RE VONG PAK CHEONG

HCB 16256/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

IN BANKRUPTCY PROCEEDINGS

NO. 16256 OF 2002

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J U D G M E N T

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Introduction:

1. This is a bankruptcy petition presented by the petitioning creditor (the "Petitioner") based on eight deeds of guarantee given by the Debtor to secure the repayment of eight loans, totalling $7,080,289.03 advanced by the petitioning creditor to Luen Cheong Tai International Holdings Limited ("LCTH"), a company listed in the Hong Kong Stock Exchange Limited. The Petitioner was the principal contractor of a construction project for Po Leung Kuk which it sub-contracted (the "PLK Sub-contract") on a back to back basis to Luen Cheong Tai Construction Company Limited ("LCTC"), a subsidiary of LCTH. The loans were made to LCTH but paid over to LCTC's material suppliers or sub-contractors at the direction of LCTH. LCTH deposited eight post-dated cheques with the Petitioner in repayment of the eight loans. LCTC also signed six deeds of set-off indemnity and guarantee in favour of the Petitioner in respect of six of the loans and agreed to deduct or set-off the full repayment of the loans against any certified interim payments due from the Petitioner to LCTC under the PLK Sub-contract. In addition, the loans were secured by the personal guarantees of the Debtor and Chan Man Chuen ("Chan"), who were both directors of LCTH and LCTC. It is common ground that the loans were granted for the purpose of financing LCTC in the performance of the PLK Sub-contract and were guaranteed by LCTH, the Debtor and Chan.

2. LCTC went into financial difficulties and defaulted on the PLK Sub-contract. It owed the Petitioner $4,231,252.08 being money paid by the Petitioner on behalf of LCTC to its sub-contractors in connection with the works done under the PLK Sub-contract and estimated costs of remedial works to be carried out by the Petitioner as a result of LCTC's default under the PLK Sub-contract. At the same time, LCTC owed Bank of China and other creditors more substantial debts. Subsequently, Bank of China petitioned for winding up of LCTC and a winding up order was made on 15 July 2002.

3. On the other hand, LCTH was unable to repay the loans when due on or about 25 August 2001 and the eight post-dated cheques deposited with the Petitioner were dishonoured upon presentment. The Petitioner obtained judgment in respect of the eight dishonoured cheques against LCTH in October 2001. That judgment remained unsatisfied. The loans together with interest accrued amounted to $7,495,982.20. Upon the petition of Bank of China, provisional liquidators were appointed to take over LCTH on 5 September 2002.

4. A statutory demand was served on the Debtor on 19 September 2001 in respect of the above outstanding loans and interest amounting to $7,495,982.20 (the "Debt"). It has not been complied with and there is no outstanding application to have it set aside. There is no proposal by the Debtor to repay, secure or compound for the Debt. A bankruptcy petition was filed against the Debtor on 12 August 2002. There is no dispute about the Debtor's inability to pay. Indeed, the Debtor was unable to pay the interim payment of costs of $70,000 ordered to be paid forthwith on 2 April 2003 when Deputy High Court Judge Poon granted the Debtor's application for adjournment of the petition. Thus the conditions under section 6 of the Bankruptcy Ordinance for the issue of a bankruptcy order are satisfied.

5. The Debtor seeks to dispute the Debt on numerous grounds, many of which were repetitive. These grounds may be summarised as follows: (1) that LCTC was the disclosed principal in the loan transactions; (2) that he signed the eight deeds of guarantee under inducement and/or misrepresentation by the Petitioner; (3) that the deeds of guarantee were signed under economic duress; (4) that the loans were not genuine loans but were either payments for services already rendered and/or advance payments to enable LCTC's sub-contractors to commence work; (5) that the Petitioner had sufficient securities; (6) that the Debt is not a liquidated sum and LCTC had a valid counterclaim against the Petitioner and (7) that the petition is an abuse of process.

