DAO HENG BANK LTD. v. NEW FAITH DEVELOPMENT LTD. AND ANOTHER

HCMP 1722/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 1722 OF 2002

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D E C I S I O N

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Background

1. This is an appeal by the 2nd Defendant against the order of the Master entering judgment in favour of the Plaintiff against him in respect of the 1st Defendant's outstanding loan due to the Plaintiff, pursuant to a continuing guarantee and indemnity signed by him.

2. The 1st Defendant is a property holding company incorporated in 1986. At that time, there were five shareholders and directors who are all brothers of the same family. Prior to 1994, the Plaintiff had granted banking facilities to the 1st Defendant for about $1.37 million on the strength of a legal charge over one of the 1st Defendant's properties and a personal guarantee for $1.4 million by one of the directors, Kwan Hin Lam.

3. Following a restructuring in 1994, three brothers remained as shareholders and directors of the 1st Defendant. They are Kwan Hin Ban, Kwan Hin Che and the 2nd Defendant. The 2nd Defendant was the managing director, while the other two brothers are ordinarily resident outside Hong Kong.

4. On 1 August 1995, the banking facilities were reduced to $1.1 million with a legal charge over one of the 1st Defendant's properties and a personal guarantee for $1.1 million by Kwan Hin Lam as security. Kwan Hin Lam and the 2nd Defendant signed on the facilities letter to confirm the 1st Defendant's acceptance of the terms of the facilities. The 2nd Defendant also certified a resolution of the board of directors to that effect.

5. In 1996, the 2nd Defendant, purportedly acting on behalf of the 1st Defendant, applied to the Plaintiff for increasing the banking facilities from about $1 million to $10 million using another nine of the 1st Defendant's properties and his own personal guarantee for $10 million as security. In the facilities letter, the Plaintiff expressly released Kwan Hin Lam of his personal guarantee. The 2nd Defendant signed a purported minute of the board of directors meeting approving the transaction and acknowledging that he had executed a personal guarantee for $10 million. On 26 March 1996, he executed legal charges over the properties in favour of the Plaintiff.

6. In 1997, the 2nd Defendant similarly applied to the Plaintiff for increase of the facilities to $15 million. This was approved by the Plaintiff in a letter dated 17 January 1997 on the condition that the 2nd Defendant furnished a personal guarantee for $15 million to replace the existing guarantee for $10 million. The 2nd Defendant duly signed a Continuing Guarantee and Indemnity for $15 million dated 22 January 1997, which is the one he was being sued upon.

7. In June 1999, the facilities were reduced from $15 million to $11.5 million. There were some terms and conditions imposed, which have no bearing on the present proceedings. Those changes apart, the facilities letter stated that "all other existing terms and conditions remain unchanged." The 2nd Defendant was not required to sign a new guarantee for the reduced facilities. This fact is strongly relied upon by him as his ground of appeal. He signed on the facilities letter to confirm his acceptance of its terms and conditions. He also signed a purported minute of the board of directors meeting dated 13 July 1999 approving the transaction and acknowledging that he had executed a personal guarantee for $15 million.

8. In November 2000, the facilities were reduced from $11.5 million to $8.4 million. There were certain changes in the terms and conditions which do not concern us. Those changes apart, all other existing terms and conditions remain unchanged. The 2nd Defendant was not required to sign a new personal guarantee for the reduced facilities, which is a fact relied upon by him in this appeal. He signed on the facilities letter to indicate his acceptance of the terms and conditions. He also signed a purported minute of the board of directors meeting on 15 December 2000 approving the transaction and acknowledging that he had executed a personal guarantee for $15 million.

9. On 2 May 2002, the Plaintiff instituted mortgage action under Order 88 of the Rules of the High Court against the 1st Defendant as borrower of the loan and against the 2nd Defendant under his Continuing Guarantee and Indemnity. On 26 July 2002, the 1st Defendant served a contribution notice against the 2nd Defendant in respect of any loss and damage suffered by the 1st Defendant.

10. On 20 December 2002, Master Yuen entered judgment in favour of the Plaintiff against the 2nd Defendant and ordered that the proceedings between the Plaintiff and the 1st Defendant shall be continued as if the proceedings have begun by writ and that the claim of the 1st Defendant against the 2nd Defendant be tried at the trial of the action. The 2nd Defendant now appeals against these orders so far as they affected him.

