CITIBANK, N.A. v. CHIT LEE (WONG'S) INVESTMENTS LTD. AND OTHERS

HCMP6872/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO.6872 OF 1999

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J U D G M E N T

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The Claim

1. The plaintiff is a bank and proceeds by way of originating summons to seek payment of all monies due to the plaintiff by the defendants under a mortgage dated 2 June 1998 ("the mortgage"). It also seeks to recover possession of the property known as Workshop 3, 5th Floor, Good Harvest Industrial Building, Tuen Mun, New Territories ("the Tuen Mun property"). The Master gave judgment for the plaintiff and ordered that :-

The 2nd defendant now appeals against the order of the Master.

Facts

2. A winding-up order was made against the 3rd defendant on 1 March 2000. Under the mortgage, the plaintiff agreed to grant banking facilities to the 3rd defendant on the mortgage of two properties, namely, Flat A, 5th Floor, Block 16 and car parking space No.313, Ground Floor of Parc Versailles, No.8, Mui Shu Hang Road, Shui Wai, Tai Po, New Territories ("the Tai Po property") and the Tuen Mun property. The 2nd defendant was the director of the 3rd defendant.

3. The 1st defendant was the owner of the Tai Po property and the 2nd defendant is the owner of the Tuen Mun property. The Tai Po property had been sold and the proceeds of sale had been used to reduce the indebtedness of the 3rd defendant. As of 2 September 1999, the outstanding principal owing by the 3rd defendant was $2,042,000. The interest up to 4 November 1999, which was the date of the issuance of the originating summons, was $46,546.42, making a total of $2,088,546.42. The principle and interest calculated up to 27 January 2000 was $2,149,638.58. This is the judgment sum that was recovered by the plaintiff against the 1st and 2nd defendants. The amount has not been disputed by the 2nd defendant.

The mortgage

4. Under Clause 1.01 of the mortgage, the three defendants jointly and severally agreed that they will pay to the plaintiff "on demand all sums of money now or hereafter owing to [the plaintiff] on account of banking facilities to the extent specified in the first schedule hereto granted to [the 3rd defendant] ... together with interest at the Agreed Rate to be calculated and paid in accordance with the provisions of Clause 4 hereto and all commission, financial institution's charges, legal and all other costs and expenses."

5. Clause 4.01 provides that interest shall be calculated in the following manner :-

6. Clause 4.03 provides that interest shall be computed on such basis as the lender may from time to time in its absolute discretion elect without the obligation of the plaintiff to notify the defendants of or obtain their consent to any alteration of such basis of computation.

7. Under the First Schedule of the mortgage, it is provided that : "extent of the banking facilities" means "such extent as may from time to time be determined by [the plaintiff] in its absolute discretion. "The Agreed Rate" means "such rate as shall from time to time be determined by [the plaintiff] in its absolute discretion and notified to the [the 3rd defendant] in writing which notice may be given prior to or after the date specified in such notice to be the effective date. "The Default Rate" means "the rate at three per cent [3%] per annum above the Agreed Rate".

The letter of 1 May 1998

8. Prior to the parties entering into the mortgage, the plaintiff had issued a letter dated 1 May 1998 which contained the terms of the banking facilities to be granted to the 3rd defendant. This letter provided, among other things, that the facility granted is "uncommitted, revolving short term credit facility up to an aggregate limit of HK$8 million ...". In respect of interest, various specified interest rates were provided for import and export bills and overdraft. It was further provided that the interest rate and commissions is subject to fluctuation at the plaintiff's discretion. In respect of security, the defendants were required to execute a first legal charge in respect of the two properties in favour of the plaintiff "to secure the grant of general credit facilities to an unlimited extent". This facility letter was countersigned by all three defendants.

The Tai Po property

9. The Tai Po property was sold on 27 March 1999. The completion date was 30 May 1999. The proceeds were used to discharge the liability of the 3rd defendant. Initially, the plaintiff stated that the net proceeds of sale of $3,825,000 was credited to the account of the 3rd defendant for partial repayment of the indebtedness. The 2nd defendant stated that the purchase price of the property was $4,250,000. The plaintiff accepted that this was indeed the purchase price. Under the terms of the agreement for the sale of the property, the purchase price was to be paid by three instalments in the sum of $212,500, $212,500 and $3,825,000 respectively. The plaintiff had received the second and third instalments in full but in respect of the second instalment, the plaintiff only received half of it, namely, $106,250. All these sums had been fully accounted for in favour of the 3rd defendant.

The defences

10. A number of defences were raised by the 2nd defendant. I will deal with them in accordance with the sequence they were raised in the various "defences" and affirmations filed by the 2nd defendant in this proceeding. The 2nd defendant had filed two documents entitled Defence in which it was stated that the 2nd defendant did not understand why the plaintiff should sue him since the banking facilities were granted by the plaintiff in favour of the 3rd defendant. Clearly, the plaintiff was entitled to sue the 2nd defendant by reason of the terms of the mortgage.

