LIU CHONG HING BANK LTD. v. ALLAN WONG AND OTHERS

HCA 11040/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 11040 OF 1999

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J U D G M E N T

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1. In these proceedings the plaintiff claims against the defendants sums claimed to be due under a guarantee signed by them and dated 1 December 1993 by which they undertook to be liable to the plaintiff for money owing to the plaintiff by Shando International Ltd (Shando) in respect of banking facilities granted to Shando. The guarantee was a continuing guarantee and the liability of each guarantor thereunder was described as unlimited. By May 1999 Shando was indebted to the plaintiff to the extent of $19,649,193.24 and this sum was demanded from the defendants who failed to pay. This action was commenced on 9 July 1999 and judgment in default of notice of intention to defend was entered against the 3rd and 5th defendants on 4 August 1999. This judgment accordingly concerns only the 1st, 2nd and 4th defendants. The 2nd defendant is the wife of the 1st defendant, and did not appear at the hearing nor give evidence. The 1st defendant appeared in person.

2. Judgment having been obtained against, inter alia, Shando on 15 October 1999, and a property the subject of a mortgage having been sold thereafter, the remaining sum now claimed is $17,266,422.32 with interest from 22 August 2000.

3. The defendants deny liability under the guarantee. By their defence the 1st and 2nd defendants contend that: (i) there was no guarantee as the plaintiff did not accept their offer; (ii) that the plaintiff, by its representative a Mr Lau Siu, represented to them, prior to the signing of the guarantee, that so long as the banking facilities were secured by landed properties, the plaintiff would not enforce the guarantee against them; (iii) they were discharged from liability by the plaintiff giving time to Shando to settle its debts; and (iv) that the conclusive evidence clause in the guarantee is unconscionable under the Unconscionable Contracts Ordinance, Cap 458.

4. I can deal with three of those defences immediately. The first must fail, as the signing of the guarantee, with the terms set out therein, must have been acceptance of the plaintiff's offer rather than an offer by the defendants made to the plaintiff. No other interpretation is possible. As the consideration stated therein is the making or continuing advances, giving credit and affording banking facilities to Shando, there must be a binding contract at the latest when those facilities have been made available. The third must also fail as the guarantee itself provides that giving time to Shando in respect of its debts shall not affect the plaintiff's rights against the guarantors. As to the fourth, the Unconscionable Contracts Ordinance was enacted on 20 October 1995, and section 4 of that ordinance provides that it shall not apply to contracts made before its commencement. This guarantee was dated December 1993. In any event I would have doubts as to its application here.

5. The 4th defendant claims that he was induced to sign the guarantee by representations of Mr Lau that the banking facilities would be secured by mortgaged properties, and the advances would not exceed their value, so that the guarantors would not be personally liable, that the limit of the facilities would not be varied without his consent, that the guarantee was just a matter of formality, and he would not in any event be personally liable. He accordingly claims that the plaintiff is now estopped from recovering Shando's debt from him. He also pleads undue influence. Ms Chan for the 4th defendant now relies only on the alleged representations that the plaintiff would not advance loans in excess of the value of the mortgaged properties, that the guarantee was just a formality, and that he would not be personally liable notwithstanding the provision as to unlimited liability. It is the 4th defendant's case that the last two representations were untrue, and that by reason of all three the plaintiff is estopped from enforcing the guarantee.

6. It is apparent that the principal issue here concerns what transpired between Mr Lau and those defendants who met him and discussed the guarantee with him prior to its signing, and whether any representations were made as to their liability under the guarantee, and if so, its effect in law.

