STANDARD CHARTERED BANK (HONG KONG) LTD v. CHAN KWOK WAH, ANDY AND ANOTHER

HCA 1762/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1762 OF 2004

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REASONS FOR JUDGMENT

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1.  The 1^st and 2^nd defendants are appealing against the summary judgment of the master for repayment of loan, interest and indemnity costs.

2.  The 2^nd defendant was absent, and was represented by the 1^st defendant.

3.  At the hearing, I dismissed the appeal.  I now give my reasons.

Background

4.  The plaintiff is a bank in Hong Kong.  It sued the 1^st and 2^nd defendants on a guarantee in respect of debts of US$17,860,028.72 owed by the principal debtors Surplus Trader Ltd and Sino Trade Asia Ltd.  The two companies have given cross guarantees in respect of their indebtedness.

5.  The 1^st and 2^nd defendants are husband and wife.  The 1^st defendant was a shareholder and director of Surplus Trader, and also a shareholder and director of Sino Trade (holding 9,000 of the 10,000 shares).  The 2^nd defendant was a shareholder of Sino Trade (holding the remaining 1,000 shares).  They have executed a Guarantee in respect of all monies owed by the two companies to the plaintiff.

6.  The advances were for bills trade finance for export to Korea on documents against acceptance and assignment of the receipts.  Some of the bills were bogus and drawn against buyers with whom the two companies had not signed contract for sale of the goods.  Sino Trade’s representative in Korea was convicted for embezzlement, and the bank manager in Korea was convicted for corruption and conspiracy. 

7.  The two companies had been wound up for non-payment of the principal debt pursuant to order of Kwan J in HCCW 826 & 827/2004 (see judgment dated 10 May 2005).

The issues

8.  The 1^st defendant raised the following points in defence:

(1)     No debt was owed by the two companies as the plaintiff agreed that the lending was on a non-recourse basis;

(2)     The plaintiff was estopped from enforcing the Guarantee against the 1^st and 2^nd defendants as it represented that the Guarantee was a mere formality and it would not be enforced against the 1^st and 2^nd defendants;

(3)     The plaintiff failed to explained to the 1^st and 2^nd defendants the liabilities of the two companies and the exposure of the 1^st and 2^nd defendants as guarantors;

(4)     The Guarantee was back-dated by the plaintiff to 19 February 2004 to facilitate the claim herein;

(5)     The plaintiff was liable for the breach of duty of its agents, i.e. the collecting banks in Korea for accepting forged documents and/or bogus buyers in Korea.

9.  The 2^nd defendant raised the following points in defence:

(1)     No debt was owed by the two companies as the plaintiff agreed that the lending was on a non-recourse basis;

(2)     She is a housewife and nominee shareholder for the 1^st defendant and not having any knowledge of the transaction;

(3)     She does not know English;

(4)     She was mislead by the 1^st defendant in signing the documents as a matter of formality;

(5)     The plaintiff did not arrange for her to sign the documents separately, and did not inform her the status and exposure of the borrowing far exceeding the net assets of the two companies.

Legal principles

10.  The principles in an Order 14 application are well settled: Banque de Paris v Costa de Narray [1984] 1 Lloyd’s Rep 21, 23 per Ackner LJ:

“It is appropriate to be reminded of the principles applicable to an Order 14 application.  They are well-known and in fact not disputed by the parties.  The Plaintiff (a Defendant to the 2^nd Defendant’s counterclaim) must show that there are triable issues.  He has to satisfy the court that he has a ‘real or bona fide defence’ ”.

11.  In Re Safe Rich Industries Ltd [1994] HKLY 183, Bokhary JA (as he then was) said:

“The test at the summary stage is indeed as simple as whether the defendant’s assertions are believable, but it must be recognised – because failure to recognise it would create a debt-dodger’s charter – that whether the defendant’s assertions are believable is a questioned no by taking those assertions in isolation but rather by taking them in the context of so much of the background as either undisputed or beyond reasonable dispute.”

12.  In relation to Order 14 proceedings upon guarantees, in Bank Of Credit and Commerce Hong Kong Ltd (In Liquidation) v Quadrutec Hotel Management & Development Ltd & Ors [1994] 4 HKC 316, Godfrey JA (as he then was) said at p. 324:

“… These are O. 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, O 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.”

13.  And His Lordship also said at p. 323:

“… 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 Lloyd's Rep 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.’ ”

14.  And Bokhary JA (as he then was) said at p. 324:

“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.

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.”

15.  And at p. 325:

“The best O 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?”