6. The Debtor's case is that in or about 1999, the Petitioner granted LCTC a loan of about $2 million for the sole purpose of enabling LCTC to perform the PLK Sub-contract. In September or early October 2000, the Debtor again approached the Petitioner for loans to LCTC. The Petitioner agreed to grant the loans provided that the loan documentations were to be made in the name of LCTH as borrower, and the loans were to be released direct to LCTC's material suppliers or its sub-contractors but not to LCTH. The loans were secured by (1) LCTC's retention money of about $4 million held by Po Leung Kuk, (2) the costs for additional works performed by LCTC under the PLK Sub-contract, (3) payments due from the Petitioner to LCTC for works done under the PLK Sub-contract and (4) the eight post-dated cheques issued by LCTH in repayment of the loans. The Debtor was told by Zhao Ning ("Zhao") of the Petitioner that the deeds of guarantee to be signed by him were for reference only and would only be resorted to after exhausting the four securities mentioned above. He signed the deeds of guarantee as a result of Zhao's representation. He also disputed the amount outstanding after deducting the payments from items (1) to (3) above.

Ground (1): LCTC was the borrower

7. By way of background, the Petitioner entered into a contract with Po Leung Kuk for the execution of certain construction works for the Phase II Development of Po Leung Kuk Jockey Club Tai Tong Holiday Camp in Yuen Long on 8 January 1998. The Petitioner subcontracted the works to LCTC. LCTC was unable to complete the works by its original date of completion despite an extension of time to 15 November 1999. Eventually, the Petitioner and LCTC were required to vacate the site on 19 August 1999 because of poor progress. In order to mitigate the damage and upon assurance given by the Petitioner, Po Leung Kuk re-employed the Petitioner on 11 August 2000. On 16 August 2000, the Petitioner and LCTC entered into a supplemental agreement to complete the works.

8. What is in dispute is about the negotiation of the loans. According to the Petitioner, shortly after signing the supplemental agreement, the Debtor and Chan approached Zhang Weiping ("Zhang"), the general manager of the Petitioner and requested for a loan to LCTC. Zhang refused because of LCTC's poor performance and because of his doubts of LCTC's ability to repay in view of its financial condition. The Debtor and Chan then desperately urged Zhang to consider granting a loan to LCTH and offered to provide their personal guarantee as security. On that basis the loans were granted. In my view, such differences are irrelevant for the purpose determining this petition.

9. The Debtor argues that LCTC was the disclosed principal borrowing and LCTH was its agent. The eight loan agreements are in the form of deeds entered into between the Petitioner and LCTH, in which LCTH is described as the "Borrower". In the preamble, it states that the Borrower has agreed that the loan shall be solely used for its subsidiary or associated company LCTC for carrying out the works as a sub-contractor of the Petitioner. Clause 2.02 provides that the payments made by the Petitioner "shall be regarded conclusively for all purposes as loan advanced to and/or made available to the Borrower for the works of the Projects to which the Borrower hereby fully acknowledge and admit." The deed was signed by the Debtor and Chan on behalf of LCTH and sealed with its common seal.

10. In a separate document also described as a "loan agreement", which in fact is LCTH's payment instruction to the Petitioner, LCTH requested the Petitioner to make payments to LCTC's material suppliers or sub-contractors (the "Loan Request"). The Loan Requests contain the following clause:

"We once again confirm the advancement of the Loan under the Loan Agreement made out in the manner as above is in fact or deemed for all purposes the advancement to us of the whole of the Loan amount set out in the Loan Agreement, receipt whereof we hereby duly acknowledge and admit."

The Loan Requests were signed by the Debtor and Chan for and on behalf of LCTH.

11. The Debtor and Chan also signed the deeds of guarantee in which they expressly guaranteed repayment by LCTH of the loans.

12. These incontrovertible documents put it beyond dispute that it was the parties' agreement that LCTH was to be the borrower though the loans were to be paid direct to LCTC's suppliers and sub-contractors. The Debtor must have consented to that arrangement because according to his own affirmation, the Debtor knew about that arrangement when Zhao represented to him that the Petitioner would exhaust the four securities, including recovery from LCTH, before resorting to his personal guarantees. Thus there could be no truth in his assertion that LCTC was the borrower and LCTH was the agent of LCTC for the purpose of negotiating the loans. In any event, this ground of objection would not assist the Debtor at all as he was being sued under his personal guarantees, whoever might have been the borrower.

