XCHRX STANDARD CHARTERED FINANCE LTD. v. WAI FAT MOTORS CO. LTD. AND OTHERS

HCA 9254/95

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 9254 OF 1995

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DECISION

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1. This is the 3rd Defendant's application to set aside a default judgment which has become the basis of a petition for bankruptcy.

History of proceedings

2. The history of the proceedings is as follows. The Writ herein was served by post on the Defendants in mid-September 1995. At that time, the 3rd Defendant had left Hong Kong and the businesses of the 1st and 2nd Defendant companies (which he controlled) had ceased. No notice of intention to defend having been filed, judgment was entered against the 3rd Defendant in early October 1995.

3. A Bankruptcy Notice was issued against the 3rd Defendant in August 1997 and a Petition was filed in November 1997. The 3rd Defendant took steps to oppose the Petition in January 1998, and in February 1998, the present summons to set aside the default judgment was issued.

Factual background

4. The factual background of the present application is as follows. The 1st Defendant was a taxi dealer which started business with the Plaintiff finance company in 1990/1.

5. In 1992, the 2nd Defendant also became an authorised dealer of the Plaintiff. There is some dispute between the parties as to whether the 1st Defendant still remained an authorised dealer of the Plaintiff thereafter.

6. The Statement of Claim pleads that between 15 June 1995 and 6 July 1995, the 1st Defendant entered into 16 Short Term Loan Agreements with the Plaintiff of $1.6m each, totalling $25.6m. The evidence discloses that each Short Term Loan Agreement was executed by the 1st Defendant as "Borrower" by a director signing against the rubber chop of the 1st Defendant. Each Agreement was also executed by the 2nd Defendant as "Dealer", also by means of a director signing against the rubber chop of the 2nd Defendant. The 2nd Defendant agreed therein to indemnify the Plaintiff against all losses suffered as a result of the Loan to the 1st Defendant.

7. It is common ground that pursuant to these 16 Short Term Loan Agreements, various amounts were credited into the accounts of the 2nd Defendant.

8. Subsequently however, cheques drawn by the 2nd Defendant in purported repayment of these loans were dishonoured. A report was made to the police against the 3rd Defendant as the signatory of these cheques, which resulted in a prosecution, and the present proceedings were instituted as well.

9. The Statement of Claim pleads that by virtue of a Guarantee dated 15 January 1995 executed by the 3rd Defendant in favour of the Plaintiff, the 3rd Defendant guaranteed the repayment of each Short Term Loan made to the 1st Defendant. Further or alternatively, that the 16 Short Term Loans were the subject of a Wholesale Finance Loan Agreement dated 16 April 1992 made between the Plaintiff and the 1st Defendant; and under the Guarantee, the 3rd Defendant guaranteed repayment by the 1st Defendant of loans which were the subject of the Wholesale Finance Loan Agreement.

Burden on an application to set aside default judgment

10. It has not been suggested by the 3rd Defendant that the present judgment had been obtained irregularly. In any event, even if it had been obtained irregularly, the modern approach is to still consider whether there are any merits in the defence, instead of adopting a rigid distinction between judgments which had been regularly obtained and those which had not.

11. Of course, the Court must also consider whether the proceedings have been deliberately ignored by the defendant. If that is so, that is a matter to be considered by the Court in the exercise of its discretion.

12. The burden is on the 3rd Defendant to satisfy the Court that the judgment should be set aside. The test to be applied is that set out in the Saudi Eagle case [1986] 2 Ll Rep 221:- does the defence of the 3rd Defendant have "a real prospect of success"?

Ignorance of proceedings?

13. It is clear from the 3rd Defendant's travel records that he was not in Hong Kong when the writ was served and when judgment was entered against him.

14. The 3rd Defendant says that he was first made aware of the proceedings when he received the Bankruptcy Notice in September 1997. This is disputed by Mr Kevin Nie, the solicitor for the Plaintiff, who says on affirmation that he had informed the 3rd Defendant of these proceedings in December 1996, when he served him with certain New Zealand bankruptcy documents. The 3rd Defendant admits that he did meet Mr. Nie then, but denies that Mr. Nie had told him about these proceedings.

15. It is not appropriate for this court at this stage of the proceedings to decide that factual dispute on affirmation. On the one hand, there was no reason for Mr. Nie not to inform the 3rd Defendant about these proceedings; on the other hand, it would appear that the 3rd Defendant moved immediately once he was served with the Bankruptcy Notice and did not ignore those proceedings.

16. In the light of the disputed facts, I cannot determine whether the 3rd Defendant has deliberately ignored the proceedings, such as to turn the exercise of the court's discretion against him.

17. Further, it is now established that even if there has been delay on the part of a defendant in applying to set aside a judgment, so long as he has merits, the merits of his case would transcend any delay, even if the explanation for the delay is false (Supreme Court Practice 1999 Vol. 1, §13/9/5).

