DBS KWONG ON BANK LTD v. MORE FAIR PROPERTIES LTD & OTHERS

HCMP 3101/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 3101 OF 2001

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J U D G M E N T

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Introduction

1.  The Plaintiff is a bank.  It has brought this action against the Defendants for repayment of a loan of $26 million that it made to the 1^st Defendant.  The 2^nd and 3^rd Defendants are 50% shareholders in the 1^st Defendant; the 2^nd Defendant personally and the 3^rd Defendant through a 100% owned BVI company by the name of Win Favour Limited.  This trial only concerns the 3^rd Defendant’s (“the Defendant”) alleged liability. 

2.  The loan was made to the 1^st Defendant so that it could purchase shop premises at Jordan from the then owners Larry Yung & Company Limited which was a company owned and controlled by the Defendant.  The Plaintiff required and obtained security for the loan by means of a legal charge over the premises and personal guarantees from the 2^nd Defendant and the Defendant.

3.  The loan was extended to the 1^st Defendant on 8 September 1997.  Default under the loan started in or about October 2000.  By 8 February 2001 the amount outstanding was $22,189,548.90.  Letters of demand were sent to both Defendants under their guarantees on 3 January 2001, requiring them to pay this outstanding amount.

4.  That demand was not responded to save for two part payments made by the 2^nd Defendant in February and March 2001, totalling $719,707.40 for which credit has been given by the Plaintiff.

5.  Judgment in default was entered against the 1^st and 2^nd Defendants on 1 November 2001 in the sum of $22,545,549.80.  Neither of these Defendants would appear to be in a position to satisfy the judgment.

6.  In March and April 2002, in circumstances to which I will be required to make further reference, the Defendant made further part payments totalling $1.1 million.

7.  Pursuant to its rights under the Legal Charge, the Plaintiff obtained possession of the premises which it has now sold.  As a result the amount claimed against the Defendant, reduced by the proceeds of sale of the premises, is $11,569,195.52 comprising principal and interest. 

The various relationships

8.  The Defendant has defended the matter on the basis that his liability under the guarantee is void and unenforceable because, he says, the 2^nd Defendant has acted as the Plaintiff’s agent throughout the negotiation that preceded the signing of the guarantee and that as such he made a number of false representations to him by which he was induced to enter into the guarantee.  Whilst this is strongly denied by the Plaintiff there are some unusual features in the evidence which require me to set out the connections between the parties.

9.  The 2^nd Defendant was at the time that this was going on a practising solicitor and the senior partner of the firm that bore his name, Messrs S. H. Chan & Co.  This firm was and had been for sometime on the Plaintiff’s list of approved solicitors that it would appoint to do its conveyancing work with particular reference to mortgage loans that it would provide customers wishing to purchase property.  The 2^nd Defendant was also associated with the Defendant.  In paragraph 6(ii) of his amended-Defence and Counterclaim their relationship is pleaded in the following way:-

“a close personal friend of [the Defendant] to whom [the Defendant] had reposed trust and confidence and had handled various personal matters for [the Defendant] personally and through Messrs SH Chan & Co, as well as advising [the Defendant] on various personal and legal matters.”

10.  The impact that these relationships allegedly have on the validity of the transactions relied upon by the Plaintiff will emerge more clearly from a consideration of the evidence and it does so in two separate ways.  Firstly, in respect of the precise nature and effect of the Plaintiff’s instructions to the 2^nd Defendant in the execution of the legal charge and the guarantee and secondly, in respect of the relationship between the 2^nd Defendant and the Defendant as between themselves and how that relationship allegedly affected the mind of the Defendant when he came to sign the guarantee.

The sale of the shop premises by Larry Yung & Company Limited (LYCL)

11.  These premises which comprise Shop 1 and 2 of the Ground Floor, Fortune Court, 4-6, Tak Hing Street, Jordan, had been purchased by LYCL (a company controlled by the Defendant) for $3.55 million in 1985.  In July 1997, it sold these premises to the 1^st Defendant for $40 million making a, at all events paper, profit of over $36 million for the Defendant and LYCL.  The 1^st Defendant was the vehicle set up by the 2^nd Defendant and the Defendant to purchase the premises and to operate a restaurant business from there.  There is no doubt that both men got on well together having regard to their previous association going back a number of years.  I am satisfied on the evidence that the Defendant respected the 2^nd Defendant as a solicitor and as someone whose judgment he could trust.  That having been said, the Defendant himself is an experienced businessman having operated in the retail fashion industry for a number of years beforehand and indeed these premises had been used by him as a retail clothing shop.  I am satisfied having heard the evidence that he knew all about the ins and outs of commercial life having in the past, inevitably, dealt with banks, accountants, government departments including the Inland Revenue and of course all that goes with being involved in the fashion industry which would include the nitty gritty of buying and selling.  That would have involved him in commercial contracts, shipping documents, letters of credit and so forth.  Whilst the Defendant has sought to present himself as somewhat lacking in knowledge of property transactions, banker’s guarantees and the rest that would have gone with this particular transaction I am satisfied that he in fact had more than a working knowledge of such matters and that he would have been aware of what was required of him and what was involved.  He was certainly no innocent abroad. 