Background

7. The 1st defendant is a businessman who resides for the greater part of the time in the USA, having left Hong Kong to emigrate there in 1981, after studying in Canada prior to that from 1971 to 1976. While at school in Hong he had been classmates, and remained friends, with the 4th and 5th defendants. One of the businesses in which he was engaged involved a Canadian company importing gift items from China, and he requested the 5th defendant to form a company in Hong Kong through which to conduct this business. This was Shando. Although there have been different shareholders at various times in the company's history, it is clear that the 1st defendant was always the major beneficial shareholder and controller of Shando, and came to Hong Kong regularly to oversee its business. Indeed, it was the 1st defendant who negotiated the terms of the banking facilities with Mr Lau, who also became a friend and with whom he and the other defendants, except possibly the 3rd defendant, the son of the 5th defendant and a student at the time, regularly socialised with meals in restaurants. From 1989, when a joint venture the 1st defendant was engaged in expired, he was able to devote more time to Shando and the China trade through it began to expand. The 1st defendant bought a flat in Hong Kong, in Scenic Heights, Conduit Road, but still left the day to day running of Shando to a manager who reported to him, and the 3rd and 4th defendants became the only directors, presumably because they were the only ones resident in Hong Kong and available to sign company documents. The 2nd defendant does not appear to have had any dealings with Shando at all apart from being a nominal shareholder for her husband. The 4th defendant is a practising surgeon and the 5th defendant is employed by the United States government at its consulate general in Hong Kong, and whose terms of employment do not allow him to engage in any other business.

8. In 1993 Shando's business, which had diversified into the import also of footwear from China, was doing well and the 1st defendant wished to expand it, for which greater banking facilities than hitherto were required to cover the documentary credits necessary for the larger international trade envisaged. There seems to be no dispute that the other shareholders and directors concurred with this decision, but it was the 1st defendant who negotiated the terms of the facilities to be granted, with Mr Lau. These were agreed to be trust receipt financing up to a limit of $5,500,000.00 with interest at 1% over prime, and an overdraft of $200,000.00. In effect a limit of $5,700,000.00. This was to be secured by legal charges over two properties, the 1st defendant's flat in Scenic Heights, and Unit 804 Harbour Centre, Hok Cheung Street, Kowloon, a property owned by another company with similar shareholders, and an unlimited guarantee by the defendants, all the shareholders and directors. The terms were agreed to and by a letter of 5 January 1994 the facilities were granted.

9. On 20 July 1994 the Scenic Heights property was sold, and the 1st defendant pledged instead a US dollar fixed deposit with the bank of the equivalent of about HK$2,500,000.00.

10. Business continued to do well and in September 1994 the limit of the facilities was increased to a maximum of $18,200,000,00, being as to $6,500,000.00 for trust receipt financing, $3,700,000.00 overdraft, and an instalment loan of $8,000,000.00 used to purchase another property in Harbour Centre, Unit 408, for $13,456,000.00, again in the name of another company. This was secured by the 1st defendant's fixed deposit, legal charges over the two Harbour Centre properties, and the guarantee. The limit for the trade financing was accordingly $10,200,000.00 if one ignores the instalment loan. In April 1995 the limit was increased again to $11,200,000.00, secured by the same properties and the guarantee. In December 1995 the limit was further increased, although no details are available. The 4th defendant gives the limit as $18,000,000.00.

11. Meanwhile, in August 1995, the amount of the facilities being, or intended to be, greater than the value of the property securities, and the other defendants being unwilling to charge their own properties, a further guarantee to secure the facilities, to a limit of $5,000,000.00, was provided to the plaintiff by a Mr Lee Wai Man, a friend of the 5th defendant's father and who was well known to the plaintiff as a wealthy man.

12. In May 1996 the 4th defendant, wishing to spend more time abroad in connection with his profession, and in particular charitable work he had been heavily engaged in, resigned his directorship, and the 2nd defendant took his place. He also disposed of his shares. However, he remained as a guarantor.

13. In July 1996, there was a further adjustment to the facilities, which resulted in a decrease to a limit of $16,200,000.00, being $15,000,000.00 for trust receipt financing and an overdraft of $1,200,000.00.

