RE YOHAN CHANDRA

CACV 671/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 671 OF 2001

(ON APPEAL FROM HCB NO. 3453 OF 2000)

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REASONS FOR JUDGMENT

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Hon Rogers VP:

1. This is an appeal from a decision of Deputy High Court Judge Kwan, as she then was. The matter before the judge was a bankruptcy petition. At the hearing of the petition the debtor applied for a further adjournment of the hearing so that an appeal could be brought against the judgment which was the foundation of the petition. The judge refused the adjournment. The judge then went on to consider the objection to the making of the bankruptcy order. She found that there was no valid ground to object to the same and made an order. As a matter of completeness, it can be observed that the Official Receiver, as trustee, later applied by consent to have the hearing of the appeal vacated.

2. On this appeal, the debtor challenged the making of the bankruptcy order primarily on the basis that it had been inequitable on behalf of the judgment creditor to enforce the guarantee which the debtor had provided without also enforcing its other security, in particular, a guarantee executed by Mr Soh Lye Huat. At the hearing of this appeal, this court dismissed the appeal but said that it would give its reasons in writing which we now do.

The fact

3. The facts can be taken from the judgment in the court below. The judge below referred to the debtor's affirmation which had been placed before the master in the High Court Action giving rise to the judgment debt. The judgment creditor was a bank. It brought action against the borrower, Cute Toons Limited ("Cute Toons"), and against the debtor as guarantor. Cute Toons was a private company which had been formed by the debtor and Mr Soh. They were the sole directors. Mr Soh was a Singaporean resident. The shareholders of Cute Toons were Artrend Industrial Limited, which was the debtor's company, and Complement Garments Pte Limited ("Complement"), which was a Singaporean company owned by Mr Soh and his wife.

4. Starting from July 1996, the bank had provided banking facilities to Cute Toons. Initially, the amount of the facilities was HK$10 million and later it was reduced to $7.8 million. The last facility letter was dated 16 March 1998. The facilities were secured, first of all, by an existing "letter of authority and earmarking" executed by Complement in the bank's favour authorising it to earmark or debit its account with the bank's main branch in Singapore for a sum of up to HK$8 million. Secondly, there was to be a joint and several guarantee for HK$10 million executed by the debtor and Mr Soh in the bank's favour. Thirdly, the bank would have the right to demand such additional security as would be required. The joint and several guarantee had been executed by the debtor and Mr Soh in the bank's favour on 13 January 1998.

5. The debtor also put in evidence that Complement had mortgaged its property in Singapore to the bank to fortify the security whereby the bank was authorised to earmark Complement's account up to HK$8 million. It was said that the value of the property was estimated to be HK$30 million. It was alleged that Mr Soh was likely to be solvent because he was the joint owner of another property in Singapore which was also mortgaged to the bank. There is also evidence that as recently as September 2001, the bank was still conducting business with Complement. The debtor's evidence was that he and Mr Soh had fallen out some time in 1999. The debtor in argument told the court that he and his wife had sold their flat in Hong Kong, which was a substantial property, to try and keep Cute Toons afloat. He said that by his efforts alone the indebtedness of Cute Toons had been reduced from something in the order of HK$10 million down to approximately HK$4 million. He said that Mr Soh had not contributed anything other than his payment of HK$250,000 capital.

The appeal

6. On this appeal the debtor takes the point that the court, whilst exercising its bankruptcy jurisdiction, is not bound by any judgment but can go behind the judgment and inquire whether, notwithstanding the judgment, there was a good debt. In this respect the debtor relies upon the judgment of Danckwerts J, as he was then, in the case of Re a Debtor (No. 66 of 1955) [1956] 1 WLR 480 in particular at page 483. In this respect Danckwerts J was referring to the decision of the Court of Appeal in In Re Fraser [1892] 2 QB 633. In that case Lord Esher MR had specifically said that the mere fact that a judgment had been entered against a former partner did not prevent the court of bankruptcy going behind the judgment to inquire into the validity of the debt. The Registrar, in that case, had reached the conclusion that since the debtor had not been a partner of the firm at the time when the alleged debt was incurred he would refuse the making of a receiving order and dismiss the petition. It was pointed out, following the case of Ex parte Lennox (1885) 16 QBD 315, that the making of a bankruptcy order involved not merely the petitioning creditor and the debtor but it interfered with the rights of other creditors who would not be able to recover against the debtor if he remained bankrupt. Nevertheless, what the court inquired into in that case was whether there was a debt due from the debtor. In this respect, the first matter to be borne in mind is that there is a judgment in the action between the bank and the debtor.

7. The debtor, however, seeks to rely upon the proposition that the bank, in enforcing the debtor's guarantee, up to and including bankruptcy proceedings, whilst ignoring its other security and in particular the security of Mr Soh's guarantee, is acting inequitably and no bankruptcy order should be made. The foundation for that proposition is a statement made by Lord Eldon in the course of his judgment in Craythorne v Swinburne (1807) 14 Ves. 160. In that passage in his judgment he summarises the effect of a decision of Lord Chief Baron Eyre in the case of Dering v Earl of Winchelsea (1787) 1 Cox 318. He said:

"... the creditor, who can call upon all, shall not be at liberty to fix one with payment of the whole debt; and upon the principle, requiring him to do justice, if he will not, the Court will do it for him."

This passage was cited by Wright J in the case of Wolmershausen v Gullick [1893] 2 Ch 514 at 523. It should be pointed out that all three cases dealt with the question of contribution between co-sureties. Although taken out of its context, the passage cited might lead to the supposition that a creditor might be prevented from suing one surety alone, that, in my view, was not what was intended in the passage. What was intended was that at the behest of the surety who is sued, the court will force co-sureties to make contribution. In other words, one guarantor can sue another guarantor for contribution towards any amount he has been called upon to pay.

8. Although these cases have been referred to in a number of subsequent authorities, no case has been drawn to our attention in which it has been held that a creditor cannot sue one of a number of sureties. The most helpful statement in favour of the debtor's proposition is to be found in the judgment of Bokhary J, as he then was, in Bank of America National Trust and Savings Association and Graham Harry Fountain [1990] 1 HKLR 115 at 119 where he said:

"As far as the co-sureties are concerned, I do not think that the defendant can erect a defence merely on the basis that the co-sureties have not been pursued. There may well be a rule of equity which prevents a creditor from unfairly placing the whole burden of the debt upon a particular surety. That may be the case where, for example, the creditor pursues a particular surety to the exclusion of a solvent principal debtor or solvent co-sureties who could easily be, but are not, joined in the action. But merely to point out that the co-sureties have not been pursued without more does not avail the defendant."

9. There may well be grounds for the debtor's allegation that the bank has treated him in a biased way and favoured Mr Soh. That was not fully explored below. Nevertheless, in the present state of the law, because of a wealth of authorities indicating that the liability of a surety is several, I do not consider that it is open to this court to hold that the judge below was incorrect in her approach that it did not avail the debtor that the creditor had not sued the co-surety and had not sought to rely on its other security. It would, it seems, have been open to the debtor to seek contribution against the co-surety. It would also seem appropriate that the trustee in bankruptcy at least explores the possibility of seeking contribution from the co-surety. But on the crucial issue as regards this case, I do not consider that on authorities, it is open to this court to set aside the bankruptcy order.

Hon Le Pichon JA:

10. I agree.

Hon Burrell J:

11. I agree.