Re Kasetsumpan Chiewcharn

HCB7596/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCYPROCEEDINGS NO. 7596 OF 2004

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Before: Hon Barma J in Court

Date of Hearing: 12 April 2005

Date of Judgment: 6 July 2005

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J U D G M E N T

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1.This was the hearing of a bankruptcy petition presented by Chun Yip Industrial (Holding) Limited (“the Petitioner”) against Kasetsumpan Chiewcharn (“the Debtor”).  The petition was presented on 30 July 2004, and is based on a debt of some US$2,465,462.56 arising from a guarantee dated 29 July 2002 (“the Guarantee”) executed jointly by the Debtor and his elder brother, Kasetsumpan Sukhon (“Sukhon”) in favour of the Petitioner, by which the debtor guaranteed all debts owing to the Petitioner by Regent Alpha Chemicals International Limited (“Regent Alpha”), up to a limit of HK$25,000,000.

2.At the hearing, it was contended for the Debtor that no bankruptcy order should be made since the Guarantee was not binding on him as it had been procured by undue influence exercised by Sukhon over him.

3.The background facts are as follows.  Regent Alpha is a company that trades in plastic materials.  95% of its shares are owned by Sukhon, the remaining 5% being owned by his cousin Ms Choi So So.  Sukhon was the person who effectively ran the business of Regent Alpha.  The Petitioner began supplying plastic materials to Regent Alpha in about 1995, and has since about 1997 been the major supplier of such materials to Regent Alpha.  Such supplies were made on credit terms, and from 1998 onwards, the Petitioner obtained guarantees in respect of the debts of Regent Alpha.  The first guarantee was obtained in 1998.  It was given by Sukhon, and had a limit of HK$6,000,000.  On 25 August 1999, it was replaced by a second guarantee executed by Sukhon and his mother, which was limited to HK$16,000,000.  The Guarantee was executed on 29 July 2002 by Sukhon and the Debtor, apparently in place of the second guarantee.

4.The Debtor’s case as to undue influence is set out in his affirmation of 11 October 2004, and is as follows.  He was born in 1977 and is the youngest son in his family.  Sukhon is some six years older than him, and is the second eldest son.  The debtor studied in Hong Kong, and then spent two years in school in England, before going on to university there.  He graduated in 1999 and returned to Hong Kong, where he joined Regent Alpha.  Initially, he worked as a clerk, although his role was more that of a trainee and assistant to Sukhon.  Initially his salary was some HK$14,500 per month, although he later received an additional HK$6,000 by way of a housing allowance.  The Debtor lived with Sukhon and his wife, together with his mother and eldest brother.

5.The Debtor says he is dependent on Sukhon both in his work and daily life, and that Sukhon was a “strong brother” to him, by which I understand him to mean that he was a dominant personality, whom the Debtor found difficult to oppose.  He says that Sukhon was also a dominant personality within Regent Alpha, whose staff did not dare to oppose him.

6.In July 2002, the Debtor says that he was called into Sukhon’s office, and asked to sign a document.  He noticed the Petitioner’s name on the document, and that it was headed “Guarantee”.  From this, he understood that he was being asked to act as a guarantor of Regent Alpha’s debts to the Petitioner, although he did not know why he was being asked to do so, as nothing had previously been mentioned to him about this.  When he asked Sukhon if he could decline to sign the Guarantee, he was told that he should do as he was told.  He then signed the Guarantee without reading through it or having it explained to him.  However, when he later filed the Guarantee in Regent Alpha’s files, he read through it and noted the limit of HK$25,000,000.  He says that at the time, he knew that the Petitioner was one of Regent Alpha’s main suppliers, and that it supplied goods on credit to Regent Alpha.  He says that he did not know the staff of Regent Alpha particularly well at that time.  He understood at the time that Regent Alpha was paying for such supplies on time and believed that it would continue to do so, and therefore was not very concerned about the apparently substantial amount for which he was being asked to provide his guarantee.  However, he did feel that it was somewhat unfair that he, rather than the other shareholder, Ms Choi,  should be asked to provide a guarantee.

7.Sukhon has also filed an affirmation in which he confirms the Debtor’s version of events.

