XCHRX CHINA MERCHANTS BANK v. MINVEST INTERNATIONAL LTD. AND ANOTHER

HCA9070/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.9070 OF 2000

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REASONS FOR DECISION

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1. This is the plaintiff's appeal against the Order of the Master made on 25 April 2001 granting the defendants unconditional leave to defend. At the conclusion of counsel's submissions, I allowed the appeal. My reasons appear below.

Background

2. The plaintiff is a bank incorporated and carries on business in the Mainland of the People's Republic of China ("PRC") and the 1st defendant is one of its customers.

3. By a Chinese loan agreement dated 1 July 1996 executed by the plaintiff and the 1st defendant in Shenzhen ("the Loan Agreement"), the plaintiff extended to the 1st defendant a term loan of US$50 million ("the Loan"). The Loan was guaranteed by a PRC entity called 國家物資儲備調節中心 under an undated Chinese guarantee. As at 21 June 1997, the 1st defendant's indebtedness under the Loan Agreement was US$12,432,000.

4. It is common ground that the 1st defendant defaulted under the Loan Agreement in July 1997. The 1st defendant's case is that it had lent part of the Loan to a Zhuzhou Smelter Factory ("the Factory") and as a result of the Factory's failure in making repayments, the 1st defendant was unable to repay the plaintiff.

5. By 20 December 1998, the 1st defendant owed the plaintiff US$12,332,000. On 30 December 1998, the plaintiff, the 1st defendant and one Seapower International Holdings Limited ("Seapower") entered into a Loan Assumption Deed whereby Seapower agreed to assume US$6 million of the 1st defendant's debt. As a result of this and as a result of three sums paid by the 1st defendant, the 1st defendant's indebtedness was reduced to US$5,332,000 (excluding interest) by the end of May 1999.

6. On 23 June 1999, the 1st defendant and the Factory entered into a Chinese Repayment Agreement ("the Repayment Agreement"), under which the Factory agreed to repay US$2,922,820 by six monthly instalments to be paid into the 1st defendant's account with the plaintiff, commencing July 1999. The last instalment was to be made on or before 25 December 1999.

7. On 2 July 1999, the 2nd defendant executed a Chinese guarantee in favour of the plaintiff ("the Guarantee"). On the same day, the 2nd defendant also signed a Chinese Confirmation Letter ("the Confirmation Letter") in respect of the Guarantee.

8. On 5 July 1999, the plaintiff, the 1st defendant and the Factory entered into a Chinese tripartite agreement ("the Tripartite Agreement") whereby the Factory and the 1st defendant agreed that the repayments to be made by the Factory under the Repayment Agreement and paid into the 1st defendant's account with the plaintiff were to be applied towards the repayment of the debt owed by the 1st defendant to the plaintiff.

9. On 27 October 1999, the 1st defendant created a debenture over its assets in favour of the plaintiff ("the Debenture"). In the meantime, the 1st defendant had in July 1999 paid two sums totalling US$727,000 to the plaintiff. Between July and December 1999, the Factory also paid to the plaintiff a total sum of US$2,922,820 pursuant to the Repayment Agreement and the Tripartite Agreement.

10. By two letters dated 30 August 2000 addressed separately to the defendants, the plaintiff through its solicitors demanded payment of the sum of US$4,477,950.86, being the balance of the 1st defendant's indebtedness as at 24 August 2000, together with interest. No payment was made. The plaintiff therefore issued these proceedings on 19 September 2000.

The Action

11. The plaintiff claims against both defendants for the sum of US$4,477,950.86 together with interests. The 1st defendant was sued as a borrower pursuant to the Loan Agreement. The claim against the 2nd defendant is based on the Guarantee.

12. The defendants filed their defence on 31 October 2000. On 13 December 2000, the plaintiff issued a summons applying for summary judgment. Thereafter, the defendants applied to and were granted leave to amend their Defence. The Amended Defence was filed on 10 January 2001. The plaintiff's application for judgment was heard on 25 April 2001. The Master granted the defendants unconditional leave to defend. It is against that order that this appeal lies.

The Defence

13. The defendants have raised a number of defences. They can be summarized as follows :

(1) Forum non conveniens in that the PRC Court is a more convenient forum.

(2) The Loan Agreement and the Guarantee are unenforceable as a result of non-compliance with or breaches of the Money Lenders Ordinance, Cap.163.

(3) There is a binding settlement agreement between the parties whereby the defendants' liabilities under the Loan Agreement and the Guarantee had been extinguished or discharged.

(4) The Guarantee is not supported by consideration, hence unenforceable.

I shall deal with these defences in turn.

