CHISICORP (HONG KONG) LTD v. E & C DEVELOPMENT LTD & ANOTHER

HCA 7956/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 7956 OF 2000

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REASONS  FOR  JUDGMENT

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Introduction

1. At the end of the trial, final judgment in the sum of US$700,000 with interest and costs was entered against the 2nd defendant ("the defendant"). The following are the reasons for the judgment. At the beginning of the trial, the plaintiff indicated that, since the 1st defendant ("E & C") has been wound-up, it does not wish to proceed against E & C. The trial involving E & C was accordingly adjourned sine die with liberty to restore (subject to any court order, especially order(s) which may be made by the Companies Judge).

2. The plaintiff commenced this action in August 2000 alleging, among other things, that the defendant was liable for US$700,000 with interest pursuant to a personal guarantee dated 1 May 1997. At the time of trial, the defendant admitted that he had executed the guarantee but claimed that it was given for an intended loan only (which was never advanced by the plaintiff).

3. The above was the only issue (accepted by the parties to be purely factual) which the court needs to resolve in this action. The defendant's pleading can be read as also having advanced other lines of defence. However, defence counsel indicated at trial that no other defence would be relied upon by the defendant.

Undisputed Facts

4. The following background facts are undisputed. The plaintiff is and was the Hong Kong subsidiary of China Silk Import and Export Corporation (中國絲綢進出口總公司) in the Mainland.

5. In 1993, the Plaintiff and E & C formed a joint venture company in the US called "Sinolink Apparel Inc." ("Sinolink"). Sinolink was mainly engaged in importing low-end women's apparel for re-sale in the US.

6. In July 1995, at the request of E & C, the plaintiff advanced a total of US$1 million (by way of 3 sums) to E & C with interest thereon at 15% per annum. The loan was to be repaid within 2 years (that is, by 30 June 1997): para. 2, the defendant's skeleton submission. At trial, it was accepted by the plaintiff's witness (Mr Chen) that the loan was negotiated by a Mr Shen for the plaintiff and the defendant for E & C, before Chen took over as the plaintiff's general manager in March 1997.

7. On 1 January 1996, E & C repaid US$300,000 by way of injection of capital into Sinolink (representing 60% of the shares in Sinolink): para. 3, the defendant's skeleton submission.

8. The guarantee dated 1 May 1997 and signed by the defendant was in the following terms:-

"THIS GUARANTEE is made on this 1st day of May, 1997 by [the defendant] of Ground Floor, NO 167, Nam Wai, Sai Kung, New Territories, Hong Kong ... in favour of [the plaintiff] of Room 601, Ka Wah Centre, NO. 191 Java Road, North Point, Hong Kong ...

WHEREAS :-

[The plaintiff] has agreed to lend or has lend [sic] a cash loan to [E & C] of Room 305, 3/F Nanyang Plaza, 57 Hung To Road, Kwun Tong, Kowloon, Hong Kong ... to the extent of US$700,000 as [the plaintiff] shall think fit, I, [the defendant] hereby guarantee [the plaintiff] in respect of all liability, loss, damages, expenses and costs which may be owed or incurred by E & C to [the plaintiff] with all my assets including all my cash, deposit in bank and all my estate right title and interest of and in Ground Floor, No. 167, Nam Wai, Sai Kung, New Territories, Hong Kong."

(bold type is original, but italics together with bold type are supplied) ("the money guarantee").

9. There was also another guarantee dated 1 May 1997 but it was in these terms:-

"THIS GUARANTEE is made on this 1st day of May, 1997 by [the defendant] of Ground Floor, NO 167, Nam Wai, Sai Kung, New Territories, Hong Kong ... in favour of [the plaintiff] of Room 601, Ka Wah Centre, NO. 191 Java Road, North Point, Hong Kong ...

WHEREAS :-

[The plaintiff] has agreed to issue or has issued a stand-by letter of Credit to [Sinolink] of Room 1205, 1410 Broadway, New York, NY10018 U.S.A. ... to the extent of US$500,000 as [the plaintiff] shall think fit, I, [the defendant] hereby guarantee [the plaintiff] in respect of all liability, loss, damages, expenses and costs which may be owed or incurred by Sinolink to [the plaintiff] with all my assets including all my cash, deposit in bank and all my estate right title and interest of and in Ground Floor, No. 167, Nam Wai, Sai Kung, New Territories, Hong Kong."

