ANSBACHER (HONG KONG) LTD. v. AM-ASIAN RESOURCES LTD. AND OTHERS

HCCL151/97

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMMERCIAL LIST NO.151 OF 1997

---------------

---------------

__________________________

J U D G M E N T

__________________________

1. This is an action by the Plaintiff against the 7th and 8th Defendants in this case on a Guarantee dated 19th September 1990 which was executed by these Defendants in favour of the Plaintiff in respect of the obligations of the 1st and 2nd Defendants, namely Am-Asian Resources Limited and Am-Asian Resources (International) Limited.

The Background Facts

2. The factual background is not complex, and for present purposes a brief outline will suffice. The 7th and 8th Defendants, namely Johnny Tsang and Betty Zau (who have been referred to throughout this case as 'Johnny' and 'Betty' respectively) were directors and shareholders in the Am-Asian Group of companies, which I understand they founded in or about 1981, and built up into a successful business with its core activity as a garment sourcing agent for major retail chains and department stores in the United States.

3. The banker for the Am-Asian Group was the Plaintiff, Ansbacher (Hong Kong) Limited, which was formerly known as FNB (Asia) Limited, and before that as Midlantic (Asia) Limited. Indeed, it was in this latter incarnation as Midlantic that the Plaintiff bank entered into a Continuing Guarantee dated 19th September 1990 with the 7th and 8th Defendants, Clause 2 of which reads in part :

"2. THIS Guarantee shall be a continuing security and shall cover and extend to secure any moneys which shall for the time being constitute the ultimate balance owing from the Principal [Am-Asian Resources Limited and/or Am-Asian Resources (International) Limited] or if more than one any of them to Midlantic until determined by not less than six calendar months' notice in writing given to Midlantic by the Guarantor or if more than one any one or more of them ..."

4. This Guarantee is widely drawn in the type of 'boiler-plate' language beloved of commercial lawyers, and Mr Paul Shieh, who appears on behalf of the Plaintiff, has also emphasised the provisions of Clause 3 (that which Midlantic may do without affecting the liability of the Guarantor), Clause 6 (a 'principal debtor' clause), Clause 8 (the ambit of the Guarantee to cover the whole and every part of the ultimate balance owing by the Plaintiff), Clause 12 (governing any notice of demand by Midlantic) and Clause 13, which is expressed in these terms :-

"13. A certificate signed by an officer of Midlantic as to the amount at any time owing by the Principal or if more than one any of them to Midlantic shall be conclusive evidence as against the Guarantor or if more than one any of them of the amount so owing."

5. But to return to the broad background. This Guarantee of September 1990 was signed by Johnny Tsang, Betty Zau and one Lo Hon Chuen (who does not figure in this action), and was witnessed by Mr Benny Wong, at that time Manager of Midlantic, whom over a period of time clearly built up a banking relationship with the present Defendants; Mr Wong, I think it fair to say, was the Plaintiff's principal witness at this trial.

6. The Guarantee in question covered various Facility Agreements which had been entered into by the Plaintiff in favour of the 1st and 2nd Defendants (against whom, I am told, default judgment has been entered by the Plaintiff). The first to these Facility Agreements was signed on 28th August 1990, and was followed by five more, the final one in the series being dated 21st August 1995 and expiring on 31st July 1996. I understand, further, that these Facility Agreements were also signed by Mr Tsang and Miss Zau, although I am told by both Defendants that on the occasion of signing the sixth and last such Facility Letter they informed Mr Benny Wong that this would be the final occasion upon which they would do so.

7. But I am getting ahead of the story. In or about April 1995, Johnny Tsang and Betty Zau sold their shares in the Am-Asian Group to what have been referred to as the 'Kwan family interests'; indeed, the title of this case shows Samuel Kwan, Joyce Kwan and Tracy Kwan as the 4th, 5th and 6th Defendants respectively. Once again, these Defendants have not been before the Court at this trial, although I am given to understand that they too have been the subject of default judgments entered against them by the present Plaintiff.

8. After the takeover of the Am-Asian Group, Johnny and Betty continued to participate in the management of the Group, although it is clear on the evidence that they did not fit entirely happily with the new regime. Johnny Tsang in fact emigrated to Canada and spent a large amount of time there, whilst Betty Zau resigned from her position with the Group in or about November 1996, some six months prior to the expiry of her service contract. After their departure, the financial fortunes of the Am-Asian Group began waning, and I have been told, in general terms, of the involvement of the Commercial Crime Bureau in investigating the affairs of the Group. But this is merely background detail, and bears no direct relevance to the matters currently in issue.

