William Young Hong Yui And Others v. Bank of Credit & Commerce Hong Kong Ltd.

IN THE COURT OF APPEAL

1993, No. 185
(Civil)

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J U D G M E N T

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Godfrey, J.A. (giving the judgment of the court):

1. This is an appeal from an order of Barnett J. made on 29 September 1993. The main issue before the judge, simply stated, was whether the liability of William Young Hong Yui (to whom we shall refer as "the depositor") to the Bank of Credit and Commerce Hong Kong Limited (to which we shall refer as "the bank") under two instruments headed "CONTINUING GUARANTEE" made on 27 February 1991 was, at the date of the hearing, immediate or contingent; contingent, that is to say, on the bank's first making a demand in writing upon the depositor to satisfy his liability. For reasons which will appear (and curious though at first sight it may seem), it was in the depositor's interest to argue that his liability was immediate. It was in the bank's interest to argue that the depositor's liability was contingent. Before the judge, the bank succeeded. The depositor now appeals to this court.

2. The facts may be shortly stated.

3. On 27-February 1991, the date when the depositor signed the "Continuing Guarantees" in favour of the bank, the bank held for the account of the depositor Canadian dollar deposits which, when the bank went into liquidation (as it did on 17 July 1991) were of a value of some HK$6.4 million. Again on 27 February 1991, as well as signing the Continuing Guarantees, the depositor signed two instruments headed "SECURITY OVER DEPOSIT in respect of THIRD PARTY OBLIGATIONS" in favour of the bank. By one of these, the depositor charged the deposit to the bank to secure the indebtedness to the bank of a company called Galleon Industrial Ltd and by the other he charged the deposit to the bank to secure the indebtedness to the bank of his brother Antonio Young Shau Yan. The depositor and his brother were both shareholders in the company (and the depositor was also a director of the company). The depositor's brother, and the company, are co-plaintiffs with the depositor in these proceedings. The considerations which affect the depositor's liability for the indebtedness of his brother are the same as those which affect his liability for the indebtedness of the company. We shall refer to both the company and the depositor's brother as "the principal".

4. The "Security over Deposits" imposed no personal obligation on the depositor to answer for the indebtedness of the principal to the bank. The Continuing Guarantees did impose a personal liability on the depositor to answer for the indebtedness of the principal to the bank.

5. It is common ground that, if the liability of the depositor to the bank under the "Continuing Guarantees" is immediate, the depositor is entitled to the benefit of a set-off of the HK$6.4 million odd owed to him by the bank against what is due from him to the bank to satisfy his liabilities to the bank under the "Continuing Guarantees". If, however, the liability of the depositor to the bank under the "Continuing Guarantees" is contingent, it is equally common ground that the depositor is not so entitled; the bank will not have to give credit to the depositor, as against what may become due from him to the bank, for the HK$6.4 million or any part of it. The depositor will simply be left as an unsecured creditor to prove in the liquidation for the HK$6.4 million, only part of which he will recover. So, the depositor will be better off if he is entitled to a set-off and the general body of creditors will be better off if the depositor is not entitled to a set-off. In the first case, his deposit would be worth the full HK$6.4 million to the depositor; in the second, it would be worth only what he can obtain for it by way of dividend in the liquidation.

6. The case for the bank is that the liability of the depositor to the bank under the "Continuing Guarantees" is contingent on demand in writing first made of him by the bank to pay the bank what is due to the bank from the principal. The liquidator has made no such demand on the depositor (whether in writing, or at all) and has no present intention of doing so, since the making of such a demand would make the liability immediate and thus afford the depositor a right to set-off (to the detriment of the general body of the bank's creditors).

7. A subsidiary issue in the case is whether the court ought to allow the liquidator to act (or refrain from acting) like this. The depositor claims that the court ought not to do so but, on the contrary, ought to order the liquidator to make a demand in writing on the depositor (or treat him as having done so), so as to give the depositor the right of set-off for which he contends. We will return to this subsidiary issue later in this judgment.

