BANK OF CHINA (HONG KONG) LTD v. COSAN LTD AND OTHERS

HCA 1600/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1600 OF 2004

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REASONS FOR JUDGMENT

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1.  On 11 April 2006 Master S. Kwang gave judgment to the plaintiff on its O.14 application against the 2^nd defendant in the sum of HK$6,266,300.71 together with interest on the principal sum of HK$5,693,295.99 at the rate of 11% per annum from 19 May 2004 to judgment and thereafter at judgment rate until payment and costs with certificate for counsel.

2.  On 11 August 2006 I dismissed the 2^nd defendant’s appeal against the order of the Master with costs to the plaintiff.  These are my reasons for so doing.

3.  The plaintiff claims against the 1^st defendant as debtor and against the 2^nd and 3^rd defendants as guarantors of the 1^st defendant’s liabilities to the plaintiff under two deeds of guarantee given by the 2^nd and 3^rd defendants respectively dated 2 July 1996 and 21 April 1997 in favour of the plaintiff.

4.  The 1^st defendant was extended loans by the plaintiff under facility letters signed between the plaintiff and the 1^st defendant and respectively dated 16 October 1996, 16 April 1997 and 14 May 1999.

5.  By a legal charge dated 18 October 1996 executed by the 1^st defendant as the borrower and the plaintiff as lender the 1^st defendant mortgaged its property at Ground Floor, Wai Yip Building, 110-114 Cheung Sha Wan Road, Kowloon (“the charged property”) to the plaintiff as security.

6.  There is no dispute that by 2002 the 1^st defendant had defaulted in repayment to the plaintiff.  Letters of demand dated 26 July 2002 were sent to the defendants by the plaintiff’s solicitors.  There were some intermittent payments thereafter but by March 2003 the 1^st defendant was still in default in repayment to the plaintiff with monthly instalments in arrears under the time loan and the mortgage loan.

7.  The writ of summons with statement of claim was issued on 8 July 2004.

8.  As has been pleaded at paragraph 16 of the statement of claim, by 18 May 2004 the defendants were indebted to the plaintiff in the sum of HK$6,266,300.71.  This is made up of the sum of HK$5,693,295.99 being the outstanding principal as at 18 May 2004 and HK$573,004.72 being the accrued interest up to 18 May 2004.

9.  By letters dated 19 May 2004 demands were made on the defendants to pay the plaintiff the said sum of HK$6,266,300.71 together with interest from 19 May 2004 until payment at the rate of prime + 6 % per annum.

10.  The plaintiff’s claim was for the sum of HK$6,266,300.71 together with interest on the sum on HK$5,693,295.99 at the rate of prime + 6% per annum from 19 May 2004 to judgment and thereafter at judgment rate until payment.

11.  Judgment in default of defence was entered for the plaintiff against the 1^st, 2^nd and 3^rd defendants on 2 June 2005 for the sum of HK$6,266,300.71 together with interest and costs.

12.  However, the 2^nd defendant was away from Hong Kong when notice of intention to enter judgment was sent to him and hence he did not have notice of intention to enter judgment.  This led to the making of a consent order on 25 August 2005 whereby the Master set aside the judgment entered against the 2^nd defendant and gave leave to him to file his defence within 14 days.

13.  There was no setting aside of the default judgment entered against the 1^st and 2^nd defendants and the same remained intact.

14.  On 8 September 2005 the 2^nd defendant filed his defence and counterclaim.

15.  The plaintiff issued its summons for summary judgment under O.14 on 4 November 2005.

16.  On 11 April 2006 the Master gave judgment to the plaintiff.

17.  It is well settled that on an O.14 application the threshold onus is on a defendant to show a triable issue.  I refer to what I said in Bank of China (Hong Kong) Ltd v Cheng Ka Lun Grand and Others, HCA 513 and HCA 515 of 2000, 13 January 2004 at paragraphs 6 to 8:

“ 6.   The threshold onus is on the 2^nd defendant to show a triable issue.  The court should not, of course, embark on a mini-trial of the action on affidavit evidence.  However, the mere fact that a defendant supported a defence by sworn evidence did not mean that the court was obliged to suspend its critical faculties and accept that evidence as if it were probably accurate.  The filing of evidence which surpassed belief should not deprive a plaintiff of its entitlement to relief (Microsoft Corporation v. Electro-Wide Limited and another [1997] FSR 580).

