PAN GLOBAL LTD v. SILVER TECH INTERNATIONAL LTD AND OTHERS

CACV377/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 377 OF 2005

(ON APPEAL FROM HCA NO. 2429 OF 2003)

______________________

______________________

_______________

J U D G M E N T

_______________

Hon Ma CJHC :

1.  The issue before the court is whether the default judgment that had been entered against the 3rd Defendant on 30 September 2003 (consequent on no intention to defend having been given) should be set aside.  Master Au Yeung set aside the judgment on 14 May 2004 and on appeal, this was upheld by Deputy High Court Judge Saunders.  The Plaintiff now appeals to this court.

2.  The Plaintiff's claim against the 3rd Defendant (who was the only relevant defendant in the appeal) is based on a guarantee that was signed by him on 19 June 2002 ("the Guarantee").

3.  The Guarantee was one of a number of documents that was signed that day.  The facts relevant to the Plaintiff's claim are as follows : -

(1) The Plaintiff was and is a moneylender.  The 1st Defendant was a company engaged in business, whose directors and shareholders were the 2nd to 7th Defendants.

(2) As to the running of the 1st Defendant, the 3rd Defendant said this in one of his affirmations, "Although we were all directors, the management and operation of the 1st Defendant was left to the 5th Defendant."  Paragraph 2(5) of his Defence (which was filed following the setting aside of the default judgment by Master Au Yeung) stated, "The 5th Defendant was responsible for the incorporation, management and operation of the 1st Defendant.  The other directors and shareholders took no part in the management of the 1st Defendant."

(3) The 1st Defendant wanted to borrow some $2,000,000 from the Plaintiff.  On 19 June 2002, a Facility Letter was signed by the 3rd and 6th Defendants on behalf of the 1st Defendant, in which a loan of $2,000,000 was extended to the company.  It was a condition of the loan that security was to be provided in the form of a mortgage of certain properties belonging to a company called Winning Power Limited and also of guarantees from the directors of the 1st Defendant (the 2nd to 7th Defendants).

(4) The same day, a Third Legal Mortgage was duly signed by the 3rd and 5th Defendants on behalf of the 1st Defendant (as the borrower), and by the 5th Defendant and another person on behalf of Winning Power Limited (as the mortgagor), whereby certain properties in Lantau Island were mortgaged to the Plaintiff.  An Undertaking was also signed by the 3rd and 5th Defendants on behalf of the 1st Defendant.

(5) A guarantee dated 19 June 2002 was signed by each of the directors of the 1st Defendant (this was the Guarantee).  The liabilities of the guarantors thereunder were stated to be joint and several.  It will presently be necessary to refer to some of the terms.

(6) Minutes of a meeting of the directors of the 1st Defendant held on 19 June 2002 (signed by all the directors) recorded the passing of a resolution that the 1st Defendant enter into a mortgage and that the 3rd and 5th Defendants be authorized to sign and execute the Facility Letter, the said mortgage and the Undertaking.

(7) By a letter also dated 19 June 2002, the Plaintiff's solicitors were instructed to draw a cheque in the sum of $1,950,000 (the agreed loan to the 1st Defendant less expenses) in favour of the 5th Defendant.  This letter was signed by the 3rd and 5th Defendants (on behalf of the 1st Defendant), and by the 5th Defendant and another person (on behalf of Winning Power Limited).

(8) A cheque in the sum of $1,950,000 was drawn in favour of the 5th Defendant, given to him and then cashed.

(9) The 1st Defendant defaulted in the repayment of the loan.  Accordingly, letters of demand was sent to the 6 guarantors in June 2003 pursuant to the Guarantee.  This led to payments being made to the Plaintiff by the 3rd, 4th, 6th and 7th Defendants.  The 3rd Defendant made payments of $50,000, $10,000 and $340,000 (in all $400,000) on 20 May, 9 June and 3 November 2003.  The 4th Defendant paid $180,000.  The 6th Defendant paid $210,000 and the 7th Defendant paid $240,000.  These payments were, however, not sufficient to repay the whole of the loan advanced by the Plaintiff.

4.  Proceedings were instituted against the Defendants on 2 July 2003.  As stated above, no notice of intention to defend was given by the 3rd Defendant and default judgment was accordingly entered against him on 30 September 2003.

