TRILEASE INTERNATIONAL LTD. v. KINSLEY LTD. AND OTHERS

HCA 9069/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 9069 OF 1999

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J U D G M E N T

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1. This is a claim to enforce a guarantee for due performance of a lease of chattels under which the lessee has defaulted in the payment of rent and other moneys due.

2. In a separate but consolidated action the guarantor is claiming recovery of a sum paid in a conditional offer made by him to settle the debt, wrongfully withheld when the offer was rejected.

Background

3. Trilease International Limited (Trilease) is a Hong Kong company whose primary business is to lease machinery. Kinsley Limited (Kinsley) is a Hong Kong company controlled and operated by Mr Chan Cheung Lit (Mr Chan). Mr Thomas Lai Sin Tong (Mr Lai) is a certified public accountant in practice in Hong Kong. He describes himself as a longstanding friend of Mr Chan. He was also at the material time a director of Kinsley, though he has since resigned.

4. In or about October 1997 Kinsley expressed an intention to lease a power generator and cone crusher from Trilease. Trilease was willing to do so provided Messrs Chan and Lai guaranteed Kinsley's performance. The parties agreed to this proposal and the terms. The upshot was that on 20 October 1997 Kinsley and Trilease signed a lease agreement under whose terms Kinsley agreed to lease from Trilease a power generator and cone crusher as more particularly described therein for a period of three years. It was agreed that the rental would be payable monthly in advance, the first being $495,073.60 and the next 35 being $59,213.00, the last three of which in fact being payable at the commencement of the lease. On the same date Messrs Chan and Lai entered into a document called a continuing guarantee in favour of Trilease in terms of which in consideration of Trilease entering into the lease agreement with Kinsley they guaranteed sums due by Kinsley up to the sum of $1,569,659.00 (excluding accruing interest and charges).

5. I do not believe it necessary to reproduce the terms of the lease agreement or continuing guarantee in whole or in part. But those I think are pertinent I now summarize.

6. Dealing first with the lease agreement:-

7. Clause 2 provided that the term of the lease should run from the date Kinsley accepted delivery of the machinery. (This took place on 21 October 1997).

8. Clause 3 stated that at all times title to the machinery shall remain with Trilease.

9. By virtue of clause 4.1 the first rental payment fell due on 20 October 1997, and that established the monthly date thereafter.

10. Clause 4.5 gave Trilease the right to charge interest at 2.5% per calendar month on any overdue payment.

11. Clause 13 prevented Kinsley from removing or permitting the removal of the machinery from Hong Kong.

12. Clause 15 gave Trilease power to terminate the lease agreement on stated grounds, one of which was when Kinsley fell into default in meeting its rent payments or for other breach.

13. Clause 16 stated that if Trilease exercised its right under clause 15 to terminate the lease agreement Kinsley would be deemed to have repudiated it and be liable to Trilease for, inter alia, all rent due under the lease agreement and interest thereon still outstanding, and entitle Trilease to repossess the machinery.

14. I come now to the continuing guarantee:-

15. Clause 1 provided that Messrs Chan and Lai agreed to be liable for all moneys due by Kinsley to Trilease, up to the stated limit, excluding interest and costs. (The stated limit is $1,569,659.00).

16. Clause 5 I shall reproduce in full, where Principal refers to Kinsley:-

"5. This Guarantee shall be in addition to and shall not prejudice or be affected by any other guarantee or security or lien now held or hereafter held by you on account of or for the moneys the payment of which is hereby guaranteed or secured and you shall not be obliged to take any action against the Principal, any other guarantor or any other person in respect of the moneys, obligations and liabilities hereby guaranteed before enforcing your rights against the undersigned."

17. Clause 9(a) gave Trilease the right to act as if Messrs Lai and Chan were principal debtors.

18. Clause 17 provided that none of the terms of the guarantee could be waived, altered or modified except in writing and signed by or on behalf of Trilease.

19. Up to the beginning of 1999 Kinsley paid the rent as it fell due and otherwise complied with the terms of the lease agreement. But on 20 February 1999 and thereafter Kinsley defaulted.

