TSANG KIN CHUNG TERRY v. WONG CHUNG MANG JONAH AND ANOTHER

HCA 2381/2019

[2021] HKCFI 1033

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2381 OF 2019

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DECISION

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A.   INTRODUCTION

1.  Two related matters are before me:

(1)  An appeal from the decision of Master Jonathan Wong dated 4 January 2021 whereby he dismissed the application of the 1^st defendant to set aside a final judgment entered on 13 March 2020, for want of a notice of intention defend, for HK$8,000,000 plus interest and costs against both defendants (“the Judgment”).

(2)  The 2^nd defendant’s summons dated 21 December 2020 to set aside the Judgment.

2.  Ms Natalie So, who appears for the defendants before me but not before the Master, accepts that the Judgment was entered regularly.  Thus, the question before me is whether the defendants have a defence on the merits to the claim by the plaintiff, i.e. do the defendants have a “real prospect of success” at the trial? 

3.  As will be seen, the defences raised concern primarily the proper interpretation of an agreement made between the plaintiff (as lender), the 1^st defendant (as borrower) and the 2^nd defendant (as guarantor) dated 21 June 2019 (“the Agreement”).

B.   THE FACTS

4.  By the Agreement, the plaintiff lent HK$8,000,000 to the 1^st defendant, with interest at 1% per annum.  The 2^nd defendant, who is the wife of the 1^st defendant, was the guarantor.  The Agreement provides that the loan plus interest was to be repaid on the Maturity Date (defined to mean “the 7^th Banking Day after the second anniversary of the Drawdown Date”). The Drawdown Date was the date of the Agreement, i.e. 21 June 2019.  However, the Agreement also provides (at cl 3.3):

“Notwithstanding any other provisions in this Agreement, the Borrower shall ON DEMAND in writing of the Lender made to the Borrower and in pursuance to the terms herein contained, repay the Indebtedness or any part thereof and repayment shall be made in such manner as the Lender shall direct”.

5.  The 1^st defendant, in his evidence in support of his application to set aside the Judgment, says that the HK$8,000,000 was in fact an investment by the plaintiff in a project in Thailand.  Before me, for the purpose of the application to set aside, Ms So no longer pursues any argument on behalf of the defendants that the agreement between the parties was an investment by the plaintiff, “but reserve their rights in that regard”.

6.  Under cl 12 of the Agreement, the 2^nd defendant, as primary obligor and not as surety only, guarantees and agrees to make payment on demand of all sums due to the plaintiff.  Under cl 12.3:

“As security for repayment of the Loan and interest thereon, the Guarantor shall deliver to the Lender the following documents in connection with the 8,000 ordinary shares (‘Shares’) owned and held by the Guarantor in Star New Limited (the ‘Company’), a limited company incorporated under the laws of Hong Kong: -

(a) a sold note and instrument of transfer in respect of the Shares, duly completed and executed by the Guarantor in advance with the name of transferee left blank;

(b) a directors’ written resolution of the Company: -

(i) approving the transfer of the Shares by the Guarantor to the Lender or his nominee(s), authorizing the registration by the Company of such transfer as aforesaid subject to stamping and of the sealing and the issue of share certificates to or as directed by the Lender; and

(ii) appointing such person(s) as the Lender may nominate to be the additional directors of the Company.

The sole note and instrument of transfer shall take effect (in favour of the Lender) the day immediately after the Maturity Date if the Borrower and/or the Guarantor fails to repay the Loan and interest thereon in full to the Lender on the Maturity Date, and for that purpose the Guarantor hereby authorises the Lender to insert a date to the sold note and instrument of transfer for effecting the transfer of Shares to the Lender or his nominee.

For the purpose of determining the actual value of the Shares transferred by the Guarantor above, an independent valuer agreed by all the parties of this Agreement will be appointed to do the valuation, or if no such agreement is reached between the parties, the independent valuer will be appointed by any council member of the Hong Kong Institute of Certified Public Accounts [sic]. All parties hereby agree and confirm that the decision of the above valuer appointed shall be final and conclusive”.

7.  Further, cl 12.6 of the Agreement provides:

“The Guarantor waive any rights which the Guarantor may have to require the Lender first to proceed against or enforce any guarantee or security of, or claim payment from, the Borrower before claiming from the Guarantor”.