The 1st Defendant's case

11. Upon the 2nd Defendant's failure to provide the full books of accounts, Kwan Hin Ban took over the office of managing director from the 2nd Defendant in May 2001 and learned from the Plaintiff about the increased banking facilities and outstanding loan. As against the Plaintiff's claim, the 1st Defendant's case is that the borrowing and legal charges are void as they were entered into without consent and authorization of the 1st Defendant and that the purported signatures of Kwan Hin Ban and Kwan Hin Che on the purported minutes and resolutions approving the loan transactions were forgeries. According to Kwan Hin Ban, the 2nd Defendant admitted that he had embezzled the money lent by the Plaintiff to the 1st Defendant. He reported the matter to the police on 2nd May 2002, four days before the originating summons in this mortgage action was served on him. The 2nd Defendant agreed that the 1st Defendant had made a report to police. The 1st Defendant's case has no bearing on the dispute either between the Plaintiff and the 2nd Defendant or between the two defendants, as the Plaintiff is suing on the basis of the Continuing Guarantee and Indemnity signed by the 2nd Defendant while the Master has effectively ordered the dispute between the two defendants to be tried.

The 2nd Defendant's case

12. Much of the background prior to 1995 is not in dispute. The 2nd Defendant started managing the business of the 1st Defendant since 1994. He was informed about the personal guarantee signed by Kwan Hin Lam for $1.1 million and was asked to sign a banking facilities letter dated 1 August 1995, which he did. He admitted in his affirmations that by the facilities letter dated 17 January 1997, the banking facilities of the 1st Defendant was increased to $15 million but said nothing in his affirmations about the personal guarantee for $15 million. In view of the terms of the facilities letter, the Continuing Guarantee and Indemnity and the purported resolutions of the 1st Defendant produced by the Plaintiff, I do not think he could dispute that he signed these documents.

13. What is in dispute is whether when the Plaintiff reduced the 1st Defendant's facilities in about 1999, 2nd Defendant told Mr Leung Chi Chun of the Plaintiff that he did not want to give a personal guarantee for the banking facilities and Mr Leung promised him that he was no longer a guarantor. Hence, he alleges he had not been requested to give a personal guarantee for the banking facilities since 1999. Similarly, in 2000 when the facilities were reduced to $8.4 million, the Plaintiff did not require a personal guarantee from him. Hence, he argues that it was not a term of the banking facilities that he should provide a personal guarantee for the loan of the 1st Defendant.

14. As for the purported certified resolutions of the board of directors meeting in which he acknowledged having executed a personal guarantee for $15 million, his explanation is that it was a clerical mistake carried over by copying the previous minutes.

15. He submits that there is a dispute of fact as to whether Mr Leung had promised him that he was not required to be a guarantor since 1999 and it is only fair that the matter should proceed to trial so that he could be given the opportunity to cross examine the Plaintiff's witnesses, in particular, Mr Leung.

The law

16. The present proceedings were commenced by originating summons and not by writ, pursuant to Order 88 of the Rules of the High Court. As such, the wide discretion under Order 28 rule 4 are available to the court hearing the originating summons. It may enter judgment in favour of the Plaintiff if the liability of the defendant is established. It may consider whether there is or may be a dispute as to fact and whether the just, expeditious and economical disposal of the proceedings can accordingly best be secured by hearing the summons on oral evidence or mainly on oral evidence and give direction as to the attendance of deponents for cross-examination. Or it may decide that matter should proceed to full trial as if the proceedings have been begun by writ.

17. In my view the position is analogous to an Order 14 application. The plaintiff has to show on incontrovertible evidence supported by affidavits verifying the facts on which the claim is based that the defendant has no defence to his claim, except as to quantum. Once the plaintiff achieves that standard of proof, the burden shifts to the defendant to raise a triable issue, i.e. that there is an issue or question which ought to be tried or that for some other reason there ought to be a trial. It is for the defendant to make good that assertion by credible evidence. The defendant need not show a complete defence, merely an issue to be tried would suffice. While the court shall not engage in a "mini trial" on affidavits, the defendant has the burden of showing that its assertions in support of the issues it sought to raise are believable. It does not have to go that far as to show that they are to be believed. But failing that, the court may enter judgment in favour of the plaintiff.

