BANK OF CREDIT AND COMMERCE HONG KONG LTD. v. QUADRUTEC HOTEL MANAGEMENT & DEVELOPMENT LTD. and Others

IN THE COURT OF APPEAL

1996, No. 108
(Civil)

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J U D G M E N T

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Bokhary, J.A.:

1. The first judgment will be given by Mr Justice Seagroatt.

Seagroatt, J. :

2. This is an appeal against the judgment of Mr Justice Sears whereby he entered judgment for the Plaintiffs against the Defendants with other findings in respect of liability for interest and for costs. The judgment was entered under Order 14. As the learned Judge himself complained when confronted with an extensive bundle of documents, so we have been similarly confronted, and we question the need for such a volume. In fact, the essential documents form but a small fraction of the whole.

3. The Plaintiffs, a well-known bank, now in liquidation throughout the world, sues the 1st Defendant in respect of money owing to it for banking facilities provided - in short, credit advanced. The sum, at the time of the issue of the writ was in excess of $12m Hong Kong. There is no doubt that this sum was owing to the Plaintiffs by the 1st Defendant company. They sue the 2nd, 3rd and 4th Defendants as guarantors of the company's indebtedness.

4. The Plaintiffs commenced proceedings by writ indorsed with the Statement of Claim on 31st July 1993. The Defendants served a Defence and Counterclaim on 14th October 1993. In that pleading they contended that far from the 1st Defendant owing any money to the Plaintiffs, the latter had failed to account for the surplus of monies received by them over and above the sum necessary to extinguish the debt of the 1st Defendant company. The Defendants set out a number of transactions in great detail in which the Plaintiffs were involved with the 1st and/or 2nd Defendants and other entities, the purpose of which appears to have been to settle various debts owed to the Plaintiffs by means of the profits achieved.

5. In answer to that, the Plaintiffs served a reply and Defence to Counterclaim putting certain transactions in their proper perspective as evidenced by a number of documents. As a consequence, the Plaintiffs proceeded to seek judgment under Order 14 and an affidavit filed on behalf of the Plaintiffs exhibited the material documents. In reply, the 2nd Defendant was forced to concede that the Plaintiff's picture and sequence of transactions was more accurate than his, that the Defence to Counterclaim as pleaded was on a false basis, and the concentration then shifted to a few documents and actions in a very short time frame.

6. We start with a letter of 3rd November 1988 (p. 130) written by the 2nd Defendant as director of Black Pearls Ltd. It referred to a sale of shares in a company and other transactions involving companies in which the 2nd Defendant was concerned, and that the proceeds would be paid to the Plaintiffs with irrevocable instructions to dispose of the proceeds in five directions.

7. The first was to discharge all that was owing to the Plaintiffs by Birren Limited, a company in which the 2nd Defendant had an interest. The second was an identical instruction in respect of Golden Root Investments Ltd., again a company with which the 2nd Defendant was concerned. Thirdly, the Plaintiffs were to credit themselves with $14.3m as management fee for their part in the ventures involving the two companies. Fourthly, $14m was to be credited to the account of the 1st Defendant company, which would have extinguished that company's indebtedness to the Bank and finally to pay the costs of the solicitors involved in the transaction. The total sum to be distributed was $119,252,000. The balance was to be paid into the 2nd Defendant's account with the Plaintiffs.

8. The 2nd Defendant well knew the extent of the indebtedness of the companies whose accounts were to be credited so as to extinguish their indebtedness. As recently as 6th October 1988, the solicitors concerned had sent a cheque on behalf of the 2nd Defendant with instructions to divide it between the accounts of Birren and Golden Root to reduce their indebtedness to the Plaintiffs. The 2nd Defendant in his affidavit does not seek to suggest that he was unaware of the indebtedness of the 1st Defendant. It was one of the reasons for the ventures with the Plaintiffs. Whatever may or may not be the risk inherent in any such ventures, the prime purpose was for the Bank to be repaid what it was owed.

9. The instructions in the letter from the 2nd Defendant were repeated by an undated letter from Pugh describing himself as a director of Black Pearls Ltd.

