廣東匯立投資有限公司 v. WONG MAN PAN

HCA 10027/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 10027 OF 2000

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D E C I S I O N

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Appeal

1. This is an appeal by the Defendant against the decision of Master Wong given on 29 June 2001 upon the Plaintiff's application for summary judgment. In this action, relying upon a Letter of Irrevocable Guarantee in Chinese dated 1 August 2000 ("the Guarantee"), the Plaintiff claims against the Defendant the outstanding amount of a loan advanced by the Plaintiff to one "廣州市金隆地產發展有限公司" (Long Age Jim Long Estate Development Co. Ltd. or LAJL) and accrued interest thereon in the sum of RMB20,772,308.63, and interest thereon. By the decision, it was ordered as follows ("the Order"):

(1) Judgment be entered against the Defendant for RMB16,192,940.00 or its equivalent to Hong Kong Dollars at the time of payment and interest thereon at judgment rate from 17th November 2000 until payment;

(2) Leave to the Defendant to defend the Plaintiff's claim of interest of the principal sum of RMB30,000,000.00 or such outstanding sum as from 12th November 1999 on condition that the Defendant do pay the said sum of RMB16,192,940.00 to the Plaintiff within 21 days from the date hereof;

(3) Costs of and occasioned by the application for summary judgment be to the Plaintiff, to be taxed if not agreed with a Certificate for Counsel.

On this appeal, the Defendant applies to set aside the Order and asks for unconditional leave to defend the whole of the Plaintiff's claim in the action.

Background

2. The Plaintiff is a limited company incorporated under the laws of the PRC. By a tri-parte agreement in Chinese ("the Loan Agreement"), the Plaintiff agreed to lend to LAJL the sum of RMB30 million for use in the development of a property project in Guangzhou called "世紀廣場" ("Century Square") owned by LAJL. The loan was to be advanced by the Plaintiff to LAJL on or before 5 November 1999 for a period of 6 months from the date of advance (the "loan period") at the interest rate of 10% per annum. The loan was to be repaid together with interest thereon within the loan period. No extension of time was allowed without the Plaintiff's consent. In default of repayment within the loan period, default interest would be calculated at the rate of 15% per annum. The parties to the Loan Agreement were the Plaintiff, LAJL and one "廣州世紀房地產實業有限公司" ("Long Age Real Estate Enterprises Co. Ltd. or LARE"). LAJL and LARE agreed to provide security for the loan to the value of RMB58.3 million in the form of charges over some commercial and residential units owned by LARE. For this purpose, a mortgage agreement was executed. It was further provided that any dispute would be referred to arbitration and that Loan Agreement would be construed in accordance with PRC law.

3. The Loan Agreement was chopped with the seal of one Gao Yeung ("Gao Yeung") as legal representative of the Plaintiff, and signed by the Defendant as legal representative of LAJL and LARE. The Defendant is the Chairman and majority shareholder of LAJL and LARE which are also limited companies incorporated under the laws of the PRC. The Loan Agreement is undated but the Plaintiff claims that it was signed by the Defendant in mid-October 1999 in Guangzhou.

4. There is no dispute between the parties that pursuant to the Loan Agreement a total of RMB30 million was advanced by the Plaintiff to LAJL by three drawdowns on 3 November 1999 and 11 November 1999 respectively.

5. By a supplemental agreement in Chinese dated 21 July 2000 ("the Supplemental Agreement") and effective retrospectively as from 5 May 2000, the loan period was agreed to be extended to 13 August 2000 ("the extended loan period"). During the extended loan period, LAJL was to pay monthly interest to the Plaintiff on the outstanding loan together with accrued interest thereon at the rate of 15% per annum. Within five days of the expiration of the extended loan period, LAJL was to repay the Plaintiff the outstanding loan together with accrued interest thereon. The mortgage agreement was correspondingly extended. LARE agreed to provide additional security in the form of prior charges over 100 car parks owned by LARE in Century Square. The Supplemental Agreement was chopped with the seal of Gao Yeung as legal representative of the Plaintiff, and signed by the Defendant as legal representative of LAJL and LARE.

