NANYANG COMMERCIAL BANK LTD v. WONG MAN HUNG AND ANOTHER

1986 No. MP 344

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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JUDGMENT

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1. This is an appeal from the decision of a Master when at the hearing of the originating summons herein, he dismissed the plaintiff's claim against the 2nd defendant.

2. The plaintiff had brought these proceedings to recover monies advanced under a Deed of Mortgage dated the 21st of May 1976 and three further charges dated the 11th of July 1978, the 2nd of January 1980 and the 31st of March 1981 and to enforce the terms of the said mortgage and further charges.

3. The mortgage was made between the 1st defendant as Mortgagor the 2nd defendant as Confirmor and the plaintiff as Mortgagee. By this mortgage, the plaintiff at the request of the 1st defendant and 2nd defendant agreed to grant to the 1st defendant general banking facilities to the extent of HK$140,000 upon the 1st defendant at the request and by the direction of the 2nd defendant assigning to the plaintiff 2 premises, one in King's Road and the other in Argyle Street. By the same mortgage, the 1st defendant and the 2nd defendant further jointly and severally covenanted with the plaintiff, inter alia, that they would on demand in writing of the plaintiff, pay to the plaintiff all sums of money then and thereafter owing to the plaintiff on account of the general banking facilities granted to the 1st defendant together with interest at the rate of HK$9.50 per HK$1,000 per calendar month or at such higher rate of interest as the plaintiff might from time to time charge with monthly rests and all commission and other usual charges and lawful charges and all costs and expenses which might be incurred in respect thereof.

4. By the three further charges between the same parties, the plaintiff agreed to grant to the 1st defendant further general banking facilities to the extent of HK$660,000 making with the general banking facilities granted under the mortgage, the total extent of HK$800,000, upon the 1st and the 2nd defendants' covenanting (inter alia) that the 1st defendant at the request and by the direction of the 2nd defendant further charging to the plaintiff the mortgaged property as security for and henceforth to stand charged with the payment to the plaintiff of all moneys owing to the plaintiff by the 1st and the 2nd defendants.

5. It is common ground that on the 19th of April 1983, there was an Indenture of Partial Reassignment executed by the same parties. This Indenture released the King's Road property from the mortgage and at the same time reduced the general banking facilities limit on the mortgage and further charges from HK$800,000 to HK$300,000.

6. Mr. Li Chi Hung, a clerk of the Loans Department of the plaintiff bank, has deposed in an affirmation to the effect that the plaintiff has advanced more than $1.8m to the 1st defendant and though their solicitors have demanded repayment on the 5th of June 1985, despite repeated demands the same has not been repaid.

7. The plaintiff therefore seeks in its originating summons payment of all monies and interest due under the mortgage and further charges, delivery by the 1st and 2nd defendants to the plaintiff of vacant possession of the mortgaged property and costs.

8. The originating summons came before the Master for hearing on the 13th of May 1986 when judgment was entered against the 1st defendant that, (1) "The plaintiff do recover against the 1st defendant HK$2,058,289.37 secured by a mortgage dated 21st May 1986 and three further charges with interest on HK$1,894,373.45 at the rate of HK$553.77 per day from the 28th of March 1986 to the date hereof" and thereafter at the judgment rate until full payment, (2) Application for possession of the mortgaged property be adjourned sine die with liberty to restore and (3) The costs of these proceedings including costs of this application be to the plaintiff in any event.

9. It was also ordered that (1) The hearing of the Order 88 application against the 2nd defendant be adjourned sine die with liberty to restore (2) The plaintiff do have leave to file an affirmation in reply within 14 days and (3) The costs of these proceedings against 2nd defendant be reserved.

10. The matter came on for hearing again on the 3rd of September when an order was made by the Master in the following terms:

11. It is against this order that the plaintiff now appeals. By its notice of appeal, the plaintiff asks that: -

"The order of the Master insofar as it relates to the claim against the 2nd defendant be set aside and that in place then it may be ordered that:-

12. This notice of appeal was served on the 2nd defendant and only the 2nd defendant was represented at the hearing of this appeal.

