Leung Kwok Kwong and Another v. Bank of Credit and Commerce Hong Kong Ltd.

CACV000138/1994

IN THE COURT OF APPEAL

1994, No. 138
(Civil)

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Coram: Hon. Nazareth, V.-P., Penlington and Bokhary, JJ.A.

Date of hearing: 2 December 1994

Date of judgment: 2 December 1994

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J U D G M E N T

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Nazareth, V.-P.:

1. This is an appeal against the order of Kaplan J setting the aside the order of Master C.B. Chan granting the defendant's unconditional leave to defend, and instead awarding judgment against both defendants.

2. The plaintiff ("BCC") sued the two defendants upon two continuing guarantees dated 15th February 1989, signed by the two defendants, Mr and Mrs Leung, guaranteeing to BCC the liability of two companies, Kam Kui Trading Ltd ("Kam Kui") and KeepOn-Go International Ltd ("Keep-On-Go"). These were two companies within the Kam Kui Group. A third guarantee in respect of Tai Fung Hong, another company within the Group, was signed by the defendants on the same date, 15th February 1989. All three guarantees were sent to BCC with a letter of the same date. I pause here to mention that the letter is of some significance. It made no mention whatever that the guarantees were conditional or suspensive to use the word used by Mr Ronny Wong Q.C., who with Mr Ronald Mayne appears for the appellant, or that they were to be held in escrow. I should mention that BCC does not now claim on this third guarantee because, as Mr Chan Q.C. who with Mr Michael Liu appears for BCC, explains from the Bar, of a late suggestion by the defendant, that it was not executed by the defendants or at any rate, not on the date pleaded by BCC.

3. By letters dated 18th March 1989 BCC informed of the three companies that debt restructuring proposals that had been made on 1st December 1988 were not acceptable and that unless BCC received $10m that month, it would take further action. In October 1990 Tai Fung sought further facilities from BCC for their New World Apartment Project. In the context of such facilities the defendants executed a guarantee for $27m. I make no mention of the date of that guarantee which seems to be disputed.

4. In 1991 BCC demanded repayment from all three companies and also made demands upon the two defendants. On 2nd March 1992 BCC went into liquidation. By the writ in the action leading to this appeal dated 3rd August 199, some $39m was claimed. As mentioned it came before Master Chan on 9th May 1994 in the context of an Order 14 application by BCC. She gave the defendants unconditional leave to defend. BCC appealed and it came before Kaplan J. He identified two issues upon which, in his judgment, the appeal rested. First, whether the plaintiff allowed time to the principal debtors, i.e. the three companies, to repay the debts and whether this amounted to sufficient consideration under the guarantee. Second, whether the defendants' affidavit at the 11th hour raised an additional or alternative defence in alleging that the guarantees had been executed in escrow, i.e. subject to the approval of BCC's head office.

5. As to the first issue, the defendants claimed that the guarantees were executed in anticipation of acceptance of the restructuring proposals subject to BCC's head office approval. Kaplan J observed that courts have approached defences to written guarantees with a fair degree of scepticism, referring to the Murjani v Bank of India [1990]1 HKLR 586 and Banque de Paris v Costa de Naray [1984]1 Lloyd's Rep.21.

6. In the light of that he turned to the second issue and concluded that the defendants claim that the guarantees were held in escrow was incredible. The first issue he found somewhat more difficult. But despite the fact that the guarantees do not say that the guarantors had requested time, approaching the matter from a standpoint of commercial reality, he concluded that the giving of time must surely have been at the express or implied request of the guarantors. Had it not been given, it is pretty clear, he thought, that BCC would have taken steps to recover from the principal debtors and that the defendants most certainly did not want.

7. For the appellants, Mr Wong's fundamental submission is that the judge erroneously reduced the case to the two issues I have mentioned, i.e. first, the consideration point and second, the escrow point. The real issue, he submits, is whether there was an express agreement as pleaded by BCC, to grant time in consideration of the two guarantees. He concedes (subject to a reservation I do not in the event consider material) that the appeal stands or falls upon that point, i.e. whether or not the issue, as averred by BCC, there was an express agreement for time to be granted in consideration of the tender of the two guarantees.

8. It turns out, in fact, that the point can be quite simply dealt with. Each of the guarantees being in proforma addressed to BCC commences with the words "In consideration of your giving time ...". Upon that basis, notwithstanding Mr Wong's eloquent and able submissions to the contrary, it seems to me that it must be accepted that time was requested. As to whether time was granted, again, that seems to me to also admit of a clear answer.

9. Following the execution of the guarantees, negotiations and desultory correspondence dragged on for about two years, at least, leading to Mr Wong's characterisation of the Bank as an inactive bank. Moreover, he has submitted that mere inaction, or even time, where there are other even earlier guarantees, does not lead to a conclusion that time has been granted in respect of the guarantees in question. That is as may be, the judge took the view that time had been granted. For myself, I have no difficulty in taking a similar view. In that regard we have been referred by Mr Warren Chan to the following passage in Andrews & Millet, Law of Guarantees, 1992 edition, at p.22 where it is said that:

"Although mere voluntary inaction by the creditor will not suffice, a court will readily infer that the inaction is attributable to an express or implicit request by the surety. Thus, if there is a pre-existing debt, the existence of which cannot in itself amount to consideration, the inference will often be drawn that the guarantee was given on the understanding that the creditor would forbear from taking action with respect to that debt: see e.g. Glegg v Bromley [1912] 3 KB 474 per Parker J at 491; Fullerton v Provincial Bank of Ireland [1903] AC 309 at 313-16."

Of course, such an inference has to be drawn in the particular circumstances an again, notwithstanding the submissions made by Mr Wong, I have had no difficulty in drawing the inference that time was afforded in pursuance of the guarantees.