20. In purported exercise of its rights under clause 15 and 16 of the lease agreement Trilease terminated the lease agreement and called up the full amount due, calculated at $1,018,163.72, together with interest under clause 4.5 of 2.5% per month. Notice to this effect was sent to Kinsley on 13 May 1999. On the same day similar notices were sent to Messrs Chan and Lai. I reproduce that sent to Mr Lai:-

"13 May, 1999

Mr Lai Sin Tong, Thomas
House 1A, Plantation Heights
29 Plantation Road
The Peak
Hong Kong

Dear Sir,

Re:	Lease Agreement No.:10604-6704-211 (the "Agreement") Lessee: Kinsley Ltd. Guarantor: Mr Lai Sin Tong, Thomas & Mr. Chan Cheung Lit

We refer to above Agreement.

The Lessee has defaulted in its payment to us of rentals under the said Agreement and we have by a letter dated 13th May 1999 issued to the Lessee terminated the said Agreement or alternatively accepted the repudiation of the said Agreement by the Lessee and a total sum of HK$1,018,163.72, the particulars whereof are as follows is now due and owing to us:

Particulars

-	Due and unpaid rentals:	HK$
	·Rental due on 20/2/99 (Balance)	57,639.00
	·Rental due on 20/3/99	59,213.00
	·Rental due on 20/4/99	59,213.00
-	Balance of total rental payments as stipulated in the Agreement	828,982.00
-	O/S overdue interest charged and billed:	5,339.84
-	Accrued overdue interest charged on due & unpaid rentals and calculated up to 13/5/99 inclusive and thereafter interest at the rate of 2.5% per month as stipulated in the Agreement	7,776.88
	Total Amount Due:	1,018,163.72 =========

We therefore demand from you payment of the Sum of HK$1,018,163.72 due and payable to us that you are liable under the said Guarantee. Unless the said sum of HK$1,018,163.72 is paid to us by you or the Lessee, within the next 7 days, we shall institute legal proceedings against you for the recovery of the same in which event you may be further liable for the costs occasioned thereby.

Yours faithfully,
for and on behalf of
TRILEASE INTERNATIONAL LTD.

(signed)
Stephen Vong
Manager, Credit"

21. Mr Lai took legal advice and instructed his solicitors to respond by letter of 18 May, which I reproduce in full:

"

Date: 18th May 1999

Messrs. Trilease International Ltd.
33rd Floor,
World Trade Centre,
280 Gloucester Road,
Causeway Bay,
Hong Kong

Attn:

Mr. Stephen Vong Manager, Credit

Dear Sirs,

Re:	Lease Agreement No.:10604-6704-211 (the "Agreement") Lessee:Kinsley Ltd. Guarantor: Mr. Lai Sin Tong, Thomas & Mr. Chan Cheung Lit

Your letters dated 13th and 14th May 1999 respectively addressing to our client Mr. Lai Sin Tong Thomas regarding the above matter has been passed by our client to us for advice and we have instructions to reply thereto as followings:

After consultation with us, our client is agreeable to discharge in full his obligation under the Guarantee of the above agreement, that is to say, to pay to you in full the total outstanding sum due to you under the above agreement on condition that you will enter into possession and assign the Goods under the said agreement to him by way of assignment free from encumbrance upon full payment of the said sum.

Please advise our client through us the total outstanding amount inclusive of repossession charge and the place and mode as to where and when the said Goods can be delivered to our client in Hong Kong so that we can advise our client accordingly.

We are instructed by our client that if you will proceed with the aforesaid arrangement, our client agrees to issue a Bank Guarantee in the sum of five hundred thousand to guarantee the due payment of the outstanding charge upon assignment of the said Goods by your company free from encumbrances.

Incidentally, we are instructed by our client, as a gesture of his goodwill to honour his obligation under the personal guarantee, to send you herewith our client's cheque for the sum of HK$248,394.72 for settlement of the unpaid instalments and accrued interest under the said agreement up to the date hereof, particulars are as follows:

Due and unpaid details:-

Rental due on 20th February 1999 (balance)	$57,639.00
Rental due on 20th March 1999	$59,213.00
Rental due on 20th April 1999	$59,213.00
o/s overdue interest charged and billed	$5,339.84
Accrued overdue interest charged and billed	$7,776.88
Rental due on 20th May 1999	$59,213.00
Total:	$248,394.72

We shall be grateful if you will let us have your official receipt thereof. We also await your early reply to this matter.

