Citibank N.A. v. Dayaram Nanik and Another

HCA 2145/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2145 OF 2011

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D E C I S I O N

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1.This was an appeal from the decision of Master de Sousa dismissing the plaintiff’s summons summary judgment and granting the defendants unconditional leave to defend. The defendants are respectively the personal and corporate guarantors of unpaid debts under 3 guarantees of Days Impex Ltd (“the Borrower”), a company incorporated in Hong Kong. At the conclusion of the hearing, judgment was reserved which I now give.

Background facts

2.Nanik Dayaram (“the first defendant”) is the majority shareholder and director of the Borrower.  The second defendant (having the same name as the Borrower) is a Liberian company owned by the first defendant.

3.The Borrower was wound up in December 2011.  The outstanding indebtedness is said to be HK$36,523,487.88 plus interest.

CHRONOLOGY OF EVENTS

The 2001 facility letter

4.On 30 July 2001, the plaintiff (“Citibank”) issued a Demand Credit Facility (“the 2001 facility letter”) to the Borrower for “[u]ncommitted, revolving short-term credit facilities up to an average limit of HK$12,195,000” with specified sub-limits.  The 2001 facility letter contained conditions precedent including a board resolution of the Borrower approving the facility with the lender and the execution of the relevant documents as well as resolutions of the board of directors and/or shareholders of the guarantors approving and authorising issuance of the guarantees. The security to be provided included a personal guarantee from the first defendant “guaranteeing the repayment of all outstanding indebtedness plus interest, costs and expenses” and a continuing guarantee from the second defendant “guaranteeing the repayment of all indebtedness plus interest, costs and expenses” (collectively “the Citibank guarantees”).

5.The 2001 facility letter contained the following provision (“the additional facilities provision”) printed inbold:

“The Borrower and the security provider(s), if any, hereby confirm that the Borrower may from time to time request that Lender to extend additional facilities which, in aggregate with the Facility, may exceed the Facility Amount specified in this Facility Letter. If the Lender accedes to such request by acting in accordance with the instructions from any authorized signatory of the Borrower, any transaction conducted in such manner shall bind the Borrower and the security provider(s) without the requirement of making any amendment to this Facility Letter.

… Please indicate your acceptance of the Facility by signing and returning to us the enclosed duplicate of this Facility Letter within one month after the date of this Facility Better, after which the offer will elapse (sic).”

Documents executed on 30 August 2001

(i)    GCA

6.On 30 August 2001, the Borrower signed a General Customer Agreement (“GCA”) with Citibank.

(ii)   The 2001 facility letter

7.The 2001 facility letter was executed by the Borrower and endorsed by the defendants.

(iii) Board minutes of the second defendant

8.On the same day, a copy of the 2001 facility letter and the Citibank guarantee were tabled at the board meeting of the second defendant held that day.  The first defendant who was the chairman noted that the second defendant and the Borrower were in the same group of companies and that the second defendant was a “holding” company of the Borrower.  The board minutes show that it was resolved that the board give its approval to the second defendant entering into the Citibank guarantee.

(iv)   Notice to [the first defendant] as guarantor/security provider for   the borrower (“the notice”)

9.This notice was sent to the first defendant pursuant to the Code of Banking Practice together with a copy of the guarantee. It was acknowledged in writing by the first defendant.  This notice largely focused on liabilities under the 2001 facility letter.  However, it was made clear that the guarantee was unlimited amount and, importantly, that “such liabilities will consist of, but are not limited to, amounts outstanding under the facilities granted to the Borrower …” (emphasis added)

(v)   The Citibank guarantees

10.Each of the defendants executed the required security document viz. the Citibank guarantee on 30 August 2001.  In pertinent part, each of the Citibank guarantees provides:

“1. (a) In consideration of your at my/our request:-

(i) from time to time granting, making and/or continuing any loan(s) or advance(s) and/or any form of financial facility and/or entering into and/or continuing to make available any credit arrangement on any account or in any other manner, either with or without security … upon which the Borrower (as hereinafter defined) is or may become liable … and/or making and/or continuing to make any advance to or with [the Borrower] (hereinafter called ‘the Borrower’) or to or with any other person at the request or on the guarantee or indemnity of the Borrower …; and/or