  7.  And Bokhary JA (as he then was) said in Re Safe Rich Industries Ltd. unrep., Civil Appeal No. 81 of 1994 at pg. 5:

‘The test at the summary stage is indeed as simple as whether the defendant’s assertions are believable.  But it must be recognized-because failure to recognize it would create a debt-dodger’s charter-that whether the defendant’s assertions are believable is a question to be answered not by taking those assertions in isolation but rather by taking them in the context of so much of the background as is either undisputed or beyond reasonable dispute.’

  8.   If what a defendant says is not credible, then there is no fair or reasonable probability of the defendant having a defence (per Glidewell LJ in National Westminster Bank plc. v. Daniel [1993] 1 WLR at pg. 1457 E-F.”

18.  In his defence filed on 8 September 2005, the 2^nd defendant relied on two settlement agreements as raising defences to the plaintiff’s claim.

19.  Paragraph 5 pleaded a settlement agreement made around the end of March 2003 (“the 1^st Settlement Agreement”) and paragraph 15 pleaded a further settlement agreement made around July or August 2004 (“the 2^nd Settlement Agreement”).  Mr Ho, for the 2^nd defendant, at the hearing before the Master abandoned any reliance on the 2^nd Settlement Agreement.  At the hearing of the appeal he also did not rely on the 2^nd Settlement Agreement as raising a triable issue.

20.  There was no dispute before the Master as to the amount claimed by the plaintiff in its statement of claim whether by way of principal or interest.  However, at paragraph 3 of the 3^rd affirmation of the 2^nd defendant filed on 9 August 2006 the 2^nd defendant for the first time sought to rely on an oral agreement allegedly made in or about July 2002 between the 3^rd defendant and Ian Wong of the plaintiff that the plaintiff “would reduce the penalty interest to 1.75% above the regular mortgage interest from time to time”.  As the amount claimed did not reflect this reduced penalty interest but instead claimed the penalty interest of prime + 6% per annum, the 2^nd defendant for the first time in his 3^rd affirmation did not admit the amount claimed.  Be that as it may, Mr Ho confirmed in his oral submissions that he was not relying on this allegation as raising a defence to the amount claimed.

21.  That being so, the only defence relied on is the 1^st Settlement Agreement.

22.  The 1^st Settlement Agreement is pleaded at paragraph 5 of the defence as follows:

“5.   By an agreement made around the end March 2003 the Plaintiff agreed, in consideration of :-

(a) the 1^st Defendant selling the [charged property] referred to in Paragraph 10 of the Statement of Claim forthwith and paying the proceeds thereof to the Plaintiff and

(b) the 2^nd and 3^rd Defendants, as guarantors, agreeing to pay the balance of the outstanding indebtedness to the Plaintiff by monthly installments of $3,500.00 to be deducted from the 1^st Defendant’s savings account No. 031-362-1-0317998 with the Plaintiff (‘the said Account’),

to withhold all legal proceedings or other actions against the 1^st, 2^nd or 3^rd Defendants to recover the outstanding balance of the said indebtedness then owing by the 1^st Defendant to the Plaintiff (‘the Outstanding Indebtedness’) (‘the 1^st Settlement Agreement’).”

23.  There it is clearly pleaded that the 1^st Settlement Agreement was made around the end of March 2003.  The alleged agreement was that the 1^st defendant would sell the charged property forthwith and pay the net proceeds of sale to the plaintiff, that the 2^nd and 3^rd defendants would pay the balance of the outstanding indebtedness by monthly instalments of HK$3,500 to be deducted from the 1^st defendant’s savings account with the plaintiff and that the plaintiff would withhold all legal proceedings or other actions against the 1^st, 2^nd and 3^rd defendants to recover the outstanding balance.

24.  The evidence shows that the 1^st defendant entered into an agreement to sell the charged property for HK$6.8 million.  The sale was completed in June 2003 and the net proceeds were paid to the plaintiff towards repayment of the 1^st defendant’s indebtedness.  After paying the net proceeds of sale to the plaintiff, the remaining outstanding principal owed to the plaintiff was in the sum of HK$5,693,295.99 (paragraph 20 Ian Wong’s affirmation).  If one were to pay off this outstanding balance of principal by monthly instalments of HK$3,500 it would take 135 years to pay off just the principal, not to mention any interest.  The alleged agreement defies common sense and the allegation is wholly incredible.  It is inconceivable that any commercial organization like a bank would ever agree to the alleged terms.