	Yours faithfully,
	(Signed)"

22. Mr Lai's cheque for $248,394.72 payable to Trilease accompanied the letter.

23. Trilease instructed its solicitors to decline the proposal and they responded by letters of 19 and 21 May giving reasons as follows:-

"

Date: 19th May 1999

Messrs S.H. Chan & Co.,
Solicitors,
18th Floor, China Overseas Building,
139 Hennessy Road,
Wanchai,
Hong Kong.

Dear Sirs

Re:	Lease Agreement No.:1064-6704-211 (the "Agreement") Lessee: Kinsley Limited Guarantor: Mr. Lai sin Tong, Thomas and Mr. Chan Cheung Lit

We act for Trilease International Limited and have been passed a copy of your letter dated 18th May 1999 addressed to our client with instructions to reply. In breach of clause 13 of the Lease Agreement the Lessee has removed and/or or permitted the goods leased under the Agreement to be removed to China without our client's consent. As the goods are in China, our client is unable to ascertain their present condition nor can they confirm, at this stage, whether they have been encumbered by a third party or the authorities in China. As such your client's conditions as set out in your letter are not acceptable to our client.

Your client is obliged under the guarantee dated 20th October 1997 to satisfy on demand all moneys and discharge the obligations of the Lessee under the Agreement. As such our client instructs us that it is prepared to apply the cheque in the sum of HK$248,394.72 towards partial settlement of the amount claimed by our client against the Lessee. However, your client should not be under any apprehension whatsoever that by doing so our client is agreeing to the terms set out in your letter.

Please let us hear from you by return

	Yours faithfully, (Signed)"
"	Date: 21st May 1999

Messrs S.H. Chan & Co.,
Solicitors,
18th Floor, China Overseas Building,
139 Hennessy Road,
Wanchai,
Hong Kong.

Dear Sirs

Re:	Lease Agreement No.:1064-6704-211 (the "Agreement") Lessee: Kinsley Limited Guarantor: Mr. Lai sin Tong, Thomas & Mr. Chan Cheung Lit

We refer to above matter and our client's notice dated 13 May 1999 to terminate the Agreement and to demand payment of total amount due and payable for the sum of HK1,018,163.72.

We are instructed to give your client notice that if your client fails to pay the aforesaid sum together with further interest and cost of this action, within the next 3 days from the date hereof, our client has instructed us to issue a Writ against your client without further notice. Please note that our client will of course give credit for the sum of HK$248,394.72 which your client has paid and which will be used to offset against the arrears of rental.

	Yours faithfully,
	(Signed) LO, WONG & TSUI"

24. These prompted a response from Mr Lai's solicitors of 24 May as follows:-

"

Date: 24th May 1999

Messrs. Lo, Wong & Tsui,
Solicitors,
Suites 1213-1219,
12th Floor, Jardine House,
1 Connaught Road Central,
Hong Kong

Dear Sirs,

Re:	Lease Agreement No.:1064-6704-211 (the "Agreement") Leasee:Kinsley Ltd. Guarantor: Mr. Lai Sin Tong, Thomas & Mr. Chan Cheung Lit

We refer to your letter dated 19th and 21st May 1999 in respect of the above matter.

We must at the point state clearly that our client entered into the guarantee dated 20th October 1997 in the belief and understanding that your client and Kinsley Limted will act strictly in compliance with the terms and condition of the Lease Agreement no. 10604-6704-211 signed by both parties and will not act in collusion with each other and/or to render indulgence to the other for breach of the terms and conditions of the lease agreement, and in the honest belief that if your client and Kinsley Limited fully observe their obligations under the said lease agreement, our client's protection as the guarantor (and as such, as a secondary debtor in case of default) would be protected to the extents that he is only liable to pay all the outstanding sum after the security property (i.e. the goods, the subject matter of the lease agreement) has been realized and all sum derived therefrom has been applied towards payment of the outstanding debts incurred.

