BANK OF CHINA (HONG KONG) LTD v. LEUNG YAU BUILDING LTD AND OTHERS

   HCA 1467/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1467 OF 2006

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J U D G M E N T

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INTRODUCTION

1.  This is an action instituted by a banking institution (“the Bank”) against the 1^st Defendant (“Leung Yau”) for repayment of loans advanced to it under a loan agreement and against the 2^nd Defendant (“Cheung”) and 3^rd Defendant (“Lam”) as guarantors under the loan agreement.  Leung Yau was a corporation, which until 9 December 2005 was held by Cheung as to 70% of its shareholding and by Lam as to the remaining 30%.  Thereafter, Cheung became the sole shareholder when Lam’s shareholding was transferred to him.  Prior to 9 February 2006, Cheung and Lam were the only directors of Leung Yau.  Thereafter, Lam resigned from his directorship and Cheung became the sole director of Leung Yau.

2.  By way of background, the Bank had advanced loans to Leung Yau under the terms of a facility letter dated 10 January 2004.  Cheung and Lam executed a deed of guarantee dated 16 January 2004 jointly and severally guaranteeing Leung Yau’s indebtedness to the Bank to the limit of $1,300,000.  Those loans were duly repaid.

3.  On 10 July 2004, Leung Yau executed a “Mandate (Change)” (“1^st Mandate”).  The 1^st Mandate was a general mandate.  It authorized Cheung and Lam as signatories of Leung Yau’s account with the Bank and either of their signatures was effective.

4.  On 14 September 2004, Leung Yau underwent some organisation changes.  On that day, Cheung and Lam entered into an agreement described as “Shareholders’ Deed relating to Leung Yau Building Limited” (“Shareholders’ Deed”) under which Lam agreed to transfer his shareholding in Leung Yau to Cheung.  Though Cheung referred to it repeatedly as a share transfer agreement, it was not an agreement for sale and purchase of shares to take effect immediately, but an agreement by which Lam granted an option to Cheung to purchase his shares for $1 subject to certain interim arrangements between Cheung and Lam.  The share transfer subsequently took place on 9 December 2005, while Lam’s resignation as director of Leung Yau took effect on 9 February 2006 with notification of his resignation filed with the Companies Registry on 13 February 2006.

5.  Shortly after the date of the Shareholders’ Deed, by a letter dated 30 September 2004 (“1^st Facility Letter”), the Bank granted Leung Yau an overdraft facility of up to $500,000, letter of credit facility of up to $2,000,000 and a trust receipt facility of the same amount.  Cheung and Lam signed acceptance of the terms of the 1^st Facility Letter on behalf of Leung Yau and individually countersigned an endorsement agreeing to act as guarantors.  They also signed a separate deed of guarantee dated 8 October 2004 jointly and severally guaranteeing Leung Yau’s indebtedness to the Bank to the limit of $2,000,000.

6.  On the same day, Cheung and Lam signed a “Master Agreement for Bills Transactions and Trade Finance” (“Master Bills Agreement”) and a “Mandate And Appointment Of Authorized Signatory(ies) Under Master Agreement For Bills Transactions And Trade Finance (By A Limited Company)” (“2^nd Mandate”).  Under the 2^nd Mandate, the signature of either Cheung or Lam was effective.  

7.  By a letter dated 27 April 2005 (“2^nd Facility Letter”), the Bank granted Leung Yau two overdraft facilities of up to $500,000 and $1,000,000, letter of credit facility of up to $2,000,000 and a trust receipt facility of the same amount.  Only Cheung signed acceptance of the terms of the 2^nd Facility Letter on behalf of Leung Yau but both of them individually countersigned an endorsement agreeing to act as guarantors.  They also signed a guarantee dated 20 May 2005 jointly and severally guaranteeing Leung Yau’s indebtedness to the Bank to the limit of $1,000,000.

8.  Between April and August 2005, Lam signed on behalf of Leung Yau four applications for drawdown of loans from the Import Invoice Finance Facility (“IIF Facility”) under the 1^st and 2^nd Facility Letters.  Those loans were drawn to pay local suppliers.  Those loans remain unsettled.  The Bank commenced action against the Defendants on 11 July 2006.  Cheung on behalf of Leung Yau as well as himself negotiated with the Bank for settlement.  However, no settlement was reached.  The Bank obtained judgment against Lam on 10 August 2006.

9.  The Bank’s action against Leung Yau is based on the 1^st and 2^nd Facility Letters, while that against Cheung is based on the three guarantees.  Lam had authority to apply for drawdown from the IIF Facility under the 2^nd Mandate and had authority to sign cheques under the 1^st Mandate.  There is no dispute that the IIF Facilities were drawn down by Leung Yau and remained unpaid.  Unless valid defences were raised, the Bank is entitled to judgment.  Leung Yau and Cheung raised three defences.  First, they claim there was a valid change of mandate in March 2005 such that only Cheung’s signature would be effective and as a result the Bank should not have allowed the drawdown applications signed by Lam only.  Second, they allege that there was gross negligence or wilful default on the part of the Bank when determining if the documents presented for credit were compliant with the terms of the 1^st and 2^nd Facility Letters.  Third, they rely on a settlement agreement reached between the Bank and Cheung for himself and Leung Yau.

Change of Mandate

10.  Part of the Bank’s case is based on the 1^st Mandate signed on 10 July 2004 and the 2^nd Mandate signed on 8 October 2004.  In this defence, Cheung alleges that these two mandates were superseded by a change of mandate in March 2005 to the effect that Cheung became the sole signatory.  This allegation is denied by the Bank.  The dispute between the parties is a factual dispute.

11.  Cheung’s case is as follows.  Under the Shareholders’ Deed, Lam sold his shares in Leung Yau to Cheung and left Leung Yau on 14 September 2004.  Nonetheless, Leung Yau and Cheung entered into a commercial arrangement with Lam under which Lam was allowed to use Leung Yau’s general banking facilities provided by the Bank with Cheung’s prior approval.  As a safeguard against unauthorized drawdown by Lam, Cheung held the company chop which he thought was part of the signing arrangement with the Bank.  In order to further safeguard against the unauthorized drawdown by Lam, he had a lunch meeting with Sin and Yip of the Bank in January or February 2005.  During the lunch meeting, he informed them of Lam’s departure from Leung Yau and requested for a change in Leung Yau’s mandate so that the general banking facilities account with the Bank would be operated on the signature of Cheung only.  Yip told Sin to arrange the documentation.  Pursuant to that discussion, Sin sent him the documents for signature by him and Lam.  Despite repeated requests, Cheung was unable to obtain Lam’s signature on the documents and Lam responded to him with foul language.  In late March 2005, he returned the documents completed with his signature only to Sin for further processing.  Cheung said that in October 2005, Sin told him that Lam had made use of Paco Construction Engineering Limited (“Paco”) to drawdown from the IIF Facility of Leung Yau.  He then informed Sin that Lam’s daughter was a director of Paco.  Sin promised that the Bank would not allow similar drawdown thereafter.

12.  Both Sin and Yip had no recollection of any lunch meeting with Cheung and denied having any discussion with Cheung about the change of mandate.  Sin rejected the suggestion by Mr Cheung, counsel for Leung Yau and Cheung, that Sin and Yip had a meeting with Cheung to review Leung Yau’s financial position for the coming financial year because at the material time the account of Leung Yau was regular and a paper review within the Bank was adequate.