Forum non conveniens

14. This issue is relevant to the 1st defendant only. It is pleaded in the Amended Defence that the Courts of the Mainland Court is the convenient forum in that the Loan Agreement is governed by the PRC laws, that the Loan Agreement provides that legal proceedings should be carried out in the PRC Courts and that the Loan Agreement and the Loan were both made in Shenzhen.

15. Mr Chong for the defendants rightly accepts that the Hong Kong Court has jurisdiction over the defendants. Among other things, the defendants were served within jurisdiction. All that the 1st defendant is contending is that the Hong Kong Court should decline jurisdiction on the basis that there is another court which is the convenient forum. This is not a plea of defence that goes to the merits of the claim. Mr Chong also acknowledges this. This being the case, the issue of forum non conveniens cannot give rise to any triable issue. It will only be relevant in considering whether the action should be stayed to enable the parties to pursue the dispute in another forum.

16. In the present case, the defendants have not applied for a stay of the action. On the contrary, the 1st defendant has chosen to file a Defence and subsequently an Amended Defence. It has also filed evidence to contest the Order 14 application. Although the issue of forum non conveniens has been pleaded in the pleading, the Court does not have to consider it unless and until there is an application for stay. There is no reason why the Hong Kong Court should on its own motion consider to or actually decline jurisdiction in preference of another forum. The Hong Kong Court shall continue to have jurisdiction over the case until the defendants succeed in staying the action.

17. The defendants had stated in the opposing affirmation that they would consider applying to strike out the Statement of Claim after the conclusion of the Order 14 proceedings. This is clearly misconceived. At the most the 1st defendant can only seek a stay of these proceedings. Even if the 1st defendant were to cross-apply for a stay in the Order 14 proceedings, it is bound to fail. The defendants' conduct of filing a Defence, amending the Defence and of filing evidence on the merits of the case to oppose the Order 14 application is clearly inconsistent with the alleged intention of objecting to the Hong Kong continuing to have jurisdiction over the merits. In taking these steps, the defendants never indicate any reservation or that the steps taken are without prejudice to some other procedural step that is being contemplated : see Busisiwe Ngcobo v. Thor Chemicals Holdings Ltd (unreported) English Court of Appeal 9 October 1995.

18. Even if the Court were to consider the argument of forum non conveniens, despite the inconsistent steps taken by the 1st defendant, the Court would still have regard to the merits of the case in deciding on the exercise of its discretion. If there is no arguable defence, a stay will be refused : Bayer Pelymers Co. Ltd v. Industrial and Commercial Bank of China, Hong Kong Branch [2000] 1 HKC 805, 807-808. For the reasons set out below, I am of the view that the defence raised by the defendants discloses no triable issues on the merits, any application for stay will therefore be refused.

Money Lenders Ordinance

19. This is a defence relied on by both defendants. It is argued that the plaintiff is a money lender, but has not been licensed. Accordingly under section 23 of the Money Lenders Ordinance, the Loan Agreement is unenforceable against the defendants. The defendants further argue that no note or memorandum in writing in respect of the Loan had been made and signed by the defendants. This constitutes a breach of the Ordinance and the Loan is not enforceable against the defendants. The issue here is whether the Money Lenders Ordinance applies to the Loan Agreement and/or the Guarantee.

20. Clause 13.01 of the Loan Agreement provides that the agreement was made in accordance with the laws of the PRC and was protected by the laws of the PRC. The parties have therefore expressly chosen the PRC law as the governing law. In order to succeed on the Money Lenders Ordinance defence, the defendants will have to show that, notwithstanding that the chosen law is the PRC law, the Money Lenders Ordinance still applies in the sense that it is an "overriding statute" : Dicey & Merris, the Conflict of Laws, (13 edn), Vol. 1, p.21, Hong Kong Shanghai (Shipping) Ltd v. The Owners of the ships or vessels "Cavalry" (Panamanian flag) [1987] HKLR 287, 294C-H.

21. In Hong Kong Shanghai (Shipping) Ltd, the parties to a loan agreement expressly agreed for the English law to be the governing law. The lender commenced admiralty action in Hong Kong against the guarantors to recover the indebtedness. The defendants defended on the main ground that the loan agreement was illegal and unenforceable by virtue of section 3 of the Money Lenders Ordinance 1911, which required money lenders to be registered and to comply with the conditions set out therein. Hunter J (as he then was) held that the Ordinance would only apply to the loan agreement upon two conditions being satisfied, namely, (1) that at the time of the making of the agreement, the lender was carrying on business as a money lender in Hong Kong or advertising, announcing or holding itself out as so conducting itself; and (2) that, objectively assessed, the proper law of the contract was Hong Kong law : p.296I.

