BANCA DI ROMA SOCIETA PER AZIONI v. LISGOLD HOLDINGS LTD. AND OTHERS

1997, No. CL-72

IN THE HIGH COURT OF HONG KONG

COURT OF FIRST INSTANCE

COMMERCIAL LIST

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J U D G M E N T

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1. In this action the Plaintiff bank sues the 1st Defendant for repayment of monies due and owing pursuant to banking facilities granted to the 1st Defendant, and with regard to which the 2nd and 3rd Defendants were guarantors. The application presently before me is the Plaintiff's application for summary judgment under an Order 14 summons dated 30th May 1997.

2. The broad background of this case is relatively straightforward. On 9th August 1994 the 1st Defendant, a jewellery company, entered into an agreement with one Banca Nazionale dell'Agricoltura Societa per Azioni ("BNA") whereby banking facilities were to be extended to the 1st Defendant. A condition of such agreement was that guarantees were to be provided from the 2nd and 3rd Defendants, who were at the time directors of the 1st Defendant. These guarantees were dated 18th August 1994.

3. BNA suspended finance facilities to the 1st Defendant in January 1996, the 1st Defendant thereupon requesting, shortly thereafter on 13th February 1996, an extension of time with regard to the repayment of certain sums. In March 1996 BNA revoked facilities granted to the 1st Defendant prior to its merger with the present Plaintiff, Banca di Roma Societa per Azioni, in April 1996.

4. The next event of importance was that by letter dated 1st April 1996 the 1st Defendant was requested to execute a novation agreement. The letter in question read, in part, as follows:

"As you are aware, early in April 1995 Banca di Roma ("BDR") took over Banca Nazionale dell'Agricoltura ("BNA"). ...

As a result of the take-over, it has been necessary to carry out a review of the internal organisation of the Group's business activities, in order to restructure the Group in the way most suited to the business diversity and experience of the various components of the Group. ...

In order to effect an orderly wind-down of BNA's operations, it is intended that customer business will be transferred to BDR during the period from 11 April 1996. It is also intended that any security given to BNA in respect of customer business shall be transferred at the same time as the corresponding customer account(s). The transfer of your account(s) and other agreements shall therefore be conditional upon BNA receiving all relevant consents in respect of the transfer of any security given in respect of your obligations (the date of the transfer of your account(s) shall be referred to as the "Transfer Date").

On and from the Transfer Date, all obligations owed to you by BNA will be novated to BDR so that all obligations will be owed to you by BDR. On and from such date, you will have exactly the same rights in respect of such obligations against BDR as you previously had against BNA, in each case on exactly the same terms as applied between yourself and BNA immediately before the Transfer Date.

Further, on and from the Transfer Date, the benefit of all of BNA's right, title and interest (legal and equitable, present and future, actual or contingent) in and to all obligations owed by you to BNA in respect of your account, any remaining obligations in respect of the repayment of your facility and under all agreements entered into between you and BNA, will be assigned to BDR and its successors and assigns, substituting BDR in its full right and place in respect thereof. ..."

5. It is important to note that this letter was signed by the 3rd Defendant for and on behalf of the 1st Defendant on 21st April 1996 confirming that the letter had been read and understood, and signifying agreement to the provisions thereof.

6. A truncated version of a similar letter was sent to the 3rd Defendant, qua guarantor, which however the 3rd Defendant refused to sign. Moreover, such a letter was never sent to the 2nd Defendant.

7. Pursuant to this restructuring, the 1st Defendant's debt and the guarantees of the 2nd and 3rd Defendants in favour of BNA were assigned to the Plaintiff as from the Transfer Date; although perhaps it does not greatly matter, on the basis of the letter of 1st April 1996 this was designated to be 11th April 1996 which also, it was submitted, constituted notification of such assignment. Thereafter, by letter dated 6th August 1996 the Plaintiff's solicitors made formal demand of the 1st, 2nd and 3rd Defendants for the then outstanding sum of HK$7,655,374.22.