13.  I shall first examine the documentary evidence which is incontrovertible and then analyse the evidence of Cheung on the one part and that of Sin and Yip on the other.  Then I shall make my finding of fact.

The 1^st Mandate

14.  The 1^st Mandate was a general mandate.  It provided that the signature of either Cheung or Lam was sufficient to operate the bank account of Leung Yau. 

15.  The company chop of Leung Yau was affixed on the 1^st Mandate, but it was expressly stated that the company chop was for reference only.  In addition, clause 3 of the mandate provided that any chop or seal affixed in addition to a manuscript signature did not form part of the signature, unless the Bank agreed otherwise, although it may be used to indicate the capacity of the signatory.  This fact put it beyond doubt that the company chop of Leung Yau was not part of the signing arrangement.  It was once argued by Cheung that the company chop formed part of the signing arrangement and hence the Bank should not have allowed the IIF Facility to be drawn down on the signature of Lam alone without the company chop.  This argument was subsequently abandoned by Cheung during his cross-examination.

16.  Clause 6 provided that the mandate would remain in effect until an amending document was sent to and acted on by the Bank.  Clause 7 provided that the authority would be binding notwithstanding any change in the constitution of Leung Yau.  Thus, whatever was the nature of the Shareholders’ Deed and regardless whether there was any discussion about change of mandate during the lunch meeting, these had no effect on the Bank unless an amending document had been sent to and acted on by the Bank.

17.  The mandate contained an attestation clause in the follow term:

“The undersigned certify that resolutions in the above terms have been duly passed by the customer’s board of directors/governing body in accordance with its articles of association/constitution (and any rules or by-laws) on 12 July 2004 and continue in full force and effect without amendment.”

This clause impliedly suggests that any change in mandate required a board resolution of Leung Yau.

The 2^nd Mandate

18.  The 2^nd Mandate related specifically to transactions under the Master Bills Agreement.  It expressly stated that the signature of either Cheung or Lam was sufficient.  The company chop of Leung Yau was not even affixed on the 2^nd Mandate and therefore did not form part of the signing arrangement. 

19.  The mandate contained extracts of a board resolution of Leung Yau passed on 8 October 2004.  Clause 1 of the resolution approved the terms of the Master Bills Agreement and authorized Cheung and Lam to complete, accept and sign the agreement on behalf of Leung Yau.  Clause 2 gave Cheung and Lam the power set out under clause 14 of the Master Bills Agreement.  Clause 3 provided that the agreed signing arrangement for the purpose of the Master Bills Agreement was the signature of either Cheung or Lam. 

20.  Clauses 4 and 7 are pertinent.  Mr Cheung submits that clause 4 governs change of mandate.  Mr Man, counsel for the Bank, draws a distinction between change in the signature of an authorized signatory and change in the identity of the authorized signatory or change in signing arrangement.  He submits that clause 4 applied to the former while clause 7 applied to the latter.  These two clauses read as follows:

   “4.  That in case of any change in the specimen signature(s) of any of the Authorized Signatories, the Company shall inform the Bank by notice in writing under the hand of the Chairman or the Managing Director or the General Manager or the relevant Authorized Signatory(ies), and the Bank shall be entitled to act upon such notice until the receipt by the Bank of further notice under the hand of the Chairman or the Managing Director or the General Manager or the relevant Authorized Signatory(ies).

  7.  That these resolutions be communicated to the Bank and remain in force until expressly revoked and/or amended by resolution passed by the board of directors of the Company and a copy thereof certified by the Chairman and by either the secretary or one other director of the Company shall have been sent to and received by the Bank at its branch/sub-branch at which the bills transactions are effected (the “Designated Office”). For the avoidance of doubt, it is expressly declared and resolved that any similar resolution given to and/or received by any branch/sub-branch of the Bank other than the Designated Office will not revoke terminate and/or affect the validity of these resolutions.”

21.  Mr Cheung submits that clause 4 empowered Cheung as the chairman, managing director or general manager of Leung Yau to inform the Bank of change in mandate.  In so arguing, he equates change in specimen signature as change in signing arrangement.  The opening words of this clause read “in case of any change in the specimen signature(s) of any of the authorized signatories”.  On the face, this clause is expressly about change in the signature of an authorized signatory and not about change in the authorized signatory himself.  Cheung and Lam were the authorized signatories appointed by resolution of the board under clauses 2 and 3.  It is therefore reasonable to construe clause 4 as only empowering the chairman, managing director or general manager of Leung Yau to inform the Bank of change in the way Cheung and Lam wrote their signatures.   

22.  On the other hand, Mr Man argues that there is a clear distinction between change in the specimen signature of an authorized signatory and change in signing arrangement.  He submits that clause 4 empowered the chairman, managing director to notify the Bank of change of the way an authorized signatory wrote his specimen signature but not of change of the identity of the authorized signatory.  The opening words of clause 7 stated that the board resolutions quoted, i.e. clauses 1 to 6, shall be communicated to the Bank and remain in force until expressly revoked and/or amended by a subsequent resolution passed by the board and communicated to the Bank.  It then provided for the mode of communication and certification of the subsequent resolution.  It is amply clear from this clause that the appointment of Cheung and Lam as authorized signatories and the signing arrangement might not be changed unless pursuant to a subsequent resolution of the board.  In the light of these express words, it is impossible to give any room to the construction as submitted by Mr Cheung.  The chairman, managing director or general manager could not have such overriding power under clause 4 to replace someone appointed by resolution of the board when clause 6 expressly provided that that appointment would remain in force until expressly revoked and/or amended by a subsequent resolution.  To construe clause 4 the way Mr Cheung does is absurd from point of view of the level of authority required to appoint an authorized signatory and that construction would render the words “the specimen signature(s) of any of” in clause 4 superfluous and is contrary to the unequivocal intention as expressed in clause 7.  On the other hand, construing it the way Mr Man does accords with the language of the two clauses and common sense.  It can be easily understood why something less than another board resolution would suffice in the case of a change in the way the authorized signatory wrote his signature which did not involve any change in the identity of that authorized signatory.  I think Mr Man is plainly correct.  I accept Mr Man’s construction of clauses 4 and 7.  Thus, not only that the signing arrangement may not be changed except by a subsequent resolution of the board, for the change to be effective, a copy of the subsequent resolution duly certified in the manner as prescribed in clause 7 must be received by the designated office of the Bank. 

23.  As I shall explain later, even on the basis of Cheung’s evidence, the above construction destroys the entire legal basis of Leung Yau’s and Cheung’s defence.

The Shareholders’ Deed

24.  Cheung’s case is premised on Lam having sold his shares to Cheung and left Leung Yau on the date of the Shareholders’ Deed, i.e. 14 September 2004.  Cheung repeatedly called the deed a share transfer agreement.  He relied on the proforma instrument of transfer, bought and sold notes and a proforma resignation as director of Leung Yau signed by Lam as evidence of the transfer of shares. 

