BANK OF CHINA (HONG KONG) LTD v. CHARTER POINT ENTERPRISES LTD

HCA 401/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATION REGION

COURT OF FIRST INSTANCE

ACTION NO 401 OF 2011

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BETWEEN

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REASONS FOR DECISION

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1.  At the conclusion of the hearing, I allowed the appeal of the 2^nd, 3^rd and 4^th defendants. I made the following orders:

(1) The Order of Master K Lo dated 11 September 2012 be set aside.

(2) Conditional leave to defend to the 2^nd, 3^rd and 4^th defendants, the condition being payment into court within 14 days from today of the following sums:

(a) the sum of $2,224,781.15, and

(b) interest on the sum of $1,622,737.96 at the rate of 6% per annum over the plaintiff’s prime rate from 22 February 2011 to 27 December 2012.

(3) Costs below be costs in the cause.

(4) Costs on the appeal be these defendants’ costs in the cause.

(5) Liberty to apply.

2.  Here are my reasons.

Facts

3.  Briefly, the plaintiff’s claim in this action is against the 1^st defendant as the borrower and the 2^nd, 3^rd and 4^th defendants, its directors and shareholders, who are brothers (“the brothers”), as guarantors of a loan of money in the 1^st defendant’s purchase of a property known as House P, No 15, Santa Barbara Avenue, Royal Palms Phase B, Yuen Long, New Territories (“the Property”).

4.  The loan was made in 1997 by Kwantung Provincial Bank Hong Kong Branch (“Kwantung Bank”).  Since 1 October 2001, all Kwantung Bank’s undertakings have been transferred to and vested in the plaintiff pursuant to the Bank of China (Hong Kong) Limited (Merger) Ordinance, Cap 1167. For all intents and purposes of this action therefore, Kwantung Bank and the plaintiff are one and the same.

5.  Pursuant to a facility letter dated 31 July 1997 issued by Kwangtung Bank and signed by the brothers on behalf of the 1^st defendant (“the 1^st Facility Letter”), Kwangtung Bank granted a loan of $9,600,000 to the 1^st defendant, repayable by monthly instalments, and also repayable in full on demand upon notice being given.  It was expressed stated that the security for the loan was a mortgage of the Property in favour of Kwangtung Bank, and personal guarantees of the brothers.  The brothers signed a Deed of Guarantee dated 6 August 1997 (“the Guarantee”) to jointly and severally guarantee to repay the 1^st defendant’s debts to Kwangtung Bank on demand, capped at $9,600,000, plus interest thereon.  By a second facility letter dated 13 February 2001 (“the 2^nd Facility Letter”) issued by Kwangtung Bank and signed by the brothers on behalf of the 1^st defendant, the interest rate of the loan of $9,600,000 was revised.  In May 2001, the 4^th defendant resigned as a director of the 1^st defendant and in January 2002 he transferred his shareholding in it to the 3^rd defendant.  By a third facility letter dated 3 September 2002 (“the 3^rd Facility Letter”) issued by the plaintiff and signed by the 1^st defendant and by the brothers (including the 4^th defendant) in their own capacity as guarantors, the repayment terms of the loan of $9,600,000 was revised to be by way bi-weekly instalments.

6.  Between July 1997 and February 2011, instalment repayments were made to Kwangtung Bank and later to the plaintiff.  When payments of instalments were late, the plaintiff would send demand letters to the 1^st defendant and the brothers as guarantors for repayment. Eventually, by letters all dated 23 February 2011 addressed and sent to the 1^st defendant and the brothers individually, the plaintiff demanded payment of $2,224,781.15 being the entire outstanding indebtedness as at 21 February 2011.  Upon their failure to pay, on 10 March 2011, the plaintiff took out the writ in this action.

7.  Judgment in default was entered against the 1^st defendant on 21 May 2011.  The plaintiff then sought summary judgment against the brothers as guarantors, which they deny and dispute as having any knowledge or understanding.  This defence is based on facts, to which I shall return later. Judgment against them was granted by Master K Lo on 11 September 2012. Against the Master’s order, the brothers now appeal.

