RE YOHAN CHANDRA

HCB 3453/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS NO. 3453 OF 2000

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J U D G M E N T

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1. The petitioner, United Overseas Bank Limited ("the bank") brings this petition for bankruptcy against the debtor Mr Yohan Chandra ("the debtor") on the basis of a judgment debt in the sum of HK$4,540,797.46 with interest thereon obtained in High Court Action No. 9980 of 1999 on 21 July 1999 in default of notice of intention to defend.

2. When the petition first came before Hartmann J on 27 December 2000, he adjourned this to the first Monday after the determination of the debtor's application to set aside the default judgment in the High Court Action. That application was determined by Master Jones on 16 March 2001 and he dismissed the debtor's application. Hence, the petition was restored for hearing on 26 March 2001 before me.

3. It was submitted by Mr Jonathan Wong on behalf of the debtor that the petition should be further adjourned as the debtor has lodged an appeal against the decision of Master Jones and this is to be heard on 28 May 2001. Mr Wong submitted to the court the skeleton argument that would be used in the appeal against the Master's decision to demonstrate that the debtor had reasonable prospects of setting aside the default judgment. The application to adjourn the petition until after the hearing of the appeal was opposed by Miss Janine Cheung for the petitioner. As no factual disputes were involved in the argument to be raised on appeal against the Master's decision, I have heard submissions from the parties on the merits or otherwise of the debtor's application to set aside the default judgment. I adjourned the matter for decision to the following Monday because I was not provided by counsel with copies of the relevant authorities they were relying on. In particular, Mr Wong cited a passage in Rowlatt on Principal and Surety, 4th edition, which was in turn cited by the Court of Appeal in Tan Soon Gin v. China & South Sea Bank Ltd [1988] 2 HKLR 202 at 206, in support of the proposition he advanced that there is an equity preventing a creditor from attempting to place the whole burden of the debt upon a surety. He did not provide the Court with the latest edition of Rowlatt, which is the 5th edition, or any of the cases cited by the editors of Rowlatt in support of the proposition advanced. I should mention that Master Jones had the benefit of submissions from counsel who appeared for the debtor (not Mr Wong) on the relevant passage in the 5th edition of Rowlatt.

4. I propose to take the facts from the debtor's affirmation placed before the Master in the High Court Action. The bank brought that action against the borrower, Cute Toons Limited ("Cute Toons") and against the debtor as the guarantor. Cute Toons was formed by the debtor and a Singaporean resident Mr Soh Lye Huat and they are the sole directors. The only shareholders of Cute Toons are Artrend Industrial Limited (which is controlled by the debtor) and Complement Garments Pte Ltd ("Complement"), a company incorporated in Singapore and owned by Mr Soh and his wife.

5. Starting from July 1996, the bank had provided facilities to Cute Toons, initially in the sum of HK$10 million and later reduced to HK$7.8 million. The terms on which the facilities were provided were revised periodically. According to the latest facilities letter dated 16 March 1998, the facilities were secured by the following: (1) a letter of authority and earmarking executed by Complement in the bank's favour authorising the latter to earmark or debit Complement's account with the Singapore office of the bank for a sum of up to HK$8 million; and (2) a joint and several guarantee to the extent of HK$10 million executed by the debtor and Mr Soh in the bank's favour on 13 January 1998 ("the guarantee")."

6. It was alleged by the debtor that Complement had mortgaged its property in Singapore to the bank to "fortify" the security provided whereby the bank was authorised to earmark Complement's account up to HK$8 million and that the value of this property was estimated to be HK$30 million. It was further alleged that Mr Soh was likely to be solvent because he was the joint owner of another property in Singapore which was also mortgaged to the bank. I shall assume in favour of the debtor that these allegations are correct for present purpose.

7. The debtor and Mr Soh fell out in February 1999. In May 1999, the bank's solicitors served a letter of demand on the debtor demanding payment of Cute Toons' indebtedness of approximately HK$4.5 million which was guaranteed by the debtor and Mr Soh. The writ in the High Court Action was issued in June 1999 and judgment in default was obtained on 21 July 1999. It was not in dispute that the default judgment was obtained regularly. The debtor took no action to settle Cute Toons' indebtedness or to defend the action because he had expected that the bank would realise the other security provided in that Complement's bank account was earmarked to the extent of HK$8 million to discharge Cute Toons' liability to the bank.

8. In the light of the decision of the Privy Council in China & South Sea Bank Ltd v. Tan Soon Gin [1990] 1 AC 536, the argument that the bank should have realised the security provided by Complement before enforcing its remedy against the debtor under the guarantee is bound to fail. Lord Templeman stated at 545C-G as follows:

"The creditor had three sources of repayment. The creditor could sue the debtor, sell the mortgage securities or sue the surety. All these remedies could be exercised at any time or times simultaneously or contemporaneously or successively or not at all. ...

