DAO HENG BANK LTD v. LAM YING BOR INVESMENT CO LTD AND ANOTHER

1984, No. 2773

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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JUDGMENT

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1. This is an action brought by a bank against a borrower and a guarantor. The Plaintiff, which I shall call the bank, is Dao Heng Bank Limited. The first Defendant, which I shall call the borrower, is Lam Ying Bor Investment Company Limited. The second Defendant, whom I shall call the guarantor, is Lo Bor Kit, Felix. He was at all material times a director of the borrower.

2. The bank lent $25 million to the borrower, who created a mortgage, in favour of the bank, of two properties. The arrangement was that the borrower would pay interest to the bank at stated intervals and that, after a grace period, he would repay the principal by instalments. The mortgage provided that if the borrower defaulted on any payment, the bank could, if it chose, by a declaration communicated to the borrower, cause the whole of the principal and other moneys due to the bang to become payable immediately. There was also provision for the bank, in the event of default, to enter upon, let or sell the mortgaged properties.

3. It is common ground that the borrower defaulted on the payment of interest which fell due. The bank alleges that it has taken steps which have rendered the whole of the principal immediately payable. According to paragraph 7(i) of the Re-re-amended Statement of Claim, the borrower was, as at the 11th March 19$4 indebted to the bank to the extent of the $25 million principal and $5,044,073.88 by way of interest. When I refer to dollars I am, of course, referring to Hong Kong dollars. The Plaintiff's claim against the borrower is for $30,044,073.33 (the sum of the above two figures) plus interest thereon from the 11th March 1984 until judgment or payment, as well as for possession of the mortgaged properties.

4. The borrower's position is that while interest was and is admittedly owing and the bank would have been entitled to take steps to render the principal immediately payable, it has failed so to do.

5. The guarantor signed a letter of guarantee in favour o?ê the bank, which claims against him under that guarantee the principal sum of $25 million, with interest thereon at 15 per annum from the 16th March 1934. The guarantor's position is that the whole of the principal is not immediately payable and, even if it is, the bank cannot succeed against him because there was no valid demand made by the bank to him prior to the issue of the writ. The bank alleges that there was a valid demand, in a letter.

6. There are issues, which at the request of the parties I shall leave aside for the time being, as to the quantum of interest payable by the borrower.

7. So far as the facts of the case are concerned, there is very little dispute. I shall deal with the disputed facts before turning to the legal arguments.

8. The bank alleges that it effected delivery of two letters upon which it seeks to rely, upon the borrower, who does not admit receiving the letters and has put the bank to proof. I heard evidence on this matter from Mr. Francis KO See Kit, a manager at the head office of the bank. He produced a document, Exhibit P1, of which a copy appears at pare 155 of the agreed bundle. According to Mr. Ko, the document is a photocopy of a carbon copy of the text of a letter dated June 4 1983, addressed to the borrower. The original would have had a printed letterhead showing that it came from Mr. David Kiang, the General Manager of the bank and it would have been signed by Mr. Kiang.

9. Mr. Ko also produced, (Exhibit P2), a document which, he said, was a photocopy of a carbon copy of a letter signed by Mr. Clarence CHEUNG, a manager in the Corporate Banking Department of the bank. The letter was addressed to the guarantor in his capacity as a director of the borrower. It was dated 21st November 1983.

10. According to the witness, the bank's normal procedure is that letters are drafted, typed and sent out by hand or by mail. Finding the two exhibits in the bank's file, he would expect the original letters to have been sent to the borrower. According to the witness, the address on each letter was that to which most of the correspondence (between the bank and the borrower) was sent.

11. Mr. Ko was not cross-examined. There was no evidence at all of posting or delivery of the letters.

12. Mr. Faulkner submitted that posting and delivery could be inferred from Mr. Ko's evidence. He also relied on clause 23 of the mortgage made between the bank and the borrower and dated the 29th July 1932.

13. Clause 23 is headed "NOTICES AND DEMANDS". The first part of the clause reads:

14. Mr. Faulkner contended that the letters in question came within the description of "notice demand or certificate". There was no formal evidence as to the address of the registered office of the 1st Defendant, but the mortgage stated. the registered office to be at an address other than that shown on the two copy letters. Mr. Faulkner relied on Mr. Ko's unchallenged evidence that most correspondence went to the address shown on the letters, in order to establish that it was "such other address as may from time to time be notified by the Borrower to the Lender or vice versa. ". There was no evidence that the borrower had ever notified the bank of any address for correspondence other than its registered office. Moreover, there was no evidence that any letter sent to the address shown on the letters had ever been acknowledged. Mr. Faulkner argued that the effect of the wording of clause 23.01 was that the two letters in question were deemed to have been delivered, so that a burden fell upon the borrower to prove the contrary.