The law

8.  The parties have no argument about the applicable law.  I will briefly state the principles, which are encapsulated in para 14/4/9 at p 250 of Hong Kong Civil Procedure, 2013, Vol 1. It is the duty of the defendant to show a triable defence.  In the normal circumstances, when the success of otherwise of a plaintiff’s application rests upon a dispute on the facts, a defendant would be entitled to unconditional leave to defend.  In Crown House Engineering v Amec Projects Ltd (1990) 6 Const LJ 141, Bingham LJ (as he then was) had this to say at 154:

“… Order 14 is for clear cases; that is, cases in which there is a no serious material factual dispute and, if a legal issue, then no more than a crisp legal question as well decided summarily as otherwise. … The procedure is entirely inappropriate where the plaintiff’s entitlement to recover any sum is the subject of any serious dispute, whether of law or fact … where there are substantial issues of genuine complexity the parties should prepare for trial … rather than dissipate their energy and resources on deceptively attractive short-cuts.”

9.  However, it is not any factual defence that is raised that entitles the defendant to unconditional leave to defend.  When considering whether a defence is unbelievable so as to be regarded as not qualified for a triable issue, Bokhary JA (as he then was) stated in Re Safe Rich Industries Ltd [1994] HKLY 183 as follows:

“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.”

10.  As to how a factual defence should properly be considered, Montimer JA in Manciple Ltd v Char On Man [1995] 3 HKC 459 at 466 said:

“There is a difficulty because the court cannot resolve issues of fact on affidavits. However, there are some cases in which the defendant’s own case, although apparently it raises issues which, if found in his favour, would provide him with a defence, are so incredible or so contradicted by contemporaneous documents or circumstances that it becomes clear that his defence is a sham.”

The defence

11.  The defence raised by the brothers is that the Guarantee was not presented to them as a guarantee document, nor was it presented in full.  It is pleaded in the Defence that both of the 1^st and 2^nd Facility Letters and the Guarantee are in English, and that the brothers were brought up from a humble social background with insufficient education so as would enable them or any of them to understand the contents of any of these documents.  At the time of execution of the 1^st Facility Letter, representation was made by one Chan Chung Chuen, the Bank Officer of Kwangtung Bank (not the plaintiff), that the document was for the 1^st defendant to borrow upon mortgage of its legal interest in the Property as security for repayment of principal and interest of the loan to be advanced by Kwangtung Bank.  At the time of its execution of the 2^nd Facility letter, its contents were not explained to them and they believed that it was a document for extension of the term of the then existing loan. 

12.  The brothers deny entering into the Deed of Guarantee on 6 August 1997 or at any time.  They aver that as the time of the execution of the document, they were only given a one-page document, that is, the last page of the document which now appears to be the Schedule to the Guarantee.  When they executed the said one-page document, they were told by the said Chan Chung Chuen that it was “a standard document to support the 1^st Defendant’s application for a bank loan” “upon mortgage of the legal interest of the 1^st Defendant” (para 19 of their Defence).  Paragraph 20 of their Defence continues to plead that at no time had the brothers or any of them been explained the contents of the one-page document or advised that it formed part of a Deed of Guarantee or that they were entering into a guarantee so as would render them principally liable for the debts of the 1^st defendant despite the mortgage of the latter’s legal interest of and in the Property with Kwangtung Bank.  Thus, the one-page document they signed was of a character and nature completely different from the nature of a guarantee.  They rely on the defence of non est factum.  Mr K M Chong, Ms Yvonne Yip with him, for the brothers, also points out that the defence also consists of misrepresentation by the said Chan Chung Chuen that the document to be executed was a standard document, but he agrees with me that the two defences rely on the single fact that the brothers did not know that what they signed was a guarantee and their understanding, as induced by the said Chan Chung Chuen, was that the document was but a standard document in support of the loan to be advanced to the 1^st defendant.