Defence

18. So the true issue is whether the 3rd Defendant has any defence which has a real prospect of success? His defences can be summarised as follows:-

(1) The Loans had not been made to the 1st Defendant, but to the 2nd Defendant, and the 3rd Defendant has not been sued as guarantor for the 2nd Defendant's debts;

(2) The 3rd Defendant had not signed the Guarantee; but if it did contain his signature, he was not aware that it was a Guarantee;

(3) Even if he had signed it as a Guarantee, the Guarantee was not valid because:-

(a) it referred to an "Agreement" annexed thereto, and no agreement was annexed;

(b) if the consideration moving from the Plaintiff was the entering into of the Wholesale Finance Loan Agreement, that Agreement had been entered into in 1992, so the consideration was past;

(c) the liability under the Guarantee was only to repay each of the short term loans "the subject of the Agreement" and the 16 Short Term Loan Agreements were not such.

I shall deal with each defence in turn.

(1) Loans not made to 1st Defendant

19. It would appear to me that on the present evidence before me, the 3rd Defendant does not have a real prospect of success on this defence.

20. The Short Term Loan Agreements bore the chop of the 1st Defendant. The 3rd Defendant argues that he had left the chop of the 1st Defendant with the Plaintiff's staff for convenience, as there were many transactions requiring paperwork to be completed within a short period of time.

21. That is denied by the Plaintiff. Even if it were true, and the 1st and 2nd Defendant's respective chops were left with the Plaintiff, one would expect the company chop to be applied first, and the 3rd Defendant (or any other signatory) to check that the correct one had been applied before signing the Agreements, and not the other way around. That would only be commercial common sense because these Agreements affect the financial position of the particular company to whom the loans were to be made.

22. Further, the 3rd Defendant's allegation seems to go against the grain of his case that the 1st Defendant was no longer an authorised dealer, or at least not a dealer of any substance. If the 1st Defendant was no longer actively involved in dealership transactions, then it is difficult to see why its chop had to remain with the Plaintiff to expedite the paperwork.

23. Moreover, each Agreement was executed by the 1st Defendant as borrower, and by the 2nd Defendant as dealer agreeing to indemnify the Plaintiff for the 1st Defendant's default. If (as the 3rd Defendant alleges) the 2nd Defendant was intended to be the borrower, and (as dealer) the surety, the agreement to indemnify does not make sense because there is no point in the same person standing surety for himself. Counsel for the 3rd Defendant was unable to explain this nonsensical consequence of his case, and could only point to the 3rd Defendant's allegation on affirmation that this was the case with the 1st Defendant's loan agreements before the 2nd Defendant came onto the scene. However he was unable to exhibit any previous agreements illustrating this.

24. The 3rd Defendant relied on the fact that the funds were credited to the 2nd Defendant's account and not the 1st Defendant's. The Plaintiff's explanation was that this was because the 2nd Defendant was the dealer who was selling the taxis to the 1st Defendant, and points to documents of the 2nd Defendant sent to the Plaintiff stating the balances due "for the 1st Defendant's account". Although there are no formal documentary instructions from the 1st Defendant to the Plaintiff for the latter to pay the 2nd Defendant, clause 6 of the Short Term Loan Agreements contemplates that the money would be received by someone other than the 1st Defendant. So the fact that the money borrowed by the 1st Defendant was paid by the Plaintiff to the 2nd Defendant is perfectly consistent with the loans having been made to the 1st Defendant.

25. The fact that purported repayment was made by the 2nd Defendant does not advance the 3rd Defendant's case either. The 2nd Defendant was of course liable to the Plaintiff as surety under the Agreements.

(B) 3rd Defendant did not sign the Guarantee

26. The second defence was that the 3rd Defendant did not sign the Guarantee, or if the signature on the Guarantee was his, he says he had been asked to sign his name on a number of blank sheets and the Guarantee could have been typed on afterwards.

27. In support of this defence, the 3rd Defendant points to the fact that the date appearing on the Guarantee "15 January 1995" was a Sunday; that he did not return to Hong Kong until the early morning of that day, and that there was no reason why the Plaintiff needed to obtain his signature on a Sunday when he had been a good customer for many years.

28. The Plaintiff has exhibited a letter from Mr Arthur Yeung, the bank officer who witnessed the 3rd Defendant's signature. Mr Yeung says that he could not recall the date when the Guarantee was signed but confirms that the Guarantee had indeed been signed by the 3rd Defendant. So the Guarantee might or might not have been signed on Sunday 15 January 1995. However the evidence of a number of senior officers of the Plaintiff is that in early 1995, it was concerned that the 1st and 2nd Defendants were going to require more facilities, and instructions were given that a Guarantee should be obtained from the 3rd Defendant before facilities were increased. This considerably diminishes the strength of the 3rd Defendant's case.

29. The 3rd Defendant further argued that since the 1st Defendant was no longer an authorised dealer after the 2nd Defendant came onto the scene in 1992, it would not have been necessary for him to sign a Guarantee for the 1st Defendant. However the Plaintiff's evidence shows clearly that the 1st Defendant still received loans from the Plaintiff in 1994, albeit of lesser amounts than the 2nd Defendant.

30. The 3rd Defendant's further point was that if the Guarantee had indeed been signed in January 1995, why did the draft Deed of Settlement not contain any reference to it? There is some point in this contention which awaits explanation from the Plaintiff.