25.  The 1^st Settlement Agreement is also inconsistent with the contemporaneous undisputed events and documents.

26.  By the 1^st defendant’s 1^st letter of 26 March 2003 signed by the 3^rd defendant it is plain that the 1^st defendant was going ahead with the sale of the charged property in any event.  At that time the price was HK$7.5 million but this sale fell through and it was later sold for HK$6.8 million with completion in June 2003.  But the point is that at the time of the 1^st letter of 26 March 2003 the 1^st defendant was going ahead with the sale of the property.  By that letter the 1^st defendant informed the plaintiff that the purchaser was willing to purchase the property with completion in April 2003.  The 1^st defendant was also making a proposal for the plaintiff to release the 2^nd and 3^rd defendants as guarantors to repay the mortgage loan.  That was rejected by the plaintiff.

27.  By its 2^nd letter of the same date 26 March 2003 the 1^st defendant wrote to the plaintiff as follows:

“ We refer to our telephone conversation with you this morning and would like to apply for the terms of repayment of the outstanding mortgage loan by the guarantors as follows:-

(1)  The outstanding mortgage loan will be repaid by the two guarantors (Mr. Kwan Hin Chu and Mr. Kwan Hin Kee) by way of monthly instalments in the sum of 10% of their total annual income divided by 12.

(2)   The two guarantors will produced their Income Tax Demand from the Inland Revenue Department to the Bank as proof of income.

Kindly consider our above application and let us have your reply accordingly.”

28.  Again, this was an application made by the 1^st defendant for the plaintiff to consider.  It does not evidence any agreement on the part of the plaintiff.

29.  By letter dated 2 April 2003 the 1^st defendant wrote again to the plaintiff asking for a reply to “our application for the terms of repayment of the outstanding mortgage loan as soon as possible …”.  So by 2 April 2003 it was still an application made by the 1^st defendant and it is clear that there was no agreement on the part of the plaintiff.

30.  By letter dated 10 April 2003 the 1^st defendant wrote to the plaintiff enclosing a copy of the provisional agreement for sale and purchase of the charged property.  No mention was made of the alleged agreement with the plaintiff.

31.  On 15 April 2003 letters of demand were sent to all the defendants by solicitors for the plaintiff for the total amounts then outstanding to the plaintiff.  There was no protestation by any of the defendants that the demand was made in breach of the 1^st Settlement Agreement made around the end of March 2003.

32.  It is also clear that after the demand was made on 15 April 2003 a sum of HK$64,203.84 was deposited into the 1^st defendant’s account on 13 May 2003 for repayment of two overdue monthly repayments of the time loan.  The payment of this sum was wholly inconsistent with the 1^st Settlement Agreement.

33.  By letter dated 15 May 2003 from the 1^st defendant (which was signed by the 3^rd defendant) to the plaintiff the 1^st defendant informed the plaintiff that it wished to redeem the charged property and asked the plaintiff to inform its solicitors Messrs Raymond Chan, Kenneth Yuen & Co. of the outstanding amount of principal and interest payable on redemption.  The letter went on to ask the plaintiff to issue a letter of instructions to the said solicitors who were the 1^st defendant’s nominated solicitors “to prepare the necessary Discharge/Release in order to expedite the transaction”.  There was no mention anywhere in that letter of the 1^st Settlement Agreement made around the end of March 2003.

34.  The completion of the sale and purchase of the charged property was in June 2003.  The Release was executed by the plaintiff on 21 June 2003.  It was expressly provided in the Release that:

“… nothing herein contained shall prejudicially affect the remaining or other security (if any) which the Lender may now or at any time hold or take from the Mortgagor and/or any other person in respect of the monies which remain due and owing by the Mortgagor to the Lender and provided further that the right of the Lender to recover from the Mortgagor and/or other responsible parties (if any) in respect of monies which remain due and owing to the Lender is unaffected by this Release …”

35.  The above express provision in the Release is also inconsistent with the terms of the 1^st Settlement Agreement.  However, neither of the defendants nor their solicitors raised any objection to the same.

