XCHRX THE CHINA AND SOUTH SEA BANK LTD. v. HAPPY SQUARE LTD. AND ANOTHER

HCA 5/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 5 OF 2001

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J U D G M E N T

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The actions

1. On 1 June 2001, Master Kwan ordered that judgment be entered in favour of the Plaintiff, the China and South Sea Bank Limited, in four actions. Mr Lam Chin Chun is the 2nd Defendant in all the four actions. The 1st Defendants in these actions are Infinity Development (Holdings) Company Limited, Kiloworld Limited, Kofield Limited, Happy Square Limited respectively. These are all companies under the control of Mr Lam. In all these actions, the Plaintiff bank is suing for repayment of banking facilities granted to these companies and Mr Lam is being sued as a guarantor. Applications were made by the Plaintiff bank for summary judgment and pursuant to the direction of Master Ho on 12 March 2001, all the applications were heard together since they involved common issues of facts and law. In fact, no substantive evidence has been filed by the Defendants in High Court Action No. 10672, 10673 and 10674 of 2000. They chose to rely on the evidence filed in High Court Action No. 5 of 2001. It is therefore common ground that the issues are the same in all these actions and the defence case in all the actions stands and falls together. The Defendants appealed against the orders of Master Kwan of 1 June 2001 and the appeal came before me for hearing on 23 October 2001.

The defence case

2. There is no dispute that the facilities as particularised in the Statement of Claims filed in these actions were advanced to the Defendants and remained outstanding. In essence, the defence case is that these banking transactions were only part of the story. They said that there was an underlying transaction between two groups of companies and these banking facilities were granted pursuant to such underlying agreement. Mr Ronny Wong SC who appeared on behalf of the Defendants summarised the defence case as to the underlying agreement as follows:

(a) There was an agreement between the Bank of China Group and Mr Lam and Mr Lam's Group of Companies that:-

(i) the Bank of China Group would take a 1/3 interest in a real estate development project at a prime site at the junction of Wai Huan Lu and Si Huan Lu in Dongguan ["the Dongguan project"];

(ii) the Bank of China Group would have complete control over the development of the site. In exercising such control, the Bank of China Group would not prejudice or jeopardize the interest of Mr Lam and Mr Lam's Group of Companies.

(iii) the Bank of China Group would extend banking facilities in favour of Lam's Group of Companies and until the taking of account on completion of the development project or the purchase of Mr Lam's interest in the project by the Bank of China, no step would be taken to enforce recovery of the banking facilities so extended; and

(iv) the Bank of China Group would, at the request of Mr Lam, purchase the interest of Mr Lam's companies in the site at 75% of the prevailing market value.

This is what Mr Wong called the 1st agreement.

3. The defence case was that after the 1st agreement a joint venture company called Applecrest Properties Limited ["Applecrest"] was incorporated under the laws of the British Virgin Islands and companies within the two groups became shareholders of this joint venture company. On the side of the Bank of China Group, the companies involved were Excellent Investment Limited ["Excellent"], Jenshing Limited ["Jenshing"], Sun Chung Estate Company Limited ["Sun Chung"]. On the side of Mr Lam, Infinity Development (Holdings) Company Limited ["Infinity"] became a shareholder. A shareholder agreement was made between these companies and the joint venture company on 22 September 1993. Mr Wong emphasized before me that this shareholder agreement was one sided in the sense that although Infinity held 2,000 shares out of a total of 3,000 (Excellent held 500, Jenshing held 300 and Sun Chung held another 200), it was expressly provided in the shareholder agreement that the shares held by Infinity shall not carry any right to attend or vote at general meetings of the joint venture company nor any right to nominate directors to the board of the joint venture company (see Clause 3 of the Shareholders Agreement). On the other hand, in terms of finance for the joint venture company, each shareholder including Infinity had to contribute in proportion to their respective shareholdings (see Clause 10.2 of the Agreement). The contribution by its shareholders to the joint venture company also shows that Infinity had advanced about $240 million to the joint venture while Excellent advanced about $57 million, Jenshing advanced about $34 million and Sun Chung advanced about $22 million. These were the figures according to the internal accounts of Applecrest (see Exhibit "LCC-4") and were figures up to September 1995.

