THE HONGKONG AND SHANGHAI BANKING CORPORATION LTD v. KUAN TAO SHENG AND ANOTHER

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 6152 OF 1990

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JUDGMENT

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1. This is the Trial of the Action by the Hongkong and Shanghai Banking Corporation ("the Bank") to recover a sum of about $11 million against the 1^st, 2^nd and 3^rd Defendants as guarantors under a Guarantee dated 31^st March 1989 ("the 2^nd Guarantee") which was given in respect of banking facilities granted by the Bank and available to Engstrong Ltd. ("Engstrong"), Texxan Industries Ltd. ("Texxan") and Chino Industries Ltd. ("Chino"). The 1^st Defendant who is the father and the 2^nd Defendant who is the son both have financial interests directly or indircetly in the above three companies. The 3^rd Defendant is also associated closely with the three companies. The banking relationship between the Bank and the three companies went back to some time before 1989 and the Table of History of Banking Facilities produced by the Plaintiff shows that the bank guarantee given by the 3 Defendants had increased steadily from US$6 million in 1986 to HK$166 million given in March 1989.

2. At the trial of the Action, quantum was not disputed. Two officers of the Plaintiff gave excellent evidence to the Court. There was no evidence from the Defendants. The 3^rd Defendant was absent from the Trial and the 1^st Defendant took no active part at all at the Trial. Although the pleading of the 1^st Defendant raised an issue of undue influence, having regard to the nature of the allegation and that there was no evidence from the Defendants on that issue, I have no doubt that there is no substance in that defence. Accordingly, I find that judgment must be given against the 1^st and 3^rd Defendant in the amount of $11,007,903.13 now claimed by the Plaintiff ("Debt"), after having taken into account the concession made by the Plaintiff in its solicitors' letter dated 18^th September 1995.

3. The only active opposition to the claim came from the 2^nd Defendant. Three Issues were raised by Mr. Chan for the 2^nd Defendant, namely: -

DEBT NOT WITHIN 2^nd FACILITY LETTER

4. The Table of the History of Banking Facilities shows clearly the progression of the facilities and the progression of the guarantees to secure such facilities. The 2^nd Facility Letter was preceded by the Bank's Facility Letter dated 15^th December 1988 ("1^st Facility Letter") which provided for facilities of : (1) overdraft of HK$7.8 million, (2) Import and Export Facilities of US$15 million inclusive of Trust Receipt Facilities of US$14 million and (3) Cheque Discount Facility of HK$10 million. Facilities (2) and (3) are also available to Texxan and Chino and the 3^rd Defendant. The 1^st Facility Letter provided that as security for the above facilities, the Bank would be given amongst others the following securities, namely the existing guarantee for HK$134.8 million dated 8^th June 1987 from the 3 Defendants ("87 Guarantee") and a guarantee of Engstrong of $134.8 million. Three months later, the facilities available under the 1^st Facility Letter was replaced by the greater facilities available under the 2^nd Facility Letter. The Back to Back Facility (US$2.6 million) and Standby Documentary Credit Facility (US$1.4 million) were merely additional facilities available. Facilities (1), (2) and (3) of the 1^st Facility Letter were still in place as made clear by the words in the 2^nd Facility Letter "all other terms and conditions as per our facility letter dated 15 December 1988 remain unchanged". It is because 2 new facilities of US$4 million were given that the Bank asked for the guarantee from the 3 Defendants and the guarantee from Engstrong to be each increased by HK$31.2 million, from HK$134.8 million to HK$166 million. It is to be noted that HK$31.2 million is exactly equivalent to US$4 million, namely the total sum of US$2.6 million and US$1.4 million, the amounts of the additional two facilities made available under the 2^nd Facility Letter.

5. I have no doubt that the commercial reality as reflected in the 2^nd Facility Letter and in the 1^st and 2^nd Guarantee was that the Trust Receipts Facility would continue to be available as well as the two new facilities in the total sum of US$4 million. These facilities were used which resulted in the present Debt. I have no hesitation in holding that the Debt is recoverable and with every respect to Mr. Chan, there is no merit in this eleventh hour defence.

MONEY LENDER

6. Section 23 of the Money Lenders Ordinance provides that "No moneylender shall be entitled to recover in any court any money lent by him or any interest in respect there of or to enforce any agreement made or security taken in respect of any loan made by him .... unless he was licensed." Moneylender is defined as "every person whose business (whether or not he carries on any other business) is that of making loans or who advertised or announces himself or holds himself out in any way as carrying on that business, but does not include .... (b) as respects a loan specified in Part 2 of Schedule I, any person who makes such loan". Paragraph 11 of Part 2 of Schedule 1 provides "a loan made to a company where the loan (a) forms part of a transaction involving the export from, or the import into, Hong Kong of good or services; and (b) is for the purpose of facilitating that export or import, as the case may be, of those goods or services."

7. It is clear on the evidence that there was never any loan or money given by Engstrong to Texxan or Chino. Whatever loan which was made came from the Bank and not from Engstrong and I do not therefore see how in these circumstances, when there was no loan by Engstrong that Engstrong could be said to. be a lender, let alone a moneylender. The evil of moneylending is the obtaining of extortionate interest. The interest on the loan was received by the Bank and not by Engstrong and there is no evidence that Engstrong carried out any sort of lending business. I do not understand how in these circumstances, the giving of the 1^st Guarantee by Engstrong could be said to be moneylending by Engstrong. As correctly pointed out by Mr. Tang citing Chow Yoong Hong v Chong Fah Rubber Manufactury [1962] A.C. 209 at 216-7, the 1^st Guarantee was neither a loan in substance nor in disguise. In any event, the exempted loan provision of the Schedule makes it quite clear that there is no breach of the Ordinance. In my judgment, the defence of moneylending is a thoroughly bad point and should never have been raised.

ULTRA VIRES

8. Mr. Chan's point of Ultra Vires depends for its success on the money lending point. But in any event, I agree with Mr. Tang that this point is also devoid of merit because Clause 3(42) of the Memorandum as well as Section 5(5) of the Companies Ordinance provide ample grounds to hold that the giving of the 1^st Guarantee by Engstrong was not ultra vires the company.

9. I hold against the 2^nd Defendant on all three Issues and it follows that judgment should also be entered in the same sum against the 2^nd Defendant. The Plaintiff is awarded also the costs of the Action against each and every Defendant.