PAN GLOBAL LTD v. SILVER TECH INTERNATIONAL LTD AND OTHERS

HCA 2429/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2429 OF 2003

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J U D G M E N T

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1.  In these proceedings, the Plaintiff, (Pan Global), a moneylender, sues the 1^st Defendant, (Silver Tech), a defaulting mortgagee of land, and the 2^nd to 7^th Defendants, who are the directors and shareholders of Silver Tech, and who guaranteed a loan by Pan Global to Silver Tech.

2.  On 2 July 2003, Pan Global issued the writ against the Defendants.  On 30 September 2003, Pan Global entered judgment by default for the sum of $2,110,000.00, together with interest, against the 3^rd Defendant, (Mr Lam), he having taken no steps in the proceedings.  On 3 February 2004, Mr Lam took out a summons to set aside the default judgment.  On 14 May 2004, the default judgment was set aside by the Master.  From that order, Pan Global has lodged this appeal.

3.  Certain facts are not in dispute.  The 2^nd to 7^th directors were the directors and shareholders of Silver Tech.  The management and operation of Silver Tech was primarily left to the 5^th Defendant, (Mr Ling), by the other directors.  Silver Tech agreed to borrow $2,000,000.00 from Pan Global, and its directors, the 2^nd to 7^th Defendants, agreed to act as guarantors of that loan.

4.  On 19 June 2002, at the offices of Pan Global’s solicitors, the following documents were executed in relation to the loan: a facility letter, signed by Mr Lam and the 6^th Defendant, on behalf of Silver Tech; a legal charge over Silver Tech’s land, signed by Mr Lam and Mr Ling on behalf of Silver Tech; an undertaking signed by Mr Lam and Mr Ling on behalf of another related company; the guarantee, signed by the 2^nd to 7^th Defendants inclusive, and finally a board resolution of Silver Tech, signed by its directors.  On 20 June 2002, a cheque for the amount of the loan, less the lender’s legal costs, was drawn in favour of Mr Ling by the mortgagees’ solicitors, that cheque being drawn as a result of a letter of authorization dated 19 June 2002, signed by Mr Lam and Mr Ling for and on behalf of Silver Tech.  It appears that Mr Ling has absconded with the funds.

5.  Silver Tech defaulted on the mortgage, but payments were made by Mr Lam and three other director Defendants, both before and after the issue of the writ.  When Mr Lam received the writ he chose to ignore it completely.  The default judgment entered against him was a regular judgment.  On 3 November 2003, following the entry of judgment on 30 September 2003, Mr Lam made a payment to Pan Global in a sum of $340,000.00.

6.  The first point taken for Mr Lam that as the Plaintiff has failed in a summary judgment application against the 2^nd Defendant, and the 7^th Defendant has filed a defence and counterclaim, to which Pan Global has responded by reply and defence to counterclaim, the Plaintiff accepts that the claims against those Defendants must be tried.  It is then said that if they have an arguable defence, it follows that so must Mr Lam.

7.  There is no merit in the argument.  The basis upon which a defendant can resist summary judgment under Order 14, and the basis upon which a regularly entered default judgment may be set aside under Order 13, are quite different.  For an Order 14 judgment to be resisted, it is merely sufficient for a defendant to show merely that he has an arguable case.  To have a regular default judgment set aside, the defendant must show a defence on the merits that has a real prospect of success: see Premier Fashion Wears Limited v Li Hing Chung [1994] 1 HKC 213.

8.  The essence of Mr Lam’s defence, as revealed by the papers, is that Mr Lam did not read the documents that he signed, and did not appreciate either that he was signing a guarantee, or that he was authorising the payment of the proceeds of the loan to Mr Ling, and not Silver Tech.  He takes the usual points, taken so often in guarantee cases in the courts today, that the lender did not explain the document to him and that he did not understand the document that he signed.

9.  There is no merit in these defences.  The law is clear.  There is no general obligation on a creditor to explain security documents or to disclose material fact to a surety in any particular circumstances which would make the surety’s position more hazardous.  It is the surety who has the obligation to make all necessary inquiries: see Bank of China (Hong Kong) Limited v Wong King Sheng and others [2002] 1 HKC 83 at 90F.  It is equally clear that a person who elects to sign a document without reading it cannot thereafter be heard to complain about the terms of the document and will be taken to have agreed to its terms.  See Gallie v Lee [1971] AC 1004.

10.  Mr Chain, for Mr Lam, mounts an argument, based upon a technical issue, relying upon the authorization letter.  He says that Pan Global’s solicitors ought not to have paid the cheque for the proceeds of the loan directly to Mr Ling, notwithstanding the fact that both Mr Lam and Mr Ling had signed an authorization to that affect.  Pan Global, in answer to the argument, relies upon Clause 5 of the Guarantee which contains the following provisions:

“5.7.1     Should any purported obligation of the Borrower, which if valid or enforceable would be the subject of this Guarantee, be or become wholly or in part invalid or unenforceable against the Borrower by reason of any defect in or insufficiency or want of powers of the Borrower or irregular or improper purported exercise thereof or breach or want of authority by any person purporting to act on behalf of the Borrower or because the Lender’s rights have become barred by reason of any legal imitation, disability, incapacity or any other fact or circumstance whether or not always know to the Lender or if for any other reason whatsoever the Borrower is not or ceases to be legally liable to discharge any money, obligation or liability undertaking or purported to be undertaken on its behalf the Guarantor shall nevertheless be liable to the Lender (notwithstanding the avoidance or invalidity of any assurance, security or payment on any ground whatsoever including (without limitation) avoidance under any enactment relating to liquidation) in respect of that purported obligation or liability as if the same were wholly valid and enforceable and the Guarantor was the principal debtor in respect thereof.  The Lender shall not be concerned to see or enquire into the powers of the Borrower or its officers, employees or agents purporting to act on its behalf.  The Guarantor hereby agrees to keep the Lender fully indemnified against all damages, loss, costs and expenses arising from any failure of the Borrower to carry out any such purported obligation.” (Emphasis added)

11.  Mr Chain acknowledges that he has a hard task ahead of him, bearing in mind that Mr Lam himself signed the authorization letter.  Not surprisingly, Mr Lam says of that letter, that he did not read it when he signed it, and did not know that cheque would be payable to Mr Ling.  The Gallie v Lee principle will undoubtedly apply to that argument.  But the point taken by Mr Chain is that Clause 5.7.1 of the Guarantee does not extend to protect Pan Global in the particular circumstances.  Mr Chain says that as a matter of law, Clause 5.7.1 will extend to protect Pan Global only in relation to simple procedural matters.  He says that it does not protect the lender in circumstances where a fraud is perpetrated by the recipient of cheque.

12.  Neither party was able to point me to any authorities on this point.  The legal extent and operation of a clause such as Clause 5.7.1, a common clause in a guarantee, is plainly a point of importance, and not one which ought to be decided on either summary judgment or on an application to set aside a default judgment.  In this respect, I bear in mind, the approach adopted by the Court of Appeal in Hang Seng Bank Limited v the Golden Tech (Asia) Limited and others CACV 262/2004.

13.  While I have very serious reservations as to the validity of the argument, and even more serious reservations as to whether Mr Lam, himself a signatory to the authority, a document which was not part of the security documents, can raise this matter by way of defence,  I am satisfied that there is a proper argument to be made, which if successful may succeed in providing Mr Lam with a defence to the claim. 

14.  For that reason, Pan Global’s appeal against the decision of the Master to set aside the judgment is dismissed.  There will be an order nisi, absolute in 14 days, that costs on the appeal will be in the cause.