Ground (2): Inducement/misrepresentation that guarantees would not be invoked or until the Petitioner had exhausted all other securities

13. Presumably, the Debtor seeks to argue under this ground of objection that the deeds of guarantee are unenforceable or enforceable only subject to conditions. In his first affirmation filed on 6 November 2002, the Debtor said he signed the deeds of guarantee under inducement by the Petitioner because Zhao represented to him that the guarantees were for the Petitioner's internal reference only and would not be invoked against him. In his second affirmation filed on 19 November 2002, thirteen days later, he changed his story and said that Zhao's representation was to the effect that the Petitioner would exhaust his four other securities before resorting to his personal guarantees. This illustrates his lack of sincerity in his affirmations and that he was trying to conjure up contentions for the purpose of opposing the petition.

14. Zhao is a mainland resident who has returned to China. Zhang enquired of Zhao and was informed that Zhao had never made the representation. Zhang never heard Zhao make such representation in his and the Debtor's presence. I consider that credible. Zhao was the chief engineer who was responsible for technical matters relating to the works and had no authority to deal with the loans. The Debtor had been liaising with Zhang, whom he knew is the general manager of the Petitioner, for the loans. It is extremely unusual and highly unlikely that Zhao in his position as chief engineer would have made the representation as alleged.

15. An examination of the circumstances under which these deeds of guarantee were signed show that the Debtor's account is impossible of belief. These loan documents had been faxed to the Debtor and Chan for consideration and approval. The Debtor was under no pressure of time to sign the deeds of guarantee and had opportunity to read and consider the documents and to seek independent advice. He was a director of a publicly listed company and must be a person of good ability and understanding. He must have realised that these deeds are inconsistent with Zhao's representation. It would be repugnant to common sense if despite Zhao's representation and assurance, he did not seek confirmation from Zhang before signing these deeds or raise objection to the solicitors before whom the deeds were signed. The representation, in either version, was never raised as a ground of objection in any of the documents exhibited by the Debtor including the letter dated 9 November 2002 from the Debtor's solicitor in response to the bankruptcy petition. The Debtor's allegation is incredible.

16. Furthermore, it is trite law that oral evidence is not admissible to contradict or vary a written contract, particularly when the contract is required by law to be in writing. A contract of guarantee is required by section 4 of the Statute of Frauds 1677 to be evidenced by a note or memorandum in writing. All the guarantees in question are by way of deeds. Clauses 5 and 6 of the deed of guarantee are pertinent. They provide as follows:

"5. This Guarantee and your rights under it shall not be affected or prejudiced by your holding or taking any other or further securities ...

6. You shall be at liberty but not bound to resort for your own benefit to any other means of payment at any time and in any order you think fit without thereby diminishing the liability of the Guarantor ... notwithstanding that other means of payment have not been resorted to ..."

17. To admit the Debtor's allegation about Zhao's representation would tantamount to contradicting and nullifying these provisions of the deeds of guarantee. The parol evidence rule prohibits admission of such evidence. The parties have taken the trouble of having the guarantees drawn up as deeds by a solicitor and signed them in his presence. The Debtor and Chan must be taken to have read and understood the contents of the deeds of guarantee and executed the same with the intention that they shall be binding. Even if Zhao had made the representation as he alleged, the Debtor must know that by signing the deeds of guarantee, he must be taken to have accepted that clauses 5 and 6 of the deeds shall be binding on him and the prior representation contrary to these clauses were superseded. Even if his account were true, it would not have availed him.

Ground (3): Economic duress

18. To raise duress, one must show such a coercion of the will as to vitiate consent. In a contractual situation, commercial pressure is not enough. There must be present some factor which could in law be regarded as a coercion of the will so as to vitiate consent. In Pao On v Lau Yiu and another [1979] 3 All ER 65, Lord Scarman held at 78:

"In determining whether there was a coercion of will such that there was no true consent, it is material to enquire whether the person alleged to have been coerced did or did not protest; whether, at the time he was allegedly coerced into making the contract, he did or did not have an alternative course open to him such as an adequate legal remedy; whether he was independently advised; and whether after entering the contract he took steps to avoid it. All these matters are, as was recognized in Maskell v Horner [1915] 3 KB 106, relevant in determining whether he acted voluntarily or not."

19. The Debtor's case is that in respect of every loan he was told either he signed the documents or LCTC was not going to get the money. If this was the condition the Petitioner was willing to lend, it was up to LCTH to accept or to reject. Invariably, when someone goes to a bank to borrow money, this is the same message he will receive.