13. The determination of this appeal depends upon the construction to be placed on the mortgage, the three charges and the Indenture of Reassignment. The central bone of contention in this case is whether when the plaintiff advanced up to HK$1.8m to the 1st defendant without obtaining the consent or agreement of the 2nd defendant to the variation of the terms as to the limit of the general banking facilities, the 2nd defendant is thereby at law discharged from any liability to the plaintiff.

14. The material parts of the mortgage for the purposes of the arguments before me are as follows:

"WHEREAS the Mortgagor keeps an account with the bank AND WHEREAS the Mortgagor may have been and may from time to time be indebted to the Bank in respect of banking facilities granted by the bank at the request of the Confirmor to the Mortgagor to the extent of DOLLARS ONE HUNDRED AND FORTY THOUSAND ($140,000.00) and in particular in respect of advances made by the Bank to or on account of the Mortgagor or in respect of credits opened in connection with bills or acceptances discounted or negotiated for the Mortgagor or for the constituents customers or agents of the Mortgagor or otherwise or in respect of exchange contracts made with the Bank or release of merchandise to the Mortgagor or to other persons upon the request of the guarantee of the Mortgagor whether in each case the liability of the Mortgagor shall be separate and sole or joint with other person firms or corporations or in respect of advances made by the Bank on account of the Mortgagor or to any other person at the request of the Mortgagor or in respect of any credit opened at the request of the Mortgagor in favour of any persons firm or corporation in  any place AND WHEREAS for this purpose the Mortgagor has requested the Confirmor to join in these presents AND WHEREAS the Mortgagor and the Confirmor have agreed to furnish security for the due payment to the Bank of all moneys owing to the Bank in respect of the matters aforesaid as hereinafter appearing NOW THIS INDENTURE WITNESSETH that in pursuance of such agreement and in consideration of the premises the Mortgagor and the Confirmor hereby jointly and severally covenant with the Bank that the Mortgagor and/ or the Confirmor will or demand in writing of the Bank sent to their last known place of abode or business or left on some part of the premises hereby assigned pay to the Bank all sums of money now or hereafter owing to the Bank on account of banking facilities granted to the Mortgagor either alone or jointly with other persons firms or corporations in respect of matters aforesaid together with interest at the rate of $9.50 per $1,000 per calendar month or at such higher  rates of interest as the Bank may from time to time charge with monthly rests and all commission or other usual or lawful charges and all costs and expenses which may be incurred in respect thereof AND THIS INDENTURE ALSO WITNESSETH that in further pursuance of the agreement and in consideration aforesaid the Mortgagor DOTH hereby assign unto the Bank (the two premises at King's Road and Argyle Street) ...... PROVIDE ALWAYS that if the Mortgagor and/or the Confirmor shall on demand as aforesaid pay all sums of money hereby secured then the Bank shall at the request cost and charges of the Mortgagor and/or the Confirmor such cost including the cost of one attested copy of any Power of Attorney under which the Bank may execute a reassignment reassign the said premises to the Mortgagor or as the Mortgagee shall direct AND IT IS HEREBY AGREED AND DECLARED that the Bank shall be at liberty at any time to determine or vary the credit of the Mortgagor to vary exchange or release any securities held by the Bank from or on account of the Mortgagor to renew bills or promissory notes and to grant time or other accommodation to or compound with the Mortgagor or any other person or  persons liable on any bill, note or other security without discharging or affecting this security PROVIDED ALWAYS that the Bank shall not be bound to make advances or payment or to incur liabilities in respect of the matters aforesaid and of banking facilities to be granted to the Mortgagor under and by virtue of these presents beyond such sum as the Bank in its absolute discretion consider to be safe .... "

15. The three subsequent charges on the two properties are in identical terms to one another except As to the "total extent". The first of these dated the 11th of July 1978 was in the following terms:-