31. The Plaintiff relies on the other hand on the fact that the 3rd Defendant had signed an acknowledgment of indebtedness in July 1995 in which he offers his personal properties by way of settlement, a course of action he would not have needed to take if he had not signed the Guarantee. The 3rd Defendant's explanation is that he was the signatory of the 2nd Defendant's dishonoured cheques, and he was offering his properties in an effort to avoid criminal proceedings, which in the event did take place. This is a matter which would have to be investigated at trial.

(C) Invalidity of the Guarantee

32. The last category of defences assumes that the Guarantee had indeed been signed by the 3rd Defendant.

33. The 3rd Defendant says that the Guarantee may have been one of the blank sheets of paper that he had been asked to sign. The Plaintiff denies that the 3rd Defendant had ever been asked to sign blank sheets of paper. In my view, it would be extremely difficult for a court to be persuaded that an experienced businessman such as the 3rd Defendant would have done something as foolish as that.

34. In my view, the 3rd Defendant's best prospects of success lie with the questions surrounding the Guarantee itself. The Guarantee reads:-

"In consideration of your (the Plaintiff) at my request entering into an agreement (in terms of the document annexed hereto and signed by me for identification) ("the Agreement") with [the 1st Defendant] (hereinafter called the "Company") and agreeing to continue the arrangements contemplated thereby I [the 3rd Defendant] jointly and severally hereby

(a) guarantee to you in respect of each of the short term loan agreements ("the loan agreements") the subject of the Agreement that the borrower thereunder will make repayment of the loan or any monies due and interest thereon [etc]

(b) guarantee to you that the Company will perform and observe all the terms of the Agreement on its part to be performed or observed".

35. The problem the Plaintiff faces was that there was no document annexed to the Guarantee and the "Agreement" was not otherwise identified.

36. The Plaintiff's evidence was that the "Agreement" was the Wholesale Finance Loan Agreement signed in 1992, which the Plaintiff says would have been shown to the 3rd Defendant.

37. The 3rd Defendant's argument was first, that if that was indeed the "Agreement" referred to in the Guarantee, then the consideration moving from the Plaintiff would have been past, because the Wholesale Finance Loan Agreement had been entered into some 3 years previously. So there was no Agreement to "enter into" and no arrangements "contemplated" thereby.

38. In my view, however, irrespective of the argument that the consideration was past, there is evidence from the Plaintiff that there was additional consideration for this Guarantee, in that the Plaintiff would increase the facilities available to the 1st and 2nd Defendant companies. Such evidence of additional consideration is admissible (Pao On v Lau Yiu Long [1980] AC 614, P.C.).

39. The 3rd Defendant's second argument is, in my view, more formidable.

40. Under the Guarantee, the liability of the 3rd Defendant was confined to (a) each of the short term loan agreements "the subject of the Agreement", and (b) the performance by the 1st Defendant of the "Agreement".

41. If (as the Plaintiff says) the "Agreement" referred to in the Guarantee was the Wholesale Finance Loan Agreement, it is difficult to see how the 16 Short Term Loan Agreements were "the subject of the Wholesale Finance Loan Agreement".

42. The Wholesale Finance Loan Agreement (exhibited by the Plaintiff as "RCD-1") envisages and applies to a single loan, to be made by one or more advances on the execution of the agreement, with a single interest rate applicable thereto with a right to charge interest on overdue payments at 2% per month on a day-to-day basis (although in fact on the document, the loan amount and interest rate have been omitted). It is an agreement for a discrete loan - it does not envisage or provide for any other loan agreement to be made under it.

43. I am therefore unable to see (on the present evidence) how the Short Term Loan Agreements here could be "the subject" of the "single-loan" Wholesale Finance Loan Agreement, so as to fix the 3rd Defendant with liability under paragraph (a) of the Guarantee, even if it is assumed that the "borrower" in that paragraph can be the same entity as the 1st Defendant (which is called "the Company" in the Guarantee).

44. Paragraph (b) of the Guarantee guarantees the performance by the 1st Defendant of the "Agreement", and if the Plaintiff is right, that is the Wholesale Finance Loan Agreement. However, the 1st Defendant is not liable on the Wholesale Finance Loan Agreement because no actual loan is stated there. As noted above, the amount of loan has been left blank, as has the interest rate, and the date of the facility letter.

45. So it seems to me that on the present state of the Plaintiff's case: that the "Agreement" in the Guarantee was the Wholesale Finance Loan Agreement, the 3rd Defendant does have real prospects of success on the arguments rehearsed above.

Order

46. I would therefore grant an order in terms of paragraph 1 of the 3rd Defendant's Summons filed on 16 February 1998. As for costs, it has been the practice that where judgment has been entered regularly, a defendant who asks that judgment be set aside should pay the Plaintiff's costs in any event. The 3rd Defendant has not argued that the judgment here was irregular. I would therefore grant an order nisi that the 3rd Defendant pay the Plaintiff's costs in any event, save that he need not pay the costs of the adjourned hearing, since the hearing had to be adjourned at the Plaintiff's request in order to produce evidence of the "Agreement" referred to in the Guarantee.