8.  The 2^nd defendant duly delivered the documents provided for by cl 12.3.

9.  Star New Limited (“SNL”) was the operator of a kindergarten.  As at the date of the Agreement, the wife of the plaintiff held 2,000 of the 10,000 issued shares in SNL (having purchased the same from the 2^nd defendant in April 2018), while the remaining 8,000 shares (“the Shares”) were held by the 2^nd defendant.  Thus, the 2^nd defendant offered her entire interest in SNL as security for the loan under the Agreement, and if the Shares were then transferred to the plaintiff pursuant to cl 12.3, the plaintiff and his wife would become the sole owners of SNL.

10.  By letter dated 27 November 2019 from his solicitors, the plaintiff demanded early repayment.  No repayment was made.

11.  The plaintiff did not take steps to register the Shares.  Instead, by a writ of summons dated 23 December 2019, he sued the defendants for HK$8,000,000 plus interest and costs.  No notice of intention to defend having been filed, the Judgment was entered on 13 March 2020.

12.  By a letter dated 21 September 2020, two weeks after the 1^st defendant applied to set aside the Judgment, solicitors for the plaintiff wrote to the 2^nd defendant as follows:

“We refer to Clause 12.3 of the Loan Agreement. We are instructed to inform you that ever since the commencement of the action, our client has no intention to enforce the security (‘Security’) referred to in Clause 12.3 of the Loan Agreement.

We are instructed to further inform and hereby do that, our client shall give up and/or not enforce the Security, and we accordingly return to you the original signed sold note and instrument of transfer (both in blank) in respect of your 8,000 ordinary shares in Star New Limited, and the related Board Written Resolutions (undated) (all in duplicate)”.

C.   DISCUSSION

13.  The submissions of Ms So for the defendants can be summarised as follows:

(1)  Ms So acknowledges that ordinarily a creditor can choose to enforce whichever remedy is open to him.[1] That is, on default, the creditor does not have to resort to the security, but can sue the debtor (and/or the guarantor) directly.  However, she submits that on a proper interpretation of cl 12.3, this case is an exception:

“P is required to have recourse first to the security provided by Ds in the form of 8,000 ordinary shares in Star New Limited (“SNL”) before he can bring proceedings against either D1 or D2.  Alternatively, there is an implied term to such effect”.

(2)  Ms So emphasises the mandatory terms used in cl 12.3.  Because of the language used, the enforcement of the security is automatic if neither defendant repays on Maturity Date, with mandatory provisions on valuation, etc, and the plaintiff does not even need to elect to do so.

(3)  Where the Agreement runs its course to the Maturity Date, cl 12.3 provides for a clear duty on the plaintiff to first realise his security before anything else.  The plaintiff is therefore not entitled to resort to all remedies at his disposal but has to first (passively) realise the security in the form of the Shares.

(4)  Because cl 12.3 provides for the said situation at Maturity Date, there is at least a case with real prospect of success that there is an implied term that the plaintiff has to resort to the Shares first even where the loan becomes due before the Maturity Date, when the plaintiff demands early repayment.  Otherwise, there will be a significant loophole so that the plaintiff can circumvent easily the obligation to go to the security first.  The obvious intention of the parties must be that the same situation applies when the loan becomes repayable before the Maturity Date.  This is particularly so in the factual matrix that at least in June 2019 the plaintiff was interested in co-operation/investment in the 1^st defendant’s business and his wife had in fact purchased 20% of SNL, and the plaintiff has admitted that he was interested in education-related businesses.  With the Shares, the plaintiff and his wife would then be able to get their hands on SNL entirely.

(5)  Thus, by failing to recourse to the Shares, arguably (with real prospect of success for the defendants) the plaintiff is in breach of cl 12.3, and he cannot rely on his own wrong to pursue the defendants, citing Kensland Realty Ltd v Whale View Investment Ltd[2].

(6)  Further, in respect of the 2^nd defendant as guarantor, such failure by the plaintiff is “unreasonably unfair” and tantamount to bad faith.  In Bank of India v Trans Continental Commodity Merchants Ltd[3], Robert Goff LJ (as he then was, and with whom Stephenson and O’Connor LJJ agreed), in dismissing an appeal from a judgment[4] of Bingham J (as he then was), said:

“The learned Judge expressed his view of the law in the following passage in his judgment, at p. 515 of the report:-

… But as a matter of principle I cannot accept Mr. Murray’s submission that a surety is discharged id a creditor acts towards the principal debtor in a manner which is irregular and prejudicial to the interests of the surety. Leaving aside what may be the special case of fidelity guarantees, I consider the true principle to be that while a surety is discharged if the creditor acts in bad faith towards him or is guilty of concealment amounting to misrepresentation or causes or connives at the default by the principal debtor in respect of which the guarantee is given or varies the terms of the contract between him and the principal debtor in a way which could prejudice the interests of the surety, other conduct on the part of the creditor, not having these features, even if irregular, and even if prejudicial to the interests of the surety in a general sense, does not discharge the surety.

