JCG FINANCE CO. LTD. v. GROUP LIFE INVESTMENT LTD. AND ANOTHER

HCA 2417/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2417 OF 2001

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D E C I S I O N

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Introduction

1. This is an appeal by the 2nd Defendant against the Master's decision in granting it leave to defend conditional upon payment into Court the sum of $8 million and lodging certain documents into Court.

The Plaintiff's case

2. The Plaintiff's case is that as at 31 July 1999 Tung Kee Investment Limited ("Tung Kee") and Unity Win Investment Limited ("Unity Win") were indebted to the Plaintiff in the sum in excess of $146 million. For the purpose of restructuring this debt, the Plaintiff and five other parties, including the 2nd Defendant, entered into a Debt Restructuring Deed dated 13 August 1999 ("the Deed"). As part of the consideration for the debt restructuring and pursuant to the Deed, inter alia, the 2nd Defendant entered into a Security Assignment of Shares on the same date ("the Assignment") under which:

(i) The 1st and 2nd Defendants covenanted to repay to the Plaintiff on demand and by way of primary obligation the principal sum of $80 million plus interest;

(ii) As security for this repayment obligation, the 1st and 2nd Defendants mortgaged by way of first legal mortgage their shares in Yield Win Property (China) Limited ("Yield Win") (constituting the entire issued share capital of Yield Win);

(iii) For the purpose of the security, various documents including share certificates, board resolution and letters of resignation by existing directors ("the Documents") were lodged with the Plaintiff.

3. Both the 1st and 2nd Defendants failed to repay the debt upon the Plaintiff's demand by letters dated 9 August 2000. Despite repeated requests, the 2nd Defendant failed to provide the Plaintiff with the latest audited accounts of Yield Win, without which the relevant contract notes cannot be stamped. As a result, the Plaintiff has been prevented from completing the transfer of the Yield Win shares. Yield Win also appointed three additional directors which has the effect of rendering part of the Documents previously provided to the Plaintiff ineffective for the Plaintiff in enforcing the security over the Yield Win shares.

The 2nd Defendant's defence

4. The background, according to the 2nd Defendant, is as follows. Tung Kee is the parent company of Unity Win. In 1997, Unity Win and a Chinese party formed a joint venture company called Beijing Jinlong Building Company Limited ("Beijing Jinlong") to refurbish and convert Jinlong Building in Beijing into a service apartment in return for higher rental income. The joint venture borrowed from the Plaintiff a loan secured by the mortgage of Jinlong Building, for the purpose of funding its refurbishment. Beijing Jinlong made repayments to the Plaintiff until 1999 when it started to default in payments and arrangements were made for the debt to be restructured as alleged by the Plaintiff. The 2nd Defendant alleges that the loan was advanced to Beijing Jinlong and it signed the Deed as guarantor and not as principal debtor. Concurrent with the re-structure was the transfer of the Unity Win's shareholding in Beijing Jinlong to Yield Win and notional substitution of Unity Win by Yield Win to some extent. The 2nd Defendant's shares in Yield Win were mortgaged as security under the Assignment. Since then $20 million had been repaid to the Plaintiff by Beijing Jinlong. Beijing Jinlong was again in default in 2000 and the Plaintiff enforced the mortgage by instituting arbitration proceedings against Beijing Jinlong. Subsequently, the parties reached a settlement on 21 November 2000 to defer repayment of the debt.

5. The 2nd Defendant's first defence is that there was an agreement that in consideration of Yield Win executing the Deed, Beijing Jinlong agreed with the Plaintiff that it would pay the $80 million debt for itself and Yield Win. Thus there was an "express or implied agreement" that the Plaintiff should first look to Beijing Jinlong before Yield Win for repayment, and that the 2nd Defendant would only be liable if both Beijing Jinlong and Yield Win failed to pay. The second defence is that the loan now sued upon was the same loan advanced by the Plaintiff to Beijing Jinlong in 1997 for refurbishing Jinlong Building. The 2nd Defendant contends that it signed the Deed as guarantor and not as principal debtor, that the Plaintiff in fact looked to Beijing Jinlong as the primary party liable for repayment, and that by compromising with Beijing Jinlong in the arbitration proceedings without the 2nd Defendant's consent, the 2nd Defendant was discharged of its liability as guarantor of the loan.

