XCHRX THE NATIONAL COMMERCIAL BANK, LTD. v. CHEUNG HOI CHING AND ANOTHER

HCA 499/99

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 499 OF 1999

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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 Jones made on 14 November 2000 ordering summary judgment under O14 RHC against the 2nd defendant for the total sum of HK$19,735,677.98 and US$837,734.48 for principal and accrued interest up to 10 November 1998 as well as for interest thereon and costs.

2. The plaintiff's action against the 2nd defendant is under two Deeds of Guarantee dated 20 May 1997 and 23 July 1997 respectively, given in favour of the plaintiff in consideration of the plaintiff agreeing to grant and/or continuing to grant banking facilities to Karsun International Holdings Limited ("the borrower"). As at 10 November 1998, the borrower was indebted to the plaintiff in the sums claimed and the plaintiff made a demand upon, inter alia, the 2nd defendant. Despite demand, the sum claimed was not paid.

3. On 12 January 1999, the plaintiff issued the writ in this action against the 1st and 2nd defendants. The 1st and 2nd defendants were represented by solicitors, M/s Pang Wan & Choi, and filed a Defence on 28 September 1999. The Defence filed consists only of non-admissions and denials. No sufficient particulars were provided there. On 31 March 2000, the plaintiff issued a summons for summary judgment which was eventually heard by Master Jones on 14 November 2000. He gave judgment to the plaintiff.

4. As part of the background, after the two Deeds of Guarantee were entered into, on 25 July 1997 the borrower mortgaged the 7th floor and two car parking spaces of China Aerospace Centre, 143, Hoi Bun Road, Kwun Tong, Kowloon ("the property") to the plaintiff as security for the borrower's indebtedness. And on 28 October 1997, the borrower also executed a Debenture in favour of the plaintiff under which the borrower charged its automated compact disc manufacturing system ("the machinery") to the plaintiff as security for the due payment of all moneys payable from time to time under the facilities granted to the borrower.

5. The borrower leased the property and the machinery to Shin Shin Trading Company ("Shin Shin") in or about January 1998. Shin Shin was alleged to have been involved in copyright infringement and on 23 June 1998, the Commissioner of Customs and Excise ("the C&E") seized some of the items of the machinery and kept the same at the property pending disposal of forfeiture proceedings. On 7 October 1999, the C&E took out forfeiture proceedings in the District Court by Notice of Originating Motion. This was dealt with by Deputy Judge Lok who ordered that the disputed items be returned to the plaintiff. Also, since 22 August 2000, the plaintiff has obtained vacant possession of the property and the return of the machinery.

6. Ms Law, counsel for the 2nd defendant, submitted that the defence was that there was an oral agreement that the plaintiff would withhold the proceedings against the 2nd defendant unless and until there will be a shortfall after realisation of the assets given as security by the borrower, and the 2nd defendant would shoulder the legal costs in relation to the forfeiture hearing. This agreement was allegedly made in November 1999 after the forfeiture proceedings were instituted by the C&E. The plaintiff denies that there was an agreement to withhold the proceedings against the 2nd defendant.

7. It is necessary to examine the evidence of the 2nd defendant in this regard. Para. 6 of his 1st affirmation affirmed on 15 April 2000 states :

"Hence, I had been told prior to and after the execution of the said Deed of Guarantee by the plaintiff that if the borrower ultimately pays all sums of money debts and liabilities or the legal charges in respect of the security and property created in favour of the plaintiff has failed to satisfy the said all sums of money debts and liabilities, they would not enforce the Guarantees against me."

Para. 10 of the same affirmation states :

"As I had been told and relied on the said misrepresentation made by the plaintiff prior to and after the entering the Guarantees that it would not enforce the Guarantees until and unless the borrower has failed to pay all legal charges in respect of the security and property created in favour of the plaintiff has failed to satisfy the indebtedness, I was very surprised to receive the writ of summons of this action in January 1999 and I complained to the borrower that they had misrepresented the matter to me and after some discussion, it was subsequently agreed that I would pay for costs of the action in opposition of the Forfeiture even though the Machinery has been vested in and belonged to the borrower since April 1998, the date of the occurrence of the said the illegal operation was discovered. In reliance thereof and not otherwise, I have paid, up to November 1999, an interim sum of legal fee at an amount of HK$53,000.00 for the plaintiff in consideration for the plaintiff's oral agreement of not enforcing the Guarantees against me, pending the outcome action of Forfeiture ("the oral agreement"). Furthermore, I am now arranging to pay a further sum of HK$200,000.00 for and on behalf of the plaintiff to meet the legal costs of the Forfeiture hearing."

A subsequent affirmation sought to correct parts of this affirmation.

8. What the 2nd defendant says in his affirmation is that prior to and after the entering into of the Deeds of the Guarantee, it was represented to him by the plaintiff that the plaintiff would not enforce the guarantees :

"until and unless the borrower has failed to pay all legal charges in respect of the security and property created in favour of the plaintiff has failed to satisfy the indebtedness."

