WING HANG BANK LTD v. KIT CHOY DEVELOPMENT LTD AND ANOTHER

HCMP 5172/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 5172 OF 2002

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HCMP 220/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 220 OF 2003

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(Heard together)

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REASONS  FOR  JUDGMENT

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Introduction

1.  This was the trial of consolidated Originating Summons proceedings, issued by Wing Hang Bank, Limited ("the Bank"), against Kit Choy Development Limited ("Kit Choy") and Mr Choy Bing Wing ("Mr Choy").  By these proceedings, the Bank seeks to recover moneys allegedly owing by Kit Choy to the Bank under banking facilities provided by the Bank at Kit Choy's request.  The facilities in question consisted of a total of three irrevocable banker's guarantees, issued by the Bank in favour of third parties on the application of Kit Choy, in order to provide security for costs which had been ordered to be provided to the third parties in two sets of legal proceedings.  In the event, the Bank was called upon to make payments to the third parties pursuant to the guarantees which it had provided, and it is those payments, plus accrued interest thereon, that the Bank now seeks to recover from Kit Choy.  The Bank also seeks to recover those payments from Mr Choy, relying on guarantees given by him to the Bank to secure Kit Choy's obligations to the Bank.  Whereas the claim against Kit Choy is for the whole of the amounts due plus interest, the principal amount of the claim against Mr Choy was limited to the sum of HK$2,223,000 pursuant to a limit which had been inserted in the guarantee on which the Bank relied.  The Bank also claimed, as against Kit Choy, possession of four properties which were the subject of a Legal Charge given by Kit Choy to the Bank on 30 October 1993.

2.  The factual background to these proceedings was set out in some detail in an earlier judgment which I gave on 23 July 2004, in relation to an unsuccessful application by the Defendants to strike out the Bank's claims against them.  As there were few, if any, additional facts that emerged during the course of the trial, I do not propose to repeat them here.  I will, however, refer to the salient facts below, when considering each of the issues which arose for determination in relation to liability and the quantum of the claim.

3.  At the trial, Mr Choy appeared in person.  Although he purported also to represent Kit Choy, no leave to do so had been sought or obtained from the Master pursuant to RHC Order 5 rule 6(2)(b) and (3).  In the circumstances, Kit Choy must be treated as being absent at the trial.  That said, however, as the defences advanced by Kit Choy and Mr Choy were identical, it would not seem to me to be appropriate to enter judgment against Kit Choy if Mr Choy has a good defence to the claims against him that would apply equally to the Bank's claims against Kit Choy.

4.  When the trial commenced, Mr Choy made two preliminary applications seeking (i) directions that the Bank should make available originals of certain documents, which Mr Choy contended were relevant to these proceedings, so as to facilitate the carrying out of forensic examination of fingerprints on such documents on behalf of the Defendants and (ii) directions for the hearing of a proposed counterclaim by the Defendants against the Bank and its solicitors, Messrs P.C. Woo and Co.  Mr Choy also sought a further adjournment of the trial (which had in fact been adjourned from October 2005) for these purposes.  Having heard submissions from Mr Choy and Mr Au, appearing for the Bank, I dismissed both applications, for reasons which are explained in my ruling of 26 July 2006, which has been separately transcribed and provided to the parties.  Half way through the delivery of my ruling, when it was apparent that the applications would be dismissed, Mr Choy, as he had threatened to do should the ruling go against him, left the courtroom and did not return, notwithstanding that the consequence of doing so would be that the trial would continue in his absence.

5.  As Mr Choy had left the courtroom, Mr Au for the Bank proceeded to prove his case in order to obtain the relief which the Bank sought.  For this purpose he relied on a number of affirmations filed by four officers of the Bank, these comprising five affirmations filed by Ms Sheh Ching Man, and affirmations filed by each of Mr Chan Han Wo, Mr Fung Kai Shing and Mr Ma Yu Ling.  On the original date fixed for the trial in October 2005, I ordered that each of the deponents of affidavits in these proceedings should attend at the trial to be cross-examined.  Ms Sheh, Mr Chan, Mr Fung and Mr Ma were all present in the courtroom, and were identified by Mr Au.  However, as Mr Choy had chosen to absent himself from the proceedings, I did not require them to give viva voce evidence, and permitted the Plaintiff to rely on their affirmations, as they were present and available for cross-examination as required by my earlier order.