12.  LYCL having sold the premises to the 1^st Defendant, the evidence is that in August 1997, the Plaintiff was approached to provide a loan to the 1^st Defendant in order to facilitate the purchase of the premises.  I am satisfied that the Plaintiff was approached for the loan, as opposed to any other bank, having regard to the 2^nd Defendant’s association with it. 

The course of the application for the loan

13.  The plaintiff’s staff having had the application referred to them by the 2^nd Defendant proceeded to process it.  This would have included discussions with both the 2^nd Defendant and the Defendant.  One of the matters which would have exercised the Plaintiff’s staff was the nature of the security, that is to say the shop premises themselves, and the financial ability of the two individual defendants.  With that in mind Mr Tong, the Plaintiff’s branch manager, and a Miss Chu visited the Defendant at the shop premises.  There is an important dispute as between Mr Tong and the Defendant as to the nature of this visit.  The Defendant’s evidence is that this was no more than a courtesy visit with very little being said about his financial position.  Mr Tong’s evidence is that whilst the visit may have been courteous it certainly also involved him and Miss Chu asking the Defendant a number of pertinent questions about his and his companies financial position.  Mr Tong accepts that he did not address any questions to the Defendant about LYCL’s financial statements but the Defendant was asked to produce more up-to-date ones which Mr Tong says were subsequently sent to the bank by fax.  As to this meeting, I prefer the evidence of Mr Tong.  He and Miss Chu would hardly bother to go there for a general chat.  I am satisfied that they went there to generally appraise the Defendant and his financial position without in any sense going into it to any great detail.  In the course of the meeting, they discussed the prospects of the hoped for new venture and no doubt were able to form some reasonably reliable opinion about the Defendant as a potential borrower, through the 1^st Defendant, and as a guarantor of 1^st Defendant’s debt to the Plaintiff. 

14.  An important part of the Defendant’s case is that the Plaintiff, having regard to its relationship with the 2^nd Defendant, showed favoritism towards the 2^nd Defendant and approved this loan rather more easily and certainly more leniently than would have been the case but for that relationship.  Having regard to the loan approval documents, it would appear to be that this matter was processed in the usual professional way, with the bank anxious to ensure that a substantial loan such as this was not being extended to parties that would not be good for the loan.  The approval documents all confirm that view of the evidence.  Mr Tong of course has said that he saw the Defendant as a potentially valuable customer because he hoped that he would be depositing the $40 million that represented the proceeds of sale of the premises with his bank.  No doubt that was something which the Plaintiff would have taken into account in a general way and made the bank perhaps more kindly disposed towards the Defendant, but this factor did not in my judgment cause it to approve this matter without regard to its usual policy in relation to loans such as this.  The amount advanced was within the 60 to 70% range of the value of the premises which had been professionally appraised by the bank’s own valuer.  The restaurant business was to be run by a professional manager and the 2^nd Defendant and the Defendant had presented themselves as careful individuals who had thought out what they were proposing to do in the running of the restaurant.  A proper budget had been prepared and presented as part of the supporting documentation.  Having regard to all of this evidence, I am therefore satisfied that the loan application was processed on an entirely arms length basis and that the bank extended no favours to these applicants.

The 2^nd Defendant’s role in relation to the execution of the documents

15.  It is this which really lies at the heart of the Defendant’s case.  It is submitted on his behalf, by Mr Kenneth Chan, that properly viewed the 2^nd Defendant was acting on behalf of the Plaintiff as its agent when it came to the execution of the guarantee.  The Defendant says that the bank required him to sign the guarantee as a matter of formality only and that it would not look to him, in the event of default, to make good his promise under the guarantee.  The basis to all of this is that the 2^nd Defendant and the Defendant had entered into a 1^st Defendant shareholders’ agreement between themselves whereby the 2^nd Defendant would have the use of $20 million of the loan of $26 million and the Defendant the remaining $6 million to be used by his company Win Favour Limited.  The Defendant says that the 2^nd Defendant told him that upon the two of them signing the shareholders’ agreement that this agreement had been passed by him to the Plaintiff which was therefore aware of the arrangements between the two of them and which it was agreeable to.  It is his case that he was only prepared to sign the legal charge, the loan agreement and the guarantee on the strength of these representations.