25.  However, clauses 10.2 and 13.1 of the Shareholders’ Deed provided as follows:

   “10.2  Subject to Clause 13.1 of this Deed, Cheung and/or the Company may appoint a transferee whose name be entered in the Bearer I/T and B/SN and the register of members of the Company.  In such case, the parties hereto agree that a consideration of HK$1.00 shall be paid by the transferee to Lam.”

  “13.1  Notwithstanding Clause 3.1 above [which provided for Lam’s signing of the proforma instrument of transfer and bought and sold notes] and subject to Clause 7 above [which provided for Leung Yau and Cheung’s undertaking to repay all the liabilities of Leung Yau], each of Cheung and the Company undertakes that Lam shall remain as a legal and beneficial owner of his holding of 30 shares of the Company unless and until all the Indebtedness and Obligations of the Company had been repaid by the Company and the Guarantees had been released and such transfer be unanimously agreed by the Shareholders and the Company and a transferee is named in the Bearer I/T and B/SN and such name is entered into the register of members of the Company.”

   (The part in square brackets is inserted for clarification purpose.)

Furthermore, clause 4.2 of the Shareholders’ Deed provided that unless otherwise agreed by the shareholders unanimously, Lam would be paid a director’s fee of $20,000 per month from 1 September 2004 until 28 February 2005.  Cheung accepted in his cross-examination that it was contemplated that Lam would at least remain as director until 28 February 2005 and that Lam was actually paid director’s fee until he resigned on 9 February 2006.

26.  It is clear from those provisions that the effect of the Shareholders’ Deed was not to effect an immediate share transfer.  It provided for Leung Yau’s and Cheung’s obligation to repay the liabilities of Leung Yau and in particular to release Lam from his guarantees of Leung Yau’s indebtedness.  It was only when Lam was released of his liability under his guarantees that his 30% interest in Leung Yau would be transferred to Cheung or his appointee at a consideration of $1.  It is also Cheung’s evidence in cross-examination that by the end of 2005, he was able to repay the indebtedness of Leung Yau substantially and had procured the release of Lam from his various guarantees.  Hence, the transfer of Lam’s 30% interest in Leung Yau to him took place in December 2005 and Lam resigned as director on 9 February 2006.  Based on the Shareholders’ Deed and his own evidence, Lam remained as a shareholder and director of Leung Yau until 9 December 2005 and 9 February 2006 respectively.  Thus, Cheung’s own evidence does not support the factual basis of his defence that Lam had left Leung Yau on 14 September 2004 which gave rise to the commercial arrangement between Lam on the one part and Leung Yau and Cheung on the other.

The commercial arrangement

27.  Leung Yau’s and Cheung’s case is that Lam was allowed to use Leung Yau’s IIF Facilities provided by the Bank, but only if it was approved by Cheung in advance.  In paragraph 14 of the Re-Re-Amended Defence, they pleaded as follows:

   “… Another condition of the [Shareholders’ Deed] is the 3^rd Defendant would be permitted to use 1^st Defendant’s general banking facilities save that every time shall be approved by the 2^nd Defendant in advance.  In order to protect the 1^st and 2^nd Defendants, this condition is not only contained clearly in the [Shareholders’ Deed], but also the Company chop of the 1^st Defendant is and was, at all material times, kept by the 2^nd Defendant.”

28.  Cheung was unable to identify the provision in the Shareholders’ Deed pleaded in paragraph 14 of the Re-Re-Amended Defence, which according to the pleading has clearly set out the commercial arrangement.  Clause 9.3(i) of the Shareholders’ Deed was the only provision permitting Lam to use Leung Yau’s account for his own operation, but that clause did not contain any condition for prior approval by Cheung.  That clause provided as follows:

 “9.3(i)  Without prejudice to other provisions of this Deed, commencing from 1 September 2004, the Company’s bank account with (a) Bank of China (Hong Kong) Limited (account no. 012-724-0-000887-1) … shall be used solely by Lam for operation of Lam’s Projects.”

Cheung admitted that the account mentioned in clause 9.3 was the overdraft account and not the bills account at issue, but reiterated that he had agreement with Lam that Lam could also use the other facilities granted by the Bank on condition that Lam had to seek his prior approval.

29.  Clause 9 is as close to the provision pleaded in paragraph 14 of the Re-Re-Amended Defence as one could find from the Shareholders’ Deed.  Under clause 9.1, Lam was to undertake projects on his own account independent of Leung Yau.  Under clause 9.2, Lam could use Leung Yau’s Registered General Building Contractor Licence (“RGBC Licence”), reputation and goodwill to tender for construction contracts, while Leung Yau and Cheung would use their best endeavours to assist and procure the tendering of Lam’s projects, including, inter alia, assisting Lam to obtain banking facilities in relation to Lam’s projects.  Clause 9.3 permitted Lam to use Leung Yau’s overdraft account as mentioned above.  In return, clause 9.4 provided that Leung Yau was to be remunerated management fees at the rate of 5% of any amount received by Lam for his projects regardless of whether Lam made any profit on his projects.  Under clause 14.1, these arrangements were to continue even after Lam ceased to be a shareholder of Leung Yau.  Despite all these detailed provisions, there was no mention at all of the condition pleaded in the defence. 

30.  The Shareholders’ Deed was prepared by Leung Yau’s solicitors.  Cheung said that he did not read the deed.  But, it is unlikely that an important provision such as use by one party of the banking facilities belonging to another party and the requirement for prior approval, had they really existed, could have been left out by Leung Yau’s solicitors.  In addition, clause 19 was an entire agreement clause stating that the deed constituted the entire agreement between the parties.  Clause 20 provided that the deed could only be amended by instrument in writing signed by the parties.  Cheung admitted that there was no such written amendment.  These circumstances are such as to render Cheung’s evidence about the commercial arrangement wholly incredible.

31.  When cross-examined on why the alleged condition never found its way into the Shareholders’ Deed, Cheung said that he thought he had adequate safeguard by keeping the company chop.  As discussed above, the company chop was not part of the signing arrangement under the 1^st or 2^nd Mandate and nothing in the two mandates could have given him the impression that the company chop was necessary for Lam to sign cheques and bank documents on behalf of Leung Yau.  Cheung then explained that his belief came from the fact that in January 2004, he told Sin to prepare the mandate in such a way that the company chop was part of the signing arrangement.  Not only was that a first time allegation which had not been disclosed in his affirmations or witness statements or evidence in chief, it is incredible.  It is incredible that Sin could have got it wrong on not just one mandate but both.  It is also incredible that Cheung could have thought about such a safeguard in January 2004 when Leung Yau was operating smoothly as a partnership and the commercial arrangement as part of the Shareholders’ Deed was not in the contemplation of the parties.  It is also incredible that Cheung could have failed to check the mandates when, on his own case, his only protection against Lam’s unauthorized withdrawal from Leung Yau’s accounts was his custody of the company chop.  Cheung’s evidence bears the hallmark of an impromptu concoction in the witness box.

32.  Accordingly, I reject Cheung’s evidence that there was a commercial arrangement among Lam, Cheung and Leung Yau for Lam to use the banking facilities of Leung Yau only if prior approval was given by Cheung. 