6.  Although Mr Choy himself was not present, Mr Au nonetheless addressed me on the evidence which he had given in the various affirmations which he had filed in these proceedings, and I shall deal in these reasons for judgment with the various arguments which were put forward in those affirmations.

The orders made at the trial

7.  At the conclusion of Mr Au's submissions, I gave judgment for the Bank, making the following orders:-

(1)	Kit Choy should pay to the Bank the sum of HK$2,822,751.68, together with interest on the sum of HK$2,023,217.09 at 10.921% per annum from 22 July 2006 until 26 July 2006, and with further interest on the total sum due as at 26 July 2006 at the judgment rate from 27 July 2006 until payment.
(2)	Mr Choy should pay to the Bank the sum of HK$2,223,000, with interest thereon at the judgment rate from 27 July 2006 until payment.
(3)	Kit Choy should deliver up to the Bank vacant possession of each of the properties the subject of the Legal Charge dated 30 October 1993.
(4)	Kit Choy should pay to the Bank the Bank's costs of these proceedings, such costs to be taxed on the solicitor and own client basis if not agreed.
(5)	Mr Choy should pay to the Bank the Bank's costs of these proceedings, such costs to be taxed on the party and party basis if not agreed.

8.  I indicated that I would hand down my reasons for judgment in due course.  This I now do.

The Defendant's defences

9.  The Defendant's defences appear principally from the 1^st, 3^rd and 5^th affirmations filed by Mr Choy, and certain additional submissions which he addressed to me in the context of his applications made at the beginning of this hearing.  These can be summarised as follows:-

(1)	The Legal Charge did not apply to the facilities out of which the Bank's claims in these proceedings arise, as there was no agreement between Kit Choy and the Bank to this effect.  Instead, the Legal Charge had been discharged on or after 30 October 1998, on the settlement of previous banking facilities, in the form of an instalment loan, which it had secured.
(2)	The new banking facilities had been cancelled pursuant to instructions given by the Defendants in response to requests for instructions or requests for renewal which the Bank had made from time to time.
(3)	The effect of Kit Choy's failure to countersign a facility letter sent by the Bank to Kit Choy dated 17 January 2001 meant that the facilities no longer existed, and could not be relied upon by the Bank.
(4)	The action being based on an agreement for the disposition of land, it was not enforceable because, contrary to section 3 of the Conveyancing and Property Ordinance (Cap. 219), the agreement was not in writing signed by the party to be charged - in this context, it was Mr Choy's argument that the relevant agreement was the facility letter of 17 January 2001 which Kit Choy had failed to countersign.
(5)	The judgments on which the third parties relied to make calls on the banker's guarantees provided by the Bank to them at Kit Choy's request had been obtained by fraud on the part of the third parties and/or the courts dealing with those proceedings, and Mr Choy having notified the Bank of such frauds, the Bank should not have made payment pursuant to the banker's guarantees, and having done so, must be treated as having made the payments at its own risk, so that it could not recover them from Kit Choy, or from Mr Choy under his personal guarantee.
(6)	The Bank (or Miss Sheh) was guilty of perjury by reason of the failure to disclose the documents evidencing cancellation of the facilities, and for this reason also, should be denied relief.

No agreement that the facilities should be secured by the Legal Charge?