The applicable principles

6. The principles applicable on an application for summary judgment are well settled. The burden is on the defendant to show that there are issues which ought to go to trial. He has to show what he says is credible: Ng Shou Chun v Hung Chun Sang [1994] 1 HKC 155. Whether the defendant's assertions are believable is a question to be answered not by taking those assertions in isolation but rather by taking them in the context of so much of the background as is either undisputed or beyond reasonable dispute: Re Safe Rich Industries Ltd (CA 81/94, unreported) and as tested against contemporaneous documents.

Whether the defence is credible

7. In respect of the first defence, Mr Coleman submits there is a complete failure on the part of the 2nd Defendant in its pleadings and affidavits to condescend upon particulars, such that it might even be suggested that a triable issue has been shown. The allegation in the pleading is glaringly lacking in particulars, e.g. as to when the agreement was made, who were the parties to the agreement and why if such an agreement was made the parties nevertheless saw fit to enter into the Deed and the Assignment. In the absence of particulars, both in the pleading and in the affirmations, I have to agree with Mr Coleman that no triable issue has been shown by this defence and the 2nd Defendant's affirmations. However, it should be noted that the defence appears to be supported by the Deed and Assignment as a matter of construction (see below).

8. The 2nd Defendant's second defence is more substantive. In reply to this defence, the Plaintiff pleaded that the arbitration and the settlement between the Plaintiff and Beijing Jinlong had nothing to do with the present claim. Mr Coleman sought to persuade me that this was in fact the case as the parties to the Jinlong Building Mortgage and the parties to the Deed and Assignment were different. He submits that the 2nd Defendant is attempting to complicate the issue by bringing in the mortgage so as to delay the action against which it has no defence. In my view, whether these were in fact one and the same loan has a significant bearing on the defence.

9. There is no specific averment that the present claim against the 2nd Defendant is not in respect of the same loan which formed the subject matter of the arbitration proceedings. If these were different loans, it would not be difficult for the Plaintiff to plead with more particularity in reply. Similarly, it would not be difficult for the Plaintiff to depose with more particularity supported by documents that the advances referred to in the Statement of Claim were some other advances for some other purposes and not the same advances made in 1997 to Beijing Jinlong for funding the refurbishment of Jinlong Building referred to in the Plaintiff's pleadings in the arbitration proceedings. It would not, for example, be difficult for the Plaintiff to produce the loan documentation in respect of its advances to Beijing Jinlong in 1997 which formed the subject matter of the arbitration proceedings rather than just relying on the mortgage document, which is just a security document.

10. On the contrary, a scrutiny of the contemporaneous documents supports the case of the 2nd Defendant that the loan referred to in the Deed and the loan which formed the subject matter of the arbitration proceedings against Beijing Jinlong was one and the same loan. Clause 1 of the Deed, which is the basis of the Plaintiff's claim, defines "Jinlong Building Mortgage" as the mortgage dated 29 July 1997 granted by Beijing Jinlong in favour of the Plaintiff over the Jinlong Building. Clause 5.2 provides that if Yield Win defaults in payment of debt, Tung Kee and Unity Win (together known as the "Borrowers" under the Deed) will pay the remaining sums due, but the Plaintiff "will not be entitled to enforce the Borrower's obligations under this clause 5.2 unless the Lender has used reasonable endeavours to enforce, as expeditiously as possible, the Jinlong Building Mortgage and a period of two years from the date of Yield Win's default has expired." Thus it is obvious that the loan which was said to have been made available to Tung Kee and Unity Win in the Recital to the Deed is in fact the same loan made to the foreign party to the joint venture, while the joint venture, i.e. Beijing Jinlong, provided the mortgage of Jinlong Building as the security for the loan. Hence, the loan which formed the subject matter of the Deed is the same loan advanced under the Jinlong Building Mortgage, the repayment of which would discharge the liability of all the parties, including the 2nd Defendant, to the Deed. This is consistent with the pleadings filed by the Plaintiff with the China International Economic and Trade Arbitration Commission in connection with the arbitration proceedings. It defies common sense for the Plaintiff to say that the arbitration and the settlement between the Plaintiff and Beijing Jinlong had nothing to do with the present claim.