33.  While it is not necessary for my decision, it is obvious that the intention of the Shareholders’ Deed was to provide for an arrangement for the dissolution of the partnership between Cheung and Lam.  Part of the arrangement was to allow Lam to continue to exploit the reputation and goodwill of Leung Yau and to use its RGBC Licence for operating his own projects independently of Leung Yau.  Leung Yau was to finance Lam in his operation by allowing him to use Leung Yau’s general banking facilities.  In return, Leung Yau was to be remunerated 5% of Lam’s receipts from his own projects regardless of Lam’s profit or loss in the projects.  The Shareholders’ Deed did not provide for Cheung’s prior approval as a condition for Lam’s use of the general banking facilities.  That such approval was not required was understandable in view of the trust that had been built up between Cheung and Lam throughout the operation of Leung Yau and the fact that Lam had signed a personal guarantee to pay for Leung Yau’s indebtedness.  However, having drawn on the facilities, Lam dishonoured his obligation to repay the Bank.  Cheung then concocted various excuses to isolate Leung Yau and therefore himself from the liabilities created by Lam.

Informing the Bank about the change of mandate

34.  Cheung’s case of having a lunch meeting with Sin and Yip in about February 2005 to discuss about the change of mandate was premised on Lam having left Leung Yau on 14 September 2004 and that there was a commercial arrangement reached among Lam, Cheung and Leung Yau for Lam to use the banking facilities upon having received Cheung’s prior approval.  Cheung also relied on his belief that the company chop of Leung Yau was part of the signing arrangement.  None of those premises was proved.  On the contrary, the evidence was that at that time, Cheung and Lam was masquerading Lam’s independent projects as Leung Yau’s by allowing Lam to use the RGBC Licence upon payment of 5% of Lam’s receipt from the project as management fee.  Lam was expressly allowed to use the banking facilities.  No condition of prior approval was required under the Shareholders’ Deed.  There was therefore no underlying purpose to have a lunch meeting with Sin and Yip to discuss about the change of mandate.

35.  Mr Cheung refers to the fact that prior to 27 April 2005, all facility letters were signed by Cheung and Lam, however, the 2^nd Facility Letter dated 27 April 2005 was signed by Cheung alone.  Mr Cheung submits that this is a strong indication of a change in Leung Yau’s company management and corroborates Cheung’s evidence that he had a discussion with Sin and Yip about change of mandate during the lunch meeting.  This is a possible inference.  However, as at that date, there was no change in the company structure of Leung Yau.  Lam was still a shareholder and director of Leung Yau.  He also signed an endorsement on the 2^nd Facility Letter that he agreed and accepted to act as guarantor.  Cheung’s signing acceptance of the 2^nd Facility Letter was consistent with the 1^st and 2^nd Mandates.  These facts diminish the significance of the inference which Mr Cheung urges me to draw.

36.  Mr Cheung refers to the fact that the total outstanding loan in the amount of $1,357,078 was in fact drawn down to pay suppliers, Dexin Marketing Co. Ltd (“Dexin”), E.G. Engineering Co. Ltd (“EG”) and Smart Hill Engineering Limited (“Smart Hill”).  He submits that this is consistent with Cheung’s evidence that the IIF Facility was not allowed to be drawn down to pay Paco as agreed by Sin in October 2005.  In my view, this is rather equivocal and could not be treated as corroborative of Cheung’s evidence.

37.  Though Cheung gave a vivid description of his lunch meeting with Sin and Yip, that evidence only came out for the first time in his second affirmation.  In his earlier police statement, he said that he notified Sin over the telephone about the change in mandate, but mentioned nothing about the lunch meeting.  Under cross-examination, he explained that the telephone conversations mentioned in the police statement were follow-ups after the lunch meeting.  That explanation is inconsistent with the tenor of the police statement.  More significantly is that by the time he made his first affirmation, he had already recognised that the disputes between the directors of Leung Yau were not a defence, he and his solicitors who drafted the affirmation must have realised that whether the mandate had been validly changed was in issue and would have obtained full instruction about the circumstances of the telephone conversations.  In his negotiation for settlement with the Bank, he never mentioned that Lam could only use Leung Yau’s banking facilities with his prior approval, that notice of change of signing arrangement had been given to the Bank and that he had signed and returned documents to that effect.  In his further complaints to the vice chairman of the Bank, which was drafted by his friend who was a solicitor, he mentioned not a word about these important matters which formed the basis of his substantive defence.

38.  Cheung is not an ordinary businessman.  He is highly educated.  He has a bachelor’s degree in science, a master degree in business management and a doctorate degree in environmental engineering.  He had been an assistant professor in computer science in the University of Hong Kong.  He has a very broad base education.  He was able to switch from science to management, to engineering and then to computer science and to teach in that subject in the university.  He is a man of exceptional intelligence, wide exposure and good common sense.  Had things happened the way he described, he would certainly have mentioned them in his negotiation for settlement with the Bank and in his complaint to the vice chairman.  He would have made a huge issue, may be not so much about the lunch meeting, but certainly about having informed Sin and Yip of the change in mandate and would have challenged the Bank about receipt of the new mandate signed by him.  There is no such evidence at all.  Regrettably, I find Cheung incredible.  I find that he merely took advantage of the Shareholders’ Deed to concoct a case which never existed.  I reject Cheung’s evidence. 

Validity of the first defence

39.  On the facts, I find there was no agreement between Lam and Cheung that Lam could use the banking facilities only if prior approval had been given by Cheung.  There was no need for having a meeting with Sin and Yip to discuss about change of mandate.  I reject Cheung’s evidence and accept Sin’s evidence.  I find that there was no such lunch meeting as alleged by Cheung and that Cheung had not informed Sin and Yip about any change of mandate.  Accordingly, this defence must fail.

40.  Even if I were to accept Cheung’s evidence, as a matter of law, I can reach no other conclusion.  As I have explained in paragraph 22, the mandate could only be changed by a resolution of the board of directors of Leung Yau.  It is common ground that Lam was a director of Leung Yau until 9 February 2006.  Clause 4.4 of the Shareholders’ Deed provided that the quorum of any board meeting was two.  Accordingly, without Lam’s participation, there could be no valid board resolution.  It was Cheung’s evidence that Lam had repeatedly refused to sign the documents to change the signing arrangements and responded with foul language.  He gave the documents signed by himself only to Sin.  It must necessarily follow that the documents he gave to Sin in March 2005 could not have been a valid board resolution of Leung Yau and could not effect any change in the mandate.  Furthermore, clause 7 of the resolution as quoted in the 2^nd Mandate required the new resolution to be delivered to the designated office of the Bank which was the branch office at Olympian City.  Handing the document to Sin at the Nan Fung Centre branch of the Bank could not suffice.  Even if I were to accept Cheung’s evidence in total, this defence is bound to fail.

Gross negligence or wilful default of the Bank

The defence

41.  The outstanding loans were drawn down from the IIF Facilities to pay various suppliers of Lam’s independent projects.  The applications were all signed by Lam.  Under the 2^nd Mandate, Lam had authority to utilise the facilities of Leung Yau by his signature alone.  Thus the loans were validly drawn down by Leung Yau.  Accordingly, Leung Yau is obliged to repay the loans and Cheung is liable as guarantor.