15. Mr. Bunting for the borrower, however, submitted that clause 23 must be read as a whole. Clause 23.02 reads:

16. I understand Mr. Bunting's argument to be that the terms of 23.02 made it clear that the parties contemplated that some evidence of delivery or of despatch would be required. I agree.

17. The authenticity of the two copy documents was admitted by Mr. Bunting at the hearing, I am not satisfied on the evidence before me that the two letters in question had been despatched by any means to the address shown on them and I do not accept the suggestion that they are deemed to. have been delivered to the address which they bore. In the circumstances it is unnecessary for me to speculate upon the legal effect of delivery of those letters.

18. That disposes of the factual issues. I now turn to a consideration of the undisputed facts and the issues of law relating thereto which I am called upon to decide.

19. On the 20th July 1982 the bank wrote to the borrower a "facility letter" marked for the attention of the guarantor in his capacity as a director of the let Defendant. The letter advised that a term loan facility for $25 million had been made available to the borrower on certain terms as to, inter alia, repayment; interest and security. There was to be a guarantor "to the extent of HK$25,COO, COO, 00. That guarantor was the guarantor in this case. It is clear from a copy of that letter at pages 5i and 52 of the agreed bundle that it was signed by a director of the borrower and sent back to the bank. The signature is in Chinese and has not been translated but there is no difficulty because the guarantor admits that, by the said facility letter, he agreed to guarantee the loan to the extent of HK$25,000,000.00 T therefore take it that the signature is his.

20. As to security, the letter provided for a first legal mortgage over two properties, namely 151 Waterloo Road, Kowloon Tong and "C/F1., 1/F1., 2/F1., Sanpokong Mansion, 84-86 Choi Hung Road, Kowloon (Ying Wah Theatre)".

21. On the 26th July 1982 the mortgage provided for in the letter of the 20th July was sealed with the common seal of the borrower and signed by two of its directors, namely the guarantor and LO May Chun. However, the mortgage was not dated until the 29th July 1986, after a preexisting mortgage had been cleared off with part of the money lent by the bank.

22. The guarantor, on the 27th July 1986, signed a letter of guarantee, a copy of which appears at pages 65 to 69 inclusive of the agreed bundle.

23. The whole of the $25,00,000.00 dollars agreed to be advanced was drawn by the borrower on the 26th July 1982.

24. The terms for repayment of principal and interest contained in the mortgage were as follows:

Principal

 

The sum of $25,000,000.00 was to be repaid by 20 instalments of $1,250,000.00, such payments to be made every three months, starting after a "grace period" of 21 months after the date of the first "drawdown" of the loan (i.e. after the 26th July 1982).

Interest

 

The borrower would pay interest on the loan at three-monthly intervals, the first payment to be made three months after the first "drawdown". "

 

The claim by the bank against the borrower for interest.

 

25. There is a dispute over the rate and the amount of interest. The parties have asked for consideration of that question to be postponed for the time being.

26. It is common ground that the mortgage superseded the letter of the 20th July 1982.

27. In the Re-re-amended Statement of Claim, paragraph 6, the bank averred that the borrower had failed and/or refused to pay, (inter alia), the interest on the loan. The total arrears of interest as at the 11th March 1904 were shown in paragraph 7(i) as HK$5,044,073.88. In their reamended defence the borrower and. guarantor denied paragraphs 6 and 7(i) of the re-reamended Statement of Claim but they do admit that neither of them has paid any sum to the bank following the admitted receipt of certain letters of demand dated 16th March 1934 to which I shall later refer.

28. Mr, Ko said in his unchallenged evidence that he had inspected the account of his bank with the borrower and that since the advance was made in 1982, payments amounting to HK$1.3 million, which he supposed to be in respect of interest, had been made by the 1st Defendant. No other sums had been received.

29. Mr. Bunting admitted in court, on behalf of both defendants, that some accrued interest was due to the bank from the borrower, and that there had been an "Event of Default".

