OVERSEAS TRUST BANK LTD v. SCARPORI LTD AND OTHERS

1985, No. A2376

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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JUDGMENT

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1. This is a claim by the Overseas Trust Bank Limited against the 2nd and 4th defendants who are husband and wife under a Guarantee. Like so many Guarantee claims it is a very unfortunate one, I suspect that the whole basic of the dispute which has been argued out before me is that in this particular transaction, the defendants, and particularly, Mr. So, was in over his head in the sense he had a very limited understanding of what he was taking on, and certainly a more than inadequate understanding of the full nature of the obligations he was assuming, and indeed, had assumed.

2. It goes back to 1980 when a school friend persuaded him to enter into a corporate partnership (if I can so describe it) to conduct a business under the name of Scarport Company Limited importing building materials. The school friend was Mr. Tong, the named 3rd defendant. He put up l/3 of the share capital, The balance of 2/3 rds was put up by Mr. So and his wife, and taken in his wife's name. They opened an account in the company name with the plaintiff bank, with documentation which purports to show Mr. Tong and Mr. So not simply as the signatories on behalf of the company, but as directors of the company. It transpires that the directors were in fact Mr. Tong, the 3rd defendant Madam Lee, and Mr. So was never properly a director at all. But this did not stop him from signing a number of documents as a director.

3. The bank advanced facilities to the company in various forms. It was allowing the company to draw Letters of Credit on credit, and it was operating a TR account. As time went on the net indebtedness of the company to the bank slowly increased. At a time when that indebtedness was running at the order of a figure that I cannot name because the ledger sheet I see is missing, but was probably something in the order of $500,000 or $600,000, a Guarantee was entered into. It was dated the 24th May and it was signed by all three of the participants, Mr. So, his wife Madam Lee and Mr. Tong. It is a common form Guarantee under which the signatories accept liability to pay on demand all sums in any account not paid by Scarport Limited.  It goes on : "The undersigned by way of continuing security hereby charge the money standing to the credit of our accounts with you, and authorise you without further notice to us to apply such monies as you may think in satisfaction of the said liabilities". There is also express provision in Clause 3 to the effect that partial payment or satisfaction does not operate as a discharge and the liability continues to attach to the outstanding balance.

4. There is no issue on the figures. A valid demand was made under the Guarantee by the plaintiff's solicitors by letter dated 5th March.  Immediately before the issue of these proceedings the pass sheets show that on 27th March 1985 the company was indebted to the bank in the sum of $267,577.93.

5. Before that Guarantee was entered into, two other events happened. The first was that in the joint names of Mr. So and Mr. Tong, three sums of money were deposited in a call deposit" account with the bank. The first was $200,000 and this deposit was made on the 24th December 1980. That deposit receipt was endorsed with the words that this deposit was "to be pledged as collateral for general banking facilities granted to the company". The second deposit was made on 6th November 1981 and was $100,000. The third was on 7th May 1982 and was a further $100,000.

6. On the same day as those last two deposits were made both Mr. Tong and Mr. So signed Letters of Hypothecation whereby they said this : "We hereby pledge, assign and transfer to the bank all fixed deposit receipts ..... as well as any money which we may have deposited or may deposit from time to time hereafter in our account whether current, saving or savings or otherwise as security for the payment to the bank on demand for all moneys now owing or to become owing". It is highly significant that on the same two dates as these deposits, these two Letters of Hypothecation were signed. I am quite satisfied that Mr. So had very little idea indeed of what he was doing when he signed those documents, and he did not, I think, then appreciate that he had committed control of these monies to the bank by way of security for the current lending to the company. I think is that lack of understanding which really explains the dispute which has arisen on the evidence before me.

7. In May 1983 the So's and the Tong's fell out, and that Mr. So and his wife ceased to have anything to do with the company. But of course their money, and they say 50% was put up by them, remained locked in these deposit accounts. The company's business did not prosper. From about October 1983 the bank were not accepting any new business and started trying to recover a sum of nearly $600,000 that was then outstanding. They were bringing pressure to bear on Mr. Tong to repay these sums without success, Mr. Tong conversely was trying to persuade the bank to extend his credit. Again not surprisingly the bank were not prepared to do that. The net result was that there was a meeting at the bank attended by Mr. So, Mr. Tong and Mr. Tse, the bank manager, in mid-April 1984. The basic dispute between the parties on the evidence arises out of that meeting.