Clause 13 of the said lease agreement provides that "the Lessor shall keep the goods on the Premises and not remove or permit the remove of the goods from the Premises save for the purposes of repair in accordance with the provision of Clause 8. Under no circumstance shall the goods be removed from Hong Kong.

Our client notes with great astonishment that you have informed our client that the goods leased under the lease agreement have been removed to China. Your client has alleged that the removal thereof was without their consent, such allegation is totally inconceivable and unacceptable to our client.

We must ask your client to let our client have full details as to:

(a) When did you first discover that the said goods was removed to China?

(b) What measures have been taken by you after such discovery?

(c) When was the last occasion your Company effect repair works on the said goods, was it in compliance with the agreement for regular repair and check up of such goods? Please supply us with a copy of the maintenance and repair agreement, if any.

(d) Did your client report the matter to the insurance company, if so, when?

(e) Please specify what measures have been made by your client to recovery the said goods or to demand for return of the said goods to Hong Kong.

(f) If there have been any demand from you to the Lessor for the return of the said Goods to Hong Kong. Please give particulars thereto. Please advise the reaction of the Leasee to your demand, if any.

We rightly believe that our client is entitled to a detail accounts of the above matter in order to decide the propriety of your client in the whole matter, whether adequate measures have been taken by your client to protect the security under the Lease Agreement, to pursue actions against the principal debtor before making such hasty demand on our clients being the secondary debtor, whether there is any collusion between any party to injury our client as the guarantor in this matter, and whether your client is entitled, as your claimed, to pursue against our client as secondary debtor the whole of the outstanding balance under the lease agreement when they have lost control of the security of the said lease agreement, if the said lost was attributed as a result of their own breach of duty and/or negligence.

In the circumstance, unless a full investigation has been conducted into the above matter and the result whereof shows that there is no breach of duty an/or negligence on the part of your client, and/or indulgence to take positive action against the lessor and/or collusion between your client and the lessor, we see no reason why our client shall pay the sum as claimed in your said letter. In any event, we are interested to be advised of any positive act that has been taken by you against the Lessor and/or the other guarantor for the recovery of the outstanding sums. Please let us have the said particulars by return.

If, despite our letter herein, you still deem fit to issue a Writ against our client without first giving our client a full and satisfactory account of the matter raised in this letter, we have instructions that our client will to contest the said case strenuously on the ground that your client's claim is pre-matured and without merit. In such event, we are advised that our client is prepared to make payment of the full outstanding sum into the Court as security and to lodge counterclaim against your client for all losses and damages and may seek costs against your client on an indemnity basis. We further reserve our client's rights to produce the contents of this letter and our previous letter dated 19th May 1999 for the attention of the Court in determining the matter of costs.

Your attention hereto is much appreciated.

	Yours faithfully,
	(Signed)"

25. The parties were unable to resolve their differences and each filed a writ.

The Proceedings

26. Trilease filed its on 3 June 1999 suing Kinsley as 1st defendant and Messrs Lai and Chan as 2nd and 3rd defendants respectively. The claim sought to recover the debt due by Kinsley arising from its default under the lease agreement and as against Messrs Chan and Lai for their failure to comply with a notice of demand as guarantors for payment thereof. With due credit allowed for the sum of $248,394.72 paid by Mr Lai the claim is for $774,725.40 together with accrued interest at 2.5% per month to judgment.

27. Mr Lai filed his on 2 June 1999 suing Trilease as 1st defendant and Kinsley as 2nd. The claim against Trilease is for recovery of the sum of $248,394.72 which was incorporated in Mr Lai's offer to settle and which was wrongfully withheld by Trilease notwithstanding its rejection of the offer. The claim against Kinsley is to recover such amount that he is found to be liable to pay Trilease under the guarantee.

28. No steps in either proceedings have been taken either by Kinsley or Chan. Trilease in its action was on 26 July 1999 awarded judgment against both in the full amount claimed. Mr Lai in his action was on 27 June 2000 awarded judgment against Kinsley for damages together with interest on $248,394.92 to be assessed.