11. In the Plaintiff's letter dated 30 July 1999 to Beijing Jinlong, shortly before the Deed was entered into, the Plaintiff outlined a proposal which is very similar to the restructure arrangement under the Deed, such as: Unity Win transferring its shareholding in Beijing Jinlong to "a new company"; upon repayment of $20 million, the Plaintiff would release Block 4 of Jinlong Building from the Jinlong Building Mortgage; that the Plaintiff's security over the Kowloon Tong property be limited to $3 million. From this letter, it is abundantly clear that the loan to be restructured and referred to in the Deed and the 1997 refurbishment loan under the Jinlong Building Mortgage was one and the same loan, which formed the subject matter of the arbitration proceedings.

12. Again, in the recital in another restructure agreement between the Plaintiff, Beijing Jinlong and Unity Win dated August and September 1999, it is clearly stated that Unity Win is a shareholder of Beijing Jinlong which is a joint venture between a foreign investor and a Chinese party; that the Plaintiff borrowed a total of $122 million to Unity Win and its parent company, Tung Kee, for refurbishment of Jinlong Building. The amount of the loan is the same as that referred to in the Deed and the Assignment. The lender, the borrowers and the mortgaged property are also the same.

13. In the light of these documents, the Plaintiff's assertion that the arbitration proceedings had nothing to do with the present claim is hardly credible. Its failure to proffer any explanation in rebuttal makes the 2nd Defendant's defence all the more credible. It is therefore very likely that the loan which formed the subject matter of the arbitration proceedings against Beijing Jinlong was the same loan raised in 1997 for the purpose of refurbishing Jinlong Building secured by a mortgage over Jinlong Building and is also the same loan which formed the subject matter of the loan restructure Deed in 1999 which the Plaintiff is now seeking to enforce against the 2nd Defendant.

14. It is trite law that dealings between the creditor and debtor which vary the contract between them in the absence of the guarantor's consent, has the effect of discharging the guarantor's liability under the guarantee: Rowlatt on Principal and Surety, 5th ed. para 5-16, 8-01; Paget's Law of Banking, 11th ed. pp 621-622. In order to succeed on this defence, the 2nd Defendant has to show that on a true construction, the Deed is a deed of guarantee and not an indemnity so that its liability is a secondary liability. As a fall back, the 2nd Defendant contents that this raises difficult questions of construction involving disputes as to the whole factual matrix which requires to be fully investigated and assessed in a full trial.

15. Mr Coleman submits that the Assignment is a simple document which does not raise difficult questions of construction. He refers to Clause 2.2 and submits that as the 2nd Defendant has covenanted to indemnify the Plaintiff by way of primary obligation, its liability is one of indemnity and not guarantee. The relevant part of Clause 2 provides as follows:

"2.1 The Assignors covenant with the Lender that they will on demand pay to the Lender:-

2.1.1 The principal sum of $80 million plus interest ...;

2.2 The Assignors agree with the Lender as a primary obligation, to indemnify and keep indemnified the Lender on demand by the Lender from and against all and any losses, damages, costs and expenses incurred by the Lender arising from any failure by the Assignors to carry out, perform or meet any of the Assignors' obligation as particularised in clause 2.1 above ..."

16. I think Mr Coleman may have understated the problem of construction that is involved. The "primary obligation to indemnify" in Clause 2.2 refers to indemnifying the Plaintiff of the 2nd Defendant's obligation to pay the principal sum of $80 million under Clause 2.1. However, Clause 2.1 is silent as to whether the liability to pay the $80 million is one under an indemnity or guarantee. The general principle of construction is that a document ought to receive that construction which its language will admit, and which will best effectuate the intention of the parties, to be collected from the whole of the document and that greater regard is to be had to the clear intention of the parties than to any particular words which they may have used in the expression of their intent: see Ford v Beech (1848) 11 QB 852 at 866. Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract: per Lord Hoffman in Investor's Compensation Scheme Ltd v West Bromwich Building Society, [1998] 1 WLR 897 at pp 912. The Assignment, in particular Clause 2.1, has to be construed against the background, including the Plaintiff's loan to Beijing Jinlong, the Jinlong Building Mortgage, the restructure of the debt and in particular the Deed from which flowed the 2nd Defendant's obligation under the Assignment. Clause 3.2 and 5.2 of the Deed provide:

"3.2 In consideration for the Borrower, Yield Win, Group Life and Charteryield entering into the Agreements the Lender agrees that the indebtedness referred to in clause 3.1 shall be repaid and satisfied by the Borrower and Yield Win in accordance with the terms of this Deed."