30. Clause 1.01(d) of the mortgage provides that the term "Event of Default" means "any one of the events of default mentioned in clause ...., hereof". The parties did not bother to fill in the blank space but clause 13.01 lists the events which should be events of default. The first one is listed in sub-paragraph (i) as follows :

"13.01(i) if the borrower shall fail to pay any principal, interest or any other sum payable hereunder on the date on which the same is due and payable hereunder, or in the case of any sum expressed to be payable on demand, forthwith upon any such demand for the payment thereof being made. "

31. Clause 14.01 of the mortgage provides that "If any Event of Default shall have occurred then it shall be lawful for the lender at any time thereafter without any consent on the part of the Borrower or of any person to: .... " and there follow provisions for entry upon the mortgaged property, receiving the rents and profits, letting and sale.

32. One of the prayers in the re-reamended Statement of Claim is for "Possession of the said mortgaged premises."

33. If before the issue of the writ an "Event of Default" had occurred, then according to the clear terms of clause 14.01 of the mortgage, the bank was and is entitled to an order for possession. Such an Event of default, in the form of failure to pay interest on the due date, is admitted. Mr. Bunting, however, submitted that no order for possession can be made, if the bank fails in its claim for the principal sum, until there is a money judgment against the borrower in respect of the claim for interest. He did, however, explain that he meant that the amount of interest due must be ascertained before the order for possession can be made. I disagree. The right to possession under clause 14 arises as soon as there is an Event of Default and does not depend upon the making of an order for the payment of a specified sum of money.

34. I hold that, an event of default being admitted in respect of interest, the bank is entitled to an immediate order for possession of the mortgaged properties, whether or not the bank succeeds in its claim for payment of the principal sum.

35. I hold also that the bank is entitled to judgment against the borrower for unpaid interest, to be assessed.

The Claim b the bank for repayment by the borrower of the principal sum.

36. I now turn to that which was treated. by the parties as the main issue in the proceedings. It relates to the principal sum of $25 million.

37. Clause 13.02 of the mortgage provides, (so far as is material), that "The Borrower shall notify the Lender forthwith in writing of any occurrence of an Event of Default ....".

38. Clause 13.03 goes on to provide (I quote the material part) that "The Lender may at any time after the happening- of an Event of Default (whether or not any notice pursuant to Clause 13.02 shall have been given by the Borrower), unless and until that Event of Default and any others shall have been fully remedied to the Lender, by notice in writing to the Borrower declare that the Loan ..... " (etc) "have become immediately clue and payable". The purpose of notice under clause 13.02 is clearly to give the borrower a chance to pay up before action is taken under clause 13.03.

39. The bank claims that it has given effective notice under clause 13.03, (that notice clearly having effect, according to 13.03, whether or not prior notice of the occurrence of an Event of Default had been given under 13.02). Three documents are relied upon as each constituting an effective notice. I shall deal with each in turn.

1. The Letter dated 27th October 1983

40. A copy of the letter in question is to be found at pave 179 of the agreed bundle. Mr. Bunting for both defendants admitted that the letter, dated the 27th October 1983, was received by the borrower. It was addressed to the borrower and marked for the attention of the guarantor, and signed "Clarence Cheng, Manager, Corporate Banking Department". Theletterhead is that of the bank. The material part of the letter reads as follows:

41. That letter clearly contains, in its reference to unpaid interest, the notice of an Event of Default provided for in clause 13.02. Can it be regarded, however, as notice for the purposes of clause 13.03 that the loan has become immediately due and payable? In my judgment, it cannot. It might be argued that the statement that the loan has been rolled over implies that the sum lent has become due and payable, hence the need to roll it over. If, on that view, the letter was notice that the loan had become immediately due and payable, then the legal effect of that letter would be that the loan thereupon became immediately due and payable. Yet the letter was clearly saying to the borrower that the loan was not then immediately due and payable.

42. The purpose of clause 13.03 is to enable the bank, if it so chooses, to render the whole loan immediately due and payable. The letter informs the borrower that the loan is to continue for three months. It would be contrary to commonsense to hold that, by informing the borrower that it was rolling over the 1oan for three months, the bank was rendering the loan immediately due and payable. I am not prepared so to hold.

