Bank of China (Hong Kong) Ltd v. Chan Tin Chi and Others

HCA 4215/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 4215 OF 2003

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BETWEEN

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Before: Hon A Cheung J in Court

Date of Hearing: 19 July 2005

Date of Ruling: 19 July 2005

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R U L I N G

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1.This is the first day of trial of this action.  The 3^rd Defendant is the only remaining defendant. 

2.According to his defence, the 3^rd Defendant says that a bank employee, Mr Leung, has agreed on behalf of the bank to release him from liability under one or two guarantees that he has given to the bank, as security for indebtedness owed by the principal debtor to the bank.  That agreement was reached against the background of a change in shareholders of the principal debtor whereby the remaining shareholder would, so it is said, take over the liability of the outgoing shareholders, including the 3^rd Defendant.  The defence says that the bank, through Mr Leung, agreed to that arrangement and therefore the bank can no longer sue the 3^rd Defendant on the guarantees. 

3.At the PTR and again at the hearing this morning, the 3^rd Defendant told the Court in no uncertain terms that, in fact, Mr Leung did not indicate any agreement at all during the meeting nor did the bank otherwise indicate to the 3^rd Defendant that it agreed to the discharge of the 3^rd Defendant’s liability under the guarantees or to the remaining shareholder taking over the 3^rd Defendant’s liability thereunder. 

4.The 3^rd Defendant expressly and specifically confirms with the Court that he is dropping that defence.  Instead, he wants to run a new defence.  In essence, he says that as guarantor he has a right to ask the bank to terminate his liability under the guarantees so long as he has been able to find a replacement guarantor to take over his liability and provided that he has given notice to the bank to do so.  He says he believes that, as a matter of law, he has a right to do so. 

5.Apart from paragraph 6 in the standard form guarantees, the 3^rd Defendant is unable to pinpoint any law or authority in support of his proposition.  He makes an application to amend his defence so as to allow him to run such a defence. 

6.Needless to say, this is a very late application.  That is an important factor against my allowing the application.  But much more important than that, I am in agreement with counsel for the Plaintiff that this last-minute proposed defence is doomed to failure. 

7.First of all, there is nothing in the general law which would give a right to a guarantor to terminate his liability under the guarantee  (at least for indebtedness already accrued thereunder – see below) without the agreement of the bank, regardless of how much notice he has tried to give to the bank or what replacement guarantor he is offering to the bank.  Without the bank’s agreement, he cannot unilaterally have his own liability under the guarantee determined and, in the present case, as I have explained, it is no longer the 3^rd Defendant’s case that the bank has agreed to the determination of his liability under the guarantee(s).  As I say, under the general law, there is no such right on the part of the guarantor but the position would be otherwise if, under the guarantee itself, there are provisions to that effect, and of course, the position under general law may be restricted or extended by agreement under the guarantee itself.  

8.In order to determine whether the proposed defence is arguable at all, I must therefore turn to paragraph 6 of the standard form guarantees.  Clause 6 certainly gives the guarantor a right to discontinue and determine the guarantee by giving six months’ notice in writing but it also says specifically that the determination shall not release the guarantor from his liability under the guarantee in respect of liability undertaken by the bank prior to the expiry of the six-month period. 

9.Furthermore, the liability of the bank, according to clause 6, refers to actual or contingent liability of the bank undertaken prior to the expiry of that six-month period even though the contingent liability may only mature after the expiry of the six-month period.  In short, the right given to the guarantor under clause 6 only relates to future liability first incurred after the expiry of the six-month period.  For liability or pre-existing liability incurred prior to the expiry of the six-month period, the guarantor would continue to be responsible.

10.In the present case, the Plaintiff’s claim concerns three loans.  They have been particularised under paragraph 12 of the statement of claim.  The mortgage loan was made in 1996, well before the alleged notice of determination that is said to have been given by the 3^rd Defendant to the bank.  That purported letter of determination was dated 10 January 1999 and even if one were to start counting time from the date of the alleged meeting, that meeting took place on 5 January 1999. 

11.The other two loans sued upon are time loans.  According to the documents available, the first time loan was already in existence at least by May 1999.  That would be within the period of six months counting from January 1999.  In other words, both the mortgage loan and the first time loan were pre-existing liabilities unaffected by any determination or purported determination of the guarantees pursuant to clause 6. 

12.The second time loan pleaded in the statement of claim is quite irrelevant because it has since been repaid. 

13.In the circumstances, I agree with counsel that the proposed defence does not afford any defence at all to the Plaintiff’s claim at this trial.  Any purported determination or discharge of the guarantees pursuant to clause 6 by the 3^rd Defendant will not affect his liability in respect of the indebtedness that is being pursued at this trial. 

14.Bearing all this in mind, I refuse the application.  Furthermore, in the light of the admission made by the 3^rd Defendant this morning, I order that the whole of paragraph 10 of the defence be struck out and that the opening phrase of paragraph 11 of the defence, i.e. “Induced by and in reliance upon the said representations of Mr Leung”, be struck out.  I further order that paragraph 13 of the defence be struck out.  In the light of the admission, those paragraphs are frivolous or vexatious.  They are therefore struck out. 

Mr John J E Swaine, instructed by Rowland Chow, Chan & Co., for the Plaintiff

The 3^rd Defendant, appearing in person