42.  Simply put, by the second defence, Leung Yau and Cheung pleaded that the Bank had been grossly negligent or in wilful default in allowing Leung Yau to draw down from the IIF Facility.  They rely on clause 4.3 of the Master Bills Agreement, which provided as follows:

“The Bank is authorized to accept and/or pay all documents, bills of exchange and/or drafts made or purporting to be made under any Credit and to pay all sums which appear or purport to be claimed or demanded under such Credit or which the Bank, in its sole opinion, is liable to pay in accordance with or pursuant to such Credit, without any reference to or further authority from the Customer.  The Bank has the sole and unfettered discretion to determine whether documents presented under a Credit are compliant with the terms thereof and such determination shall be binding on the Customer unless there is gross negligence or wilful default on the part of the Bank.”

They allege that there was gross negligence or wilful default on the part of the Bank in approving the suppliers’ list and the applications for drawdown of the loans thereby relieving Leung Yau and Cheung from liability for the loans thus drawn down from the account.

Construction of clause 43.2 of the Master Bills Agreement

43.  Mr Man submits that clause 4.3 is only applicable to the Bank’s handling of documents presented under a “Credit” and not to loans drawn down under the IIF Facility.  The word “Credit” is defined under paragraph 1.1 of the Master Bills Agreement to mean:

 “a documentary credit issued, transferred or confirmed by the Bank, or issued by a third party bank (the “Third Party Bank”) upon the instructions of the Bank, at the request or for the account of the Customer (whether or not the Customer is named as the applicant on such credit) and any commitment by the Bank to issue or confirm, or request for the issue or confirmation of, such credit, and also includes any such credit or commitment as extended or amended from time to time at the request of the Customer.”

Both Mr Cheung and Mr Man accept that a “documentary credit” is a banker’s assurance of payment against presentment of specified documents.  That term is defined by the Uniform Customs and Practice for Documentary Credits (“UCP”) as meaning:

“any arrangement, however named or described, whereby a bank (the ‘issuing Bank’) acting at the request and on the instructions of a customer (the ‘Applicant’) or on its own behalf,

i.  is to make a payment to or to the order of a third party (the ‘Beneficiary’), or is to accept and pay bills of exchange (Draft(s) drawn by the Beneficiary), or

ii.  authorises another bank to effect such payment or to accept and pay such bills of exchange (Draft(s)), or

iii.   authorises another bank to negotiate,

against stipulated document(s), provided that the terms and conditions of the credit are complied with.”

44.  Mr Man argues that the typical documentary credit is a letter of credit which is an undertaking by the issuing bank to pay a third party or the beneficiary upon presentation of documents.  The applicant of the letter of credit is the party who has to pay the bank in the end, while the party applying for payment under the letter of credit is the beneficiary.  The bank has the sole and unfettered discretion to determine whether the documents presented by the beneficiary are compliant with the terms of the letter of credit.  In that context, the relief given to the applicant or borrower in the case of the bank’s gross negligence or wilful default in making the determination makes sense. 

45.  The IIF Facility in issue is a type of facility which would be available for drawdown by the borrower and applicant upon presentation of a supplier’s invoice (i.e. Leung Yau) but not a third party.  The facility is intended to assist the borrower in paying its suppliers.  For that purpose, a list of suppliers has been submitted by the borrower to the bank for approval.  When it becomes necessary for the borrower to pay the supplier, the borrower will apply to the bank for drawdown from the IIF Facility.  The application will be supported by the supplier’s invoice.  If the drawdown is approved, the bank will pay the supplier direct from the IIF Facility.  Unlike the usual case of documentary credit, the supplier does not have to apply to the bank for payment.  It is the borrower who has to apply for payment and who ultimately will be liable to repay the bank.  The bank does not have to assume the burden of determining whether the documents submitted by the supplier is compliant with the terms of the IIF Facility, which it will have to in the case of a documentary credit.  Instead, the borrower warrants and represents to the bank that the application is made for the purpose of facilitating the acquisition of goods by submitting the invoice: see clause 6 of the terms and conditions in the application for drawdown of the IIF Facility.  The protection given to the borrower against arbitrary or irresponsible determination of documents is irrelevant in the case of IIF Facility.  The argument that clause 4.3 of the Master Bills Agreement applicable to documentary credit is applicable to IIF Facility is simply absurd.  I agree with Mr Man’s submission that clause 4.3 does not apply to IIF Facility.  Leung Yau, through Lam as its authorized agent and authorized signatory, applied for drawdown of the IIF Facility representing that the loans were to facilitate the acquisition of goods as described in the invoices and in accordance with the terms and conditions of the IIF Facility.  It lies ill in Leung Yau’s mouth to argue that the Bank had been grossly negligent or guilty of wilful default in allowing the drawdown.  On this ground alone, the defence is to be dismissed.

Local suppliers

46.  Quite apart from the above, the defence has no merit at all.  The gross negligence and wilful default alleged in paragraph 37(1) and (5) of the Re-Re-Amended Defence is the Bank’s allowing the IIF Facility to be drawn down on the strength of invoices from suppliers who were not approved suppliers as set out in the 1^st Facility Letter and who were local suppliers.

47.  It is convenient to deal with Leung Yau’s and Cheung’s complaint about local suppliers first.  There is no dispute that the suppliers were all local entities.  But there is no provision in any contractual documents that the suppliers must be foreign entities.  Mr Cheung is unable to identity any such condition in the Master Bills Agreement.  He relies on the words “for the purpose of importing goods” in clause 6 of the terms and conditions printed overleaf in the application form for drawdown of the IIF Facility which provided:

“Each of the persons signing this application (in his own personal capacity and as authorized representative(s) of the applicant) warrants and represents to the Bank that this application is made for the purpose of importing goods particularized herein and for no other purpose and acknowledges that the Bank has relied on such warranty and representation when assessing this application.”

It is immediately apparent that this clause only offered a warranty as to the purpose of application which is far short from being a condition of the loan.  Besides, the last part of that clause simply neutralised the effect of the warranty as Leung Yau acknowledged that the Bank has relied on its warranty and representation as to the purpose of the drawdown.

48.  On the facts, Cheung was the person who negotiated the IIF Facility.  He accepted that the vast majority of Leung Yau’s suppliers, including all those listed in the January 2004 facility letter, were local suppliers.  He even said that prior to the execution of the 1^st Facility Letter, it was the understanding and agreement of Leung Yau and the Bank that the suppliers under the IIF Facility could be local suppliers.  On 4 October 2004, Leung Yau faxed to the Bank a list of suppliers for the Bank’s approval and those suppliers were all local suppliers.  Mr Man submits that this is part of the factual matrix against which the 1^st Facility Letter and related documents were to be construed.  I agree.  Using the IIF Facility to pay local suppliers had been a long standing arrangement between the parties.  Though the application form was a serious commercial document, presumably drafted by lawyers, it was nevertheless a standard form document.  The long standing arrangement between Leung Yau and the Bank and all the circumstances are such that the rule of construction that words should be given their natural and ordinary meaning and the common sense proposition that we do not easily accept that people have made linguistic mistakes particularly in formal documents do not apply.  On the facts of this case, this rule does not reflect the true intention of the parties.  The factual matrix, in particular, the standard application form, leads a reasonable man to conclude from the background that something must have gone wrong with the language used in the standard form: see Antaios Compania Naviera SA v Salen Rederierna AB [1985] A.C. 191, per Lord Diplock at 201.  The interest of the Bank as the financier was to ensure that the money lent was spent on the legitimate business of Leung Yau to enhance the value of its assets or business so that Leung Yau would be in a good position to repay the loan.  The Bank was concerned with assets and not at all concerned with whether the assets were imported or made or acquired locally.  I have no difficulties to construe the words “importing goods” in the application form to mean no more than “purchasing and bringing goods into the company” and that the source of the goods was irrelevant.

