CHUNG KHIAW BANK v. INTERADING MANUFACTURING (HK) LTD AND OTHERS

IN THE COURT OF APPEAL

1987, No. 6
(Civil)

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JUDGMENT

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Cons, V.-P. delivered the judgment of the Court:

1. On the 1st August 1986 the 1st Defendant, Interading Manufacturing (HK) Ltd., was indebted to the Plaintiff, the Chung Khiaw Bank, to the extent of something over $8.7 million. The indebtedness was covered by a joint and several guarantee from the 2nd and 3rd Defendants, who are the sole shareholders and directors of the 1st Defendant company. The guarantee was first executed in 1981 and then extended in 1982.

2. On the 8th August 1986 the Plaintiff bank wrote to the company, and to the 2nd and 3rd Defendants, demanding payment of the moneys due. None of those moneys has since been paid.

3. On the 2nd September the Plaintiff bank issued its writ against all the Defendants who filed their defences on the 30th September. The Plaintiff took out a summons under Order 14 and on the 20th November a Master entered judgment against the 1st Defendant company, but gave unconditional leave to the 2nd and 3rd Defendants to defend.

4. The Plaintiff and the 1st Defendant company both appealed to a judge. On the 29th December Hunter J. dismissed the 1st Defendant's appeal but allowed that of the Plaintiff and entered judgment against the 2nd and 3rd Defendants.

5. All Defendants now appeal to this Court and there is a Respondent's Notice on the part of the Plaintiff.

6. Mr. Ma, who appears now for all the Defendants, although he did not appear in either of the proceedings below, drew our attention at the outset to authorities as to the attitude we should take in this instance. We are satisfied therefrom that if we find an arguable defence shown in any way, then we should intervene.

7. Three possibilities are put forward. The first I will call the “suspensory estoppel defence”. This was not raised before the judge below. Mr. Warren Chan, for the Plaintiff, did take objection, but not until after the point had been fully developed by Mr. Ma and we think it right that we should deal with it. It is based on what is said to have been a representation by a Mr. Budd of the Hongkong & Shanghai Bank, that as long as the 2nd Defendant co-operated in realising the assets of the company, no action would be taken until all the company's assets had been gathered in. At that stage the banks would consider the situation as it then stood and would accept some payment from the Defendants in full and final settlement of all their liabilities.

8. We should interpose here that at some stage of the history, - we are not sure when, - several banks had become involved in the situation. Possibly there was some: suggested restructuring of the debts. In any event, the Hongkong & Shanghai Bank had become the leading or controlling bank in dealing with the Defendants.

9. The difficulty in the way of this defence, quite apart from any question of whether the Plaintiff bank could be said to be acting inequitably, was that the Defendants have put forward no evidence that there are assets still remaining outstanding. A letter written on the 3rd December 1985 suggests that some assets were then outstanding, although they were of very doubtful value. However the writ was not issued until September 1986 and; the wording of the letter we have just mentioned shows a strong probability that everything would have been settled very soon after it was written. Moreover, in paragraph 14 of the affirmation dated the 1st October 1986, we find the 2nd Defendant positively affirming that by the 18th October 1985 the banks were satisfied that all the assets had in fact been safely gathered in. We find no arguable defence in this respect.

10. The second defence put forward is the "agreement not to sue". Mr. Ma advances it under two guises, either as a second part of the representation to found an estoppel, or as a collateral agreement. In our view it must be an agreement or nothing. The suggestion is not well particularised in the affirmations. We are not told who made the agreement on behalf of the Hongkong & Shanghai Bank. We are not even told when it was made, although the documents would support prior to or in October of 1985.

11. What is suggested is that the Hongkong & Shanghai Bank accepted, on behalf of all the banks, a suggestion by the 2nd Defendant that he would pay half a million dollars on signing a formal agreement and a further one million dollars 6 months later. In return all the Defendants would be released from their liabilities. If such an agreement was in fact made, for it to be effective so far as this case is concerned, it must be binding in some way upon the Plaintiff bank. It could be that the Hongkong & Shanghai Bank had actual authority to make such an agreement on behalf of all the banks, including the Plaintiff bank. But there is no evidence to that effect and the documents suggest the contrary. Alternatively it could be that the Hongkong & Shanghai Bank had been held out as having authority, or that authority was to be implied from the circumstances then pertaining. We were asked to find this from the conduct of the Hongkong & Shanghai Bank in carrying on the negotiations with the 2nd Defendant. In our view that alone is by no means sufficient.

12. Finally, it might be that the Hongkong & Shanghai Bank held itself out as having authority. But there is no evidence of that either, and even had it done so, it would have given a cause of action against itself and not against the Plaintiff bank. When one considers it as a. matter of fact the documents show clearly that the Hongkong & Shanghai Bank had a great deal of sympathy with the 2nd Defendant, but they are not consistent with the Bank's having concluded a settled agreement. Nor was the conduct of the Defendants. At no stage since October 1985 has any money been tendered under the purported agreement. Again, we find no arguable defence.

13. The third possibility put forward, which concerns only the 2nd and 3rd Defendants, relies on words which are said to have been spoken by the manager of the appropriate branch of the Plaintiff bank. According to the affirmation of the 2nd Defendant, with regard to the first signing of the guarantee in 1981 -

"We asked why we had to sign guarantee, but was assured by Lo Poon Keu (that is the manager) that if the security was up to value, the Plaintiff would not seek to rely on the guarantee."

And again -

"He represented to us that signing of the guarantee was a mere formality that everything was all right, and further to show his intention of not seeking to rely on the guarantee, he said 'he would not stamp or register the guarantee'."

With regard to the extension of the guarantee in 1982 -

“Additional security was provided and satisfactory valuation was made by the Plaintiff. Thereafter we were similarly asked to sign a guarantee. When we expressed concern, Lo Poon Keu again assured us not to worry as the Plaintiff had more security for its loan.”

14. Hunter J. construed all that was said on those occasions as nothing more than an indication that, if the securities realised sufficient value to meet the outstanding debts, the 2nd and 3rd Defendants would not be called upon to honour their guarantees.

15. The alternative interpretation, which Mr. Ma suggests at least as a possibility, is what the judge termed in his judgment “a sham, window dressing and a formality”. Taken in that way it would have been a clear invitation by the manager to the Defendants to participate with him in a fraud upon his own bank. Of course the 2nd and 3rd Defendants do not put it that way now. Indeed they have not put it in any way at alll until the Defence was filed, despite the guarantees and their liability having being mentioned in several letters to them. But that would be the inevitable result of adopting the construction which is urged upon us and in the circumstance we think it very appropriate for the judge below to have adopted the test put forward by Ackner, L.J. in B.N.P. v. Costa de Maray[1] -

"The Court must look at the whole situation and ask itself whether the defendant had satisfied the Court there is a fair or reasonable probability of the defendant having a real or bona fide defence."

The judge's answer, when he asked himself that question, was "no". We respectfully agree with him.

16. For these reasons the appeal is dismissed.