4. The Defendants' case is that after the conclusion of this agreement, the Bank of China Group granted Mr Lam and his group of companies generous facilities "simply on his asking". It is also said that the facilities from the Plaintiff were amongst the facilities so granted (see paragraph 21 of the 1st affirmation of Lam). This paragraph is important because it is in fact common ground that the facilities granted by the Plaintiff had nothing to do with the project and the funding for Applecrest. In order to link up the relationship between the joint venture transaction and the present action, the Defendants cannot merely rely on what transpired with regard to the joint venture project. They have to go further to show that there was an underlying agreement which covered not only matter relating to the joint venture project but also as to other facilities granted by banks within the Bank of China Group to Mr Lam and his companies. The crucial term in the 1st agreement for the purpose of the defence in the present context was the term that until the taking of account on completion of the development or the purchase of Mr Lam's interest by the Bank of China Group, the banks would not take any step to enforce recovery of banking facilities extended to Mr Lam's group of companies.

5. I was referred to some transactions by Mr Wong for the purpose of demonstrating their relationship between the two groups. Again, it is common ground that those transactions did not have any direct relationship with the claims of the Plaintiff in the present actions. I will just refer to these transactions as the 'Yin Toi transaction' and the 'welfare trust fund transaction'. Mr Wong also referred to two other dealings, one in respect of an investment at the Fortress Tower and the other in respect of a project called Infinity Traffic relating to highways in China. Mr Wong submitted that these were also ventures undertaken by the two groups jointly.

6. Mr Wong said that by reason of a press announcement made by Bank of China on 16 February 1998 with regard to the affairs of Applecrest and the denial of agreement for the sale of some of the shares in Applecrest to Kong Tai International Holdings Company Limited ["Kong Tai"], the relationship between the Bank of China Group and Mr Lam's Group broke down. Starting from May 1998, various banks within the Bank of China Group pursued against Mr Lam and his companies for repayment. Starting from 5 June 1998, demand letters were sent on behalf of the Plaintiff by their solicitors to the various Defendants. Mr Wong laid emphasis on the fact that despite the threat of legal proceedings unless payment was received within a time limit embodied in these letters, the Plaintiff did not actually commence any proceedings even after the expiration of those time limits. Mr Lam said in his 1st affirmation that he was able to meet a Mr Zhao, the general manager of business division of the Hong Kong - Macau Office of the Bank of China on 2 July 1998 to have discussion about the solution of the matter. He said that Mr Zhao agreed that the banking facilities granted in favour of Mr Lam and his group of companies could be dealt with together with the development project in Dongguan. It seems that even on Mr Lam's own case, no firm agreement was reached at that stage because he then referred to another meeting on or about 11 August 1998 between him and Mr Ngai On Sai, the Deputy Manager of the Business Affairs Department of the Hong Kong - Macau Office of the Bank of China. Mr Lam said that at that meeting it was agreed as follows:

(a) The Bank of China Group would arrange a facility of HK$6 million to pay off the workers of Commercial and Industrial Associates Group Limited. That was another company controlled by Mr Lam. It was formed with a view of providing cohesion amongst Chinese industrial and commercial concerns during the handover in 1997 and Mr Lam said it had received strong backing from the Bank of China Group.

(b) The banking facilities would first be sorted out. After taking into account what was used by members of the Bank of China Group, the properties pledged by members of Mr Lam's Group in favour of the Bank of China Group would then be sold to cover the shortfall. Any further shortfall after such sales would be secured by Infinity's interests in the project in Dongguan.

(c) After sorting out the banking facilities, arrangements would then be made in relation to Mr Lam's interests in the Dongguan project. The arrangement envisaged was the purchase by the Bank of China Group of his interest at 75% of the prevailing market value.

(d) No proceedings would be pursued by any member of the Bank of China Group against any member of Mr Lam's Group pending such work out.

This is what Mr Wong called the 2nd agreement.