49.  Even assuming that this clause was a condition and that the word “importing” should be given its ordinary and natural meaning, Leung Yau and Cheung offered no evidence that the goods referred to in the invoices were not imported goods.  The best they could prove is that the suppliers were local suppliers and not foreign suppliers.  That does not mean the goods they supplied were not imported goods.  It was expressly stated in some of the invoices that the goods were from Australia.  Leung Yau and Cheung bear the burden of proof.  They failed utterly in discharging that burden.

Approved list of suppliers

50.  The second limb of this defence is that the suppliers had not been approved by the Bank.  According to the record of the Bank, Paco was one of the seven approved suppliers under the 1^st Facility Letter and that Paco, Dexin, EG and Smart Hill were four of the eight approved suppliers under the 2^nd Facility Letter.  Those suppliers were approved at the request of Leung Yau’s consultant, Shiu, by fax dated 4 October 2004 (“2004 List”) and September 2005 (“2005 List”).  The 2004 List was sent under the letterhead of Leung Yau to Sin, while the 2005 List was sent without a letterhead. 

51.  According to Sin, Shiu was introduced to him by Cheung in January 2004 and Shiu produced a name card with the logo and address of Leung Yau and describing him as its consultant.  He filed Shiu’s name card together with Cheung’s name card in the file of Leung Yau.  The two cards were similar.  Cheung’s case is that he had never heard of Shiu and had no idea who he was.  He denied Shiu was an employee of Leung Yau.  He suggested that Shiu might have been introduced to Sin by Lam.  Even so, it is evidence that Shiu was introduced to the Bank as a member of the staff of Leung Yau by an authorized signatory and its director.  Cheung never disputed the authenticity of Shiu’s name card, the 2004 List and the 2005 List.  Cheung did not dispute that the suppliers named in the 2004 List were Leung Yau’s suppliers.  It is inexplicable that Shiu would have submitted the list of suppliers to the Bank for approval if he was just Lam’s staff and not a staff of Leung Yau.  I think Cheung was being selective in telling the truth.  I accept Sin’s evidence that Shiu was introduced to him by Cheung and reject Cheung’s.  But, as I said, it makes no difference whether Shiu was introduced by Cheung or Lam, both of them being directors and approved signatories of Leung Yau’s account. 

52.  Mr Cheung criticised the Bank for acting on the 2005 List which was not sent on the letterhead of Leung Yau and without any signature.  As Shiu had been introduced to the Bank by Cheung, it was reasonable for the Bank to act in the normal course of business on the purported representation of Shiu on matters which Shiu had handled on behalf of Leung Yau before.

53.  Mr Cheung also criticised the Bank for relying on information supplied by someone other than an authorized signatory of Leung Yau.  I think such criticism is fault finding only and has no substance.  As submitted by Mr Man, authorized signatories cannot be expected to handle all businesses on behalf of the company with the bank and they are very commonly assisted by other staff of the company in routine matters.  It would be unreasonable and absurd for the Bank to insist that each and every piece of communication between the Bank and Leung Yau be done by the authorized signatories.  Clearly, it would be sufficient and prudent for the Bank to require signatures by authorized signatories when withdrawals and applications for drawdown are involved. 

54.  As Yip had confirmed, approved list of suppliers would not change the balance of Leung Yau’s account, it was reasonable for the Bank to act on Shiu’s 2004 List and 2005 List.  The applications for drawdown were all signed by Lam on behalf of Leung Yau.  It was therefore Leung Yau requesting the Bank to pay suppliers whose names were on the list of approved suppliers provided by Leung Yau.  None of these criticisms could constitute gross negligence or wilful default of the Bank.

Validity of the second defence

55.  In conclusion, I find that this defence is absolutely devoid of merit.

The settlement agreement

56.  There are two elements in this defence, an oral settlement agreement (“Oral Settlement Agreement”) and an agreement to withhold repayment under the Oral Settlement Agreement (“Withholding Payment Agreement”). 

57.  It is common ground that on 26 July 2006, Cheung had a meeting with a collection manager of the Special Assets Management Department of the Bank, Wong, to discuss about cancellation of the action and settlement.  Cheung alleged that on that occasion, the Bank, Leung Yau and Cheung reached agreement that Leung Yau’s liabilities be limited to the loan capital of $1,320,000 with all interest waived.  According to the Bank, no agreement whatever was reached at that meeting.

58.  It is also common ground that thereafter Cheung continued negotiation with Wong and paid in $150,000 and they reached some form of an agreement on or about 20 August 2006.  According to Leung Yau’s and Cheung’s pleaded case, they reached the Oral Settlement Agreement with the Bank that Leung Yau would repaid the loans over a period of three years in the following manner:

(i)  a lump sum of $150,000 to be paid in August 2006;

(ii)     a monthly sum of $20,000 to be paid during the first year commencing from September 2006;

(iii)   a monthly sum of $40,000 to be paid during the second year;

(iv)  all remaining outstanding sum to be paid in the third year; and

(v)    the Bank would cancel the action against Leung Yau and Cheung when the total repayment sum reached the level of $200,000.

According to Wong, after receipt of $150,000 from Leung Yau, he was instructed by his superior, Luk, to inform Cheung that the Bank would withhold the proceedings against Cheung and Leung Yau on condition that they would repay the outstanding loans by monthly instalments of $20,000 commencing September 2006 (“Withholding Proceedings Agreement”).  But, should there be default in payment, the Bank would restore the legal proceedings against them.

59.  There is no dispute that subsequently Leung Yau paid in $20,000.  Cheung said that the payment was made towards the end of September 2006, but Wong said that it was received on or about 5 October 2006.  Their difference is not material as it is common ground that the payment was for the month of September 2006.

60.  It is also common ground that on 31 October 2006, the Bank recovered $360,000 from Lam, being $300,000 as repayment of the loans and $60,000 as legal costs.  It is Leung Yau’s and Cheung’s pleaded case that as a result, the Bank and Leung Yau entered into the Withholding Payment Agreement agreeing that Leung Yau may withholding making repayment under the Oral Settlement Agreement.  This is denied by the Bank.

61.  Leung Yau’s and Cheung’s case is quite ambiguous.  The terms of the Oral Settlement Agreement as first pleaded in the Amended Defence dated 22 November 2007 were those as set out in paragraph 58 above.  Impliedly, the agreement was that Leung Yau would repay the full amount of loans and all interest accrued over a period of three years.  After the conclusion of Wong’s evidence, Leung Yau and Cheung applied to re-re-amended their defence and additionally pleaded that during the meeting on 26 July 2006, “the parties agreed that the outstanding debts were $1,320,000 with interest being waived”.  So their pleaded case changed from one in which the parties reached the Oral Settlement Agreement in August 2006 to one in which the parties first agreed on 26 July 2006 to cap Leung Yau’s liability to $1,320,000 with the instalment terms agreed in August 2006.  But, in his evidence, Cheung departed from the pleaded case and said that both the cap and the instalment terms were agreed on 26 July 2006.

