XCHRX TSINLIEN METALS & MINERALS CO. LTD. v. CHINA KENT HOLDINGS LTD. AND ANOTHER

HCA7503/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.7503 OF 1999

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J U D G M E N T

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1. This is the hearing of an appeal from a summary judgment given by the master against the 1st and 2nd defendants in respect of money owing by the 1st defendant to the plaintiff under a document headed "A Guarantee" dated 30 July 1998 (at page 138 of the Bundle) whereby the 1st and 2nd defendants promised and agreed firstly, that the money of something like $4.2 million was owing by the 1st defendant to the plaintiff; secondly, whereby they asked for more time to make the payment and for legal proceedings not to be pursued; and thirdly, whereby the 2nd defendant agreed to guarantee the indebtedness.

2. The only substantive defence raised at the hearing of this appeal is that the document being sued upon, the guarantee document of 30 July, was signed and given by the 1st and 2nd defendants as a result of a misrepresentation made by Mr Lu of the plaintiff that this document will not have any legal effect, was merely for formality purpose for Mr Lu's superior and will not be enforced. The sole question before me on this appeal is whether such a defence of misrepresentation is capable of belief or is pure moonshine and has no substance.

3. The general view, which is not disputed by Mr Chan for the defendants, is that when a document in the language understood by the defendants had been signed, to suggest such a document signed was given as an inducement or misrepresentation for pure formality with no legal effect is not likely to be believed unless the surrounding circumstances are so special or persuasive as to lead the court to the view that there is a possibility of such misrepresentation having taken place.

4. What are the circumstances in this case which might lead the court to such a view?

5. The history of this matter is a little bit complex and I think it may be necessary to go into the history. There is first the coming into existence of an agreement dated 12 January between the plaintiff and the 1st defendant whereby the plaintiff agreed to grant financial assistance in the form of the opening of a letter of credit of US$2 million for the benefit of the 1st defendant. The reference number to that agreement ("the 1st agreement") is 98MN001. This reference number is important because it would be repeated in many other subsequent documents. It is to be seen that this was dated 12 January 1998. A few days after this, there had been changes to the arrangement and this was the subject matter of the 2nd agreement pleaded by the plaintiff in the Re-Amended Statement of Claim which is supposed to have taken place on around 14 or 15 January. What happened was that, as one can see from the correspondence (from page 215 to page 226 of the Bundle), there had been changes to the arrangement with the supplier of the goods, T.T. (Holdings) Limited, whereby instead of paying by a letter of credit, payment was to be made in a different form. Therefore the arrangement between the plaintiff and the 1st defendant was that the plaintiff was going to make loans to the 1st defendant by means of direct payment rather than by means of letter of credit. These were all documented.

6. The money was subsequently advanced and it came in the form of a large number of payments from various sources of people related, associated or controlled by the plaintiff. The total sum owing came to something like $4 million odd. One could see acknowledgement of the debts at pages 174 and 179 of the Bundle. The one on page 174 was dated 10 February with reference made there to 98MN001 and to the sum of $1.981 million. It was agreed that sum would be repaid on 22 April 1998. This was under the letterhead of the 1st defendant. It was addressed to Mr Lu at Holding company. I think in the context of the documentation as a whole, it is clear that the creditor is the plaintiff and not the Holding company. There is a similar acknowledgement of debt at page 179 whereby it was acknowledged that the second payment of $1.981 million had been received by the 1st defendant and the 1st defendant agreed to repay the said loan on 7 June 1998.

7. The next stage in the development of the story is the question of the Guarantee to be found at page 138 as indicated before. This is an agreement between three parties - the Guarantor (2nd defendant), the Debtor (1st defendant) and the Creditor (the plaintiff). It recites under clause 1 that the 2nd defendant was the managing director and general manager of the 1st defendant. It further recites under clause 2 that there was the agreement 98MN001 and that the 1st defendant had been given the loan of $4.2 million to buy Taiwanese generator and according to the agreement of the parties, the loan should have been repaid in two instalments on 22 April and 7 June. That, of course, reflects very clearly the acknowledgements of debt at pages 174 and 179. Clause 3 then proceeds to say that as of 30 July 1998, the amount owing was still $4,027,938.20 and 1st defendant asked for time to repay. Then clause 4 recites the agreement of the 1st and 2nd defendants for the 1st defendant to repay $1 million by 20 August and the balance by 20 September, namely that it had been given something like another 20 days to make the first payment and one month and 20 days to make the second payment. By the same clause, the 2nd defendant agreed to be liable as guarantor. Clause 5 then provides for interest.

8. This document makes it very clear firstly, that there was the acknowledgement of debt and secondly, the agreement for later payment, and thirdly, the guarantee by the 2nd defendant.

9. Is it possible that this document was signed by the 1st and 2nd defendants not because of what it said in the document was true but because of some inducement on the part of the plaintiff? I do not think so. The contemporaneous documentation certainly does not support the fact that there was such inducement. What happened, however, afterwards with the parties is also to be looked at for a scrutiny as to whether such was the case.

10. As a result of the non-payment under the Guarantee, the writ was issued on 7 May 1999 followed on the same day by a prohibition order against the 2nd defendant. At paragraph 5 of the first affidavit that was filed by the 2nd defendant to discharge the prohibition order (page 37 of the Bundle), although there was reference to the Guarantee, there was nothing there to suggest that the Guarantee was not binding, that there was assurance that this was a formality, or that there was any misrepresentation - the sort of thing one would expect to come out immediately if such was the case. The same position also followed when the defence was filed on 6 December 1999 (at pages 46 and 47 of the Bundle), there was nothing about misrepresentation.

11. In the written repayment proposal from the 1st defendant to the plaintiff (at page 119), there was a clear acknowledgement that the debt is due and the proposal was to make repayment by various instalments with the first payment of $2.5 million and the rest by nine instalments.

12. The case of the defendants that was ran in tandem with the misrepresentation defence was that the money was not owed by the 1st defendant to the plaintiff but in fact was owed by the 1st defendant to the Holding Company. I think there is no substance in such a case. The contemporaneous documents all seem to point to the money clearly being owed to the plaintiff.

13. So what is then left in these circumstances on the central question of misrepresentation? Mr Chan had said everything he could in favour of such a version. He referred me initially to the money being not for the Taiwanese generator but that suggestion, I think, has since been withdrawn. He pointered to the 1st agreement stated in clause 2 of the Guarantee with the reference number of 001 and the allegation that such agreement was cancelled. I think the true position is really that the clause 2 reference to 001 was a shorthand for the financial arrangement between the parties. What is clear is that the contemporaneous documents showed that there had been a change - instead of a L/C arrangement, it was a loan - and it is clear that money had been advanced by people related to the plaintiff to the 1st defendant.

14. In the light of the indebtedness repeatedly acknowledged by the 1st defendant of these loans, I cannot see on what basis there can be a valid defence of misrepresentation. The story of misrepresentation simply does not add up and there can be no possible connection between the misrepresentation and the indebtedness and the Guarantee. For me, it is simply all moonshine - a desperate effort on the part of the 1st and 2nd defendants to create any kind of defence in order to put off the evil day. The attempt fails and I find that there is no substance in the defence and the summary judgment is rightly ordered by the master. The appeal must be dismissed with costs.