2. The Letter dated 16th March 1994 to the 1st Defendant

43. This is a letter written by the bank's then solicitors to the borrower. After referring to the mortgage and the two mortgaged properties, it reads:

"We are instructed to demand from you, which we hereby do, for immediate payment of all the money advanced by our client to you under the said mortgage totalling as at the 11th March 1984 HK$30,044,073.88 together with all the interest thereon accrued up to the date of such repayment. The said sum of HK$30,044,073.88 is computed as follows:

Notice is hereby given that if you fail to make the said repayment to our client in full as demanded herein within the next 30 days from the date hereof, our client will upon the expiration of the 30 days exercise its right as conferred upon it under the said mortgage which includes putting up the said properties for sale in the manner as stipulated therein without any further notice to you and without prejudice to any other of our client's rights against you for damages and/or remedies".

44. The letter does not say "we hereby declare under clause 13.03 of the mortgage that the loan and all interest and other sums payable hereunder or secured under the mortgage have become immediately due and payable. " Is it, nevertheless, an effective notice under clause 13.03 so as to render principal, interest and all other sums payable or secured, immediately due and payable? I shall now deal with the arguments advanced by counsel, on this question. It may be helpful to proceed by stages.

                (a)      Is a demand for payment a declaration for the purpose of clause 13?

45. Mr. Faulkner for the bank submitted that, on a sensible commercial view, the letter of the 16th March was a declaration in that it brought it home to the borrower that the full amount of the loan as well as interest was clue and owing. I took him to mean immediately payable also.

46. By way of analogy Mr, Faulkner cited the case of The Queen v The Vestry of St Mary, Islington (1890) QB 523. In that case the vestry was under a statutory duty under S.18 of the Burial Act 1355 to repay to the churchwardens certain costs and expenses "upon the certificate of the burial board or churchwardens". It was held that a letter or precept written by a churchwarden and stating the sum required was a sufficient certificate within the meaning of the section.

47. In that case, Pollock B said (at p. 526)

                "Now,I am inclined to agree with the Attorney General that, in construing the word "certificate" we ought to take it in a reasonable sense, giving consideration to the facts which had already happened and which were known to both parties". Both Pollock B., and A. L. Smith J. expressly took account of the fact that similar documents had in the past been honoured by the vestry. No such previous course of dealing exists in the present case, but in construing the words of clause 13,03 I feel it proper to take them "in a reasonable sense, giving consideration to the facts which had already happened."

48. When the borrower received the solicitor's letter dated the 16th March 1984 it was well aware of the fact that it was in default, for it had received the letter dated 27th October 1983 stating that there was unpaid interest as at the 26th October amounting to HK$3,095,329.46.

That letter of the 27th October had contained the warning:

 

"Please clean up this sum soonest, otherwise, we would be forced to take more drastic actions".

 

49. The borrower, of course, knew the terms of the mortgage and. was aware that, since it was in default of payment of interest, the bank was entitled, if it chose so to do, to call in the whole of the loan and interest and any other sums which it was entitled to claim under the mortgage.

The letter of the 16th March contained an unequivocal demand:

"We are instructed to demand from you, which we hereby do, for immediate repayment of all the money advanced by our client to you under the said mortgage ..... together with all the interest thereon accrued up to the date of such repayment".

50. That demand could have left the borrower in no doubt whatever that the bank had decided to treat the entire loan as immediately payable. Mr. Bunting argued that a demand presupposes an existing obligation and cannot therefore constitute a clause 13 notice which creates an obligation. In my judgment, a declaration that the whole sum is immediately due and payable is implicit in such a demand, which thus creates an obligation to make immediate payment. No further demand is necessary.

51. In Reliance Car Facilities Ld. v Roding Motors [1952] QB 844 the Court of Appeal in England considered the case of a hire purchase agreement which provided that if the hirer "made default in any .... payment .... the owner shall have the right .... to declare the hiring terminated and to retake possession. " It held that, on the terms of the hire purchase agreement, in order to terminate it, there had to be a declaration by the finance company communicated to the hirers, or, alternatively, an unequivocal act amounting to such a declaration to the hirer, Denning L. J., as he then was, described the retaking of possession as such an unequivocal act.

52. I am not sure that the example was happily chosen, for it is possible to envisage a retaking of possession without the knowledge of the hirer. I respectfully agree, however, with the statement of principle. Whilst the letter of the 16th March 1984 to the borrower was not expressed to be a declaration, it was an unequivocal act communicating to the borrower the bank's decision to claim immediate payment of the whole of the moneys due. Such communication was the object o?ê the exercise. It was at the same time not only a demand but also a declaration for the purposes of clause 13.