8. Consequent upon such demand the 1st Defendant proposed various repayment schedules to the Plaintiff; indeed there is before me a sequence of correspondence from 28th August 1996 to 18th January 1997 dealing with the issue of repayment by instalments of the sum due by the 1st Defendant, and also dealing with various alterations to such repayment schedule. Indeed, the Amended Points of Claim pleads certain of these repayments made by the 1st Defendant. It is plain from the correspondence, however, that from the beginning of 1997 the Plaintiff's patience was beginning to wear thin in terms of missed repayments, and firm indications were then being given regarding the institution of proceedings.

9. On 30th April 1997 Messrs. Amelia Cheung & Co., solicitors for the 1st Defendant, wrote to the Plaintiff's solicitors a letter, the final four paragraphs of which read as follows:

"Our client is unable to repay the entire principal sum of HK$6,044,630.45 and would request your client to grant further indulgence.

Our client has been paying interest on the outstanding principal regularly to your client every month. Our client still has some problem in its factory in Indonesia and our client's investment in Indonesia still cannot generate any income for our client. Therefore, our client still has a tight cashflow at the moment.

Our client proposes to pay part of the principal in the sum of HK$500,000.00 to your client on 31st May 1997 and will continue to pay the monthly interest regularly. As for the balance of the principal instalments, our client will try its very best to resume the monthly instalment payments from end of June 1997 onwards.

Please ask your client to consider our client's circumstances and its genuine intention to repay to your client and to withhold legal proceedings against our client."

10. In my view, this letter could not be plainer; its clear terms speak volumes.

11. Thereafter, proceedings were issued on 2nd May 1996.

12. It is against this background, therefore, that Miss Rattigan, appearing on behalf of the Plaintiff, mounted the present application for summary judgment against all three Defendants.

13. Mr. Yip, who appeared for the 1st Defendant, in my view did not have a great deal of room for manoeuvre in resisting such application. I confess that he encountered a certain amount of judicial resistance in his efforts to convince me of a triable issue on the part of the 1st Defendant, although he stuck to his task manfully. Despite his efforts, I find it difficult to see why in these circumstances the 1st Defendant should be permitted to take this matter to trial. On the evidence before me the 1st Defendant clearly had agreed to the novation, and its actions subsequent thereto were equally consistent with its acknowledgment of its payment obligations. One line of argument which did seem to me to be promising was the suggestion, in the affidavit of Mr. Chan, the 3rd Defendant and Managing Director of the 1st Defendant, to the effect that "the 1st Defendant's consent to the novation agreement was obtained by BNA and the Plaintiff's misrepresentation to the effect that the Plaintiff would continue to offer banking facilities to the 1st Defendant on the terms previously agreed between BNA and the 1st Defendant after the signing of the said novation agreement on or about 1st April 1996 but which was in fact untrue" (see paragraph 10a).

14. As Miss Rattigan pointed out, however, no particulars whatever of this defence were provided, as the Defendant was obliged to do, there being no indication of precisely what was represented by whom, to whom, when or how. I agree with this submission. Further, there appears to be no reference in the contemporary correspondence to any such representation, nor is the content of that correspondence, so far as I can tell, in any way consistent with such a case.

15. Nor in the circumstances was I able to detect any other line which might offer some prospects of success; evidence of the assignment was put in by the Plaintiff, if indeed such was actually required, and in light of all the evidence before me, I could not see that there was any viable point to be made in terms of consideration and consent, at least with regard to the 1st Defendant. Indeed, Mr. Yip was frank enough during his address to accept that the 1st Defendant owed money, and the thrust of his submission seemed to be that the Plaintiff should not be permitted to make a demand for a lump sum as opposed to instalments; nor do I think there is anything in the submission that no valid demand had been made.

16. In the circumstances, I consider that this is one case where summary judgment is warranted, and accordingly I grant judgment to the Plaintiff against the 1st Defendant in the principal sum claimed, namely HK$6,044,630.45. I will hear counsel in due course as to interest and costs.

17. In my judgment, however, the position of the 2nd and 3rd Defendants is less clear-cut.

18. I take the 2nd Defendant first. This gentleman, Mr. Lee Kai, had indeed signed the original guarantee. However, the uncontroverted evidence is that he had left the 1st Defendant on 1st December 1995, from which date he was no longer involved in its management or operation; he had ceased to be either a shareholder or a director. Indeed, the first that he had heard about the present action was when Mr. Roy Chan, the 3rd Defendant, informed him that he was named in the Writ. Nor had Mr. Lee any idea as to the existence of the novation agreement, and he states in his evidence that if he had been so notified he would not have agreed to continue to guarantee the 1st Defendant's financial obligations in any event.