36.  There is no documentary evidence of the 1^st Settlement Agreement.  At all material times the 3^rd defendant was a practising solicitor and a partner of a firm.  It is inconceivable that if the parties arrived at the 1^st Settlement Agreement as alleged the same would not have been reduced into writing.

37.  It is also pertinent to observe that different versions of the 1^st Settlement Agreement have been put forward by the 2^nd defendant at different times.

38.  In the ‘home made’ defence drafted by the 3^rd defendant for the 2^nd defendant it was pleaded at paragraph 9 that:

“There was an agreement between the Plaintiff and the 1^st Defendant that the money which remains due and owing to the Plaintiff will be repaid by the 1^st Defendant by way of monthly instalments of HK$3,500 per month.”

39.  In his 1^st affirmation the 2^nd defendant said that the charged property was sold pursuant to the 1^st Settlement Agreement.  However, there was no mention anywhere in the ‘home made’ defence of any agreement to sell the charged property.

40.  The 2^nd defendant said at paragraph 6 of his 1^st affirmation that:

“       I have been informed by the 3^rd Defendant and verily believe that the terms of the 1^st Settlement Agreement were that in consideration of the 1^st Defendant selling the charged property as soon as practicable and paying all net proceeds of sale thereof to the Plaintiff after the 26^th March 2003, the Plaintiff would accept all outstanding debts owing by the 1^st Defendant to be paid for by the 3^rd Defendant and myself by way of monthly instalment in the sum of 10% of the total annual income of the 3^rd Defendant and myself divided by two.  There is now produced and shown to me and marked as exhibit ‘KHC-1’ copy of the letter by the 1^st Defendant to the Plaintiff dated 26^th March 2003 proposing the said terms of the 1^st Settlement Agreement.”

41.  By his affirmation he asserted that the agreement was that the plaintiff would accept all outstanding debts by monthly instalments in the sum of 10% of the total annual income of the 2^nd and 3^rd defendants divided by two.  In the pleaded defence at paragraph 5, the monthly instalment was said to be HK$3,500.  The versions put forward in the affirmation and in the pleaded defence are different.

42.  In Mr Ho’s written skeleton submissions at paragraph 18 another version is put forward.  As to the monthly repayment of HK$3,500 it was submitted:

“ But one must not overlook the fact that this monthly payment was only for the first 12 months, monthly payments for subsequent 12 months, or indeed until all outstanding indebtedness were cleared, were subject to adjustment basing on the joint income of D2 D3.  It is clearly so stated in 29^th letter B/26.”

This was neither pleaded in the defence nor deposed to by the 2^nd defendant in any of his affirmations.

43.  The letter referred to in Mr Ho’s submission is the letter dated 29 March 2003 signed by the 3^rd defendant.  It is plain from that letter that the 1^st defendant was only making a proposal for repayment for the plaintiff to consider.  It is not evidence of any agreement on the part of the plaintiff.

44.  In his oral submissions before me a further version was put forward by Mr Ho.  It was submitted for the first time that the agreement was made on 5 August 2003 when HK$3,500 was accepted by the plaintiff.  The savings passbook of the 1^st defendant shows that on 29 July 2003 a deposit of HK$3,500 was made into the account and on 5 August 2003 this was accepted by the plaintiff by debiting the account with the said amount.  Mr Ho thus submitted that the 1^st Settlement Agreement was made on 5 August 2003.  This is wholly contrary to the pleaded defence and the affirmations of the 2^nd defendant and is without any merit.  It is plain that the charged property was sold by the 1^st defendant with completion in June 2003.  The Release is dated 21 June 2003.  By August 2003 the charged property had already been sold and disposed of.  The alleged agreement was that the plaintiff agreed to withhold legal proceedings or other actions against the defendants to recover the outstanding balance in consideration of the 1^st defendant selling the charged property and paying the proceeds to the plaintiff and the 2^nd and 3^rd defendants agreeing to pay the outstanding indebtedness by monthly instalments in the sum of HK$3,500 (as pleaded at paragraph 5 of the defence) or monthly instalments in the sum of 10% of the total annual income of the 2^nd and 3^rd defendants divided by two (as deposed at paragraph 6 of the 2^nd defendant’s 1^st affirmation).  By August 2003 the charged property had already been sold and the net proceeds had already been received by the plaintiff.  Having already received the net proceeds it is inconceivable that in August 2003 the plaintiff would agree to accept payment of the outstanding balance by monthly instalments either of HK$3,500 or 10% of the joint income of the 2^nd and 3^rd defendants divided by two which would be an uncertain amount.