It is not specified who made the alleged representation.

9. The 2nd affirmation of the 2nd defendant made on 30 August 2000 and the 3rd affirmation, wrongly described as also the 2nd affirmation, of the 2nd defendant made on 7 September 2000 give further particulars of the alleged oral agreement made in November 1999 between the 2nd defendant and the plaintiff's representatives, one Mr C P Lam and Mr Marvin P W Lo.

10. The alleged oral agreement is denied by the plaintiff. However, the plaintiff accepts that it did not pay for the legal costs in opposition to the forfeiture proceedings.

11. Mr Lo Ping Wing in para. 3 of his affirmation made on 17 October 2000 states as follows :

"In or about February 1999, the 2nd defendant came to the plaintiff's office and requested the plaintiff to instruct Messrs Pang, Wan & Choi to oppose the forfeiture proceedings. He explained that they have more experience in these type of cases and undertook that he should bear the legal costs in the forfeiture proceedings. It was on this basis the plaintiff agreed to instruct Messrs Pang, Wan & Choi to act for the plaintiff in the forfeiture proceedings. However, there has never been any agreement that the plaintiff shall withhold legal proceedings against the 2nd defendant in exchange for the 2nd defendant paying the legal costs of the forfeiture proceedings.............."

It should be observed that it was also in the 2nd defendant's interest that the forfeiture proceedings be properly defended as the result would affect the total amount payable by the 2nd defendant under the guarantees.

12. The question to consider is whether the 2nd defendant's assertions are believable. It is important to bear in mind Cl. 15 of the Deeds of the Guarantee which provides as follows :

"Independently of the above stipulations, I/we further agree to be liable as an independent Principal debtor to you for the payment of all sums guaranteed or ought to be guaranteed hereby so that :

(a) This Guarantee may be enforced against me/us (or any one or more of us) without your first enforcing any rights or claims or instituting legal proceedings against the Principal and/or any third party or parties and/or to join in the Principal as a party in the same proceedings against me/us and/or your first realizing or enforcing any of the securities or other guarantees held by you whether from me/us or any other party or parties.

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(c) I/We hereby waive all and any of my/our rights as surety which may at any time be inconsistent with any of the provisions of this Guarantee."

Under that clause, the plaintiff could enforce the guarantee without first enforcing the claim against the borrower or without first realising or enforcing any security. The assertions made by the 2nd defendant that there was a representation by someone from the plaintiff that prior to and after the Deeds of the Guarantee were entered into that the plaintiff would not enforce the guarantee until and unless the borrower had failed to pay contradicts the written guarantees. It flies in the face of the written documents and makes no commercial sense in the light of Cl. 15. It is not even pleaded in the defence filed on 28 September 1999.

13. In Bank of India v. Surtani Murlidhar Parmanand (trading as Ajanta Trading Corp.), Civil Appeal No. 196 of 1992, in his judgment dated 19 March 1993, Nazareth, JA (as he then was) said of collateral agreements at pg. 6 and 7 as follows :

"Since the defence rests upon a collateral oral agreement the sole effect of which is to vary the settlement deed, the threshold onus is in a sense compounded by the onus to strictly prove such agreement. That onus, as approved by Lord Goff in Universal Dockyard Ltd. v. Trinity General Insurance [1989] 2 HKLR 160 at 164, was propounded in the following way by Lord Moulton in Heilbut, Symons & Co. v. Buckleton [1913] AC 30 at 47, 48 :-

"Such collateral contracts, the sole effect of which is to vary or add to the terms of the principal contract, are therefore viewed with suspicion by the law. They must be proved strictly. Not only the terms of such contracts but the existence of an animus contrahendi on the part of all the parties to them must be clearly shown. Any laxity on these points would enable parties to escape from the full performance of the obligations of contracts unquestionably entered into by them and more especially would have the effect of lessening the authority of written contracts by making it possible to vary them by suggesting the existence of verbal collateral agreements relating to the same subject-matter." "

14. The 2nd defendant's assertion that there was an oral agreement made in about November 1999 that the plaintiff would withhold the proceedings against him until they had realised all the assets obtained from the borrower also contradicts the written guarantees, in particular Cl. 15. It flies in the face of the written documents and also makes no commercial sense for the plaintiff to waive or disregard Cl. 15. Even if the plaintiff had itself incurred legal costs in the forfeiture proceedings, it would, in any event, have been able to recover the same from the borrower and the 2nd defendant as the guarantor, under the Debenture and the Deeds of Guarantee. I also observe that the 2nd defendant was represented by solicitors at all times in defending these proceedings against him. Yet, there is no contemporaneous correspondence between the parties' solicitors in confirmation of the alleged oral agreement.

15. The 2nd defendant's assertions are, in my judgment, unbelievable. Looking at the whole situation, the 2nd defendant has failed to satisfy the threshold onus on him to show that there is a triable issue. The appeal is dismissed.