10.  So far as the first defence is concerned, it is the Bank's evidence, principally by Mr Chan, that there was in fact an express agreement between the Bank and Mr Choy (acting for Kit Choy) that the Legal Charge should continue to be held by the Bank as security for any liability of Kit Choy's that might arise as a result of the provision by the Bank of the banker's guarantees at Kit Choy's request.  Mr Chan said that although it was correct that the original instalment loan secured by the Legal Charge had been fully repaid, and that the Bank had given instructions to its solicitors to prepare a discharge of the Legal Charge, in early December 1998, before the discharge was prepared or executed, Mr Choy contacted him and indicated that Kit Choy wished to obtain fresh facilities in the form of the banker's guarantees, and would offer the property as continued security for any liabilities that might accrue to it.  Mr Chan says that having regard to the value of the properties, which was many times the value of the banker's guarantees that were sought, he agreed to this proposal, and gave instructions to the Bank's solicitors by letter dated 7 December 1998 to cease work on the preparation of the discharge of the Legal Charge, and to return the Legal Charge and title deeds of the properties to the Bank.  Thereafter, formal applications for the issue of the banker's guarantees were made by letters dated 21 December 1998, 6 January 1999 and 28 January 1999, in each case supported by resolutions of the directors and shareholders of Kit Choy, respectively dated 21 December 1998, 4 January 1999 and 25 January 1999.  A facility letter referring to the first two of the banker's guarantees, which made it clear that the Legal Charge was to stand as security for them, was also sent to Kit Choy on 22 December 1998, and was countersigned by way of acceptance by Kit Choy.

11.  For his part, Mr Choy's evidence was that there was no such agreement.  He contended that the Bank had agreed to make the banker's guarantees available purely on the basis of its assessment of Kit Choy's and his own creditworthiness.

12.  In my view, the Bank's evidence must be preferred to that of Mr Choy.  The contemporaneous documentation clearly supports the Bank's version of events.  Further, the conduct of Mr Choy thereafter is also supportive of the Bank's version of events.  Moreover, the inherent probabilities of the situation point to the Bank's version being the true one.

13.  Perhaps the clearest indication that the Legal Charge was to stand as security for the facilities to be granted by the issuance of the banker's guarantees is the facility letter of 22 December 1998.  So far as material, it states:-

"	The aforesaid facilities [that is, the first two banker's guarantees] are subject to the following terms and conditions:-
"	As securities we continue to hold:
	(1)	A first legal charge executed in our favour for General Banking Facilities for unlimited amount on the property located at Portions 3E, 7A, 9A2 on G/F, 1/F (Whole Floor), Fok Lin Bldg. Nos. 7-21 Baker Court, Hunghom, Kowloon by Kit Choy Development Ltd [that is, the Legal Charge].
"	As further securities, we require:
	(2)	Mr Choy Bing Wing will execute a Personal Guarantee in favour of the Bank for HK$1,695,000, together with accrued interest.  You agree to and authorize the Bank's supply to the guarantor, at any time without the need of consulting you before doing so, with a copy or summary of the contract evidencing the obligations to be guaranteed or secured, a copy of any formal demand for overdue payment and a copy of the latest statement of account and other related documents that are sent to you."

14.  The important part of these passages is, of course, the reference to the continued holding of the Legal Charge.  This clearly indicates that the Legal Charge was not discharged, and remained in place as security for the banker's guarantees.  The facility letter was countersigned by Mr Choy for Kit Choy.  No explanation has been provided as to why he should have done so, if it was not in fact the agreement between Kit Choy and the Bank that the Legal Charge should continue to be available as security for the Bank.

15.  Further, the fact that the Bank first instructed its solicitors to prepare a discharge of the Legal Charge, and then, on 7 December 1998, cancelled those instructions and called for the return of the Legal Charge and the title deeds of the properties is also, to my mind, strongly supportive of the Bank's case.

16.  Apart from these matters, if it truly were the case that there was no agreement for the Bank to continue to hold the Legal Charge as security for the new facilities granted by way of the banker's guarantees, it is to say the least surprising that no request for the return of the title deeds was made for some considerable time after the facilities were made available.  If the Legal Charge was not to stand as security for such facilities, there would have been no basis for the Bank not to have executed the appropriate discharge and returned the title deeds of the properties to Kit Choy.  Not only was this not done, there is no evidence of the Bank having been asked to follow up on this.  This silence on the part of Kit Choy at the relevant time is also strongly supportive of the Bank's case.