45.  In his 3^rd affirmation the 2^nd defendant made the further point that the sum of HK$500 as administrative charges had been charged by the plaintiff for late payments.  However, although there were payments after March 2003, there were no more charges of HK$500 for late payment.  Hence it was submitted that this supported the existence of the 1^st Settlement Agreement.  In his written submission Mr Ho submitted that:

“ This is also consistent with the fact that the 1^st Settlement Agreement was reached by the 2^nd Letter dated 26.3.03.  From the pass book no such deductions were made for the months of April and May 2003 when instalment payments were made.”

46.  There is no merit in this submission.  The evidence shows that there was no payment of the mortgage loan from March 2003 onwards.  The evidence is that after the plaintiff’s demands on 15 April 2003 the 1^st defendant repaid $64,203.84 on 13 May 2003 in respect of overdue monthly repayments for the time loan.  After the demand letters dated 15 April 2003 were sent to the defendants the full outstanding indebtedness became due and payable as a debt.  Lee Wai Ho of the plaintiff said at paragraph 3 of his 2^nd affirmation that any payment subsequent to the demand letters issued to the defendants in April 2003 was treated as partial repayment of the full outstanding indebtedness.  As Mr Lam, for the plaintiff, submitted, correctly in my view, once the whole loan was called in there was no question of accepting monthly payments which attracted administrative charges of HK$500.  The administrative charges fell by the wayside and it is not surprising that these were not charged after March 2003.  What was paid on 13 May 2003 was not monthly repayment but partial repayment of the whole loan which was due and payable.  There is no merit in the submission that the absence of administrative charges after March 2003 supports the making of the 1^st Settlement Agreement.

47.  In my judgment the 2^nd defendant has failed to show a triable issue.  The defence raised is wholly incredible.

48.  In any event the defence raised is unsustainable in law.

49.  It is settled law that a creditor is not bound by a promise to accept part payment in full settlement of a debt (Foakes v Beer (1884) 9 App Cas 605; In re Selectmove Ltd [1995] 1 WLR 474; Lee Tak Wan v Chekiang First Bank Ltd HCSD 14/2000, unreported 3 November 2000, Chu J).

50.  In Foakes v Beer the House of Lords held that an agreement between judgment debtor and creditor, that in consideration of the debtor paying down part of the judgment debt and costs and on condition of his paying to the creditor or his nominee the residue by instalments the creditor will not take any proceedings on the judgment, is nudum pactum, being without consideration and does not prevent the creditor after payment of the whole debt and costs from proceeding to enforce payment of the interest upon the judgment.

51.  In re Selectmove Ltd at page 480 Peter Gibson L J said:

“ Foakes v Beer has been followed and applied in numerous cases subsequently, of which I shall mention two.  In Vanbergen v St Edmunds Properties Ltd [1933] 2 KB 223, 231, Lord Hanworth MR said:

‘It is a well established principle that a promise to pay a Sum which the debtor is already bound by law to pay to the promise does not afford any consideration to support the contract.’

  More recently in D & C Builders Ltd v Rees [1966] 2 QB 617 this court also applied Foakes v Beer, Danckwerts LJ saying, at p. 626, that the case:

‘settled definitely the rule of law that payment of a lesser sum than the amount of a debt due cannot be a satisfaction of the debt, unless there is some benefit to the creditor added so that there is accord and satisfaction.’”

52.  There can be no doubt that prior to the making of the 1^st Settlement Agreement as alleged at around end March 2003 the charged property was mortgaged to the plaintiff and the defendants were indebted to the plaintiff.  The plaintiff could have enforced its rights over the charged property under the mortgage.  By agreeing that the charged property be sold and the net proceeds be paid to the plaintiff in partial repayment and that the balance be paid by monthly instalments whether of HK$3,500, or 10% of the joint income of the 2^nd and 3^rd defendants divided by two, the defendants provided no consideration.  It also cannot be said that the defendants suffered any detriment as they were bound to pay the plaintiff anyway.  There was no accord and satisfaction.  The 1^st Settlement Agreement is in any event unsustainable in law for want of consideration.

53.  For the above reasons, I dismissed the appeal with costs to the plaintiff.