62.  By this defence, Leung Yau and Cheung claim that they had reached the Oral Settlement Agreement and Withholding Payment Agreement with the Bank, and as Leung Yau and the 3^rd Defendant had repaid more than $200,000, the action should have been discontinued.  Even if Leung Yau and Cheung were still liable to repay, the Bank should commence a new action under the Oral Settlement Agreement.

Analysis of the parties’ case and finding of fact

63.  Cheung’s evidence departed from the pleaded case.  His evidence is that the outstanding debt to be capped at $1,320,000 (a newly pleaded issue) and the instalment terms (which according to the former pleaded case were agreed in August 2006) were both agreed on 26 July 2006.  He said that on 26 July 2006, he asked Wong about the outstanding debt and offered to repay one-third of the loan capital.  Wong replied that he had to check the outstanding amount.  Then before ascertaining that amount, Wong arbitrarily agreed to put a cap at $1,320,000 and waived interest.  

64.  It is common ground that Cheung and Wong had a meeting on 26 July 2006 to discuss settlement.  There is no dispute that Cheung requested the Bank to waive default interest and to reduce the amount of loan capital to be repaid by Leung Yau.  However, while Cheung said that all the terms of the Oral Settlement Agreement were reached at that meeting, Wong said otherwise.  According to Wong, he attended the meeting with Luk.  They did not agree to any of Cheung’s proposals.  Wong did request for payment of $200,000 as a pre-condition and gesture of sincerity for the Bank to consider Cheung’s proposal.  Cheung replied that Leung Yau was in financial difficulties and could not say how much it could pay.  He offered to pay a monthly sum of $20,000 during the first year and $40,000 during the second year.  Wong then asked for financial statements to show why Leung Yau could not pay more and invited Cheung to put forward his proposal in writing for the Bank’s consideration.  Thus, according to Wong, no agreement of anything was reached at that meeting.  In particular, there was no agreement that Leung Yau’s and Cheung’s liability be capped at $1,320,000, that the Bank would waive interest and that the Bank would cancel the action upon Leung Yau repaying $200,000.  

65.  It is again common ground that pursuant to that meeting on 26 July 2006, Cheung wrote on behalf of Leung Yau to the Bank on 31 July 2006.  He referred to the meeting and the Bank’s request for a written proposal.  Then he made the following proposal:

(i)  Leung Yau to repay the debt within a period not exceeding three years of the Bank’s approval of the settlement;

(ii)     Leung Yau to pay not less than $20,000 per month during the first year, not less than $40,000 during the second year and the balance of within the third year with an undertaking to pay within the shortest period possible if its financial conditions improved;

(iii)   the Bank to temporarily cancel all legal proceedings against Leung Yau and Cheung (but not against Lam);

(iv)   a list of account receivable was enclosed as evidence of Leung Yau’s means of repayment; and

(v)     if Lam made any repayment, the Bank shall return the surplus amount to Leung Yau.

66.  According to Wong, Cheung telephoned him on 2 August 2006 and informed him that Leung Yau could not repay $200,000 but would try to repay a sum of $150,000.  Wong told him to repay $150,000 first.  Between 9 and 16 August 2006, Leung Yau repaid a total sum of $150,000.  After consulting Luk and at Luk’s instruction, Wong orally agreed with Cheung that the Bank would withhold the proceedings if Leung Yau would continue to make monthly payments of $20,000 commencing from September 2006 and Cheung agreed.

67.  Cheung’s letter of 31 July 2006 betrayed him.  In the letter, there was absolutely no mention of any concluded agreement on 26 July 2006.  Cheung explained that he was expressly told by Wong not to mention the agreement reached but to put the agreement forward as a proposal for the Bank to consider and approve.  Be that as it may, there was no mention of the ceiling of $1,320,000 or the waiver of interest, though I note there was no mention of payment of interest either.  More importantly, there was no mention of the repayment of $200,000 in return for the withholding of the legal proceedings.  There was no mention that the said sum of $200,000 included repayments recovered from Lam either.  Those were important matters which Cheung as the author of the letter must have put forward had there been any agreement on those matters for the Bank’s approval.  In the letter, Cheung was simply asking for cancellation of the legal proceedings on his agreement to repay over a period of three years.  The payment of $150,000 was not mentioned in the letter, but only pleaded as one of the terms of the Oral Settlement Agreement reached in August 2006.  This letter destroyed Cheung’s case about having reached a concluded Oral Settlement Agreement during the meeting on 26 July 2006.

68.  Cheung’s evidence is confusing and incredible.  From point of view of the Bank, whose business was to make profit by lending, there was no reason why it would so readily offer to waive interest.  Wong admitted that Cheung had requested waiving default interest but not all interests.  The Bank had an indisputable case and a good cause of action against Leung Yau and Cheung.  Cheung had signed a personal guarantee for Leung Yau’s debt.  Leung Yau and Cheung had all along indicated their willingness to repay if Lam failed to repay.  In its letter dated 4 July 2006, Leung Yau confirmed that it would bear responsibility for any debt which Lam failed to pay.  Though there was no distinct mention about interest in that letter, it must be assumed that interest was part of the debt.  It is difficult to envisage Wong, in his position as a collection manager of the Bank, could have the authority to agree to put a cap on the loan capital to be repaid and to waive all interest and would in the circumstances of this case have done so arbitrarily and at the spur of the moment.  That Wong could have done so without even consulting Luk is also incredible.  Cheung’s evidence that Wong agreed to cancel the proceedings upon payment of $200,000 without any assurance of full payment is devoid of business sense.  It is also incredible that the Bank would have reached the Oral Settlement Agreement without any agreement as to payment by Leung Yau of the substantial legal costs incurred.  I find Cheung’s evidence illogical and incredible when tested against the contemporaneous documents.  He is only to blame for the confusion caused by his evidence and his latest amendment to the defence.  I do not accept his evidence.

69.  By way of contrast, Wong’s evidence that he insisted repayment of $200,000 as a gesture of sincerity before the Bank would consider Cheung’s proposal is consistent with the business sense of a seasoned collection manager trying to extract as much as possible from a defaulting client.  That approach is also consistent with the approach of the Bank’s solicitors in their negotiations with Lam: see paragraph 71 below.  His invitation for a written settlement proposal from Cheung for his superior’s approval is logical.  His evidence that the Bank would withhold the proceedings only upon continued monthly repayment thereafter also made business sense.  I accept Wong’s evidence which is cogent and presented in a logical manner. 

70.  Accordingly, I find there was no Oral Settlement Agreement reached between Leung Yau, Cheung and the Bank in the terms as Cheung alleged.  Instead, I find that upon receipt of the $150,000 repayment by Leung Yau in mid August 2006, Wong, on behalf of the Bank agreed to withhold legal proceedings if Leung Yau was able to make monthly repayment of $20,000 commencing from September 2006.

