BANK OF CREDIT AND COMMERCE HONG KONG LTD. v. MANGE RAM MITTAL AND ANOTHER

1995, HCA No.A8592

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMMERCIAL LIST

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J U D G M E N T

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1. This case has a somewhat chequered history. It comes before me in the form of a combined Order 14 application and a Master's appeal.

2. What happened was this. On 19th March 1996 the Plaintiff issued an Order 14 Summons for final judgment against the 1st Defendant. I say the 1st Defendant, but at that stage this gentleman was the only Defendant in this action. In any event, by Order dated 22nd November 1996 Master O'Donnell ordered that interlocutory judgment be entered for the Plaintiff with damages to be assessed. A Notice of Appeal against that Order was immediately lodged, on 25th November 1996, and it is that appeal which is one of the applications presently before me.

3. On 10th March 1997 the 2nd Defendant was added as a Defendant to this action, and an Order 14 application was taken out by the Plaintiff against the 2nd Defendant on 28th March 1997. This, then, is the second matter for decision.

4. Both applications came on for hearing before me on 3rd July 1997, Mr Ng appearing for the Plaintiff and Mr Coleman for both Defendants. The first hearing was adjourned in mid-argument, essentially for two reasons : first, for Mr Ng to obtain copies of authorities on one of the points in issue, the "excessive demand" point, and second, for clarification by the Plaintiff of what I will for shorthand purposes called the "contingent liability" point. In the event a further affidavit was filed by Mr Tam, his third, sworn on 5th November 1997 on behalf of the Plaintiff. And the case then resumed after a lapse of some four and a half months.

5. I turn now to the broad shape of the proceedings. The Plaintiff is, of course, a well-known bank in liquidation. It actually went into provisional liquidation on 17th July 1991. It is undisputed that the 2nd Defendant was a customer of the Bank : it had entered into an agreement in writing dated 19th December 1987 entitled General Agreement for Commercial Business, whereby the Plaintiff agreed to give credit and to perform banking services for the 2nd Defendant. The 1st Defendant is a Director of the 2nd Defendant - indeed, I think that it is probably his company - and entered into a written guarantee dated 11th August 1989 whereby, in consideration for the banking services accorded by the Plaintiff to the 2nd Defendant, the 1st Defendant as primary obligor agreed to irrevocably guarantee payment on demand of sums due from the 2nd Defendant.

6. So far so good. A simple enough structure, and one that is certainly not unusual in banker/customer relations in Hong Kong. The Plaintiff's claim against both Defendants is for the specific sum of US$92,587.54.

7. Although the hearing of this case has been bifurcated, at the end of the day three main points have emerged, I think. I take them in turn.

8. First, what I have termed the "excessive demand" point. The demand issued to the 1st Defendant under the guarantee was dated 21st April 1995, and demanded repayment of the sum of US$149,446.86. I note in this connection that paragraph 6 of the Amended Statement of Claim dated 25th March 1997 pleads that this was the amount "then owing" as of that date, whereas as at 8th August 1995 (the writ was issued on 24th August 1995) the 1st Defendant was indebted to the Plaintiff in the sum of US$92,587.54, the sum now claimed.

9. Mr Coleman, on behalf of both Defendants, takes the point that the demand under the guarantee is not good. He says that there is no difficulty if the demand is for too little, or alternatively if the demand makes no reference to any sum at all. But he says that a demand for too much is ineffective, the essence of his argument being that there can only be a valid demand under a continuing guarantee for a sum that is in fact due. I note also that he elides this point with his further submission, that in any event the sum now claimed is not in fact due by reason of the large counterclaim, but I will avoid the temptation to get ahead of the argument. He maintains that this is a difficult area, as was recognised specifically by Knox J. in N.R.G. Vision Ltd. & Others v. Churchfield Leasing Ltd. & Others (1988) 4 BCC 56 wherein the learned judge referred in passing to the "much more difficult case" of whether an excessive demand is valid in order to constitute an effective demand.

10. Mr Ng, for the Plaintiff, argues strongly as to the validity of the demand being sufficient for the purpose of bringing the guarantee into play. Oddly, there appears to be no English authority directly on the point of a demand for too much, but Mr Ng has placed several authorities before me from Commonwealth jurisdictions, and two academic texts. O'Donovan and Phillips, Modern Contract of Guarantee, 3rd Edition (1996), a leading Australian text, highlights but does not answer the question, the editors contenting themselves with the footnoted observation, op.cit., at page 49, fn. 255, that "even in cases where a demand is made for an excessive amount, it may be effective for the amount actually owing", citing in support of the proposition Bank of Montreal v. Winter (1981) 101 APR 385 (a decision of the Trial Division of the Newfoundland Supreme Court), Bunbury Foods Pty Ltd v. National Bank of Australasia Ltd. (1984) 58 ALJR 199 at 205 (a decision of the High Court of Australia), and Westpac Banking Corporation v. Evans (1986) 1 NZBLC 102 (a decision of the New Zealand High Court).

