RE NANIK DAYARAM

CACV 146/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 146 OF 2013

(ON APPEAL FROM HCB NO. 7651 OF 2011)

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REASONS FOR JUDGMENT

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Hon Kwan JA (giving the Reasons for Judgment of the Court):

1.  This is an appeal by the debtor Nanik Dayaram against a bankruptcy order made by Deputy High Court Judge Le Pichon on 13 June 2013 for reasons given in the judgment of that date (“the Judgment”). The debtor challenged all the findings against him and sought to adduce further evidence on appeal, which application was directed to be heard at the same time as the appeal.

2.  We refused leave to adduce further evidence at the hearing and dismissed the appeal at the conclusion of the hearing.  These are the reasons for our judgment.

The background

3.  It would be convenient to set out first the relevant background matters.

4.  The bankruptcy petition was presented by the Hongkong and Shanghai Banking Corporation on the basis of a statutory demand served on the debtor on 1 November 2011.  The debt demanded was in the aggregate of HK$39,217,885.47 and US$23,557,733.80, arising out of two guarantees executed by the debtor in favour of the bank in respect of all monies due and owing by Days Impex Limited (“Days Impex”) and Days International Limited (“Days International Limited”).  The debtor was a director of both companies.

5.  The liabilities of the companies to the bank arose mainly from the drawdown of 59 import loans and the financing of 12 export bills.  As at the date of the winding-up orders made against the companies on 12 December 2011, Days Impex’s indebtedness amounted to HK$5,219,274.97 and US$19,886,891.27 and Days International’s indebtedness amounted to HK$34,735,047.38 and US$3,966,457.43.

6.  When the bankruptcy petition was heard in May 2013, the debtor’s liability was reduced as a result of the realisation of security held by the bank in respect of Days International’s indebtedness and the set-off of credit balance from Days International’s account with the bank in respect of Days Impex’s debt.  Hence, the debtor no longer has liability under the guarantee in respect of Days International.  His outstanding liability was only in respect of the guarantee for Days Impex’s indebtedness, which amounted to HK$3,396,272.79 and US$21,201,337.67 as at 25 September 2012 on the bank’s calculation.

7.  The debtor opposed the petition on three grounds.  First, he had a bona fide defence on substantial grounds as regards the petitioning debt.  Second, he had a genuine cross claim of substance against the bank.  Third, he had made the bank an offer to repay which the bank had unreasonably refused.

The findings in the Judgment

8.  The judge rejected all three grounds of opposition.

9.  The debtor contended he had a bona fide defence on substantial grounds in that the bank had acted in breach of the bank mandate in respect of the drawing down of import loans and financing of export bills for Days Impex.  He alleged that the authorised signatory mandate for the import/export accounts was changed from 30 March 1999, when the authorised signatories were divided into two groups, “A” and “B”.  The Group A signatories were the debtor and his son, they were authorised to sign singly.  The Group B signatories included one Ms Kwok Kwai Wah Pitty, who was a director and employee of Days Impex, and others.  The Group B signatories were authorised to sign only if two signed together.

10.  Of the import loans and export bills of Days Impex, only 6 were signed singly by the debtor or his son, the total amount of which was US$1,834,593.40.  The rest were all signed singly by Pitty Kwok.  Hence, the debtor admitted liability only in respect of US$1,834,593.40 (equivalent to HK$14,309,828.52), and disputed the balance of the indebtedness of Days Impex on the ground that the authorised signatory mandate was not adhered to.

11.  The judge found that the bank had not breached the mandate for the operation of the import/export accounts of Days Impex.  Even if there were breach of mandate as alleged, the debtor should still remain liable on the basis of apparent authority and estoppel, and under the principle that a guarantee given by a director of an obligation of a company which is ultra vires is nonetheless enforceable against the director.

12.  The cross claim asserted by the debtor was founded on the tort of causing loss by unlawful means and was premised on the contention that the bank’s action in appointing provisional liquidators for Days International constituted an unlawful interference with the business of the company, in which the debtor had an economic interest, thereby causing loss to the debtor.  It was alleged that the appointment of provisional liquidators and their failure to liquidate or safeguard the stock of electronic goods in Brazil worth approximately HK$200 million at the time had the effect of wiping out or substantially reducing the value of those assets.

