Citibank, N.A. v. Heroes Industrial Ltd

DCCJ 2875/2006

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 2875 OF 2006

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Coram:  Deputy District Judge Anthony Chow in Chambers (open to public)

Date of Hearing:  22^nd September 2006

Date of Handing down of Judgment:  28^th September 2006

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JUDGMENT

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1.This is an application for summary judgment under Order 14 of the Rules of the District Court.

The claim:

2.The plaintiff is a licensed bank and pursuant to the terms and conditions of various agreements granted a credit facility to the 1^st Defendant.

3.The 2^nd and 3^rd Defendants executed a Guarantee and Indemnity dated 12/7/2004 (the “Guarantee”), in favour of the plaintiff to jointly and severally guarantee the liability of the 1^st Defendant.

4.On or about 11/8/2004, the 2^nd Defendant deposited the sum of US$384,615.38 into a Cancellable CMS Spread Daily Accrual Deposit account (the “Investment Account”) with the plaintiff. The Investment Account was for a fixed term of 5 years, maturing on 27/8/2009. The terms and conditions of the Investment were contained in a confirmation letter (the “Confirmation Letter”) signed by the 2^nd Defendant on or about 12/8/2004.

5.On or about 17/7/2005, the 1^st Defendant was indebted to the plaintiff in the sum of HK$6,548,842.15. The plaintiff called on the loan, the Defendants were unable to repay the full amount of the indebtedness.

6.On or about 29/7/2005, pursuant to the terms of the Confirmation Letter, the plaintiff terminated the Investment Account, charged the 2^nd Defendant a termination fee in the sum of US$57,692.31 and applied the balance as partial repayment of the 1^st Defendant’s indebtedness to the plaintiff.

7.As at 30/5/2006, HK$241,620.68 is still outstanding in the 1st Defendant’s account. The plaintiff filed this claim to recover the same against the Defendants.

The defence:

8.No Statement of Defence was filed. In the 3^rd Defendant’s affirmation in opposition to the Order 14 summons, the only defence stated was there would have been sufficient funds in the account to cover all of the 1^st Defendant’s indebtedness to the plaintiff, but for the plaintiff’s deduction of HK$450,000.00 as termination fee when the Investment Account was terminated,.

9.The 3^rd Defendant further alleged: first, the plaintiff had never advised the 2^nd Defendant if the Investment Account was terminated there would be any termination fees; second, there was no foundation or basis provided by the plaintiff on how the termination fee was determined.

The law:

10.The legal principle is well known: The defendant must show that there are triable issues. He has to satisfy the court that he has a ‘real or bona fide defence.’ If he makes an allegation, it must be credible or believable in the light of the evidence placed before the court. [Para 14/4/9 Hong Kong Civil Procedure 2006].

Analysis:

11.Mr. Man, counsel for the plaintiff, replied that even taken to the highest, the defence could only form the bases of a counterclaim by the 2^nd Defendant and cannot form a defence for the 1^st and 3^rd Defendants.

12.In Andrews & Millett: The Law of Guarantees, 4^th Ed. 2005, the learned authors stated in paragraph 11-102:

“Where the surety is sued by the creditor, he cannot reduce or extinguish his liability by relying on a right of set-off which his co-surety has against the creditor. The surety has no right to be exonerated by his co-surety, and must pursue his claim for contribution separately. For example, in Bowyear v Pawson (1881) 6 Q.B.D. 540, the creditor sued the surety in respect of the principal’s debt. The creditor owed the co-surety a debt, which the co-surety had assigned to himself and the surety jointly and severally equally as tenants in common. The surety claimed to be entitled to set-off half of the claim against the portion of the debt owed by the creditor, and as to the other half, he claimed that since he was entitled to be exonerated by his co-surety and call upon him to contribute, he could set off the remaining portion of the debt against the co-surety’s right against the creditor. This defence failed on the grounds that the surety had no right to call upon the co-surety to appropriate the debt due from the creditor to accept a set-off of the co-surety’s debt as a payment in discharge of the surety.”

13.This is especially true when I look at the chronology of events. In the letter dated 21/7/2005, the plaintiff issued notice of demand to all Defendants to repay the indebtedness of the 1^st Defendant’s credit facility within 7 days.

14.On or about 29/7/2005, the plaintiff issued notice to the 2^nd Defendant to confirm early termination of the Investment Account. The notice stated:

“We hereby confirm the following Cancelable CMS Daily Accrual Deposit transaction between yourselves and ourselves was early terminated on July 29, 2005…. In consideration of this early termination, Citibank N.A., Hong Kong shall pay NG PAK HOK the net amount of USD 326,923.07 (Principal Amount USD384,615.38 minus the termination fee USD 57,692.31) value August 2, 2005 …”

15.The plaintiff clearly treated the cancellation of the Investment Account as between the plaintiff and the 2^nd Defendant only. If there were any misappropriation of funds or improper deduction of fees from the Investment Account, only the 2^nd Defendant has standing to sue. Since there was no right of action, neither the 1^st nor the 3^rd Defendant could rely on the 2^nd Defendant’s cross-claim as a defence. The 1^st or 3^rd Defendants raised no other defence the plaintiff ought to have summary judgements against them.