(ii) agreeing not to demand immediate payment of monies or any part thereof presently due to you either Borrower or by any other person at the request or on the guarantee or indemnity of the Borrower;

(all the loans, and advances, facilities, accommodations, arrangements and transactions referred to in subclause (i) and (ii) above being hereinafter referred to as ‘the Obligations’) the undersigned hereby agrees to pay and satisfy you on demand all sums of money and/or liabilities which are now or shall at any time be owing to you anywhere on account of the Obligations (hereinafter referred to as ‘the loans’) and all fees charges and commissions or other charges (hereinafter referred to as (‘the said charges’) which may be payable under any agreement or document entered into in relation to the Obligations (hereinafter referred to as ‘the loan documents’) (the loan and the said charges are hereinafter collectively referred to as ‘the principal sum’) … PROVIDED ALWAYS that the liability of the undersigned hereunder shall with respect to the loan not exceed THE SUM OF ____________ UNLIMITED AMOUNT]…

2. This guarantee shall be a continuing security and shall not be satisfied by any intermediate payment that shall be applied to any ultimate balance which by the covenants and terms of the security documents shall remain going or payable by the Borrower or any party to the loan documents to you.

3. This guarantee shall be binding on the undersigned his executors administrators and legal representatives and successors until the expiration of three calendar months after your receipt of a written notice to determine this guarantee served by the undersigned …”

Revisions and amendments to the 2001 facility letter

11.On 14 December 2001, Citibank sent to the Borrower a letter entitled “Re: Demand Credit Facility (the “Facility”) - Supplemental Facility Letter”.  It set out the terms of the revised DCF.  The letter stated:

“We refer to our Facility Letter to you dated July 30, 2001 (as amended from time to time, the ‘Facility Letter’) …

…

All other the terms and conditions stipulated in the Facility Letter remain unchanged and this Supplemental Facility Letter once accepted shall form an integral part of the Facility Letter.

… Please indicate your acceptance of the Facility by signing and returning to us the enclosed duplicate of this Supplemental Facility Letter.”

12.The Supplemental Facility Letter was duly endorsed by the defendants but it is clear from the opening paragraph that thereafter the 2001 facility letter took effect as if it had incorporated the changes/revisions made by that letter.

13.On 5 August 2003, Citibank sent the Borrower a further letter regarding the DCF.  The only differences I can discern are that under the heading “Security”, relating to the continuing guarantee, the phrase (“already held by the Lender”) was inserted and after a provision similar to that appearing in bold and underscored in the preceding paragraph, there was another sentence added:

“When accepted and upon our satisfaction of all conditions precedent, this Facility Letter will supersede our previous facility letters and arrangements with you and the outstanding thereunder shall be transferred as outstanding hereunder.”

14.At the foot of the letter following the signature of the Borrower, each of the defendants put his/its signature to the document stating:

“I hereby acknowledge the terms and conditions of the Facility Letter and confirm that the duly executed Security Documents will automatically without the need for any further action secure any additional facilities that the Lender may at its discretion grant to the Borrower in the future.

I am fully aware that my obligations and liabilities under the Guarantee dated August 30, 2001 are unlimited in amount.”

15.Further letters were issued from time to time following the format in the letter of 5 August 2003.

16.The Borrower requested increases in the DCF limit from time to time to which requests Citibank acceded.  On 11 June 2009, the DCF limit was further revised to HK$27 million plus US$1,280,000.

The 1^st facility letter

17.On 23 June 2010, the Borrower applied for a new facility of HK$12 million from Citibank under the Government’s Special Loan Guarantee Scheme (“the SLGS loan”).  This was a non-revolving loan. The SLGS loan was subject to terms and conditions stipulated by the Government.  The SLGS loan required the provision by the Borrower of an HKSARG Guarantee (“the SLGS guarantee”) in the prescribed form.  The required SLGS guarantee was provided by the first defendant but it is clear from the wording of the 1^st facility letter that the SLGS guarantee was additional to the Citibank guarantees.