53. The letter, however, does not simply make a general demand. It specifies the amount claimed and states the principal to be $29,658,185.20. The amount of the loan was $25 million. This leads to the next question.

                (b) Is a declaration under clause 13 valid notwithstanding that it mis-states the amount of principal due?

54. Mr. Faulkner's submission was that it was not necessary under the terms of the mortgage to specify any sum. Further, if the bank chose to specify a sum and mis-stated it, the error would not vitiate an otherwise valid notice. The authorities cited to me on the question were all one way, in favour of the bank.

55. In O'Day v Commercial Bank of Australia Ltd (1933) 50 CLR 200 the High Court of Australia dealt with the question whether a demand made by a bank upon its debtor was bad because the precise amount due and demanded was not specified. The demand in question simply stated that the bank "demands payment of all principal interest and other moneys owing" by the company to the bank. It was held that the demand was valid. Starke J., delivering the leading judgment of the court, said, at p.216:

"But there is nothing in the debenture, or in the nature of the case, which suggests that the demand in writing should specifically set forth the sum demanded. The demand is for the purpose of bringing home to the company that the Bank is demanding its money, and that is sufficiently indicated by claiming all principal, interest and other moneys owing to it. "

56. In Bunhury Foods Pty Ltd v National Bank of Australasia Ltd (1984) 54 ALJ 199, the High Court of Australia in a joint judgment said (at p. 204):

"It is of some materiality to note that it is not essential to the validity of a notice calling up a debt that it correctly states the amount of the debt. Even a notice given to the mortgager by a mortgagee as a condition precedent of a power of sale is not rendered invalid because it demands payment of more than is due. "

57. In Bank of Baroda v Panessar and others (Times Law Report, 10 July 1986) a bank demanded "all moneys due to us" under the powers contained in a debenture mortgage. The defendants alleged that the demand was invalid since it did not specify the amount of money due. Lawton J, expressing agreement with the reasoning in the Bunbury case (supra) held that the demand was valid He observed that if the debtor was in a position to pay off the sum demanded and wished to know the precise sum, he could communicate with the creditor and ask him what sum he was expecting to be paid.

58. Mr. Bunting pointed out that if clause 13 is brought into operation, the effect is to transmute an obligation to repay a loan by instalments into an obligation to pay the entire balance of the loan immediately. That, according to Mr. Bunting, is akin to a penalty and therefore the wording of the clause must be strictly applied. There was no room, he said., for a "loose, purposive, sloppy construction. " If the bank was to obtain its rights, it must comply strictly with the requirements of the clause. He did concede, however, that no particular form of wordsmust be used. Nevertheless he insisted that cases relating to demands had no application where the existence of a declaration was being considered.

59. I find that by the letter dated 27th October 1983 the borrower had clear notice of an event of default (a matter in any case within its own knowledge). The letter dated 16th March 1994 met the requirements of Clause 13.03 and had the effect of rendering the whole of the principal of $25 million clue and payable. I find on the evidence that no part of that sum of $25 million has been paid. The bank is entitled to judgment for the 925 million on the basis of the letter of 16th MarCh.

3. The Writf

60. The writ in this case was issued on the 26th April 1984. An acknosoledgement of service dated the 9th May 1984 was filed on that date by the solicitors then acting for both the borrower and the guarantor.

61. Mr. Faulkner submitted that, if all else failed, the writ itself was a declaration sufficient to satisfy the requirements of clause 13,03 and thus to render all sums payable under or secured by the mortgage immediately due and payable. Inherent in his argument is the proposition that the service of a writ can create the' cause of action upon which the writ is founded. Mr. Bunting described the submission as the apogee of the forensic ingenuity employed on behalf of the Plaintiff.

62. The first decision cited by Mr. Faulkner in support of his argument is that in the case of N. Joachimson (a Firm Name) v. Swiss Bank Corporation [1921] 7 KB 110. That was a case where the question arose whether a current account customer of a bank, had a cause of action against the bank for a sum of money with effect from the date he paid it in, or whether a demand for that sum was-necessary before a cause of action arose. The question was considered in the light of the the possibility that the Statute of Limitations might apply. It was held by the Court of Appeal in England that as between banker and customer, no cause of action accrued to the customer until he had made a demand.