6. In August 2000, the Defendant signed the Guarantee. The Guarantee refers to the Loan Agreement and states in the recital that the Defendant was willing to grant the Guarantee for the Plaintiff's grant of an extension of time to LAJL to repay the outstanding loan. As provided, the Defendant agreed to act as Guarantor for LAJL guaranteeing, inter alia, that LAJL would abide by and observe the terms and conditions of the Loan Agreement and other supplementary agreement, and would repay to the Plaintiff in Hong Kong the loan together with interest thereon. The Defendant guaranteed to pay what was owned by LAJL to the Plaintiff within 15 days of receipt of the Plaintiff's written notice.

7. There is no dispute between the parties that up to 12 January 2001, there had been partial repayments of the loan and interests thereon. There is however a dispute between the parties as to the circumstances under which the Loan Agreement, the Supplemental Agreement and the Guarantee came into being.

8. On 31 October 2000, the Plaintiff issued a letter of demand for the sum outstanding and the Writ was issued on 17 November 2000. According to the Statement of Claim, as at 31 October 2000 the outstanding amounts of the loan and the accrued interest at the default rate of 15% per annum are RMB20,721,215.22 and RMB51,093.41 respectively. On 14 December 2000, the Plaintiff issued an O.14 Summons applying for summary judgment against the Defendant. The Summons was heard by Master Wong on 29 June 2001 and his decision is the subject of the present appeal.

The Plaintiff's Case

9. According to one Mr. Chiu Tao ("Mr. Chiu"), he was approached by the Defendant sometime in or after 1997 to invest in what later transpired to be the Century Square project. He however expressed no interest in the project. In September 1999, the Defendant asked Mr. Chiu if he could arrange a short term loan in a sum of RMB30 million for use in developing the project. Mr. Chiu acting on behalf of the Plaintiff arranged for the loan to be advanced by the Plaintiff to LAJL under the Loan Agreement.

10. In June and July 2000, i.e., after the expiration of the loan period, Mr. Chiu and one Mr. Yeung Kwok Yu ("Mr. Yeung") went to the Defendant's office in Hong Kong on several occasions to press for repayment of the outstanding loan. In mid-July 2000, the Defendant asked for an extension of time of three months to repay the outstanding loan. On behalf of the Plaintiff, Mr. Chiu agreed to extend the time for repayment to 13 August 2000 on, inter alia, the condition that the Defendant would provide a personal indemnity to pay all outstanding loan and interest due to the Plaintiff in the event that LAJL failed to repay the loan on 13 August 2000. The Defendant agreed to the condition. The agreement was recorded in the Supplemental Agreement which was taken by Mr. Chiu and Mr. Yeung to the Defendant's office on 21 July 2000. Mr. Chiu told the Defendant that the personal guarantee was not ready to be signed at the same time but that the Defendant had to sign the personal guarantee when it was ready. The Defendant agreed and signed the Supplemental Agreement.

11. On 1 August 2000, Mr. Chiu and Mr. Yeung took a copy of the Guarantee (the Plaintiff's chop was already affixed thereon) to the Defendant's office in Hong Kong. The Defendant signed in the presence of Mr. Yeung who also signed as a witness.

The Defendant's Case

12. According to the Defendant, the Plaintiff is owned or controlled by Mr. Chiu, assisted by Mr. Yeung. The Plaintiff operates as a vehicle through which Mr. Chiu lends money to other companies or engages in money lending transactions. The Defendant met Mr. Chiu in 1996 when he was looking for equity partners for the Century Square project. Mr. Chiu was interested and agreed sometime in October 1997 to join as an equity partner. It was agreed that each of them would contribute RMB100 million in the project, and that in return each would own 45% of the shares of LAJL. Mr. Chiu told the Defendant that he would sign a partnership agreement as soon as the Defendant had concluded the negotiation with the Civil Administration Bureau, apparently another potential equity partner for the project. In order to help the Defendant to fund the construction costs of the project, Mr. Chiu arranged a loan of RMB 30 million to be advanced by the Plaintiff to LAJL for a period of six months. This was apparently the subject of the Loan Agreement. The loan was intended to be a short term loan which would be converted into equity upon the signing of a partnership agreement.