17.  Finally, it does seem to me that the inherent probabilities of the situation favour the Bank.  It seems to me improbable that the Bank would release security which it held, and make the facilities available on a substantially unsecured basis, when it could easily retain valuable security which would cover its exposure under the new facilities many times over.

18.  In the circumstances, I have no hesitation in accepting the Bank's version of events, and rejecting that put forward by Mr Choy.  I therefore find that it was expressly agreed that the Legal Charge should stand as security for the new facilities to be provided by way of banker's guarantees to be issued to the third parties.

Facilities cancelled?

19.  Mr Choy's second argument was that the Bank having sought Kit Choy's instructions as to whether or not to renew the banker's guarantees, it was bound by Kit Choy's instructions not to renew them, so that Kit Choy was thereafter released from liability in respect of them.

20.  It is indeed the case that the Bank sought such instructions from time to time.  The Bank's evidence was that requests for renewal were made because it was its practice to levy a commitment fee on a periodic basis for the provision of the banker's guarantees.  Where the client indicated a desire to terminate the facility, steps would be taken to ask the beneficiary to surrender the guarantee for cancellation.  However, where the beneficiary did not do so (as was the case here), the banker's guarantees could not be cancelled (being unconditional and irrevocable) save in accordance with their terms, and in such circumstances, notwithstanding the client's desire to terminate the facility, it could not be terminated, and the client would remain liable in the event of a call being made on the banker's guarantees (as happened here).

21.  In my view, it is clear from the terms of the request by Kit Choy to issue the banker's guarantees that it was both aware of and consented to the terms in which the banker's guarantees were drawn.  Each of the letters of instruction addressed to the Bank is in the following terms:-

"	Dear Sirs,
	We hereby request and authorise you to issue a banker's guarantee to [name of beneficiary] for account of [the other party to the proceedings] to the amount of [amount stated] in the form of the draft a copy of which is annexed hereto and has been initialed for the purpose of identification.
	In consideration of your giving the above guarantee, we for ourselves and our legal representatives undertake to reimburse you and your successors on demand for any liability that may arise under the terms contained in the guarantee and will at all times keep you and your successors indemnified against all liabilities actions proceedings claims damages costs and expenses in relation to or arising out of the guarantee.
	..."

22.  The extracts of the minutes of the relevant shareholders' and directors' meetings of Kit Choy, which set out the resolutions by which it was resolved to apply for the banker's guarantees, also make reference to the guarantees having been tabled at the meetings.

23.  The Bank also put in evidence the draft banker's guarantees themselves, from which it is apparent that draft guarantees were in fact available to Kit Choy, and were in terms identical to those eventually issued.  What is more, in relation to the second of the banker's guarantees, the draft took the form of the first guarantee, marked up with the appropriate changes.

24.  In these circumstances, there can be no doubt that Kit Choy and Mr Choy were well aware of the exact terms of the banker's guarantees which the Bank was to issue.  It is abundantly clear from those terms that the banker's guarantees could not be unilaterally cancelled by the Bank, and were in fact terminable only on the happening of a limited number of specified events.  Kit Choy and Mr Choy must therefore have been aware that the banker's guarantees were not capable of unilateral cancellation, and cannot therefore have reasonably understood the Bank's requests for instructions as entitling them to call for such unilateral cancellation of the guarantees (and I do not think that they did so understand them).  I therefore do not consider that this argument assists Kit Choy or Mr Choy.