8.Mr Lawrence Yung Hung Chun, a director of the Petitioner, filed an affirmation in response to the evidence of the Debtor and Sukhon.  In it, he says that while Sukhon was the major shareholder in Regent Alpha, he understood that company to be a family business, as apart from two sales representatives, the only persons involved in its business were Sukhon and his relatives, including his wife, mother, the Debtor and three cousins.  He says that Sukhon had told him that the Debtor had returned to Hong Kong after his graduation and had joined Regent Alpha.  He appears to have been aware that the Debtor was living with Sukhon and other family members.

9.He says that as the volume of business with Regent Alpha increased, and goods were supplied on credit, guarantees were sought, initially from Sukhon alone and later from Sukhon and a family member.  In 2002, it was felt necessary to obtain a guarantee with an increased limit of HK$25,000,000.  Sukhon suggested that this should be provided by himself and the Debtor, who would replace their mother as a guarantor.

10.Mr Yung says that it was the Petitioner’s practice to send a draft of the proposed guarantee to the guarantors for their perusal prior to execution, and that this was done on this occasion.  In the past, Mr Yung and another employee of the Petitioner attended when a guarantee was signed.  On this occasion, however, the draft guarantee was simply signed and sent back.  Mr Yung says that this was not acceptable, as it had not been signed in the presence of anyone from the Petitioner.  He therefore asked Sukhon and the Debtor to come to the Petitioner’s offices to execute a fresh copy of the Guarantee.  This happened on 29 July 2002, when Sukhon and the Debtor visited the Petitioner’s office, and read through and signed the Guarantee in the presence of Mr Yung, one of his fellow directors and the sales manager of the Petitioner.

11.Mr Yung describes the meeting as a friendly one.  He says that he noticed the Debtor reading through the Guarantee on his own, and did not notice that the Debtor was particularly submissive towards Sukhon.  He says that nothing which took place gave him any reason to think that the Debtor’s consent to entering into the Guarantee was obtained by any form of improper conduct or influence on Sukhon’s part.

12.The Guarantee is a simple document, occupying one page, and consisting of a single paragraph in both English and Chinese.  Mr Yung exhibited to his affirmation both the draft guarantee (which was marked “copy”) and the executed and witnessed version signed on 29 July 2002.

13.Mr Yung’s affirmation was filed on 1 November 2004.  The Debtor has not sought to dispute his version of events, and has not sought to file any evidence in response to it.  So far as the signing of the Guarantee is concerned, it is in any case clear from a comparison of the draft guarantee and the final version that these were two separate documents.  The final version was marked “original”, the order of Sukhon’s and the Debtor’s signatures, names and identity card numbers is reversed, their residential address is printed (as opposed to having been handwritten in the draft) and the final version was dated and the signature of Mr Yung appears as witness.  The existence of the draft and final (witnessed) versions of the guarantee support Mr Yung’s version of events, and I therefore accept it, and proceed on the basis that it is accurate, particularly as it was disputed by the Debtor.

14.At the hearing, it was common ground between Mr Sakhrani, appearing for the Debtor, and Mr Law, appearing for the Petitioner, that in order to resist the making of a bankruptcy order against him, it was for the Debtor to demonstrate the existence of a bona fide dispute of substance in relation to the debt relied upon by the Petitioner.

15.Although it is suggested in the Debtor’s affirmation that the Petitioner exercised undue influence on him through Sukhon, this suggestion was not pursued at the hearing.  Rather, the Debtor’s position was that he had been procured to sign the Guarantee through the undue influence of Sukhon, and that in the circumstances of this case, the Petitioner was to be taken to be aware of such undue influence so as not to be entitled to enforce the Guarantee against him.

16.The law relating to undue influence, and its impact on the position of third parties, has recently been considered by the Court of Final Appeal in Li Sau Ying v Bank of China (Hong Kong) Limited [2005] 1 HKLRD 106.

17.There, Lord Scott of Foscote NPJ stated that, in cases where the relationship between the parties was not one of the well established categories of relationship in which the court would presume that undue influence had been exerted unless evidence proving the contrary was adduced, the parties should avoid reference to presumptions and concentrate on whether the evidence justified the inference that the impugned transaction had been procured by undue influence (see paragraphs 30 and 34 of the judgment, at pp. 119J-120A and 121A-C).