29. On 29 October 1999 by order the proceedings were consolidated, and thus have been tried together before me.

The Issues

30. It is not disputed that Kinsley defaulted in its payments under the lease agreement and that the amount outstanding and the interest accruing has been correctly assessed for which Trilease now has judgment against both Kinsley and Chan. Nor is it doubted that Chan and/or Kinsley caused the machinery to be transported out of Hong Kong to the Mainland and that Trilease has taken no steps to recover it. And Mr Lai fairly concedes that but for the matters he has raised that I am about to come to he, as a signatory to the continuing guarantee, would be liable to pay the judgment debt.

31. It is Mr Lai's case that there was an implied term in the continuing guarantee upon which his committing himself to it was conditional, namely, that in the event of default by Kinsley, Trilease would exhaust its remedies under the lease agreement before looking to the guarantors for relief. This included recovery of the possession of the machinery which would then have enabled it to assign the machinery to him in terms of his proposal of 18 May 1999.

32. Alternatively he says he is entitled to an equitable relief. He claims that a creditor owes a duty to protect a surety and that includes preserving the security and making it available for the surety where the surety is called upon to satisfy the debt. He prays in aid the judgment Wulf v. Jay (1872) LR 7 QB 756. Cockburn CJ said at page 762:-

"Cases have been cited and authorities have been referred to in Story's Equity Jurisprudence, which abundantly establish that which is a common and well-known proposition, that where a debt is secured by a surety, it is the business of the creditor, where he has security available for the payment and satisfaction of the debt, to do whatever is necessary to make that security properly available. He is bound, if the surety voluntarily proposes to pay the debt, to make over to the surety what securities he holds in respect of that debt, so that, being satisfied himself, he shall enable the surety to realise the securities and recoup himself the amount of the debt which he has had to pay. That is now a well-known proposition."

Hannen J said at page 764:-

"As a surety, on payment of the debt, is entitled to all the securities of the creditor, whether he is aware of their existence or not, even though they were given after the contract of suretyship, if the creditor who has had, or ought to have had, them in his full possession or power, loses them or permits them to get into the possession of the debtor or does not make them effectual by giving proper notice, the surety to the extent of such security will be discharged. A surety, moreover, will be released if the creditor, by reason of what he had done, cannot, on payment by the surety, give him the securities in exactly the same condition as they formerly stood in his hands."

And Quain J said at page 765:-

"... if through any neglect on the part of the creditor, a security to the benefit of which a surety is entitled is lost, or is not properly perfected, the surety is discharged."

33. It is Mr Lai's case that Trilease tacitly permitted the removal of the machinery out of the jurisdiction, or alternatively was negligent in allowing that to happen, and has taken no or insufficient steps to have it restored to Hong Kong. Those acts and/or omissions put Trilease in breach of the implied condition to pursue its remedies against Kinsley first; alternatively, in equity its failure to protect the guarantors by preserving the security discharges Mr Lai from liability.

34. As to Mr Lai's claim to recover the sum of $248,394.72 his case is that this was forwarded expressly on condition that it was part and parcel of his proposal to settle. Trilease having rejected the offer had no right to retain the cheque in part payment.

35. I come now to deal with these issues.

The Outcome

36. Mr Lai from the witness box confirmed his witness statement in which he said that he executed the continuing guarantee in favour of Trilease as a favour to Mr Chan and on the implied condition that Trilease and Kinsley would comply with all the terms and conditions of the lease and such guarantee would stand as a secondary collateral security of the lease. But quite fairly he conceded that he gave no notice of such condition to Trilease before signing the continuing guarantee, nor is there any reference to it in what is a comprehensive document. I find that there was no such condition, express or implied.

37. I turn now to his remedy in equity. His difficulty in pursuing that course is that in the context of these proceedings the machinery is not security as such, held by a creditor pending compliance by a debtor with the terms of repayment of a debt, thereafter to be redeemed by the debtor. In this case the machinery was being leased by its owner to a lessee. Whether or not the lease was to have run its course or, as it happened, be terminated prematurely, title at all times remained with Trilease and on termination it was entitled to recover possession. Accordingly there was no security to be protected for the guarantor even if he by subjugation assumes the role of the creditor.

