THE DAIWA BANK, LIMITED v. KIN SON ELECTRONIC (HOLDINGS) COMPANY LIMITED (IN LIQUIDATION) and Others

1995 No. A9113

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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J U D G M E N T

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1. The Plaintiff in this action, Daiwa Bank claim a sum of $11 million against 1st Defendant, Kin Son Electronics (Holdings) Ltd., 2nd Defendant, So Kin Keung, the Chairman of Kin Son Electronics (Holdings) Ltd. and 3rd Defendant, Yeebo (International Holdings) Ltd. Judgment in default was entered against the 2nd Defendant. The Plaintiff have withdrawn the action against the 1st Defendant who is in liquidation. The present proceedings are against the 3rd Defendant only.

2. The Plaintiff's case against the 3rd Defendant is that the money claimed was the loans and bank overdrafts granted by the Plaintiff to the 1st Defendant. The 3rd Defendant executed a corporate guarantee in favour of the Plaintiff in consideration for the loans and bank overdrafts being granted to the 1st Defendant by the Plaintiff. The 1st Defendant had defaulted in repayment of the loans. Pursuant to the corporate guarantee the Plaintiff demanded the 3rd Defendant for the repayment of the loans.

3. The corporate guarantee on which the Plaintiff based their claim is one purported to have been signed by Yeebo's Chairman Mr. Mackie Hui and one Miss Kitty Ma, a lady whom the Plaintiff allege was the secretary of the 3rd Defendant. The case is dependent on whether the corporate guarantee is binding on the 3rd Defendant. The 3rd Defendant's position has always been and so is their defence, that the signatures on the corporate guarantee are forgeries and that there is no company resolution authorising the execution of the guarantee in favour of the Plaintiff. Further, the guarantee was not executed in accordance with the requirements of the 3rd Defendant's By-laws and Memorandum of Association. The 3rd Defendant are not liable for the loans to the 1st Defendant.

4. Prior to the hearing, the Defendant had informed the Plaintiff that the signatures were not genuine. The Defendant had obtained handwriting expert opinion on the genuineness of the disputed signatures on the corporate guarantee and the conclusion from the expert was that these were forgeries. The expert opinion was made available to the Plaintiff after the issue of the writ. The Plaintiff agreed to the contents of the Defendant's expert report. The Plaintiff then consulted their own expert on handwriting. As a result, the Plaintiff did not see fit to rely on the evidence of their own expert. Statutory declarations by Mr. Hui and Miss Ma to the effect that they had not signed the corporate guarantee and that Miss Ma was not the Company Secretary of the 3rd Defendant were sent to the Plaintiff.

5. Nevertheless the Plaintiff persisted in proceeding to trial despite such evidence. After the Plaintiff's case, the Plaintiff's claim was dismissed by consent.

6. At the trial, Mr. Tam, the manager of the Central Branch of the Plaintiff testified that at the time he received the corporate guarantee he believed that the signatures on it were genuine. He based his belief on the fact that the instrument was delivered to him by the 2nd Defendant, So Kin Keung, the Chairman of Kin Son Electronics and that the bank had business transactions with Kin Son Electronics. He had no reason to suspect the signatures were forgeries. However, the evidence produced by the Plaintiff now proved to be otherwise.

7. The signatures on the corporate guarantee and on the resolution have not been shown to be the signatures of Mr. Hui and Miss Ma. The corporate guarantee has not been shown to have been signed by a director and the company secretary of the 3rd Defendant as required under their Memorandum of Association and By-laws. The evidence is, contrary to the case of the Plaintiff, that these signatures are not the genuine signatures of Mr. Hui and Miss Ma. Mr. Tam admitted in court that in the light of the Defendant's expert opinion and as a result of the opinion of the Plaintiff's own expert he could not now say that the disputed signatures were those of Mr. Hui and Miss Ma. There is no other evidence to support the Plaintiff's case that the instruments were executed by and on behalf of the 3rd Defendant in consideration of the Plaintiff granting banking facilities and loans to the 1st Defendant. It would appear strange that the Plaintiff as a bank should have accepted the corporate guarantee as genuinely executed purely on the basis that it was the Chairman of the 1st Defendant who took the executed instrument to them. The Plaintiff took no trouble to check with Mr. Hui or make company search to ascertain the genuineness of the signatures when they received no formal response from the banks to which they made enquiry. It is, I believe, in the light of the Plaintiff's evidence before the court that the Plaintiff have consented to the dismissal of their case.

8. The Plaintiff were well aware of the position that the instruments could have been signed by persons other than Mr. Hui and Miss Ma before they issued proceedings against the 3rd Defendant. They were better informed on this after the issue of the writ when their own expert opinion was available to them. Any doubt that these signatures were not those of Mr. Hui and Miss Ma, was removed by the two Statutory Declarations of Mr. Hui and Miss Ma which are not disputed by the Plaintiff. The Plaintiff must have known by that time their claim must fail if they were to continue its prosecution. Nevertheless, the Plaintiff insisted to pursue the action knowing the likelihood of success is remote. The whole purpose of continued prosecution of the action against the 3rd Defendant is to enable the Plaintiff to obtain a judgment from the court to obtain a reduction in tax when writing off the amount under claim as bad debt under the Japanese tax system, regardless of the expense and inconvenience and possible damage that may be caused to the 3rd Defendant. This motive was admitted by the Plaintiff through Mr. Tam. The 3rd Defendant was dragged into these proceedings which should not have been initiated and if it had, should have stopped short of proceeding to trial when the position became clear.

9. The cases of Overseas Trust Bank Ltd. v. Coopers & Lybrand (a firm) and others [1991] 1 HKLR 177,Burgess v. Stafford Hotel Ltd. [1990] 3 All ER 222,Lau, Wong & Chan (a firm) v. Famous Investment Co. Ltd. and others [1991] 1 HKLR 115 are all based on facts different from the present case. They can be distinguished. But the principles in the OTB case should apply when considering whether I should exercise my discretion to award costs on an indemnity basis.

10. This is a case falling squarely within the categories of cases which the court will order costs on an indemnity basis. The present proceedings were issued and prosecuted with an ulterior motive and in circumstances as to constitute an affront to the court. A motive to obtain a judgment to facilitate the Plaintiff to secure a financial tax benefit which is extraneous to the matter in dispute, at the expense and inconvenience of the other party where the chances of success are very unlikely is an example of ulterior motive where it is proper for the court to order costs on an indemnity basis.

11. In coming to this conclusion, I have disregarded the fact that the 3rd Defendant is a plc and I have placed no weight on the evidence of Mr. Lunning on the fall in share prices. I do not regard these would in any way affect the conclusion.

(A. Leong)

Judge of the High Court