9. In any event the Guarantee of 19th September 1990, which is the operative instrument in this action, apparently continued in place under the signatures of Johnny and Betty, and by letters dated 29th July 1997 the Plaintiff demanded repayment of the sums then outstanding from the 1st and 2nd Defendants and from Betty and Johnny. Payment was not forthcoming in response to these demands, and the writ in this action was issued on 13th August 1997, claiming principal sums outstanding as at that date of HK$14,877,034.57 and US$529,550.90, together with significant sums in terms of interest and default interest.

10. This, then, is the judgment in this action, the trial of which, for the reasons I have given, involved only the 7th and 8th Defendants. They have appeared in person before this Court, their solicitors having obtained an order to come off the record some five weeks prior to the hearing of this case, albeit these solicitors, together with Counsel, originally had been retained to draft a Joint Defence, which was filed on behalf of the 7th and 8th Defendants on 5th September 1997.

The Defences Raised

(a) On the Pleadings

11. In the course of this trial, a number of defences were raised, some pleaded and some not. I deal first with those which have been pleaded.

12. In their Joint Defence, Mr Tsang and Miss Zau plead one substantial defence on liability, and one on quantum.

13. As to liability, paragraph 4 of the Defence pleads that it was an express term of the Guarantee that the same should be revocable at any time by the 7th and 8th Defendants, and that such revocation shall take effect six months after serving a notice of revocation. Paragraph 5 of this document then asserts that by a letter dated 26th January 1996 the 7th and 8th Defendants revoked the Agreement, and that such revocation took effect on 26th July 1996.

14. For its part, the Plaintiff's position was that it had never received this letter, and furthermore that it did not admit that it had been sent (indeed the Plaintiff issued a notice disputing the authenticity of this document pursuant to Order 27 rule 4).

15. In terms of the evidence at this trial, the Plaintiff led a battery of evidence to establish that the letter in question had never been received, complete with reference to incoming mail logs compiled by the relevant office staff. In fact, the evidence of Mr Benny Wong, by now the Senior Manager of the Plaintiff, who had dealt with Johnny and Betty throughout, together with that of Ms Regina Wong, the Receptionist, and Ms Bella Ngai, Mr Wong's secretary, was to the effect that they had not sighted this document until they had been shown a copy in 1998 at a stage when the respective parties were well into this litigation.

16. Be that as it may. I have no reason to doubt, and do not so doubt, the truth of the Plaintiff's evidence in this regard, although in finding as a fact that it is more probable than not this letter was not received it does not follow that I have concluded that the document in question is fabricated. Because that which emerged when Johnny Tsang and Betty Zau gave evidence was that the letter of 26th January 1996 was a matter that had been left exclusively to a Mr Ben Lau, then Financial Controller of the Am-Asian Group, to handle. Indeed, the evidence was that Mr Lau had been instrumental in retrieving the personal guarantees of Johnny and Betty from both Bank America and Belgian Bank, and that he was handling matters with FNB (Asia) Limited as well. Sadly, Mr Lau was suffering from cancer by early 1996, and in fact left the Am-Asian Group shortly afterwards, spending the remainder of that year in hospital until his untimely death on 5th October 1996. The result of this unfortunate event is that his evidence was not available, although Mr Tsang and Miss Zau told me that they had no doubt whatever that Mr Lau, who had been with them for a long time, would have done what he had said he was going to do.

17. In the circumstances, of course, we will never know exactly what happened, and whether this particular letter was mislaid and was not posted; certainly by January 1996 Mr Lau clearly had considerable health difficulties and had taken frequent sick-leave prior to finally leaving his employment with the Am-Asian Group. In any event what did or did not happen to this letter is pure speculation. But what is clear - and that which in my judgment is decisive of this particular issue - is that as a matter of construction of this Guarantee (and indeed as one might expect) a notice of termination is only effective if this is received by the Plaintiff (in this connection I agree that Clause 12 of the Guarantee deals only with notices given by the Plaintiff), and, as I have found, on the evidence before the Court the probabilities are that it was not received by the Plaintiff. In this regard, not only was there comprehensive evidence as to the manner of dealing with the incoming mail, which I accept, but also it is abundantly clear from the contemporaneous documents - in particular Mr Benny Wong's proposal dated 20th December 1996 recommending retention of the Guarantee, and that of 14th July 1997 recommending release of the Guarantee - that there was no indication in the mind of the Plaintiff's relevant officer that any document such as the letter of 26th January 1996 purportedly terminating the Guarantee had been so received by the Plaintiff.