8. The depositor and the bank are agreed that on the main issue the question which the court has to decide is a question of construction of the "Continuing Guarantees".

9. The authorities establish and it is not disputed that as between debtor and creditor, when there is a present debt, and a covenant or promise to pay "on demand", the debtor's liability will be treated as arising immediately, and the making of the demand will not usually be considered a condition precedent to the liability of the debtor, although the parties may of course stipulate expressly that the making of the demand is to be a contingency which must be satisfied before the debtor can be held liable. On the other hand, as between creditor and surety, when the liability of the surety to pay is expressed as a liability to pay "on demand", the making of a demand will usually be treated as a condition precedent to the liability of the surety.

10. The reason for this distinction is that, in the ordinary case, the obligation of a surety is a secondary obligation, to arise only on default of the principal. However, a surety may engage himself in express terms to be primarily as well as secondarily liable for the indebtedness of the principal debtor; and, if he does so, he may well be held to have undertaken an immediate liability, and not one contingent upon the making of a demand on him. That indeed is what happened in M.S. Fashions Ltd v. Bank of Credit of Commerce International SA [1993] Ch. 425, in which each of three company directors signed as a "principal debtor" an agreement with the bank whereby, as a guarantee for repayment of loans by the bank to his company, the bank could withdraw money from his deposit account with that bank towards satisfaction of his company's debt. The judge, at first instance, held that the "principal debtor" clauses had the effect of creating primary liability for the purposes of the rule that the debt was not contingent upon demand: see his judgment at p. 436. In the Court of Appeal, Dillon L.J. said that the effect of the "principal debtor" provision was to make "the companies' debts to BCCI [the director's] own debts and thus immediately payable out of the deposit without demand": see pp.447, 448. In the able and attractive argument of Mr. Gabriel Moss, Q.C., on behalf of the depositor, before us, we were much pressed with this case.

11. But the question in every such case, as Atkin L.J. pointed out in Joachimson v. Swiss Bank Corporation [1921] 3 KB 110, at p. 129, is whether the parties did in fact intend to make the demand a term of the contract. If they did, effect will be given to their contract, whether it be a direct promise to pay or a collateral promise, though in seeking to ascertain their intention the nature of the contract may be material.

12. We therefore must consider the nature of the contract made in this case between the depositor and the bank constituted by the "Continuing Guarantees"; and we must consider and interpret the words the parties have used to express their intention. We must not forget that what we have to construe is this particular contract. In this connection, we bear in mind the wise words of Sir George Jessel M.R. in Aspden v. Seddon (1875) 10 Ch. App. 394, at p. 397:

"I think it is the duty of a Judge to ascertain the construction of the instrument before him, and not to refer to the construction put by another Judge upon an instrument, perhaps similar, but not the same. The only result of referring to authorities for that purpose is confusion and error, in this way, that if you look at a similar instrument, and say that a certain construction was put upon it, and that it differs only to such a slight degree from the document before you, that you do not think the difference sufficient to alter the construction, you miss the real point of the case, which is to ascertain the meaning of the instrument before you. It may be quite true that in your opinion the difference between the two instruments is not sufficient to alter the construction, but at the same time the Judge who decided on that other instrument may have thought that that very difference would be sufficient to alter the interpretation of that instrument. You have, in fact, no guide whatever; and the result especially in some cases of wills, has been remarkable. There is, first, document A., and a Judge formed an opinion as to its construction. Then came document B., and some other Judge has said that it differs very little from document A. - not sufficiently to alter the construction - therefore he construes it in the same way. Then comes document C., and the Judge there compares it with document B., and says it differs very little, and therefore he shall construe it in the same way. And so the construction has gone on until we find a document which is in totally different terms from the first, and which no human being would think of construing in the same manner, but which has by this process come to be construed in the same manner".