20. Next, the Debtor said that a pre-condition of the loans was that the loans shall be applied to pay the LCTC's suppliers or sub-contractors. Again, I fail to see anything improper in imposing such a pre-condition. When someone borrows money to purchase a flat, the bank requires that the money borrowed goes direct to pay the vendor so as to ensure that the bank has a good security. Letters of credit, commercial loans, building mortgages and construction loans are granted on similar conditions. This is to ensure that the loans are applied to the proper purpose for which they are granted and to protect the security of the borrower. There was nothing wrong or unconscionable for the Petitioner to require the loans be applied towards the execution of works of the PLK Sub-contract of which it was the principal contractor. It was prudent to do so in order to minimise the Petitioner's risk by ensuring that the loans would not be applied to discharge other liabilities of LCTH for which the Petitioner has no obligation or reason to assume any risk.

21. Lastly, the Debtor said he was informed by Zhao that it was the Petitioner's policy to make sure that it would have the right of recourse against him or Chan in the event that all channels of recovery were exhausted. This is almost an universal lending policy which applies to any loan made by any bank to any body corporate. It is invariably the practice to require company directors to guarantee the debt of the company. I do not see any reason that LCTH should be treated differently.

22. On the contrary, the evidence shows that LCTH and the Debtor entered into the loan agreements and the deeds of guarantee respectively on their own free will. The documents had been sent to the Debtor and Chan for comment and approval before they were executed. They were under no pressure of time and had opportunity for independent advice. One of the LCTH's directors, Richard KY Mak ("Mak") was a very capable person to give such advice, being a qualified engineer and member of the Chartered Institute of Arbitrator. For example, in the case of the first loan of $2,000,000 made on 5 October 2000, a copy of the draft loan agreement was faxed to the Debtor on 30 September 2000. Chan altered the number of guarantors from three to two, relieving Mak from having to give a personal guarantee. He was free to bargain for more favourable terms. In respect of the loan of $300,000 made on 20 February 2001, the full set of documents were sent to LCTH for comment and Mak replied saying "we have no adverse comments." The Debtor and LCTH must have independent advice from Mak. Mak did not consider there was anything adverse in the loan documents. Mak was also present on many occasions when the loan agreements and personal guarantees were executed by the Debtor and Chan. He must have knowledge of the contents of these documents as he was a co-director and attended the execution of the documents. He did not complain of economic duress.

23. Furthermore, on 15 February 2001, the Debtor wrote to the Petitioner expressing appreciation to the Petitioner for "extending some financial assistance to this project". Then he requested more assistance saying "more is needed for the completion of the project" and "in conclusion, we hope for the benefits of both our companies and all parties affected by this project that you would agree to provide to us further financial assistance towards completing the Po Leung Kuk Project." This is not a case where the Debtor and LCTH were forced into an unconscionable bargain by the Petitioner. These loans were all made bona fide and at the request of the Debtor and LCTH.

24. There is some suggestion that the duress came in the form of the Petitioner withholding payment by granting of loans instead. But this is not borne out by the evidence. There is nothing in the circumstances to suggest that the transactions were unfair or unconscionable or that these transactions were entered into as a result of any commercial pressure or coercion of the will. The Debtor on behalf of LCTH was free to accept the loans on the terms as they were offered or to reject them. LCTH did change some of the terms of the loan agreements. The loans were made at the request of LCTH, the Debtor and Chan for the benefit of LCTH which entered into the agreements in its own free will. Putting the Debtor's case at the highest, LCTH was in financial difficulties and the Petitioner lent under a very cautious lending policy. His ground of objection based on economic duress must fail.

Ground (4): The loans were in substance payments under the PLK Sub-contract which the Petitioner was bound to pay and for services rendered or advance payments

25. The Debtor claims that the Petitioner was obliged to pay LCTC under the PLK Sub-contract but the Petitioner by passed the payment mechanism to pay LCTC and paid LCTC's material suppliers or sub-contractors by dressing the payments up as loans to LCTH. The fallacy of the Debtor's argument is immediately apparent. There is no dispute that the loans were advanced during the period from 5 October 2000 to 27 June 2001, ignoring for the benefit of the Debtor that they were advanced to LCTH and not LCTC. The alleged liability to pay LCTC did not arise until completion of the works under the PLK Sub-contract on 17 August 2001.