The 2^nd facility letter

18.On the same day, Citibank granted the Borrower’s application to revise the DCF to HK$27 million plus US$2.5 million.  The revised terms are set out in the revised facility letter dated 23 June 2010 (“the 2^nd facility letter”) which was in the same format as that dated 5 August 2003.

The 3^rd facility letter

19.On 4 August 2011, the Borrower requested a further revision of the DCF.  It was increased to HK$35 million (“the 3^rd facility letter”).

20.The SLGS loan was fully drawn down on 30 June 2010.  As regards the DCF, the amounts drawn down were US$3,652,400 and US$515,291.

21.After the Borrower’s default, demand letters were issued to the Borrower and the defendants on 17 October 2011.  No repayment was made by the defendants and these proceedings were commenced against them on 16 December 2011.  Citibank applied for summary judgment on 25 May 2012.  At the hearing before the master, the defendants advanced a new and underused argument on the construction of the Citibank guarantees.

22.The master granted unconditional leave to defend, culminating in the present appeal.

IS THERE A TRIABLE ISSUE?

23.Mr Alder who appeared for the defendants sought to resist summary judgment on the basis that there are triable issues both as to liability as well as quantum.  These will be considered in turn.

(1)   Liability

24.The question that arises is the scope of the Citibank guarantees, namely, whether on their true construction, they extend to the amounts advanced to the Borrower under the 2001 facility letter as well as subsequent facility letters including the 1^st, 2^nd and 3^rd facility letters issued almost a decade later.

25.It is trite law that in construing the scope of a guarantee, the factual matrix is relevant and may be taken into account in ascertaining the meaning of the words used in the guarantee.  In the present case, the only affirmation filed on behalf of the defendants does not deal with the factual matrix and the only available evidence is to be found in the documents themselves which the parties signed.

26.Mr Alder, counsel for the defendants, submitted that the Citibank guarantees only applied to facilities made available under the 2001 facility letter and do not extend to facilities afforded by Citibank to the Borrower under subsequent contractual arrangements that entirely superseded the arrangements under the 2001 facility letter such as the amendment/revision made by the letter of 5 August 2003 and subsequent letters.  He invited attention to the notice and the board resolution of the second defendant and submitted that, fairly read, it was at least arguable that the Citibank guarantees were brought into being for the purpose of the 2001 facility letter and nothing else.  As regards the additional facilities provision in the 2001 facility letter, he submitted that this provision was meant to address advances needed as a matter of emergency and to oral variations of the 2001 facility letter only.

27.There is no evidence that prior to 2001 there had been any dealings between the parties.  So, in considering the scope of the Citibank guarantees, the transaction entered into in 2001 has to be regarded as the beginning of a new and continuing relationship.  Although Mr Alder submitted that future transactions could be explained by the fact that the facility under the 2001 facility letter was for uncommitted revolving facilities, it is an undeniable fact that the 2001 facility letter contemplated future transactions beyond the limit of HK $12.195 million.  That was made absolutely clear by the additional facilities provision (see § 5 above).

28.Further, despite Mr Alder’s submission that the “additional facilities … that may exceed the Facility Amount” only contemplated funds needed in an emergency and to oral variations of the facility amount, he did not identify the basis for making those inferences and none can be ascertained from the contemporaneous documents themselves.

29.As already noted, the 2001 facility letter contained conditions precedent including the need for a personal and a corporate guarantee.  Board approval and resolutions were required from the Borrower in respect of the facility and from the second defendant for the issuance of the corporate guarantee.  A copy of the Citibank guarantees must have been made available to each of the defendants and the notice given to the first defendant at about the same time.

30.The Citibank guarantee was intituled “Continuing Guarantee” and expressed to be such in clause 2 of the Citibank guarantee.  It contemplated the making of “loans, advances, facilities, accommodations, arrangements and transaction” by the bank from time to time collectively referred to as “the Obligations” and it was in respect of those “Obligations” that the Citibank guarantee (which was unlimited amount) was being provided. While the notice might suggest that the Citibank guarantee was tied to the 2001 facility letter, upon careful reading, in fact, that was not the case.  Rather, responsibility was “for all actual and contingent liabilities of the Borrower(s), whether now or in the future”.  Specifically, such liabilities were “not limited to amounts outstanding under the facilities granted to the Borrower (s)”.

