ETERNALMIN ENTERPRISE LTD. v. TRIPLEDAY LTD. AND ANOTHER

HCA8645/97

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 8645 OF 1997

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J U D G M E N T

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The parties

1. The two main players in this case are Mr Poon Hung Cheong Nelson ("Mr Poon") and Mr Ching Chi Wai ("Mr Ching") (the 2nd Defendant). They knew each other when they were studying in an university in Canada in the 1970's. In 1987, they teamed up as partners in business and set up the 1st Defendant. Mr Ching held 75% of its shares while Mr Poon held 25%. They were the two directors of the 1st Defendant.

2. The business of the 1st Defendant was to supply clothing to a US customer. The 1st Defendant obtained the fabric for the clothing from the Plaintiff of whom Mr Poon is a director and shareholder.

The agreement

3. The business of the 1st Defendant, however, was not doing well. In early 1996, Mr Poon suggested closing down the 1st Defendant. Mr Ching did not express any opinion at that time. In June 1996, Mr Poon raised the topic again. Mr Ching suggested that he would carry on with the business of the 1st Defendant and he asked Mr Poon to sell his shares to him. He promised to pay personally the debt of 1st Defendant to the Plaintiff.

4. Mr Poon agreed. He also agreed to give up his shareholding to Mr Ching and resigned as a director of the 1st Defendant. Mr Ching asked for one year to repay. Mr Poon agreed. The parties agreed to have everything settled on 30th June.

5. Mr Poon instructed an accountant, Mr Chu, who is also acquainted with both of them, to prepare a guarantee. A Letter of Guarantee ("the Guarantee") was signed by Mr Ching on 1st July 1996 promising to repay $2,437,279.65 to the Plaintiff on or before 1st July 1997. In turn Mr Poon resigned as a director and transferred his shares to Mr Ching and Mr Ching's mother.

6. Mr Ching did not pay the Plaintiff the money under the Guarantee. The Plaintiff now sues on the Guarantee. The Plaintiff had earlier obtained judgment against the 1st Defendant.

Was there an agreement that Mr Ching would be personally liable?

7. A number of issues arise from this claim. The first issue is whether there was any agreement that Mr Ching was personally responsible for the debt of the 1st Defendant. Mr Ching stated that he felt sorry for causing loss to the business of the 1st Defendant and he was non-committal when Mr Poon raised the matter concerning the 1st Defendant. He was embarrassed and did not want to think about the matter.

8. In my view Mr Poon is a truthful witness and I accept his evidence that an agreement was reached between him and Mr Ching that Mr Ching would be personally liable for the liability of the 1st Defendant.

9. I further accept Mr Chu's evidence that when he was asked to prepare the Guarantee, he had confirmed from both Mr Poon and Mr Ching that they had agreed to deal with the liability of the 1st Defendant in this manner. Mr Ching was prepared to adopt this course notwithstanding Mr Chu's advice that a better approach was simply to wind up the 1st Defendant. I accept that Mr Chu had received from Mr Ching documents relating to the resignation by Mr Poon as a director and minutes of meetings of the 1st Defendant dated 13th and 15th May 1996 respectively, duly signed by Mr Ching, approving the transfer of shares. Mr Ching clearly prepared these documents pursuant to the agreement reached earlier.

The Guarantee

10. The Guarantee is in these terms :

"LETTER OF GUARANTEE

THIS AGREEMENT is made the 1st day of July, 1996 Between ETERNALMIN ENTERPRISES LIMITED whose registered office is situate at 153-155, Ki Lung Street, Kowloon (hereinafter called 'the Creditor') of the one part and Mr. Ching Chi Wai who is a shareholder/director of TRIPLEDAY LIMITED residing at 111, Robinson Road, 6th Floor, Hong Kong (hereinafter called 'the Guarantor') of the other part.

WHEREAS :

TRIPLEDAY LIMITED (hereinafter called 'the Company') is indebted to Eternalmin Enterprises Limited in the sum of HK$2,437,279.65 as per Exhibit 'A' attached. To enable the directors of the Company to make its creditor the comfort of settlement of debt, the Guarantor has agreed to give this guarantee.