13. After the deal was concluded between the Defendant and the Civil Administration Bureau, Mr. Chiu apparently had second thoughts about the investment and suggested to extend the loan period. This apparently led to the Supplemental Agreement.

14. In August 2000, the Defendant's negotiation with Mr. Chiu on the partnership agreement or any other form of cooperation in the project broke down. Mr. Chiu went to see the Defendant in his Hong Kong office, produced a blank copy of the Guarantee and pressed the Defendant to sign, saying that the Guarantee was required to satisfy his bankers and that he would not enforce it in any event. The Guarantee was thus signed by the Defendant. It was subsequently agreed between Mr. Chiu and the Defendant that the loan of RMB30 million would be refunded to Mr. Chiu without interest and on an ex-gratia basis. According to the Defendant, Mr. Chiu knew that inter-corporation financing or borrowing was forbidden under PRC law and that it was illegal to charge interest higher than that prescribed in the PRC.

15. According to the Defendant, when he signed the Guarantee, only Mr. Chiu was in his office. Neither the chop of the Plaintiff nor the signature of the witness Mr. Yeung appeared on the document. He was not given any opportunity to consult independent legal opinion.

The Defences

16. On this appeal, Mr. Beaumont appearing for the Defendant submits that unconditional leave to defend ought to be granted as there are a number of triable issues. Alternatively, he submits that there ought to be a trial for a number of reasons. These issues and reasons can be summarized as follows:

(1) The loan was inherently illegal or void and thus unenforceable. Under PRC law, the Plaintiff was forbidden to lend money to LAJL and it was illegal to charge interest higher than 10% per annum. The Guarantee arising out of an underlying transaction which was illegal or void was also illegal and unenforceable.

(2) There was no consideration for the Guarantee. Alternatively any consideration would have been past considerations.

(3) Mr Chiu was not a legal representative of the Plaintiff.

(4) The Guarantee in itself is oppressive and for that reason unenforceable. The Defendant was deprived of any opportunity to obtain legal advice.

(5) Mr Chiu made various false representations which induced the Defendant to later into the Guarantee.

(6) When the Defendant signed the Guarantee, Mr. Yeung was not present and both Mr. Yeung's signature and the Plaintiff's chop were absent from the document.

The loan and Guarantee are illegal and unenforceable

17. According to the Defendant's PRC lawyer, the Plaintiff was not a company authorized to make loans, and inter-corporation financing and borrowing were forbidden under PRC law. Both the Plaintiff's and the Defendant's PRC lawyers are of the opinion that the Loan Agreement is void and that LAJL should repay the principal of the loan to the Plaintiff. They seem to differ however as to the payment of interest. According to the Defendant's expert, the PRC Court will, depending on the circumstances, decide whether to confiscate the interests earned or to impose a fine (generally not). According to the Plaintiff's expert, LAJL should repay the loan together with interest thereon. Neither expert refers to any specific PRC law or provides any authority to support his statements. The experts also differ as to the rate of interest provided in the Loan Agreement. The Defendant's expert considers that the interest rate was higher than that stipulated by the People's Bank of China and is thus illegal. The Plaintiff's expert however takes a different view. Finally, the experts also differ as to the consequence of the Loan Agreement being void. The Defendant's expert is of the opinion that the Guarantee is void as a result. The Plaintiff expert takes the view that even if the Guarantee is void the Defendant still has to bear the relative civil responsibility under the PRC law.