5.  Deputy High Court Judge Saunders upheld Master Au Yeung's order setting aside the default judgment.  It is clear from his judgment that he arrived at this result not without much hesitation.  He rejected the 3rd Defendant's case that he had not read the relevant documents he signed, that he had been misled (not by the Plaintiff but by the 5th Defendant) and that the Plaintiff had not explained to him the meaning of the documents.  Reference was made to Gallie v Lee [1971] AC 1004 and Bank of China (Hong Kong) Ltd v Wong King Sing & Ors [2002] 1 HKC 83.  He also rejected the submission that the default judgment should in any event be set aside on account of the Plaintiff having failed in its application for summary judgment against the 2nd Defendant and that as against the 7th Defendant, it had not applied for summary judgment at all, instead continuing with the action against him in the normal way.

6.  Where the Judge found in favour of the 3rd Defendant was in relation to clause (3) of the Guarantee which stated : -

"(3)   Should any purported obligation of the Borrower, which if valid or enforceable would be the subject of this Guarantee, be or become wholly or in part invalid or unenforceable against the Borrower by reason of any defect in or insufficiency or want of powers of the Borrower or irregular or improper purported exercise thereof or breach or want of authority by any person purporting to act on behalf of the Borrower or because the Lender's rights have become barred by reason of any legal limitation, disability, incapacity or any other fact or circumstance whether or not always know to the Lender or if for any other reason whatsoever the Borrower is not or ceases to be legally liable to discharge any money, obligation or liability undertaking or purported to be undertaken on its behalf the Guarantor shall nevertheless be liable to the Lender (notwithstanding the avoidance or invalidity of any assurance, security or payment on any ground whatsoever including (without limitation) avoidance under any enactment relating to liquidation) in respect of that purported obligation or liability as if the same were wholly valid and enforceable and the Guarantor was the principal debtor in respect thereof.  The Lender shall not be concerned to see or enquire into the powers of the Borrower or its officers, employees or agents purporting to act on its behalf.  The Guarantor hereby agrees to keep the Lender fully indemnified against all damages, loss, costs and expenses arising from any failure of the Borrower to carry out any such purported obligation."

7.  The Judge was concerned about the question of agency raised by the 3rd Defendant.  The 3rd Defendant had in his various affirmations specifically denied that the signatures contained in the various documents set out in paragraphs 3(3), (4) and (7) above were made with the authority of the board of directors of the 1st Defendant.  It was particularly denied that the board had given any authority to enable the cheque to be made out in the name of and paid to the 5th Defendant.  The Judge must have taken the view that this was a plausible defence with some prospect of success.  In relation to clause (3) of the Guarantee, he was persuaded by the argument that as this particular clause had not been the subject of any previous decisions, its true construction and effect were therefore matters that ought to go to trial (or at least made the subject matter of an Order 14A application, as Mr Chain for the 3rd Defendant submits).  Here, the Judge referred to the judgment of this court in Hang Seng Bank Limited v Golden Tech (Asia) Limited and others, unreported, CACV 262/2004, 9 March 2005.  Accordingly, he dismissed the Plaintiff's appeal.

8.  In my judgment, the Judge erred by assuming that the 3rd Defendant's defence based on lack of authority had a real prospect of success and in placing too much emphasis on the status of clause (3) of the Guarantee being somehow a difficult clause to construe and which therefore required a full trial to resolve its effect.  Looking at the matter overall, I am of the view that the 3rd Defendant has simply not discharged the onus upon him to demonstrate a defence or defences which have a real prospect of success (the requisite test on a setting aside of a default judgment regularly obtained : - see Premier Fashion Wears Ltd v Li Hing Chung [1994] 1 HKC 213) : -

(1) The assertion that the board of directors of the 1st Defendant had not given the requisite authority for the various documents to be signed, is considerably undermined by the fact that the Minutes of Meeting (see paragraph 3(6) above) indicate otherwise.  And, as far as the 3rd Defendant was concerned, he had himself signed the relevant documents.  The fact that, as alleged by him, the 3rd Defendant did not read the documents before he signed them is not a point that can enure to his benefit.  He is taken as having fully comprehended the documents he signed.  The defence of non est factum (relied on by the 3rd Defendant), is, in most cases, notoriously difficult to maintain.  As Lord Reid remarked in Gallie v Lee at 1015, the defence "must be kept within narrow limits if it is not to shake the confidence of those who habitually and rightly rely on signatures when there is no obvious reason to doubt their validity."

(2) This allegation of lack of authority is also inconsistent with the fact that, far from raising this as a defence to the demands that were made by the Plaintiff for payment under the Guarantee, the 3rd Defendant and the other directors of the 1st Defendant (with the exception of the 5th Defendant, the alleged fraudster) actually paid significant amounts of money to the Plaintiff (altogether totalling $1,030,000, with the 3rd Defendant having paid $400,000).  In his affirmation, the 3rd Defendant admitted making the said payments but denied that this was an admission of liability.  The explanation was that he did not at that stage take any legal advice and thought that if he made payment of his share of the 1st Defendant's indebtedness of $2.4 million, then the Plaintiff would not issue legal proceedings against him.  I find this explanation wholly implausible; certainly it is not an argument that has a real prospect of success.