14. Following this the value of the commercial units used as security decreased and, at a meeting in October 1996, they were requested to repay $5,000,000.00 of the debt, and their facilities were suspended until this was done. This obviously adversely affected Shando's business and by December 1996 the total indebtedness of Shando including interest was $20,585,946.40. Payment was demanded in January 1997. There followed a number of meetings between representatives of the plaintiff and the 1st defendant, together with one or more of the other defendants, and sometimes with Mr Lee Wai Man. Ways were sought to reduce the indebtedness of Shando so that further banking facilities might be granted and business continue. A number of payments were made on behalf of Shando over the next 18 months, but property values continued to decrease, and in May 1999 the outstanding balance was demanded from Shando and the guarantors.

The factual issues

15. The only real factual issue remaining for determination in this case is whether or not Mr Lau made representations to the defendants, prior to the signing of this guarantee, which could reasonably be taken to mean that they would incur no personal liability thereunder, and was the reason that they signed it. As to evidence of what transpired we have that of Mr Lau, and the 1st and 4th defendants, and the first thing to note is that all three have difficulty in remembering in any detail exactly what was said and when, and indeed where, after such a lapse of time. This is particularly understandable in the case of Mr Lau. Apart from trying to recall events of some seven and a half years ago, Shando was only one of no doubt many clients, and since then he left the plaintiff to pursue a different career in 1996, only returning to them, when that did not work out, in 2000.

16. Mr Lau said that the first approach had been orally from the 1st defendant, starting some two to three months before 1 December 1993. He knew that he was a businessman with international interests, and was the one who ran Shando, the others being effectively silent partners. He said that he was good friends with the 1st defendant and always got together with him socially when he was in Hong Kong, and that there were many discussions with him about his requirements, often with the 4th and 5th defendants there as well. He said that it was common practice to require guarantees as well as other collateral from companies wanting banking facilities, and the plaintiff had had guarantees from the 1st, 4th and 5th defendants for a similar purpose in 1991, for the initial mortgage of Unit 408 Harbour Centre in 1992, and for Shando's overdraft in early November 1993, although Mr Lau could not recall being in charge of Shando's account before this transaction. These defendants were accordingly no strangers to guarantees, and Mr Lau admitted that he never discussed the legal effects of this guarantee with them. He said that he gave the guarantee forms to them to sign one to two weeks before 1 December, and had visited the offices of Shando to do so where he gave them to Miss Cheung, the secretary, who returned them after they were signed. Although it was not disputed that Mr Lau had visited Shando's office several times, there is a dispute of fact here, as Miss Cheung says that she received the forms from the 1st defendant, not Mr Lau, but did return them to the plaintiff bank after they were signed and she had also signed as a witness, although they had not been signed in her presence. I do not consider that this is any more than a difference in memory and does not assist in the matter of credibility, and he may well have given the forms direct to the 1st defendant, probably at the meeting referred to below.

17. Both the 1st and 4th defendants, while not denying that they had met Mr Lau on a number of social and other occasions, and I have no reason to disbelieve Mr Lau that their business interests were then discussed, gave evidence that the matter of the guarantee was discussed particularly at a meeting in November 1993 in the conference room of the plaintiff's office. Mr Lau has no memory of this meeting, but I consider it more likely than not that such a meeting took place. It is what transpired at this meeting which is the crux of this case. The 1st defendant says that Mr Lau, when asked why a guarantee was necessary, in view of the fact that they were putting forward two properties as security, told them that it was only a formality and that the plaintiff had never, and would not, go against customers personally. I consider this last representation to be so unlikely in respect of a bank that I give no credence to it, but I think it likely that the 1st defendant already knew of the requirement for a guarantee, as he did not mention this meeting in his witness statement, but said that the request for a personal guarantee was during the process of negotiation for the banking facilities. It is the case of the defendants that, by the time of the meeting, the facilities had already been approved, subject to security and signing of the necessary documents.

