Bank of China (Hong Kong) Ltd v. Chan Yeuk Wai and Another
Read the full judgment text of CACV 26/2006 on BabelCite. This Court of Appeal judgment was delivered on 16 October 2006.
1. The plaintiff, Umbrella Finance Company Limited (‘UFC’), sued the defendants under five personal guarantees and sought summary judgment against them. Deputy High Court Judge Jeremy Poon granted the defendants unconditional leave to defend. The plaintiff now appeals.
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CACV 26/2006 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF APPEAL CIVIL APPEAL NO. 26 OF 2006 (ON APPEAL FROM HCA NO. 3156 OF 2002) ______________________ BETWEEN
AND BETWEEN
______________________ (By original writ and order to carry on) Before : Hon Cheung JA, Hon Yuen JA and Hon Stone J in Court Date of Hearing : 26 September 2006 Date of Judgment : 16 October 2006 ______________________ J U D G M E N T ______________________ Hon Cheung JA : The appeal 1.The plaintiff, Umbrella Finance Company Limited (‘UFC’), sued the defendants under five personal guarantees and sought summary judgment against them. Deputy High Court Judge Jeremy Poon granted the defendants unconditional leave to defend. The plaintiff now appeals. 2.Originally, the plaintiff in this action was Bank of China (Hong Kong) Limited (‘BOCHK’). The action was first commenced on 16 August 2002. By an order dated 3 January 2005, UFC was made a party to these proceedings and these proceedings were ordered to be carried on as if UFC had been substituted for BOCHK as a plaintiff. Background 3.By a loan agreement dated 15 October 1996 (‘the loan agreement’) Kwangtung Provincial Bank (‘KPB’) agreed to lend funds to Ananda Holdings Limited and Ananda Enterprises Limited (‘the borrowers’). There were subsequent variations to this agreement which are not relevant to this appeal. The loan granted by KPB was secured by a mortgage and five personal guarantees executed by the defendants in favour of KPB. The defendants were the shareholders and directors of the borrowers. The particulars of the guarantees are as follows :
4.On 14 June 1999 KPB sold its interest in all the loans and related securities in the loan agreement to Zhong Gang (Cayman) Company Limited (‘ZG’). This was part of the arrangement whereby KPB, a bank in Hong Kong with Mainland interests, was merged together with other banks of similar status with BOCHK. BOCHK was appointed by ZG to service and administer the loans and related securities under the loan agreement. 5.On 16 August 2002 BOCHK commenced High Court proceedings, namely, HCMP 3254 of 2002 in which it sought to enforce the loan agreement against the borrowers and the two mortgagors under the mortgage. Deputy Judge Poon also handled that action. He entered judgment in favour of BOCHK against the borrowers for, among other things, HK$980,112,001.60. The appeal against the judgment was by consent dismissed. There was a further order that ZG be added as a co-plaintiff to HCMP 3254 of 2002 and UFC was made a party to that proceeding in substitution for BOCHK and ZG as the plaintiffs. Title to sue 6.The entitlement of UFC to sue on the guarantees is based on an assignment dated 23 December 2003 (‘the Assignment’) from ZG to UFC. UFC claims that it acquired its interests in the following manner :
Guarantees not included? 7.The first issue raised by the defendants is that the guarantees had not been sold or assigned to UFC. The argument is that under clause 2.1(d) of the 2nd SPA the guarantees needed to be identified in a schedule, however the schedule did not identify the guarantees. Likewise under the Assignment the guarantees needed to be set out in the schedule to the Assignment. Again the schedule attached to the Assignment did not refer to the guarantees. Construction of documents 8.This point involves a construction of the terms of the 2nd SPA and the Assignment. Although it has been submitted that the matter can only be resolved after discovery of documents it has not been shown how additional documents would assist this construction exercise. 9.The judge held that the argument raised by the defendants was arguable and the matter should proceed to trial. I disagree. As a matter of construction, my view is that the guarantees do not need to be specified in the schedule. The 2nd SPA 10.Under Clause 2.1(d) of the 2nd SPA, ZG agreed to sell to CFPI,
11.The definition of ‘Unrestricted Loans’ is
12.‘Loan Security’ means
13.In my view the words of Clause 2.1(d) are clear. Sale by ZG to CFPI are in respect of the loans referred to as IIIA, IIIB, IIIC and IIID in Schedule 1 together with the Loan Security of those loans that had been identified as IIIA, IIIC and IIID in the schedule. The words are not capable of meaning that the loan securities of the unrestricted loans must be identified in the schedule as well. This is made clear by the meaning of ‘Loan Schedule’ as defined in Clause 2.3.1 which stated that
14.Schedule 1 therefore consists of, amongst other things, the following three types of assets that were sold :