16.  So far as the documents are concerned, these are all standard banking documents.  It is clear on the evidence that a Miss Janice To, one of the 2^nd Defendant’s partners at SH Chan & Company, and not the 2^nd Defendant, had arranged for the execution of the guarantee by the Defendant and who also witnessed his signature.

17.  Approaching this matter on as generous a view of the facts, as I can reasonably adopt in favour of the Defendant, I am simply unable to accept any part of the interpretation that Mr Kenneth Chan has invited me to adopt.  The Defendants’ case simply cannot stand up to any proper scrutiny.  It lacks any sense of realism.  From start to finish, in my judgment, the bank had dealt with this in accordance with its normal banking practice.  It would have done it on no other basis.  Whilst the business was introduced to them by the 2^nd Defendant who was one of their approved solicitors everything that followed was dealt with on a commercial arms length basis.  Whilst one cannot help but feel considerable sympathy for the Defendant who quite clearly was very badly let down by the 2^nd Defendant once the restaurant business went from bad to worse that cannot excuse his attempts to get out of his lawful obligations by giving untruthful evidence.  His case that the bank had told the 2^nd Defendant that the guarantee was a mere formality and that this is what the 2^nd Defendant told him is frankly moonshine.  I reject his account completely.  This also involves my rejecting the suggestion that the bank had told the 2^nd Defendant that the shareholders’ agreement, whereby the Defendant would only be responsible for $6 million of the $26 million loan was something that the bank was agreeable to.  That suggestion simply does not make sense.  The Plaintiff was not interested in any agreement that the two Defendants had entered into amongst themselves.  This is a document that quite clearly only regulated matters between the two of them.  The Plaintiff would not have been interested in accepting anything other than joint and several liability in respect of the guarantee.

18.  As to the status of the 2^nd Defendant, vis-à-vis the Plaintiff and the Defendant I am satisfied that the only authority that they gave him and his firm was to see that the Defendant properly executed the guarantee and the loan agreement.  Equally, I am satisfied that the Defendant would have known that and did in fact know it.  He realized that he was entering into a normal commercial transaction with a bank who in lending the 1^st Defendant a very substantial amount of money would have been anxious to protect itself as best it could.  This was a tried and tested transaction which was routine so far as the Plaintiff was concerned and which the Defendant fully appreciated.

The negotiations

19.  I had heard a lot of evidence as to the course of the negotiations between the Defendant and Mr Kwan, the responsible officer of the Plaintiff, as to repayment of the outstanding amount.  Again I am afraid to say that the Defendant has chosen to misrepresent to the position.  The bank by then had possession of the premises under the terms of the legal charge and it would have been anxious to recoup everything that was owing to it whilst understanding the commercial realities that the two guarantors were clearly short of funds.  The 2^nd Defendant had in effect absconded leaving the Defendant holding the baby, if I can express it in that way.  The premises were sold and I am satisfied that the bank was not going to come to any agreement with the Defendant which would have in any way diminished its ability to look to him under his joint and several liability on the guarantee.  Accordingly, I reject his account of the negotiations with Mr Kwan.  Mr Kwan’s evidence shows that bank whilst firm was also trying to be as fair as possible in not pushing the Defendant too far to the extent that if it did so he would be unable to pay anything.  The bank would have preferred to negotiate on the basis of giving him time to pay off the liability provided the instalments were reasonably substantial.  That is the reality and the extent of it.  In the event, the Defendant was unable to meet the bank’s requirements with the result that the matter has now proceeded to trial. 

The law

20.  Both counsel, who have had to consider the matter on a number of alternative factual bases, have very carefully addressed me on the law as it is relates to misrepresentation, undue influence and agency.  In the event I have been able to resolve this case entirely as a question of fact.  Accordingly, it has not been necessary from me to refer to the cases to which I have been helpfully referred.  Sadly, this is an all too familiar case of a failed business venture were a commercial borrower is being called to account on his agreements.  In the case of the Defendant I am sorry to say that he appears to have been badly let down by the 2^nd Defendant on what is a commercial transaction between them.  That is something for which the bank can have no involvement or responsibility.  Unfortunately, whilst I am sure that he is usually an honourable man he has, on this occasion, decided to put forward an untruthful account with a view to trying to get out of his lawful obligations.  Overwhelmingly, the evidence is all one way and there must be judgment to the Plaintiff against the Defendant in the amounts claimed, together with an order for costs on an indemnity basis in accordance with the terms of the guarantee.  The order for costs will be an order nisi in the usual way and I will give the parties liberty to apply as to the precise terms of the order particularly having regard to the amount of interest now outstanding in addition to the principal amount claimed.