CHIYU BANKING CORPORATION LTD v. WAH LOON PACKING & STATIONERY CO LTD AND OTHERS

HCA 472/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 472 OF 2003

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J U D G M E N T

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Introduction

1.  During a period spanning May 1992 and October 1999, the third defendant called Liu Guan Yao (D3) entered into eight deeds of guarantee in favour of the plaintiff bank, called Chiyu Banking Corporation Limited, to secure advances and other accommodation to principal debtors with which D3 was connected.  By writ of February 2003, the plaintiff sues D3 (with others) to recover debts due by the principal debtors and called in but unpaid.  By summons of June 2004, the plaintiff applied for summary judgment from D3 and other guarantors.  The matter came before a Master and in January 2005, she made various orders.  Insofar as they concern D3, she gave him unconditional leave to defend the claims deriving from four of the guarantees, but entered judgment for the sums claimed under the remaining four guarantees.  D3 lodged a notice of appeal against the summary judgment; this is the appeal.

History

2.  What emerges from the evidence filed by D3 both before the hearing before the Master and (with leave) after that is that during the period of 7 years in which D3 executed the guarantees, he came to be involved in a number of commercial ventures working in turn for an employer and in his own right.  The picture is by no means complete, but during the best I can I summarize it as follows.

3.  D3 was born and educated in China.  In 1984, he joined Jiangxi Electrical and Mechanical Product Import and Export Corporation (Jiangxi); as the name implies it trades in electrical and mechanical equipment.  He also worked for a subsidiary of Jiangxi called Hua Gan Enterprises Co. Limited (Hua Gan Enterprises).  In December 1985, he was seconded to a company newly formed called Wah Loon Mechanical and Electrical Co. Limited (Wah Loon Mechanical) which figures prominently in this history, as it is its default which, by virtue of four of the guarantees given by D3, has led to the summary judgment entered against D3.  At the outset D3 and a fellow Jiangxi employee who is the second defendant in this action (D2) each held one share in Wah Loon Mechanical.  In 1988, the capital was increased to $170,000.  D3 and someone called Luo Maoxing (Luo) whom D3 describes as his boss in Jiangxi, took one share short of 51,000 of the shares jointly.  D2 was similarly involved with another, holding jointly one short of 68,000 shares.  Hua Gan Enterprises was allotted the remaining 51,000 shares.  Then and at all material times afterwards D2 and D3 were directors of Wah Loon Mechanical.  It is D3’s case that his interest held jointly with Luo at this point in time was held in trust for Jiangxi. 

4.  In May 1992, D3 entered into the first of the four guarantees that are the subject of this appeal.  However, there was an earlier transaction which, interestingly, emerged only latterly in the evidence.  D3 had in April 1984 bought a shop in Tuen Mun.  It was registered in his name but on his account he was the owner in trust for his employer Jiangxi.  He exhibited an authorization letter dated March 1984 to that effect.  The plaintiff provided funds to complete the purchase.  D3 executed a mortgage to the plaintiff as security.  In May 1992, again on D3’s case, the powers that be at Jiangxi decided that D3 should sell the shop to Wah Loon Mechanical.  The plaintiff agreed to fund the purchase, taking an all moneys legal charge from Wah Loon Mechanical and requiring personal guarantees from the directors D2 and D3.  It is D3’s primary case that he was reluctant to make this personal commitment, but was told that he had to or face a sacking or demotion.  He was also assured, he says, that he would not be chased for payment in the event of default.  Signing it under these circumstances, he was not told that it purported to guarantee repayment of general banking facilities in an unlimited amount rather than the amount specifically borrowed to complete the shop purchase.  So, as he claims, he was misled into the belief that his personal obligation would have come to an end when, sometime in 1999, Wah Loon Mechanical paid off the last installment of the amount borrowed to complete the purchase. 

5.  There is no dispute that the guarantee was validly executed, or that it spells out in straightforward terms that it was to guarantee payment by the principal debtor of all moneys due under the legal charge.

6.  It is further apparent, that whilst D3 was committing to the guarantee upon completion, at the same time his personal covenant under the mortgage to the plaintiff was discharged.

7.  In December 1994, Wah Loon Mechanical applied to the plaintiff for banking facilities to the extent of $4 million, which was the precursor to the second of the four guarantees the subject of this appeal.  The plaintiff responded with a loan offer to be secured inter alia by directors’ guarantees, and a charge over a property owned by a company called Hanway Properties Limited (Hanway).  This collateral charge was also a feature which has only latterly emerged in the evidence.  Hanway according to a search produced is a company incorporated in August 1993 having a paid up capital of $3 million divided equally between D3 and another living at the same address; perhaps she is his wife.  Both are directors.  It is D3’s case that again he was reluctant to sign the guarantee, this time limited to the sum of $4 million.  He did so only when he was told by the plaintiff’s clerk before whom he signed that the guarantee was a formality.  Taken to the Hanway collateral security, he stated that this was a different transaction altogether entered into 3 months later, to secure accommodation sought by Hanway for its own purposes.  This ‘separate transaction’ allegation is not supported by the plaintiff’s documentation.  In any event, it reveals that D3 was prepared to put up as personal security his stake in Hanway.  This charge was an unlimited, all moneys charge.