This means the list of assets in the schedule is not exhaustive. The definition of ‘Loan Security’ makes it clear that those loan securities particularly described in the schedule are for the purpose of the representations and warranties only. This does mean that all the loan securities must be specified in the schedule. The Assignment 15.Clause 1(d) of the Assignment stated that:
16.In my view the same construction is to be applied in respect of the Assignment. Other defences 17.The judge held that since he had granted leave to the defendants to defend on the construction point it was not necessary for him to consider the other defences raised by the defendants. In this appeal the defendants relied on other defences. I now proceed to consider these defences. Subject matter of the assignment 18.Mr Jeremy Cheung, counsel for the 1st defendant, associated himself with two defences raised by the 2nd defendant. First he argued that the guarantees were not capable of being assigned to UFC in the first place. He argued that prior to the assignment BOCHK had already terminated the loan agreement, obtained judgment against the borrowers and commenced proceedings against the defendants. He argued that therefore the assignment is an assignment of a mere right of action. He relied on an Australian case, Hughes v Fresh Pack Fruit & Vegetable Market Pty Ltd [1965] W.A.R. 199. 19.Very briefly the facts of the case showed that the lessor of a property granted a lease to the 1st defendant (‘the lessee’) for a term of five years with an option to renew. The lease contained a guarantee by the 2nd defendant (‘the guarantor’) who was a director of the lessee guaranteeing to the lessor the performance of lessee’s covenants. In March 1963 the plaintiff acquired the interest of the lessor in the lease. After the plaintiff acquired the interest of the lease the lessee rescinded the lease and vacated the premises in July 1963. The plaintiff was only able to let out the premises again in November 1963. On 27 February 1964 the lessor assigned the guarantee to the plaintiff. The plaintiff claimed against the lessee for arrears of rent between April and November 1963, the difference between the rent payable under the lease for the remainder of the term and the rent payable under the new lease and some other charges. The plaintiff also claimed against the guarantor under the guarantee. Jackson J found for the plaintiff against the lessee but dismissed its case against the guarantor. He held (at p. 204) :
20.It is clear from this passage that the judge decided that
21.This being the case, the lessor had nothing to assign to the plaintiff since it had disposed of the property the subject of the lease and had sustained no loss or damage which could be the subject of a claim under the guarantee. The judge’s comment that ‘Had there been any existing liability under the guarantee to (the lessor) this would have been non-assignable as being a mere right to litigate’ in my view was said by way of observation only and was not the issue he had to decide. 22.In any event, I do not regard the comment made by the judge as strictly accurate. If liability had already accrued under the guarantee, it does not necessarily mean that the assignment of the guarantee is merely in the form of a ‘mere right to litigate’ : see the discussion on Trendtex Trading Corporation v. Credit Suisse [1982] A. C. 679 at paragraph 28 of this judgment. 23.Mr Cheung also referred to The Modern Contract of Guarantee (English Edition) by Donovan and Phillips at para. 10–175 which stated that :
24.The footnote in respect of the last passage is as follows :
Valid assignment 25.Once the judgment of Hughes is properly understood, I cannot see how it or the passage in the textbook will assist the 1st defendant. In this case both the loan and guarantees were assigned to a single party namely, UFC. By the time of the Assignment the loans had been advanced to the borrowers. In other words the debt had already been incurred by the borrowers. This is a classic situation of an assignment of a debt or chose in action to UFC. As Donovan and Phillips observed at para. 10–173 a contract of guarantee is assignable as a legal chose in action. Such an assignment is effective to transfer the right to the assignee as expressly provided for by section 9 of the Law Amendment and Reform (Consolidation) Ordinance (‘LARCO’) (Cap. 23) :
26.In any event the terms of the guarantees precluded any argument that the liability of the guarantors was determined by the actions of the lender towards the borrowers. The guarantees were stated to be binding on the guarantors as a continuing security (clause 3). Clause 5 provided that
Clause 6 further provides that :
Champerty 27.Mr Cheung also relied on the defence that the assignment to UFC may amount to maintenance or champerty. 28.The principle is that where an assignee has by the assignment acquired a property right and the cause of the action was incidental to that right the assignment is effective and the court should not strike down such an assignment as one only of a bare cause of action. Thus Lord Roskill in Trendtex Trading Corporation, after disagreeing with the statement by the Master of Rolls who had stated in the Court of Appeal that ‘the old saying that you cannot assign a bare right to litigate is gone’, held at p. 703 :