10. On 12th December 1988, the Plaintiffs wrote to the 2nd Defendant's solicitors setting out the indebtedness of Birren and Golden Root. On 17th December, the promised proceeds of sale were sent to the Plaintiffs by the solicitors with a copy of the two letters of instruction.

11. There is a note of 17th December to which the cheque/cashier order is attached referring to the three companies (Birren, Golden Root and the 1st Defendant) and the adjustment of their loans. On 19th December, the sums to extinguish the loans of Birren and Golden Root are transferred.

12. On 20th December, the solicitors gave a receipt for their costs.

13. For some reason, no transfer was made to extinguish the 1st Defendant's loan. There is an instruction from a Mr Kapoor which refers only to adjusting the outstanding amounts in the accounts of Birren and Golden Root with a request that the balance be held on a cash deposit account for the 2nd Defendant, pending his instructions. There appears to be some confusion in the contents of the Bank's internal memoranda. Another memo instructs adjustment of all loans but Kapoor had specifically mentioned only two, although a memo had been sent to him mentioning the 1st Defendant's account.

14. In the event an instruction came in the form of a letter from the 2nd Defendant to the effect that the entire balance of $54.428m dollars was to be credited in U.S. Dollars to the account of Black Pearls Ltd. in Manila. There appears to be a note of such instruction in manuscript on the Bank's paper. This was done. The effect was that no sum was transferred to the account of the 1st Defendant so as to discharge its liability and the Bank did not take out the management fee of $14.3m.

15. At the end of December, the sum of $11.98m is received by the Plaintiffs from Black Pearls Ltd. via BCCI Manila as advisory fees - no doubt the management fee, but slightly reduced.

16. The 2nd Defendant must have known when he sought payment of the balance to Black Pearls Ltd.'s account that the indebtedness of the 1st Defendant had not been discharged. He was the sole signatory (p. 428). He gave the instructions for the eventual transfer of funds from that account. On the same day as his instruction for sending the balance (29th December 1988) he sent an instruction for a transfer to a Swiss Bank (p. 433). Furthermore, he was making a payment to the Plaintiffs to be credited to the 1st Defendant's account which clearly indicates that he must have known that that indebtedness had not been extinguished (p. 441).

17. The Bank may have made a mistake, in some confusion, in not transferring the sum to extinguish the 1st Defendant's indebtedness quickly enough but the 2nd Defendant countermanded the original instruction by his letter of 29th December. In any event, he was quickly transferring substantial sums out of the Manila account. His instructions to the Plaintiff Bank in September 1989 also clearly indicated that he knew that the indebtedness of the 1st Defendant continued. He attended a meeting on 2nd May 1991 (p. 211) at which the 1st Defendant's indebtedness was discussed and when he gave some detail about the prospects. There had been letters to him demanding payment of the loan on a number of occasions prior to that.

18. The 2nd Defendant's assertions in his affirmation (p. 97) as to Kapoor's instructions and preparations are not credible. I have no doubt that he gave the instruction orally initially, hence the notes on the Bank's papers and then confirmed it in writing. His conduct then and thereafter is conclusive of not simply an awareness that the account of Quadrutec has not been settled by the Plaintiffs but that of a positive change of instruction which enabled him to receive and dispose of the balance leaving the indebtedness of the 1st Defendant to continue.

19. Mr Andrew Li, Q.C., on behalf of all Defendants has argued that since there is only one letter of instruction in relation to the BICC Manila account of Black Pearls Ltd., it is at least highly arguable that Kapoor, the Plaintiffs' servant or agent, was manipulating the account for the Plaintiffs (or his own) purposes. But a significant number of the other payments went to the 2nd Defendant or his wife. Since I do not find any of the 2nd Defendant's contentions credible - the complete change of story in his affidavit is enough on its own to raise at least one sceptical eyebrow - and his subsequent actions in relation to the 1st Defendant's account are inconsistent with these, he has made Mr Andrew Li's task virtually impossible from the outset.