Triable issue

18. The issue raised by the 2nd Defendant is whether Mr Leung of the Plaintiff had orally released him of the obligation under the guarantee signed by him on 22 January 1997. This has been denied by Mr Leung in his affidavit in reply to the 2nd Defendant's affirmation. It is not for me to resolve the dispute on facts by comparing affirmations, but still, the 2nd Defendant has to show that his assertion is, in the light of the incontrovertible evidence and documentary evidence, credible.

19. The Plaintiff granted banking facilities to the 1st Defendant which were reviewed from time to time. A personal guarantee from its director has always been required as a security. In May 1993, the Plaintiff required a personal guarantee for $1.7 million for banking facilities of $1.62 million. In June 1994, it required a personal guarantee for $1.4 for banking facilities of $1.37 million. In August 1995, it required a personal guarantee for $1.1 million for $1.07 million banking facilities. All these guarantees were given by Kwan Hin Lam.

20. When the 2nd Defendant became more involved in the business of the 1st Defendant, the banking facilities were increased enormously ten times to $10 million. In its facilities letter dated 24 January 1996, the Plaintiff wrote to the 1st Defendant as follows:

"We refer to our recent discussions and are pleased to inform you that we are prepared to release the personal Guarantee for $1,100,000.00 from Kwan Hin Lam and the facility extended to you will be revised as follows subject to our review at any time, but in any event not later than 31st July, 1996.

.....

In addition to the remaining securities, we require the following:

1. A first legal charge for all monies over the following properties:-

(then it lists nine properties)

2. A personal guarantee for $10,000,000.00 from Kwan Hin Kee."

.....

All other existing terms and conditions remain unchanged."

It is worth to note that Kwan Hin Lam was expressly released from his personal guarantee, while the 2nd Defendant became a guarantor.

21. When the banking facilities were further increased to $15 million in January1997, the bank wrote:

"As part of the securities for the above facility(ies), we require a personal guarantee for HKD15,000,000.00 from Kwan Hin Kee to replace the existing one for $10,000,000.00.

.....

All other existing terms and conditions remain unchanged."

It is worth to note that no reference was made to the legal charge used as securities though the Plaintiff required the 2nd Defendant to furnish a guarantee for a larger amount to replace the former guarantee. That means the legal charge over the ten properties referred to in the 1995 and 1996 facilities letters remain unchanged and the 2nd Defendant was required to furnish a personal guarantee appropriate to the increased banking facilities.

22. When the banking facilities were reduced from $15 million to $11.5 million in June 1999, the Plaintiff did not require a guarantee for a lesser amount to replace the one for $15 million as it did in 1994 and 1995. Apart from some minor changes in terms and conditions, it stated that all other existing terms and conditions remain unchanged. When the banking facilities were further reduced to $8.14 million in November 2000, the Plaintiff did not require the 2nd Defendant to furnish a guarantee for the reduced amount, but stated that all other conditions remain unchanged.

23. The 2nd Defendant says that it was on the basis of Mr Leung's oral promise that he was not required to provide any personal guarantee that he was not required to sign any personal guarantee in June 1999 and again in November 2000. This was denied by Mr Leung.

24. I think the 2nd Defendant's assertion is untenable. On the face of these two facilities letters, all other terms and conditions remain unchanged. As no reference has been made to this term about the legal charge and personal guarantee, that means the securities by way of legal charge over the ten properties as well as the 2nd Defendant's guarantee for $15 million remain unchanged. Previously, in January 1996 when Kwan Hin Lam was released from his guarantee, the Plaintiff spelt that out clearly in the facilities letter. It may well be that with the reduction in the banking facilities the 2nd Defendant's personal guarantee is for an amount far in excess of the banking facilities granted to the 1st Defendant, but in effect the liability to be incurred will not exceed the banking facilities granted. Thus, there was no need to require the 2nd Defendant to furnish a guarantee for the reduced amount and the 2nd Defendant would suffer no prejudice by being held onto his guarantee for $15 million.