8.  The third guarantee derives from an application made by Wah Loon Mechanical submitted on its behalf over the signature of D3.  By this time, in December 1996, D2 and D3 were substantive shareholders in Wah Loon Mechanical in their own right.  In March of that year D3 had taken all the shares hitherto held by himself and Luo, that is 51,000, and he also held jointly with D2 another 51,000.  It is the plaintiff’s case that he negotiated the prospective terms, pursuing banking facilities to the extent of $2 million.  The loan offer that emerged, dated 16 December 1996, required as before guarantees from the directors D2 and D3.  On 17 December, D3 signed a guarantee, to the limit of $2 million.  It is his case that he signed without realizing that in fact facilities of only $300,000 were being granted to Wah Loon Mechanical.

9.  The fourth and final guarantee with which this appeal is concerned was signed on 27 January 1998.  Wah Loon Mechanical had prior to then applied to the plaintiff through its directors for letter of credit and trust receipt facilities.  The amount sought was for American dollars which converted to about $1,260,000.  It was expressed to be urgent.  It was applied for over the signatures of D2 and D3.  The loan offer required as usual the personal guarantees of the directors; they signed accordingly, limited to $1,260,000.  It is D3’s case that the facility that was provided was different altogether and had no bearing on the guarantee that he was obliged to sign.  In any event, it was fully discharged about 3 months later. 

10.  I should say that D3’s allegations put forward in evidence of misrepresentation and undue influence by staff of the plaintiff and/or those representing the plaintiff have been hotly disputed by those who dealt with the various transactions leading to the signing of the guarantees, and in particular they denied misleading D3 as to his potential liability or otherwise misrepresenting the possible consequences, as would have been directly contrary to the wording of the guarantees.  But this is the rehearing of a summary judgment application which does not permit a trial by affidavits.  Thus it is not pertinent or appropriate from me to deal with disputes of fact.

11.  Before departing from an account of events, it is I believe appropriate to make passing reference to those of the guarantees, four in all, that are affected by the Master’s decision to give unconditional leave to defend.  Three of them, signed in October 1995, August 1996 and October 1997, are respectively for a maximum liability of $5 million, $1.1 million and $1.5 million, to secure facilities for Harvest Wide International Limited (Harvest Wide).  Harvest Wide according to search records was a company whose share capital of $3,000,000 was divided as between D2 and D3 in the percentages of 55% and 45%.  They were both its directors.  D3 disposed of his shares and resigned from office in June 1998.  The 4^th guarantee was signed in October 1999.  It was for a maximum liability of $600,000 to secure facilities for a company called Wah Loon Packing and Stationery Co. Limited (Wah Loon Packing).  Wah Loon Packing was almost wholly owned by Harvest Wide.

12.  In general terms, D3’s complaint was levelled at the staff of the plaintiff allowing him to sign whilst either misrepresenting the consequences or providing sketchy and inadequate advice.

13.  Why it was that the Master gave unconditional leave to D3 to defend the claim arising from these guarantees is not clear.  A transcript of her judgment was not produced.  Ms Tai who represented D3 at that hearing, could not recall, but she surmised that a material issue may have been that D3 had given notice to the plaintiff of his resignation and departure from Harvest Wide in 1998.

The Law

14.  Miss Tai helpfully summarized the tests that are adopted in Order 14 applications and I repeat verbatim her submissions:-

“	The test at the summary stage is indeed as simple as whether the defendant’s assertions are believable.
	[Hong Kong Civil Procedure 2004 Vol 1 para 14/4/9]
	It must also be borne in mind that the court must not embark on a mini trial on affidavits.
	[Hong Kong Civil Procedure 2004 Vol 1 para 14/4/9]
	Order 14 is for clear cases; that is, cases in which there is no serious material factual dispute and, if a legal issue, then no more than a crisp legal question as well decided summarily as otherwise…  The procedure is entirely inappropriate where the plaintiff’s entitlement to recover any sum is the subject of any serious dispute, whether of law or fact.  This is not to say… that a defendant with no or no more than a partial defence can cheat a plaintiff of his just desserts by producing hefty affidavits and voluminous exhibits to create an illusion of complexity where none exists.  Where the point at issue is at heart a short one the court will recognize the fact and act accordingly no matter how bulky its outer garments.  But it does mean that where there are substantial issues of genuine complexity the parties should prepare for trial… rather than dissipate their energy and resources on deceptively attractive short-cuts.
	[Hong Kong Civil Procedure 2004 Vol 1 para 14/4/9]
	A complete defence need not be shown.  The defence set up need only show that there is a triable issue or question or that for some other reason there ought to be a trial; and leave to defend ought to be given unless there is clearly no defence in law such as could have been raised on the former demurrer to the plea and no possibility of a real defence on the question of fact.
	[Hong Kong Civil Procedure 2004 Vol 1 para 14/4/9]
	Where there are unexplained features of both the claim and the defence which are disturbing because they bear the appearance of falsity and disreputable business dealings and questionable conduct, the court should not make tentative assessments of the respective chances of success of the parties or the relative strengths of their good or bad faith, and should not on such an examination grant the defendant conditional leave to defend, but should give unconditional leave to defend.
	[Hong Kong Civil Procedure 2004 Vol 1 para 14/4/9]
	Leave to defend should be given where there is reasonable ground for an inquiry or account in order to ascertain the amount recoverable.
	[Hong Kong Civil Procedure 2004 Vol 1 para 14/4/13]
	O.14 proceedings are quite unsuitable for the resolution of genuine commercial disputes in which the facts call for investigation.
	[Hong Kong Civil Procedure 2004 Vol 1 para 14/4/25]”

