STARIC LTD. v. EVER GAIN REALTY LTD. AND OTHERS

HCA 5026/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 5026 OF 1999

____________

____________

_______________

J U D G M E N T

_______________

1. This is a claim to recover from all three Defendants advances and interest thereon (including default interest) made by the Plaintiff to the 1st Defendant, secured by personal guarantees given to the Plaintiff by the 2nd and 3rd Defendants.

2. The Defendants deny liability.

History

3. The Plaintiff (Staric) is a company incorporated in Hong Kong. By agreement of November 1996 it agreed to purchase seven properties. Only one is relevant. That consisted of a number of floors of the Chun Kiu Commerical Building in Shantung Street, Kowloon. Completion was fixed to take place on 15 September 1997.

4. By agreement of sub-sale and purchase of December 1996 between Staric and a company called Presto Profits Limited (Presto) Staric agreed to sell and Presto to purchase some of the floors in the Chun Kiu Building that Staric had agreed to purchase. Completion was timed to take place contemporaneously - 15 September 1997.

5. The sale between Staric and Presto was conducted through the offices of a real estate agency called Uni-Pacific Property Consultants Limited (Uni-Pacific) which, in the usual way, looked for its commission to be paid by both parties, in recognition of its acting as agent for both parties in the sub-sale and purchase.

6. Presto's purchase was of what used to be space occupied by a large department store for the purpose of converting the same into individual shops for resale, in a commercial complex comprising shops and common areas, to be called Sim City. There were terms in its agreement with Staric that provided for these intentions. These included a provision that if Presto (as purchaser) so requested Staric (as vendor) would advance funds on terms to the purchaser of any individual shop in the complex upon the security of the purchaser's interest. This was clause 30(b) parts of which I reproduce:-

"30. Upon written request to the Vendor by the Purchaser of not less than 21 working days before the date for completion of the sale and purchase of the said premises herein, the Vendor or its nominee shall:-

(b) advance to the sub-purchaser(s) of units in the said premises (whether directly or indirectly from the Purchaser but on an arms length basis) sums aggregated up to a maximum of HK$385,000,000.00 (.........) at an annual interest rate of 3% above the prime rate (quoted from time to time from the Hongkong and Shanghai Banking Corporation Limited) and be repaid by 24 equal consecutive monthly instalments together with interests accrued thereon the first instalment to be paid one month after the drawdown date for the sole purpose of completion thereof ("Sub-Purchase Loan") But Subject to the following conditions:-

(here follow calculations to determine the maximum that may be borrowed in any given case)

(iii) the said sub-purchaser who applies for the Sub-Purchase Loan shall not be the subsidiary (direct or indirect) or affiliated company of the Purchaser or have common shareholders or directors of the Purchaser and shall be a genuine third party unconnected with the transaction hereunder between the Vendor and the Purchaser."

7. Presto proceeded to market the proposed shop units, seeking to attract owner occupiers or capital investors, ideally to commit and complete the purchase of the shop unit or units of their choice on the date Presto was committed to complete, namely, 15 September 1997. It produced a glossy brochure depicting a shopping mall with a high tech, space age theme. Presto appointed Uni-Pacific as its agent.

8. The 2nd Defendant (Mr Cheung) came on the scene in about May 1997. He was introduced to the proposed Sim City by a real estate agent called Leiman Leung (Mr Leung) who at the time was employed by Uni-Pacific. Of course there were no completed shops in a completed mall to show him - no work was possible until the purchase by Presto was completed and it took possession in September. Mr Cheung expressed interest and, in June, he committed himself by signing provisional agreements to purchase three adjoining units designated numbers 307 to 309 on the third floor for $5.431 million, $5.33 million and $8.295 million respectively. They were identified on an attached plan.

9. The deals that were struck provided for completion on 15 September 1997, with Presto however retaining possession for 3 months (subject to extension) to enable the mall to be constructed and that included the partitioning of the shop units.

10. Mr Cheung instructed Messrs Kok & Ha, solicitors, to represent him in the purchases. Through that office he signed the formal sale and purchase agreements. He paid the required deposits on due date, amounting to 15% of the purchase price in each case. There was, curiously, a clause that "the keys or written authorization to get possession would be delivered within 5 days of the date of completion". Quite apart from the physical impossibility of the mall and its shops being ready by then, this was at odds with that clause which permitted Presto three months to carry out the construction.