16.As to the 2^nd Defendant, Mr. Man submitted since the 2^nd Defendant failed to satisfy the indebtedness of the 1^st Defendant as demanded, the plaintiff had terminated the Investment Account pursuant to clause 11 of the Confirmation Letter. Clause 11 states:

“Collateral: Where the Deposit is used as collateral to secure obligations owing by the Depositor or any third party to Citibank and Citibank becomes entitled to terminate and apply any or all the Deposit in accordance with the collateral arrangement, the Depositor agrees that Citibank shall have the sole discretion to and shall in good faith determine an amount representing the value of the Deposit as at the date of the termination. To the extent that such amount has been fully applied in accordance with the above, Citibank shall have no further obligations to the Depositor in respect of the Deposit. Any determination by Citibank hereunder shall be binding on the Depositor.”

17.Mr. Man further submitted that since the Investment Account was terminated, it must be pursuant to one of the three events of early termination specified in the Confirmation Letter. The first event was upon the depositor’s breach of obligations under the Confirmation Letter, which was not applicable. The second event was upon the plaintiff’s option and this did not apply either. The third was upon request by the depositor. Since the bank in effect had to terminate the Investment Account for the 2^nd Defendant, such that he would have fund to satisfy the guarantee, it must be this event of early termination that applied.

18.In the event of an early termination at the Depositor’s request, the plaintiff had to quote a termination amount to the depositor at a termination date and the quotation would be conclusively determined by the plaintiff.

19.Mr. Cheng, solicitor for the 1^st to 3^rd Defendants, did not challenge the plaintiff’s right to exercise the right of termination under clause 11 of the Confirmation Letter, the only complaint was it was not an early termination at the depositor’s request and the plaintiff could not rely on any other provisions in the Confirmation Letter except clause 11.

20.I have carefully reviewed the Confirmation Letter and I find the provisions of early terminations and clause 11 are totally independent. The three events of early termination and clause 11 provided for 4 different avenues to terminate the Investment Account, each contains its own provisions and obligations.

21.If the depositor requested an early termination, the bank is obligated to quote a termination amount for the depositor’s consideration. The depositor is of course entitled to withdraw his request, if he did not like the termination amount quoted to him.

22.In the clause 11 situation, when the bank is entitled to and did terminate, the depositor no longer has that option. The wording of the 29/7/2005 notice clearly confirmed this. It simply confirmed the termination and quoted a termination amount. The termination was presented to the 2^nd Defendant as fate accompli. Clearly, the plaintiff was exercising its rights under clause 11 and not any right of early repayment at the depositor’s request.

23.When exercising its rights under clause 11, the plaintiff is required to act in good faith and whether that required the plaintiff to advise the 2^nd Defendant of the termination fees before termination or to provide the foundation or basis on how the termination fee was determined clearly requires a trial.

24.As to Mr. Man’s final submission that I should consider Mr. Cheng’s explanation, that the 2^nd Defendant was unable to swear an affirmation in opposition because he was afraid to return to Hong Kong due to debt collector, in whether to grant conditional or unconditional leave to defend. Whatever Mr. Cheng said from the bar table is not evidence and I refuse to accept any of his statements as such. As it is not evidence, it cannot and will not form any part of my consideration. The 2^nd Defendant should be given unconditional leave to defend.

25.Finally, the plaintiff prayed for an order for interest accruing at the rate of 10% per annum over the plaintiff’s Hong Kong dollar prime lending rate, before as well as after judgment. My review of the facility letter and the guarantees revealed no such provision. The facility letter provided for interest at the rate of 1% above the plaintiff’s prime lending rate, if for overdrafts and 0.75% over its prime rate, if for financing export or import bills. For late payments, the guarantee only specified an interest rate at 2% above the plaintiff’s prime lending rate. None provided any default interest rate. Without any specific contractual provisions for interest rate on default, the only appropriate rate is the judgment rate.

Order:

26.Judgment be entered against the 1^st and 3^rd Defendants, jointly and severally, for the sum of HK$241,681.91, together with interest at the judgment rate from 13/6/2006 until full payment.

27.Unconditional leave for the 2^nd Defendant to defend.

28.2/3 of the costs of this application and all costs reserved be payable by the 1^st and 3^rd Defendants, jointly and severally, to the plaintiff, to be taxed if not agreed. Balance of the costs be costs in the cause.

Representation:

Mr. Bernard Man, instructed by Messrs Wilkinson & Grist, for the Plaintiff

Mr. Cheng Chi Hung, of Messrs Cheng, Chan & Co., for the 1^st to 3^rd Defendants