18. While conceding that both experts state that LAJL should repay at least the principal of the loan to the Plaintiff, Mr. Beaumont submits that any authority does not support that statement and refers to a number of authorities from Hong Kong and other common law jurisdictions to support the proposition that the Guarantee, arising out of an underlying transaction which is illegal or void, is illegal and unenforceable. In Spector v. Ageda [1971] 3 All ER 417, the Plaintiff made a loan to the Defendant to discharge an earlier loan made by another party to the Defendant. The earlier loan to the Plaintiff's knowledge was partially illegal as the agreement provided for the payment of compound interest. The Plaintiff's loan was held unenforceable because it was tainted with illegality. Megarry J. (as he then was) put the following question and answered it in the affirmation:

"..... whether a loan knowingly made in order to discharge an existing loan that was wholly or partially illegal was itself tainted with illegality. A transaction may simply be void, or it may be unenforceable, and in either case other connected transactions may nevertheless be perfectly valid and enforceable. But illegality is another matter, for it may be contagious."

It should be noted that a distinction is drawn between an illegal as opposed to a void transaction. Megarry J. further cited the following statement of Jervis L.J. from Fisher v. Bridges (1854) 3 E&B 642 where there was a purchase by way of an illegal lottery, and subsequently the defendant entered into a covenant with the Plaintiff to pay him some money remaining due:

"It is clear that the covenant was given for payment of the purchase money. It springs from, and is a creature of, the illegal agreement; and, as the law would not enforce the original illegal contract, so neither will it allow the parties to enforce a security for the purchase money, which by the original bargain was tainted with illegality."

Megarry J. went on to make the following observations:

"In that case, the subsequent transaction was between the original parties: but a third party who takes part in the subsequent transaction with knowledge of the prior illegality can, in general, be in no better position."

The principle applies irrespective of whether the Guarantee is in substance a guarantee or an indemnity: Tang & Ors. v. Bilicheer Investment Limited [1999] 1321 HKCU 1.

Mr. Beaumont submits that the Defendant is entitled to adduce further evidence at trial to the effect of the Loan Agreement being illegal or void under PRC law.

19. Mr. Cheung appearing on behalf of the Plaintiff submits that even if the loan is void (he submits that it is not clear on what grounds it is), LAJL still has to repay the principal of the loan to the Plaintiff under PRC law. He submits that LAJL is liable to repay the loan (at least the principal) which is enforceable under PRC law. Consequently, the Defendant is liable on the Guarantee which in effect constitutes an indemnity, citing Yeoman Credit Ltd. v. Latter [1961] 1 WLR 828. The Guarantee, he rightly submits, is governed by Hong Kong law as provided by Clause 12 thereof. The opinion of the Defendant's expert regarding the enforceability of the Guarantee under Hong Kong law is hence inadmissible. He further relies on the Guarantee which provides (Clause11) that its legality, validity or enforceability shall in no way be affected or impaired by the Guarantee (the whole or any provision thereof) becoming illegal, invalid or unenforceable according to the laws of any jurisdiction.

20. There is a dispute between the parties as to the true nature of the Guarantee. The Guarantee is headed and describes itself as a guarantee, and has been so described in the Statement of Claim and the evidence. It's true nature however has to be gathered from the wording of the document and the surrounding circumstances. Mr Beaumont submits that it is in the nature of a guarantee while Mr Cheung submits that is in truth an indemnity. The significance lies in this: if the Loan Agreement is void, the Guarantee will also be void if it is in fact a guarantee; it is enforceable if it constitutes an indemnity: Yeoman Credit Ltd. v. Latter at 830 - 831 citing Coutts & Co. v. Browne - Lecky [1947] KB 104.