13.  At the hearing, the debtor sought leave to adduce evidence to show that the bank’s appointment of provisional liquidators in respect of Days International was malicious because the bank knew that the value of the security it held far exceeded the indebtedness of both companies.  The judge refused leave to adduce further evidence for the reasons given in §41 of the Judgment.  Further, the judge did not consider that the alleged cross claim meets the threshold of being genuine or as one of substance.

14.  As for the offer to repay, the judge refused to take this into consideration, noting that the offer to repay the sum of HK$20 million odd was made more than a year ago and the amount had yet to be raised.

The contentions in this hearing

15.  Seven grounds were advanced in the notice of appeal, challenging all the above findings in the Judgment.  The debtor also applied to adduce further evidence on appeal in respect of the breach of mandate point and the cross claim.

16.  For reasons to be mentioned, we did not find it necessary to deal with each and every contention advanced by Mr Robin McLeish for the debtor in the application to adduce new evidence or in the appeal.

17.  Two sets of documents were sought to be adduced as further evidence, together with the debtor’s affirmation made in support of this application in which he sought to explain the contents of those documents.

18.  The first set of documents comprised what were referred to as “the 2^nd Version of the 1999 Mandate”, “the 1988 Mandate”, and “a 2^nd Version of the signature card for the import/export accounts of Days Impex”.  These documents were produced by the bank in a letter to the Commercial Crime Bureau dated 29 November 2012 and formed part of a bundle of documents for committal served on the debtor in another set of proceedings on 2 August 2013, just less than two months after the Judgment was handed down.

19.  It was not in contention that the first set of documents could not have been obtained with reasonable diligence for use at the hearing before the judge, which is the first of the conditions for further evidence to be admitted on appeal according to the test in Ladd v Marshall [1954] 1 WLR 1489 at 1491.  What Ms Rachel Lam submitted on behalf of the bank was that the second condition in the test was not satisfied, namely, that the evidence must be such that, if given, would probably have an important influence on the result of the case, though it need not be decisive.  Her submission was that the debtor relied on these documents to bolster the breach of mandate defence, but, as the judge had ruled, this defence is entirely irrelevant as he should remain liable on one or both of two sets of legal principles (apparent authority or estoppel; director liable on a guarantee even when the underlying transaction is ultra vires the company), these further documents would not have made any difference to the outcome of the case.

20.  The second set of documents sought to be adduced consisted of an inventory report of stock in Brazil in November 2011, a bundle of photographs of the stock and an email of the local agent in Brazil to the debtor in November 2011 giving the addresses of the warehouses where the stock was held.  They were relied on in support of the cross claim.

21.  The bank’s contention was that the first and second conditions of the test in Ladd v Marshall are not satisfied in respect of the second set of documents.

22.  We will first deal with the issues of apparent authority and estoppel.  That would resolve the question whether the first set of documents should be admitted as evidence on appeal and the contention raised in the appeal that the judge was in error in holding that even if the bank had breached its mandate, the debtor should still be liable on the guarantee on the basis of apparent authority and estoppel.  These issues are crucial as it would not be necessary to deal with the debtor’s challenges to several other findings in the Judgment, if we are clearly satisfied that the issues of apparent authority and estoppel must be resolved against him.

Apparent authority and estoppel

23.  Pitty Kwok was at all times one of the directors and an employee of Days Impex.  As found by the judge in §35 of the Judgment, since 1994, she had been operating the import/export accounts of both companies signing singly without any issue having been raised on this at any time during the currency of the companies’ relationship with the bank, not even in the winding-up proceedings of the companies.

24.  There is also no dispute that the debtor was involved in the companies’ business from the outset and was fully familiar with their operations.  There is no suggestion that Days Impex or the debtor was not aware of the arrangement that Pitty Kwok was actively involved in the documentation of the drawing down of import loans and financing of export bills.