13.  It is also pointed out by Mr Chong that Kwangtung Bank, not the plaintiff, was the contracting party to the 1^st and 2^nd Facility Letters and the Guarantee.  No evidence of any personal knowledge of the facts relating to the execution of the 1^st and 2^nd Facilities Letters and the Guarantee has been introduced.  Only Mr Ho Wai Ki, a sales manager of the plaintiff (not Kwangtung Bank), has given affirmation evidence that none of the brothers indicated that they did not understand English or they required assistance in understanding the 3^rd Facility Letter.  The fact was, according to Mr Chong, the brothers were not conversant with the English language and the Facility Letters and Guarantee are in English.  It is therefore submitted that Mr Ho’s evidence is insufficient to rebut the brothers’ case, because the said Chan Chung Chuen, who dealt with the brothers when the 1^st and 2^nd Facility Letters and the Guarantee were issued, has not given any evidence to contradict the brothers’ case.  Moreover, it is argued that there is no evidence from the plaintiff or Kwangtung Bank that the 1^st and 2^nd Facility Letters and Guarantee had been interpreted to the brothers before they were signed or on their case that the Guarantee that they signed was only a one‑page document.  There is also no interpretation clause in the three Facility Letters or the Guarantee.

14.  Thus, Mr Chong argues that there is insufficient evidence to rebut the defence, that there is at most a genuine dispute as to facts between the parties, and that therefore the brothers have raised a triable issue entitling them to unconditional leave to defend. 

15.  On Mr Ho Wai Ki’s affirmation evidence on the signing of the 3^rd Facility Letter, the brothers also raise a number of matters in dispute, but all these disputes do not assist in adding to or reducing the credence of the brothers’ case of non est factum (and misrepresentation), which is the only defence of substance that, if not unbelievable and bound to fail, will constitute a triable issue.

16.  On behalf of the plaintiff, Mr Christopher Chain draws my attention to some documents that have been produced by the affirmations of Ng Chi Wai, an Assets Recovery Manager of the Risk Management Department of the plaintiff.  These documents contradict the brothers’ allegation that they did not know the nature of the Guarantee they signed.  For instance, there was a letter dated 1 June 2006, which was in Chinese, by the plaintiff and addressed to the 1^st defendant and all the three brothers, stating that 11 instalments of repayments totalling $294,529.07 had not made, and urged the addressees (not only the 1^st defendant), as people concerned, to present a detailed proposal for repayment.  By a letter dated 7 July 2008 addressed to the 1^st defendant and three letters of the same date addressed respectively to the three brothers, the plaintiff gave notice to each of them demanding payment of the entire outstanding balance of the debt in the sum of $1,752,864.75 as at 2 July 2008. In the three letters to the brothers, the caption of the letters specifically named all the three brothers as Guarantors.  These three letters and that for the 1^st defendant this time were in English, which would make it open to the three brothers to say that they did not understand.  However, a firm of certified public accounts, Lee & Yu, sent a letter dated 5 November 2008 in response to the said letters of 7 July 2008, notifying the plaintiff that they acted on behalf of the “above-named client” [singular], which was stated in the caption of the letter as follows:

“Borrower: Charter Point enterprises Limited
Guarantors: Or Chi Kwong, Or Che Tai, Or Chap Shing”

17.  This letter of 5 November 2008 then went on to state that “our clients [plural] have financial difficulties in repaying…” and suggested two alternative proposals for the repayment of the loan of $1,752,864.75. However, the plaintiff refused to accept the repayment proposal by letter of 19 November 2008.  Lee & Yu wrote again on 23 January 2009, providing the 1^st defendant’s latest financial information, to urge the plaintiff to accept two suggested proposals for repayment that were very similar to those suggested previously.  The letter of 23 January 2009 similarly had the same caption of the earlier letter of 5 November 2008, stating that “you request our clients [plural] to provide latest financial information of captioned borrower … Based on the financial information of the company and the financial difficulties or our clients, our clients are not capable of repaying the total loan amount …”

18.  There is a document dated 29 October 2008 signed by all the four defendants addressed to Lee & Yu, which was apparently drafted by Lee & Yu for the defendants to sign (“the appointment letter”). It stated:

“Dear Sirs,

Charter Point Enterprises Limited

For the purpose of the Debt Restructuring Arrangement, we hereby appoint your firm to act on our behalf concerning the company’s affairs.”

