THE CHINA AND SOUTH SEA BANK LTD v. TAN SOON GIN GEORGE

IN THE COURT OF APPEAL

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J U D G M E N T

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

1. This is an appeal by Mr. George Tan against a judgment in the sum of HK$33,496,438.34, and various awards of interests and cost, in favour of the Plaintiff Bank which was entered against him in Order 14 proceedings on the 30th April 1984. At the same time the Master in question rejected Mr. Tan's application to strike out the Statement of Claim and for the action to be dismissed. His Appeal a judge in chambers in both respects was dismissed by Rhind J. the following month. The further appeal to this Court was originally set down to be heard on the 30th October of the same year, but shortly before the date of the hearing the parties agreed that the date should be vacated with liberty to restore the appeal to the list in due course. That order was duly made.

2. The Bank's claim is based on what was said in the Statement of Claim endorsed upon the Writ to be "a guarantee dated the 18th May 1982 and signed and given" by Mr. Tan. The document is directed to he Basil, with the opening paragraph in these words -

"In consideration of your having agreed to advance at my request to CARRIAN HOLDINGS LIMITED whose registered office is situate at Carrian Centre, 151 Gloucester Road, Hong Kong (hereinafter called 'the Principal') the sum of HK$30,000,000.00 Hong Kong Currency I, GEORGE TAN of Flat B and D on the 18th floor of Seaview Garden, Cloudview Road, Hong Kong, Gentleman HEREBY UNDERTAKE AND GUARANTEE that I shall on the 18th day of August 1982 pay to you the said sum of $30,000,000.00 (hereinafter called 'the Principal Sum') and shall pay interest for the same in the meantime at the rate of 1.5% over the Hong Kong and Shanghai Banking Corporation's Prime Lending rate from the 19th day of May 1982 payable monthly in equal calendar monthly payment on the 18th day of each calendar monthly without deduction. If the Principal Sum or any part thereof shall not be paid on the date of repayment I will pay to you interest on so much of the said Principal Sum as shall for the time being unpaid at the rate as aforesaid by equal calendar monthly payment on the 18th day of each calendar month without deduction."

3. The loan was effectively rolled over on the 18th August for a further three months by an indenture made between the Bank, Mr. Tan, Carrian Holdings Ltd. (CHL) and another company called "Filomena Ltd". Repayment thus became due on the 10th November 1982.

4. The Bank's Statement of Claim further alleged that CHL had failed and/or refused to repay the $30 million and interest on the due date and despite repeated demands and requests the money remained, with further interest, unpaid at the date of the Writ; a letter demanding payment of the sums guaranteed by him had been sent to Mr. Tan on the 31st October 1983, but he had not complied.

5. Mr. Tan's Defence admitted his signing, on the date alleged, a guarantee which had been subsequently varied. It did not admit that the guarantee imposed upon him liability as claimed, nor did it admit the further allegations we have just set out.

6. The appeal has been argued before us under four heads. None, other than the initial construction point, was taken before the judge below, although it is fair to say that not one of the counsel who have appeared before us were involved in any of the earlier proceedings.

7. Before consideration of the arguments we should mention that the guarantee signed by Mr. Tan did not stand in isolation. The minutes of a board meeting of CHL held on the same day show that the Company then resolved to apply for the loan from the Bank through Filomena, that Filomena had agreed to execute a mortgage of shares, together with a Power of Attorney and a guarantee in favour of the Bank, and that Filomena had already deposited certain shares certificates with the Bank as security. For these assurances CHL was to pay Filomena $60,000 per annum. A copy of the document executed by Filomena is exhibited to the affidavit of Mr. Tan who states therein his belief that having regard to the price at which the Carrian Investments Limited shares were then traded on the stock exchange, the shares which had been deposited by Filomena were worth not less than 200% of the loan of KK$30 million. CHL also executed a document, an "Undertaking For Repayment of Loan", a short document in terms similar to the opening paragraph of Mr. Tan's guarantee which we have already set out.

The Construction Point

8. For guidance as to general principles we were referred to paragraphs 143 and 151 of the Fourth Edition of Halsbury's Laws of England Volume 20 -

"143. PRINCIPLES OF CONSTRUCTION. The principles of construction governing contracts in general apply equally to contracts of guarantee. Dealing with a guarantee as a mercantile contract, the court does not apply to it merely technical rules but construes it so as to reflect what may fairly be inferred to have been the parties' real intention and understanding as expressed by them in writing, and so as to give effect to it rather than not.

The name given to a contract, for example 'insurance' or 'guarantee', is not conclusive as to its true nature.