22. Mr Chong argues that the case should not be followed in that the Money Lenders Ordinance 1911 had been repealed and replaced by the current Money Lenders Ordinance in 1980 and that a new regime applies. In Hong Kong Shanghai (Shipping) Ltd, Hunter J gave the reasons for the first condition as :

" [The 1911] Ordinance is plainly directed primarily to domestic transactions. Its apparent social purpose is to prevent the exploitation of Hong Kong citizens by Hong Kong loan sharks. Section 2 imposes no direct obligations on parties. It enables the court, clearly meaning I think the Hong Kong court, to reopen transactions in certain circumstances. Section 3 positively shouts domesticity. The money lender must register his name and address: carry on business only under that name; and carry on that business at the address and at no other address. These provisions, and the references to 'business of a money lenders' there, and in the definition in s. 6, plainly refer to business in Hong Kong conducted at one or more Hong Kong addresses. Section 3 is the penal section, the breach of which renders the contract illegal and unenforceable: Victorian Daylesford Syndicate v. Dott [1905] 2 Ch 624 and Bonnard v. Dott [1906] 1 Ch 740. In Shaik Sahied v. Sockalingam Chettiar [1933] AC 342, 346, Lord Atkin said that the English Money Lenders Acts were 'intended to regulate the exercise in England only of particular activities by providing for registration, licences, procedure and penalties which can only be carried into effect in England itself. Such law is not capable of extension to the Colony' of Straits Settlements. This reasoning applies equally to our Ordinance. So the first condition for its application to any transaction is that the lender should in fact carry on the business of a money lender in Hong Kong."

23. In my view, the new Money Lenders Ordinance retains the same objective. There is nothing in its provisions which suggests that the new Ordinance intends to supervise and regulate money lending activities outside Hong Kong. I do not agree that the Hong Kong Shanghai (Shipping) Ltd can be distinguished on the basis submitted by Mr Chong.

24. Applying the two conditions stipulated by Hunter J, it is apparent that the Money Lenders Ordinance has no application to the Loan Agreement. Firstly, the plaintiff is a PRC bank and carries on business in the Mainland. This is pleaded in paragraph 1 of the Statement of Claim, and is admitted by the defendants. It is also common ground that the Loan Agreement was signed in Shenzhen and the Loan was made in Shenzhen. Secondly, it is the defendants' case that the Loan Agreement and the transaction have little connection with Hong Kong. Objectively assessed, given that the plaintiff's place of business is in the Mainland, that the Loan was advanced in Shenzhen and initially guaranteed by a PRC entity, and that the plaintiff is situated in the Mainland, the proper law is the PRC law. Since neither of the pre-conditions necessary to the application of the Money Lenders Ordinance is satisfied, the Ordinance has no overriding effect of displacing the parties' express choice of law.

25. Mr Chong further argues that the case of the 2nd defendant should be approached separately from that of the 1st defendant. It is argued that the Guarantee, unlike the Loan Agreement, was executed in Hong Kong and was expressed to be governed by the Hong Kong law. What Mr Chong has overlooked is that clause 11.1 of the Guarantee provides that any repayment to be made by the 2nd defendant is primarily to be made in Shenzhen. That aside, this argument ignores the fact that the Money Lenders Ordinance is to regulate money lender activities and not the giving of guarantee or security per se. A guarantee or security will only be rendered unenforceable if the underlying loan transaction infringes the provisions of the Money Lenders Ordinance. Accordingly, in determining whether the Money Lenders Ordinance applies, the court is deciding whether the Ordinance applies to the loan transaction. If it does, then the security given in respect of the loan will also be affected by the Ordinance. If it does not, then the security remains valid and can be enforced. Mr Chong has argued that the subject matter of the Guarantee is not confined to the Loan Agreement or the Loan but also the Loan Assumption Deed. I disagree with this construction of the Guarantee. Even if the construction is right, it is irrelevant because the debt that the plaintiff is seeking to recover in these proceedings does not arise out of the Loan Assumption Deed.

26. In short, the Money Lenders Ordinance defence gives rise to no triable issue.

Settlement Agreement

27. This is a defence relied on by both defendants. The defendants' case on this runs as follows. On 23 June 1999, the plaintiff, the 1st defendant, acting by the 2nd defendant, and the factory reached an agreement ("the Settlement Agreement") whereby :

(1) The Factory would repay US$2,922,820 to the 1st defendant by six monthly instalments commencing from July 1999.