18. I would add here that I say 'purportedly' terminating the Guarantee because I think that Mr Shieh is correct also in his back-up proposition to the effect that even if the Notice had in fact been received, on its face it failed to fulfil the requirements of a notice required by Clause 2 of the Guarantee, namely, it did not purport to be a notice having the effect of determining the Guarantee. In this regard, Mr Shieh noted that it referred to a conversation between Mr Ben Lau and Mr Benny Wong, and sought to "confirm" Benny Wong to "withdraw" the Guarantee, so that it was more in the nature of a request for the cancellation of the Guarantee rather than a document which had the effect of the termination thereof. Whilst each case depends on its own factual matrix - and I was referred to authority in this regard - had it been necessary to decide in this case on this point I think that Mr Shieh's alternative argument is correct, and I would have so held had I found that the Plaintiff had actually received the letter of 26th January 1996.

19. In fact, although in this judgment I have attended to the issue of termination as pleaded, it was quite clear as the evidence unfolded that so far as Johnny and Betty were concerned they recognised that the bank had not acceded to their request (as per their letter) to release them from their Guarantee, which in itself is unsurprising since the overwhelming evidence was that the bank had not agreed to release the Guarantee (albeit in the summer of 1997, as we shall see, Mr Wong did make a recommendation to the Plaintiff's Credit Committee so to release, a recommendation which in the event was refused).

20. Lastly under this head, in the circumstances I see no need to address in detail Mr Shieh's alternative contention that even if the Guarantee in question had been terminated by a Notice properly given under Clause 2, liability would not have been avoided, as is claimed by the Defendants. To the contrary. On a proper construction of Clause 2, Mr Shieh submitted, termination by Notice still preserved the Guarantors' liability as at the expiry of the notice period, and that in fact the outstanding sums on that date were higher than the sums actually claimed in the Points of Claim. This may be so, but since evidence was not led on this point, and since I am against the Defendants anyway on the first two issues, I see no necessity further to pursue this aspect of the matter.

21. If follows from the foregoing, therefore, that I dismiss the Defendant's pleaded defence on liability.

22. As to the quantum issue as it appears on the pleadings, the Defendants made the point, correctly in my view, that any liability under the Guarantee must be offset by first, a charge over a cash deposit held by the Plaintiff in the sum of US$130,000, and second, the proceeds of sale of a mortgaged property on a Yaumatei flat, that is, that the proceeds of these two sums should be appropriated in reduction of the monies guaranteed.

23. There is no dispute here. Mr Shieh, who has conducted this case against the unrepresented Defendants with conspicuous fairness, agrees that the Plaintiff should give credit for the proceeds of sale of the Yaumatei property (which were themselves placed on deposit) and for the US$130,000 deposit charged earlier.

24. Accordingly, I am satisfied that these elements have been fully taken into account in the quantum figures prepared by the Plaintiff, to which I shall shortly refer.

(b) Other Matters

25. I turn now to consider briefly certain other issues raised in cross-examination or in the course of final submission by both Mr Tsang and Miss Zau. Whilst not pleaded, I took the view in a dispute of this nature in the Commercial Court that it was appropriate to accord a significant degree of latitude towards unrepresented Defendants, and Mr Shieh, to his credit, made no real demur.

26. On reviewing the manner in which the Defendants put their submissions, I think the following three particular issues emerge.

(i) Expiry of the 6th Facility Letter dated 21st August 1995

27. The Defendants drew my attention to that part of the Facility Letter entitled Review/Termination, which reads :-

"Review/Termination:

This Facility will be reviewed by us periodically, may be modified, reduced, or terminated at any time by us at our sole discretion and, in any case, will expire, without prejudice to your liabilities to us, on 31 July, 1996 provided that it has not been renewed by us in writing before said date. Notwithstanding any other provision of this Facility Letter, it is expressly agreed that all amounts borrowed under the Facility together with interest on those amounts will be and shall remain repayable on demand and we expressly reserve our right to call for full cash cover in respect of contingent and prospective liabilities." (emphasis added)

28. As I understood it, the thrust of the argument here was that there had been no written renewal of the Facility by the Plaintiff, and therefore either the Guarantee ceased to bite on the Defendants or it 'bit' only upon the 'old' loans and not upon the 'new' loans granted pursuant to the Facility.