11. By fax of 6 September Kok & Ha gave notice to Staric's solicitors Messrs Vincent T K Cheung Yap & Co (Vincent Cheung) that Mr Cheung was among several end-purchasers who wanted to borrow such amounts as by formula Staric was in its agreement with Presto committed to advance. After that Mr Cheung decided to complete the purchases in the name of a family owned company. He and his son the 3rd Defendant (Mr K M Cheung) took 1 share each in the capital of $2 of the 1st Defendant (Ever Gain Realty) and appointed themselves directors. Then, at the offices of Kok & Ha on 13 September, Mr Cheung nominated Ever Gain Realty to become the purchaser and to take title on completion. Mr Cheung signed the requisite nominations in his own right and as an authorised signatory for Ever Gain Realty.

12. On the same day the Messrs Cheung, armed with Ever Gain Realty's common seal, attended at the offices of Vincent Cheung to complete the documents prepared in advance to secure the advances Staric had agreed to provide. The amounts to be advanced and secured by the legal charges were the maximum amounts by formula Staric had committed itself to advance in its agreement with Presto under clause 30(b). That was $2,339,856 for each of units 307 and 308 and $3,873,339 for unit 309, to be repaid over 24 months at an interest rate of 3% p.a. above prime. There was a default rate of 28% p.a. The borrower being an incorporated company with limited liability, there was the further condition that the directors execute joint and several guarantees securing payment. The documents thus to be signed were the legal charges and personal guarantees in respect of each of the three purchases.

13. Mr Cheung signed the minutes as chairman of Ever Gain Realty. Ever Gain Realty executed under seal the legal charges in the presence of the Messrs Cheung as directors. And the Messrs Cheung each signed the guarantees. These documents were signed in the presence of a Miss Judy P Y Fung (Judy Fung). At the time she was a conveyancing clerk employed by Vincent Cheung under a partner called Miss Agnes W Y Fung (Miss Fung) who was in overall charge of the plaintiff's conveyancing.

14. On or by 15 September, the due date for completion of the various sales, sub-sales and sub-sub-sales, all transactions were completed without a hitch. Presto thereafter took possession and proceeded to undertake the work necessary to convert what it had bought into Sim City. The shops were partitioned including those sold to Ever Gain Realty.

15. By 19 December 1997 the work was certified complete. Presto's solicitors wrote to Kok & Ha on 20 December 1997 giving notice of completion and that the end-purchasers of the various shop units, including Ever Gain Realty, could take possession. Ever Gain Realty did not take possession and has not done so since, or otherwise assumed its rights as owner.

16. Meanwhile Staric began invoicing Ever Gain Realty for the instalments of principal and interest due on the three legal charges Ever Gain Realty had executed in its favour. Those falling due on 15 October, November and December were paid on cheques drawn on an account held by the Messrs Cheung. After that no more payments were made. Staric continued to invoice each month, the amounts including the 28% default rate, which under the loan terms had fallen due. There was no response.

17. By letter of 17 December 1998 Vincent Cheung wrote to Ever Gain Realty as debtor and to the Messrs Cheung as guarantors giving notice that as a result of the default all moneys had become immediately due and payable and demanded payment. By this time a total of $10,387,424.13 including default interest was due, the interest accruing on a day by day basis .

18. There was no response. Staric issued its writ on 25 March 1999. There has been no payment since. Staric has calculated that as at 12 December 2001, the first day of trial, the total outstanding principal sum and accrued interest (but excluding default interest) was $8,455,291.37 with default interest from 17 December 1998 to 12 December 2001 amounting to another $7,076,500. Thereafter the interest accrues at $6,486.25 per day.

19. Those figures were not agreed but nor were they challenged. Nor is it the Defendants' pleaded case that the default rate represented a penalty.

The Proceedings

20. Staric's case is that Ever Gain Realty's failure to repay the amounts advanced together with interest are acts of default under the legal charges, entitling it to recover these amounts including default interest to the date of repayment from the defaulting debtor, Ever Gain Realty, and the persons who guaranteed performance, the Messrs Cheung.

21. I come now to the defence case as pleaded.

22. The defence begins by recounting the history and, in particular, that Mr Leung was employed by Uni-Pacific which was the agent for Presto promoting the sale of the shops proposed to comprise Sim City.