31.I do not consider that the board minutes take matters further because its language was neutral and there is nothing in them that assists in the construction of the scope of the Citibank guarantees.

32.Mr Alder submitted that the present case falls within the principles set out in HSBC v Martel, unreported, CACV 54/2003, 3 June 2005.  In that case, one of the issues raised on the appeal involved the identification of the underlying agreement which was guaranteed by the surety.  In Martel, there was an existing banking relationship under which a joint and several guarantee for $5.5 million had been provided.  Five years later, the bank had discussions that culminated in new facilities being granted set out in a facility letter in respect of which the company was asked to provide a new joint and several guarantee from the three directors for $6 million.

33.On the facts of that case, the Court of Appeal came to the conclusion on the evidence that the underlying agreement guaranteed was the agreement between the bank and company set out in the facility letter of the previous day, the facilities referred to in the letter being the commercial purpose which the guarantee was intended to serve.  

34.As a matter of construction, in the present case, the clear commercial purpose the Citibank guarantees were intended to serve was to secure the “Obligations” as defined in those guarantees.  It was a new banking relationship involving a new client and given the nature of the transactions for which Borrower required financing, the parties clearly contemplated future advances going beyond the specified limit.  While the immediate financing required were the facilities granted by the 2001 facility letter, a fair reading of the contemporaneous documentation strongly support the view that the intention of the parties was that those guarantees should secure all monies to be advanced to the Borrower under the new banking relationship.  The factual matrix is very different from that of Martel.

35.The fact that the 2001 facility letter was revised and amended from time to time is of no moment whether or not those revisions/amendments were expressed to supersede earlier arrangements because all the arrangements fell within the term “Obligations” as defined in the Citibank guarantees.

36.Another feature which is very different is that in the Martel case it was common ground that the surety knew nothing of subsequent revisions and did not consent to it.  Contrast the present case where the defendants acknowledged and confirmed each and every revision/amendment to the 2001 facility letter as well as the 2^nd and 3^rd facility letters.

CONCLUSION

37.On the facts of this case and based on the contemporaneous documents, I have no hesitation in reaching the conclusion that there is no arguable defence.  The Martel case is distinguishable and none of the legal arguments based on the documentation shows a triable issue on liability. I find that both defendants are liable under the Citibank guarantees and that those guarantees extend to the amounts advanced to the Borrower under the 2001 facility letter as well as subsequent facility letters including the 1^st, 2^nd and 3^rd facility letters.

(2)   Quantum

38.The amount claimed in the statement of claim is HK$36,523,487.88. It is made up of the items shown in the following schedule below:

Facility	Amount (HK$)
SLGS loan	12,000,000
(Less 14 monthly repayments of $200,000)	(2,800,000)
Sub-total	9,200,000
DCF	Amount (US$)
(a) Invoice financing	515,291.00
(b) Advances against documents	3,652,400.00
Sub-total	4,167,691.00
(c) Overdraft	HK$453,635.08

39.Mr Lee has deposed to the fact that on 7 and 31 October 2011, Citibank applied a total sum of HK$5,638,137 held on security to partially set off the outstanding amounts owed by the Borrower to Citibank: see Mr Lee’s 1^st affirmation at § 17.

40.The Citibank guarantees contained a conclusive evidence clause.  Clause 16 provides:

“A certificate in writing signed by your Manager or you or any other duly authorised officer stating the amount at any particular time due and payable to you from or by the Borrower or any party to the loan documents or any judgment obtained by you against the Borrower or any party to the loan documents shall (in the absence of fraud or manifest error) be conclusive evidence against the undersigned.”

41.At § 21 of the 1st affirmation of Lee Tak Sing dated 20 March 2012 the amount of HK$39,437,812.54 was stated to be due and owing made up of HK$36,523,487.80 being the principal outstanding and accrued interest up to and including 20 March 2012 as HK$2,914,324.66.

42.Mr Alder submitted that the statement in Mr Lee’s affirmation did not amount to a certificate within § 16 of the Citibank guarantee.  As I understand it, the reason given was that Mr Lee’s statement did not predate the writ.  Further, it was said that a conclusive evidence clause is akin to contractual estoppel and must be pleaded.  Mr Alder also took issue with the amount said to be outstanding under the SLGS loan on the basis that no documentation has been provided to verify the amount of HK$9.2 million.  Those matters were said to give rise to triable issues.