10. That, in my view, disposes of the construction point. But before leaving it, I ought to mention that BCC did not originally plead consideration in that way. The original pleading was that in pursuance of the guarantees, loans and banking facilities were granted and utilised. Subsequently, after the matter was dealt with by the master, the pleading was amended to plead that the plaintiff granted time which was utilised by the principal debtors. The point made by Mr Wong was that this should be taken into consideration in assessing the credibility of the version of each side.

11. Quite apart from the express words of the guarantees I have quoted, I have to say that even were they absent, I would have had no hesitation in coming to the same conclusion. I would in that context mention briefly the three points made by Mr Chan in his written submission. The principal debtors were indebted to the Bank in very substantial amounts. That indebtedness was repayable on demand and BCC had in fact made a demand. Second, it is apparent from the evidence that Kam Kui and Keep-on-Go did not have money to repay and needed time. Third, after the guarantees were given in February 1989, much time elapsed without action or a suit been taken. All this has to be considered against the background that this is a commercial case and the facts have to be viewed in the light of common sense and commercial sense. Besides there is the passage I have already averted to in Andrews and Millet.

12. I turn then to consider the escrow or conditional point, i.e. that the guarantees were given in the context of the restructuring proposals which were rejected and therefore, it is submitted, they did not have effect. It is perhaps not without significance that this point is couched in such understated terms and not, e.g. that the guarantee was conditional upon the acceptance of the restructuring proposals. Be that as it may, I find this point no more difficult to dispose of than the consideration point.

13. The conclusion seems to me to be inescapable that the version of the two defendants is unbelievable when viewed against the documents put in evidence and the commercial nature of the transaction, specifically in the following respects. First, the covering letter dated 15th February 1989, to which I referred, by means of which the three guarantees were sent to BCC, made no mention whatsoever of the guarantees being conditional, suspensive, or to be held in escrow. I do not consider that matter neutral in the circumstances. Second, when the Bank rejected the restructuring proposals, it did not return the two guarantees to the defendants. Nor did they seek the return of those guarantees. Third, there is no evidence that the defendants thought that the Bank in its subsequent letters was relying on the earlier 1986 guarantees. Fourth, the Bank by its letter of 2nd January 1991 reminded the two defendants of their obligation as guarantors. There is no evidence that the defendants disputed this, as one would have expected them as business people to have immediately done. Fifth, the BCC solicitors by letter dated 25th April 1991 and 4th June 1991 demanded payment from the defendants. There is no evidence that the defendants thought the solicitors were relying on the earlier guarantees, nor any evidence that they responded with any suggestion that the two guarantees did not have effect. Sixth, the BCC solicitor's letter of demand in April 1993 expressly stated that reliance was placed on the two guarantees and referring to their date, 15th February 1989; the defendants did not write back disputing this or stating that the guarantees had not taken effect. Finally, the writ was issued on 3rd August 1993, more than three months after the demand letters; the defendants did not protest about action being taken on the two guarantees. In those circumstances, I conclude that the judge was clearly right in holding this claim of the defendants as unbelievable.

14. Thus the utter failure of the appellants' case in respect of the two issues so completely destroyed its overall credibility, that the other minor points made by Mr Wong, simply did not begin to raise any arguable issue. It seems to me, therefore, there is nothing in the appellants' appeal which I would dismiss.

Penlington, J.A.:

15. I would also dismiss this appeal for the reasons which have already been given by Nazareth V-P. There is little I can add.

16. So far as the escrow grounds are concerned, I have no doubt whatever that a consideration of the documents, particularly the exchange of correspondence, is such that it is quite unbelievable that it was considered by the appellants that these guarantees were delivered to the bank in escrow and ceased to have any effect when the proposals for restructuring the debts were not accepted. So far as the consideration point is concerned, I think, one is to look at the actual wordings of the guarantee when it says that it was "in consideration of your giving time credit and/or banking services and accommodation". That is the clear wording of the document itself. In my view, there is nothing to show that such wording of the guarantee itself did not reflect the actual position of the parties. The giving of time was a consideration for the execution of the guarantees.

17. Mr Wong, who has attractively presented the argument for the appellants, did say that this would have the effect of the bank saying "give us a new guarantee in replacement of the existing valid, unlimited guarantee and we will give you more time to re-organise your deeds". Mr Chan cannot really give clear reasons as to why the second guarantees were required. Nevertheless, I am satisfied that the clear wording of the guarantee is such that there was a consideration of granting additional time for the re-organisation of the appellants' companies' finances.

Bokhary, J.A.:

18. In his judgment, the judge said that "Courts have approached defences to claims under written guarantees given to Banks with a fair degree of scepticism". That is not how I would choose to put it. But taking what the judge said in context, it becomes clear that all that he really meant was that the courts approach such defences in a realistic manner. That is true. And it is right. For it is necessary. It is necessary if guarantees are to fulfil their proper role in the business world and, indeed, in all dealings between banks and those dealing with them. Judges are not sceptics; but we are realists.

19. Mr Wong for the Leungs has, with considerable skills as always, taken every point which could conceivably be taken on their behalf. But the plain facts are too strong for them. When things are clear against defendants on their face, there is a limit to how far they can credibly go in seeking to undermine the case against them by exploring background matters which can be made to look controversial. Very often, exactly why people do the things they do readily lends itself to controversy. But it does not always lend itself quite so readily to relevance.

20. I, too, agree with my Lord that this appeal must be dismissed.

Representation:

Mr Ronny Wong, Q.C. and Mr Ronald Mayne (M/s Gallant Y.T. Ho) for Appellants

Mr Warren Chan, Q.C. and Mr Michael Liu (M/s Tang & So) for Respondent