29.See also Camdex International Limited v Bank of Zambia [1998] Q.B. 22 where it was held that an assignment of a bona fide debt in accordance with the provisions of section 136 of the Law of Property Act 1925 (i.e. section 9 of LARCO) was valid and no question of maintenance or champerty arose even if the necessity for litigation to recover the assigned debt was contemplated. Any objectionable element alleged to invalidate the assignment had to be proved independently and distinctly. 30.In this case the defendants had not showed any objectionable elements which may invalidate the Assignment. Mr Cheung argued that the consideration of the Assignment to UFC was only stated to be $10. The situation is that CFPI had assigned its interest to UFC before the assignment of 23 December 2003. According to the evidence, this assignment was not for a nominal value but because of commercial confidentiality the exact amount was not disclosed. In any event the $10 consideration must be viewed in the context. I do not see how this point could assist the defendants. Compromise 31.I will now deal with the defences raised by the 2nd defendant. The 2nd defendant alleged there was a compromise between the parties whereby BOCHK agreed not to sue the defendants on condition that the defendants put up further securities. This defence is simply not credible by reference to the contemporaneous documents. In fact the same defence was relied upon by the borrowers in HCMP 3254 of 2002. In that case the evidence also came by way of an affidavit from the 2nd defendant. The judge examined the allegations in detail by reference to the contemporaneous documents and also rejected the defence. 32.It is not necessary for me to consider the argument raised by Ms Ismail, counsel for the plaintiff, that this is a collateral attack on an earlier decision of a court of competent jurisdiction and may amount to an abuse of the process of the court by reference to the cases of Secretary of State for Trade and Industry v Bairstow [2004] Ch 1 and China North Industries Investment Limited v Chum, HCCL 10 & 54/2003. Personal contracts and material variation of guarantee by change of creditor 33.The 2nd defendant seemed to argue that the guarantees were in the nature of personal contracts. But as pointed out in Chitty on Contracts 29th Edn. Vol. 1 para. 19–054, prima facie, contractual rights to the payment of money do not involve personal considerations and are capable of assignment. I accept that the benefit of a contract is only assignable in ‘cases where it can make no difference to the person on whom the obligation lies to which of two persons he is to discharge it’ but the question whether any assignment makes any difference to the debtor must be decided by the court on objective grounds, having regard to the nature of the contract and of the subject matter of the rights assigned : Chitty para. 19–053. 34.Further as pointed in Chitty at para. 10–175 :
See also Wheatly v Bastow (1855) 7 De G.M. & G; 44 ER 102; Bradford Old Bank v Sutcliffe [1918] 2 KB 833 at 841; Banca Di Roma Societa Per Azioni v Lee Kai & Another [1998] 2 HKC 338. Absence of notice of assignment 35.The 2nd defendant argued that it is a triable issue whether the 2nd defendant had received or had notice of the assignment. The 2nd defendant had merely raised a bare allegation that he had not received the notice of assignment. The plaintiff on the contrary had provided evidence of the service of the notice of assignment. This is not a credible defence. Duty not to mislead and duty to disclose 36.The 2nd defendant argued that the debts and the related securities were assigned to ZG on 14 June 1999. However, KPB and BOCHK did not inform him that KPB was no longer the lender of the loan in the subsequent dealings between KPB and BOCHK and the defendants. 37.Other than for the purpose of section 9 of LARCO, there is no need to give notice of the assignment to the guarantor. The point was dealt with by Turner LJ in Wheatly :
38.Further unlike contracts such as insurance, guarantees are not contracts of utmost good faith and there is no general duty of disclosure to a guarantor. Illegal business of ZG 39.The 2nd defendant argued that ZG did not hold any banking licence in Hong Kong. When KPB assigned the loan and securities to ZG in June 1999 ZG did not have any capacity to continue any banking business, in particular the overdraft facilities. It was submitted that ZG was performing illegal business in Hong Kong. The contracts in relation to such business were illegal and unenforceable. 40.It is incumbent upon the 2nd defendant to give particulars as to how ZG carried on banking activities in Hong Kong. Like many of the other defences raised by the 2nd defendant, the attacks were couched in vague terms with no particulars being given. In this case, ZG had appointed BOCHK as its serving agent and BOCHK itself had a banking licence. 41.Further banking business is defined in the Banking Ordinance, Cap. 155 as