63. On the face of them, the above remarks appear to support Mr. Faulkner's argument.

Mr. Bunting, pointing out that the remarks relating to a writ were made obiter, submitted that they had never been followed and were inherently fallacious. He referred to a case cited by Mr. Faulkner, Esso Petroleum Co. Ltd v Alstonbridge Properties Ltd and others [1975] 3 All ER 358, where Walton J said in his judgment (at page 367):

"My difficulty is that the demand in the present case is a demand which of its own intrinsic nature changes the nature of the liability; it turns a liability to pay by instalments into a liability to pay the whole at once. Under these circumstances, in my judgment, even as against a principal debtor, a demand antecedent to the issue of proceedings is a necessary prerequisite to the whole cause of action. I would put it this way; that where the pre-existing obligation is to pay the debt by instalments, the demand that it be paid in one lump sum is an act which radically changes the nature of the debtor's obligation, and so is an essential ingredient of any cause of action to recover the lump sum. I think the case is precisely equivalent to the type of case envisaged by Scrutton L. J. in Bradford Old Bank Ltd v Sutcliffe (1918) 2 KB 833 at 348, where he said "But it is otherwise where the debt is not present, but to accrue ... " i.e. in such cases a demand is requisite".

64. If I understood him aright, Mr. Bunting, relying on the above passage was saying that the writ in a case such as the present one must be preceded by a demand. There was no evidence of an antecedent demand, so that according to Mr. Bunting, Mr. Faulkner must be in error in relying on the writ. That is not what I understand the passage to mean. It means that where a debt is payable by instalments and some act is required (in that case a demand) to render the whole sum immediately payable, the act must be done before the issue of the writ because the act creates the cause of action upon which the writ is founded. In the present case, the act required is a declaration rather than a demand but the principle appears to me to be the same. The passage does appear to favour the borrower, but not for the reason given by Mr. Bunting.

65. The Esso Petroleum case had been cited by Mr. Faulkner in support of his argument, founded on the Joachimson case, that service of the writ was a sufficient declaration for the purposes of Clause 13. He relied upon a sentence in the judgment of Walton J which also appears at p. 367 of the report, immediately before the remarks to which I have already referred, and reads:

"I fully accept, of course, that where there is a pre-existing debt which is payable""on demand" such a demand (other than the service of proceedings) is not a prerequisite to the bringing of an action to recover that debt: See 12e Brains Estate [1893] 2 Ch 300. "

66. Bankes L. J. in Joachimson said "a writ is a sufficient demand". A demand can have effect only when it is communicated to the person upon whom the demand is to be made and I take it that Bankes L. J. must have contemplated service of the writ as constituting a demand. Likeorise Warrington L. J. in the same case when he spoke of "a demand, either by the issue of a writ or otherwise" must have contemplated both issue and service of a omit rather than its mere issue as constituting a demand. Walton J., in the Esso case, clearly contemplated "the service of proceedings" as a demand.

67. It may be argued that service of the writ constitutes notice by the court to the party served that the plaintiff has made a claim to the court so that the service of the writ of summons, which is effected on behalf of the court, is not a demand by the plaintiff. But I am concerned with the necessity for a declaration, not for a demand. When the borrower received the writ and statement of claim he must have realised, if he did not already know it, that the bank was asserting that the whole of the principal was immediately payable. Such a communication, effectively by the bank, to the borrower would in my view be a sufficient declaration for the purposes of clause 13. The service of the writ would therefore render the whole of the principal immediately payable without subsequent demand. The bank would then have its cause of action, so far as the principal was concerned.

68. That is not to say, however, that the bank's action would succeed, for it would face the fatal objection that the writ was issued before the cause of action arose. Nevertheless I think that there would be nothing to prevent it from issuing and serving a further writ and it would seem that in the subsequent proceedings it would be able to rely upon the service of the first writ as a clause 13 declaration. Thus the dicta in Joachimson and the decision in Esso can be reconciled. Bankes LJ and Warrington LJ suggested that the service of a writ could create a cause of action. They did not say that the Plaintiff would succeed without taking further proceedings. The point does not appear to have been raised before them.

69. I hold that the service of the writ herein, if there had been no previous declaration, would be a sufficient declaration for the purpose of clause 13, but the Plaintiff, though he might succeed in a future action, could not succeed in this one in the absence of a declaration antecedent to the writ. Following the reasoning of Walton J in the Esso case, I have come to the conclusion that a clause 13 declaration must precede the issue of proceedings if those proceedings are to have any chance of success.