71.  In the meantime, the Bank made some progress with its recovery action against Lam.  On 23 October 2006, Lam’s solicitors, Messrs Peter Lau & Co. (“PLC”), wrote to the Bank’s solicitors, Messrs Kao, Lee & Yip (“KLY”), offering to pay $300,000 within seven days and $1,000,000 by ten equal monthly instalments in full and final settlement of the action against him, Cheung and Leung Yau.  KLY wrote back on 26 October 2006 demanding payment of $300,000 and agreed legal costs of $60,000 within seven days as a condition precedent to the Bank’s consideration of the proposal.  On 31 October 2006, PLC wrote back to accept KLY’s pre-condition.  They enclosed a cheque of $360,000 and photocopies of ten post-dated cheques in the amount of $100,000 each issued by a third party as an indication of Lam’s sincerity in the settlement.  However, the original cheques were never sent subsequently and the said sum of $1,000,000 was never paid.

72.  On or about 5 October 2006, Leung Yau paid in $20,000.  Cheung said that the cheque was handed in to the Bank in September 2006.  Thus this payment was intended to be the payment for the month of September 2006.  Since then, no further payment was made by Leung Yau, whether pursuant to the Oral Settlement Agreement as asserted by Cheung or the Withholding Proceedings Agreement as asserted by Wong.

73.  According to Cheung, he came to know about Lam’s settlement proposal in November 2006 during a telephone call with Wong.  He said that Wong told him that as Lam had made some repayment, Cheung should wait and see how much Lam would repay before making any further payment and that Leung Yau’s legal representatives had also advised him of the same.  Wong denied to have made such suggestion.  According to Wong, as no further repayment was received from Leung Yau for the month of October 2006, he chased Cheung for repayment.  Cheung refused to pay by referring to PLC’s letter and said that he was advised by his legal representatives not to make any further repayments. 

74.  Cheung had been chasing Lam to repay the loans which were incurred for Lam’s own projects.  He even lodged a complaint with the police.  It is likely that as a result of his pressure exerted on Lam, Lam made proposal to the Bank to settle the action, and that Cheung received information about the proposed settlement from Lam or PLC.  Even assuming that Wong and the Bank were sympathetic towards Cheung, I find it incredible that Wong would have volunteered information about having recovered some money from Lam and offered uninvited the suggestion to Cheung to withhold making repayment under the Withholding Proceedings Agreement.  Wong was a collection manager of the Bank.  It must have been his duty to recover as much and as quickly as possible from defaulting clients.  Nothing could have been simpler for Wong to keep silent about the recovery against Lam and for the Bank to continue to receive repayments from both Lam and Cheung.  If indeed Lam honoured his agreement, the Bank would refund the surplus to Cheung as requested in Cheung’s letter dated 31 July 2006.  Wong would be in breach of his duty to the Bank and could expose himself to severe criticism by even suggesting to Cheung to withhold repayment.  I find Cheung incredible.

75.  Furthermore, the undisputed fact was that Leung Yau was in default of repayment for the month of October 2006.  The proposed settlement from Lam did not come about until 31 October 2006.  It was impossible for Wong to have suggested to Cheung to withhold making repayment for the month of October 2006 before having recovered anything from Lam.  It was likely that Wong had been pressing for repayment for the month of October 2006 through to November 2006.  The fact that Leung Yau defaulted payment for the month of October 2006 suggests that there was no suggestion by Wong to withhold repayment.  I find that Cheung was again taking advantage of the proposed settlement by Lam to concoct a case for the Withholding Payment Agreement.  I accept Wong’s evidence and reject Cheung’s evidence.  I find that the parties had not entered into the so called Withholding Payment Agreement. 

76.  Accordingly, I find that as a result of the issue of the Writ of Summons by the Bank on 11 July 2006, Cheung negotiated with the Bank for settlement on 26 July 2006.  Cheung requested for cancellation of the legal proceedings because Leung Yau would encounter difficulties in obtaining building contracts in view of the impending High Court action.  Wong responded to Cheung’s request by requiring a partial repayment of $200,000 as a condition precedent to the Bank’s consideration of the settlement proposal and he invited Cheung to make written proposal for the Bank’s consideration.  Nothing was agreed at that meeting.  Cheung wrote to the Bank on 31 July 2006 setting out Leung Yau’s proposal for settlement.  Then he telephoned Wong and told Wong that Leung Yau could not raise $200,000 and suggested repayment of $150,000 first.  Wong encouraged him to make the repayment first, which Cheung did.  Upon receipt of $150,000, Luk authorized Wong to agree with Leung Yau to withhold the proceedings for as long as Leung Yau would make monthly repayments of $20,000 starting from the month of September 2006 and warned Leung Yau that the proceedings would be restore if it should default in repayments.  There was no agreement reached on the terms of the Oral Settlement Agreement as alleged by Cheung.  In the meantime, the Bank recovered $360,000 from Lam, being $300,000 as repayment of the loans and $60,000 as legal costs.  Despite the recovery, there was no Withholding Payment Agreement reached between the Bank and Leung Yau.  Leung Yau only made one payment for the month of September 2006 pursuant to the Withholding Proceedings Agreement but defaulted in making any repayments thereafter.

Validity of the third defence

77.  Having dismissed Leung Yau’s and Cheung’s case about the Oral Settlement Agreement and the Withholding Payment Agreement and found that the parties had only reached agreement on the Withholding Proceedings Agreement, I find that the Bank was entitled to restore the proceedings against Leung Yau and Cheung upon their breach of that agreement.

conclusion

78.  There is no dispute that Leung Yau owed the Bank $32,571.65 in the overdraft account No. 012-724-0-000887-1 and $1,357,078 in the inward bills account No. 012-349-61-02351-3 with respective accrued interest in the amount of $472.27 and $30,825.73 as at 27 June 2006.  Between 28 June 2006 and date of filing of the Writ of summons on 11 July 2006, additional interest in the amount of $211.77 ($16.29 x 13 days) and $6,887.66 ($529.82 x 13 days) accrued in the overdraft account No. 012-724-0-000887-1 and inward bills account No. 012-349-61-02351-3 respectively.  Leung Yau repaid $150,000 in mid August 2006 and $20,000 on 5 October 2006; and Lam repaid $300,000 on 31 October 2006.  After deducting those repayments and taking into account the additional interest accrued as at 11 July 2006, the amount of principal outstanding is $919,649.65 and accrued interest is $38,397.43 making a total indebtness of $958,047.08.  There is also no dispute that Cheung is liable as guarantor of Leung Yau’s indebtedness under the three guarantees.  No valid defence has been proved. 

79.  Accordingly, I enter judgment in favour of the Bank against the 1^st and 2^nd Defendants jointly and severally in the amount of  $958,047.08 with interest at judgment rate on the capital sum of

(i)  $1,389,649.65 ($32,571.65 + $1,357,078) from 11 July 2006 to 14 August 2006;

(ii)  $1,239,649.65 ($1,389,649.65–$150,000) from 15 August 2006 to 4 October 2006;

(iii)  $1,219,649.65 ($1,239,649.65–$20,000) from  5 October 2006 to 31 October 2006; and

(iv)  $919,649.65 ($1,219,649.65–$300,000) from   1 November 2006 till to full repayments.

80.  The 1^st and 2^nd Defendants shall pay the Plaintiff’s costs on a full indemnity basis.