21. On the basis of the expert opinions, its would appear that LAJL is liable to repay the principal of the loan and the repayment is enforceable under the PRC law. On this basis, it would matter not if the Guarantee is in truth a guarantee or an indemnity. In either case, subject to the Defendant's submissions on illegality and other submissions, the Defendant would be liable on the Guarantee. It would thus be unnecessary for me to, and indeed I should not, without hearing fuller arguments make any finding as to the nature of the Guarantee.

22. But was the Guarantee tainted with antecedent illegality such that it is not enforceable under Hong Kong law?

Both experts state that the Loan Agreement is void but neither states that it is illegal. The effect of the Loan Agreement being void is however not entirely clear from the expert opinions. The Defendant's expert further states that the interest rate provided in the Loan Agreement is illegal. The effect of this alleged illegality on the Loan Agreement under PRC law is also unclear. Was the Loan Agreement partially illegal? What is the effect of this alleged illegality on the enforceability of the Guarantee under Hong Kong law?

In Spector v. Ageda where the earlier loan was held partially illegal, Megary J. said:

"No authority has been put before me which states the law applicable to a subsequent transaction which is based on a contract which is illegal only in part, and I do not wish to decide more than is necessary to dispose of this case. It seems to me that where, as here, the subsequent transaction is entered into by a person who not only knows of the partial illegality of the prior contract but also is in a real degree responsible for it and wishes to avoid the consequences of it ...., then unless that partial illegality is shown to relate solely to some defined portion of the subsequent transaction, so that only that defined portion is affected, the whole of the subsequent transaction will be affected by the illegality. I cannot see why the court should be astute to limit the effects of the illegality and make some artificial apportionment of the subsequent transaction for this purpose. When the illegality affects only a small part of the prior contract, it may seem somewhat Draconian to hold that the whole of the subsequent transaction is affect by the illegality: but illegality is illegality, and it is not for the courts to devise means of preventing those who are implicated from burning their fingers more than to a limited extent."

Would it make a difference that the alleged illegality arises under PRC but not Hong Kong law? These questions involve mixed questions of law and fact including PRC law do not admit of clear and simple answers. As Bingham L.J. puts it in Crown House Engineering v. Amec Projects Ltd. (1990) 60 Const LJ 141 at 154:

"..... Order 14 is for clear cases; that is, cases in which there is no serious material factual dispute and, if a legal issue, then no more than a crisp legal question as well decided summarily as otherwise ..... The procedure is entirely inappropriate where the plaintiff's entitlement to recover any sum is the subject of any serious dispute, whether of law or fact ...."

The defence of illegality is one for the Defendant to raise and make good. While the Defendant's expert has not given a comprehensive and clear legal opinion providing the answers to these questions under PRC law, I consider that the defence does raise serious issues that should be allowed to go to trial.

Other Defences

23. Mr. Beaumont further submits that there was no consideration to support the Guarantee which was signed by the Defendant some few weeks after the signing of the Supplemental Agreement. Alternatively, he submits that any consideration would have been past consideration. This turns on whether, as claimed by Mr. Chiu, the Defendant requested for an extension of the loan period and agreed before the Supplemental Agreement was signed to provide a personal indemnity. A guarantee of a past debt or transaction is valid if the creditor promises to give time to the principal debtor if he actually does so at the request of the surety: Chitty on Contracts, 28th Edition, Volume 2, para.44-019; see also Pao On v. Lau Yiu Long [1980] AC 614.

Mr. Chiu claims that the Plaintiff would not have agreed to extend the loan period if the Defendant did not agree to provide the Guarantee. The Defendant provides a different version of the events. He claims that the loan period was extended at the suggestion of Mr Chiu who was then having second thoughts about investing in the Century Square project. This defence raises further factual disputes which should be resolved trial. In view of my conclusion on the defence of illegality, I should not say anymore about this or other defences.

Conclusion

24. For the reasons that have been given, I would allow the appeal and set aside the Order, and grant the Defendant unconditional leave to defend this action. I also make the following order nisi as to costs: the costs below be in the cause and the costs on appeal be to the Defendant with a certificate for counsel.