Re: YANG YEE KWAN, HENRY and Ex parte: FORTIS BANK ASIA HK, formerly known as GENERALE BELGIAN BANK

HCB 1512/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS NO. 1512 OF 2000

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REASONS FOR JUDGMENT

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1. This is a petition for a bankruptcy order against Yang Yee Kwan, Henry ("the Debtor") based on his failure to comply with a Statutory Demand for a liquidated sum.

2. At the conclusion of the hearing on 27 February 2001, I made the usual bankruptcy order, but in view of the time, said that I would give reasons for my judgment in writing later. I do so now.

3. The petitioner is a bank which had provided facilities to a company called Whole Right Development Ltd ("the Company"). The indebtedness was secured by a Legal Charge over an apartment and car parking space in Shatin owned by the Company, and by a Guarantee dated 12 August 1997 signed by the Debtor, his wife and a Mr Choy Ping Chung ("Choy").

4. The Guarantee was signed by all 3 persons even though the Debtor, previously a director and shareholder of the Company, was no longer a director or shareholder of the Company.

5. The Guarantee provided, amongst other things, that the guarantee was in consideration of the Bank making or continuing loans or advances to the Company, and at clause 7.02, provided:-

"Where there is more than one Guarantor, the agreements obligations and liabilities of such persons herein contained or implied are joint and several. ... The Bank shall be at liberty to release any one or more of the Guarantor from this Guarantee and to compound with or otherwise vary or agree to vary the liability of or to grant time or indulgence to or make other arrangements with any one or more of the Guarantor or any other person without prejudicing or affecting the rights and remedies of the Bank against the other of the Guarantor."

(The word "Guarantor" was defined in clause 8(b) to mean every person liable under the guarantee).

6. Between 1997 and 2000, the Bank granted various facilities to the Company. By 11 April 2000, the Company was indebted to the Bank in the sum of about $16.5m.

7. On 11 April 2000, a Statutory Demand was issued by the Bank against the Debtor. No repayment was made and on 15 May 2000, the present Petition was presented.

8. In his affirmation filed on 31 July 2000 in opposition to the petition, the Debtor raised essentially 5 main arguments, which may be summarised as follows:-

(1) the Guarantee no longer exists, as it had been replaced by a document which he refers to as a "new guarantee" signed on 16 November 1999;

(2) there was no agreement that the Bank could call in the loan by reason of a decrease in the value of the charged properties;

(3) the Bank was not entitled to use an amount of $2m. guaranteed by the Government under the Special Finance Scheme for Small and Medium Enterprises for repayment of the Company's debt;

(4) there was an agreement amongst the 3 guarantors under which any settlement reached by any one of them with the Bank would be a settlement which "covered" all of them, and Choy has reached a settlement with the Bank whereby he would pay half the amount of indebtedness in settlement of the Bank's claim;

(5) the amount of the debt should be reduced by the value of the charged properties.

(1) Guarantee not replaced by document of 16 November 1999

9. The Guarantee signed on 12 August 1997 was clearly entitled "Guarantee". It was 4 pages long and contained detailed clauses setting out, amongst other things, the guarantors' covenant to pay the Bank, the powers of the Bank, set-off and lien, and other detailed provisions. It was signed by the guarantors in the presence of an officer of the Bank.

10. The document of 16 November 1999 is a letter from the Bank addressed to the Company. It confirmed an agreement to revise the Company's facilities. Apart from a reference to the legal charge and the guarantee as security for the facilities, it does not itself contain any terms or conditions of a guarantee, such as a promise by the guarantors to pay the Bank. In short, it is not, in form or in substance, a guarantee.

11. The Debtor's contention that this was a guarantee which replaced the Guarantee on 12 August 1997 is based on the fact that the guarantors were asked by the Bank to sign the letter in their capacity as guarantors, a fact which was acknowledged by Mr Godfrey Lin Wai-shing, a Special Assets Officer who gave evidence on behalf of the Bank. However, the mere fact that the guarantors were asked to sign the letter in their capacity as guarantors does not turn the letter into a guarantee. It is the contents of the letter that determine what it is, and the letter does not contain any terms or conditions of a guarantee.

12. Mr Lin denies having told the Debtor that the document of 16 November 1999 was a guarantee. I accept his evidence. In any event, the Debtor, who understands English, could not have been under any misapprehension as to the nature of the document. He is an experienced businessman who has, on his own admission, signed many facility letters in the course of his career. He could not have failed to know that the document that he was signing, albeit in his capacity as guarantor, was a facility letter, no more and no less, and not a guarantee.

13. I find therefore that this contention by the Debtor fails.

(2) Right of Bank to call in the loan

14. The Debtor's next contention was that the Bank had no right to call in the loan by reason only of the decrease in the value of the charged properties.