13. In our case, it appears from clause 1 of the "Continuing Guarantees" that they were given by the depositor to the bank in consideration of the bank's giving credit to the principal. The nature of the "Continuing Guarantees" then is that of a secondary obligation, whereby the depositor engaged himself to answer for the indebtedness of the principal; they are not instruments the nature of which is to create a primary obligation on the part of the depositor. What exactly is the nature of the engagement of the depositor under clause 1? It is expressed as follows:

"I/We the undersigned as primary obligor and not merely as surety, hereby irrevocably and unconditionally guarantee the payment or discharge to you and undertake that the undersigned will on demand in writing made on the undersigned pay or discharge to you all moneys and liabilities which shall for the time being be due owing or incurred by the Principal to you whether actually or contingently and whether solely or jointly with any other person and whether as principal or surety including interest commission or other lawful charges and expenses which you may in the course of your business charge in respect of any of the matters aforesaid or for keeping the Principal's account (including any further advances made by you to the Principal and any other liabilities of the Principal to you arising during the three months period of notice hereinafter referred to) together also with:

(i) such further sum for interest (whether or not the same shall have been compounded) and charges accruing due to you from the Principal before or after the date of demand or expiration of the said notice as the case may be; and

(ii) all costs and expenses recoverable by you from the Principal. Any statement of account of the Principal signed as correct by any of your duly authorised officers shall be conclusive evidence as against [me] of the indebtedness of the Principal to you." [emphasis added]

14. Leaving out of account for the moment the words we have emphasised, it is, as a matter of construction of clause 1, plain that this is not an arrangement whereby the depositor engages himself to pay his own debt; it is an engagement to pay, on demand in writing, what is not his own debt and what, but for such engagement, he would never be liable to pay anyone (cp. Rowe v. Young (1820) 2 Bli. 391, per Bayley J. at p. 465).

15. There are a number of other clauses in the "Continuing Guarantees" which demonstrate that the demand is to be a condition precedent to any liability on the part of the depositor. It is sufficient to refer to clause 3 which provides as follows:

"3. The undersigned hereby undertakes that, upon the default by the Principal in the payment when due of any payment guaranteed hereunder, the undersigned will, on demand, make immediate payment thereof, at the place, in the funds and currency and in the manner required of the Principal and without any withholding or deduction whatsoever. You are entitled to make demand on the undersigned or otherwise enforce this Guarantee against the undersigned notwithstanding that you may have any outstanding right, power or remedy against the Principal or any other person and without proceeding or enforcing any claim against the Principal or any other person. The undersigned agrees that no time for limitation of liability in respect of this Guarantee shall begin to run in favour of the undersigned unless and until you shall have made demand on the undersigned, and if more than one demand is made, then only from the date and to the extent of each demand respectively".

16. It is difficult to imagine any form of wording which could make it clearer that, under these "Continuing Guarantees", a demand is necessary before any liability is to arise on the part of the depositor. The last sentence of clause 3 is particularly telling; if the depositor's liability was to be immediate, time for limitation of liability in respect of it would begin to run in favour of the depositor from the moment he signed the "Continuing Guarantees"; yet clause 3 is expressly conditioned so that time shall not begin to run until demand made.

17. Nothing in the "Continuing Guarantees" lends any support to the depositor's contention that his liability to the bank under the "Continuing Guarantees" is to be an immediate liability; all the indications are the other way.

18. But, of course, the words we have emphasised must, if possible, be given some meaning. The depositor expressly contracted "as primary obligor and not merely as surety". What effect does that have?