IT IS HEREBY AGREED as follows :-

The Guarantor irrevocably and unconditionally guarantees to pay in full for and on behalf of the Company to Eternalmin Enterprises Limited upon on demand for the payment of residue balance or whatever amount due to them by the Company at 1st July, 1997 (subject to the subsequent deduction of reasonable claims from the customers of the Company, if any) which the Company might be unable to pay off the debt in full to them as at 30th June, 1997 and the Company shall not be liable to reimburse the Guarantor in respect of any such payments made by the Guarantor.

IN WITNESS WHEREOF the Guarantor has set his hands and seals the day and year first hereabove written.

SIGNED AND SEALED AND DELIVERED

by the Guarantor in the presence of :-

Mr. David Chu"

Intention to enter legal relation

11. Mr Ching said that the document was merely a comforting letter to the Plaintiff. He suggested that he had no intention to enter into legal relation with the Plaintiff.

12. The title of the document signed by Mr Ching is called "Letter of Guarantee". The nature is clearly an undertaking by Mr Ching to be personally responsible for the debt of the 1st Defendant. He is described as the guarantor and he "irrevocably and unconditionally guarantees" the payment.

13. The Guarantee was drafted by a non-lawyer. It was also badly drafted. However, the meaning is clear: it is an agreement by Mr Ching to be personally responsible for the money owing by the 1st Defendant to the Plaintiff at 1st July 1997. The words in the Recital of the Guarantee stated that "To enable the directors of Company (i.e. the 1st Defendant) to make its creditor (i.e. the Plaintiff) the comfort of settlement of debt". While this may be suggestive of some sort of comfort letter, one has to construe the document as a whole to ascertain its true intention.

14. The words "for and on behalf of the Company" in the operative clause are superfluous. All that they mean is that Mr Ching was to be responsible for the debt of the 1st Defendant. It does not mean, as contended in the Defence, that Mr Ching was to pay as agent for the 1st Defendant and therefore he was not personally liable. In my view Mr Ching was responsible for the payment.

15. The signing of the Guarantee by Mr Ching was obviously pursuant to the agreement reached earlier with Mr Poon. Mr Ching said that the first time he read the Guarantee was when he signed it before Mr Chu. I do not accept this. I accept Mr Chu's evidence that a draft was sent to Mr Ching by fax and he had inserted an additional clause, namely "subject to the subsequent deduction of claims from the customers of the Company if any". Mr Ching must have considered the draft beforehand.

16. Mr Ching is an experienced businessman. He is also highly educated. He graduated from a university in Canada with two degrees. There is no question of him not knowing what he had signed. Nor is there any question of mistake. Obviously he knew what he was doing.

17. In an ordinary commercial transaction, the burden of proving that there is no intention to create legal relation is on the party who asserts that no legal effect was intended : Kleinwort Benson v. Malaysia Mining Corporation Berhad [1989] 1 WLR 379. Mr Ching simply fails to discharge this burden. If he was not signing a guarantee, then what was he signing before Mr Chu? The only answer is that he signed and he knew that he was signing a guarantee.

Uncertainty

18. It was pleaded in the Defence that the liability was uncertain because the payment by Mr Ching was subject "to the subsequent deduction of reasonable claims from the customer of the Company, if any". I disagree. The maximum liability of Mr Ching was known when the guarantee was signed, namely HK$2,437,279.65. The amount that Mr Ching would be liable would be the amount that was due to the Plaintiff on 1st July 1997. The amount that was due was subject to deduction if the 1st Defendant's customers had made claims against the 1st Defendant. The claims can be ascertained. Whether the claim is reasonable or not can also be ascertained. While the Guarantee was indeed badly drafted, I do not think the terms were so uncertain as to render the document totally meaningless and of no effect.

Consideration

19. Although the Guarantee contained the words "signed, sealed and delivered", it was not actually sealed. It is not necessary for me to express any view whether this document is in the nature of a deed and hence consideration is not necessary.