18.As for the situation where it is suggested that a party to a contract is affected by the fact that the other party’s apparent consent to entering into the contract has been procured improperly, by the exercise of undue influence by some third party, Lord Scott made it clear that the question was whether the party relying on the contract was put on inquiry, not about the existence of undue influence, but as to whether the other party understood the nature and effect of the transaction which he was entering into (see paragraph 37 of the judgment at p.122E-H).  He went on to say (at paragraph 41 of the judgment, p.123F):-

“In Royal Bank of Scotland Plc v Etridge (No. 2) [2001] UKHL 44, Lord Nicholls said that a bank would be “put on inquiry not only in a case where a wife was becoming a surety for her husband, or his company, but in every case in which the relationship between the surety/mortgagor and the principal debtor was “non-commercial” (see paras. 49 and 87).  It must be borne in mind, however, that the relationship between the surety and the principal debtor must be looked at with the eyes of the bank.  The bank would generally, but not always, know whether the surety was the wife of the principal debtor, its customer.  Some wives, however, do not take their husbands’ surnames and the concept of a “non-commercial” relationship is inherently imprecise.  It is certainly not necessary for a proposed mortgagee to make inquiries about the relationship between its principal debtor and the proposed surety/mortgagor before deciding on the steps it should take to satisfy itself that the surety understands the transaction he or she is entering into.  Nothing Lord Nicholls said in Royal Bank of Scotland Plc v Etridge (No. 2) suggests the contrary.  And for a bank/mortgagee to make inquiries of that character would in most cases be an unwarrantable impertinence.”

19.It seems to me therefore, that whether or not a party relying on (in this case) a guarantee is put on inquiry in the sense explained above will depend to a large extent on what he or it knows about the relationship between the other party and the person or company for whose debts he stands surety.  Where he is aware that the relationship is one of those in which the law presumes, absent evidence to the contrary, that undue influence has been exercised, he will be affected by the exercise of undue influence unless he takes certain steps which the law requires.  That said, if he is not in fact aware of the relationship, it would not appear that he is obliged to enquire as to the nature or details of the relationship.

20.Where the relationship is not one in which undue influence is presumed, it would therefore seem necessary for the party relying on the guarantee to be aware of facts which establish that it is nonetheless one in which the other party places trust and confidence in the person for whose debts he is a surety.  Even then, it will be relevant to consider the circumstances of the transaction with a view to ascertaining whether they indicate that the other party does not appreciate the implications or consequences of entering into the transaction.  That will involve an examination of the relationships involved, and of the effect of the transaction which it is sought to impugn.

21.Where a party to a contract is put on inquiry as to whether or not the other party understands the nature and effect of the transaction into which he is entering, it is incumbent on him to take reasonable steps to satisfy itself that the other party understood the transaction he or she was entering into (see Li Sau Ying, supra, at paragraphs 36 and 37 of the judgment, pp. 122C-G).

22.Applying those principles to this case, it follows that the Debtor must show that there are bona fide disputes of substance in relation to each of the following issues:-

(1)	whether he was procured to enter into the Guarantee by the exercise of undue influence over him by Sukhon;
(2)	whether the Petitioner was put on inquiry as to whether or not he understood the implications or consequences of entering into the Guarantee;
(3)	if so, whether the Petitioner took reasonable steps to satisfy itself that he understood such implications or consequences.

23.In my view, the Debtor is unable to demonstrate that there is any triable issue, or bona fide dispute of substance, in relation to the second of these issues.  In my judgment, there was nothing in the circumstances in which the Guarantee was signed by the Debtor to put the Petitioner on inquiry that the Debtor might not have understood the implications or consequences of entering into the Guarantee.  I say this for the following reasons:-

