XCHRX ASIA COMMERCIAL BANK LTD. v. NGAI HING CYCLE (ELECTRICIAL) LTD. AND OTHERS

HCMP 6146/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 6146 OF 1999

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D E C I S I O N

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Background:

1. The 2nd defendant mortgaged an industrial unit (hereinafter referred to as "the Mortgaged Property") to the plaintiff bank in return for a loan to the 1st defendant. The other defendants also entered into further guarantees for the due payment by the 1st defendant of all advances owing by the 1st defendant to the plaintiff. The 3rd defendant and his wife were the owners of a house in Fairview Park (hereinafter referred to as the "Subject Property") which was also mortgaged to the plaintiff under a separate arrangement.

2. Since July 1999, the 2nd defendant defaulted payments in respect of his Mortgaged Property. On 4 September 1999, the plaintiff's solicitors demanded repayment of the outstanding loan from all the defendants by reason of the 1st defendant's default. On 10 September, Gary Mak, Dennis Wong & Chang (hereinafter referred to as "GM") acting for the 3rd defendant, informed the plaintiff of the 3rd defendant's intention to discharge the mortgage and to sell the Subject Property on 7 October 1999. At a meeting on 23 September, the plaintiff demanded the 3rd defendant to repay the 1st defendant's loan under his guarantee from the proceeds of sale of the Subject Property. The 3rd defendant agreed but refused to sign any document.

3. In the course of documenting for the discharge of the mortgage of the Subject Property, the plaintiff's solicitors advised Wong Fung & Co. (hereinafter called "Wong Fung"), who then represented the 3rd defendant in place of GM, of the redemption figure of about $1.9 million. This amount included the outstanding mortgage loan in respect of the Subject Property of about $800,000.00 and the 1st defendant's outstanding loan of about $1,100,000.00. Wong Fung replied in the following terms:

"We were instructed by our client..... to write to you to be informed of how the figure HK$1,924,791.74 was reached.

........, we noted that the outstanding principal of the property as on 17 September 1999 is HK$757,669.33.

..........., your prompt reply is much appreciated. Otherwise, our client will refer the said matter to the Banker's Association of Hong Kong for arbitration."

So obviously, either the 3rd defendant had not agreed to repay the loan under the guarantee or that he was repudiating that agreement.

4. The plaintiff's solicitor wrote back on 4 October explaining that the $1.9 million included the two loans and demanded Wong Fung to provide answer to four questions otherwise they would take all action, including application for an injunction order against the 3rd defendant. The questions were whether the 3rd defendant would admit personal liability for the loan under the guarantee, whether he was selling the property and to whom; and if not, who provided the redemption money. They also requested for a copy of the sale and purchase agreement. The questions were to assist the plaintiff to determine if the sale was genuine and if the 3rd defendant was trying to dissipate his asset so as to avoid his liability under the guarantee. In their reply dated 5 October, Wong Fung did not respond to the questions but insisted to proceed with redeeming the Subject Property. The plaintiff's solicitors wrote back on the same date, reminding Wong Fung of the questions, repeating the threat of applying for an injunction order and asking whether they had instruction to accept service.

5. Wong Fung wrote back on 6 October insisting on proceeding with the redemption. Again, they did not respond to the questions asked and refused to accept service. The plaintiff's solicitors then wrote and faxed to Wong Fung on the same day, informing Wong Fung that they have briefed counsel to make an application for an injunction order that very afternoon. Accordingly they obtained a Mareva injunction that afternoon against the 3rd defendant, restraining him from disposing of his share of the proceeds of sale from the Subject Property to the amount of $1,120,525.37. On 7 October, they also obtained an order for substituted service of the injunction order against the 3rd defendant. The injunction order was subsequently discharged by consent upon the 3rd defendant repaying the loan under the guarantee. The question now is who should bear the costs of the applications for Mareva injunction and for substituted service of the order.

Plaintiff's summons to strike out 3rd defendant's affirmation relating to a "without prejudice" letter:

6. The 3rd defendant filed an affirmation six days before today's hearing exhibiting a letter from the plaintiff's solicitors marked "without prejudice save as to costs". In that letter, the plaintiff's solicitors made an offer to accept a certain amount in settlement of their costs claim. Mr Ting submitted that this letter was issued without prejudice save as to costs of taxation and should not have been exhibited for this hearing in which the issue of liability and perhaps quantum will be determined. Production of this letter is certainly objectionable in a taxation hearing. For a liability hearing, this letter suggests that the parties have engaged in a course of negotiation in which the 3rd defendant may have conceded liability. For that reason, production of the letter is also objectionable, as the 3rd defendant is contesting liability. As a matter of principle, I do not consider this letter should be produced. Accordingly, I grant the plaintiff's application and strike out para. 22 of the 3rd defendant's affirmation in which this letter was referred to, with costs to the plaintiff. The letter is excluded from the bundle and I give it no consideration whatever in my subsequent deliberation.