25. Not only is the 2nd Defendant's assertion inconsistent with the terms of the two facilities letters, his assertion is also contrary to the purported resolutions of the board of directors meeting which he certified as true respectively on 13 July 1999 and 15 December 2000 and forwarded to the Plaintiff. Quite apart from whether these minutes were genuine or not, he acknowledged in the minutes that he had executed a personal guarantee for $15 million. Thus, on the face of the minutes, at the time he accepted the terms of the facilities letters, he knew his personal guarantee for $15 million is still valid and binding on him.

26. The 2nd Defendant argues that the reference to his guarantee of $15 million in the minutes was a clerical mistake as the amount of the loan was well below $15 million. It is not clear on the affirmations who prepared the extract of the minutes. Usually such documents would have been prepared by the bank. If they were, clearly there is no truth in his assertion about Mr Leung's oral promise. If they were prepared by the 1st Defendant's staff, then clearly, they did so on the 2nd Defendant's instruction and hence he knew his personal guarantee for $15 is still binding on him. In any event, the bald assertion of clerical mistake in his affirmation is wholly lacking in particulars as to how the mistake came to be made and repeated itself in the two extracts of minutes and who made them. To say the least, his assertion is bald and unconvincing.

27. The 2nd Defendant argues that the two extracts of minutes do not form part and parcel of the terms of the facilities letters. I agree. But the important fact remains that these extracts reflect his state of mind and knowledge that the personal guarantee he signed on 22 January 1997 is still valid and binding on him.

28. He submits that the credibility of Mr Leung is in doubt and Mr Leung should be cross examined by all the parties in order to find out the truth of the matter. It is not my function to make finding of credibility in a hearing of this nature. However, it remains, given the circumstances of this case, the 2nd Defendant's burden to show a credible defence. In my view, in the light of the incontrovertible evidence and the documents, in particular his signatures on the facilities letters and on the extracts of minutes of board of directors meeting, he has failed badly to show a credible defence. His assertion is bald and incredible. The defence he put up is not bona fide and is only aimed at delaying the Plaintiff from obtaining judgment. This is precisely the type of case which originating summons proceedings are designed to stop at this early stage from proceeding so as to save the parties from having to incur more time and costs over a defence which is bound to fail and to avoid delay in obtaining judgment.

29. While the Master ordered the proceedings against the 1st Defendant should be continued as if begun by writ, this does not mean the proceedings against the 2nd Defendant should follow a similar course and could not be disposed of at the hearing of the originating summons. The defence of the 1st Defendant is that the borrowing was not the act of the company and was procured by the fraud of the 2nd Defendant. Quite apart from the fact that the 2nd Defendant is precluded from pleading his own fraud, or lack of authority, or is estopped from denying the validity of the loan, the Plaintiff's case against him is founded on the Continuing Guarantee and Indemnity which he signed. It imposes on him a primary and independent liability regardless of whether the 1st Defendant defaults or not.

30. Further, the Continuing Guarantee and Indemnity contains clear and unequivocal terms which preserved the 2nd Defendant's liability where the 1st Defendant's obligation becomes unenforceable or defective.

31. Clause 2 of the guarantee provides:

"As an original and independent obligation under this Deed, the Guarantor shall, subject to the limit specified in the proviso to clause 1:

(a) indemnify you and keep you indemnified against any cost, loss, expense or liability of whatever kind resulting from the failure by the Principal to make due and punctual payment of any of the Guaranteed Moneys or resulting from any of the obligations under any agreement or arrangement relating to or evidencing the whole or any part of the Guaranteed Moneys, or pursuant to which any of the Guaranteed Moneys are expressed to be due, owing or payable (the "Related Arrangements") being or becoming void, voidable, unenforceable or ineffective against the Principal (including, without limitation, all legal and other costs, charges and expenses incurred by you in connection with preserving or enforcing, or attempting to preserve or enforce, your rights under this Deed); and

(b) pay on demand the amount of such cost, loss, expense or liability whether or not you have attempted to enforce any rights against the Principal or any other person or otherwise."

