, and that as far as he knew, such an agreement was entered into on 16 January 2001 (the date of the Disengagement Agreement). In cross-examination, Mr Shek said that he heard Mr Hung say, in the course of the negotiations for the sale of ASG Brokerage and ASG Futures, that ASG and its subsidiaries would waive any claims they might have against Mr Lai. However, he was unable to recollect when or where this might have been said. Mr Shek was unable to explain why his statement referred only to an understanding on his part as to what had been agreed between Mr Hung and Mr Lai, rather than simply stating that he had been present when such agreement was reached. Nor was he able to explain why it might have been thought necessary for Mr Hung to have made such a promise on behalf of ASG Brokerage, when the anticipation was that ownership of that company would pass to Mr Shek and his associates, so that it should more appropriately have been for them to decide what to do about Mr Lai’s liabilities to ASG Brokerage. 65.Mr Hung’s position was straightforward. He said that he never promised or represented that Mr Lai would be released from his liabilities to ASG Brokerage. He agreed that it was intended to terminate the Management and Option Agreements, as this was something that was sought by both Mr Lai and Mr Shek. Mr Hung also stated that Arch had been overpaid some HK$300,000 in respect of bonuses under the Management Agreement, and that it was the claim to recover such overpayment, together with any claims that might exist against Arch and Mr Lai arising out of their management of the affairs of ASG that were to be waived. 66.Having heard from each of Mr Lai, Mr Shek and Mr Hung, it seems to me that Mr Hung’s evidence is consistent with the objective realities of the situation, for the following reasons:-
67.Mr Ng suggested that in giving up his rights under the Management and Option Agreements, Mr Lai was giving up something of substantial value (pointing to the fact that some HK$500,000 odd in bonuses were payable in respect of the first year of the Management Agreement, and to the existence of the option to acquire shares in ASG at possibly substantial discounts to its net asset value according to its books), so that it was unlikely that he would have agreed to do so unless he received a substantial inducement. Mr Ng submitted that the waiver of a claim to repayment of overpaid bonuses of HK$300,000 was unlikely to be a sufficient inducement, when the fees receivable under the Management Agreement might run to several millions of dollars over its nine year term. 68.In my view, this submission overlooks a number of pertinent factors. First, there could be no guarantee that a bonus would necessarily be paid in every year that the Management Agreement was in place. The payment of a bonus and its size would depend on the profits earned by ASG in each six-month period. Although the first six months of operations after the commencement of the Management Agreement had been profitable, there had been losses in the following period. There was therefore no guarantee that there would be profits in the future, on the basis of which the bonus would be paid. In the event of losses, Mr Lai would not be entitled to any remuneration at all. Second, whatever bonus was received would have had to be earned, by Mr Lai devoting time and effort to the affairs of ASG. By terminating the Management Agreement, Mr Lai would be free to deploy his talents elsewhere. Third, it is clear from the evidence of Mr Shek that he and his associates wished to have the benefit of Mr Lai’s services - this would not have been possible if the Management Agreement remained in place. So far as the option to subscribe for shares in ASG is concerned, this would have involved Arch in substantial expenditure in order to acquire such shareholding, as the shares subscribed for would have to be paid for - given the size of the issued share capital of ASG, the amount required to pay for such a subscription would have run into many millions of dollars. Moreover, once the option had been exercised, Arch’s entitlement to the bonus payable under the Management Agreement would cease. 69.Finally, as I have pointed out, the evidence which Mr Lai and Mr Shek gave as to the terms of the alleged oral agreement and the way in which it was made was vague and lacking in detail. In these circumstances, I have litte hesitation in preferring Mr Hung’s evidence on this aspect of the matter to that of Mr Lai and Mr Shek, and I find that Mr Hung did not make the representation or agreement alleged in relation to the release of Mr Lai from liability under the guarantees. It follows that there is no basis for the rectification of the Disengagement Agreement sought by Mr Lai, or for the claim based on the alleged warranty given by Mr Hung to him, whether on behalf of ASG or otherwise. The consequence is that Mr Lai has not been released from liability under the guarantees which he gave to ASG Brokerage, and in the light of my earlier findings, is liable to ASG Brokerage under the Bowen (but not the Chan) Guarantee. Decision 70.The amount claimed under the Bowen Guarantee is HK$2 million. At the time that repayment was demanded from Bowen in March 2001, Bowen’s account was in debit to the extent of over HK$2.2 million, and I therefore enter judgment for ASG Brokerage in the sum of HK$2 million, being the amount claimed by ASG Brokerage. ASG Brokerage’s claim under the Chan Guarantee is, as I have already indicated, dismissed. Interest 71.So far as interest is