11. In light of my decision on the summary judgment application, I do not, I think, have finally to decide the point at this stage, although after considering dicta in those cases, I incline strongly to the view that in this case the notice of demand was valid, and that demand in excess of that actually owed does not render the demand ineffective or relieve the guarantor of his obligation to pay under the guarantee. Accordingly, whilst an interesting forensic debate, particularly in the context of an Order 14 application, I do not think that it succeeds as a defence, and had matters been clearer elsewhere, I should, I think, have been disinclined to refuse judgment upon this basis alone.

12. Which brings me to the second issue, namely, the amount that is actually owing and for which judgment has been claimed. The draft Defence prepared by Mr Coleman denies in terms that either the 1st or 2nd Defendants were indebted to the Plaintiff in the sum of US$92,587.54 on 8th August 1995 or at any other date.

13. Initially this point had been canvassed in slightly different form. At the first hearing of these applications, Mr Coleman had taken the point that the Schedule to the Statement of Claim, whereon appeared the detailed calculations of the balance due by the 2nd Defendant to the Plaintiff as at 8th August 1995, was predicated upon a contingent, as opposed to a vested, liability arising from the acceptance by the Plaintiff of liability under a letter of credit. However, Mr Tam's third affidavit now puts this point to rest, validating the base figure of US$271,335.87, and Mr Coleman now accepts that the point in that form is no longer open to him. However, Mr Coleman continues his scrutiny of the Schedule in question, focusing upon the figure of US$28,184.78 which appears opposite the legend "Accrued Interest 9/10/91 - 08/08/95". He observes that the Plaintiff's case is put, in Mr Tam's third affidavit (at paragraph 19) in terms that "the Plaintiff has paid out money by virtue of its acceptance liability. It is therefore entitled to look to the 2nd Defendant to repay it", and he argues that it is difficult in the circumstances to see why, and upon what basis, interest should run for the period of almost four years which is covered by the interest calculation. In a nutshell, he says that the claimed figure of US$92,587.54 must include an unwarranted interest element because during the period between the provisional liquidation and prior to payment out of any dividends in that liquidation, the base figure of US$271,335.87 was effectively frozen, and no interest was accruing thereon. Mr Coleman accepts, in all fairness, that interest should accrue once monies had been paid out to the Cho Hung Bank in respect of the acceptance liability claim, but on the evidence such payment out did not occur until a series of dates commencing on 30th September 1994. He also notes that the payment of dividends to the Cho Hung Bank encompassed in addition claims other than the present claim. Ergo, he says, the figure of US$28,184.78 is clearly incorrect, and arguably significantly so, although he is currently not in a position to do any amended calculation. However he says that since the interest amount is an integral element within the precise sum presently claimed, judgment clearly ought not to be given for this amount. Put bluntly, if the Plaintiff moves to obtain summary judgment for a sum specific, it had better get it right. And the Plaintiff had not done so in this instance.

14. In response, Mr Ng appeared to have little difficulty with this argument, although I am bound to say that I am not sure that in this regard the situation is as straightforward as he maintains. The basis of this interest calculation is not clear on the evidence, Mr Tam simply observing (at paragraph 19 of his third affidavit) "The net amount which fell to be due by the 2nd Defendant is the amount claimed in the Amended Statement of Claim. In addition, the Plaintiff claims interest on that amount at the rate set out in the Schedule to the Statement of Claim." Nothing further is proffered on the point. Nevertheless, Mr Ng has tried to assist. He identifies the relevance of the starting date for the interest period, that is 9th October 1991, as being the date of maturity of the draft accepted under the letter of credit, with usance interest being payable thereon up to that date, and the date for the end of the scheduled interest period, that is 8th August 1995, as the date of preparation of the Schedule itself. So far as interest within this period is concerned, he says, his instructions are that the Plaintiff had charged interest on the net sum of US$60,427.77 pursuant to Clause 31 of the General Agreement for Commercial Business entered into between the Plaintiff and the 2nd Defendant on 19th December 1987.

15. At first blush, this contention struck me as somewhat unusual in the circumstances of this case. Apparently it struck Mr Coleman as odd as well. I permitted a brief response on the Clause 31 point, and in essence Mr Coleman's contention was twofold : first, given that the Plaintiff Bank ceased to function as an operating entity and had been placed into provisional liquidation as at 17th July 1991, so that the guillotine had come down as at that date, so to speak, it was inappropriate to invoke contractual obligations premised upon a continuing banker/customer relationship existing prior to that date; and second and in any event, that this position did not sit with the Plaintiff's case on affidavit to the effect that, as earlier noted, since the Plaintiff had paid out by virtue of its acceptance liability, it now wished to recoup the sum thus paid out.