25.  Given these circumstances, we agree with the judge’s holding in §35 of the Judgment that the elements of estoppel by representation that Pitty Kwok had apparent authority to sign singly are made out, as she had been held out by Days Impex as having the authority to do so.  The principle in Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480 applies and Days Impex would remain bound in respect of indebtedness incurred on the import/export accounts attributable to Pitty Kwok’s transactions with the bank.

26.  We also accept Ms Lam’s submission there would be estoppel by convention, in that Days Impex and the bank had entered into a series of transactions over the years on the basis of an assumption that was shared by both that Pitty Kwok was entitled to operate the import/export accounts signing singly, and any attempt by Days Impex to depart from that shared assumption years later would be unjust as the bank would suffer detriment arising out of its having entered into the transactions on the basis of the common assumption (Unruh v Seeberger (2007) 10 HKCFAR 31 at §§133 to 155).

27.  Mr McLeish accepted that Days Impex was liable to repay the indebtedness to the bank.  He made three points for the debtor.

28.  First, he submitted that it is “unreal” to characterise the submission of loan documentation signed by one person who had no authority to sign singly as a representation that that person had authority to sign, or that this was the shared assumption of the parties, when there was an express instruction – which he characterised as overriding – given by the companies that Pitty Kwok did not have authority to sign singly.

29.  We find nothing “unreal” about the situation.  We find no support for the suggestion that the alleged express instruction was “overriding”.  Estoppel by representation or estoppel by convention operates in the situation when the representation or the assumed state of affairs is untrue.  There is no valid basis for any suggestion that the bank was not induced on the faith of such representation to alter its position to its detriment or that both parties did not act in the belief that they were proceeding with the transactions on the basis of the shared assumption.  As Ribeiro PJ stated in Unruh v Seeberger at §136, there is no necessity for the parties or either of them to believe that the assumed state of affairs is true.  And at §137, quoting from Handley, Estoppel by Conduct and Election (2006) at §8-001: “The representation is not necessarily that the convention is true but that it has been mutually adopted and each party relies on its adoption when they enter into the transaction.”

30.  Second, Mr McLeish submitted that estoppel by representation of apparent authority or estoppel by convention should only operate against the party who made the representation or was the other party to the shared assumption, in this case, Days Impex, and should have no effect on a third party such as the debtor.

31.  We are inclined to agree with Ms Lam that this distinction is artificial and not supported by the reality of the situation, as the debtor was involved in the business of Days Impex as one of its directors, he was aware of the situation and did not raise this as an issue at any time, not even in his opposition to the winding up of the companies.

32.  In any event, we do not think Mr McLeish’s argument is sound.  The debtor’s liability under the guarantee is co-extensive to the obligation of the principal debtor, i.e. Days Impex, by virtue of the co-extensiveness principle, unless he can invoke an exception to this principle that in this situation the surety should be discharged notwithstanding that the principal debtor is liable.  There is no authority in support of Mr McLeish’s proposition.  And it is not his contention that as a matter of construction of the guarantee, the liability of the debtor as guarantor would not cover the indebtedness of Days Impex arising out of estoppel by representation of apparent authority or estoppel by convention.  Indeed, the unlimited guarantee given by the debtor in November 1988 for Days Impex was broadly worded and the express provision in clause 12 put this beyond doubt.

33.  The relevant parts of clause 12 read as follows:

“[The guarantor’s] liability shall not be affected by … any defective, excessive or irregular exercise of the borrowing powers of the Principal (if a company or companies) … or by any other fact or circumstance (whether known or not known to [the guarantor and the creditor]) as a result of which any indebtedness or liability incurred or purported to be incurred by the Principal or by any person purporting to act on behalf of the Principal is void or unenforceable by [the creditor] against the Principal and [the guarantor] agree that in any such case [the guarantor] shall be liable to [the creditor] as principal debtor and by way of indemnity to the same amount as that for which [the guarantor] would have been liable by way of guarantee had a valid and enforceable indebtedness or liability as between the Principal and [the creditor] been created.”