concerned, the effect of Clauses 1.01 and 1.02 of the Bowen Guarantee is to provide that the guarantee is given not only in respect of the principal amount owing by Bowen, but also in respect of interest at the same rate as was payable by Bowen to ASG Brokerage, and that interest is recoverable in addition to the principal sum guaranteed. It appears from the facility application form that the interest rate for Bowen’s facilities was 3% over HSBC prime. I shall therefore award interest on the sum of HK$2 million at 3% over HSBC prime from 30 May 2001 (which was the date on which ASG Brokerage’s solicitors demanded payment from Mr Lai under the Bowen Guarantee) until judgment. Mr Lai’s counterclaims 72.So far as Mr Lai’s counterclaims are concerned. The counterclaims in HCA 3384 of 2001 must be dismissed, Mr Lai having failed to establish either of his defences to the claim on the Bowen Guarantee. So far as the claim on the Chan Guarantee is concerned, the only relief to which Mr Lai might be entitled is to have a declaration that he is not liable under it, and to have it delivered up for cancellation. However, in the light of my dismissal of ASG brokerage’s claim on the Chan Guarantee, it is not necessary to make any order for such relief, and I do not propose to do so. In the light of my other findings, Mr Lai is not entitled to the rest of the relief which he seeks. Costs 73.As for costs, the first matter that I propose to deal with is the effect of ASG Finance having been made a party to these proceedings. As I have held that ASG Finance had no valid claim against Mr Lai under either of the guarantees, it seems to me that, to the extent that ASG Finance has incurred any costs in respect of these proceedings, it cannot be entitled to recover such costs from Mr Lai. On the other hand, so far as Mr Lai is concerned, having regard to the issues that were raised and the manner in which the claims against him were dealt with in the pleadings, witness statements and at trial, it does not seem to me that Mr Lai can have incurred any additional costs, over and above the costs that would have been incurred had the action been brought by ASG Brokerage alone, as a result of the inclusion of ASG Finance as a plaintiff in these proceedings. That being so, I do not propose to make any order for costs in favour of Mr Lai against ASG Finance. There will therefore be no order as to the costs of these proceedings as between ASG Finance and Mr Lai. 74.Before considering what orders for costs should be made as between ASG Brokerage and Mr Lai, it is, I think, necessary to consider the basis of taxation for any costs order in favour of ASG Brokerage. This is because ASG Brokerage has sought costs on an indemnity basis against Mr Lai, contending that this is what it is entitled to under the terms of the guarantees. In my view, Clause 1.01 of the Bowen Guarantee does provide, in effect, that legal costs in respect of the enforcement of the liabilities guaranteed under it are to be paid on a full indemnity basis. While the question of costs is ultimately a matter within the discretion of the court, in this case I see no reason why, to the extent that ASG Brokerage has been successful, it should not have its costs on the basis agreed between it and Mr Lai. 75.However, the position is complicated by the fact that ASG Brokerage has been successful in relation to its claim on the Bowen Guarantee, but has failed in its claim on the Chan Guarantee. Given that these consolidated proceedings started as separate actions, it seems to me that the appropriate course would be to make an order for costs in favour of ASG Brokerage (to be taxed on the indemnity basis if not agreed) in respect of its costs in HCA 3384 of 2001 until the date of consolidation (19 February 2003), and an order for costs in favour of Mr Lai (to be taxed on the party and party basis if not agreed) in respect of his costs in HCA 762 of 2002 (including any costs incurred by him while the action was in the District Court, as DCCJ No. 11391 of 2001) until the same date. 76.After the two actions were consolidated on 19 February 2003, there will have been a single set of costs. While it might have been possible, had the bases of taxation been the same, to have fashioned a costs order that took into account the relative success and failure of the parties, including the time spent on the issues on which each had been successful, I do not think that this is realistically possible in this case, where the basis of taxation for each party’s costs is different. In the circumstances, while recognising the complications that this may cause for any taxation that may be necessary, I think that the appropriate order would be for ASG Brokerage to have the costs of the consolidated action, other than those costs referable to question of whether, on the proper construction of the guarantees, there was good consideration for the Chan Guarantee, such costs to be taxed on the indemnity basis if not agreed, and for Mr Lai to have an order for costs in his favour in respect of his costs of that issue, such costs to be taxed on the party and party basis if not agreed. 77.I therefore propose to make a costs order nisi in respect of these proceedings that:-
Mr Richard Zimmern, instructed by Messrs Boase, Cohen & Collins, for the Plaintiffs by original action and for the 1st to 4th Defendants by Counterclaim Mr Edward Ng, instructed by Messrs P C Woo & Co., for the Defendant by original action and for the Plaintiff by Counterclaim |
Further hearings and rulings under HCA 3384/2001