20. Mr Li also argued that the Plaintiffs by virtue of their involvement in the joint venture owed a duty to the 1st Defendant and that they breached that duty by allowing the money, originally earmarked for their account, to be repaid, in effect, to the 2nd Defendant. But the Plaintiffs exacted an undertaking by the 2nd Defendant to discharge the 1st Defendant's indebtedness as well as the indebtedness of other companies with which he was concerned. The 2nd Defendant changed his instructions and breached his undertaking. Whilst they may have, arguably, acted more quickly and applied part of the proceeds as originally instructed, they assumed no duty of care to the 1st Defendant by taking part in the joint venture and relying upon the 2nd Defendant to honour his undertaking. The 1st and 2nd Defendants have no defence in law or on the facts to this claim.

21. The position of the 3rd and 4th Defendants needs a little examination but is shortly stated. They were obligors and guarantors of the 1st Defendant's indebtedness by guarantees dated 28th June 1988. The 2nd Defendant's undertaking by deed is dated 6th September 1988. This is in addition to his liability under the guarantee of the same date as the 3rd and 4th Defendants' guarantee.

22. There is no affirmation or affidavit by the 3rd and 4th Defendants. Mr Andrew Li, Q.C., relies upon the 2nd Defendant's affirmation. His argument on their behalf is essentially the same as that advanced on behalf of the 1st Defendant, viz. the Plaintiffs owed the guarantors a duty of care which, by allowing the 1st Defendant to have his "money back", they breached. I have already dealt with this. There was no bad faith on the part of the creditor toward the sureties; the Bank had not acted in any prejudicial way towards the sureties. On the contrary, the undertaking extracted by the Plaintiffs from the 2nd Defendant, if honoured, would have relieved the sureties of their immediate liability. He failed to honour his undertaking and gave instructions to transfer money back to himself. The fact that he succeeded in this does not even begin to lay the foundation for a breach or neglect of a duty to the other sureties.

"Merely irregular conduct on the part of the creditor, even if prejudicial to the interests of the surety, does not discharge the surety" - see Goff L.J. (as he then was) in Bank of India v. Patel W.L.R. 1983 Vol. 2, p. 302. I consider that there was not even irregular conduct.

23. In my view, the learned Judge's conclusions were entirely correct. The suggestion of fraud, or connivance or breach of duty or negligence have no basis and no defence is made out. I would dismiss the appeal with costs.

Godfrey, J.A.:

Introduction

24. This is an appeal from an order of Sears J. made on 21 May 1996. By this order, made pursuant to O.14 of the Rules of the Supreme Court, the judge ordered the first defendant Quadrutec Hotel Management and Development Ltd ("the principal debtor") to pay Bank of Credit and Commerce Hong Kong Limited, a company in liquidation ("the creditor") the sum of HK$12,406,972 together with interest and costs. The 2nd defendant Hsu, the 3rd defendant Hui and the 4th defendant Lee ("the sureties"), who had guaranteed the performance of the principal debtor's obligations to the creditor, were also ordered to pay the creditor this sum of HK$12,406,972 together with interest and costs. The judge in making this order expressed himself satisfied that there was "no defence at all" to the creditor's claims against the principal debtor and the sureties. The principal debtor and the sureties now appeal. They accept that they must satisfy this court that they have a fair case for defence; or reasonable grounds for setting up a defence; or a probability that they have a bona fide defence. We have to decide whether they or any of them have succeeded in doing any of these things.

The facts

25. The primary facts are not in dispute (although the parties differ as to who was responsible for the events which happened). These primary facts may be summarised as follows.