7. Mr Wong told me that 'sorting out Banking facilities' meant the crystallisation of the amounts due from the Defendants into a final balance after using various cash deposits held in the name of the Defendants' to set off their indebtedness. It appears to me that even on the Defendants' own case, if I were to find that there are triable issues with regard to the 2nd agreement, that must have the effect of superseding the 1st agreement. When I raised this point with Mr Wong, he did not demur.

8. Mr Wong's case was that the facility granted by the Plaintiff to Infinity pursuant to a facility letter dated 24 August 1998 in respect of a fixed loan for $6 million was granted pursuant to this 2nd agreement. According to the loan documentation it was for a period of 3 months with an option to extend not more than 3 times of 3 months each. This loan does form part of the claim of the Plaintiff in the present actions. According to document produced by the Plaintiff, the maturity date had been extended to 26 May 1999. Mr Wong referred me to part B of the schedule to the said facility letter (at B237 of the court bundle) in which it was stated that consents have to be obtained from Excellent, Jenshing and Sun Chung for Infinity to enter into the deed of second share charge, assignment and subordination in favour of the Plaintiff. Mr Wong argued that this showed that the transaction in fact required approval from the higher echelon within the Bank of China Group. These companies were in fact the shareholders of Applecrest who had entered into the shareholders agreement with Infinity on 22 September 1993 and they were all companies within the Bank of China Group of companies. However, I do not agree that one can infer from this requirement in the schedule that the facility was granted pursuant to the 2nd agreement. Under the terms of the facility letter, the shareholding of Infinity in Applecrest had to be charged and a deed of second share charge, assignment and subordination had to be executed (see part A of the same schedule). Under Clause 14.1 of the shareholders agreement of 22 September 1993, there was a restriction against the pledge, mortgage or other encumbrances being created in respect of the shareholdings except in favour of the other shareholders. Hence, it was necessary for the Plaintiff to require consent from these other shareholders be obtained.

9. Apart from the $6 million facilities, this 2nd agreement is also directly relevant to the present actions because of the term that no proceedings would be pursued by any member of the Bank of China Group against Mr Lam's Group pending the working out of the arrangement as agreed under the 2nd agreement.

The Plaintiff's arguments

10. Mr Warren Chan SC who appeared on behalf of the Plaintiff, with his usual prowess, submitted that the main issue in these appeals was: is the story told by the Defendants with regard to the 1st and 2nd agreement believable? In his oral submissions before me, his main focus was to demonstrate that the answer to this question must be "no". Although it is well settled that in an Order 14 application, the court should not embark on a mini trial, Mr Chan submitted that what the court could do is to look at the documents and the conducts of the Defendants and, after the examining the same, said to the Defendants, "Don't insult my intelligence. The story told by you is so inconsistent with the documents that the matters should not be sent to trial."

11. There were other points made in the skeleton submissions of the Plaintiff placed before me which were not developed by Mr Chan in his oral submissions. For the purpose of record, I would just set out the same and would only come back to them if necessary. The Plaintiff said that there was no consideration for the alleged agreement not to sue. Further, it was said that the Hong Kong - Macau Office of the Bank of China had no authority to enter into this alleged agreement on behalf of the Plaintiff.

The proper approach

12. The principles with regard to Order 14 applications are well established and I do not propose to go through the authorities at length. Mr Chan referred me to 3 authorities in his oral submissions, the China and South Sea Bank Limited v. Wong Wai Chi, HCA 2611/2001, 5 October 2001; Banque de Paris v Costa de Naray [1986] 1 Lloyds Report 21; DMT Finance Limited v Ming Kee Investment [1998] HKCU 675. In the Banque de Paris case, Ackner LJ said at page 23,

"It is of course trite law that Order 14 proceedings are not decided by weighing the two affidavits. It is also trite that the mere assertion in an affidavit of a given situation which is to be the basis of a defence does not, ipso facto, provide leave to defence; the court must look at the whole situation and ask itself whether the defendant had satisfied the court that there is a fair or reasonable probability of the defendant's having a real or bona fide defence."

In DMT Finance Limited, Stone J said at page 5 of the judgment,

"Whilst naturally I accept the dictum of Godfrey JA in Ng Shou Chun and also that equally well-known observations of the Court of Appeal on the same subject in Man Earn Limited v Wing Ting Fong [1996] 1 HKC 225, the dichotomy between "believable" and "to be believed" does not, in my view, constitute a licence to suspend disbelief when, for example, sworn assertions are tested against contrary sworn assertions, which themselve are backed by what appears to be unassailable contemporary documentation."

