KIWAIT ASIA BANK E.C. v. YIP LEE NOMINEES (HONG KONG) LTD AND OTHERS

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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JUDGMENT

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Mortimer J.:              In January 1985, the 2nd defendant approached the plaintiff's bank in Singapore for a loan. That loan was to be to the 1st defendant, a Hong Kong company.The 1st defendant is the 2nd defendant's investment company. Five million Malaysian Ringgit on the wanted. The bank was not prepared to lend in Ringgit but was prepared to lend in US dollars or Swiss Francs. A Loan agreement was drawn up whereby the sum was to be lent in those two currencies. It was executed on 2nd April 1985.The draw down was to be in three instalments in those currencies but in fact the arrangement was that when the draw down was made it was to be converted into Malaysian Ringgit on the 1stdefendant's behalf and credited through the banking system to the 1st defendant's agent in Kuala Lumpur.

1. The purpose of the loan was to buy Renong shares and the 1st defendant deposited those shares (5.3 million) with the bank as security and the 2nd defendant guaranteed the loan.On the 6th May 1986, the plaintiff bank declared an event of acceleration as interest due on the 3rd April had not been paid.The repayment of the loan was demanded from 1st defendant. The 2nd defendant was given notice of their intention to call upon his guarantee.On the 29th April 1986 the 3rd defendant met Mr. Tam, the bank Manager and there were discussions as to whether the bank would consider financing the 3rd defendant's purchase of the 5.3 million Renong shares, a transaction which was to be effected on behalf of the 3rd defendant through a limited company. In November and December 1986, the 1st defendant was in further default in not paying interest but in addition the Renong shares had apparently fallen in value and the 1st and 2nd defendants were asking for time to complete the proposed sale of shares. The bank was prepared not to take action for 120 days but the condition was the 3rd defendant should sign a 1st demand guarantee, guaranteeing the payment of the 1st defendant's liability in consideration of the Plaintiff continuing to advance the suns involved to the 1st defendant.

2. On the 2nd January 1988, the 3rd defendant deposited more shares to secure the 1st defendant's loan. Interest and principal remained unpaid by the 1st defendant and so in April 1983 the bank decided to take action against the 1st and 2nd defendants but not at that time against the 3rd defendant who was prepared to assist the bank in certain ways in the prosecution of their claim against the other defendants.

3. On the 1st August 1988, the plaintiff took action against all 3 defendants. On that day a writ was issued with a specially endorsed statement of claim. That statement of clam claimed repayment of the loan interest and also claimed against the 2nd defendant and the 3rd defendant on their guarantees of the 1st defendant's loan.

4. In October 1988, the plaintiff took 0.14 proceedings. Judgment was in due course obtained against the 3rd defendant. The proceedings against the 2nd defendant did not succeed.

5. On the 30th November, there was an application by the 3rd defendant to set aside the judgment. That application was in due course dismissed.together with the plaintiff's application for summary judgment against the 2nd defendant on the 18th April 1989. Now the 3rd defendant appeals against the Master's refusal to set aside the judgment and the plaintiff appeals against the Taster's refusal to give summary judgment against the 2nd defendant.

6. Although I heard the 3rd defendant's appeal first, it is convenient for me to deal initially with the plaintiff's appeal against the "taster's refusal to give Summary judgment. On its face, plaintiff's claim appears to be a perfectly straightforward claim on a guarantee which is expressed in the widest terms and gives the most stringent undertakings and warranties.

7. Mrs. Kaplan for the 2nd defendant takes three broad points in supporting the 2nd defendant's claim and resisting the appeal saying that the 2nd defendant ought to have unconditional leave to defend. The three points are these: first, that the loan agreement is an illegal agreement as it is in contravention of Malaysian Exchange Control laws and that the guarantee is tainted by that illegality. Secondly, that the arrangement made by means of the loan is unenforceable as contrary to the Bretton foods agreement and the exchange control imposed by it. Thirdly that in any event, there is a triable issue raised by the 2nddefendant that he was orally released from his guarantee by the manager when the 3rd defendant executed his guarantee in the circumstances which I have broadly outlined.