15. The Bank, through its officers, has accepted that, prior to the restructuring of the Company's debts, the Company was not a "non-performing" customer. The Company had not exceeded its overdraft limits and had not failed to keep up with loan instalments. However, Mr Wan Koon-man, the Special Assets Manager, explained that the Bank's decision to call in a loan was based on various circumstances, such as a change in the value of the security, change in management of the borrower company, change in bank policy, etc.

16. Whether or not, morally, the Bank was doing the decent thing to call in a loan from a good customer, when the customer has no control over the prices of property used as security, is not for a court of law to judge. The Court can only look at the parties' contractual obligations, and here all the facility letters contained express provisions that the Bank had an overriding right to demand immediate repayment of any or all of the amount outstanding in respect of the facilities together with accrued interest and to revise or withdraw the facilities at any time at its discretion.

17. With such a wide discretion, it was not necessary for the Bank to have specified that it could call in the loan by reason of a decrease in the value of the charged properties. Accordingly, this contention on the part of the Debtor also fails.

(3) Use of sum guaranteed under SME Scheme

18. The Debtor's next contention was that the Bank was wrong to have applied part of a loan guaranteed by Government under the Special Finance Scheme for Small and Medium Enterprises ("SME Scheme") towards settling the Company's outstanding overdraft and to reduce an outstanding loan. He says that the loan should only have been applied towards running the business.

19. The only evidence before the court as far as this Scheme is concerned is a document entitled "Acceptance of Conditions for the Issue of a Guarantee" signed by the Company in favour of the Director of Accounting Services. There appear to be no provisions in this document that limits the use to which the funds guaranteed by the Government may be put. In the absence of any other evidence, the Debtor's contention in this respect does not assist his case.

(4) No settlement with Choy

20. The Debtor's contention was that he, his wife and Choy had made an agreement amongst themselves that he or Choy could act for the others in negotiating any settlement with the Bank, and that the Bank was aware of this. He says Choy has reached an agreement with the Bank to settle the indebtedness by agreeing to pay half of the debt by instalments, so he (the Debtor) should be released from liability.

21. The Bank's short answer to this contention was that there was no agreement with Choy. This was the evidence given on oath by Mr Wan of the Bank. His evidence was not shaken in cross-examination.

22. In contrast, there is no evidence from Choy to say that there was such an agreement. This absence of evidence is all the more surprising when the Debtor says that he sees Choy from time to time as they are related. In the absence of Choy's evidence or indeed of any evidence that supports the allegation of a settlement agreement, the only reasonable conclusion is that there was no such agreement.

23. In any event, cl. 7.02 of the Guarantee is clear that the release of one guarantor would not affect the Bank's rights against the others. Even if there had been an agreement amongst the 3 guarantors themselves, that would not affect the rights of the Bank. I cannot accept the Debtor's argument that the Bank was a party to the agreement amongst the 3 guarantors, an argument which the Debtor attempted to substantiate by referring to letters to the Bank which he had signed. The letters were letters from the Company, not from the guarantors, and his signature was simply part of the Company's corporate signature.

24. Accordingly, this contention also fails.

(5) Value of properties sold

25. Finally there is the question of the value of the charged properties. Even after crediting the Company with the proceeds of sale, there is still an amount of more than $9m. due and owing.

26. The properties were surrendered by the Company to the Bank in March 2000. It was then occupied by a tenant who moved out in June 2000. (There is a dispute as to whether the Bank had given consent for the tenancy, but this is immaterial to the issue over the value of the properties, as the properties were sold with vacant possession).

27. The properties were placed by the Bank with estate agents for sale. It took some months before the estimated price was reached. On or about 17 October 2000 (being 14 days before the Formal Sale and Purchase Agreement dated 31 October 2000), the Bank entered into a Provisional Sale and Purchase Agreement to sell the properties for $8.6m.

28. The properties were inspected by Vigers on 25 October 2000 and a valuation of $8.5m was given as at 30 October 2000 being the date of the Valuation Report. This was after the Provisional Sale and Purchase Agreement. However, the evidence of Mr Wan was that the Bank had an in-house independent valuation department which had given a valuation which justified the sale at $8.6m. and there had been a time lag between oral communications with the external valuers and the Report.

29. There is no competing expert valuation adduced by the Debtor. Nor has he adduced any other evidence, such as land search records for comparable properties, to show that the valuation was below market price, even if it be assumed that a mortgagee has a duty to obtain a fair price for the property.

30. The Debtor has contended that a higher price might have been obtainable if the property had been auctioned, rather than sold by private treaty. Mr Wan's evidence was that in his experience that was not so, and there is no evidence to challenge this.

Order

31. In the circumstances, the debt having been proved and the Debtor having failed to show any sufficient cause why a bankruptcy order should not be made against him, I made the usual bankruptcy order.