XCHRX CHINLUCK PROPERTIES LTD. v. CASIL CLEARING LTD.

HCA 11008/97

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 11008 OF 1997

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J U D G M E N T

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1. This is an appeal from the order of Master Mary Yuen made on 29 November 2000 whereby she gave leave for Gold All International Investment Limited ("Gold All") and Cheng Zhen Shu ("Shu") to be added as plaintiffs in the action. She also gave leave to the plaintiff by original action to amend the writ of summons and the statement of claim.

2. By the statement of claim the original plaintiff Chinluck Properties Limited ("Chinluck") sued the defendant for breach of a loan agreement made between Chinluck as borrower and the defendant as lender dated 24 July 1997 whereby the defendant agreed to grant and advance a loan of HK$330 million to Chinluck. The loan was to be secured by a legal charge on two properties in Peng Chau as pleaded in the statement of claim. The registered owner of one of those properties was Chinluck whilst the registered owner of the other property was Shu. The loan was also to be secured by a personal guarantee from Shu in favour of the defendant. Shu was the president and beneficial owner of all the fully paid up shares of Chinluck and Gold All and other companies pleaded in the amended statement of claim filed pursuant to the order of the master.

3. The legal charge on the two properties and the said personal guarantee of Shu were provided to the defendant and amounts were drawn down under the loan agreement. These included amounts under the loan agreement which were used to pay off loans owing to the defendant by companies controlled by Shu. This has been pleaded in para 5 of the re-amended reply of Chinluck and the defence to re-amended counterclaim of Shu. Also, on 5 August 1997, the plaintiff drew down the sum of HK$75 million from the defendant under the loan agreement. However, when the plaintiff later requested payment of a further sum of HK$78,688,152.30 from the defendant under the loan agreement this was refused by the defendant. Chinluck's claim was for specific performance of the loan agreement and payment of the said sum as well as damages in addition to specific performance.

4. The defendant denies the claim and filed a defence and counterclaim against Chinluck as well as against Shu on the personal guarantee claiming payment of sums due and payable under the loan agreement and under the personal guarantee. The counterclaim against Chinluck and Shu is for, inter alia, payment of the sum of HK$308,720,192.75 as particularized in para 27 thereof.

5. By the application to amend the statement of claim and to add parties as additional plaintiffs, Chinluck sought to add Gold All as the 2nd plaintiff and Shu as the 3rd plaintiff. The loan agreement was previously pleaded as a written agreement made on 24 July 1997. By para 3 of the amended statement of claim, it is pleaded as a contract made partly orally and partly in writing. Also, it is pleaded that Chinluck on behalf of itself and Gold All entered into the loan agreement as the borrower. It is pleaded that in so far as it was made orally, it was made between Wang Mei Yue ("Wang"), chairman of the defendant, and Shu. I am told that a minor amendment needs to be made to the pleading as already filed to make it clear that the meeting took place during a dinner party held on 14 July 1997. Mr Ho, counsel for the plaintiffs, has also submitted that para 3A of the amended statement of claim pleads the oral part of the agreement namely, that it was made known by Shu to Wang and agreed that the loan was required by Gold All to meet stage payments under the Prince Garden project as well as to feed premium payment for exchange of lands for the Peng Chau project. By the earlier part of the pleading, it was asserted that Gold All had entered into a contract to purchase apartment units in Prince Garden in Shanghai, being the Prince Garden project, for resale at a profit and that the deposits and balance of purchase price were to be paid at stages (para 2B and 2C). It was also asserted that Chinluck had submitted an application to the District Lands Office Islands for land exchange in respect of industrial and agricultural lands in Peng Chau which were registered in the names of Chinluck and Shu to be redeveloped into a residential development with clubhouse facilities for profit (para 2E). Thus, it was asserted that the loan under the loan agreement was also required to meet the stage payments under the Prince Garden project as well as for payment of premium for the exchange of lands for the Peng Chau project.