29. Disregarding for present purposes the fact that the history of the previous five Facility Letters did not demonstrate a precise conjunction between expiry and renewal (I think in fact that in the first four cases there was a gap and in the last instance an overlap), Mr Shieh responded by submitting that the Plaintiff was not in this case suing on the Facility Letter. It was suing on the Guarantee signed in 1990, this being a continuing Guarantee covering the ultimate balance due from the 1st and 2nd Defendants to the Plaintiff, and he noted that the wording of Clause 1 of the Guarantee was extremely wide and was not limited to any particular transaction or documents.

30. Mr Shieh further submitted that the Facility Letter only defined the limit and type of credit facilities that the Plaintiff had bound itself to grant to the 1st and 2nd Defendants, and that there was nothing in law to prevent the Plaintiff from acceding to the 1st and 2nd Defendants' request for credit/advances after the expiry of the formal Facility Letter. Accordingly, he said, if the Plaintiff did so accede to a request of this sort, this would be a de facto renewal of the Facility and would result in a debt owing by the 1st and 2nd Defendants to the Plaintiff, and as a matter of construction this was caught by Clause 1 of the Guarantee. Moreover, he argued, even if there had been no Facility Letter at all, as long as there was a debt owing by the 1st and 2nd Defendants to the Plaintiff, nevertheless this would be caught by the Guarantee executed by the 7th and 8th Defendants.

31. I agree. In my view, this analysis serves to defeat the argument of the type that the Defendants, and Miss Zau in particular, were making in this case.

(ii) Verbal notice

32. The Defendants submitted that Mr Wong had been given ample verbal notice of their desire to terminate their obligations under the Guarantee. I have no doubt on the evidence that this matter indeed was mooted with Mr Benny Wong by Miss Zau, on behalf of herself and the largely absent Mr Tsang (whom, it will be remembered, was spending a lot of time in Canada), and also by Mr Ben Lau, to whom the task of retrieving the various bank Guarantees had been given - indeed, Mr Wong does not seek to deny that conversations of this type took place during 1996 and early 1997, albeit he was not apparently persuaded to accede to such requests until mid-1997, at which time he wrote in his Proposal to the Plaintiff's Credit Committee dated 14th July 1997 (Exhibit P1) that :-

"With regard to the proposed release of the two personal guarantees of the previous key members of management, I believe the request is reasonable since Betty and Johnny are now no longer with the Group. We have never obtained PFS [personal financial statements] from Betty and Johnny. The PFS given to us by the Kwan family suggested that their net worths comprised mainly their investments in Am-Asian and several real estate properties which are mostly mortgaged to banks to support credit facilities made available to Am-Asian. Whilst it is hardly to determine how we are losing in terms of financial support in the replacement of the guarantees from Betty and Johnny to the Kwan family, our proposed reduced facility structure and improved collateral position will compensate to some degree for our losses of the guarantees. Rather, we have never place reliance on the guarantor's net worth in extending our facility and the guarantee is only token as a firm commitment to the business. As the Kwan family has been in the garment industry for over 10 years and in fact has been responsible for Am-Asian's business in the past 2 years, I believe the release of the guarantee given by Betty Zau and Johnny Tsang will not have adverse impact on the Group's business. In fact, the expertise of the Kwan family in the garment industry has brought in new business to the Group (i.e. knitwear business since 1995). In addition, I understand that all other lenders do not hold any guarantees from Betty and Johnny except Standard Chartered Bank with whom Johnny's personal guarantee will be released in the next review while Betty's guarantee has been released.

In view of the above, I recommend approval of my proposal as submitted."

33. The history of the matter, however, is that the Plaintiff's Credit Committee refused to go along with this proposal because evidence came to light of what are described as "unusual" L/C transactions within the Am-Asian Group under the management of the Kwan interests, which such "unusual" transactions, I am told, made the Credit Committee reluctant to release any existing security.

34. The point here, however, as Mr Shieh points out, is that the Guarantee contract does not provide for termination by means of verbal notice, and there is no case being run by the 7th and 8th Defendants on the basis of discharge by consent.

(iii) Mr Wong's treatment of the requests for release of the Guarantee

35. There is some difference in recollection between Miss Betty Zau and Mr Benny Wong as to the date of a lunch when the issue of the Guarantee was undoubtedly discussed.