16.  As to signature of legal document in English, in Bank Of China (Hong Kong) Ltd v Fung Chin Kan & Another [2003] 1 HKLRD 181, Litton NPJ said at p. 197 para. 51:

“… generally speaking, when a person signs a legal document, he or she is bound by the act of signature: As a matter of general law, it is no defence to say that he or she did not understand the contents of a legal document; that person takes the chance of being bound by its terms, as he or she can take the simple precaution of not signing until its contents have been fully explained and understood. But there are special circumstances where the burden is thrown on the other party, under the principles of what are broadly called equitable fraud.”

17.  The law as to undue influence on the surety by the debtor as affecting the mortgagee bank is laid down in Barclays Bank Plc v O’Brien [1994] 1 AC 180 and Royal Bank of Scotland v Etridge (No.2) [2001] 4 All ER 449; [2001] 3 WLR 1021, as succinctly set out and applied in Bank of China (Hong Kong) Limited v Wong King Sing & ors HCMP3350/1998; [2001] HKCU 1216  per Recorder Ma SC (as the Chief Judge then was).

18.  Recorder Ma referred to Barclays Bank Plc v O’Brien  per Lord Brown-Wilkinson:

“59.   The position of third parties was summarised in the speech of Lord Browne-Wilkinson in Barclays Bank Plc v O’Brien at 191, where he said:-

‘Undue influence, misrepresentation and third parties

Up to this point I have been considering the right of a claimant wife to set aside a transaction as against the wrongdoing husband when the transaction has been procured by his undue influence. But in surety cases the decisive question is whether the claimant wife can set aside the transaction, not against the wrongdoing husband, but against the creditor bank. Of course, if the wrongdoing husband is acting as agent for the creditor bank in obtaining the surety from the wife, the creditor will be fixed with the wrongdoing of its own agent and the surety contract can be set aside as against the creditor. Apart from this, if the creditor bank has notice, actual or constructive, of the undue influence exercised by the husband (and consequentially of the wife’s equity to set aside the transaction) the creditor will take subject to that equity and the wife can set aside the transaction against the creditor (albeit a purchaser for value) as well as against the husband: see Bainbrigge v Browne (1881) 18 Ch D 188 and Bank of Credit and Commerce International SA v Aboody [1990] 1 QB 923, 973. Similarly, in cases such as the present where the wife has been induced to enter into the transaction by the husband’s misrepresentation, her equity to set aside the transaction will be enforceable against the creditor if either the husband was acting as the creditor’s agent or the creditor had actual or constructive notice.’ ”

19.  And His Lordship also referred to Royal Bank of Scotland v Etridge per Lord Hobhouse of Woodborough:

“60.   It should be made clear that the questions of agency and constructive notice only arise where it has been shown that the relevant transaction (say, a guarantee) has been affected by undue influence (whether actual or presumed). It is pointless to go into the question of the extent to which a third party is affected by undue influence unless the alleged undue influence has been shown to exist in the first place. In this regard, I respectfully refer to the speech of Lord Hobhouse of Woodborough in Royal Bank of Scotland v Etridge at 1054 para. 101:

‘It can be expressed by answering three questions: (1) Has the wife proved what is necessary for the court to be satisfied that the transaction was affected by the undue influence of the husband? (2) Was the lender put on inquiry? (3) If so, did the lender take reasonable steps to satisfy itself that there was no undue influence?’ ”

20.  On notice of undue influence on the part of the third party, Recorder Ma said:

“64.   As for notice of the undue influence, again one begins with the speech of Lord Browne-Wilkinson at 196D-E:

‘Therefore in my judgment a creditor is put on inquiry when a wife offers to stand surety for her husband’s debts by the combination of two factors: (a) the transaction is on its face not to the financial advantage of the wife; and (b) there is a substantial risk in transactions of that kind that, in procuring the wife to act as surety, the husband has committed a legal or equitable wrong that entitles the wife to set aside the transaction.’

65.    These words are properly to be regarded as being the underlying rationale why a bank is put on inquiry, not as somehow being the requisite matters which a complainant must prove: see Royal Bank of Scotland v Etridge at 1038 para. 46.

66.    The test of what is required to be proved is simpler than that: a bank is put on inquiry whenever a wife offers to stand as surety for her husband's debts: Royal Bank of Scotland v Etridge at 1037-1038 paras. 44-49, 1056-8 paras. 108-110.

67.    Inherent in this formulation in my view are two requirements which have to be shown:

(a)     Knowledge by the bank of the relationship between the creditor and the surety;

(b)     That the nature of the transaction is such as to be apparently disadvantageous to the surety (such as where the surety guarantees the indebtedness of the debtor, no part having been played by the surety in the negotiations: see Royal Bank of Scotland v Etridge at 1038 paras. 46-49, 1072-3 paras. 145-147).”