Costs of the injunction:

7. Mr Leung for the 3rd defendant submitted that the plaintiff was behaving in a very high handed manner in seeking to enforce the 1st and 2nd defendants' liability against the 3rd defendant and to force him to pay from the proceeds of sale of his jointly owned property. He submitted that the proceedings were instituted under Order 88 which is a special procedure available to the plaintiff for instituting a claim for possession or payment under a mortgage deed but does not extend to cover a claim under a guarantee which is a separate claim altogether. He said that the 3rd defendant is not even a party to the mortgage deed.

8. Mr Ting submitted that money due by guarantors under the guarantees are those money due by the mortgagor, i.e. the 2nd defendant in respect of the Mortgaged Property, under the mortgage in question. He therefore submitted that as such, the claim against the guarantors for the sum guaranteed are also "money secured by the mortgage" contemplated under Order 88 rule 1(a) of the Rules of the High Court. With respect, I find that argument difficult to follow. The liability of the 3rd defendant is based on the default of the 1st defendant who is not the mortgagor of the Mortgaged Property. Thus if the plaintiff sought to enforce the guarantee against the 3rd defendant only or against the 1st defendant as the borrower and the 3rd defendant as guarantor, the procedure under Order 88 rule 1 is inappropriate, because it would not then be a mortgagee action. However, when it is sought to enforce the mortgage deed over the Mortgaged Property against the 2nd defendant as well, the procedure under Order 88 rule 1 is applicable. It is also appropriate for all the defendants to be joined in one action under Order 15 rule 4, in view of the common questions of law and fact involved.

9. As the primary object of the plaintiff was to lay their hands on the 3rd defendant's share of the proceeds of sale over the Subject Property, rather than to take mortgagee action against the 2nd defendant, I think it is not preferable to join all the defendants in one action and to make it a "mortgagee action" under Order 88 rule 1. However, whether to bring in all the defendants, including the 2nd defendant in particular, is a matter within the prerogative of the plaintiff.

10. Mr Leung's second objection is that a Mareva injunction can only be granted to support a recognised cause of action. He submitted that as the basis of the present proceedings is Order 88 of which the 3rd defendant was not even a party to the mortgage deed, the claim under the guarantee is a separate claim and should have started under a different action. I cannot agree as it is appropriate that all the defendants should be joined together in view of the common question of law and fact involved. The plaintiff certainly has a cause of action against the 3rd defendant under the guarantee. The Mareva injunction is rightly granted to support that cause of action.

11. Mr Leung's strongest point is really whether there was any evidence of risk of dissipation of assets put before the Court on 6 October when the injunction was applied for. He submitted that the 3rd defendant had made numerous contacts with the plaintiff during September and October and there was no evidence that there was a real risk that he would be dissipating his assets. I think these contacts were neutral because at the time he had to liaise with the plaintiff for the purpose of selling the Subject Property.

12. The exchange of correspondence between the parties' solicitors from 4 October to 6 October show a persistent ignorance by Wong Fung of the questions raised by the plaintiff's solicitors and a total lack of response to the demand for repayment of the loan under the guarantee. The inference to be drawn is that the 3rd defendant did not consider himself bound by the guarantee and did not intend to repay the loan under the guarantee. By refusing to produce a copy of the sale and purchase agreement or disclose the identity of the purchaser, it is doubtful if the alleged sale was a genuine one or simply a device to remove the asset out of reach of the plaintiff. This was highly suspicious as it took place shortly after the plaintiff demanded repayment under the guarantee. Even if the sale was a genuine one, as it probably was, the 3rd defendant only had himself to blame for uncooperatively refusing to answer the questions raised by the plaintiff's solicitor and thereby putting suspicion on himself.