(bold type is original, but italics together with bold type are supplied) ("the L/C guarantee").

10. Interest on the outstanding loan was paid by E & C to the plaintiff from July 1995 to December 1998.

The Plaintiff's Case

11. In short, the plaintiff says that the money guarantee signed by the defendant was a straight-forward personal guarantee. The consideration for the money guarantee was in essence that the plaintiff was to give time to E & C to repay the outstanding loan of US$700,000.

The Defendant's Case

12. On the other hand, the defendant says that the money guarantee was signed by him in the following circumstances. Sinolink's business suffered a significant drop in early 1997 and it held a board meeting from 7 to 11 April 1997 to discuss this. The defendant proposed that Sinolink should move to a higher quality market. He also suggested cooperating with a "brand name" company in the US. The board agreed to this approach in principle.

13. In order to proceed with the new business plan, funding was needed by Sinolink. The need was met in the following circumstances according to the defendant's supplemental witness statement:-

"... I requested [the plaintiff] to assist Sinolink in increasing the amount of their guarantee guaranteeing Sinolink's repayment under the relevant standby letter of credit ... In about July 1997, [the plaintiff] finished the necessary procedure and increased their guarantee amount by US$250,000. In relation to this, I also signed a guarantee in favour of [the plaintiff] ... " (para. 11 thereof).

Although the guarantee has not been specified in the supplemental witness statement, the defendant clarified in his testimony in effect that it was the L/C guarantee.

14. The defendant continued in his supplemental witness statement:-

"On [E & C's] part, in order to meet Sinolink's requirements under their new business plan, [E & C] was willing to cut profit margin and provided a longer credit payment term to Sinolink. In about early May 1997, [E & C] indicated that they would need an extra cash of about US$700,000 in order to suit Sinolink's requirements ..." (para. 12 thereof);

"In about mid-June 1997, I had made a telephone call to Chen to explain to him my business plan and he agreed to the same. At that time, I also raised the issue of budget of my plan with him. He said that if [the plaintiff] was to increase the amount of their guarantee ... their parent company may have some opinion ... Then, I asked him whether it would be easier for them to consider granting a new loan to [E & C]. Chen replied it would be easier ... Chen said that such loan did not require their parent's [sic] company's approval ... Chen asked me ... whether I am confident with the new business plan and whether it was feasible and I repeated my proposal to him. Finally, Chen asked me whether I am prepared to sign a guarantee for such loan ... At that time, since I was confident with my new plan, I told Chen that it would be alright for me" (para. 13 thereof).

The guarantee referred to above obviously was the money guarantee and this is undisputed by counsel for the defendant. The defendant also said in his supplemental witness statement:-

"It was under the aforesaid background ... that I signed the guarantee in question in front of a U.S. Notary Public in about mid-June of 1997 (para. 15 thereof)."

15. The passages quoted above suggest that both the plaintiff and E & C were to assist Sinolink to carry out this new business plan. The above account does not, however, explain how Sinolink was finally able to carry out its new business plan without the funds from E & C. It is the defendant's case that the loan referred to in the money guarantee was never advanced by the plaintiff to E & C. When this was raised with the defendant during his testimony, he explained that, in fact, the money guarantee represented an optional plan. The plan was as follows.

16. Although the plaintiff asked the defendant to sign both the money guarantee and the L/C guarantee, these documents would not both be used. Instead, the plaintiff would try to obtain additional standby letter of credit for Sinolink first. If that succeeded (which, according to the defendant, did succeed), the plaintiff would not need to lend US$700,000 to Sinolink (or E & C).

Credibility and Findings of Fact

17. The defendant's account is incredible for the following reasons.

18. His story that the 2 guarantees were options appears only since the time of his second supplemental witness statement (dated 29 May 2002). It was not set out in any pre-action correspondence, the Defence (dated 25 September 2000), the Amended Defence (dated 28 February 2001), the Re-Amended Defence (dated 13 September 2001), his witness statement (dated 1 February 2001) or his supplemental witness statement (dated 21 September 2001).