13. Mr Wong reminded me that in applying these principle and test, the Court should not just look at the conduct of the defendant and the documents in isolation. He said that one have to test the case put forward by the Defendants against the conduct of both parties. He also stressed that every case depended on its own facts. He would prefer the approach of Laddie J in the case of Microsoft Corporation v Electro-Wide Limited [1997] FSR 580 at page 593,

"[After citing the dictum of Ackner LJ in Banque de Paris and Glidewell LJ in National Westminster Bank] So here the court has to ask whether there is a fair or reasonable probability of the defendants having a real or bona fide defence in relation to these issues. In answering that question it is not sufficient just to look at each factual issue one by one and to consider whether it is possible that the defendant's story in relation to that issue is credible. The court must look at the complete account of events put forward by both the plaintiff and defendant and, to use Ackner LJ's words, look at the whole situation. The mere fact that the defendant supports the defence by sworn evidence does not mean that the court is obliged to suspend its critical faculties and accept that evidence as if it was probably accurate. If, having regard to inconsistency with contemporaneous documents, inherent implausibility and other compelling evidence, the defence is not credible, the court must say so. It should not let the filing of evidence which surpasses belief deprive a plaintiff of his entitlement to relief. But the court must also be careful before it deprives defendant of the opportunity to have their evidence tested at the trial. It is a strong thing to say, simply on the documents before the court and in the absence of discovery and cross-examination, that a party's evidence is not to be believed. It is an even stronger thing for the court to come to that conclusion when it involves finding that a number of witness for the defence have given evidence which is not credible."

This was in fact an authority also relied upon by Mr Chan in his written submissions.

14. I do not think there are differences in substance in terms of the tests set out in the cases cited. I agree with Mr Wong that the court should look at the overall picture and consider the case put forward by the Defendants against the account of events put forward by both sides. But I do not think Mr Wong disputed the proposition put forward by Mr Chan that even in an Order 14 context the court is entitled to test the case of the defence against contemporaneous documents to see whether it is capable of being believed. What Mr Wong sought to emphasize is that while this is permissible, the court should also bear in mind the other material before the court, in particular the conduct of the Plaintiff, in coming to an overall conclusion as to whether the defence is believable. As I said, I accept that approach and I shall follow the approach of Laddie J in the case of Microsoft Corporation.

My analysis

15. Both the 1st and 2nd agreements were said to be made orally. Mr Wong was therefore unable to refer to any particular document in which the terms of the 1st or the 2nd agreements were recorded. Mr Chan pointed out that not only were the terms of these alleged oral agreement not reflected anywhere in the shareholders' agreement with regard to Applecrest, they were in fact contradicted by the loan documentations between the Plaintiff and the Defendants. It is not necessary for me to go through each and every document in respect of these transactions. Suffice for me to say that apart from the $6 million loan for 3 months in 1998, the facilities were usual mortgage financing transactions. The loans were repayable monthly by instalments subject to the Plaintiff's overriding right to demand immediate repayment. These provisions are inconsistent with the alleged term in the 1st agreement to the effect that the Plaintiff did not have the right to recover the banking facilities until the taking of account on completion of the Dongguan project.

16. In respect of the 2nd agreement, it was stated clearly in the facility letter of 24 August 1998 for the $6 million loan that it was for a fixed term and subject to the Plaintiff's right to demand for earlier repayment. This facility letter was issued by Plaintiff shortly after the alleged date of the making of the 2nd agreement (which was said to be made on or about 11 August 1998). As mentioned, this loan was extended on its original maturity and there were notices for extension executed by the Defendants. Further, in 1999, the Defendants executed surrender agreements in respect of the landed properties which were the subject matters of the mortgage facilities from the Plaintiff. In those surrender agreements, the Defendants acknowledged that the loans were due and payable. In a minute of the board meeting of Infinity dated 14 December 1999, the board acknowledged that event of default regarding facilities from the Plaintiff had occurred.