15.  To this I add Mr Chan’s equally helpful summary:

When the Judge is satisfied not only that there is no defence but no fairly arguable point to be argued on behalf of the defendant it is his duty to give judgment for the plaintiff.

Ref. O14r3 RHC and the White Book § 14/4/8 p161

Order 14 proceedings are eminently suitable for claims on dishonoured guarantees when the primary facts are not in doubt and the only result of letting the case go to trial would be to delay the plaintiff further in the recovery of the money plainly due to him.

Ref: Bank of Credit and Commerce Hong Kong Ltd (in liquidation) v Quadrutec Hotel Management & Development Ltd [1996] 4 HKC 316; CACV 108 of 1996

The test at the summary stage is whether D3’s assertions are believable which is a question to be answered not by taking those assertions in isolation but rather by taking them in the context of so much of the background as is either undisputed or beyond reasonable dispute.

Ref: Re Safe Rich Industries Ltd [1994] HKLY 183 per Bokhary J.A.

It is trite law that the mere assertion in an affidavit of a given situation does not, ipso facto, provide leave to defend since D3 must satisfy the Court that he has a fair or reasonable probability of showing a real or bona fide defence, i.e. that his evidence is reasonably capable of belief.  The threshold onus is on D3 to show that there is a triable issue.

Ref: Banques de Paris et des Pays-Bas (Suisse) S.A. v Costa de Naray [1984] 1 Lloyds’ Rep per Ackner L.J. at p28, followed in Bhagwandas Kewalram Murjani & Others v Bank of India [1990] 1 HKLR 586 and Tandy/Rank Video & Another v Yee Hing Cassette Factory Ltd [1991] 1 HKC 136

It is well establish that in an Order 14 application a mere dispute of fact does not automatically entitle the defendant to leave to defend.  The Court is entitled to test D3’s case against contemporaneous documents and asked the question as to whether D3’s case is credible.

Ref: Ng Shou Chun v Hung Chun San [1994] 1 HKC 155 per Godfrey J.A. at p158C-G

There are some cases in which the defendant’s own case, although apparently it raises issues which, if found in his favour, would provide him with a defence, was so incredible or so contradicted by contemporaneous documents or circumstances that it becomes clear that his defence is a sham.  Two tests are appropriately namely “Is what the defendant says credible?” and “Is there a fair or reasonable probability of the defendant having a real or bona fide defence?”  Where an issue of fact is raised the first question must be answered in the affirmative before considering the second.

Ref: Manciple Ltd. v. Chan On Man [1995] 3 HKC 459 at 466 per Mortimer J.A.

If the evidence of D3 is incredible in any material respect, it cannot be said that there is a fair or reasonable probability that he has a real or bona fide defence and judgment will be given to the Plaintiff.

Ref: National Westminster Bank plc v. Daniel [1993] 1 WLR 1453; [1994] 1 All ER 1156

Application of the law

16.  What stands out as being particularly apposite in this case is that at no stage in the history of events, from beginning to end, could D3 be considered a greenhorn when it came to formal legal documentation to secure repayment of bank loans.

17.  In what is a very useful and revealing overview, Mr Chan has from the documents available provided a long list of transactions in which D3 has played a hands on role; transactions in which money was raised and consequential security documents were signed.  Consistently and persistently he dealt with the same bank and its staff in respect of one loan transaction after another, at first in the early stages as trustee for his employer and then later in his own right.  He was free to commit personally to the security documents or not, and chose to do so.  The guarantees spelt out in each case precisely the commitment.  I am satisfied that he was well aware; of the commercial risk that he chose to take.

18.  On the facts there can be no credible defence of undue influence or of misrepresentation.  His allegation that he was driven to sign when trustee of Jiangxi’s interests is a bare assertion not supported by contemporaneous or earlier events.  In most of the other cases, he had a vested financial interest in pursuing the loans.  In none has he demonstrated that he was or may have been led astray, or otherwise was ignorant of what he was letting himself in for, as would justify a hearing on the facts.

The result

19.  I am satisfied the Master came to the correct decision when she entered judgment.  There is more evidence before me at this the rehearing but nothing to warrant altering her findings and conclusion.

20.  The appeal is dismissed.  Costs are to the plaintiff taxed if not agreed, nisi at first instance.