26. The principal debtor was indebted to the creditor; and in order to resolve the position the creditor agreed to finance a property development in Causeway Bay from the profits of which the indebtedness would be discharged. The creditor was to take a 30 per cent interest in the venture; Hsu a 40 per cent interest; and one Bryce the remaining 30 per cent. Two corporate vehicles Birren Ltd ("Birren") and Golden Root Investment ("Golden Root") were to be used for the venture. These companies acquired the necessary properties and consolidated the site for development. On 6 September 1988 Hsu agreed with the creditor that upon completion of the matter the creditor would be paid a management fee of $12m and a further $12m in reduction of the principal debtor's indebtedness to the creditor. On the same day Hsu entered into arrangements with Fourth Tudor Inc. ("Fourth Tudor") for its acquisition of the development. Fourth Tudor paid $1m down and a further $12.3m in October 1988; the total, $13.3m, was applied in reduction of the indebtedness of Birren and Golden Root incurred in connection with the development. Fourth Tudor completed its purchase via a tax avoidance scheme involving the use of two Liberian companies Black Pearls Ltd ("Black Pearls") and Caballine Ltd ("Caballine"). The shares in Black Pearls were beneficially held ultimately for the creditor (through its nominee), Hsu and Bryce. Caballine was allotted 998 shares by Birren and 997 shares by Golden Root. Caballine had one issued share registered in the name of Black Pearls. On 2 November 1988 the shareholders in Birren and Golden Root granted options to Black Pearls to purchase two shares in Birren and three shares in Golden Root. Thus Black Pearls held the one share in Caballine which held 998 shares in Birren and 997 shares in Golden Root and options to purchase the remaining two shares in Birren and the remaining three shares in Golden Root. On the same day Black Pearls transferred to Fourth Tudor the share in Caballine and the benefit of the options. In this way Fourth Tudor acquired complete control of Birren and Golden Root. The consideration for the acquisition was HK$132,552,000 (less certain specified loans). This was to be paid to Black Pearls. On 3 November 1988 Hsu "for Black Pearls Limited" gave instructions (expressed to be irrevocable) to the creditor to apply and dispose of the balance of the proceeds of the transaction, HK$119,252,000, to settle the indebtedness of Birren and Golden Root; to pay the creditor's management fee, HK14.3m; "to pay the sum of $14m into the account of [the principal debtor] with you"; to settle legal costs and expenses; and to pay the balance into Hsu's account with the creditor. (These instructions were subsequently confirmed on behalf of Black Pearls by a director of that company, which Hsu was not.) On 17 December 1988 Black Pearls received a cashier order payable to the creditor for the sum of HK$119,252,000.

27. Despite all this, neither the sum of HK$14 mentioned in the "irrevocable" instructions given by Hsu (and subsequently confirmed) on behalf of Black Pearls, nor any other sum, found its way into the principal debtor's account with the creditor so as to reduce the former's indebtedness to the latter. The indebtedness of Birren was apparently discharged, as was the indebtedness of Golden Root. But the principal debtor's indebtedness was not discharged. Instead, the remaining money found its way into a 24 hours call deposit with the creditor, in the name of Hsu, the money being subsequently transferred, on 29 December 1988, to the account of Black Pearls with BCC Manila Philippines. (Hsu says that it was the creditor, through its regional manager, one Kapoor, who had acted for the creditor in the whole matter throughout, who set up these curious arrangements; but Hsu has not explained how they could enure to the benefit of anybody other than perhaps Hsu himself.)

28. Various sums were subsequently disbursed in favour of various payees out of Black Pearls' account with BCCI Manila (on which Hsu was the sole signatory), some for Hsu's own account with the creditor. No payment was made to the credit of the principal debtor. Accordingly, the present position is that the debtor remains indebted to the creditor in a sum exceeding HK$12m; and that the sureties have refused to honour their guarantees.

Have the sureties, or any of them, any defence to the creditor's claim?

29. In his submissions on behalf of the defendants, Mr Andrew Li, CBE, QC, contended that, on these facts, the defendants had an arguable defence to the creditor's claim. However, he was unable to explain what was the nature of that defence. His point appeared to be that, although the liability of the principal debtor to the creditor had not been extinguished, it ought to have been and would have been but for the conduct of the creditor in entering into the arrangements involving the transfer of moneys to BCCI Manila to which I have referred. No doubt that is so; but the question remains as to what defence that affords the defendants. Certainly, if it could be said that what the creditor had done amounted to a release of the principal debtor, that would have discharged the principal debtor, and with it the sureties, from any liability to the creditor. But it is clearly not the case that the conduct of the creditor here amounted to a discharge of the principal debtor. Indeed, on the defendants' own story (the creditor does not accept it) the purpose of the curious arrangements I have mentioned was to ensure that the creditor would be paid, not to ensure that it would be left to whistle for its money. If the conduct of the creditor did not amount to a release of the principal debtor, it could not have affected the liability of the principal debtor to the creditor. Nor, as it seems to me, can it have affected the liability of the sureties either. There is no general principle that "irregular" conduct on the part of the creditor, even if prejudicial to the interests of the surety, discharges the surety : see Bank of India v. Transcontinental Commodity Merchants Ltd and Patel [1983] 2 Lloyds Law Reports 298, per Goff LJ, at p.302. There are particular circumstances in which the conduct of the creditor may discharge the surety, for example, if the creditor acts in bad faith towards him; or is guilty of concealment amounting to misrepresentation; or connives at the default by the principal debtor; or varies the contract between himself and the principal debtor. These are, as Goff LJ points out, "certainly the most significant, and possibly the only, examples." (loc. cit.). The present case exhibits none of these circumstances. No other defence is suggested.