17. Mr Wong sought to brush aside all these by arguing that there was a distinction between the facilities being due and repayable and the Plaintiff's entitlement to commence legal proceedings for the recovery thereof. On that basis, he submitted that the fact that the Defendants have been paying monthly instalments pursuant to the terms of the facility letters and the acknowledgements by the Defendants that the loans and facilities were due and repayable and the provisions in the loan documentation that the facilities were repayable on demand were not contradictory to the terms of the 1st and 2nd agreement. He submitted that under the terms of the 2nd agreement as put forward in the 1st affirmation of Mr Lam, the sorting out of the banking facilities included the process of the utilization of various cash deposit placed by the Defendants with the Plaintiff to set off part of the loans due to the Plaintiff as well as the surrender of landed properties which the Defendants duly did in 1999. Hence, there was no inconsistency between such realisation of securities by the Plaintiff with the alleged term in the 2nd agreement that no proceedings would be taken by the Plaintiff. Mr Wong said these were all reasonable and appropriate steps to which the Defendants had indicated that the Defendants would not object (see a letter dated 24 June 1998 from Infinity to the Plaintiff).

18. In my judgment, what Mr Wong invited the court to accept is to say in effect that we could disregard all the provisions in the loan documentations between the Plaintiff and the Defendants because of the terms embodied in the underlying 1st and 2nd agreements. If the court were to give effect to these oral agreements, the terms contained in the loan documentations between the Plaintiff and the Defendants would be varied. In this connection, the observations of Lord Moulton in the case of Heilbut, Symons and Co. v Buckleton [1913] AC 30 at page 47 are apposite,

"Such collateral contracts, the sole effect of which is to vary or add to the terms of the principal contract, are therefore viewed with suspicion by the law. They must be proved strictly. Not only the terms of such contracts but the existence of an animus contrahendi on the part of all the parties to them must be clearly shown. Any laxity on these points would enable parties to escape from the full performance of the obligations of contracts unquestionably entered into by them and more especially would have the effect of lessening the authority of written contracts by making it possible to vary them by suggesting the existence of verbal collateral agreement relating to the same subject matter."

The circumstantial evidence and inherent implausibility of the defence case

19. Apart from Mr Lam's assertions in his affirmations, Mr Wong submitted that if one took into account of the surrounding circumstances, there were evidence to support the existence of these oral agreements. Firstly, he invited me to bear in mind the close relationship between the two groups of companies as demonstrated by Mr Yin Toi transaction and the welfare trust fund transaction. In fact, the cooperation between the two groups can also be illustrated by the Applecrest joint venture. However, in my judgment it is one thing to say that the two groups had business dealings with each other and trusted each other in respect of those dealings, it is another thing to suggest that because of such relationship one of the party totally disregarded prudent commercial considerations in all dealings with the other. I find it inherently implausible that the Bank of China Group would agree to grant banking facilities to Mr Lam's Group concerning Mr Lam's other business activities and promise not to take any step to enforce the recovery of such facilities until the completion of the Dongguan project. With respect to Mr Wong, this just flies in the face of commercial reality. The absurdity of such a promise can be highlighted by analysing the consequence if legal effect is to be given to such a term. It has to be remembered that it is the defence case that such promise applied to all banking facilities advanced in favour of Mr Lam's Group of companies by the Bank of China Group irrespective of the amounts and the financial positions of those companies. The 1st agreement was said to be made in June 1993. In the case of Infinity, the loans concerned were advanced in 1996 (apart from the $6 million loan in August 1998). The amounts involved were substantial. Although there were securities in respect of such facilities, they would be of little comfort to the Plaintiff Bank if the Bank would not be able to take steps to enforce recovery in case of default. Yet this is exactly what was said to be the promise binding on the Bank. Even taking into account of the joint venture in Dongguan, such a blanket promise from a bank is so incongruent with the practice in the banking and commercial world that I find it incapable of being believed.