13. Mr Leung complained that the plaintiff failed to disclose to the Court the mortgage deed relating to the Mortgage Property and its valuation so as to enable the Court to decide whether to grant the injunction. This is irrelevant, as the question for me is whether it was reasonable to apply for the injunction and not whether the injunction order ought to have been granted. In any event, the mortgage has been clearly pleaded. How to secure repayment of the outstanding loan is a matter entirely within the prerogative of the plaintiff. As the plaintiff knew that the 3rd defendant would soon be receiving substantial amount of cash, the plaintiff understandably wished to lay its hand on the 3rd defendant's share of proceeds of sale, rather than to proceed with the more complicated mortgagee action. Again, that is a matter entirely for the plaintiff.

14. In view of the conduct of the 3rd defendant, I am satisfied that the plaintiff reasonably entertained a real fear that the 3rd defendant was about to dissipate his asset and will not honour the guarantee. It is therefore reasonable for the plaintiff to apply for the Mareva injunction.

Substituted service:

15. Mr Leung submitted that in light of the background of continuous communications between the parties, the allegation that he was avoiding service is unjustified. In his affirmation, the 3rd defendant said that he had a telephone conversation with Mr Ting of the plaintiff's solicitors and told him that he would be at the Subject Property at about 8 p.m. to receive the documents. He said Mr Ting did not tell him that it was about the injunction order. He said he waited with his wife at the entrance of the Subject Property until 8 p.m. but no one arrived. Then he instructed his employee to continue waiting and to receive the documents.

16. What he said in the affirmation is patently untrue and incredible. Firstly, his solicitors have refused to accept service on his behalf. Presumably that was on his instruction. That reflects that the 3rd defendant had no intention to receive service. Secondly, the plaintiff's solicitors have unequivocally informed the 3rd defendant's solicitors that they were applying for the injunction order that very afternoon. There is no reason why Mr Ting would hide from him the fact that the legal documents to be given to him were related to the injunction.

17. The 3rd defendant said he left the Subject Property at 8 p.m. and left his employee waiting there. This is contradicted by Mr Yuen's affirmation. Mr Yuen said he arrived at the Subject Property at 7:50 p.m. and waited. The 3rd defendant was not there. At 8:10 p.m., a young man arrived and told them that the 3rd defendant had left. According to Mr Yuen's affirmation, this young man arrived after 8 p.m., i.e. after Mr Yuen had been waiting there for some time. It is therefore untrue that the 3rd defendant had been waiting for Mr Yuen and left as they did not arrive in time. Mr Yuen's affirmation was contemporaneous, being made on 7 October. The 3rd defendant's was made four months afterwards. He did not address to these points raised by Mr Yuen, nor did he produce another affirmation from this young man to contradict Mr Yuen's affirmation.

18. The 3rd defendant's allegation is also incredible. He talked to Mr Ting at about 7 p.m. and told him that he would be at Fairview Park in Yuen Long at 8 p.m. Then he said in his affirmation that he had to leave for Macau at 8 p.m. to join a birthday celebration. He would not be in Macau by 10 p.m. for the celebration. The story did not sound credible.

19. On the following day, i.e. 7 October, Mr. Yuen went to the 3rd defendant's address in Proficient Industrial Centre, which is also the address given by the 3rd defendant in his affirmation used for the purpose of the present proceedings. There, he was told by the 2nd defendant that the 3rd defendant did not work there anymore. There is no affirmation from the 2nd defendant to explain why he said that the 3rd defendant was not working there anymore. If the 3rd defendant is still working at that address as he says in the affirmation, then it is obvious that he was evading service with the help of the 2nd defendant. Mr Yuen then went to the address of the Mortgaged Property and the address of the 3rd defendant's father with a view to serve the order on the 3rd defendant. Both premises were locked.

20. I do not believe in what the 3rd defendant said relating to the service of the injunction order on 6 October. I accept Mr Ting's and Mr Yuen's evidence in their affirmations. It is obvious that the 3rd defendant was evading service. If he had business to go to Macau at 8 p.m. he would happily have authorised his solicitors to accept service or made other arrangements. He could not be located anywhere on 7 October. In the circumstances, it is also reasonable to apply for substitution service of the injunction order.

Costs order:

21. Having found it reasonable for the plaintiff to apply for the Mareva injunction and to serve the order by substituted service, I order costs against the 3rd defendant for the following:

(a) the costs of and occasioned by the plaintiff's application for

i) Mareva injunction order dated 6 October 1999,

ii) The application for the substituted service order dated 7 October 1999,

(b) the plaintiff's costs of the hearing on 17 February 2000;

(c) the costs of the hearing on 15 October 1999 before Mr Justice Yeung; and

(d) the costs of these proceedings.