Conclusion

30. For these reasons I am satisfied that the judge was quite right to hold, as he did, that the defendants have "no defence at all" to the plaintiff's claims. These are Order 14 proceedings; and while, on the one hand, I would take this opportunity to re-affirm that such proceedings are quite unsuitable for the resolution of genuine commercial disputes in which the facts call for investigation, I would also stress that, on the other hand, Order 14 proceedings are eminently suitable for claims on dishonoured guarantees when the primary facts are not in doubt and the only result of letting the case go to trial would be to delay the plaintiff further in the recovery of the money plainly due to him.

The result

31. I would dismiss this appeal.

Bokhary, J.A.:

32. Needless to say, I do not question for one moment the correctness of the Privy Council's decision in Black v. The Ottoman Bank (1862) 15 Moo. PCC 472; 15 ER 573. But it does not follow that I accept - or even consider reasonably arguable in the present state of the law's development - everything which at one time was thought to flow from what was said in that case.

33. The present law as to what conduct on the part of the creditor discharges a surety is, I have no doubt, as stated by Robert Goff LJ in Bank of India v. Patel [1983] 2 Lloyd's Rep. 298 at pp 301-302.

34. As can be seen, Robert Goff LJ began by rejecting the proposition that merely irregular conduct on the part of the creditor, even if prejudicial to the interests of the surety, discharges the surety. And in rejecting that proposition, he based himself on the irrefutable ground that the word "irregular" is so unspecific in that context as to be devoid of legal content.

35. Next, he addressed the particular circumstances identified by Bingham J at first instance in that case as those in which a surety is discharged by the creditor's conduct. Those were circumstances in which the creditor "acts in bad faith towards [the surety] or is guilty of concealment amounting to misrepresentation or causes or connives at the default of the principal debtor in respect of which the guarantee is given or varies the terms of the contract between him and the principal debtor in a way which could prejudice the interests of the surety".

36. Those instances, Robert Goff LJ said, provide "certainly the most significant, and possibly the only, examples" of conduct on the part of the creditor which discharges a surety.

37. He acknowledged that no other examples occurred to him. But he warned against "shutting the door upon any further development of the law in this field by rigidly confining the circumstances in which a surety may be discharged to the specified instances."

38. Now, the law could never develop if a suggested defence were summarily shut out simply because it cannot be brought within the established instances. So if it has the potential for developing into such an instance, it should be left for consideration at a full trial.

39. Naturally, it would be of great help in testing whether any suggested defence has such potential if one could identify a common theme running through the established instances. But I do not think that can be done. If it could be, I think Robert Goff LJ would have done it.

40. The best Order 14 test I can think of is this : is there in the suggested defence at least the embryo of something which goes beyond merely irregular conduct on the part of the creditor prejudicial to the interests of the surety?

41. Despite the typically able way in which Mr Li has presented his case, I do not think that we have in this case anything credible containing any such embryo.

42. I must acknowledge that I feel some unease in regard to the 3rd and 4th defendants which I do not feel in regard to the 1st or 2nd defendants. But I do not, at the end of the day, feel driven to press such unease to the point of dissent.

43. In the result, the appeal is unanimously dismissed in its entirety and with an order nisi as to costs in the plaintiff's favour.