26. A perusal of the loan agreements and the Loan Requests shows on the face that these payments were indeed loans to LCTH but paid on its direction to LCTC's material suppliers or sub-contractors. These payments were related to the performance of the PLK Sub-contract, but are not referable to any payment of sums due to LCTC from the Petitioner or any sum referable to any payment certificates under the PLK Sub-contract. Clearly, these were loans.

27. Not only that, these documents had been sent to the Debtor and Chan for comment before their execution. They had time to consider and to seek independent advice and LCTH had competent personnel to give such advice. If these were payments for services rendered or advance payments, it is surprising that Mak would have replied that LCTH had no adverse comments and LCTH would have gratefully thanked the Petitioner for the assistance and looked for further assistance. What the Debtor alleged is incapable of belief.

28. Furthermore, the Debtor admitted in Court that the retention money would only be released to LCTC after the expiry of the defect liability period which would be two years from August 2001 and not payable to LCTC at the time the various loans were advanced. On the other hand, payment for the additional works would only be due after November 2001. This is wholly inconsistent with the Debtor's allegation that the loans were payments for services rendered.

29. If the eight loans were not loans but payment for services rendered or advance payments, then LCTH had a valid defence to the action on dishonoured cheques taken out by the Petitioner. However, LCTH chose not to defend the action and allowed judgment to be entered against it. The Debtor and Chan were directors of LCTH. No credible reason was offered as to why the Debtor did not contest that action. They had a personal interest to make sure that the action was defended, lest they would be called upon on their deeds of guarantee. The Debtor's assertion could not be believed.

Ground (5): Petitioner had sufficient security

30. Under this ground of objection, the Debtor argues that the Petitioner had sufficient securities, which were the six deeds of set off signed by LCTC agreeing to set off six of the loans against payments due from the Petitioner to LCTC under the PLK Sub-contract. Apart from the fact that two of the loans were not secured by deeds of set off, this ground of objection is wholly misconceived. Though the loans were used to pay LCTC's material suppliers and sub-contractors for the purpose of performing the PLK Sub-contract, these loans were expressly made to LCTH, with LCTH as the borrower and the Debtor and Chan as guarantors. The six deeds of set off are securities offered by LCTC as a co-surety and not by the Debtor. They are third party securities. The Debtor is deliberately confusing the identities of LCTC and LCTH with that of himself personally.

31. In general, a guarantor becomes a debtor when he is unable to pay upon demand being made pursuant to the guarantee. His unfulfilled liability to pay becomes a debt due from him to the creditor. He is a debtor and his liability to pay becomes a debt for the purposes of a statutory demand. In addition, as against the Debtor in these proceedings, his position is put beyond doubt by Clause 11 of the deeds of guarantee which provides as follows:

"11. Independently of the above stipulations, the Guarantor further agrees to be liable as principal debtor for the payment of any money secured hereunder so that : -

(a) this Guarantee may be enforced against the Guarantor without your first instituting legal proceedings against the Borrower in the first instance or to join in the Borrower as a party in the same proceedings against the Guarantor; ..."

32. The petition is made against the Debtor based on his liability under the deeds of guarantee and not against the borrower based on the loan agreements. Thus whether this Debt which arose out of the guarantor's liability under the deeds of guarantee is unsecured for the purposes of section 6(2)(b) of the Bankruptcy Ordinance depends on whether the guarantor has furnished security in respect of his liability under the guarantees and not just whether the loans guaranteed was otherwise secured or at all. If a borrower has offered any security for the loan, it is a third party security so far as the debt of the guarantor is concerned. The guarantor may not resist a petition on the basis that the loan guaranteed by him was secured against the asset of the borrower or any third party. Indeed the Debtor's guarantee is one of the securities offered by borrower. Hence, the Debtor may not rely on the six deeds of set off provided by LCTC as they are third party securities. Furthermore, any receivables which LCTC may receive from the Petitioner, including the retention money and costs of additional works are property of LCTC and not the Debtor's or LCTH's. I therefore reject the Debtor's argument that the debt is secured.