(1)	Although the Petitioner was aware that the Debtor and Sukhon were brothers, and that Sukhon was the major shareholder of Regent Alpha, the sibling relationship is not one which the law regards as giving rise to the rebuttable presumption of undue influence to which I have referred.  It is one of those relationships which require an investigation into the nature and circumstances of the relationship before any conclusion can be drawn as to whether or not it was one in which one sibling placed trust and confidence in, or relied upon, the other.  That being so, the fact that the Petitioner was aware of the sibling relationship is not enough, of itself, to put it on inquiry as to whether the Debtor understood the nature of the transaction into which he was entering by signing the Guarantee.
(2)	Even thought the Petitioner may have been aware that the Debtor lived with Sukhon, this additional factor would not, I think, be sufficient to tip the balance the other way.  It seems to me that in order to be put on inquiry in the sense which has been explained, it would be necessary for the Petitioner to have such knowledge of the relationship between Sukhon and the Debtor as would indicate to it that the Debtor was likely to be influenced by Sukhon.  There is nothing in the Debtor’s evidence to indicate that the Petitioner was aware of the nature or particular aspects of the alleged relationship between himself and Sukhon that would suggest that the relationship was any different from that between most siblings.
(3)	The circumstances in which the Guarantee was signed also would have provided no reason for the Petitioner to think that there was any risk of undue influence or impropriety.  The Debtor was asked to come to the Petitioner’s office, and although Sukhon was also present, it is clear that the Debtor was afforded an opportunity to read through the Guarantee, which was a short and straightforward document, in both English and Chinese (both of which the Debtor understood).
(4)	Further, there was nothing at that meeting which suggested to the Petitioner’s representatives that the Debtor was reluctant or unwilling to sign the Guarantee, or that he was deferential or submissive to Sukhon.
(5)	Moreover, on the Debtor’s own case, he would appear to have read through and understood the terms of the Guarantee and its implications for him, apparently prior to the occasion on which the final version of the Guarantee was signed at the Petitioner’s offices.
(6)	So far as the Petitioner was concerned, Regent Alpha was a family company of Sukhon’s, and various members of his family, including the Debtor, were involved in its operations.  It does not seem to me that the fact that a guarantee is being provided by a family member who works with the company concerned would be something which would of itself put a person in the position of the Petitioner on inquiry as to the possibility that that family member does not understand the implications of giving such a guarantee.  While the Debtor was not a shareholder or director of Regent Alpha, there is no evidence to suggest that this was known to the Petitioner.  Even if it had been, I do not think that this would make a difference in this case.
(7)	The fact that this was the first time that the Debtor had provided a guarantee does not, in my view, add anything for these purposes.  I do not consider that the Petitioner would (or should) have been put on inquiry by reason of the fact that the Debtor was replacing his mother as a guarantor of Regent Alpha’s debts.
(8)	Insofar as it may be necessary, I would not regard the relationship of the Debtor and Regent Alpha (whose debts he was guaranteeing) as being non-commercial, so as to put the Petitioner on inquiry as aforesaid.

24.I would also add that so far as the third question - whether or not the Petitioner took reasonable steps to satisfy itself that the Debtor understood the implications of signing the Guarantee - is concerned, I am of the view that in the circumstances of this case, it would have done this by having ensured (as it did) that the Guarantee was signed in its presence, having given the Debtor an opportunity to read through it and understand its terms both at the meeting at which it was signed, and prior to that having supplied a draft of the Guarantee to the Debtor and Sukhon for their consideration.

25.Having regard to the fact that the Guarantee was a short and uncomplicated document, and that the Debtor was well educated, I do not consider that it was incumbent on the Petitioner to advise the Debtor as to its effect, or the extent of his liability thereunder (which was in any event clearly indicated by the limit of the guarantee).  Nor do I think it was necessary for the Petitioner to urge the Debtor to take independent legal advice, or to have a separate meeting with him in the circumstances of this case.

26.As to the question of whether or not the relationship between Sukhon and the Debtor was such that it should be concluded that Sukhon exercised undue influence over the Debtor in relation to the signing of the Guarantee, it seems to me that this is a matter which would have required an assessment of the Debtor and Sukhon’s personalities and relationship, which could not appropriately be done on the basis of the affidavit evidence alone.   However, in the light of my conclusions as to the other questions, this is not a matter that arises for consideration.

27.Finally, I should add that the further (uncontradicted) evidence of Mr Yung, in his affirmation of 1 November 2004, as to the events which took place after demands were made for repayment, from which it appears that the Debtor attended a number of meetings with Sukhon at which it was made clear that steps would, if necessary, be taken to enforce the Guarantee against him, without any protest or indication on the part of the Debtor that he considered the Guarantee to be unenforceable by reason of undue influence also suggests that the defence now put forward is lacking in substance.

28.I am therefore satisfied that there is no bona fide dispute of substance as to the Petitioner’s claim under the guarantee, and will make the usual bankruptcy order against the Debtor, with a costs order nisi that the Debtor is to pay the Petitioner’s costs of these proceedings, including all previously reserved costs.

Mr Dennis Law instructed by Messrs Tony Kan & Co. for the Petitioner

Mr Sanjay A Sakhrani instructed by Messrs Wat & Co. for the Debtor

Attendance excused for Official Receiver