XCHRX NANYANG COMMERCIAL BANK, LTD. v. WANG QING HUA AND OTHERS

HCA10041/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.10041 OF 2000

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J U D G M E N T

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1. This is an appeal by three defendants guarantors from the summary judgment granted by the master, in respect of a claim brought by the bank, i.e. the plaintiff, against these three guarantors which were executed by them pursuant to what had been called a second banking facility granted by the bank to the borrower, Winsouthern Industries Ltd ("Winsouthern") under the second Facility Letter ("the 2nd Facility Letter") dated 17 September 1996.

2. The loan came about as a result of Winsouthern, a Hong Kong company doing business in Hong Kong and, I think the evidence not too much in dispute is that, it is a Hong Kong subsidiary of a Hong Kong company by the name of China Tian Gong Fashion Technology Development Group ("Tian Gong") which in turn is a subsidiary of or owned by China Fashion Research and Design Centre which in turn was either subsidiary or owned by the Ministry of Textile Industry in the People's Republic of China. It is not in dispute, therefore, that Winsouthern is a wholly-owned subsidiary of a state-owned enterprise in China and that it is, in essence and in truth, a state company. The state company, Winsouthern, had, I believe in 1993, two directors who were the 1st and 3rd defendants because, under the first facility letter ("1st Facility Letter") dated 11 May 1993 whereby the facility given was for some $30 million to the borrower, the 1st and 3rd defendants executed two Guarantees, both dated 19 May 1993. Other security that were also obtained by the bank under the 1st Facility Letter included some property mortgage.

3. In 1996, the 2nd Facility Letter dated 17 September 1996 was written as a result of the facility being required by the borrower to be increased to some $32 odd million. The bank required additional security in the form of the 2nd defendant, being a director, also required to furnish a Guarantee in addition to the Guarantees required under the 2nd Facility Letter of the 1st and 3rd defendants who were also directors. This is, of course, in addition to other securities mentioned in the 2nd Facility Letter such as the property mortgages and the corporate Guarantee of the Hong Kong parent company, Tian Gong.

4. The dispute between the parties on this hearing centres on two issues raised by the defendants. The first defence is that there was assurance given before or at the time of the signing of the Guarantee, namely in October 1996, by officers of the bank to the three defendants to the effect that the Guarantees will not be enforced by the plaintiff bank and that they were merely required as a matter of formality. The second defence raised is that in the circumstances, it was unconscionable bargain and therefore in equity, the court should not enforce the Guarantees. At the start of the hearing, I indicated to Mr Au Yeung for the defendants that his defence, i.e. unconscionable bargain, was going to be an extremely difficult point to run and he did not press it. So, the only issue that requires for consideration on this appeal is the question of whether assurance was given as alleged in the defence and in the affidavit of the 1st defendant contesting the summary judgment.

5. The main point which was forcefully argued is whether it is credible, i.e. the allegation of the defendants that assurance is given. Mr Thomas Au for the plaintiff, in his extremely able argument, submitted to the court that the surrounding circumstances are such that like many of similar cases that regularly come before the court with claims by banks against guarantors most of which were adversely decided by other judges in the High Court, this type of defence is not considered worthy of belief. I, of course, accept that the defence by directors guarantors against bank enforcement for these Guarantees very often involved the allegation of assurances of no enforcement of the Guarantees and these defences are regularly rejected by the court. But I believe that this case has some unusual features factually. I think firstly it cannot be disputed that the borrower is a state company, nor is it in dispute that the defendants, all from mainland China, sent down from China as cadres to man this state company, nor is it in dispute that they had no assets or had no beneficial interest in the borrowing company although, of course, I think the company's search does reveal that one of the defendants holding some shares in his name, but not surprisingly because, very often, shares are held on trust for the parent, some other higher entities in PRC. All these are of some significance as these are persons from China with no apparent asset which can give rise to the bank having, therefore, a better security as a result of obtaining the Guarantees or any particular incentive or interest for the Guarantors to execute Guarantees because they have some personal stake in the company.

6. The second unusual feature in this case is that there was a letter dated 28 June 1996 from Tian Gong, i.e. the Hong Kong parent of the borrower, addressed to the bank where the parent was asking the bank and pointing out to the bank the inappropriateness of cadre directors sent down from China giving personal guarantees. The letter end by asking for the cancellation of the Guarantees that had been given, presumably those given in 1993. It is not in dispute the bank insisted on obtaining Guarantees in relation to the 2nd Facility Letter, i.e. the 1996 Facility from all three directors. So, the second unusual feature is that the bank knew that when the Guarantees were executed, that there was assertion or representation made by the Hong Kong parent company as to the inappropriateness of these gentlemen defendants, giving Guarantees or that the bank relying on these Guarantees.

7. The central question in this case is whether, having regard to those two features that I have indicated and perhaps a third feature, that the plaintiff is also, as I understand it, a PRC bank, there might had been, as alleged by the defendants assurance, conversation in October 1996 at the time of the making of the 2nd facility, namely that the defendants were asking for assurances that they would not being called upon for these Guarantees and such assurances were given. It is alleged in the affidavit of the defendants that in 1993 when the first set of Guarantees were given, assurances were given and that in 1996, these assurances were repeated by the officers of the bank. It is, of course, true that these allegations are not supported by any contemporaneous written material and the question that the court has to ask is : Is there no chance of the allegation of assurance from the bank officers be true? I must confess for myself in the rather unusual circumstances of this case, I cannot say positively that this is all moonshine and totally incapable of belief.

8. Mr Au points to various factors which should persuade the court to take a more stringent view and be persuaded that there is no substance in the allegation which is capable of belief. The first point that he relies on is the contents of the letter of 28 June addressed to the bank from the Hong Kong parent. He asked vigorously if there was an assurance given in 1993, why was such a letter be written? The letter, however, is not from the defendants but is from the parent of the borrower and I do not regard the fact that there is such a letter as in a way destroy totally or substantially the allegation of the defendants that assurance was first given in 1993. Reference was also made by Mr Au to the fact that there was no evidence of suitable response from these defendants upon demand being made against them in December 1999 on the Guarantees. But the evidence was that there was a demand. There was no other evidence. I do not see how I can draw any adverse inference from that. But in any event, even if it is established by evidence that they did not answer, e.g. there was no answer to the demand, the fact that there was a lack of protest could not convert what otherwise would be a possible allegation capable of belief into an allegation incapable of belief. I do not believe that aspect assists Mr Au. I think at the end of the day, this sort of case must depend on impressions and the impressions have to be gathered from all the surrounding circumstances. Judges sometimes feel particularly comfortable with one answer than another answer in cases of Order 14 and I think judges generally and normally will not give summary judgment when they feel uncomfortable about a particular case because they are not certain that must be the right answer and that is what Order 14 is supposed to do - that you are supposed to enter summary judgment only if you feel sufficiently comfortable that there is no defence. I do not have that feeling of sufficient confidence and I think, therefore, that unconditional leave to defend ought to have been given. The order of the master, therefore, is reversed and I grant unconditional leave to defend.