6. Mr Yin, counsel for the defendant, has submitted that the defendant would suffer irreparable prejudice if the amendments were allowed. He points out that previously the loan agreement was said to be in writing but only by the amendment is it said to be partly oral and partly in writing. Wang is alleged to have entered into the oral part of the agreement on behalf of the defendant. Wang, however, has left the defendant's employment in March 1999 and has gone to live in the United States of America. The defendant has difficulty contacting Wang according to the affirmation of Wang Yanguang. However, according to para 10 of the said affirmation, the defendant has been in touch with Wang and has asked him about the allegations in the proposed amended statement of claim. Wang has denied having the discussions or making any alleged oral agreement with Shu. Wang simply denies the oral part of the agreement. The position is not that the defendant will be unable to locate Wang. Even if he is located, from what is stated in the said affirmation Wang denies that he had the discussions as alleged in the amended statement of claim with Shu. Also, it appears that Wang would be a reluctant witness in any event. That might still have been the position even if the matters introduced by amendment as regards the agreement being partly oral and partly in writing were matters originally pleaded. In the circumstances, I do not think that the defendant would be prejudiced by the amendment to the extent that it cannot be adequately compensated by an order for costs in its favour.

7. Mr Ho has submitted that the oral part of the agreement is pleaded in para 3A. I am of the view that para 3 and para 3A of the amended statement of claim sufficiently pleads what the plaintiff's case is on what the oral part of the agreement is.

8. Para 5A of the amended statement of claim pleads implied terms of the loan agreement. The defendant would be entitled to particulars of the basis on which it is said that the terms were implied. I have been told by Mr Ho that the implied terms were to be implied by necessary implication from the terms of the loan agreement. If such particulars are supplied, I see no objection to the amendment in para 5A.

9. As regards the securities provided under the loan agreement namely, the legal charge on the two properties and the personal guarantee, it is important to see the prayers for relief. Quite apart from the claim by Chinluck for specific performance of the loan agreement and for damages in addition to specific performance, there is also a claim for a declaration that the legal charge granted by Chinluck and Shu has been avoided or discharged. There is also a claim for damages for breach of the loan agreement by Gold All. Shu claims for a declaration that his liabilities under the personal guarantee given to the defendant are discharged and for an order that the personal guarantee be delivered up to be cancelled.

10. In para 9 of his defence to amended counterclaim dated 20 May 1999, Shu avers that there has been a total failure of consideration on the part of the defendant. It must be remembered that the loan agreement was a secured loan agreement secured by a legal charge on the two properties and the personal guarantee from Shu. Loans were advanced under the loan agreement for substantial amounts. This is accepted by Mr Ho. It was the non-payment of the sum of HK$78,688,152.30 out of the total loan amount of HK$330 million that was the subject of complaint in the action. There has clearly been consideration moving from the promisee. There is no question but that any claim based on total failure of consideration will inevitably fail. Any claim seeking a discharge of the legal charge on the two properties and the personal guarantee of Shu will, in my view, fail.

11. As is stated in Andrews and Millett "Law of Guarantees" 3rd ed para 9.17:

"If the creditors commits a repudiatory breach of his contract with the principal so that the principal is entitled to treat the contract as at an end, the surety is also discharged from further liability."

And it goes on as follows :

"The principal will, however, remain liable in respect of rights which have accrued due prior to the termination, and the surety will be correspondingly liable."

12. As Mr Yin has submitted, to seek to discharge the securities given under the loan agreement in circumstances where monies have been advanced under the loan agreement would be tantamount to seeking to convert the secured loan into an unsecured loan and that would be re-writing the contract between the parties which the court will not do. In my view, Chinluck's claim for a declaration that the legal charge has been avoided or discharged and Shu's claim for a declaration that the personal guarantee has been discharged are misconceived. I am satisfied that the amendments which deal with these claims ought not to be allowed. Save as aforesaid, I would allow the amendments to the statement of claim. I will hear counsel on the order I should make.