INDIAN OVERSEAS BANK v. TSEA SUNG WAH

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J U D G M E N T

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Power, J.A. (giving the judgment of the Court):

1. The appellant/defendant Mr. Tsea Sung Wah (Mr. Tsea) along with three other persons, who included Cheung Kai Chan and Lau Wing Yeung, on the 1st of February 1975 entered into a guarantee with the respondent/plaintiff, the Indian Overseas Bank Ltd. (the Bank), whereby, in consideration of the Bank making and agreeing to make loans and advances to the Mansonit Garment Manufactory Co. Ltd. (Mansonit), the four parties jointly and severally guaranteed the payment of up to HK$6m of moneys advanced. The guarantee which is dated 1st February 1975 was on a standard bank form.

2. The Bank issued a writ of summons on 24th July 1987 against the appellant claiming the sum of $2,494,294.54 being the amount then outstanding under the guarantee together with interest.

3. On 24th September 1987 a defence was filed alleging that the Bank had released Cheung Kai Chan without Mr. Tsea's consent thereby prejudicing his right of contribution and discharging him from his obligations under the guarantee.

4. It also pleaded that Madam Li Pik Man, the "Proposed administratrix" of the estate of Lau Wing Yeung, had in 1981, upon the death of Lau, revoked the guarantee and further that, at about the same time, the Bank had released Lau giving rise to the same conquences as the alleged release of Cheung.

5. On 12th October 1987 Mr. Tsea's solicitors filed Answers to a Request for Further and Better Particulars to which reference will be made later.

6. The Bank applied to a Master for summary judgment under O.14, r.3 on 25th July 1988 and Mr. P. Suresh, the Senior Manage of the Bank on 24th June 1988, made an affirmation in support of that application in which he confirmed the truth of the facts pleaded in the Statement of Claim, denied Cheung Kai Chan had ever been released and denied that there had ever been a valid revocation on release of the guarantee of Lau Wing Yeung.

7. Mr. Tsea in an affirmation in reply filed on 22nd July 1988, affirmed that Mansonit had been solely managed by one Fong Tze Kee and that Cheung Kai Chan had personally told him that he had been released in June or July 1976.

8. Mr. Suresh made a further affirmation on 10th January 1989 which dealt with the remaining assets of Mansonit.

9. The application was heard by Master O'Donnell on 14th March 1989 and he ordered that judgment be entered for the Bank.

10. Mr. Tsea appealed to Mayo, J. Before this appeal came on for hearing on 24th April 1989, two further affirmations were filed - one by Mr. Tsea on 11th April and one by Mr. Suresh on 20th April.

11. Mayo, J. was satisfied that the defendant had not established any arguable defence and that the Bank was entitled to judgment. It is from that decision that the present appeal is brought.

12. Miss Eu who appears for the appellant, when contending that there was an arguable offence, relied in particular upon a letter dated the 8th of June 1976 from the bank to Mansonit. This letter was not before the Master as, according to the affirmation of Mr. Tsea filed on the 11th April, it only came to light subsequent to the master's order when his solicitors were examining documents which belonged to Mansonit. It is fair here to remark that a copy of this letter should at all times have been in the files of and within the knowledge of the Bank. The letter is addressed to Mansonit. Its heading carries the notation "Attn: Mr. Tsea Sung Wah Chairman". In the letter, the lank stated itself to have the intention of placing "at your disposal revised credit facilities as per particulars furnished in the attached sheet, which we trust would satisfy your requirements". It goes on to state:

"We also invite reference to your letter informing the resignation of Mr. Cheung Kai Chan, one of the directors of your company. In the circumstances, as requested by you, our Central Office have permitted release of the guarantee of Mr. Cheung Kai Chan. We have therefore forwarded herewith a fresh personal guarantee form for HK$8,100,000- which we would request you to retransmit to us, duly executed by all the existing directors of your company on both sides OF THE FORM, without company's chop. If any director is appointed in the place of Mr. Cheung Kai Chan, we shall take his guarantee later. We shall onreceipt of the fresh personal guarantee form signed by the present directors of the company, return the guarantee form already held by us for HK$ six million, executed by the directors of the company, including Mr. Cheung Kai Chan."

13. Miss Eu contends that this letter is, in terms, an admission by the bank that it had released the guarantee of Mr. Cheung Kai Chan. She submits that if this were done the defendant would also have been discharged from the guarantee (see halsbury's Laws of England 4th Ed. Vol.20 para.293, 294). She submits further that, without discovery, the defendant will have great difficulty in formulation and arguing his defence as the documentation or copies thereof are in the hands of the now defunct Mansonit or the Bank. She points out that the letter of 8th June 1976 only came to the knowledge of Mr. Tsea after summary judgment had been given because of the diligence of his solicitors. She submits that the release admitted in the letter is confirmed by Cheung Kai Chan and refers in this regard to the first affidavit of Mr. Tsea. She points also to a letter from Ip, Ku & Stoppa acting for the widow of Lau Wing Yeung, another of the guarantors, written on 11th February 1981 which states

"We are now instructed to serve on you herewith two Notices of Revocation duly signed by our client in respect of two agreements of guarantee made by the abovenamed deceased with others dated 1st February 1975 and 5th July 1976 respectively. A true copy of the death certificate of the said deceased is also enclosed herewith for your reference"

14. She submits that, whether or not this letter was a valid revocation of the guarantee, it clearly indicates the existence of a further guarantee, dated 5th July 1976, which is in accord with the scheme outlined in the letter of 8th June 1976. She again points out that Mr. Tsea will only be in a position to fully ventilate his defence after discovery.