With that statement of principle I find myself in agreement, subject to the comment that I would perhaps have preferred to state it the other way round, that is to say that 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, though there are particular circumstances in which the surety may be discharged, of which instances specified by the learned Judge provide certainly the most significant, and possibly the only, examples.  I say that simply because I do not wish to be thought to be shutting the door upon any further development of the law in this field by rigidly confining the circumstances in which a surety may be discharged to the specified instances, though I freely recognize that I am unaware at present of any others.  But that merely irregular conduct on the part of the creditor, even if prejudicial to the interests of the surety, does not discharge the surety, there can in my judgment be no doubt.”

(7)  On the “bad faith” argument, Ms So argues that there is a basis to infer the same on the part of the plaintiff, in choosing to demand repayment before the Maturity Date so as to get out of what he perceived to be a “bad deal” because he (without evidential basis) thought that the Shares did not have much value.  She also questions why the plaintiff did not return the relevant security documents until 21 September 2020.

(8)  Regarding cl 12.6, it is argued that that relates to inter alia security provided by the 1^st defendant, and not by the 2^nd defendant, and is thus inapplicable to the Shares.

14.  In response, Ms Alison Choy, for the plaintiff, submits as follows:

(1)  There is nothing in the Agreement which amounts an exception to the ordinary rule that the creditor can choose which of the several remedies at his disposal to pursue.

(2)  Cl 3.3 gives the express right to the plaintiff to demand repayment which is not impeded by the need to exercise the option of share transfer.

(3)  Cl 12.6 is also relied upon.

(4)  The above are all in line with the trite principle that the plaintiff could elect to seek repayment from either or both of the defendants or to enforce the security.

(5)  As to cl 12.3, Ms Choy submits that the phrase “the sold note and instrument of transfer shall take effect (in favour of the Lender) the day immediately after the Maturity Date” does not change the parties’ intention.  Specifically, the words “in favour of the Lender” indicate that this provision can be invoked by the plaintiff against the 2^nd defendant.  Under cl 12.3, the 2^nd defendant has no choice but to allow the plaintiff to execute the share documents if the plaintiff elects to enforce the security.  The mandatory language only means that the 2^nd defendant has to give up the security should the plaintiff elect to enforce it.

(6)  The implied term suggested cannot have arisen as it would be contrary to an express term, namely cl 12.6. Such an implied term is also not reasonable, equitable, necessary to give business efficacy, or so obvious that it goes without saying.

15.  In my judgment, the construction of cl 12.3 contended for by Ms So has a real prospect of success at the trial.  The wording used is strict and mandatory, to the extent that not only that it prescribes that on default at the Maturity Date the transfer of the Shares “shall” take place, it also prescribes the time as to when that is to happen, namely the day immediately after the Maturity Date.  This goes again an interpretation that the plaintiff has a choice of whether to take advantage of the Shares as security and when to happen.  The provision on valuation also supports this interpretation.

16.  I also agree with Ms So on the effect of cl 12.6 ([13(8)]) above.

17.  Referring to the words “in favour of the Lender”, Ms Choy argues that cl 12.3 still allows the plaintiff a choice. However, given the words “the day immediately after the Maturity Date”, it is difficult to see how, for example, the plaintiff can make the choice to enforce the security, say, three days after the Maturity Date.  Such an interpretation would render those words meaningless, nor can those words be interpreted to mean that the plaintiff does have a choice which he must exercise (if he so wishes) on the day immediately after the Maturity Date.  In my judgment, the words “in favour of the Lender” are not intended to give the plaintiff a choice but to describe the effect of the automatic enforcement of the security.

18.  Ms Choy also says that if it was intended that the plaintiff would not have the usual choice of remedy available to a creditor, clear words would have been used.  However, I do find the drafting of cl 12.3 to be clear enough to achieve this effect.