"5.2 If Yield Win defaults in payment of any of the sums due under clause 4 the Borrower will pay to the Lender all sums remaining due under clause 4. The Lender will not be entitled to enforce the Borrower's obligations under this clause 5.2 unless:

5.2.1 the Lender has used reasonable endeavours to enforce, as expeditiously as possible, the Jinlong Building Mortgage; and

5.2.2 a period of two years from the date of Yield Win's default has expired."

17. From Clause 3.2, it is obviously the intention of the parties that the debt shall primarily be repaid by the original borrowers under the new repayment terms, i.e. by Tung Kee and Unity Win and also Yield Win which substituted Unity Win and that the Assignment entered into by the 2nd Defendant is intended to be a security to secure the performance by Tung Kee and Yield Win of their payment obligation in accordance with the terms of the Deed. Hence it is arguable that the liability of the 2nd Defendant is a secondary one of a guarantor. Furthermore, from Clause 5.2, it is also clear that the obligation of Tung Kee and Yield Win is a secondary one and which could not be enforced against Tung Kee unless the Plaintiff has used reasonable endeavours to enforce, as expeditiously as possible, the Jinlong Building Mortgage. Hence, the combined effect of these two clauses is that the party primarily liable to repay the debt is Beijing Jinlong and that the Plaintiff will look to Beijing Jinlong to repay the debt to the extent of enforcing the Jinlong Building Mortgage expeditiously. If Beijing Jinlong is in default, the Plaintiff may only enforce the debt against Tung Kee provided it has exercised reasonable endeavours expeditiously to enforce the Jinlong Building Mortgage and a period of two years from the date of Yield Win's default has expired.

18. For the purpose of determining this appeal, it is not necessary for me to come to a concluded view as to the true construction of the Assignment. Suffice it is for me to conclude, as I do, that it is at least arguable that the intention to be collected from the Deed and the Assignment is that the Plaintiff shall first look to Beijing Jinglong for repayment of the debt even to the extent of expeditiously enforcing the Jinlong Building Mortgage and then to Tung Kee before resorting to the 2nd Defendant and hence the 2nd Defendant's liability is a secondary liability under a guarantee. The true construction of the Assignment should be left to be determined at trial after all factual disputes as to the background have been investigated and all the legal issues on interpretation fully argued. It is trite law that dealings between the creditor and debtor which vary the contract between them in the absence of the guarantor's consent, has the effect of discharging the guarantor's liability under the guarantee. Thus, if on a true construction of the Assignment, the 2nd Defendant's liability under the Assignment is one of a guarantee, the Plaintiff's compromising with Beijing Jinlong in the arbitration proceedings would discharge the 2nd Defendant of its liability as guarantor under the Assignment. Hence, I am satisfied that the 2nd Defendant has shown a credible defence and should be given leave to defend. The question is whether that leave should be subject to any condition.

19. Yield Win, which is under the control of the 2nd Defendant, has appointed three additional directors. This rendered the previous documents provided to the Plaintiff ineffective as a security. The appointment also evinced an element of bad faith in attempting to defeat the purpose of the Assignment. Justice would require the parties to be restored to the same position as if there had not been any steps taken by the Plaintiff to avoid the security. This would require the retention of the conditions (2) to (4) of paragraph 1 of the Master's Order dated 28 November 2001. But for the above consideration, I would have given unconditional leave to defend.

Conclusion

20. In the circumstances, I allow the appeal to the extent that the condition as regards payment into court of the sum of $8 million be removed.

21. By consent, I order that costs of the appeal including the costs of and occasioned by the application in so far as it concerns the 2nd Defendant be in the cause.