19.  It is obvious that Lee & Yu wrote the said letters dated 5 November 2008 and 23 January 2009 making proposals for repayment pursuant to the authorization by virtue of the appointment letter of 29 October 2008.  It appears that the only reasonable inference to be drawn from these documents that came into existence from the end of October 2008 to January 2009 is that the three brothers knowingly appointed Lee & Yu to make the repayment proposals to the plaintiff.  If the three brothers, as opposed to the 1^st defendant, did not feel that they were liable, there would have been no reason for all of them to sign the appointment letter to give the instructions to Lee & Yu.  If they knew nothing about the Guarantee because as they now allege that their understanding was that they only signed a standard document in support of the 1^st defendant’s application for a loan which was part of a package, they would not have appointed Lee & Yu to act on their behalf to make repayment proposals to the plaintiff.  What is more telling against the three brothers is that the caption of Lee & Yu’s two letters dated 5 November 2008 and 23 January 2009 stated clearly that the borrower was the 1^st defendant and the guarantors were the three brothers as named.  Not only that, there was a reference in the content of both letters warning the plaintiff that pursuing repayment over the amounts as suggested in the two repayment proposals against the borrower and the guarantors would only force them into winding up and bankruptcy respectively.  All these correspondence and documents at the crucial time when the plaintiff was pressing for repayment contradict the factual basis of the defence of non est factum.  These documents that came into existence about three years ago, when litigation did not appear imminent, is definitely much more reliable to present the true facts to the court than any allegation without the support of any documentary evidence that is made recently after proceedings had already been commenced.

20.  Notwithstanding, Mr Chong submits that the brothers could have signed the letter of appointment dated 29 October 2008 as the 1^st defendant’s shareholders for restructuring the debt that the 1^st defendant owed to the plaintiff, because the letter was very specific to say that “we hereby appoint your firm to act on our behalf concerning the company’s affairs” (emphasis added), as opposed to the brothers’ affairs of being guarantors of the loan.  Mr Chong argues that one does not know why the accountants were talking about the guarantors in their letters of 5 November 2008 and 23 January 2009 which were both making proposals of repayment by the 1^st defendant; they could have on the face of the appointment letter acted beyond their authority.

21.  Mr Chain, for the plaintiff, submits that since the 4^th defendant had resigned from being a director of the 1^st defendant in May 2001 and transferred his shares in the 1^st defendant to the 3^rd defendant in January 2002, there was no reason why he also signed the appointment letter in October 2008 but for the fact that he knew he was personally liable for the debt as a guarantor.  Mr Chain also argues that the firm of accountants, as professionals, would not have acted beyond their mandate; there is the presumption of regularity.  Moreover, the brothers have not adduced any affidavit evidence to contradict the purport of the appointment letter and those letters written on their behalf by the firm, which they are incumbent to do if they do not accept the truth of the contents.  Their failure to adduce any evidence means that there is nothing to displace the presumption of regularity.

Conclusion

22.  I have fully considered the parties’ arguments. I cannot honestly come to the conclusion that the defence of non est factum (supported by an allegation of misrepresentation) is totally unbelievable and bound to fail, although because of the documentary evidence referred to above I am almost persuaded that it is so.  I would therefore only allow the case to proceed to trial with a condition of a payment into court of the full judgment sum. 

23.  Having heard the parties on the condition to be imposed and as to costs, I made the orders as mentioned in paragraph 1 above.