42.The enforcement of the debt does not amount to banking business. Conspiracy to defraud 43.It was alleged that the assignment of the loans from BOCHK to ZG and then to UFC was a sham. This was done to ‘overinflate and overstate’ BOCHK’s financial conditions and performance so as to deceive the general public as well as the authorities. The purpose was to obtain a listing status for BOCHK. 44.The complaint of conspiracy was again couched in the vaguest terms. The 2nd defendant has not specified whether UFC was a party to the alleged conspiracy. In my view the 2nd defendant has not shown that the assignment to UFC was not a proper commercial transaction. This being the case, I do not see how this could become a triable issue in this case. Conclusion 45.Accordingly I would allow the plaintiff’s appeal, set aside the order dated 23 December 2005 and give judgment to the plaintiff as claimed in its Order 14 summons as amended on 4 July 2005. I would dismiss the 2nd defendant’s respondent’s notice. The plaintiff is entitled to the costs of the appeal and of the action (except for costs orders made in favour of the defendants prior to 23 December 2005) against the defendants. Hon Yuen JA : 46.I have had the benefit of reading the draft judgments of Cheung JA and Stone J and I agree with their reasons for allowing this appeal. I was initially troubled by Mr Jeremy Cheung’s arguments based on the Hughes v Fresh Pack case. I think however that what Jackson J held at p.204 (reproduced in para. 19 of Cheung JA’s judgment) can be understood in light of the following facts in that case and the general law regarding the assignment of leases. Guarantee 47.In September 1962, Property Holdings Pty Ltd ("PHP") as agent for the owners leased the property to the 1st Defendant for a period of 5 years from November 1962. The 2nd Defendant signed a guarantee (in favour of PHP) of the 1st Defendant’s performance of its obligations under the lease. Assignment of lease 48.In March 1963, the owners (PHP’s principals) assigned the property to the Plaintiff. The agreement for sale included an express assignment of the benefit and interest of the owners (said to include PHP) in the lease. Effect in law 49.It may be helpful at this stage to consider the effect of that assignment under the general law. As I understand it, when an owner assigns a property with the benefit of a lease to a transferee, the right to recover rent (including any arrears accrued due before the transfer) passes to the transferee. See Halsbury’s Laws of England 4th ed. Re-issue, Vol. 27(1) Landlord and Tenant, I - 12 Assignment and Devolution of Leases, para. 467 and fn. 11. 50.Therefore the effect of the assignment of the property with the lease in March 1963 to the Plaintiff was that as from that date, the right to recover rent (including any arrears) passed to the Plaintiff. 51.However there was (at that time) no assignment to the Plaintiff by PHP of any rights under the guarantee. (It was not suggested that the benefit of the guarantee ran with the land assigned). Entitlement to primary obligation divorced from entitlement to secondary obligation 52.Accordingly, the result was the "divorcing" of rights under the lease (held by the Plaintiff) from rights under the guarantee (held by PHP). As from March 1963, the right under the lease to recover rent (including any arrears) from the 1st Defendant - the primary debtor - belonged to the Plaintiff. But the right under the guarantee against the 2nd Defendant - the secondary debtor - still remained with PHP, even though this company and its principals no longer had anything to do with the property, and in particular, had no right to recover rent (not even arrears). Arrears 53.From April 1963, the 1st Defendant was in arrears of rent until November 1963 when the Plaintiff succeeded in re-letting the property to a new tenant and by re-entry terminated the 1st Defendant’s lease. 54.The Plaintiff clearly had title to sue the 1st Defendant for the arrears under the lease. But he wished to sue the 2nd Defendant under the guarantee as well. Assignment of guarantee 55.It was not until February 1964 that PHP purported to assign to the Plaintiff its rights under the guarantee. The following month, the Plaintiff as assignee of the guarantee sued the 2nd Defendant. Discussion 56.It is clear when one examines the facts and the general law set out above that the assignment of the guarantee was completely ineffective. As Jackson J put it, "there was nothing to assign". 57.The terms of the guarantee covered losses suffered by PHP in case of the 1st Defendant’s default under the particular lease. But there was neither the possibility of future losses nor the actuality of past losses. 58.There was no possibility of future losses, because by February 1964 (the time of the assignment) that lease no longer existed, as it had been surrendered in November 1963. 59.There were no past losses either, because with the assignment of the lease, the right to recover rent (including any arrears) passed under the general law to the Plaintiff. PHP no longer had the right to recover rent from the 1st Defendant (nor, for the same reason, did its principals), and thus PHP had no right against the 2nd Defendant as surety. 60.In any event, as a matter of fact, the 1st Defendant was not in arrears during the period when PHP’s principals were owners. The 1st Defendant only started to be in arrears after the sale to the Plaintiff. So the guarantee, which by its terms only covered any losses suffered by PHP, did not bite. 61.The passage in Jackson J’s judgment (at p.204):