"THIS INDENTURE made the 11th day of July One thousand nine hundred and seventy eight BETWEEN the within named WONG MAN HUNG (hereinafter called "the Mortgagor.") of the first part the within named WONG CHEONG (hereinafter called "the Confirmor") of the second part and the within named NANYANG COMMERCIAL BANK LIMITED (hereinafter called "the Mortgagee") of the third part WHEREAS the security created by the within written Indenture of Mortgage is still valid and subsisting AND WHEREAS the Mortgagor and the Confirmor have applied to the Mortgagee to grant to the Mortgagor further general banking facilities to the extent of $100,000.00 making with the within mentioned general banking facilities to the extent of $140,000.00 the total extent of $240,000.00 which the Mortgagee has agreed to do upon the Mortgagor and the Confirmor entering into the covenants hereinafter contained and upon FIRST the Mortgagor further charging to the Mortgagee All Those the premises set out in the First Schedule to the within written Indenture AND  SECONDLY the Mortgagor at the request and by the direction (hereby testified) of the Confirmor further charging to the Mortgagee All Those the premises set out in the Second Schedule to the within written Indenture with payment to the Mortgagee of all moneys which are now payable or may at any time hereafter or from time to time become payable by the Mortgagor to the Mortgagee in respect of the general banking facilities granted or to be granted by the Mortgagee to the Mortgagor or may be or become payable by the Mortgagor under any of the covenants hereinafter contained.

 

NOW THIS INDENTURE WITNESSETH as follows: -

 

1.        IN pursuance of the said agreement and in consideration of the Mortgagee granting to the Mortgagor at the request of the Confirmor such further general banking facilities as afore- said the Mortgagor and the Confirmor hereby jointly and severally covenant with the Mortgagee that the Mortgagor and/or the Confirmor will on demand in writing of the Mortgagee pay to the Mortgagee all sums of money which at the date of such demand may be outstanding and according to the books of the Mortgagee payable by the Mortgagor to the Morgagee in respect of any account whatsoever between the Mortgagor and the Mortgagee together with interest thereon at such rate or rates as the Mortgagee may from time to time charge in accordance with the covenants in that behalf contained in the within written Indenture.

 

2.        The Mortgagor and the Confirmor hereby declare and agree that all and singular the premises comprised in and expressed to be assigned by the within written Indenture as are particularly set out in the First and the Second Schedules to the within written Indenture shall be security for and henceforth stand charged with the payment to the Mortgagee of all moneys owing to the Mortgagee by the Mortgagor in respect of the matters and things mentioned in the within written Indenture and all other moneys which may be owing by the Mortgagor to the Mortgagee on any account whatsoever between them in respect of the further general banking facilities granted under these presents by the Mortgagee to the Mortgagor and shall not be redeemed or redeemable until all sums of money payable to the Mortgagee under the within written Indenture and these presents shall have been fully paid and satisfied.

 

3.        It is hereby declared that all the covenants provisions and powers contained in or subsisting in relation to the within written Indenture including the provisions relating to the rights of enforcing or redeeming the securities thereby constituted shall operate and take effect in like manner for securing the payment of all moneys and interest hereby secured as if such moneys and interest had formed part of the moneys repayment whereof is secured by the within written Indenture AND further that the terms used in this Indenture unless the content otherwise requires shall have the meaning accribed to them in the within written Indenture. "

16. Mr Chan for the plaintiff lays emphasis on the words in the mortgage immediately after the words "AND IT IS HEREBY DECLARED AND AGREED". He argues that these words give the bank wide powers to vary the terms of the credit, including the amount and also to deal with the debtors by giving time and other accommodation and also to deal with other securities which might be given in respect of the same indebtedness. The word "vary" must mean both increasing the facilities as well as decreasing them, he says.

17. He further submits that the limit of HK$140,000 is really an overall limit in respect of any of the forms of banking facilities provided for. The amount guaranteed is not really referring to a particular debt, but rather to an outstanding balance. The limit is at most being capable of being construed as the limitation of the liability of the surety. It could not in any way be read as a provision which would render the liberty of the bank to vary the credit as being inoperative, he says.

18. So far as the charges are concerned, he points out that there is an admission in the recitals that the mortgage is still valid and subsisting with the increase in the banking facilities. He draws attention to the words "any account whatsoever" in para. 1 in the body of the charge. He refers to para. 3 in the body of the charge and points out that there is no change in the terms of the mortgage save and except that the amount of facilities had been increased.

19. The other two charges operated the same way and resulted in the security being extended to general banking facilities of HK$800,000.