38. The parties, as I find, were tied by the express words of the continuing guarantee; no more or less. As Deputy Judge Saied said in Wing On Finance Co. Ltd v. Lam Soo Wing Stephen [1989] 1 HKC 307 at p. 315:-

" It is trite that the extent of a surety's liability under a guarantee is essentially a matter of contractual interpretation and where the provisions of the document under consideration are clear, effect will be given to those provisions."

39. So what does the continuing guarantee state?

40. Clauses 1, 5 and 9(a) permitted Trilease to pursue its remedies against Messrs Lai and Chan as principal debtors with or without contemporaneous action against Kinsley. Mr Vong of Trilease said in evidence that Trilease had not been invited to approve the transfer out of Hong Kong of the machinery, had not approved that and was not aware of this default until after the event. It abandoned any prospect of recovery of the machinery given the uncertainty of its whereabouts, its condition, and the possibility that the Authorities in China or some other party might have claimed an interest. But there was no need for him or anyone else on behalf of Trilease to have to justify that. The terms of the relevant clauses are crystal clear. Repossession was just one of a number of options available to it which it was entitled to choose to pursue or not, without explanation.

41. In the Privy Council case The China and South Sea Bank Limited v. George Tan [1990] 1 HKLR 546, Lord Templeman said at p. 549:-

"In the present case the security was neither surrendered nor lost nor imperfect nor altered in condition by reason of what was done by the creditor. The creditor had three sources of repayment. The creditor could sue the debtor, sell the mortgaged securities or sue the surety. All these remedies could be exercised at any time or times simultaneously or contemporaneously or successively or not at all."

42. It follows that Trilease owed no duty to Mr Lai in contract or equity to ensure that the machinery was not taken out of Hong Kong or to pursue a recovery or to assign it to him as a precondition of calling up the guarantee. As owner of the machinery it owes no one a duty apart from itself to repossess it. It was entitled to look to Mr Lai to recover its loss and he is liable to meet it.

43. To complete the picture I turn now to deal with Mr Lai's claim to recover the sum of $248,394.72, though in practical terms it makes no difference given my findings above. Whether or not the tender of the cheque was part of the offer depends on the wording. And that was professionally drawn; one must assume that if the intention was that it be part and parcel of the offer that would have been clearly spelt out. But one only has to reread the letter of 18 May 1999 to see that that was not the case. In my view the payment was tendered, as is clearly stated, as a gesture of goodwill; perhaps to encourage a positive reaction to the offer submitted earlier, but certainly not as a condition of it. And it is noteworthy that whilst the solicitors for Trilease by their letters of 19 and 21 May 1999 gave notice that the cheque would be credited against the amount due, there was no protest about that in the response of 24 May 1999. Trilease was, as I find, entitled to accept the same as part payment of the total indebtedness.

44. Save for the orders that concludes all matters. Costs shall follow the event but will be nisi at first instance.

The Orders

45. In HCA 9126/1999:-

46. There will be judgment in favour of the plaintiff against the 2nd defendant in the sum of $918,113.54 together with interest from today until payment at the judgment rate.

47. Costs, nisi at first instance, are to the plaintiff, taxed if not agreed.

48. In HCA 9069/1999:-

49. The claim against the 1st defendant is dismissed. The damages in the judgment of 27 June 2000 are assessed at the total of $918,113.54, $284,394.72, interest on the said sum of $284,394.72 being 12% from 18 May 1999 to today (561 days) $52,453.29 and the costs the plaintiff is bound to pay to the 1st defendant in HCA 9126/1999 and in this action. This amounts to $1,254,961.55 plus costs to be agreed or taxed. Interest will run at the judgment rate until payment.

50. Costs of the plaintiff taxed if not agreed shall be paid by the 2nd defendant.

51. Costs of the 1st defendant taxed if not agreed shall be paid by the plaintiff. This order shall be nisi at first instance.