18. The 4th defendant, said that when he saw the word 'unlimited' in the guarantee he was very worried and asked if he would be personally liable, and Mr Lau told him that the facilities would always be less than the other securities so that if something went wrong they could be sold and they would not be personally liable, they would not come after them, and it was only a formality. He said that he would not have signed if this had not been said, and he was encouraged in the belief that it was only a formality by the fact that the 3rd defendant, although a director, was a 19 year old student and he too was asked to sign. He claimed that Mr Lau also said that he would watch the account and the bank would not lend more than the value of the securities. The guarantee was then given to the 1st defendant, and it was some time later than they all signed and it was returned to the plaintiff.

19. Mr Lau, although his memory of his meetings with the defendants was unclear, was adamant that he would never tell a client that signing a guarantee did not involve any personal liability. He said further that, although with a new client, and he classed Shando as such as this was the first time they had had such facilities, he would ensure that the amount lent did not exceed the security held at first until he saw how the account was conducted, there was no rule that the amount must of necessity not exceed that value. In the event, the borrowings by Shando did not do so until 1996, when the decrease in the property values caused the bank to reverse the trend upwards of those borrowings. This is, however, simple common sense. This was never a large company, and it would be prudent of any bank lending to such a company to make sure that the debt remained as much as possible within the range of the easily realisable securities.

20. I have to say that I find Mr Lau an honest witness, doing his best to recall events some time ago, but certain that he did not make any promises that the plaintiff would not in any event seek to enforce the guarantee. As I have said, I am dealing with what I believe are imperfect recollections of events some time ago, and I accordingly take into account what I consider most likely to have happened.

21. The defendants were investors in Shando, although none to the extent of the 1st defendant, and naturally hoped that their investment would grow in time to be worth much more. The 1st defendant clearly believed that it would and that conditions were right to expand the business. For this, dramatically increased banking facilities were required, but his confidence in the company was such that he was prepared to put his own property forward as security. I have no doubt that the other defendants shared his enthusiasm and saw that their own modest investments might benefit. It was in this atmosphere of optimism that they approached the bank and negotiated the terms of the facilities requested. There was then no suggestion that the economy would be affected by any downturn, nor that property prices would not continue to go up, as indeed they did for over two years.

22. At that time the facilities granted by the bank were to be initially well below the value of the property secured. It follows that were the company to default, there would be no need to call in the guarantee as they could enforce the charge on the properties. It would be a far simpler and cheaper way of obtaining repayment than pursuing individuals on a guarantee, who may or may not be able to pay. I have no doubt that something along those lines would have been explained to a customer voicing concern about his potential liability. I see nothing wrong with a bank officer giving an assurance that, provided the value of the securities held exceeded the loans, then there would be no need to pursue the guarantors, and I consider it likely that this is was passed between Mr Lau and the defendants. This would leave them with the strong impression that there was little likelihood of any personal liability, and that their signing of the guarantee was in effect little more than a formality.

23. My view in this is reinforced by a number of matters, not least being the 1st and 2nd defendants' own pleaded defence, at a time when they was legally represented. In paragraph 8 they plead the only representation alleged to have been made by Mr Lau to the effect that, so long as (my italics) the banking facilities extended were secured by landed properties, the plaintiff would not enforce the guarantee against them. It follows that once the facilities were not covered by the properties' value, the plaintiff would then seek to enforce the guarantee. There is no suggestion in this defence that there was a promise to limit the lending to within the value of the securities. Indeed, in 1995, when the proposed lending would have taken it beyond the value of the properties, the defendants arranged a further guarantee from Mr Lee.

24. The next matter is that neither the 1st nor the 4th defendants ever questioned the regular reference to the guarantee in the facility letters issued by the plaintiff over the next two years as the lending was increased at the request of Shando. All these letters, after setting out the new limits of the facilities, also stated the security upon which they were granted. As well as the properties, these all referred also to the guarantees. At various times both the 1st and the 4th defendants signed such letters accepting the terms contained therein, and never questioned that the guarantee was part of the security for bank's lending. Neither saw fit to point out any promise that such a guarantee was not to be enforced.