Failure to sign facility letter dated 17 January 2001

25.  As for Mr Choy's third argument, this was no more than a variation of the second.  It seems to me that the existence or absence of a facility letter is strictly speaking irrelevant.  Kit Choy's liability arose from their request to the Bank to issue the banker's guarantees.  Once issued, for the reasons which I have explained above in relation to the second argument, the banker's guarantees could not be cancelled except in accordance with their terms, and Kit Choy's potential liability could not be unilaterally avoided.  The failure to sign the facility letter of 17 January 2001 thus cannot have the effect of releasing Kit Choy from its liability to the Bank.  Even if the failure to sign were to be considered as an implicit request to cancel the facilities, such a request would be ineffective, for the reasons which I have given above.

Lack of written agreement signed by Kit Choy?

26.  Mr Choy's fourth argument was that there was no agreement in writing signed by Kit Choy so as to satisfy the requirements of section 3 of the Conveyancing and Property Ordinance (Cap. 219).  It appeared that Mr Choy regarded the facility letter of 17 January 2001 as constituting the operative agreement.  It did not.  The relevant agreement for present purposes is the Legal Charge.  That document was clearly in writing, signed by Kit Choy.  That being so, there is nothing in this argument.

Alleged fraud on the part of beneficiaries and/or the courts

27.  As for the argument based on alleged fraud in the obtaining of the judgments pursuant to which calls were made on the banker's guarantees, the burden of proving such fraud, and of knowledge of it on the part of the Bank rests squarely with Mr Choy.  However, apart from the bare assertions in his affirmations and in correspondence exhibited to them, Mr Choy has put nothing before the court which could begin to justify such assertions.  Mere assertions of fraud on his part, however passionately he may believe in them, are quite insufficient to justify the Bank in declining to pay under the banker's guarantees.  There being valid and subsisting judgments in favour of the beneficiaries, the Bank was in no position to resist payment, and was both entitled and bound to make payment to the beneficiaries under the banker's guarantees.  This argument therefore fails also.

Perjury by Bank's witnesses?

28.  Finally, in relation to the last argument which I understood to be advanced, this is of no assistance to Kit Choy and Mr Choy either.  As I explained in my Ruling of 26 July 2006, there is no obligation of full and frank disclosure in the context of inter partes proceedings.  Nor do I think that the Bank's failure to refer to the documents mentioned by Mr Choy (being the instructions to cancel the facilities, and the unsigned facility letter of 17 January 2001) can be regarded as in any way improper, given that the Bank's position was that such documents provided, as I have held, no defence to the Defendants.

29.  In these circumstances, I would reject all of the arguments put forward by Mr Choy.

Liabilities covered by the Legal Charge

30.  Although Mr Choy did not take the point, I also considered whether or not the Legal Charge covered the liabilities undertaken by Kit Choy when it requested the Bank to issue the banker's guarantees.  Mr Au took me through the provisions of the Legal Charge, and I am satisfied that it does cover such liabilities.  It is clear from the requests for the issuance of the banker's guarantees which I have set out above that Kit Choy undertook to indemnify the bank in relation to any expense to which it might be put as a result of providing the banker's guarantees to the third parties.  So far as the Legal Charge is concerned, Mr Au relied on Clauses 1.01 (vii), 2.01(i), (ii)(c), (ii)(d), (iv), (viii) and (xi).

31.  Clause 1.01(vii) defines "Secured Indebtedness" as:-

"all sums from time to time advanced by the Lender [the Bank] to the Borrower [Kit Choy] and outstanding and [sic] interest thereon and all other money and obligations in respect of moneys which the Borrower covenant to pay to the Lender under the terms of this Charge".