11. The 2nd defendant further stated that according to the records of the 3rd defendant, the plaintiff's allegations were incorrect. Further, the 2nd defendant referred to another action, namely HCA No.15246 of 1999, in which the plaintiff alleged that the defendant therein was indebted to the plaintiff in the sum of $2,042,000. The 2nd defendant stated that as the action was still being tried, the plaintiff could not prove whether the 3rd defendant still owed that money and the plaintiff was not entitled to recover the Tuen Mun property.

12. HCA No.15246 of 1999 was an action by the same plaintiff against Chit Lee Holdings Limited ("Chit Lee") and Lai Yin Shan, Nelly ("Lai"). The cause of action was based on a guarantee dated 5 May 1998 signed by Chit Lee and Lai in favour of the plaintiff to guarantee the liabilities of the 3rd defendant to the plaintiff for an unlimited amount. Chit Lee was also wound up by the court and the plaintiff had recovered judgment against Lai. I really do not see the relevance of that action. The indebtedness of the 3rd defendant is fully set out in the statement of accounts and in the various demands of the plaintiff. Under the mortgage, the 2nd defendant was required to pay the amount due and owing to the plaintiff in respect of the banking facilities granted to the 3rd defendant.

The oral agreement

13. The defendants contended that in January 1999, the plaintiff and the 3rd defendant had reached an oral agreement on repayment. The parties agreed that the Tai Po property was to be disposed and the plaintiff would only lend 80% of the instalment repayments by the 3rd defendant. In April 1999, the Tai Po property was disposed at $4,250,000. The plaintiff and the 3rd defendant reached another agreement to sell the Tuen Mun property and to repay by a monthly instalment of $200,000 to the plaintiff. The plaintiff would allow the 3rd defendant to borrow up to 80% of the instalment payment. The plaintiff was in breach of this agreement in May by refusing to grant banking facilities to the 3rd defendant notwithstanding the 3rd defendant's payment of the monthly sum of $200,000 to the plaintiff. In July, the plaintiff informed the 3rd defendant that the credit facility guaranteed by the Hong Kong Government would due to expire in November, the plaintiff did not intend to extend the loan and the 3rd defendant had to repay the indebtedness. In November, the plaintiff further asked for three post-dated cheques of $200,000 each to ensure repayment of $200,000 before the plaintiff would grant banking facilities to the 3rd defendant. The 3rd defendant agreed but the $200,000 cheque for August was dishonoured. The 3rd defendant asked for extension of time to repay the money and also it agreed to pay interest on it but this was refused by the plaintiff.

14. The plaintiff stated that in or about November 1998, the Hong Kong Government agreed to guarantee part of the credit facilities provided by the plaintiff to the defendants and the terms of the general banking facilities were revised pursuant to a facility letter dated 4 November 1998. In this letter, the facilities were described as follows :-

15. What is clear from the terms of the letter of 4 November 1998 is that the plaintiff restructured the indebtedness of the 3rd defendant. It is accepted that at that stage, the 3rd defendant was indebted to the plaintiff in the sum of about $8 million. The $3 million under the Special Finance Scheme was used to reduce the indebtedness of the 3rd defendant on 9 November 1998 as evidenced by the Account Statement of 30 November 1998.

16. The 3rd defendant's allegation of the 80% of the repaid sum being made available to him, in fact, is contained in this letter. The letter of 4 November 1998 provided that :-

The plaintiff stated that the 3rd defendant was not able to pay the instalments provided for in this letter. By the end of December 1998, it was obvious that the 3rd defendant was unable to comply with the repayment schedule and arrangement was made to dispose of the Tai Po property. At the same time, the plaintiff agreed with the 3rd defendant that the indebtedness be repaid by $110,000 per week. However, since the first week of March 1999, the 3rd defendant had failed to keep to the agreed repayment schedule. As such, there was default on the part of the 3rd defendant to repay the indebtedness. None of this was denied by the 2nd defendant.

17. Further, according to the 2nd defendant's own admission, there was default in the payment of an instalment payment of $200,000. As the 3rd defendant had failed to repay the debt in accordance with the agreement, there was no reason why the plaintiff should continue to provide banking facilities to the 3rd defendant.

18. The 2nd defendant said he had a counterclaim against the plaintiff for breach of agreement. He asked for an adjournment of the appeal to file an affidavit setting out this claim. This was refused by me in view of the lateness of the application and the fact that he had already filed numerous affirmations in this case. The nature of the alleged counterclaim is not fully disclosed. He complained that the plaintiff had unilaterally stopped granting banking facilities and demanded repayment. I fail to see how this would assist him. The mortgage conferred very wide power on the plaintiff. Clause 6.01(d) provided that :-

Furthermore, the present proceedings is by the plaintiff against the 2nd defendant as the mortgagee. Whatever may be the contractual disputes between the borrower (i.e. the 3rd defendant) and the plaintiff, the 2nd defendant cannot avail himself of the rights of the 3rd defendant in respect of such disputes to form the basis of a counterclaim against the plaintiff.