15. Mr. Suresh's affirmation of 20th April 1989 in which he referred to the letter of 8th June 1976 states:

"...... that although in the plaintiff's letter dated 8th June 1976, the plaintiff expressed an intention to release Mr. Cheung Kai Chan as a guarantor but such contemplated release, as stated in the said letter, was subject to the execution of a fresh guarantee by all the new directors of Mansonit Garment Manufacturing Co. Ltd. However, I have made a diligent search of the plaintiff's files and after the letter of 8th June 1976, the plaintiff has never received from the company any new guarantee. As such, the guarantee dated 1st February 1975 is the latest guarantee executed by the directors of the company which is still in force. As a matter of fact, the original guarantee is still being kept by the plaintiff and no other record exists of any release having been given of Mr. Cheung Kai Chan."

16. One cannot help but remark that this statement by Mr. Suresh is clearly wrong insofar as it suggests that the letter of 8th June "expressed an intention to release Mr. Cheung Kai Chan". The letter did nothing of the sort. It stated in plain terms that Mr. Cheung Kai Chan had been released. While it refers to a diligent search of the Bank's files, it makes no statement that these files are complete nor does it give any information as to the correspondence that led up to the letter of 8th June or the correspondence that followed thereon. Indeed it does not, in clear terms, state that a copy of letter itself was found in the files. It does not, furthermore, state, as a matter of direct knowledge that no release was given, but rather indicates the conclusion of the deponent that no release could have been given because he can find no record thereof.

17. It is the contention of Miss Eu that the Bank having admitted that it had given such release, Mr. Tsea is entitled in an O.14 application to rely upon that admission.

18. Mr. Scott, who appears for the Bank, argues that on a fair reading of the letter the court should be satisfied beyond doubt that no such admission was made. He submits that the letter makes it clear that the Bank was simply speaking of an internal decision to release which would only be implemented after a fresh guarantee had been entered into. He submits that this is in accord with good banking practice and that no bank acting with ordinary prudence would have been prepared to grant a release before a fresh guarantee had been entered into.

19. It is the argument of Mr. Scott that even if there was a release of Mr. Cheung Kai Chan, Mr. Tsea is, by reasons of Clause 3 and Clause 4 of the Guarantee, nonetheless bound by it.

Clause 3 of the Guarantee reads as follows:

"3. And I/we hereby consent and authorize and declare that you may at any time or times and at all times grant or allow time or indulgence to or compound with the principal or me/us without affecting this guarantee and that all compositions and payment received by you from the principal or from any other person or persons, firm or company or his or their estate or estates shall be regarded for all purposes as payment in gross and you shall be entitled to prove against the estate of principal should the principal become bankrupt or insolvent in respect of the whole of the principal's indebtedness to you without any right on the part of me/us on any or either of us or my/our or any of my/our representatives or any representatives of any or either of us to stand in your place in respect of or to claim the benefit of any such compositions or payments or any security held by you until you shall have received the full amount of all your claims against the principal which are covered by this guarantee and that this guarantee shall apply to and secure any ultimated balance which shall remain due to you within the limit aforesaid."

20. It is the submission of Mr. Scott that the release of Mr. Cheung Kai Chan was an "indulgence" which the Bank could, by virtue of Clause 3, grant without affecting the guarantee insofar as it bound the lower parties thereto. We are satisfied that it is to put it at its lowest arguable that the word "indulgence" does not cover a release. It seems to us that there is good ground for contending that such an "indulgence" could not permit more than a variation of the strict enforcement of a term of the guarantee in favour of a guarantor.

21. Clause 4 reads as follows:

"4. And it is expressly provided and declared that this guarantee shall not be affected by your taking or varying or giving up any securities field by you,"

22. It is, the argument of Mr. Scott that a surety's liability is not affected if the bank gives up "any securities" and that this must include the security given by a co-surety. Again we consider it at least arguable that the word "securities" in Clause 4 was never intended to cover the security given by co-sureties under the Guarantee.

23. While we recognize the force of some of the submissions of Mr. Scott, we are, nonetheless, satisfied that it would be quite wrong in these circumstances to deprive Mr. Tsea of the opportunity of putting his defence.

24. We are satisfied that Mr. Tsea should have been held to have had an arguable defence and that the decision of kayo, J. must be reversed.

25. Other matters were argued before us, however it is not necessary, in the light of the view taken above, for us to canvass them. Indeed we think it better, given that this is an Order 14 application that we say no more than is necessary when arriving at our decision.

26. The appeal is allowed and the summary judgment is set aside. We give the defendant unconditional leave to defend.

27. We make an order nisi that the appellant have his costs of the appeal and of the hearing before Mayo J. The costs of the hearing before the Master are to stand. The order will be made absolute in 14 days.