70. In this case, the bank does succeed because there was a declaration antecedent to the issue of the writ, i.e. the letter of the 16th March 1984. The bank is entitled to judgment against the borrower for $25 million, the principal sum: It is also entitled, there having been an Event of Default, to an order for possession of the mortgaged properties, for clause 14 of the lease gives to the bank a right, if an Event of Default occurs, to such possession. The bank is also entitled to judgment against the borrower for unpaid interest in a sum yet to be determined. When I refer to an Event of Default I have in mind not only the admitted failure to pay interest but also the failure to pay the principal which became immediately payable, without further demand, upon receipt of the letter dated the 16th March, 1984. I have already indicated that I see no reason to delay making an order for possession pending a resolution of the dispute as to the quantum of interest since an event of default in the form of ,. failure to pay interest is admitted. My finding in respect of the principal strengthens the bank's position in this regard.

The bank's claims against the guarantor

71. In the re-re-amended Statement of Claim, the bank claims against the guarantor

A copy of the guarantee appears at pages 65-69 inclusive of the agreed bundle. In clause 1 the guarantor agrees:

I shall in due course refer to the significance of the inclusion of the words "ultimately enforceable".

72. I must also mention clause 8 which provides inter alia as follows:

"8.         Although my ultimate liability hereunder cannot exceed the limit hereinbefore mentioned yet this present guarantee shall be construed and take effect as a guarantee of the whole and every part of the principal money and interest owing and to become owing as aforesaid .... ".

73. I note here that the word "limit" does not appear before it occurs in clause 8. The draftsman must have had the proviso to clause 1 in mind, but that proviso does not limit liability. It limits the extent to which the liability may ultimately be enforced.

74. Clause 7 provides that the guarantee shall be in addition to and shall not be in any way prejudiced or affected by any collateral or other security held or to be held for the money guaranteed.

75. Mr. Faulkner suggested that the guarantee would better be described as an indemnity: it did not depend on default by the borrower. Mr. Bunting did not disagree.

76. Having indicated the relevant provisions of the guarantee, I need to mention only one other undisputed matter of fact before turning to the legal arguments. On the 16th March, 1984, the bank's then solicitors wrote to the guarantor a letter, which he admits receiving. A copy of it appears at pages 202 and 203 of the agreed bundle. After referring to the mortgage and to the banking facility granted to the borrower to the extent of 9625 million and interest, the letter reads:

Notice is hereby given that unless the said sum of HK$30,044,073.08 together with interest thereon as aforesaid are repaid by you in the capacity of a guarantor to our client forthwith, legal proceedings will be instituted against you without further notice. "

77. On the face of it, that letter is a demand for payment, addressed by the bank to the guarantor, a demand being necessary under the terms of the guarantee. Mr. Bunting submitted, however, that the letter was not a valid demand. One basis for his submission was that the principal sum had not become immediately payable by the borrower. I have found against him on that point. He argued further that even if the principal had become immediately payable, it amounted to $25 million, not the $29 million odd as stated in the letter. This invalidated the demand, he suggested, for two reasons. First, the figures were wrong, overstating the amount of principal. Second, and in addition, the sum described in the demand as principal, i.e. $29 million odd, exceeded the sum for which he was liable under the guarantee, i.e. $25 million.

78. The second point may be disposed of shortly. It is clear from the terms of the guarantee that there is no limit to the liability of the guarantor, There is a limit on the extent to which the liability is ultimately enforceable against him, (and L take the proviso to refer to enforcement of liability by legal action) but that is not the same thing. Whilst it is true that the bank could not sue for more than $25 million plus interest at 15 per cent per annum from the date of demand, it was perfectly entitled to demand the whole sum of the borrower's indebtedness to the bank, whether the borrower owed it as principal, interest, costs and expenses, or anything else, no matter how large that sum might be. From the guarantor's point of view, the whole sum demanded of him would be principal. If the guarantor had paid it all, he would not have been entitled to recover any excess over the sum of $25 million plus interest. The demand was not invalid simply because it was for more than $25 million. His liability, as distinct from his enforceable liability, was unlimited.

79. In the Australian case of Re A. & K. Holdings Pty Ltd [1964] VR 257, the Supreme Court of Victoria had to consider the terms of a demand for payment made by a creditor to a guarantor under a deed of guarantee. Under clause 1 of that deed, the guarantors "jointly and severally guarantee on demand".... the payment in full of the amounts then owed by Castley Brothers Pty. Ltd. to each of its unsecured creditors. Scholl J. after saying that he did not think the amounts need be named, added (at page 262): "It is sufficient if he makes a demand for payment in full of all debts owing at the date of the demand .... ".