23. It is convenient to summarise the remainder of the defence by listing a series of averments as follows:

(1) that Mr Leung introduced Mr Cheung and thus all three Defendants to Staric as being prospective participants to take up advances for completion. Thereby Uni-Pacific was agent for Staric in its role as a source of loans;

(2) that Staric was responsible for Presto not being in a position to give possession to Ever Gain Realty by five days after completion;

(3) when the parties were signing the security documents Staric and/or its agents induced the Messrs Cheung into the belief that the documents were mortgage documents, not personal guarantees, the execution of which would enable Ever Gain Realty to take possession of its purchase within five days after completion date, by which time the renovation and alterations would have been completed.

24. Before proceeding further it is I think appropriate to lay to rest the averment listed at (2) above. I am unable to detect a cause of action available to the Defendants under this head when the contracts to purchase were with Presto, even if factually there was any evidence in support of this contention. And in any event, in terms of Ever Gain Realty's contract with Presto, Presto was to delay giving possession until the work necessary for the reconstruction had been completed. The clause in the agreement that purported to give Ever Gain Realty earlier possession was quite apparently and obviously intended to be subject to completion of the work that brought the shops into existence. This part of the defence is wholly without merit.

The Issues

25. It is apparent from the pleadings and the way that the trial proceeded that there is no dispute but that on the documents the Defendants are jointly and severally liable to meet what Staric claims from them. The defence that now remains is that Staric, by its agents, misrepresented the true nature of the documents that have given rise to this action; in particular that they were for no other purpose than to get possession five days after completion, and also that it failed to disclose to the Messrs Cheung that what they signed were guarantees.

26. It was also submitted by Mr Chan for the Defendants that Staric was committed under clause 30(b) of its agreement with Presto to provide mortgages on request in terms of that clause. Thus it was not entitled to call for a default rate of interest nor personal guarantees in addition to the legal charges.

27. These, then, are the issues, the burden being on the Defendants to prove their case.

28. This requires findings of fact, and I turn now to consider the evidence that is relevant to deal with this.

The Evidence

29. Wong Kwong Ho (Mr Wong) was called first for the Plaintiff. He said that he acquired Staric from its former owner on 5 December 1997. Prior to that date he had no connections or dealings and in particular no first hand knowledge of what transpired. As it was the evidence he gave from the company's records served to confirm the history, as I have already related, but he could not take the matter any further.

30. The next witness was Chui Chi Shing (Mr Chui). He said he was at all material times and remains sales manager of Uni-Pacific. Mr Leung was a former sales representative of the company but he has left and his whereabouts are not known. He confirmed that Uni-Pacific was the agent for the vendor and purchaser in the sub-sale between Staric and Presto, and then agent for Presto in the sub-sub-sales of the individual shops. As far as he was aware it was not agent for Staric thereafter. He did not know that Staric was committed to provide finance for end-buyers of the proposed shops on request.

31. The third witness for the Plaintiff was Miss Fung, the partner of Vincent Cheung responsible for Staric's conveyancing, and partner in charge of the conveyancing clerk Judy Fung who assisted her. It was she who received the fax of 6 September from Kok & Ha which gave notice that Mr Cheung was one of the end-purchasers who wished to avail themselves of finance from Staric. Then on 12 September she was informed by a clerk of Kok & Ha that Mr Cheung had nominated a company called Ever Gain Realty. She instructed Judy Fung to get the details and prepare the documents. The legal charge incorporated the express terms set out in the agreement between Staric and Presto; otherwise it followed the standard form as approved by Staric; this included a default interest rate and, as the borrower was now a company with limited liability, directors' guarantees.

32. So it was that the following day arrangements were made for the Messrs Cheung to attend at her offices to sign the legal charge and related documents. Judy Fung attended to the execution. She was not present. She said it is the firm's standing instruction that before a document is signed the person overseeing takes the signatory through the document so that he or she knows the commitment being entered into. Putting a document before the signatory and telling him or her to sign is expressly forbidden. Judy Fung subsequently told her that she had explained the documents to the Messrs Cheung before they signed. She has no reason to disbelieve her. Furthermore she was an experienced conveyancer well aware of the rules and she is confident she would have complied. She said Judy Fung told her when they arrived and then when they departed so she knew the duration of the attendance which indicated it was not a 'sign it and run' exercise. The documents signed included the board resolutions, legal charges and guarantees for each of the three units. The bills of costs tendered spelt out the various documents prepared and the cost of such preparation.

33. She said completion took place on 15 September without a hitch. The keys were handed to Presto to signify possession was then given and taken.