19. Mr. Roy Chan, the 3rd Defendant, confirmed the fact of the 2nd Defendant's departure from the 1st Defendant, and says that he had forgotten to give a share transfer documentation to Mr. Au Ping Kwan, the 1st Defendant's Company Secretary, nor to update the relevant particulars in the Companies Registry. Mr. Chan further deposed to having requested the same Mr. Au to inform BNA of the resignation of the 2nd Defendant as a director, and to secure withdrawal of his guarantee. In this connection Mr. Chan stated that a Mr. Mak of BNA had been contacted, and that the said Mr. Mak had told Mr. Au that the matter would be attended to after the merger of BNA. I note in passing that the important letter of 1st April was never sent to the 2nd Defendant for his signature which fact, at its lowest, is not inconsistent with the alleged communication with BNA about the 2nd Defendant's departure and his cessation as guarantor.

20. Be that as it may. The position of Mr. Chan, the 3rd Defendant, is of course factually different. He remained very much in place running the business, but although he was sent the letter of 1st April 1996, he specifically declined to sign it - he says on oath that he intended to withhold execution of such document relating to the personal guarantee to see whether in fact the Plaintiff would grant further loans to the 1st Defendant as had been promised.

21. Miss Rattigan is unruffled by the absence of consent on the part either of the 2nd or 3rd Defendants to the letter of 1st April 1996. She says that under the terms of the guarantees that were signed, such guarantees are irrevocable except on the giving of three months' notice (Clause 2.02), that the bank may enter into renew or vary any agreements with the debtor without affecting the guarantees (Clause 3.01(iv)), that the guarantor's liability to the bank is unaffected by anything which would not have released or reduced the guarantor's liability to the bank if the guarantor had become a principal debtor instead of a guarantor (Clause 3.02), that the guarantee was continuing notwithstanding any change in the name or constitution of the bank, and that references to "bank" in the guarantee included its successors or assigns (Clause 12.04).

22. Moreover, she submitted, since there had been no notification of termination of the guarantee agreements from either of the 2nd or 3rd Defendants, under these specific and unambiguous terms of the guarantees in question the 2nd and 3rd Defendants were and are not released from any liability notwithstanding that they had not signed the letter constituting the novation agreement.

23. This is a bold and forensically attractive line, but not one that I am entirely happy to accept, at this stage at least. Quite apart from the situation of the 2nd Defendant, with regard to whom, on the facts, I think that there is ground for argument that some form of notice indeed was given, and as to which I think discovery could usefully be made, I do not consider that the argument has to the supremacy of the terms of the guarantee sits totally easily in terms of the novation.

24. As Mr. Hung, who appeared for the 2nd Defendant, argued (Mr. Yip aligning himself therewith), the point here is that by reason of the novation there is not merely a variation but a new primary contract, and absent consent (which was not forthcoming from the 3rd Defendant and not even asked for from the 2nd Defendant), the guarantee as originally signed could not and cannot without more be extended to cover a new situation involving a new contracting party. To put the point another way, the novation which took place arguably terminated the grant of banking facilities under the original contract, and the contract of guarantee, as entered, was fundamentally based upon the facilities extended under that original agreement, and accordingly the obligations of the guarantor under that original agreement should be and were discharged. That at least was the way the argument was put.

25. In this connection I was referred by Mr. Hung to Chitty on Contracts 27th Edition Volume 1 at para. 19-050 as follows:

"Novation. There is no doubt that with the consent of both contracting parties all contracts of any kind may be transferred, and the term "novation" has been introduced from Roman law to describe this species of transfer. Novation takes place where the two contracting parties agree that a third, who also agrees, shall stand in the relation of either of them to the other. There is a new contract and it is therefore essential that the consent of all parties shall be obtained : in this necessity for consent lies the most important difference between novation and assignment. ...