151. SURETY'S CONTRACT STRICTLY CONSTRUED it has been said that a surety is a favoured debtor. He is entitled to insist upon a a rigid adherence to the terms of his (the surety's) obligation by the creditor, and cannot be made liable for more than he has undertaken; for, although his contract is not, unlike that of an insurer, uberrimae, fidei, it must be construed strictly."

9. Then turning to Mr. Tan's guarantee, our attention was directed to the last sentence of the opening paragraph. This, so the argument ran, is the only part of the guarantee which deals with the question of non payment of the Principal Sum and does not imply thereby that non payment would amount to default on the part of Mr. Tan himself but provides merely for what is to happen in that eventuality; add to that what had been done by others, in particular Filomena, and one finds an intention that the Bank should look for security primarily to the shares which had been lodged; thus it was at least arguable that the true construction of Mr. Tan's liability in the case of non payment should be limited to the continued payment of interest.

10. The judge below did not accept the argument. He said simply that he could not see "any possible way in which the guarantee could be interpreted other than that the guarantor has to pay the principal sum at any stage when the principal debtor has defaulted" or "that as a matter of construction or common sense that it could be conceivably interpreted that the obligation on the guarantor's part is only to pay interest and not principal." The judge has been criticized for his failure to give any specific reason for his decision. With respect there is little else that he could have said, except perhaps that the argument appears to contain a non sequitur. We agree entirely with the judge below

11. Mr. Chang has asked us to approach the guarantee more widely. He contends that it is both, as the capital letters indicate, an undertaking and a guarantee, the undertaking being in regard to the HK$30 million and the guarantee in regard to the other sums to which it is extended by another paragraph.  The words of the first paragraph, he suggests, are clear and unambiguous and impose upon Mr. Tan a direct personal liability to pay on a fixed date, independently of whatever liabilities others may have assumed in a similar respect.

12. We cannot accept that contention. Virtually every paragraph in the document, except the first, is phrased in terms consistent with the document's being only a simple guarantee. Taking the document as a whole, as we must, we are unable to construe it as anything else. We note also, athough only in passing, that those advising the Plaintiff Bank apparently took the same view in 1983. The Statement of Claim refers to the document solely as a guarantee. Indeed, that is how it is entitled on its own back sheet.

The Equity Point

13. The Fourth Edition of Rowlatt on Principal and Surety carries this suggestion -

"There is some authority for suggesting that a surety also has an equity against the creditor to prevent the creditor from bringing down the whole weight of the debt upon the surety. Wright J., in Wolmershausen v. Gullick^(l)considered by way of dictum that a surety could in equity "be controlled and prevented from enforcing its legal right inequitably against one alone of the sureties." This in his view was the point of having the creditor joined as a party in Dering v. Earl of Winchelsea⁽²⁾. Lord Eldon in Craythorne v. Swinburne⁽³⁾ commenting on Dering v. Winchelsea⁽²⁾ accepted that case as deciding that '... the creditor, who can call upon all, shall not be at liberty to fix one with payment of the whole debt ...

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    Despite the considerable authority of the views examined in the previous edition of this work, it is felt that it is still arguable that a surety has an equity on the basis of Wolmershausen v. Guilick⁽¹⁾ and the authorities cited therein, including the views of Lord Eldon, to stay a creditor attempting unfairly to place the whole burden of the debt upon the surety, at least in special circumstances, e.g. where there is a solvent principal debtor, or solvent co-sureties who could easily be but are not joined in the action, or a security which could easily be realised to pay the whole debt."

We are indebted to counsel for their interesting submissions and for their assistance with the relevant authorities, but we prefer to leave consideration of what is by no means an easy question until that may become necessary. It is sufficient for now to say that equity acts by way of the conscience and it is not in our view necessary for a plaintiff in this kind of proceedings to prove that his claim is actually conscionable. It is for a defendant to put before the Court matters which tend to show that the plaintiff's claim is unconscionable. That has not yet been done. All that has been sworn to is that the price of the shares lodged by Filomena dropped subsequently to the loan and continued to drop substantially, the winding-up of CIL being made in November 1983; and that Filomena was wound up pursuant to a resolution of the company in June 1984. The Bank could have taken action, against the shares lodged in November 1982. They did not do so then and indeed we do not know if they have done so yet. However we see nothing unconscionable in that alone. Nothing else has been suggested.