(2) The payments were to be paid into the 1st defendant's account with the plaintiff, and to be applied towards the repayment of the debt owed by the 1st defendant to the plaintiff.

(3) The 1st defendant was to pay another sum of US$727,000 to the plaintiff.

(4) The plaintiff would accept the two sums of US$2,922,820 and US$727,000 in full and final satisfaction of the 1st defendant's debt.

28. The defendants say that this agreement was made partly in writing, and partly orally. Terms (1) and (2) are contained in the Tripartite Agreement.

29. The defendants further say that since the two sums, totalling US$3,649,820, had been paid, they have been discharged from their liabilities under the Loan Agreement and the Guarantee.

30. The plaintiff denies that there is such agreement. Mr Lam for the plaintiff submits that this assertion of the Settlement Agreement is incredible. I agree. It is of course not for me to compare the affirmations, but the assertion of the defendants, when viewed against the documentary evidence and commercial reality, is plainly unsustainable and incredible.

31. The effect of the Settlement Agreement is that the plaintiff was agreeing to receive US$3,649,820 in six months time in full and final discharge of a debt of US$5,332,000 plus interest. The plaintiff was effectively giving up no less than US$1,682,180, which is a considerable amount of money. The motivation for this, according to the 2nd defendant, was that "the plaintiff wanted to receive the cash payment as quickly as possible". Despite that, the repayment was to spread over a span of six months, with no assurance that it would be honoured. The alleged agreement is inherently improbable and defies commercial reality.

32. Further as a matter of law, there is no consideration moving to the plaintiff in return for its agreement to accept a part payment in satisfaction of the debt : Foakes v. Beer (1884) 9 App. Cas. 605, see also In re Selectmore Ltd [1995] 1 WLR 474, 479D-481E.

33. While terms (1) and (2) of the Settlement Agreement had been set out in the Tripartite Agreement and reflected in the Repayment Agreement (which was between the Factory and the 1st defendant), the other terms of the Settlement Agreement are not reflected in any document, even though a number of documents had been executed shortly after 23 June 1999. Firstly, in the Guarantee which was executed nine days later, despite a fairly full and detailed recital setting out the background and the parties' intention, there is no reference to the Settlement Agreement. On the contrary, recital (c) states that as at 30 June 1999, the principal sum owed by the 1st defendant to the plaintiff was US$5,105,000. This amount was referred to as the outstanding debt (剩餘欠款) in the Guarantee and forms part of the indebtedness secured by the Guarantee : see the definition of "debt guaranteed" (有擔保債項) in paragraph 2. Not only had the 2nd defendant, who represented the 1st defendant in the negotiation and the making of the Settlement Agreement, signed the Guarantee, but he has also declared and warranted under clause 5.1(a) that the matters set out in the recital to the Guarantee are true and correct.

34. The 2nd defendant explained in his affirmation that the Guarantee was executed because the plaintiff was worried about the Factory's ability to repay the sum owed to the 1st defendant and that the Guarantee would be discharged upon the Factory making full repayment. If this is the case, it is simply improbable that the 2nd defendant would accept recital (c) and even warrant that it is true.

35. Secondly, in the Confirmation Letter signed also on 2 July 1999 by the 2nd defendant, it states that the Guarantee was to secure the repayment of and liabilities arising out of the Loan Agreement. This is in starking contrast to the defendants' assertions that the 1st defendant's liability under the Loan Agreement was discharged by reason of the Settlement Agreement. If there were the Settlement Agreement, it would only be natural for the Confirmation Letter to go on to mention that the Loan Agreement had been varied or displaced by the Settlement Agreement.

36. The third document is the Tripartite Agreement which was dated 11 days after the Settlement Agreement. This is the document which is directly related to the Settlement Agreement. Although the recital does mention the Repayment Agreement and that the 1st defendant remained indebted to the plaintiff, it makes no reference to the Settlement Agreement. Neither does it mention the payment of US$727,000 by the 1st defendant to the plaintiff, nor the fact that the plaintiff had agreed to accept a reduced amount in full and final discharge of the liability under the Loan Agreement. The defendants have offered no explanation for the omissions.

37. Apart from these documents, there is also the Debenture which was created some four months later. By then, the 1st defendant had already paid US$727,000 to the plaintiff and the Factory had paid four of the six instalments. The creation of the Debenture does not sit comfortably with the existence of the Settlement Agreement. Yet, according to the 2nd defendant, the Debenture was required as the plaintiff was concerned about the Factory's ability to pay. The defendants have provided no explanation or reason for the alleged concern and for the need of requiring additional security. Even accepting that the plaintiff was indeed concerned about the Factory's ability to meet its payment obligations, it would have been sufficient for the defendant(s) to provide some form of guarantee over the remaining instalments to be made by the Factory. But the Debenture clearly goes much more beyond this.