32. Clause 9(a) provides:

"This Deed shall remain in full force and effect notwithstanding, and will not be determined or affected, nor shall the Guarantor be exonerated or discharged from any of the obligaitoions under this Deed, nor shall any of such obligations be in any way prejudiced or affected, by:-

(a) any invalidity or unenforceability of any obligation expressed to be assumed or owed by the Principal under any of the Related Arrangements or in connection therewith; or ....."

33. Clause 16 provides:

"As an original and independent stipulation and without prejudice to any other provision in this Deed, the Guarantor agrees that any of the Guaranteed Moneys which may not be recoverable from the Guarantor on the footing of a guarantee by reason of any legal limitation, disability or incapacity on or of the Principal or any other fact or circumstances whatsoever (whether known to you or the Guarantor or not), shall nevertheless be fully recoverable from the Guarantor as though the same had been incurred by the Guarantor as the sole or principal debtor in respect thereof and shall be paid by the Guarantor on demand."

34. Lastly, the 2nd Defendant complains of certain "without prejudice" communication contained in a letter exhibited to the third affirmation of Kwan Hin Ban having been shown to the Master. He submits that such communication is highly prejudicial and influenced the Master in her decision and hence there should be a re-trial. The Master has properly deleted reference in the affirmation to those without prejudice communication. She is an experienced and professional judge and must have excluded those communication from her mind when making her deliberation. Such complaint has no merit at all. In any event, this appeal is a hearing de novo.

35. The 2nd Defendant argues that he had not received details of the amount of the outstanding loan repayment due to the Plaintiff and that the amount claimed will be likely to be in dispute. He argues that a proper trial is needed to determine the amount of outstanding loan due to the Plaintiff. He is not specific as to what the likely dispute is apart from saying that calculation about interest is to be made on a daily basis and may be complicated. He was in control of the 1st Defendant until May 2001 when Kwan Hin Ban took over from him as managing director. He should know the amount of outstanding loan as at that time. There is nothing from the affirmations to suggest he was denied access to the 1st Defendant's books. He had been served the affirmation of Ms Wong Mo Kan in which the state of the account between the Plaintiff and the 1st Defendant as at 2 May 2002 is set out. Prior to that a demand letter dated 13 March 2001, which should in fact be dated 13 March 2002, had been sent to him. For almost eight months he took no steps to verify the amount outstanding. He raised no dispute about the amount in his affirmations. Had he done so, the Plaintiff would have filed an affirmation in reply detailing all calculations. His complaint is lacking in substance. I am satisfied that there is no genuine dispute as to amount.

36. In conclusion, I am satisfied that the liability of the 2nd Defendant is established and there is no credible defence or triable issue raised. The Plaintiff is entitled to judgment against the 2nd Defendant on the originating summons.

Contributory Notice

37. The 2nd Defendant submits that the 1st Defendant has put all the blame on the 2nd Defendant who did not admit having done anything wrong and it would not be appropriate for the court to make any order without the benefit of having heard the evidence of the 1st Defendant and the 2nd Defendant. On that ground, he submits that Contributory Notice should be refused. With respect to the 2nd Defendant who, though appearing in person, is a solicitor by profession. If he wished to challenge the validity of the notice, he should take steps to have it set aside, but he did not. The 1st Defendant issued a summons for direction as to the further conduct of this claim in relation to its contribution. Even if the summons for direction was to be treated as the 2nd Defendant's application to have the notice set aside, on the evidence before the Master, there was nothing to justify setting the contribution notice aside. There is undisputed evidence that the banking facilities were arranged by the 2nd Defendant and he signed an extract of the minutes of the meeting of the board of directors authorising him to accept the banking facilities. There is evidence that the other two co-directors were not in Hong Kong at the material time and could not have attended the meetings held on the respective dates at the registered office of the 1st Defendant and agreed to the resolutions allegedly passed. There is a prima facie case of fraud against the 2nd Defendant who had acted without authority in borrowing and in executing the legal charges over the other nine properties. The Master did not make any determination on liability. She ordered the 1st Defendant's claim for contribution be tried at the trial of the action. That order is, in my view, proper and appropriate.

Conclusion

38. In conclusion, the appeal is unmeritorious. Accordingly, I uphold the Order of the Master and dismiss the appeal with costs against the 2nd Defendant.