36. Miss Zau, I think, puts this lunch at the end of 1996, and Mr Wong's recollection was that it took place later, perhaps in February 1997 or possibly later in the year. I do not think that resolution of this argument is particular relevant, albeit my instinct is that Miss Zau's recollection may well be sharper in this regard; certainly when I pressed Mr Wong on why he thought that his date was preferable, he was unable to say more than that it was his distinct 'impression'.

37. But in any event, whatever the truth of this particular aspect, the hard fact is that, absent the Notice mechanism, there was no obligation on the part of the Plaintiff to release the Guarantee before it was prepared to do so, and it was not, apparently, so inclined - at least as far as Mr Wong was concerned - until his 14th July 1997 proposal, which, as it turned out, was not accepted by the Credit Committee overviewing such matters.

38. Whether something more could have been made of this particular sequence of events in favour of these Defendants had this matter received specific focus earlier in the preparation of this case, as opposed to being raised incidentally in the course of the trial, I know not, and in the circumstances I see no point in speculating. Certainly Miss Betty Zau's very real sense of grievance was clear for all to see during this trial, and she was particularly unhappy that when Mr Wong did finally agree to release her and Mr Tsang that such recommendation was in effect sabotaged by events over which by then she had no control, having left the running of the Am-Asian Companies to the Kwan family at least some six to seven months earlier.

39. For present purposes, therefore, I am satisfied that I am unable to take this aspect of the matter further, or that any part of this argument assists the Defendants in this case. I am also satisfied, and so find, that until his July 1997 recommendation Mr Benny Wong never went further than to advise Miss Zau during the lunch meeting, and possibly on other occasions, that he would propose to FNB's head office that her Guarantee would be released at the next review (as in fact apparently he did).

Liability

40. It follows from the foregoing that in my judgment the 7th and 8th Defendants are liable to the Plaintiff on this Guarantee, and I so hold.

41. I confess that this is not a result that I view with any great enthusiasm, given the unfortunate sequence of events whereby the apparent defalcations of the new owners of the Am-Asian Group served effectively to scupper the ultimate release of the 7th and 8th Defendants by the Plaintiff from their pre-existing liabilities under the Guarantee.

42. But sympathetic instincts aside, I can see no reason why this Plaintiff bank, which never released the 7th and 8th Defendants from their obligations under this 1990 Guarantee, should not now come to this Court and enforce those obligations. With the benefit of highsight, perhaps, Miss Zau and Mr Tsang - who both struck me as essentially honest and decent people - should perhaps have required a release from their personal Guarantee at the time of the April 1995 sale of their shares in the Am-Asian Group to the Kwan interests, or at the very least should have insisted that such release should take place shortly thereafter. However, they did not do so, and as the history of the matter relates, the matter then was left in the hands of Mr Ben Lau, and regrettably their desired objective does not seem to have been achieved, albeit apparently through no fault of their own, or for that matter, of the bank. And, as I have indicated, the fact that Mr Benny Wong as the relevant bank officer chose to recommend, albeit unsuccessfully, such release only in July 1997 does not, on the present state of the evidence, provide these Defendants with any redress.

Quantum

43. As to quantum, Mr Shieh tells me that the Plaintiff has obtained default judgment against the 1st and 2nd Defendants, the principal debtors, on 3rd September 1997. He submits, by reason of the doctrine of merger, that as from the date of such a judgment the liability of the debtors no longer flowed from the Facility but from the judgment itself. This seems to me to be correct as a matter of law. The consequence, therefore, is that interest for the 1st and 2nd Defendants' liability can only accrue at the judgment rate and not at the default rate as prescribed by the Facility. At the end of this trial the Plaintiff proffered fresh calculations prepared in terms of the "net" figures after adjusting for the new interest rate post 3rd September 1997, which was the date of the default judgment against the principal debtors, and after deducting the relevant deposits, and such calculations now have appeared in the Fourth Certificate of Debt signed by Mr Wong on behalf of the Plaintiff, which details the position as at 5th May 1999, and which I accept has taken into account the relevant amounts duly set off.

Judgment

44. Accordingly, I give judgment to the Plaintiff against the 7th and 8th Defendants in the principal sums of HK$9,913,382.40 and US$529,550.90, together with interest thereon up to 5th May 1999 of the sums of HK$2,130,020.93 and US$112,638.15.

45. Interest upon the aforesaid respective principal sums will accrue as from the date of judgment, that is today's date, at the judgment rate from time to time prevailing until payment.

46. I make an order that the costs of this action are to be to the Plaintiff, to be taxed if not agreed.