should be understood in the context of the facts and general law I have discussed. Even if there had been any arrears as at March 1963, and thus the 2nd Defendant had an "existing liability under the guarantee to PHP", once the lease was assigned to the Plaintiff, PHP no longer had the right to recover rent (including arrears) from the 1st Defendant. Once that occurred, PHP had against the 2nd Defendant as surety nothing more than a mere right to sue, which was not property capable of assignment. However, as I have noted above, there were in fact no arrears as at March 1963 so that in any event Jackson J’s remarks were obiter. Hon Stone J : 62.I have had the advantage of reading in draft the judgments of Cheung JA and Yuen JA, and respectfully agree, for the reasons they have given, that this appeal must succeed, and that judgment should be entered in favour of the plaintiff in terms of the amended application for summary judgment. 63.Notwithstanding the extensive amounts of forensic dust sought to be thrown up by each of the defendants to this application in an endeavour to raise triable issues, there clearly is no defence to this action, which at bottom is a relatively straightforward claim under personal guarantees. 64.In the circumstances I wish to add only a few words of my own about the ambitious argument advanced on behalf of the 1st defendant by Mr Jeremy Cheung based upon the Australian case of Hughes v Fresh Pack Fruit & Vegetable Market Pty Ltd [1965] W.A.R. 199, a case upon which Cheung JA and Yuen JA already have commented in some detail. 65.Suffice it to say that the proposition put forward by Mr Cheung, based upon that which clearly was an obiter dictum of Jackson J in Hughes, op cit., to the effect that the assignment of the five guarantees to the plaintiff is ineffective once the borrower’s contracts were determined by the Bank of China for breach of the borrower’s primary obligation to repay, is in my view simply incorrect as a matter of law. 66.As Cheung JA has pointed out, on the specific facts of Hughes the lessor had nothing to assign under the guarantee since no loss or damage had been sustained which could have been the subject of any claim under the guarantee, and the observation of Jackson J, together with the footnoted reference in Donovan and Phillips, op cit., must be read in this context. 67.However, this is a far cry from the startling argument that, in effect, prior determination of the primary obligation renders ineffective the purported assignment of the security collaterally underpinning that obligation – in this instance, the personal guarantees – as “a mere right to litigate.” 68.With respect, I fail to see the basis of such a general proposition which, were it to be accepted at face value, would, it seems to me, have the alarming effect of substantially emasculating the modern law of guarantees. 69.As the analysis of Yuen JA amply demonstrates, Hughes was a particular case decided on particular facts, and certainly does not justify the general proposition the 1st defendant now seeks to extrapolate therefrom. 70.In this connection I accept and agree with the observations of Ms Ismail, appearing on behalf of the plaintiff, to the effect that first, the terms of the guarantees in the present case indicate plainly on their face that these are continuing security instruments (see, for example, Clauses 3, 6 and also 17(f) of the Deed of Guarantee addressed to the Kwangtung Provincial Bank, which specifically refers to “your successors and assigns”), and second, that Hughes, op cit., in fact exemplifies the unexceptional proposition that a guarantee cannot be assigned once severed from its principal obligation, and that the principle now sought by the 1st defendant to be derived from Hughes, and its apparent approval in the footnoted passage in Donovan and Phillips, represents an unfortunate and inaccurate paraphase of that case. 71.At the end of the day there is nothing in this action which would merit the very considerable time and cost involved in sending it to trial, and with great respect to the learned judge below, in my view he erred too much on the side of caution in his grant of unconditional leave to defend.
Ms Roxanne Ismail, instructed by Messrs Clifford Chance, for the Plaintiff Mr Jeremy Cheung, instructed by Messrs Johnny K. K. Leung & Co, for the 1st Defendant Mr John Griffiths, S.C. and Mr Simon Yip, instructed by Messrs Lau, Kwong & Hung, for the 2nd Defendant |
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