38. As late as March 2000, the plaintiff was corresponding with the 1st defendant on the disposal of assets in the Mainland for settling the 1st defendant's indebtedness. The defendants say that the discussions were related to the Loan Assumption Deed and the transfer of the Mainland assets was to meet Seapower's request. However, this is not reflected in any of these letters. More importantly, in all these letters, the plaintiff referred to overdue loan or facility (逾期貸款/押滙) or outstanding indebtedness (剩餘債務) of, inter alia, the 1st defendant. The evidence before the Court does not show that the defendants had refuted this or otherwise responded to the plaintiff's letters. The defendants' assertions of a discharge by the Settlement Agreement and of the purpose of the disposal of the Mainland assets are clearly unsustainable.

39. Having regard to commercial reality and the documentary evidence before the Court, the defence of the Settlement Agreement is inherently improbable and plainly incredible. No triable issues can arise.

Consideration for the Guarantee

40. The plaintiff's case is that the Guarantee was signed, sealed and delivered as a deed. The 2nd defendant disputes this and says that when he signed on it, the document did not bear the red circular impression and he was not informed that it was a deed. Mr Lam rightly accepts that this may give rise to a dispute of fact that cannot be resolved on the affirmation evidence. The issue, however, is whether the Guarantee is nevertheless supported by good consideration. The burden of proving consideration is on the plaintiff.

41. The plaintiff has led evidence from Mr Xia Jia Qing, one of its officers, that the plaintiff was intending to take legal proceedings against the PRC guarantor after the 1st defendant defaulted under the Loan Agreement in July 1997. Subsequently, as a result of the defendants' requests, the plaintiff agreed to withhold proceedings against the PRC guarantor subject to the creation of the Debenture by the 1st defendant and the execution of the Guarantee by the 2nd defendant. The 2nd defendant agrees that there had been discussions about the possible consequence or effect of the plaintiff taking legal proceedings against the PRC guarantor, but denies that the Guarantee and the Debenture came about as a result of the plaintiff's agreement to withhold proceedings against the PRC guarantor. The 2nd defendant says that the reason for the Guarantee and the Debenture was the plaintiff's worry over the ability of the Factory to meet its payment obligations under the Settlement Agreement. I have, for reasons set out above, concluded that this reason is incredible. The defendants' denial is no more than a bare denial.

42. On the other hand, it is a fact that the plaintiff has not pursued any legal action against the PRC guarantor. There is thus actual forbearance, in which case the request to forbear can either be expressed or implied : Andrews & Millet, Law of Guarantees, 3rd edn, para. 2.13 at pp24-5. It is not necessary that there is an arrangement for forbearance. It is sufficient consideration if it can be inferred from the circumstances that there is an implied request for forbearance and that there is actual forbearance : Fullerton v. Provincial Bank of Ireland [1903] AC 309, 313. Where a creditor asks for and obtains a security for an existing debt, the Court had been prepared to infer that, but for obtaining the security, he would have taken action which he forbears to take on the strength of the security : Glegg v. Bromley [1912] 3 KB 474, 486-7, 491.

43. Mr Chong has argued that the drawing of inference is a matter which should be reserved to the trial and after hearing all the evidence. In my view, where the evidence presented at an Order 14 application is such that it does not give rise to other inferences, then the Court is entitled to draw the irresistible inference and give judgment for the plaintiff. In the present case, there is nothing to rebut the presumption of implied request to forbear. The defendants' explanation for the Guarantee had been shown to be incredible.

44. Mr Chong also argues that the forbearance to take proceedings against the PRC guarantee was not stated in the Guarantee. That is immaterial. Had it been stated in the Guarantee, it would not have been necessary for the Court to infer forbearance.

Conclusions

45. For the above reasons, I am of the view that the Defence gives rise to no triable issues and the plaintiff should be entitled to judgment. Accordingly, the appeal should be allowed with costs.

46. The order I make is as follows :

(1) The appeal is allowed.

(2) Paragraphs 1 and 2 of the Order of the Master dated 25 April 2001 is set aside.

(3) There be final judgment for the plaintiff for the sum of US$4,477,950.86 or its equivalent in Hong Kong currency as at the date of payment together with interest on US$1,677,000 at 10.75% per annum from 25 August 2000 until full payment.

(4) Costs of the action, including the costs of the hearing before the Master and this appeal, be to the plaintiff against the defendants, to be taxed if not agreed.