43.It would be convenient to deal, first, with the SLGS loan as Mr Alder’s criticisms can be addressed independently of the conclusive evidence clause.

The SLGS loan

44.The terms of the SLGS loan are in evidence.  The terms required repayment of the loan principal by 60 consecutive equal monthly instalments commencing on the day one month after the drawdown date and authorised the lender to debit the instalment outstanding or principal and interest (as relevant) directly from the designated bank account on each repayment date or interest payment date.

45.The loan was drawn down on 30 June 2010. The first monthly repayment of $200,000 therefore commenced on 31 July 2010.  As the petition to wind up the borrower was presented in September 2011, the last monthly repayment would have occurred at the end of August 2011.  So, there have been 14 monthly repayments altogether, totalling $2.8 million.  Accordingly, I see no basis for challenging the correctness of HK$9.2 million being outstanding on the SLGS loan.  

46.It should be noted that irrespective of the Citibank guarantees, at the very least, Citibank must be entitled to summary judgment against the first defendant for this amount under the SLGS guarantee.  That liability is not disputed.

47.I now turn to consider the remaining items in the schedule.

DCF

48.The amount claimed is made up of 3 items less an amount set off from the Borrower's bank accounts.  In respect of two of the items, namely invoice financing and advances against documents, the only complaint boils down to the exchange rate adopted for the conversion of US dollars into Hong Kong dollars.  There is no valid reason for challenging the amounts for those 2 items as expressed in US dollars as both amounts are fully substantiated: see exhibits LTS-10 to LTS-12 (inclusive) to Mr Lee’s affirmation.

49.In contrast, the amount of the overdraft appears be unsubstantiated.  So unless Citibank can rely on the conclusive evidence clause, this amount will have to be disregarded for present purposes.

50.The conclusive evidence clause provides for a “certificate in writing” etc. The purpose of the “certificate” is for the relevant officer to state the amount due to Citibank by way of principal and interest as at a particular date and to sign the statement so made.  Such a certificate is prima facie evidence of the debt and it will normally be conclusive as to the amount of that indebtedness.  See Andrews and Millet, Law of Guarantees, 6^th edition, § 7-032.

51.As a matter of principle I consider that there is no reason why, if the information required by clause 16 is contained in an affirmation from the relevant officer of Citibank rather than a certificate as such, it cannot satisfy clause 16.  However the 1^st affirmation of Mr Lee does not state the overdraft amount.  In the circumstances, in ascertaining the extent of indebtedness of the defendants on the Citibank guarantees, the amount shown in the schedule as being the overdraft amount must be disregarded.

52.In passing I will briefly mention the submission that a conclusive evidence clause is some form of contractual estoppel that must be pleaded.  Reference was made to DBS Bank (Hong Kong) Ltd v San-Hot HK Industrial Co Ltd, unreported, HCA 2279/2008, 12 March 2013 at §§ 194 - 209.  The first matter to note is that DHCJ Pow SC’s observations on “contractual estoppels” were strictly obiter since, on his findings of fact, it was unnecessary for DBS to rely on the principle of contract estoppel.  §§ 207-209 dealt with conclusive evidence clauses.  The type of clause considered in that case concerned the conclusive nature of bank statements, similar to the clause that was considered and upheld by the Privy Council in Tai Hing Cotton Mill Ltd v Liu Chong Hing Bank [1986] 1 AC 80, 109.  It is of tangential relevance to the clause under consideration.  I derive no assistance from it so far as Mr Alder’s submissions are concerned.  Moreover, as it is unnecessary to decide this point in the present case, nothing more needs to be said on this topic.  

Order

53.The parties are to submit an agreed draft Order for approval that reflects the matters decided in §§ 37, 45, 47 and 51 above on or before 10 June 2013.

Ms Eva Y W Sit, instructed by Baker & McKenzie, for the plaintiff

Mr Edward Alder, instructed by Tanner De Witt, for the 1^st and 2^nd defendants