BANK OF INDIA v. MINERAL INTERNATIONAL LTD AND OTHERS

HCA 1745/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1745 OF 2011

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BETWEEN

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J U D G M E N T

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1.  This is the plaintiff bank’s Order 14 summons for summary judgment against the 2^nd defendant as guarantor under a guarantee he had given in respect of banking facilities granted to the 1^st defendant ("MIL"). At the conclusion of the hearing judgment was reserved which I now give.

2.  The application is related to an appeal from Master Levy which came before this court on 11 October 2012, less than a week ago. The Master had granted summary judgment in the bank's favour against the 2^nd defendant under a guarantee he had given in respect of banking facilities granted to the fourth defendant in this case, a company which is related to MIL.

3.  It is not apparent why the two matters did not proceed in tandem so that they could come on for hearing together.  That course would have saved considerable judicial time and resources.

Background facts

4.  Be that as it may, at the outset of the hearing, Mr Leung who appeared for the bank sought leave to file the 3^rd affirmation of Nair, Janardhanan Muralidharan dated 12 October 2012.  The purpose of the affirmation was to correct a clerical error in that a wrong document had been exhibited as "NJM‑21" to Mr Nair's 1^st affirmation and to explain entries in the statement of account which is part of exhibit "NJM-37" reflecting the bank's internal entries.  The application was unopposed and leave was granted.

5.  It is common ground that the bank granted banking facilities to the MIL and its related company in the year 2000.  The initial facilities of US$1 million granted to each of MIL and its related company were doubled to US$2 million in 2002.  The bank allowed cross‑utilisation in May 2002, thus increasing the potential extent of indebtedness to US$4 million.

6.  The 2^nd defendant held 95% of the issued share capital of MIL and throughout the banking relationship was and remained a director of MIL.  In fact, according to the annual return of the MIL dated 21 June 2010, he became its sole director and remained its sole director the subsequent year.

7.  The bank's offer of banking facilities was tabled at a board meeting held on 24 May 2002 and approved.  On the same day, the 2^nd defendant executed his personal guarantee in respect of MIL’s indebtedness to the bank under the banking facilities granted.

8.  MIL began defaulting in October 2006.

9.  There is internal e-mail correspondence between the 2^nd defendant and his co‑director referring to ongoing negotiations with a potential purchaser of the plants of MIL, the 2^nd defendant stating that once the deal was finalized the intention was to settle the account balance.  This e‑mail was forwarded to the bank in May 2007.

10.  Under cover of a letter dated 25 July 2007 addressed to MIL and its related company, the bank sent a list of overdue packing credits as at 19 July 2007 in respect of each of MIL and its related company.  So far as concerned MIL, the detailed entries ("the list") read:

11.  Having received the list, the 2^nd defendant sent an e‑mail to the bank on 24 August 2007 proposing a repayment schedule covering not only the outstanding indebtedness of MIL but also that of the related company.  He requested the bank to waive interest as from September 2007 as a favour.

12.  On 28 September 2007, the 2^nd defendant asked the bank for confirmation of its acceptance of the proposal but postponing the dates by 30 days because of the delay.

13.  On the following day, the bank replied that whilst it was prepared to accept the repayment plan proposed, it was not prepared to waive interest.

14.  In an e-mail dated 24 November 2007 to the bank, the 2^nd defendant (on behalf of MIL) stated that:

"Same as I mentioned during my mail the day before yesterday that I would take possible measures to pay back the loan all by us, we just need a little more time."

15.  There is no evidence of further correspondence until late March 2009 when a further round of e‑mail exchanges took place.  On 31 March 2009, the 2^nd defendant sent an e-mail to the bank on the subject of “RE:  your outstandings with us” stating :

“I am still trying hard to organise money to pay for the company.

It has been very hard to sell operation and the few interested groups had all postponed for further negotiation.

Since you have no interest in having some shares of the operation.

I will just work hard and keep on concentrating on selling the operation to get money to pay.

Sorry for the bad news.”

16.  On 14 February 2011, the bank's solicitors sent to each of MIL and the 2^nd defendant a letter of demand to recover the outstanding principal and interest.

17.  As no repayment was made by either of them, the bank commenced this action on 14 October 2011.

18.  It entered final judgment against MIL on 22 November 2011 and, based on that judgment, it proceeded to have MIL wound up and a winding up order was made on 29 February 2012.

19.  On 8 March 2012, the bank sent the 2^nd defendant a Certificate of Indebtedness and attached a copy of the statement of account of MIL contained and kept in the bank’s books ("the statement ").

20.  The bank seeks final judgment in the principal sum was US$1,600,727.45, accrued interest of US$918,736.35 and accruing at the rate of 10.26% per annum on the principal sum from 1 October 2011 until payment, legal costs of HK$22,897.50 and costs.

The defence

21.  As in HCA 1457/2011, the substantive defence is the extent of the indebtedness.  Interest is a subsidiary issue.  Finally, on the question of costs, Mr Leung (counsel for the bank) does not seek costs on an indemnity basis.  As a result, no issue as to costs now arises.

Extent of indebtedness

22.  The bank has plainly discharged its burden in establishing a prima facie case that the packing credit loans set out in the list provided in July 2007 were made and have not been repaid.  All that is substantiated by MIL’s requests for those loans (which requests are to be found in exhibit NJM‑22 to Mr Nair's affirmation) and the correspondence between the parties referred to in §§9-15 above.

23.  Mr Wong who appeared for the 2^nd defendant relied on the statement as demonstrating the unreliability of the bank’s claim.  Given its importance to the defence of the 2^nd defendant, the entries shown on the 1^st page of exhibit “NJM‑30" are reproduced in the form of a schedule to this judgment.  Altogether, the statement records 19 loans of varying amounts.