20. He then turns to the Partial Reassignment dated the 19th of April 1983 which is again signed by the same three parties.

21. The relevant part of that deed for the purposes of these proceedings is set out as follows: -

"............ WHEREAS (inter alia) All Those premises more particularly described in the Second Schedule (the two properties referred to in the mortgage) .......... AND WHEREAS the Reassignee has requested the Reassignor to assign and release to the Reassignee the said premises hereinafter more particularly described (the King's Road premises) which the Reassignor hath agreed to do upon the said general banking facilities being reduced and limited from HK$800,000.00 to HK$300,000.00 and upon the Reassignee and the Confirmor joining in these presents signifying its consent thereto in manner hereinafter appearing NOW THIS INDENTURE WITNESSETH that in pursuance of such agreement and in consideration of the said general banking facilities being reduced and limited from HK$800,000.00 to HK$300,000.00 the Reassignor with the consent of the Confirmor ............. DOTH hereby assign and release unto the Reassignee (The King's Road premises) .......... AND IT IS HEREBY DECLARED that nothing herein contained shall prejudicially affect the security of the Reassignor under the said Indentures (referring to the mortgage and the 3 charges) for all monies now due or hereafter to become due to the Reassignor in respect of the said general banking facilities so reduced and limited to the said extent of HK$300,000.00 as aforesaid as far as the other premises (Argyle Street premises) now remaining subject to the said Indentures are concerned. " 

22. Mr Chan submits that these words are very clear and that they do not affect the terms of the mortgage, save and except that the premises mortgaged are now only the Argyle Street premises in respect of only HK$300,000.00. However, there is nothing in the Partial Reassignment, he says, which would take away the liberty of the bank under the original mortgage to determine or vary the credit of the mortgagor or ever to refuse to lend up to the amount of HK$300,000. It follows therefore, he says, that the 2nd defendant as Confirmor is liable for HK$300,000.

23. In support of his contention, he relies on Perry v. National Provincial Bank of England⁽¹⁾ and Laurie P.O. v. Scholefeld⁽²⁾.

24. The latter case is referred to in Rowlatt on "Principal and Surety" 4th Edition at p. 81 as one of the authorities supporting the following proposition:-

"A guarantee for advances 'not exceeding' a certain sum is construed as merely limiting the liability of the surety to that amount, and are not, unless it clearly appears to be the intention as making the liability conditional upon the debtor's liability being limited to that sum. "

25. Following this sentence is a sentence which expressly refers to the same case. It reads:

"and this construction has been adopted even where grammatically the limit seems imposed, not upon the liability, but upon the advance. "

26. Mr Yu for the 2nd defendant relies on the general principle stated in Halsbury's Laws of England, 4th edition at para. 253 that:-

"Any material variation of the terms of the contract between the creditor and the principal debtor will discharge the surety, who is relieved from liability by the creditor dealing with the principal debtor (or with a co-surety) in a manner at variance with the contract of the performance of which is guaranteed. "

27. An example of this principle is given in the same volume of Halsbury at para. 255 under the heading "Release of Property Pledged".  It reads:-

"Where a surety pledges his personal credit by bond or covenant, and by the same contract also pledges his goods, or mortgages or charges his land, as security for the same debt, any alteration of the contract by the mortgagee and the principal debtor behind the surety's back for example by a consolidation deed, with a fresh covenant for payment of the principal sum and other money subsequently advanced at a later date, will discharge the surety from all personal liability and also release the property which he has included in the contract. "

28. This principle was followed in Pauline Burnes v. Trade Credits Ltd.⁽³⁾ where there was a variation of the mortgage without the guarantor's consent, the variation being the increasing of mortgage interest and an extension of the time for paying the mortgage sum and it was held that the guarantor was discharged from his liability under the guarantee.