8. First, therefore, Mrs. Kaplan argues that the loan agreement upon which the guarantee depends is arguably illegal on the basis that the true nature of the loan was to lend foreign currency converted into Malaysian Ringgit in Malaysia to Malaysian residents for the_.purpose of purchasing shares on the Malaysian exchange in a Malaysian company. She points out that the Hong Kong company had its address Malaysia and was apparently being run from there and is arguably a Malaysian resident. She submits that this lending was of foreign currency in Malasia (however it was dressed up) by a person other than an authorised dealer and such transactions are illegal in Malaysia being contrary to the Exchange Control Act 1953. She relies upon the affidavits of Robert Lazar on this matter andthe Malaysian cases to which he refers:in particular American Express Bank Ltd. v. Dato Wong Kee Tat and others High Court of Malaya, Kuala Lumpur civil suit 23375986 and Bumiputra Malaysia Finance Ltd. v. Datuk Syed Kechik Bin Syed Mohammad and others in Kuala Lumour Court civil suit c23198886.

9. Further, she submits that part performance of the loan contract was necessary in Malaysia and therefore even assuming the proper law of the contract was English or Singaporian it would not be enforced by the Hong Kong Court, See Ralli Brothers [1922] K.B. 287.

10. These matters Mrs. Kaplan submits raise an arguable point of law and a question to be decided on the facts as to the true nature of the transaction.

11. Secondly, it is submitted that the contract is arguably unenforceable as an exchange contract and monetary transaction which is caught by the Bretton Woods Agreement. ' If one considers briefly the decisions Wilson, Smithett and Cope Ltd. v. Terruzzi [1976] 1 Q.B. 683 and' Mansouri v. Singh [1986] 1 W.L.R. 1393, and the passages in Dicey under exchange control legislation it becomes clear that this is a difficult area of the law - both difficult in fact and difficult in the application of the terms used.

12. Mr. Fok resists the illegality and unforceability defences and says the guarantee is not tainted because of its particular terms - in particular the 'principal debtor clause'.

13. It is to be noted in passing that the 'principal debtor clause' is not specifically reliedupon in the statement of claim. It. seems to me that where summary judgment is sought that_. judgment must be given upon the specific allegations in the statement of claim for its only upon those that the judgment can depend.

14. Having heard argument and the citing of many cases it is clear that there are difficult questions of law which arise in this case. There are also potentially difficult questions of fact in relation to the nature of the loan transaction and the currency dealings which followed. There the substance of the transaction rather than its form is a proper matter for the decision of the court it is rarely safe, it seems to me, for the Court to approach that decision relying simply upon affidavits and to deal with it summarily. It is not possible to resolve these issues of fact upon affidavit evidence - what was the true nature of this loan contract? Was it an exchange contract? Was it an agreement designed to avoid the effect of the Malaysian law?

15. Having said that, in the end, these issues may be simple to decide. On the evidence they may become clear. Whereas I could say that if I were to decide the case now I would be inclined to decide it in the plaintiff's favour, I have equally no doubt thatthese difficult matters are unsuitable to decide in summary proceedings. I have in mind in particular the two difficulties to which I have referred; the possible difficulty, in ascertaining the true nature of the transaction and the difficult questions of law which may then arise.

16. Even in these circumstances, is it arguable that the collateral guarantee to the loan is unenforceable? Again, this matter gives rise to difficult questions of law and possibly difficult question of fact. For if it were arguable (as I think it is) that the transaction was designed to make Malaysian Pinggit available to the defendant in Malaysia and later by the alternative transaction to make US dollars available elsewhere to the plaintiff with the ^problems that could arise under the Bretton floods Agreement, it seems to me to be arguable that the collateral guarantee is unenforceable, however many misgivings I have that the eventual outcome will be in the plaintiff's favour.

17. Relevant to the difficulties to which I have adverted, Neil L. J. in Mansouri v. Singh at 1400 D onwards sets out a number of questions which he approached. Those are indicative of problems which may arise and relevant to the question whether a collateralagreement may be tainted. On 1401 E he said:

"It seems to me to follow from the passage from lord Diplock's speech cited above that where the court can identify a monetary transaction which is an exchange contract within section 2(b) it. should refuse to enforce that transaction even though such refusal may involve the court in declining to give effect in whole or in part to an autonomous contract constituted by a letter of credit."

 

18. On these grounds, it is may judgment that this is an unsuitable case for order 14 proceedings and Summary Judgment.I foresee dangers if that were granted.These grounds are quite sufficient for me to dismiss the plaintiff's appeal.