34.  Third, Mr McLeish put forward a proposition that where the act of a creditor causes a guarantor to suffer some quantifiable prejudice, i.e. affecting the amount for which the guarantor will be liable in the event of default by the principal debtor, then the guarantor’s liability may be reduced by the amount of the prejudice so suffered.  In support of this proposition, he referred us to various passages in Canadian Imperial Bank of Commerce v Pax Management Ltd & Ors [1992] 2 SCR 998 at 1016 and 1018.  It was contended that the judge should have held that the debtor was not liable under the guarantee to the extent of the unauthorised drawing of monies by Days Impex and the liability of the debtor should be reduced.

35.  We do not think Pax Management was authority in support of the wide proposition advanced by counsel.  As stated in 1016 of the report, quoting from Bank of India v Trans Continental Commodity Merchants Ltd & Patel [1982] 1 Lloyd’s Rep 506 and affirmed at [1983] 2 Lloyd’s Rep 298, there is no general principle that irregular conduct which is prejudicial to the surety discharges him from liability, although there are particular circumstances in which the surety may be discharged.  The present case is simply not the situation referred to in 1018 of the report that the surety will be partially discharged from his obligation under the guarantee if the creditor impairs the value of the security, to the extent that the surety’s rights of subrogation under the contract of guarantee are affected.  The risk of being called upon as undertaken by the debtor in this instance must include the risk provided for in clause 12 under the guarantee.  There was no material alteration of the risk by any act of the bank that could discharge the debtor from liability, whether wholly or in part.

36.  We are clearly satisfied that the debtor must remain liable on the basis of apparent authority and estoppel, irrespective of whether the bank had acted in breach of the mandate as alleged.  The first set of documents, which was relied on to bolster the breach of mandate defence, would not have made any difference to the outcome of the case.  The application for leave to adduce those documents on appeal must be refused.  We do not find it necessary to deal with the other arguments of Mr McLeish attacking the finding that there was no breach of mandate for the operation of the import/export accounts, or the holding that the debtor should remain liable under the principle that a guarantee given by a director of an obligation ultra vires the company is enforceable against the director.  We reject the debtor’s contention in the appeal that the judge erred in holding that he failed to establish a bona fide defence to the petitioning debt on substantial grounds.

The cross claim

37.  We turn to the application to adduce on appeal the second set of documents which is relevant to the cross claim.

38.  We are not satisfied that the documents could not have been obtained by the debtor for use at the hearing before the judge if he had exercised reasonable diligence.  These documents were originally in his possession in November 2011, the stock list and photographs were exhibited to an affirmation he made in the winding-up proceedings.  He failed to explain why he did not obtain or could not have obtained them from his former solicitors until recently.  The only significance of these documents, as explained by Mr McLeish, is that they would prove the existence of the stock in Brazil.  We do not think these documents would have an important influence on the outcome of the case.  We refused leave to adduce them on appeal as both the first and second conditions in Ladd v Marshall are not satisfied.

39.  We do not think the judge’s holding that the cross claim was neither of substance nor genuine could be faulted.  Mr McLeish acknowledged that the bank’s acts of calling in the loans of Days International and presenting a creditor’s petition to wind up this company could not by themselves be acts of wrongful interference with the business of the company to mount a claim by the debtor of conspiracy of causing loss by unlawful means.  He accepted that it would depend on the intent of the bank in doing those acts.  As stated in the Judgment at §44, not only is the “unlawful means” relied on unclear, the evidential basis required to establish the requisite intention to cause loss to the debtor is also unclear.

40.  There is no substance in the cross claim.

The offer to repay

41.  This may be dealt with shortly.

42.  The bank rejected the offer of the debtor to repay HK$20 million in his 3^rd affirmation filed in June 2012, which, according to the “best estimate” of the debtor, was to be raised within 60 days of acceptance of the offer from a group of around 20 persons.  The judge was entirely correct not to take this belated and inadequate offer into account.  To the contrary, the fact that the debtor admitted that a substantial amount was due to the bank and has remained unpaid, whether it be HK$20 million odd or just under HK$18 million odd as subsequently contended, is sufficient reason why a bankruptcy order should be made against him.

43.  For all the above reasons, we dismissed the debtor’s appeal and awarded costs of the application to adduce new evidence and of the appeal to the bank.