29. The same principle was applied in National Bank of Nigeria Ltd. v. Oba M.S. Awolesi⁽⁴⁾ where the Privy Council held that a surety was discharged by the bank's action in opening a second account for the principal debtor, through which all transactions were passed. The action was held to be a substantial variation of the contract unknown and detrimental to the surety, the guarantee being expressed to be in consideration of the bank "continuing the existing account" inspite of the fact that the surety guaranteed payments of "all advances, overdrafts, liabilities ................ etc. "

30. The same principle was followed in the Hong Kong Court of Appeal in Asian International Acceptances & Capital Ltd. v. Samuel Macomber Churn⁽⁵⁾ where it was held that an agreement by the principal debtor made without the consent of the surety to pay a higher rate of interest in consequence of the giving of time by the creditor would discharge the surety from his undertaking.

31. In referring to the cases relied upon by Mr Chan, Mr Yu argues that Perry's⁽¹⁾ case says no more than this - that if the surety has given his consent to the variation by way of an express clause in the guarantee, then of course any variation or release made pursuant to such consent between the creditor and the principal debtor will not discharge the surety. However, he argues that after the signing of the mortgage the 2nd defendant's consent was sought to the 3 increases of the limit which took place as a result of the 3 further charges, but what was even more important is that in April 1983 the deed of Partial Reassignment expressly limited the facilities to HK$300,000.

32. He also argues that having regard to the conduct of the parties, one would have expected the bank to get the consent of the 2nd defendant again before varying the terms to increase the facilities to $1.4m. If the bank were to place reliance on the terms of the mortgage back in 1976 to give them liberty to vary the credit without affecting the security, he argues that that right must have been waived, or extinguished or superseded by the Partial Reassignment.

33. Mr Yu seeks to distinguish the Laurie P.O. v. Scholefeld⁽²⁾ case on the basis that the document in that case was completely different from the Partial Reassignment in the present case. In the Partial Reassignment he says that there is no doubt that the parties are not referring to the limit of liability of the guarantor as in Laurie P. O. v. Scholefeld⁽²⁾, where the wording was ambiguous. The wording is not ambiguous in the present case, he says.

34. He further argues that Laurie's⁽²⁾ case was decided in the last century long before the decisions of the Bank of Nigeria⁽⁴⁾ and the Pauline Burnes'⁽³⁾ case which latter cases show the strict view which the court now takes where there are variations in the original contract without the consent of the surety or guarantor.

35. With the greatest respect to Mr Yu I agree with Mr Chan that the 2nd defendant is still bound by the mortgage agreement. In the recitals to that document the facilities were stated in very wide terms. The security was to be provided not in respect of a single debt, but in respect of all moneys owing to the bank in respect of the matters referred to beforehand in that document and afterwards in that document. In particular, it was agreed and declared that the bank should be at liberty at any time to determine or vary the credit of the mortgagor ................ without discharging or affecting the security. I agree with Mr Chan that neither the charges nor the reassignment have taken away from the plaintiff the power to vary the credit without destroying or affecting the security. The limit of HK$140,000 in the mortgage was clearly the limit of the security rather than the limit of the banking facilities. That power was kept alive by para. 3 of the 3 further charges. Furthermore, I agree with Mr Chan that nothing in the Partial Reassignment takes away from that power. The use of the word "limited" in that document is in my view intended to stipulate the limit of the security. It was declared in that document nothing contained therein should prejudicially affect the security of the reassignor (the bank) under the said indentures (the mortgage and the 3 charges). The liberty of the bank to vary the credit is therefore preserved.

36. With the greatest of respect to Mr Yu, I do not agree with his argument that there was a waiver of any sort by the execution by the 2nd defendant of the further charges and the Partial Reassignment. His signature was necessary to affect the increases and decrease in the security being offered.

37. Mr. Yu submits that even if I am against him in respect of the construction to be placed on these documents, judgment should not be entered for the plaintiff but that directions should be given for trial on the basis that the full financial position between the creditor and the principal debtor has not been revealed in the affirmations. In my view, the evidence in this case is sufficient for me to enter judgment for the plaintiff forthwith against the 2nd defendant in respect of the secured sum of HK$300,000 and interest thereon at a rate to be fixed after further argument, on the basis that the mortgage has not been discharged.

(1)    [1910] 1 Ch. 464
(2)    [1869] LR 4 6P 622
(3)    [1981] 1 W.L. R. 805
(4)    [1964] 1 W.L. R. 1311
(5)    [1976] H.K.L.R. 956