19.  Nor does cl 3.3 assist the plaintiff in this respect: that goes to early payment, and not what should happen on default.

20.  I reject Ms Choy’s argument that as a matter of interpretation, the plaintiff would still have a choice under cl 12.3 whether to enforce the security.

21.  But, as Ms So correctly accepts, cl 12.3 on its terms only applies to the scenario where there is no repayment on the Maturity Date, but not when there has been a demand for early repayment, as has happened here.  She is therefore constrained to argue that there is an implied term to that effect.

22.  The question of implication of a term has to be considered, inter alia, in the light of the factual matrix and commercial common sense, although the test remains one of necessity.  In giving the advice of the Judicial Committee of the Privy Council, Lord Hughes[5] said in Ali v Petroleum Co of Trinidad and Tobago[6] (adopted by the Court of Appeal in Lo Yuk Sui v Fubon Bank (Hong Kong) Ltd formerly known as International Bank of Asia Ltd[7]):

“It is not necessary here to rehearse the extensive learning on when the court may properly imply a term into a contract, for it has only recently authoritatively been restated by the Supreme Court in Marks and Spencer plc v BNP Paribas Securities Services Trust Co (Jersey) Ltd [2016] AC 742. It is enough to reiterate that the process of implying a term into the contract must not become the re-writing of the contract in a way which the court believes to be reasonable, or which the court prefers to the agreement which the parties have negotiated. A term is to be implied only if it is necessary to make the contract work, and this it may be if (i) it is so obvious that it goes without saying (and the parties, although they did not, ex hypothesi, apply their minds to the point, would have rounded on the notional officious bystander to say, and with one voice, ‘Oh, of course’) and/or (ii) it is necessary to give the contract business efficacy. Usually the outcome of either approach will be the same. The concept of necessity must not be watered down. Necessity is not established by showing that the contract would be improved by the addition. The fairness or equity of a suggested implied term is an essential but not a sufficient pre-condition for inclusion. And if there is an express term in the contract which is inconsistent with the proposed implied term, the latter cannot, by definition, meet these tests, since the parties have demonstrated that it is not their agreement”.

23.  In my judgment, the implication of such an implied term similar to cl 12.3 in the scenario of a demand for early repayment does not have a real prospect of success at the trial.  The Agreement expressly provides for the automatic enforcement of the security for default at Maturity Date but not for default after a demand for early repayment.  The consideration of implication of a term has to take into account the express term in fact used, and since the express term provides for automatic enforcement in one scenario only it is difficult to say that such enforcement should also apply in another scenario which the Agreement also contemplates may happen but without applying the automatic enforcement provision thereto.  To this extent, one may also say that to imply such a term is inconsistent with an express term, namely cl 12.3.

24.  While this may be a “loophole” as suggested by Ms So, to imply the term as she suggests is to re-write the Agreement to plug the same so as to make it better, but not to make an otherwise unworkable contract work.  Without the suggested implied term, on default after a demand for early repayment, the plaintiff simply would have the usual choices of a creditor in choosing his remedy. The test of necessity is not met.

25.  Nor, in my judgment, would the officious bystander, knowing cl 12.3 which only applies expressly on default at Maturity Date, say that the implied term to be so obvious as to be going without saying.

26.  Ms So refers to the factual matrix that the plaintiff was obviously interested in investing in education at the time. However, with respect, even assuming that to be the case, I do not see how this could assist in the implication of the suggested term in the light of the necessity requirement, which, as Lord Hughes said, must not be “watered down”.

27.  Without an implied term which can be said to have been breached by the plaintiff in seeking to sue the defendants. I do not see how the bad faith argument can get off the ground at all.  Ms So also complains that the plaintiff kept the share documents for nine months after the issue of the proceedings before returning the same.  I do not see how that can amount to “bad faith”, which to me involves an element of dishonesty, as a ground to discharge the surety as explained by Bingham J and approved by Robert Goff LJ, as mere “irregular” conduct is not sufficient.  Ms So suggests that the 2^nd defendant might otherwise have sold the Shares in the meantime but if there was such an intention it would be difficult to see why she did not even ask for the documents back after the Judgment was entered.

28.  The appeal by the 1^st defendant is dismissed with costs against him, and the 2^nd defendant’s summons to set aside the Judgment is also dismissed with costs against her, to be taxed if not agreed.

29.  I thank counsel for their assistance.