19. It is not necessary, therefore, for the purposes of this decision for me to consider the further matter raisedh in any detail. That is the oral release alleged by the 2nd defendant by the "tanager when the 3rd defendant signed his guarantee. It is to be noted however that allegation is not supported by any contemporaneous document nor was it raised by the 2nd defendant at once after the demand was made. That is astonishing if this were a true and reliable defence for surely that is the very first matter which would have been raised by the 2nd defendant? The matter was argued by Mr. Fok, on behalf of the plaintiff in this way and it is an argument which had it been important Iwould have accented. I would have held that there is not a fair or reasonable possibility of the defendant having a defence on that ground. It remains open to the 2nd defendant to raise that matter nevertheless in the future.

20. I turn now to the 3rd defendant's appeal against the Master's refusal  to set aside the judgment. It was accepted by Mr. Chain that this was a regular judgment but he contends that having regard to the manner in which that judgment was entered no fair tribunal would have allowed the judgment to be entered at that time. The basis of Mr. Chain's submissions is that originally the 2nd & 3rd defendants were to run a join defence and to be jointly represented. The 3rd defendant was resident in Singapore at the time and when the writ was served upon him he entered an acknowledgement of service in person. He is a solicitor. Then he contacted the 2nd defendant in order that the two of them could use the same solicitor.Following that on the 20th October, he wrote to the 2nd defendant to hake arrangements for them to jointly instruct solicitors and for him to he kept informed. On the 11th November he telexed the solicitors instructed in Hong Kong and said,

"I refer to the above-mentioned suit forthe hearing on Monday, please confirm you will also be acting for me as the 2nd defendant Mr. Yap and I will be adopting a basic joint defence. Yap has also promised to instruct you to act on my behalf please confirm that you will be so doing".

21. The next thing the 3rd defendant knew was that judgment had been entered against him. There was a hearing on the 14th November the 2nd defendant had filed an affidavit raising the defence of illegality but the 2nd defendant's solicitors took the view, no doubt rightly, that there was a conflict of interest. This was explained to the faster but the Master allowed judgment to be entered against the 3rd defendant. Mr. Chain said that having regard to that background the judgment ought to be set aside if the 3rd defendant raises an arguable defence and he submits that I should not apply the higher burden (if it be a higher burden) of requiring him to show a real prospect of success following the decision in The Saudi Eagle [1986] L.R. 221. He submits that there is no difference in the burden. In passing, I disagree that there is no difference between raising an arguable defence and showing that you have a real prospect of success, but in the somewhat unusual circumstances of this case fairness really requires that if he has made out an arguable case then the judgment should be set aside. It is to be noted that in this matter the Court has avery wide discretion. The Saudi Eagle is one example of the way in which the Court exercises that discretion but the locus classicus is Lord Atkin in Evans v. Bartlam [1937] A.C. at 480.

22. The 3rd defendant seeks to raise a number of defences which he submits are arguable. First, that the guarantee was not sealed therefore not binding as a deed. Secondly, the plaintiff failed to disclose to him that an act of acceleration already taken place before signing and that amounted to a non-disclosure which affected the guarantee to such an extent that it is no longer binding. Finally, he raises the  illegality defences raised by the 2nd defendant.

23. In my judgment, the defendant has no arguable case on the ground that guarantee was not sealed when signed. He is a solicitor. It was the clear intention of all the signaturies to the document that it should be sealed as a deed and that involved, in my judgment, the defendant giving authority for that to be done. I need not pause upon that matter for reasons which you will become clear. I should say, in any event, there was consideration for the guarantee in the extension of time that was being granted.

24. I further unimpressed by the argument that a failure to disclose an act of acceleration nullifiesthis guarantee. It is not a matter, in my judgment, which it was necessary in the circumstances of this case for the plaintiffs to specifically bring to the notice of this defendant. It is a normal situation in loans and guarantees. It was not the duty of the plaintiff to specifically bring it to the defendant's notice.

25. So far as illegality is concerned however, the same grounds are relied upon as in the 2nd defendant's case. The same grounds on which the 2nd defendant ought to be allowed to go to trial apply to the 3rd Defendant. As I have said the matters raised are not suitable either in law or fact for decision in summary proceedings. Similarly, it is not suitable to have exhaustive argument in summary proceedings as to the possible effect of the illegality of the loan upon the enforceability of the guarantee whatever my initial impression. These arguments should be heard at a full trial of the issues and after witnesses have given evidence as to the nature of the transaction involved. Further it would be a strange situation indeed in this case if the 2nd defendant were to have leave to defend on illegality and the 3rd defendant were shut out by allowing the judgment against him to stand when he wishes to raise the same defence.

26. In those circumstances I allow appeal by the 3rd defendant and set aside he judgment against him.