20. In my view, the Guarantee is clearly supported by consideration. Extrinsic evidence may be admitted to show want of or failure of the consideration stated to have been given in a written instrument: paragraph 12-093 Chitty on Contracts 27th Edn., Vol. 1; Pao On v. Lau Yiu Long & Ors [1973-1976] HKC 377 and [1980] AC 615 Privy Council. At the time the Guarantee was made, it is accepted that the 1st Defendant owed the Plaintiff $2.4 million. Time was given by the Plaintiff to the 1st Defendant to repay the money within one year. Indulgence was granted and consideration was furnished by the Plaintiff. Mr Ching became the majority shareholder of the 1st Defendant as a result of this settlement. Mr Ching argued that the shares had no value at all because of the loss of the 1st Defendant. By taking up the shares he was merely assuming further liability. It is not a benefit to him to receive the shares. In my view, the transfer of the shares is part and parcel of the overall settlement between the parties. Mr Ching controlled the company as a result of the transfer. There is clearly consideration for the Guarantee. It is helpful to refer to Law of Guarantees by Andrews and Millett, 2nd Edn., 1995 at 2.11 :

" It has been said that the consideration given for the guarantee has to be real rather than illusory. Nevertheless, Wilmot J's observation in Pillans and Rose v Van Mierop and Hopkins (1765) 3 Burr 1664 at 1666 that 'the least spark of a consideration will be sufficient' is especially apposite in the modern commercial climate, for courts are extremely reluctant to conclude that a commercial transaction which the parties plainly intended should be binding and enforceable should fail for want of consideration. Similarly, if there is ambiguity as to the nature of the consideration given, the courts will normally favour a construction which will support the obligation.

The court will not inquire into the value of the consideration given; it need not be of commensurate value with the promise."

Variation

21. After the Guarantee was signed, the Plaintiff and the 1st Defendant carried on trading. By May 1997 new trading debt amounted to $1,295,000 was owing by the 1st Defendant.

22. A meeting was held on 15th May 1997 between Mr Poon and Mr Ching on the repayment of both the new debt and the old debt of $2,437,279.65. Mr Ching said that he was only able to pay one of the debts. He was reluctant to release the cargo receipt so as to enable the Plaintiff to receive payment under a letter of credit issued by the 1st Defendant in respect of new transactions between the parties. Eventually, Mr Poon agreed to give a discount for the new debt, and also a further 25% discount to the old debt and gave time to Mr Ching to repay the old debt.

23. Mr Ching wrote on the bottom of the Guarantee the new agreement reached on the old debt, namely, the net amount was 75% of $2,437,279.65. 20% thereof would be paid in July 1997 and the balance to be paid before the end of 1997. Mr Ching and Mr Poon signed their names to this new agreement.

24. In my view, the discount of 25% was clearly an indulgence granted by Mr Poon to Mr Ching. The obligations between the parties were mutual in nature. This discount was clearly conditional upon Mr Ching paying 20% of the debt in July 1997. He did not pay this amount or any other amount. There was some suggestion that the discount was given because of claims by the customers of the 1st Defendant. I accept Mr Poon's evidence that this was not the case. The discount was given simply as an indulgence to Mr Ching.

25. Further I do not agree that the new agreement was made between the Plaintiff and the 1st Defendant, and not between the Plaintiff and Mr Ching personally. The discussion was in respect of the earlier agreement he had reached with the Plaintiff on his personal liability to repay the money to the Plaintiff. Mr Ching had brought along the Guarantee to the meeting; he drafted and inserted the new term on the Guarantee itself. He did not try to qualify his signature by saying he signed on behalf of the 1st Defendant. It is clear that the discussion was made because Mr Ching was concerned about his personal liability under the Guarantee which was due on 1st July 1997.

26. Even if the new agreement had the effect of varying the obligation of the 1st Defendant by enlarging the time for repaying the debt, nonetheless, I find that Mr Ching is still liable under the Guarantee. As a Guarantor, he agreed to the variation. In O'Donovan and Phillips, The Modern Contract of Guarantee (3rd Edition) 1996, p.368 it is stated that :

"Consent by the guarantor to the giving of time

Even if there is no term in the guarantee by which the guarantor agrees to, or authorises, an extension of time, the guarantor will not be released if he or she consents to the giving of time to the principal before the extension is given."

27. In Asian International Acceptance & Capital Ltd v. Samuel Macomber Churn [1976] HKLR 956 at page 962, it is stated that :

"As to the giving of time, we think it is settled law that if the surety has given a personal undertaking to pay the loan to the creditor, an agreement between him and the principal debtor would operate to discharge the surety if it were made without his knowledge and consent."

Conclusion

28. In my view the Plaintiff has established its claim. The Plaintiff is entitled to judgment in the sum of $2,437,279.65. There shall be interest at 11.68% per annum on this sum from the date of the service of the writ to judgment, and thereafter at judgment rate until payment. The Plaintiff is to have costs nisi of the action.