34. Judy Fung left her employ in September 1998 of her own volition. she has lost contact with her.

35. For the defence both the Messrs Cheung gave evidence.

36. Mr Cheung said he is now 73 years old, retired and in poor health. His education, on the Mainland, was limited to one year's primary. In 1997 he owned and operated a seafood restaurant. In May Mr Leung, whom he had not met before, came into the restaurant, approached him and asked if he was interested in investing in Sim City. The upshot was that he signed the provisional agreements committing himself to purchase the three shops units which he intended to rent out, or resell if the price was right. He spoke to his bank about raising mortgages but without a positive result. It was through Mr Leung that he learnt that Staric would finance him. He had nominated Ever Gain Realty because, in his words, 'I chose not to be personally involved'. Mr Leung assured him that that was acceptable. Mr Leung made no mention of personal guarantees. Mr Leung took his son and him to the offices of Vincent Cheung for the signing of documents. There they were told that the documents they were to sign were necessary for possession to be given and taken five days after completion. Otherwise the terms and conditions were not explained. He does not read or understand English. He had no idea they were also signing personal guarantees.

37. When possession was finally made available the work required to complete the units was not in fact completed. Furthermore there was no high tech, space age theme about the mall. Ever Gain Realty declined to take possession.

38. In cross examination he said that he originally owned and operated a small contracting business in the field of property renovating and decorating. In the 90's he switched to running the seafood restaurant in premises he already owned. He sold that in 1997 and now regards himself as retired. Through his adult life he has bought and sold residential and commerical properties, sometimes turning over the same for immediate profit, sometimes holding them for investment. Sometimes he purchased outright. Sometimes he used bank finance. Asked how many times he had bought and sold he said there were too many to remember. He had not prior to this occasion used any corporate structure with which to buy, but he said he knew of the concept of limited liability.

39. Then I heard from Mr K M Cheung. He said he was employed as a waiter, not at any stage by his father, with whom he lived. He is now 43 years old. He knew something of his father's forays into real estate; occasionally he was required to be a signatory. But he played no part in the decision making; if his father directed him to attend at an office or a bank to sign documents he would do as he was told without question. He does not read English nor does he seek to understand what it is he signs. If his father says 'Do so' he does. Concerning events leading to this litigation he accompanied his father to the solicitors' offices. He understood that it was to do with buying into the complex called Sim City. He signed the documents put before him because, as before, his father told him to. He understood they were legal charges, to secure loans. He did not know or ask for details. He did not know he was signing a personal guarantee. He signed to help his father.

Findings of Fact

40. Mr Cheung presented himself as an ill, barely literate old gentleman, who was hoodwinked by a sharp practising real estate agent and a conveyancing clerk, representing a property developer. I am satisfied however that the true picture which emerged in cross-examination was that he had engaged in numerous real property transactions during his lifetime and knew full well how the system works and what documents have to be signed and why.

41. As to the role Mr Leung played, I am satisfied he did no more than accompany the Messrs Cheung to the solicitors' offices where the assignment and mortgage documents and so on were signed. He did not negotiate the mortgage terms. He did not represent Staric nor did his employer through him. There was no agency, in fact or in law, between Staric and Uni-Pacific.

42. Staric was under no obligation to disclose the terms of clause 30(b) to the Messrs Cheung. It had contracted with Presto, not Mr Cheung, to provide mortgage money, on terms, to Mr Cheung, or his nominee. It did so. It was not limited to lending on those terms. It was entitled to contract additional terms which were offered the borrower. There was nothing unusual or improper about requiring a default rate, nor personal guarantees where the nominated borrower was, literally, a two dollar company. Mr Cheung could have declined to borrow on those terms. But he chose to accept.

43. As to disclosure, I am satisfied from the evidence of Miss Fung that before the Messrs Cheung signed the documents to secure the advances Staric was then to make, Judy Fung took them through the documents explaining their meaning. Specifically they were told and thus knew that the company was executing legal charges to secure the advances as borrowers, and they the personal guarantees as its directors.

44. I find it not possible that Mr Cheung did not know what they were signing and why. If Mr M K Cheung chose to do as he was told without query then that was a matter for him.

45. Neither Ever Gain Realty nor the Messrs Cheung were misled into signing documents whose meaning and purport were not fully and competently explained.

The Result

46. There is no defence to Staric's claim. There will be judgment for the full amount claimed - as at this date I calculate that to be $15,680,975.12. Interest shall continue to run at the rate of $6,486.25 per day until payment.

47. Costs, nisi at first instance, shall be against Ever Gain Realty and the Messrs Cheung in favour of Staric, taxed if not agreed at a solicitor own client rate (this being an express provision of the legal charge).