24.  As I understand Mr Wong's case, he invited the court to consider the entries under the column headed "Balance". On 24 September 2005 one finds a negative entry of $1.996 million.  As at 27 September 2006, it becomes a negative entry of $1.8 million.  The difference between the two sums is $196,000.  Mr Wong submitted that at most the bank is entitled to final judgment for that sum and no more.

25.  I am unable to agree with Mr Wong's approach or methodology.  I am unable to discern its underlying rationale.

26.  Each loan granted was assigned a number, depending on the date and time the relevant loan was made by the bank.  The loan numbers are in chronological order.  The loans were posted between 24 September 2005 and 27 September 2006.  In respect of loans numbered 012000 and 012001 both posted on 24 September 2005, those entries represent indebtedness under credit facilities of MIL which were brought forward (or transferred) from the old computer system to the new computer system.  The value dates shown for those loans reflect the dates when they were taken out.

27.  As earlier noted, the bank's case is that the five packing credit loans identified in the list remain outstanding. Those loans are all supported by underlying documentation.  There is no evidence of any of those loans having been repaid.

28.  I have carried out the exercise of matching each of the 19 loans shown on the statement with its repayment (if any).  In that regard, Mr. Wong accepts that the bank has a right to appropriate a repayment to a particular loan where the borrower fails to do so.  Having accounted for all the credit entries shown on the statement which are attributable to the repayment of loans rather than to any "Past Due" or "ADJ OF ACC CODE” entry, while all the 14 earlier loans have been repaid, the five loans in question all of which were made on or after 24 July 2006 remain outstanding.

29.  Mr Nair has given an explanation for the "Past Due" and "ADJ OF ACC CODE" entries.  Having examined those entries as they appear on the statement closely, it is evident that these entries are neutral in the sense that they add nothing to the debit or credit of the account.  Accordingly, I am satisfied that the five loans totalling $1.8 million remained outstanding.

30.  The 3^rd page of the statement (which has not been reproduced in the schedule) deals with the period between 5 October 2007 and 12 October 2007.  It shows two credit entries attributable to loan repayments on 5 October and 12 December 2007 for the respective amounts of $159,526.41 and $39,746.14.  They represent set‑offs from MIL's margin facilities and had the effect of reducing the principal sum to US$1,600,727.45.

31.  Mr Wong also sought to rely on HSBC v Norman John Martel, unreported, CACV 54/2003, 3 June 2005 for the proposition that a guarantor may be discharged by certain types of conduct by the creditors towards the principal.  In the HSBC case, the surety was unaware of the revision of the overdraft facility between the bank and the borrower.  He did not know of the revision and did not consent to it.

32.  The 2^nd defendant's position in the present case is very different.  Not only did he hold 95% of the issued share capital, he was and remained a director of MIL at all material times and had signed all the relevant banking documentation on behalf of MIL.  Further, after MIL fell into arrears, he conducted all the negotiations with the bank and even came up with a repayment proposal.  The notion that MIL could have come to some arrangement with the bank regarding the outstanding loans without the involvement of the 2^nd defendant beggars belief.  The HSBC case is of no assistance to the 2^nd defendant.

Interest

33.  This is very much a subsidiary issue addressed only in Mr Wong's written submissions. Mr Wong relied on the principles stated in Birkett v Hayes [1982] 1 WLR 816 at 825E‑F and Claymore Services Ltd v Nautilus Properties Ltd [2007] BLR 452 at §§ 49‑60 and submitted that there has been unreasonable delay on the part of the bank in commencing proceedings such as would trigger the court's discretion to disallow interest for a period or to reduce the rate of interest.

34.  The point made is that while default began in October 2006, the bank has only provided an explanation for its inaction for the period up to 25 July 2007.  The letter of demand was only sent in March 2011.  Mr Wong submitted that there is a need for a factual enquiry as to what period of inaction would be considered by the court as unwarranted.

35.  It will be seen from §§8-15 above that as late as March 2009 the 2^nd defendant was pleading for more time to enable him to sell MIL.  That coincided with the worldwide financial crisis which was unfolding day to day.  I do not consider that the bank could be criticised for holding its hand in those circumstances, given the longstanding banking relationship.  On the facts of this case, I do not consider that the principles on which Mr Wong replies are engaged.

Costs

36.  It follows that bank is entitled to enter final judgment with a costs order in its favour.  While the summons seeks costs on an indemnity basis, Mr Leung is content with party and party costs.  In those circumstances, it is unnecessary to address Mr Wong's submissions which only arise should the court be minded to order full indemnity costs.

Conclusion

37.  In my view, the 2^nd defendant has failed to show that he has an arguable defence or that there are triable issues.

Order

38.  Accordingly, the bank is entitled to final judgment in this action against the 2^nd defendant for :

(1) the principal sum of US$1,600,727.45;

(2) interest of US$918,736.35;

(3) further interest on the principal sum at 10.26% per annum from 1 October 2011 until the date of judgment and thereafter at judgment rate until payment;

(4) costs nisi on a party to party basis to be paid by the 2^nd defendant to the bank, such costs to be taxed if not agreed.

GLG044P2-HONGKONG: Demand Statement

MINSOURCE INTERNATIONAL LTD

16/B, MAN HING COMMERCIAL BUILDING,

79-83 QUEEN’S ROAD,

CENTRAL, HONG KONG

OUR REF 021-037050 USD 1002001513-01          BRANCH – HONG KONG BRANCH AE

ACCOUNT   LOAN – DEMAND LOAN      CURRENCY   U.S. DOLLAR    DATE 23SEP06        PAGE  1