16. I am inclined to agree with Mr Coleman. In the circumstances of this case I am unconvinced that the sum of US$92,587.54 has been properly established to be due and owing, notwithstanding the detailed calculations appearing in the Schedule annexed to the Statement of Claim. Putting the counterclaim to one side, some amount is no doubt due, but in the circumstances there is a real doubt in my mind about the recoverability of the significant interest element (some 30%) which is an integral part of the specific sum so claimed. In my judgment this concern is sufficient, on this basis alone, to decline the Plaintiff's application for summary judgment in the terms in which it has been brought.

17. That is not the end of the matter, however. Which brings me on to Mr Coleman's third point, namely the existence of the pleaded counterclaim and its effect upon the present summary judgment application. I do not think he is correct to assert (as I think he has) that no claim bites under the guarantee until determination of the 2nd Defendant's counterclaim - with respect, I think that argument elides two quite separate issues - but what he further goes on to say is that even were the Court to be satisfied as to the amount claimed by the Plaintiff (which it should not be), there ought in any event to be ordered a stay of execution of any such judgment sum pending trial of the 2nd Defendant's counterclaim, which on the pleadings is based upon the Plaintiff's failure to collect certain bills totalling US$766,913.59. In this context, the 2nd Defendant has pleaded bad faith and breach of contractual and fiduciary duties. In response the Plaintiff admits owing a duty to the 2nd Defendant to exercise reasonable care and skill, but claims to have discharged that duty. In the course of his opening address, Mr Ng took me through the papers in the context of this counterclaim, and made a number of salient points as to the weakness of the 2nd Defendant's argument in this regard. In the circumstances, however, I am unwilling to accede to what I took to be his invitation to ignore the counterclaim at this stage and to treat it, in effect, as nugatory. The counterclaim remains on the pleadings, and the 2nd Defendant will no doubt be proceeding to trial therewith; if it makes no move to do so, I have no doubt that the Plaintiff will be the first to tell me. Whilst not constituting a true set-off, the fact remains that were the counterclaim to succeed, in whole or in part, there would clearly be set-off such sum as was recovered thereunder against the Plaintiff's claim, when finally established, and judgment would accrue thereupon to the party which emerges with a credit balance after such a netting down exercise. On this basis, therefore, said Mr Coleman, the Plaintiff in any event should wait until trial, and it is at no great disadvantage in so doing because, as Mr Coleman also pointed out, the Plaintiff is more than adequately secured against the debt for which it claims; indeed at paragraph 3 of the prayer to the Plaintiff's claim the Plaintiff asks for an Order that "the Defendant authorise and instruct the SBI Commercial and International Bank Limited to deliver up to the Plaintiff such part of the deposit of US$400,000 charged to the Plaintiff by the Defendant as will satisfy the Plaintiff's claims in (1) and (2) above". I note in this connection that this deposit is distinct from the deposit of the 1st Defendant (in the sum of US$204,540.78) which itself was the subject of a deduction by the Plaintiff and which forms a significant element within the calculation of the sum of US$92,587.54; logically, therefore, the issue of this separate deposit held by the SBI Bank is an issue which will no doubt also require to be ventilated at trial by the Plaintiff, there being no reference to this aspect in the summons for summary judgment dated 19th March 1996.

18. The result of the foregoing, therefore, is that in my view the particular circumstances of this case merit a trial of this action, albeit this is a conclusion which does not, perhaps, sit entirely happily in the context of proceedings wherein summary process was taken out some 20 months ago, when with a fair wind the entire matter probably could have come on for hearing and been completed within that period. Perhaps there is a moral there.

19. My Order therefore, pursuant to the Notice of Appeal dated 25th November 1996 and the Order 14 application dated 27th March 1997, is as follows :-

(1) the Order of Master O'Donnell dated 22nd November 1996 be set aside;

(2) the 1st and 2nd Defendants do have unconditional leave to defend the action herein;

(3) there be an order nisi that the costs of and occasioned by the hearing before Master O'Donnell be in the cause;

(4) there be an order nisi that the costs of and occasioned by the hearing of the appeal against the Order of Master O'Donnell be to the 1st Defendant in any event; and

(5) there be an order nisi that the costs of and occasioned by the application for summary judgment against the 2nd Defendant be in the cause, to be taxed if not agreed.

20. That, I think, concludes the matters presently for decision. I thank Counsel for their assistance.