21.  Further, on steps to be taken once the bank is put on enquiry, Recorder Ma said:

“69.   Once it is established that the third party has been put on inquiry, the burden is then on him to show that reasonable steps have been taken to satisfy himself that the surety's agreement has been properly obtained: Barclays Bank plc v O'Brien at 196E-F. In the context of surety transactions, since the decision of the House of Lords in Barclays Bank plc v O'Brien , the third party creditor is required to do the following:

(a)     To insist that the surety attend a private meeting in the absence of the influencer (the debtor) with a representative of the creditor;

(b)     At such meeting for that representative of the creditor to tell the surety of the extent of his liability as surety under the contract of suretyship;

(c)     To warn the surety of the risk he is running in entering into the transaction;

(d)     To urge the surety to take legal advice and in exceptional cases, to insist on it.

See: Barclays Bank plc v O'Brien at 196F-197B; Royal Bank of Scotland v Etridge at 1038-9 para. 50. These are the requisite criteria for transactions entered into after the decision of the House of Lords in Barclays Bank plc v O’Brien: at 196G-H…”

Discussion

22.  The 1^st defendant’s case is not so much that he did not fully understand the transaction, but he was told that the companies had no liability as borrowers, and he and the 2^nd defendant had no personal liability as guarantors.

23.  The 1^st defendant said that Ms. Koo, manager of the plaintiff, repeatedly assured him that the facility would be on a non-recourse basis: the plaintiff would purchase from Sino Trade at a discount an agreed part of the receivables, neither the borrowers nor the guarantors would be exposed to the risk of default of the Korean buyers.  Otherwise, as according him, the two companies would not have agreed to borrow.

24.  The non-recourse assertion is contrary to the contemporary documentation.  The loan documents were in the usual form as between lender and borrower.  The receivable purchase agreements had an entire contract clause with no mention of non-recourse against the borrowers.

25.  As mentioned in the judgment of Kwan J, there was clear admission of liability by the 1^st defendant in the statement of affairs filed by the provisional liquidator on 29 August 2004, and the non-recourse defence was first raised by the companies two months after the petitions for winding-up were filed.

26.  It is common practice for a mortgagee bank to require personal guarantees from the shareholders when lending to companies of insubstantial financial position.  If the facilities were non-recourse, there would simply be no reason for the giving of the personal guarantee.

27.  The Guarantee is in both English and Chinese.  The 1^st and 2^nd defendants also signed a Form of Third Party Acknowledgment (GD 6), which explained the liability of the guarantor, with the advice to seek independent legal advice if so wished.

28.  Hence, the loan being non-recourse against the borrower and the guarantee as a mere formality is simply unbelievable.

29.  The 1^st defendant mentioned that he could not remember when he signed the guarantee, and the plaintiff is put to strict proof there of.  I fail to see any substance in the suspicion of back dating of the Guarantee by the plaintiff.

30.  As to the alleged breach of duty by the collecting banks, fraud was practiced on the banks including the plaintiff by Sino Trade’s agent in Korea.  I wholly fail to see how the defendants, being shareholders of Sino Trade, can begin to say that the plaintiff is vicariously liable for the non-detection of the fraud by collecting banks.

31.  The 2^nd defendant is the wife of the 1^st defendant.  But she is also a shareholder of Sino Trade.  Sino Trade stood to benefit from the facility.  It could not be said that she had no connection with or benefit from the transaction. 

32.  She said she was only a nominee for the 1^st defendant because of the requirement two then two shareholders rule.  This is a bare assertion.  Be that as it may, she held the shares in order that the 1^st defendant could achieve corporate limited liability in trading, and she signed the guarantee when one was required for lending to the companies.  Her shareholding is not de minimis.  There is no reason for the bank to go behind the registered shareholding and be suspicious of any trust, even if there were one. 

33.  As mentioned, the Guarantee was in both English and Chinese, and the 2^nd defendant also signed a Form of Third Party Acknowledgment.  I find the allegation that the 2^nd defendant was misled of the 1^st defendant in signing the Guarantee as mere formality as unbelievable.

34.  In the premises, I found there was no real or bona fide defence by each of the defendants.  I dismissed the appeal, affirmed the judgment on the principal sum with contractual interest by the master.  The Counterclaim for rescission of the Guarantee is also dismissed.

Costs

35.  I ordered that the 1^st and 2^nd defendants do pay the costs of the appeal to the plaintiff, on an indemnity basis as provided in the contract, to be taxed if not agreed.