Ground (6): The Debt is not for a liquidated sum and LCTC had a valid set-off against the Petitioner

33. The Debtor's argument under this ground of objection is convoluted and based on his deliberately refusing to acknowledge his liability under the deeds of guarantee and confusing it with LCTC's liabilities under the PLK Sub-contract and the six deeds of set off. His argument is summarised as follows. The Petitioner's final accounts with Po Leung Kuk was not yet concluded. When the account is finalised, the Petitioner's retention money in the amount of $5.5 million and costs of additional works in the amount of $3.3 million would be released to the Petitioner. LCTC would then be entitled to demand the Petitioner to release its retention money. In addition, LCTC has other claims in respect of additional works executed under the PLK Sub-contract and works not yet paid for by the Petitioner because they had been dressed up as loans to LCTH.

34. Much time had been spent by Mr Chu disputing the payments received by LCTC under the PLK Sub-contract. This is not the appropriate venue to inquire into that issue and it is not necessary. The provisional liquidator of LCTC is under a duty to recover all debts due to LCTC. If there were any valid claims against the Petitioner, the Debtor would have raised that with the provisional liquidator and the provisional liquidator would have taken recovery action against the Petitioner. No such action had been taken by the provisional liquidator. The Debtor explained that since the provisional liquidator took over LCTH, he was denied access to the books of LCTC and could not have informed the provisional liquidator of such claims. This is ridiculous. He was a director of LCTC which had been ordered to be wound up. He was under a duty to assist the provisional liquidator and to provide information to enable the company to recover as much of its debts as possible. Besides, he has a personal interest to do so as well in view of his liability under the deeds of guarantee. On the other hand, according to the Petitioner, all amounts due to LCTC had been set off against LCTC's liability under the PLK Sub-contract which resulted in a proof of debt filed with the provisional liquidator of LCTC. If indeed there were any net amount due to LCTC from the Petitioner, they would have to be paid over to the provisional liquidator for distribution among the creditors and would not be available to the Debtor or LCTH. The Debtor's allegation that LCTC had valid cross claims against the Petitioner in respect of works executed under the PLK Sub-contract is incapable of belief. His assertion that the loans had been wholly or partially set off against payment due from the Petitioner under the PLK Sub-contract such that the Debt is not for a liquidated amount is just moonshine.

Ground (7): Abuse of process

35. Mr Chu submitted that there was no reason why the Petitioner did not enforce the judgment against LCTH in respect of the dishonoured cheques. He referred to LCTH's provisional liquidator's report of October 2002 that as at 31 May 2002, the net asset position of LCTH was $50.1 million and would have been in a position to pay the Debt. He also criticised the Petitioner for not suing Chan under his personal guarantees. He therefore submitted that the Petitioner's ulterior motive of the petition is to deprive the Debtor of his right to fight for the control of LCTH, which is now in the hands of the provisional liquidator.

36. I do not think there is any substance in Mr Chu's complaint. Though according to the provisional liquidator's report, the net asset position of LCTH was $50.1 million, that was inclusive of a ten-year timber concession right in Suriname at a book value of $100 million. Excluding that book value, LCTH was badly in the red and probably had no liquid asset to pay the Debt. According to Zhang, at the time when judgment was entered in respect of the dishonoured cheques, Bank of China was contemplating winding up action against LCTH, which in fact it took on 12 August 2002. Thus there was good reason why the Petitioner did not institute enforcement action against LCTH but to leave it to Bank of China to take the initiative to petition for LCTH's winding up and then join in as a supporting creditor. It was prudent for the Petitioner to look for alternative remedies from other co-sureties. As far as not suing Chan is concerned, I do not think the Debtor can erect a defence on the basis that the co-surety has not been pursued. That is a matter for the Petitioner. Unless there is evidence of abuse of process or ulterior motive against the Debtor, the Court will not enquire into the Petitioner's reason for pursuing against one but not the other or the order in which the Petitioner elects to enforce its securities. As for the fight for control over LCTH, there is simply no evidence that this petition had anything to do with the appointment of provisional liquidators by Bank of China. This ground of objection is frivolous and shows a total lack of good faith in the Debtor's contest of the petition.

Conclusion

37. The Debtor has failed to show any valid ground of objection to the petition. The Debt is clearly indisputable. The Debtor is unable to pay the Debt. Accordingly, I make the usual bankruptcy order against the Debtor with costs out of the estate of the Debtor.