20. The next piece of circumstantial evidence relied strongly by Mr Wong was what he called concerted action by the members within the Bank of China Group with regard to legal proceedings against Mr Lam and Mr Lam's companies between 1998 and 2000. In between May and June 1998, various banks within the Bank of China Group made demand against Mr Lam and his companies regarding facilities granted to them. However, after June 1998, it appears that everything was put on hold by the banks. After the striking out of Mr Lam's action against the Bank of China Group in High Court Action No. 5491 of 2000 in November 2000, the banks started to pursue against Mr Lam and his companies by legal actions. Mr Wong submitted that these could not be sheer coincidence and it showed that there was a body in the higher echelon directing an organized campaign on behalf of the Bank of China Group. Mr Wong further submitted that the withholding of legal actions in 1998 could only be explained by the existence of a master agreement. He relied on this to give credence to his 2nd agreement, in particular the promise on behalf of the banks that no proceedings would be pursued pending the working out of the overall balance due from Mr Lam and his companies and the arrangement for the purchase of his interest in the Dongguan project.

21. Mr Chan submitted that it is pure speculation as to why no proceedings were commenced by the Plaintiff in 1998 and there was no basis to infer concerted action amongst the banks. He said that the court should bear in mind that in 1998 and 1999, the Defendants were acting in a cooperating manner with regard to the use of the cash deposit to set off part of the indebtedness of the Defendants and the surrender of properties for sale. In the light of that, it was sensible for the Plaintiff to withhold legal proceedings in the meantime. I note that the last surrender letters were executed in favour of the Plaintiff on 14 December 1999, High Court Action No. 5491 of 2000 was commenced by Mr Lam on 31 May 2000 and the actions by the Plaintiff (i.e. High Court Action No. 10672-10674 of 2000 and High Court Action No. 5 of 2001) were commenced on 29 December 2000 and 2 January 2001 respectively. If there were any concerted retaliation in response to High Court Action No. 5491 of 2000, action should have been taken soon after May 2000. In any event, the crucial question is not whether there were concerted actions by the banks. Rather the issue should be whether the withholding of legal proceedings in 1998 could be regarded as circumstantial evidence to show that there is at least a triable issue relevant to the defence case, viz. whether there was a binding promise made on behalf of the Plaintiff that no proceedings would be pursued pending not only the sorting out of banking facilities in terms of crystallisation of the net amount outstanding, but also the purchase of Mr Lam's interest in the Dongguan project at 75% of the prevailing market value to the Bank of China Group. There is a difference between a temporary suspension of legal proceedings pending the crystallisation of the net balance and an indefinite moratorium until the finalisation of unspecified arrangement for the purchase of substantial interest in a real estate project which has nothing to do with these outstanding facilities. As far as the latter is concerned, the fact that legal proceedings were not commenced immediately in 1998 did not take the matter further. As Mr Chan explained, there could be many reasons why no immediate legal action was commenced. I therefore do not find such circumstantial evidence to be of any assistance to the Defendants.

22. Further, there are inherent difficulties with regard to the 2nd agreement. One has to bear in mind that by August 1998, the relationship between Mr Lam and Bank of China was by no means good. According to the allegations of Mr Lam in High Court Action No. 5491 of 2000, Applecrest encountered financial difficulties by September 1997. He alleged that there was an agreement on 23 September 1997 under which the shareholders of Applecrest agreed to dispose of half of their respective shareholdings to another investor in order to procure outside capital to the project. Mr Lam's case was that Kong Tai was approached for that purpose. However, the whole thing was frustrated by the announcement made by Bank of China on 16 February 1998. Applecrest was eventually wound up in December 1999. It is clear that the affairs with regard to Applecrest and the development of the joint venture project in Dongguan were very important to Mr Lam. According to his own evidence, he had invested substantial capital into that project. The 2nd agreement as alleged by him would be a very important agreement. That agreement is important not only in the context of Mr Lam's liabilities towards the banks regarding banking facilities granted to him and his companies. More importantly, that agreement provided for the acquisition of his interest in the project at 75% of the prevailing market value. That would certainly involve a lot of money. Given that this was an agreement said to be made in August 1998 when the relationship between the parties was tense, it is in my judgment inherently implausible that neither party saw fit to record it in some form of writing. Further, since the withholding of proceeding under the alleged 2nd agreement hinged on the arrangement for the purchase of Mr Lam's interest in the Dongguan project, if there was animus contrahendi on the part of the parties, one would expect that more precise terms as to the arrangement for the purchase would be discussed and agreed rather than to leave the same for "working out" in the future.