80. There is nothing in the report to indicate that the decision of the High Court of Australia in O'Day (supra) was brought to the attention of Scholl J, but on this point he reached: the same conclusion in relation to a guarantor as that reached by the High Court of Australia in relation to a debtor.

81. In the Canadian case of Bank of Montreal v Winter (1981) 101 APR 385 the Newfoundland Supreme Court considered the position where a bank had demanded of a guarantor a sum which was considerably greater than the sum owing to the bank by the debtor. The demand was held to be valid. Hickman, C. J., said in his judgment, at page 392:

82. Mr. Faulkner submitted that that decision must be right in principle, or in every case of error whether of law or of calculation there would be no valid demand, a consequence which the courts cannot permit. For a further illustration of the principle for which he contended, he referred to the case of Cardiff Preserved Coal and Coke Company v Norton (1867) Law Reports Ch. App. Vol II,in which it was held that a winding up order under the Joint Stock Companies Act, 1856, was not invalid because founded on neglect to pay on a demand of the petitioning creditor in excess of what was actually due to him. Lord Chelmsford, L. C., said at p. 410:

"It was contended that the winding up order was bad because Mr. Hill had demanded a sum of £628, and it appeared that he was entitled only to £411.7s 9d; and the 67th and 6th Sections of the Act make a company liable to be wound up only when a demand is made of a certain sum, and the company neglect to pay such sum, which in this case they were not bound to pay. But the liability of a company to be wound up under these provisions arises when a creditor, to whom the company is indebted above £50, serves a demand requiring the company to pay the sum so due, and the company for a certain time neglect to pay such sum. In this case there was a debt of more than £50 due to Mr. Hill. He made, it is true, a demand upon the company for payment of more than was due, but of course the amount due was known to the company, and was included in the demand, and the company neglected to pay "such sum", which means not the sum demanded, but the sum due, which they might have paid, and so have prevented the order being made. The construction contended for would make every winding up order bad where the creditor had demanded the smallest sum above what was actually due to him. "

83. Of all the cases cited in argument, the only one which appears to hold any crumb of comfort for the guarantor is the Bunbury Foods case (supra), and that only by way of an obiter dictum. After holding that it is not essential to the validity of a notice calling up a debt that it correctly states the amount of the debt, the court said, at p. 205:-

"There is perhaps a stronger case for saying that, when a third party, for example, a guarantor, is called upon to pay the debt of another, the creditor should specify the amount. But in the circumstances of this case it is unnecessary to explore the problem further. "

84. That is a far cry from saying that, if a creditor does specify an amount, and it turns out to be incorrect, the demand is ineffectual.

85. Following the reported decisions, with which I respectfully agree, I have no hesitation in holding that the demand to the guarantor was a valid demand. The amount claimed exceeded the amount recoverable from the surety by action but he was not prejudiced by that fact.

86. The guarantor would, however, only be liable for the $25 million principal sum if, when he received the demand, that sum had become immediately payable to the bank by the borrower, If it had not, he would be liable only for the amount of interest overdue at the time of the making of the demand on him.

87. Counsel have informed me that they have throughout proceeded on the basis that, if the letters dated the 16th March 1984 to the borrower and guarantor are held to be a valid declaration and demand respectively, then the bank will be entitled to judgment against the borrower for all moneys due, with interest thereon, to be assessed. The bank will also be entitled to judgment against the guarantor for $25,000,000 with interest at 15% per annum from the 16th March 1984.

88. I now give judgment for the Plaintiff against the first defendant for

(1)    $25,000,000

(2)    Possession of the mortgaged premises.

89. I give judgment for the Plaintiff against the second defendant for

(1)    $25,000,000

 

(2)    Interest thereon at 15% per annum from the 16th March 1984 until payment.

90. The following matters remain to be dealt with

 

(2)    The question of costs.

 

91. Counsel have indicated that there is hope of agreement on the basic rate of interest payable under clause 5.01 to 5.05. There may be evidence and will be argument as to whether or not an additional 1% per annum provided for in clause 5.06 of the mortgage is a penalty. I shall now hear from Counsel as to their proposals for dealing with these matters as well as the question of costs.