The Negligence Point

14. The first step of this argument is taken from the judgment of Lord Denning M.R. in The Standard Chartered Bank v. Walker(4) -

"If a mortgagee enters into possession and realises a mortgaged property, it is his duty to use reasonable care to obtain the best possible price which the circumstances of the case permit. He owes this duty not only to himself to clear off as much of the debt as he can, but also to the mortgagor so as to reduce the balance owing as much as possible, and also the guarantor so that he is made liable for as little as possible on the guarantee. This duty is only a particular application of the general duty of care to your neighbour which was stated by Lord Atkin in Donoghue v Stevenson [1932] AC 562, [1932] All ER Rep 1 and applied in many cases since: see Home Office v. Dorset Yacht Co. Ltd. [1970] 2 All ER 294, [1970] AC 1004 and Anns v. Merton London Borough [1977] 2 All ER 492, [1970] AC 728. The mortgagor and the guarantor are clearly in very close 'proximity' to those who conduct the sale. The duty of care is owing to them, if not to the general body of creditors of the mortgagor. There are several dicta to the effect that the mortgagee can choose his own time for the sale, but I do not think this means that he can sell at the worst possible time. It is at least arguable that, in choosing the time, he must exercise a reasonable degree of care.

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If it should appear that the mortgagee or the receiver have not used reasonable care to realise the assets to the best advantage, then the mortgagor, the company, and the guarantor are entitled in equity to an allowance. They should be given credit for the amount which the sale should have realised if reasonable care had been used.  Their indebtedness is to be reduced accordingly."

15. The second step relies upon the failure of the Bank to take action in November 1982 or within a reasonable time thereafter. Had is done so, it is said, it may well have been able to recoup some or perhaps all of the moneys due by sale of the CIL shares lodged by Filomena, or even to recover some moneys direct from the principal debtor itself, all of which could have been set off against the liability of Mr. Tan. Furthermore, by analogy to the situation in Ex parte Goodman⁽⁵⁾ the Plaintiff Bank ought to have proved in the liquidation of CIL.

16. It is true, as Lord Denning himself observed, that there are several dicta to the effect that a mortgagee is entitled to choose his own time for sale. An example is to be found in the judgment of Salmon L.J. In Cuckmere Brick Co. Ltd. v. Mutual Finance Ltd.⁽⁶⁾. But Lord Denning had the support of the other two Lord Justices and we cannot say that the point is not arguable.

17. It is true also that what is put forward as negligence is not very strong. It is by no means difficult to envisage circumstances in which the failure of the Bank to do anything with regard to the two Companies would have been perfectly reasonable. But as things stand at the moment, and assuming that the duty does exist, it is prima facie unreasonable to delay for a substantial length of time on a falling market. We therefore think it right Mr. Tan should have leave to defend.

18. We should mention one further argument, which may be summarized as that having regard to the strict view customarily taken of claims upon a guarantee in Order 14 proceedings, the Bank has failed to prove its case. In substance it was suggested that the computer print-outs exhibited to the affidavit of Mr. Yick Chun Wah, the Deputy General Manager of the Bank, did not sufficiently establish that the moneys had ever come into the hands of CIL; further that the undertaking by CHL to repay the primary debt, not being under seal and signed by only one director, was not shown to be enforcement.

19. In our view the evidence would have been sufficient. The computer print-outs were not the only evidence that the loan was in fact made. The variation agreement, to which Mr. Tan was a signatory, acknowledged that on the 31st August 1982 the "principal sum remains due and owing"; and his affidavit of the 26th May 1984 refers to the "debt of the principal debtor (being) owed to the Plaintiff".

20. As to the authority of a single director to sign the undertaking with CHL, this is to be found in a resolution of the Board dated the 18th May 1982. It has to be accepted that the final paragraph of the resolution incorporates as an integral part thereof the "standard printed forms and resolutions provided by" the Bank. A resolution set out on a standard form supplied by the Bank had been passed by CHL the previous month providing, by typewritten insertion in the appropriate blank spaces, that a document such as a guarantee should be signed either by Mr. Tan signing solely or by any two of the other directors of the Company. But we are not persuaded that this oblique reference to the need for two directors detracts from the intention of the company so clearly expressed in paragraph 4 of the later resolution, namely that the signature of one director alone should be sufficient in respect of the particular undertaking. This argument would therefore have failed, but for the reasons we have already given we allow the appeal, set aside the judgment entered in the court below and give leave to defend.

(1) [1893] 2 Ch. at p.522

(2) (1787) 1 Cox 318; 2 B. & P. 270

(3) (1807) 14 Ves. 160

(4) [1982] 1 W.L.R. 1410 at 1415

(5) (1818) 3 Madd 373

(6) [1971] Ch.949 at 966