It should, however, be noted that the effect of a novation is not to assign or transfer a right or liability, but rather to extinguish the original contract and replace it by another. It is therefore necessary that consideration should be provided for the new contract. ..." (emphasis added)

26. And as to Miss Rattigan's argument as to the guarantee containing 'reservation of rights clauses', I was also referred, albeit late in the argument, to Phillips & O'Donovan "The Modern Contract of Guarantee" 2nd Edition at page 270 where the learned authors comment as follows:

"Several of the authorities relating to the question of discharge of the guarantor by a novation of the principal transaction strongly suggest that the creditor cannot reserve his right of action against the guarantor by a clause in the contract of guarantee when there has been a novation. For example, in Re Mount Costigan Lead & Silver Mining Co. Ltd. a liability for a debt was effectively transferred from one company to another. It was held that the guarantor was discharged from liability despite a binding promise by the guarantor to remain liable for the debts of the old company. Manning J. was of the view that "there was in law an absolute end of any liability by the old company and a novation of contract with the new, which made any reservation of rights against sureties theretofore existing impossible". His Honour based his decision on Commercial Bank of Tasmania v. Jones where the Privy Council also was of the opinion that a novation, as it involves an absolute release of the principal debtor, is incompatible with a clause contained in a guarantee preserving the creditor's rights against the guarantor. ..." (emphasis added)

27. The learned authors then go on to observe that numerous authorities have held that a reservation of rights clause upon a release of the principal is effective despite the earlier view taken in Commercial Bank of Tasmania v. Jones that the reservation of rights against the guarantor was inconsistent with an absolute release and therefore could not be relied upon. They argue that the legal position subsisting on a simple release should logically be equated with a novation, which also involves a release of the principal debtor. They further note that many contracts of guarantee do contain a clause whereby the guarantor is to remain liable despite the release or discharge to the principal debtor, but that such a clause might not be wide enough to embrace a release of the principal debtor arising from a novation as distinct from a simple release. An effective clause, they suggest, would be one which referred to a "release or discharge by novation". This clause should render the guarantor liable for any outstanding obligations owed to the creditor before the novation but the guarantor would not be liable for any new obligations incurred by the person who has been substituted as the debtor. This further liability would require a new guarantee supported by consideration and evidenced in writing, unless the ambit of the original guarantee was such as to secure the obligations of those who might become liable by a novation.

28. Clearly this is both a difficult and an interesting area of the law. However, there was a tendency, I think, in the enthusiasm of the debate to overlook the fact that this is no more than an Order 14 application. In my view it cannot be said too often that unless a point is manifestly unarguable or is otherwise obviously "moonshine", relief by way of summary judgment will not be attracted. And I do not intend to decide this point in the circumstances of the present application, albeit I am far from certain, at any rate at first blush, whether the guarantee in question indeed has the effect for which Miss Rattigan contends. But I will say no more at this stage. It seems to me, as far as the two guarantors are concerned, that this case must be permitted to go to trial wherein (and particularly so in the case of the 2nd Defendant) there must be argument in the context of the facts as found by the trial judge, and after full submissions in terms of the lines of argument alluded to by Drs. Phillips and O'Donovan.

29. Accordingly, I decline the application for summary judgment in respect of the 2nd and 3rd Defendants, and grant the 2nd and 3rd Defendants herein unconditional leave to defend this action. I will now hear counsel as to costs and consequential directions for the further conduct of this case.

(Submissions from counsel)

Interest

30. The Plaintiff is to have interest on the sum of HK$6,044,630.45 at the rate of 8% for the period from 21st April to 1st August 1997, and thereafter interest on such sum at the judgment rate.

Costs

31. The Plaintiff is to have the costs of this action, including the costs of this application, against the 1st Defendant, such costs to be taxed if not agreed.

32. The costs of an occasioned by the application for summary judgment against the 2nd and 3rd Defendants are to be costs in the cause, save and except that the Plaintiff is to have the costs of the appearance on 4th July 1997 in any event, to be taxed if not agreed.

Directions

33. I make the following directions:

(i) The Defence of the 2nd and 3rd Defendants to be filed and served within 21 days of today, time to run in the vacation;

(ii) Reply, if any, to be filed and served within 14 days thereafter;

(iii) Discovery by list to take place within 14 days after close of pleadings;

(iv) Inspection to take place within 14 days thereafter;

(v) Statements of witnesses of fact to be mutually exchanged 6 weeks after inspection;

(vi) Liberty to apply.

34. I thank counsel for their assistance.