19. Mr. Moss, Q.C., argued that these words must have the effect of converting the "Continuing Guarantees" from instruments of secondary obligation into instruments of primary obligation, so that the contract thereby constituted is not to be treated as a contract of guarantee or suretyship at all. But, as it seems to us, the word "merely" in the words we have emphasised is inconsistent with this argument. The "Continuing Guarantees" provide, no doubt, that the depositor's obligations are not those merely of a surety; but not that they are to be, exclusively, those of a primary obligor. And indeed since all the terms of the "Continuing Guarantees" are expressed, as one would expect, in the language of suretyship, this is not at all surprising. We would be most reluctant to find ourselves forced to treat any of the provisions of the "Continuing Guarantees" as repugnant or contradictory, and we do not think it is as necessary to do this, although, as we consider, there are serious conceptual difficulties in treating the depositor as having entered into both a primary obligation and a secondary obligation at one and the same time in circumstances in which the obligations are co-terminous. We are content to assume that the words "as primary obligor and not merely as surety" must have some meaning, placing some obligation on the depositor over and above the secondary obligation which he undertakes as surety for the principal. We need not, however, pause to enquire precisely what such additional obligation may be. It is sufficient for us to consider whether on the true construction of the "Continuing Guarantees", read as a whole, the emphasised words create an obligation on the part of the depositor to answer for the indebtedness of the principal immediately, and not contingently on a demand in writing being made, despite the apparent nature of the contract and despite its express terms

20. We have come to the conclusion that it is simply not possible to construe clause 1 of the "Continuing Guarantees" in our case as creating an immediate liability on the part of the depositor. The depositor's engagement is that he "will on demand in writing made on [him] pay or discharge to you all moneys and liabilities which shall for the time being be due owing or incurred by the principal to you .....". This engagement, whether primary or secondary, is expressly conditioned upon the bank's making the "demand in writing" for which the clause stipulates. In so far as the clause creates the secondary obligation of suretyship, there is no doubt (and it is not contended otherwise) that a "demand in writing" is indeed a condition precedent to the liability of the depositor to fulfill that obligation. There is no reason at all, as a matter of law, why the requirement for the "demand in writing" should not have been intended (as we consider it was intended) to apply to the primary obligation as well as the secondary obligation; there is nothing in the "Continuing Guarantees", either in clause 1 or anywhere else, which would lead to the conclusion that the words "demand in writing" in clause 1 were intended to apply only to the secondary and not to the primary obligation. Accordingly, we would hold that it is a condition precedent to the liability of the depositor under the "Continuing Guarantees" that demand shall first have been made on him in writing; no such demand having been made, his liability remains contingent, and there can be therefore no question of set-off in relation to his deposit.

21. We appreciate, of course, that on the instruments which the court had to consider in theM.S. Fashions case (above), the court came to the conclusion that the "principal debtor" clauses in that case had the effect of creating primary liability for the purposes of the rule that the debt was not contingent upon demand. In coming to the opposite conclusion upon the true construction of clause 1 of the "Continuing Guarantees" in our case, we do not intend to express any dissent from the views expressed by the court in the M.S. Fashions case, nor to be taken as having done so. We simply decide, that on the true construction of the "Continuing Guarantees" in our case, the necessity for the "demand in writing" stipulated for in clause 1 is as applicable to the obligation entered into by the depositor as "primary obligor" as it is to the obligation entered into by him as surety or secondary obligor.

22. Mr. Moss, Q.C., argued that if this court was against him (as it is) on the true construction of clause 1, nevertheless the liability of the depositor ought to be treated as immediate by virtue of the provisions of clause 21 of the "Continuing Guarantees", which reads as follows:

"21. As a separate and independent stipulation (but without increasing the before-mentioned total amount recoverable hereon), the undersigned agrees that all sums of money which may not be recoverable from the undersigned on the footing of a guarantee whether by reason of any legal limitation disability or incapacity on or of the Principal or any other fact or circumstance and whether known to you or not shall nevertheless be recoverable from the undersigned as sole or principal debtor(s) in respect thereof and shall be repaid by the undersigned on demand in writing made by you or on your behalf."