Knowledge of the 2nd defendant

19. In his second affirmation, the 2nd defendant stated that his education level was Primary 5. He could only read simple English words. He does not understand any English document, particularly legal document. The plaintiff had not provided any copy of the documents to him before he signed them, or provided any explanatory documents. The plaintiff had not explained to him the contents of the guarantee documents, or asked him to seek independent legal advice. When the plaintiff asked him to sign the document on 4 November 1998, representative of the plaintiff informed him that the responsibility of him as a guarantor would only be $8 million, and at most, he would only lose the guaranteed property. Based on this, he agreed to sign. He further stated that if he had known that he had to assume unlimited responsibility under the guaranteed document, he would not sign the document.

20. The document signed on 4 November 1998 was the facility letter of 4 November 1998. The plaintiff in this case is relying on the mortgage of 2 June 1998 to recover from the defendants. The 2nd defendant was the director of the 3rd defendant who borrowed substantial sums of money from the plaintiff. It would indeed be surprising if he did not know the nature of the document that he had signed. If the 2nd defendant intended to rely on what he said as the basis of the defence of non est factum, then I will reject this defence. Similar lines of defence were raised by the 2nd defendant's co-director and wife, Lai, in HCA No.15246 of 1999 and was rejected by me as well.

21. In his third and fourth affirmations, the 2nd defendant stated that the content of the mortgage was not explained to him in detail or wholly by Ho & Wong, the solicitor. When he signed the document, he was not advised that he should seek independent legal advice. No one had advised him that under the mortgage, the plaintiff could revise the rate of interest. He stated that he would not have signed the document if he had known of this because if the plaintiff was able to change the rate of interest, he would not be able to control the costs of the loan and he would not be protected in his business.

22. In April 1999, the plaintiff informed him that Ho & Wong would arrange for him to amend some document. The 2nd defendant asked what was the document and what was the problem. Mr Chan of the plaintiff stated that the amendment had nothing to do with the content of the mortgage. It was only a technical amendment without any effect on the content of the mortgage. The 2nd defendant agreed and Mr Lo of Messrs Ho & Wong came and asked him to sign some English documents. Mr Lo did not explain the content of the documents or gave him any copy of the document.

23. Mr Lo, who was a conveyancing clerk of Messrs Ho & Wong, filed an affirmation in response to the allegation. He said that he had explained to the 2nd defendant and other parties the terms of the mortgage. He had asked them whether they would require any matter to be clarified concerning the term of the mortgage, and the answer was "No". The 2nd defendant and other individuals also signed the Minutes of Extraordinary General Meeting and Minutes of Meeting of the Board of Directors of the 3rd defendant confirming the loan. In January 1999, his firm discovered that there were omissions on page 18 of the mortgage. He was asked by the handling solicitor to arrange for the parties to the mortgage to re-execute the document. Mr Lo attended Mr Wong and explained to him the additional terms appearing on page 18 of the mortgage. These terms included those set out in paragraph 7 of this Judgment. In particular, Mr Lo pointed out to him that the extent of the banking facilities would be determined by the plaintiff from time to time and that the interest rate was determined by the plaintiff in its absolute discretion. He said that the 2nd defendant did not raise any question on the additional terms.

24. What the 2nd defendant said about the execution of the mortgage was clearly an afterthought. This was a document which governed the legal relationship of the parties. It would be surprising that he did not know the contents of this document. Further, he had not shown why he had not taken the trouble of finding out what he had signed later on, if he did not know the contents of the document.

25. In any event, the extent of the banking facilities and the interest charged are clearly spelt out in the letter of 1 May 1998. The letter referred to the credit facilities up to the limit of $8 million. It is also spelt out that the legal charge was to secure the grant of general credit facilities to an unlimited extent. Also, the letter stated that the interest rates would be subject to fluctuation at the plaintiff's discretion. I find it to be incredible that the 2nd defendant would not have known the extent of his liability in respect of money advanced by the plaintiff to his own company.

No defence

26. In my view, the 2nd defendant had not raised any defence to the plaintiff's claim and the Master had rightly entered judgment against him. The 2nd defendant complained that the Master had continued with the proceedings when he had applied for legal aid to defend the case. Similarly, he had applied for legal aid for the purpose of the appeal. The 2nd defendant was legally represented at some stage of the proceedings. He was certainly legally represented when he made the fourth affirmation in which he made clarification of his third affirmation. He obviously had time to prepare his defence with the benefit of legal advice. The Master had rightly refused to continue the stay of the proceedings. Likewise, I had also refused to continue to stay the proceedings.

Conclusion

27. The appeal is, accordingly, dismissed with costs to the plaintiff.