19. Further, the account given in the defendant's supplemental witness statement (quoted above) was not about an optional plan. Instead, in that document, he stated that both the plaintiff and E & C providing assistance to Sinolink: on the plaintiff's part, it was by way of increasing the standby letter of credit; on E & C's part, it was by way of an intended loan (to be advanced by the plaintiff, but through E & C).

20. His case that the money guarantee was only related to an intended loan has not been set out in any document until his supplemental witness statement was filed (in September 2001).

21. It is inherently implausible for the parties to agree to a plan where both the money guarantee and the L/C guarantee were to be signed by the defendant at the same time if in fact they evidenced optional plans. It would be more likely that either guarantee would be signed first, and the other would be signed only if the initial plan did not work. Counsel for the defendant explains in his final submission:-

"[The defendant] had to sign both documents more or less at the same time since [the plaintiff] initially indicated that there might be some difficulty in the arrangement in relation to the standby letter of credit. See para. 13 of [the defendant's] supplemental witness statement ..." (para. 8 thereof).

However, this part of the defendant's final submission ignores that para. 13 of the defendant's supplemental witness statement has to be read in context, that is, it has to be read together with, for example, para. 11, 12 and 15 (quoted above).

22. The amounts respectively set out in the guarantees also cast doubt on the defendant's version of events. The amount stated in the money guarantee was US$700,000 but that stated in the L/C guarantee was only US$500,000. If in fact they evidenced an optional plan, one would expect the amounts to be the same since it is more likely the defendant would have only one budget sum in mind when he put forth the new business plan. Further, it is known from the defendant's supplemental witness statement (at para. 11 thereof) that the standby letter of credit was, for some unknown reason, only increased by US$250,000.

23. By reason of the above matters, I do not find the defendant to be credible and reject his evidence. In relation to the other defence witness, Ms Ng Wai Ping, her testimony is in effect that, as between her and the defendant, the defendant has better knowledge of the events surrounding the two guarantees. This is because the defendant was directly involved in the discussions resulting in the execution of these documents. My impression of Ms Ng's testimony is that she was responsible for the daily operation of E & C only. Consequently, I cannot rely on her testimony to find that the defendant's allegation that the money guarantee was for a prospective loan is truthful and reliable.

24. As regards the credibility of the plaintiff's witness, defence counsel submits that it is inherently implausible the plaintiff would press for the repayment of US$700,000 even before March 1997, when the loan was only due by the end of June 1997. I disagree. It is accepted by the defendant that Sinolink's business suffered a significant drop in early 1997. At that time, Sinolink's business was closely related to that of E & C. There must have been substantial inter-company receivables and payables between them. It is understandable that the plaintiff would start to remind E & C to keep up the repayment promise even though legally the plaintiff was not yet entitled to claim repayment.

25. In fact, when Chen testified, he said, before the due date, the defendant informed him business was not good and asked the plaintiff to give E & C more time to repay.

26. Further, E & C's repayment schedule dated 27 May 1997 supports this part of the plaintiff's case.

27. Accordingly, I find the plaintiff's evidence to be truthful and reliable.

28. Other criticisms have been levied by defence counsel, such as whether there was any discussion about the guarantees before they were signed. I find them to be minor matters which do not affect my findings on credibility.

29. In view of the above findings on credibility, I make the following finding of fact, namely, that the money guarantee was given by the defendant in the plaintiff's favour, at the defendant's request and in consideration for the plaintiff's giving time to E & C to repay the US$700,000.

Other Matters

30. The plaintiff has referred to quite a number of points of law in its final submission. As stated above, these were not relied upon (or disputed) by the defendant.

31. For completeness, and insofar as it may be necessary to do so, I agree with the following points of law referred to by the plaintiff:-

(1) forbearance to sue is good consideration for a contract of guarantee;

(2) the deadline referred to in the money guarantee does not affect the defendant's liability thereunder because liability thereunder already accrued before the deadline expired;

(3) any indulgence given to E & C by the plaintiff did not discharge the defendant's liability under the money guarantee.