23. As pointed out by Mr Chan, Mr Lam was an experienced businessman. Even in an Order 14 context, the court is entitled to take into account of the fact that as a businessman with considerable commercial experience, Mr Lam would not have failed to appreciate the significance of the 2nd agreement. He would not need advice from anybody to appreciate to the need for such an important agreement to be reflected in some kind of writings. In this connection, I am adopting an approach similar to the one adopted by Ackner LJ in the Banque de Paris case at p. 23 of the report. Yet Mr Wong was unable to point to a single document which indicated that there was an agreement on the part of the Bank of China Group to purchase the interest of Mr Lam in the Dongguan project at 75% of the prevailing market value. Not a single word was mentioned about this 2nd agreement in the Statement of Claim filed on behalf of Mr Lam and Infinity in High Court Action No. 5491 of 2000 on 31 May 2000. Bearing in mind that it was an action commenced by Mr Lam and Infinity against the Bank of China with regard to the Dongguan project, one would expect them to put forward the 2nd agreement at the fore-front of their case.

24. In contrast to the complete lack of documentation to support the existence of the 2nd agreement, what I have before me are written acknowledgements by Mr Lam and his companies that they were in default of their obligation towards the Plaintiff and that the Plaintiff was entitled to exercise all rights and powers under the loan documentation (see in particular the board minute dated 14 December 1999 of Infinity and other documents referred to in paragraph 16 above). With respect to Mr Wong, I do not accept his fine distinction between the acknowledgement of default on the part of the Defendants and the right of the Plaintiff to issue legal proceedings to enforce the obligations of the Defendants. In my judgment the two matters are two sides of the same coin. The acknowledgement that the debts were due and payable by the Defendants is the same as an acknowledgement that the Plaintiff has a right to sue for recovery of the same.

Different stories told by the Defendants

25. It is against these backgrounds that I consider the assertions in the affirmation of Mr Lam as to the 1st and 2nd agreements. Mr Chan placed strong reliance in his oral submissions on the fact that different versions had been put forward by the Defendants with regard to the term of these agreements. I was referred to a letter dated 2 January 2001 written by Wai & Co. as solicitors for Infinity and Mr Lam in reply to letters of demand from Messrs K W Ng & Co. issued on behalf of the Plaintiff. In respect of the 1st agreement, Wai & Co. put forward its terms as follows,

"For the predominant purpose of financing the development project [in Dongguan], Infinity was requested by the Bank of China Group to obtain from your client the banking facilities in question. All along, it was the understanding between the Bank of China Group, your client and our clients that your client would not demand or sue for the repayment of such banking facilities or enforce the security provided for such facilities until the final completion and sale of the development project."

26. In respect of the 2nd agreement, the case was put forward by Wai & Co. as follows,

"In around early July 1998, Mr Chiu Kin Ping, General Manager of the Bank of China, Hong Kong - Macau Regional Office, informed our clients that their accounts with your client would be under the direct management and control of the Bank of China, Hong Kong - Macau Regional Office, and agreed and undertook to our clients that your client would not demand or sue for any outstanding indebtedness which might be owing from Infinity to your client or enforce any security or guarantee in respect thereof until the final resolution of the development project."

27. These assertions were repeated in the Defence filed in the four actions commenced by the Plaintiff, i.e. High Court Action 10672-10674 of 2000 and 5 of 2001. These Defence were filed on 31 January 2001. Mr Chan submitted that the story as set out in the letter and the defence is inconsistent with the story told by Mr Lam in his affirmations. In respect of the 1st agreement, the most glaring inconsistency was that in the letter of 2nd January 2001 and in the defence, the facilities covered by such agreement was said to be for the predominant purpose of financing the Dongguan project. This was not adopted in the affirmation of Mr Lam. This distinction is vital because the Plaintiff had produced incontrovertible evidence to show that the facilities granted by the Plaintiff to the Defendants had nothing to do with the Dongguan project. Another significant difference between the two versions was the absence of any reference to the sale of Mr Lam's interest in the Dongguan project to the Bank of China Group at 75% of the prevailing market value in the letter of 2 January 2001 and the Defence.