32.  Clause 2.01 is headed Covenant for Repayment of Secured Indebtedness.  It, together with sub-clauses (i) and (xi), provides:-

"	2.01	In consideration of the Lender agreeing to grant to the Borrower the general banking facilities applied for, the Borrower HEREBY COVENANT with the Lender that, subject as hereinafter provided, the Borrower will ON DEMAND, by notice in writing of the Lender made to the Borrower, PAY make good and discharge to the Lender:
		(i)	all sums of money which at the date of such demand may be outstanding and according to the books of the Lender payable by the Borrower to the Lender in respect of any account whatsoever between the Borrower and the Lender; ...
		(xi)	all moneys for the time being owing to the Lender in respect of any liability whatsoever of the Borrower to the Lender which may be incurred or arise in any manner howsoever, whether the actual conditions under which such liability may be incurred or arise have or have not been specifically mentioned and provided for by the agreements covenants and conditions in this Charge and whether such liability shall be a liability incurred or arising:-
			(a)	under circumstances or conditions incidental to any form of contractual relationship between the Borrower and the Lender which comes properly or strictly within the meaning of the term "general banking facilities"; or
			(b)	under circumstances or conditions incidental to any other form of contractual relationship whatsoever; or ..."

33.  In my view, the liability of Kit Choy under the terms of its request to the Bank to issue the banker's guarantees clearly falls within Clauses 2.01(i) and (xi)(a) and (b), and as such is part of the Secured Indebtedness under the Legal Charge.

34.  The amount of the current indebtedness is set out in Ms Sheh's 5^th affirmation, made just before this hearing to bring the figures relating to Kit Choy's indebtedness to the Bank up to date.  That evidence established that as at 21 July 2006, the indebtedness of Kit Choy was HK$2,822,751.68, inclusive of accrued interest, with interest continuing to accrue on the principal sum of HK$2,023,217.09 at 10.921% per annum.  So far as the interest and the interest rate is concerned, this too forms part of the Secured Indebtedness pursuant to Clause 2.01(xii) of the Legal Charge, which provides that the Secured Indebtedness includes:-

"Interest on all sums advanced and all other moneys payable hereunder at such rate(s) per annum as is/are applicable under the terms relating to any facility(ies) granted to the Borrower or as determined by the Lender which determination shall be conclusive and binding on the Borrower. ..."

35.  No interest rate having been specified in the facility letter or elsewhere, it was therefore open to the Bank to make a determination as to the rate of interest to be charged.  It would appear from Miss Sheh's evidence that the Bank has determined to charge interest on the outstanding amounts at effectively the judgment rate from time to time.

36.  For these reasons, I gave judgment for the Bank as against Kit Choy in the terms set out in paragraph 7(1) above.  Further, as the right to possession of the properties had arisen, I also made the order for possession mentioned in paragraph 7(3) above.

Liabilities covered by Mr Choy's guarantee

37.  As for Mr Choy's position, the personal guarantee relied upon by the Bank is that dated 28 January 1999.  It equally clearly covers (by Clause 1 thereof) the liabilities of Kit Choy pursuant to the latter's requests for the issuance of the banker's guarantees.  However, that clause also provides that Mr Choy's total liability under the guarantee should be limited to "the sum of HK$2,223,000 together with interest at such rate as may be from time to time fixed by the Bank on all such debts and liabilities aforesaid to the date of payment ..."

38.  Although Mr Au suggested that this formulation might well entitle the Bank to recover the same amount from Mr Choy as from Kit Choy, on the basis that the principal amount of the liability of Kit Choy was under HK$2,223,000, he indicated that the Bank would be content with judgment against Mr Choy for the sum of HK$2,223,000 only.  In the light of that indication, I gave judgment against Mr Choy for that amount, as indicated in paragraph 7(2) above.

Costs

39.  So far as costs were concerned, Clause 17.01(ii) of the Legal Charge provided for the recovery of legal expenses incurred by the Bank in suing for or recovering any sum due from Kit Choy to it and in enforcing the Legal Charge on the solicitor and own client basis.  However, the guarantee signed by Mr Choy did not contain any provision as to the basis on which costs should be assessed.  In those circumstances, it seemed to me that while both Kit Choy and Mr Choy should be ordered to pay the Bank's costs of these proceedings, having unsuccessfully resisted the Bank's claims against them, it would be appropriate to award costs against Kit Choy on the solicitor and own client basis which was expressly agreed upon, but that costs as against Mr Choy should be ordered on the usual party and party basis only.