8. It was called to discuss a number of things. The first was the use of the deposit monies in partial discharge of the then indebtedness. The deposit monies totalled $400,000 : the then indebtedness was in the order of $600,000 or more. It is common ground that as a result of that meeting and quite shortly thereafter, the bank, in fact, amalgamated all the accounts. That produced a debit balance on the current account in the sum as recorded in the pass sheet of that date which is $244,573.03. Secondly, there was discussion as to how the balance outstanding was to be discharged. Mr. Tong was claiming that the company would be able to do that at the rate of $20,000 a month. Thirdly, it is common ground that Mr. So was trying to extract himself from his liability and that of his wife under this Guarantee. The issue which arises between him and Mr. Tse on the evidence is this. He asserts that Mr. Tee agreed to release him, Mr. Tse disputes it.

9. In my judgment the explanation of this conflict is that Mr. So thought he was in a bargaining position which he was not in fact in. He says that in fact at the meeting Mr. Tse rejected the suggestion that he should be released from the Guarantee to which he says he then replied : "In which case, if you reject that I will not consent to the use of this deposit monies to be put in part satisfaction of this debt". Mr. So then thought because he had not understood the Letters of Hypothecation, that he was free to say 'yes' or 'no' as to how these deposit ponies were to be used. I think that Mr. So thought that because the bank manager thereafter used those deposit monies in the way I have just indicated, as partial discharge, he has necessarily accepting Mr. So's proposal that this constituted his discharge from the Guarantee

10. I think there was a complete misunderstanding between those two parties at this meeting. I do not think  for a moment that Mr. Tse was agreeing to discharge Mr. So from this Guarantee. From a bank manager's point of view this would be an act of a lunatic. There was absolutely no possible reason, when he could see that deficiency arising on the account and having got two people's guarantees, to discharge it in this way, It would be a positive ludicrous agreement. But equally I can see Mr. So's point of view upon his hypothesis that he could say 'yeah' or 'nay' to the use of these deposits. But in truth the matter was that he had no sort of bargaining position at all. He could not say 'no' to the use of those deposits. He had already signed those deposits away when he signed the Letters of Hypothecation.

11. So in my judgment there was no agreement here. There was no agreement made between Mr. Tse and Mr. So to release anybody from this Guarantee, and Mr. So's belief that he thought an agreement was made was based upon a complete misapprehension.

12. Even if I had been able to come to different conclusion or the facts I would still have said that this constituted no defence in law. I do not believe that this is a case where the law would recognize as binding or as valid the agreement Mr. So was asserting. Because all he did on this occasion, he said, as his part of the agreement was to sign on the back of the deposit receipts by way of release. But that was something he was obliged to do in any event. There was no shadow of consideration that he gave for this event. If he was not obliged, that right have been good consideration. As he was obliged there was no consideration. Neither can the same conduct be relied upon as "acting to his detriment”, to give rise to a High Tree's style consideration. So that in my judgment the agreement relied upon would have been regarded in law as a nudum pactum and ineffective in any event.

13. Although I have considerable sympathy as is so often the case when people are caught up with Guarantees which they have entered into in confidence at the time, but when the trading position has gone sadly wrong, there is, in my judgment, no defence to this claim. There must be judgment, for the bank against both defendants for the principal sum which I have already referred to which is $267,577.93.

14. Now the question has been raised about interest. It is perfectly true that no evidence has been laid before me, as to any particular rate of interest. The Guarantee provides for interest at the current rate "or such higher rate as you may from time to time charge your customers on overdraft account". I do not think that the defendants can resist an interest computation at the current rate, and I believe that will have to be done hereafter. I do not think the plaintiff is estopped from asserting current rate any more than the Court is estopped from asserting current rate which it does with great regularity in awarding interest at 1% over bank rate or something else like that. So that there must be judgment for that capital sum with interest at the bank's current rate from time to Lime since 27th March 1982 to to-day and at the judgment rate thereafter, I leave it to the parties to do their own computation of that. If they agree, it can be handed in to my clerk. If they cannot agree it, I will regrettably have to settle the figure, but I hope that contingency will not arise.