25. But it is their behaviour after the first demand was made under the guarantee in January 1997 which is most significant. Neither of them questioned the bank's right to make such a demand but entered into negotiations about how the debt by Shando could be reduced. This was initially by the 1st defendant alone, to whom the 4th defendant went to discuss the matter, but subsequently the 4th defendant too attended a number of meetings with the plaintiff's representatives, always with the 1st defendant. At no time did he suggest to the plaintiff that the guarantee was not enforceable because of what he claimed was Mr Lau's promise on behalf of the bank. His explanation for this is that he did not know that he may not be liable until he consulted solicitors for the purpose of these proceedings. I find that explanation not credible. Even a layman, if told that he will not be made to pay under a guarantee, whatever happens, when a demand is made is unlikely not to raise the matter before entering into negotiations as to payment.

26. The 4th defendant also appears to have accepted that he was liable as a guarantor before any demand was made, as at the time he resigned as a director, he requested the 1st defendant to arrange his release from the guarantee. If this was the ineffective formal document he claims it to have been, there would have been no reason for his concern. This request was made again in 1997, and the 1st defendant did eventually ask the plaintiff to release him. This was never done, and in 1998 the 4th defendant deposited $100,500.00 as further security and offered to mortgage his father's property. As to the 1st defendant, he clearly accepted that both he and the other guarantors were liable, stating in a letter in June 1999, while he was still trying to find a way to reduce the amount owed, that the responsibility of the other guarantors "remains unchanged".

27. And we are not dealing here with ordinary laymen. These are all educated men with university degrees. The 1st defendant an international businessman, and the 4th defendant an eminent surgeon. The latter may not be as experienced a businessman as the 1st defendant, but I do not accept that he is totally ignorant of matters outside his own sphere. These are intelligent men who, with varying degrees of financial interest, saw an opportunity, in an optimistic economic climate, of making a success of a business to their advantage. In that economic climate it never occurred to any of them that the level of business would decrease, or, more importantly, that the value of real property would decline. The 1st defendant admitted the latter in evidence, and that he never considered the consequences of such a decline. There was thus no intimation of any danger in signing the guarantee, as they could not envisage the circumstances in which they might become liable under it. They were carried forward on a tide of enthusiasm and optimism then prevailing, and assurances, and I am satisfied that is all they were, from Mr Lau, that should circumstances remain at least the same, they were in no danger. It is all very well with the benefit of hindsight to say that they did not intend to make themselves personally liable, but this is what they did, and the impression they then had that they had signed a document which would never be enforced has since crystallised into a belief that this is what they were told.

28. I accordingly that I find that no representations of the kind alleged by the defendants were made by Mr Lau on behalf of the plaintiff, and that they well knew that they were signing a legal obligation, albeit one which they did not think they would ever have to honour. There was no misrepresentation and the plaintiff is not estopped by its conduct from enforcing the terms of the guarantee. The defences of the 1st and 4th defendants must therefore fail.

29. As to the 2nd defendant, the evidence of her husband, the 1st defendant, was that he had taken the guarantee to the USA for her to sign. There is no evidence from her as to what happened, and the only suggestion as to any representations came from the 1st defendant who said that Mr Lau had spoken to the 2nd defendant on the telephone, who told her not to worry and that nothing bad would happen to her. For the same reasons as above, I am satisfied that Mr Lau, if he did speak to her, which he denies, gave her no more than the general assurances that he gave to the others. It is unfortunate that the 2nd defendant was not separately represented, as she might then have benefited from the presumption of undue influence of her husband.

Conclusion

30. As I find on the facts that there was no misrepresentation, nor promises or representations upon which an argument as to estoppel might be based, there must be judgment for the plaintiff against the three defendants for the sum now claimed, namely $17,266,422.32 with interest thereon at 3% over prime rate from 22 August 2000 to the date hereof. There will also be an order nisi that the 1st, 2nd and 4th defendants pay the costs of the plaintiff to be taxed.