23. But we would reject this argument, too.

24. It is clear, in our judgment, that clause 21 is intended to meet the case where for one reason or another there is no principal debtor. In such a case, there being no principal debt recoverable by the bank, there can be no obligation on any surety to answer for the principal debt in his capacity as surety. The only way in which the bank can recover is by stipulating that, in such circumstances, the "surety" is to shoulder primary liability to pay the debt; and that, of course, is a "separate and independent" obligation from his obligation as "surety". But, in our case, the event contemplated by clause 21 has not arisen. It has never been suggested that the principal debt is not recoverable from the principal here; and it is only in those circumstances that clause 21 can have any application. And, anyway, it seems to us that even when the events contemplated by clause 21 arise, and the "surety" becomes liable, not as surety but as "sole or principal debtor", his liability is still contingent on demand in writing made of him; we come to this conclusion because, in our judgment, the concluding words of clause 21 expressly so provide. It must be remembered that this is not a genuine case of original primary obligation; it is a case of substituted primary obligation and is not covered by the cases which establish, that in a case of original primary obligation, a provision for demand is not normally regarded as creating a contingency.

25. For the reasons we have endeavoured to state, we are in favour of the bank on the question of construction which we have had to consider; and it is not necessary for us to discuss at any length the additional argument which found favour with Barnett J. and was advanced in this court by Mr. Gavin Lightman, Q.C., on behalf of the bank, to the effect that the general rule, in cases of primary obligation, that a provision for a demand is not regarded as creating a contingency does not apply when the provision is for a demand in writing, as in our case. The court, in the M.S. Fashions case, appears to have assumed that there was no difference between a demand, and a demand in writing, for this purpose; but Barnett J. thought otherwise and fastened on this point as the ground of his judgment in favour of the bank. There is, so far as we are aware, no authority in which the distinction between a demand, and a demand in writing, has been drawn for the purposes of the rule that, in the case of a primary obligation, liability is not contingent upon demand. Having come to a conclusion in favour of the bank on other grounds, we are reluctant to express an opinion upon this point, which does not arise for decision.

26. Mr. Moss, Q.C., argued that if, for whatever reason, the court concluded (as it has) that the depositor's liability was contingent and not immediate, it should direct the liquidator to make such a demand (or, to avoid circuity of action, to treat the liquidator as if he had made such a demand).

27. The liquidator is an officer of the court; and (said Mr. Moss, Q.C.), the conduct of the liquidator, in deliberately refraining from making a demand on the depositor, so frustrating the set-off which the depositor wants to effect, is unacceptable conduct, calculated to benefit the general body of the bank's creditors at the depositor's expense. Of course the court has jurisdiction to ensure that its officers behave acceptably: see, for example, Ex parte James (1874) 9 Ch. App. 609; In re Wyvern Developments Ltd [1974] 1 WLR 1097; and In re Multi Guarantee [1987] BCLC 257. But in our case the only question is whether the liquidator ought to do something to the prejudice of the general body of creditors in order to favour this one particular creditor. It is the primary duty of the liquidator to protect the interests of the general body of creditors, and there is, in our judgment, nothing unacceptable in his decision not to make a demand of the depositor, a decision which ensures to the benefit of the general body of creditors although it operates to the detriment of this particular creditor. Nor is the result unjust. Why should a depositor against whom a claim might have been but is not made by the bank be entitled to any more favourable treatment than a depositor against whom the bank never had any claim in the first place? Such treatment would produce an result unfair to the general body of creditors.

28. For these reasons, we are unable to grant the depositor the alternative relief which he has sought. There is nothing we can usefully add except to note that the bank wishes to reserve the right to argue, if this case goes further, that even if the liability of the depositor to the bank is immediate he can have no set-off because his deposit was charged to the bank and he has no debt due to him, merely an equity of redemption. The bank concedes that this argument cannot stand with the decision in the M.S. Fashionscase.

29. In the result, we find ourselves constrained to dismiss this appeal. We propose to dismiss the appeal with costs; but if the depositor wishes to contend otherwise, the case must be restored to the list for argument as to costs on a date and at a time to be fixed for that purpose.