The creditor is not obliged to do anything. If the creditor does nothing and the debtor declines into bankruptcy the mortgaged securities become valueless and the surety decamps abroad, the creditor loses his money. If disaster strikes the debtor and the mortgaged securities but the surety remains capable of repaying the debt then the creditor loses nothing. The surety contracts to pay if the debtor does not pay and the surety is bound by his contract. If the surety, perhaps less indolent or less well protected than the creditor, is worried that the mortgaged securities may decline in value then the surety may request the creditor to sell and if the creditor remains idle then the surety may bustle about, pay off the debt, take over the benefit of the securities and sell them."

9. Faced with the Privy Council decision, Mr Wong argued that there was nevertheless a principle in equity which would prevent the bank from enforcing its right against the debtor alone without proceeding against Mr Soh in Singapore particularly as Mr Soh was likely to be solvent. His argument was based on a passage in the 4th edition of Rowlatt which was cited by the Court of Appeal in Tan Soon Gin, supra. at 206E-H without specific comment. I set out the relevant passage in the 5th edition of Rowlatt, giving the changes made by the editors in the current edition in italics for ease of reference:

"There is some authority for suggesting that a surety also has an equity against the creditor to prevent the creditor from bringing down the whole weight of the debt upon the surety, although this view has been challenged. Wright J in Wolmershausen v. Gullick [1893] 2 Ch 514 at 522 considered by way of dictum that a surety could in equity 'be controlled and prevented from enforcing its legal right inequitably against one alone of the sureties', even though the dictum was made in the context of a discussion regarding a guarantor's right to contribution from co-sureties. This, however, in his view was the point of having the creditor joined as party in Dering v. Earl of Winchelsea (1787) 1 Cox 318. Lord Eldon in Craythorne v. Swinburne (1807) 14 Ves Jun 160, a commentary on Dering v. Winchelsea accepted that case as deciding that '... the creditor, who can call upon all, shall not be at liberty to fix one with payment of the whole debt ...'

...

Despite the considerable authority of the views examined in the 4th edition of this work, it is felt that it is still arguable that a surety has an equity on the basis of Wolmershausen v. Gullick and the authorities cited therein including the views of Lord Eldon, to stay a creditor attempting unfairly to place the whole burden of the debt upon the surety, at least in special circumstances, e.g. where there is a solvent principal debtor, or solvent co-sureties who could easily be but are not joined in the action, or where there is a security which could easily be realised to pay the whole debt." (at p. 143-145)

10. There are a number of things to note about this extract from Rowlatt. Firstly, the editors in the 5th edition, although they have retained the extract in question from the previous edition, did not put forward the proposition as a clear statement of the law but "felt that it is still arguable" that a surety has an equity to compel the creditor to proceed against a co-surety. Secondly, the editors had conceded in the 5th edition, as a result of the criticism in "The Modern Contract of Guarantee" by O' Donovan & Phillips, 3rd edition at p.536 to 538, that the dictum of Wright J in Wolmershausen was "made in the context of a discussion regarding a guarantor's right to contribution from co-sureties". Thirdly, the passage in Rowlatt is contrary to the dicta of Latham C J in McLean v Discount and Finance Ltd (1939) 64 CLR 312 at 328 which read as follows :

"A creditor to whom guarantees have been given may compel any surety to pay according to his contract. He is not bound to take any steps to distribute the burden amount the sureties. Thus a surety who has guaranteed the whole of the debt may be compelled to pay the whole debt even though there are other sureties."

11. Similar statements were found in the House of Lords decision in Ewart v Latta (1865) 4 Macq. 983 which concerned Scottish law but where the same principle was said by Lord Westbury L C to apply as in English law and the relevant dicta were as follows :

"Until the debtor has discharged himself of his liability, until he has fulfilled his own contract, he has no right to dictate any terms, to prescribe any duty or to make any demand on his creditor. The creditor must be left in full possession of the whole of the remedies which the original contract gave him and he must be left unfettered and at liberty to exhaust those remedies, and he cannot be required to put any limitation upon the course of legal action given to him by his contract by any person who is still his debtor, except upon the terms of that debt being completely satisfied."

12. In my judgment, the law is tolerably clear notwithstanding the extract in the 5th edition of Rowlatt. A creditor is at liberty to fix one surety with full payment of the principal debt. The rights of the sureties between themselves may then be determined in an action for contribution and where the creditor has initially imposed the whole burden on one surety, equity may adjust this burden by allowing a surety who has paid more than his proper share to seek contribution from the co-surety. It is not the law that a creditor can be compelled to proceed against a solvent principal debtor or a solvent co-surety before he is allowed to place the whole burden of the debt upon a particular surety. The debtor's argument that the bank was obliged to pursue its remedy against Mr Soh who was alleged to be solvent before the bank could enforce its rights against the debtor is not an argument of substance. It has not been demonstrated that the Master was in error in refusing to set aside the default judgment obtained by the bank against the debtor.

13. In the circumstances, I make a bankruptcy order with costs to the petitioner.