28. In respect of the 2nd agreement, there was no reference to the sorting out of the banking facilities in terms of using properties pledged by the Defendants to reduce the net outstanding amount towards the Bank in the letter of 2 January 2001 and the Defence. What was said in those documents were that the Bank agreed, inter alia, not to enforce any security in respect of the banking facilities. In contrast, Mr Lam put forward a different story in his affirmation. Again this is a vital distinction because the Plaintiff had produced incontrovertible evidence that the securities had been realised between 1998 and 1999. Another discrepancy lies in the reference to the arrangement for the purchase of Mr Lam's interest in the Dongguan project at 75% of the prevailing market value. I have already highlighted the incredible lack of reference to this in the Statement of Claim filed in High Court Action No. 5491 of 2000.

29. Even with his ingenuity, Mr Wong was unable to give me any explanation as to these material discrepancies between the two versions put forward on behalf of the defence as to the terms of the 1st and 2nd agreements. Mr Wong's submission was that the letter of Wai & Co. was no longer part and parcel of his case. I take it that the same would be said in respect of the Defence filed in these actions although up to now there has not been any application for leave to amend. Mr Wong said that the Defendants have pinned their colour to the mast by the affirmations of Mr Lam and it is the case enshrined in the affirmations that I should consider. I accept that it is the case as set out in the affirmations of Mr Lam that I should assess in deciding whether a credible defence has been put forward. However, I do not think one can just ignore what has been said previously by the solicitors for the Defendants in the letter of 2 January 2001 and the Defence filed in these actions. These must be taken into account in assessing the overall position in deciding whether the defence now put forward in the affirmations are credible. That was the approach taken by the Court of Appeal in the famous case of National Westminster Bank v Daniel [1993] 1 WLR 1453. In that case, the Court of Appeal dealt with a situation where two affidavits sworn by the defendants relating to an oral agreement were totally inconsistent and could not be both correct. At p.1457 Glidewell LJ held that this cast doubt on whether either of the versions was correct and concluded that upon such material, the only proper conclusion to which the judge could have come was that the account given by the defendant was incredible. Although I appreciate that the case put forward in the letter of 2 January 2001 and the Defence filed in these actions was not set out in any affirmation filed on behalf of the Defendants, I do not regard this as a material distinction from the situation before the Court of Appeal in the National Westminster Bank case. In my judgment, even in an Order 14 application, the court could take into account of such shifting of the positions taken by the Defendants with regard to alleged oral agreements which were not evidenced by any writing. This is particularly so when reliance is placed by the Defendants on the alleged oral agreements to override the effect of written agreement.

My conclusion

30. Bearing all these matters in mind and taking an overall view of the case, I am satisfied that by reason of the inconsistencies with contemporaneous documents, the inherent implausibility of the defence case and the contradictory manner in which the case of oral agreements overriding written terms in the loan transactions were put forward on behalf of the defence, the case as enshrined in the affirmations of Mr Lam as to the 1st and 2nd agreement is not credible and I am duty bound to say so even in an Order 14 application. It follows that I should dismiss the appeal.

31. Having reached a clear conclusion that the defence case on the existence of the 1st and 2nd agreement is incredible, I do not find it necessary to deal with the other points raised by the Plaintiff. In particular, I do not consider it necessary for me to deal with the question whether the Hong Kong - Macau Office of the Bank of China Group has any authority to enter into the alleged 1st and 2nd agreements on behalf of the Plaintiff. I would just record that Mr Wong argued that express authority had been conferred upon the Hong Kong - Macau Office and such expressed authority was evidenced by a statement made in the annual report of the Bank of China Group in 1997. I have great reservation about this argument but since the point has not been argued at length by Mr Chan in his oral submissions before me, I prefer not to base my decision on this ground.

32. In the circumstances, despite the valiant effort by Mr Wong to put forward his client's case in the most palatable manner, I have to dismiss the appeal with costs, with certificate for two counsel.