(3) Even if some sort of case could realistically be made out of a lack of actual authority, there must on the facts be a strong argument that there was ostensible authority on the part of the relevant signatories to the documents.  Here, I would refer again to the signed Minutes of Meeting, which made it quite clear that the board of directors of the 1st Defendant left it to the 3rd and 5th Defendants to sign the relevant documents and therefore handle the transaction.  It is also of note that even on the 3rd Defendant's own case, the board had left the "incorporation, management and operation of the 1st Defendant" to the 5th Defendant, with the other directors and shareholders taking "no part in the management of the 1st Defendant".

(4) It should also not be forgotten in this context that the 3rd Defendant, having signed the said authorization letter (see paragraph 3(7) above) and therefore being taken to have been fully aware of what he was signing (the plea of non est factum not being a sustainable argument), he is now estopped from denying that he somehow lacked authority.  Mr Chain sought to argue that this was a plea not dissimilar to an allegation of breach of warranty of authority and on this basis, since a breach of warranty of authority had not been pleaded in the Statement of Claim, it followed that this was therefore not a point open to the Plaintiff to advance.  I disagree with these submissions.  First, an allegation of estoppel need only be made in a Reply.  It was neither necessary or even desirable to plead it in the Statement of Claim.  Secondly, an estoppel plea is quite different in nature to a plea of breach of warranty of authority (which is essentially a contractual claim : see Bowstead on Agency (17th ed) at paragraph 9-062).  Thirdly, I can in any event see no defence to a claim of breach of warranty of authority if it transpired that the 3rd Defendant in fact had no authority.  The failure to plead such a claim in circumstances where all the necessary facts are before the court would not be fatal.  The court's inquiry at this stage is simply to examine whether the 3rd Defendant can show a defence or defences which have a real prospect of success.  Here, fine and technical pleading points are not likely to elicit too much sympathy.  Mr Chain then submitted that more facts would in any event be needed to be investigated on a plea of breach of warranty of authority.  He could not point to any, apart from a query as to whether the Plaintiff actually relied on the authorization letter.  In my view, there is no difficulty here : the Plaintiff advanced the money after receiving the authorization letter and it has not been suggested otherwise.

(5) Even if for the sake of argument there was a lack of authority (actual or ostensible) as alleged by the 3rd Defendant, clause (3) of the Guarantee provides in my view the complete answer.  That clause is a variation of what is known as a principal debtor clause.  The effect of such clauses is to render a guarantor (the surety) liable as a principal, and not just as a secondary, debtor.  Often, such clauses will specifically identify those situations in which, notwithstanding any difficulty with enforcing the relevant contract as far as the principal debtor (in the present case, the 1st Defendant) is concerned, the guarantee will nevertheless be enforceable against the guarantor.  As is put in Andrews and Millett : Law of Guarantees (4th ed) at paragraph 6-028, "If such a clause is to be used in the guarantee, it should be wide enough to cover all the circumstances which may render the principle contract void, voidable or unenforceable."  In the case of clause (3), it is expressly provided that notwithstanding that the obligation of the 1st Defendant may become wholly or partially invalid or unenforceable, the guarantor will nevertheless remain liable.  Any guarantor under the Guarantee is expressly stated to be a principal debtor.  I see no reason why a clause such as clause (3) requires a trial or an Order 14A application to resolve its true construction.  Nothing in the Hang Seng Bank case dictates otherwise.

(6) Finally, Mr Chain submitted as a fallback argument that clause (3) may be an exemption clause and as such, subject to the requirement of reasonableness (see section 3 of the Control of Exemption Clauses Ordinance, Cap.71).  This was not pursued with any vigour before us and it is easy to see why.

9.  Before us, Mr Chain has again raised the point about the Plaintiff not having succeeded against the 2nd Defendant in an application for summary judgment and not having even pursued such an application against the 7th Defendant.  He relied on the case of James Graham and Co (Timber) Ltd v Southgate-Sands and Others [1986] 1 QB 80.  This eventually became his main point.  Even after the hearing had been concluded, Mr Chain provided written submissions to the court, to which Mr Kenny Lin (for the Plaintiff) responded on 20 July 2006.

10.  Mr Chain's argument was to the effect that as it could not at this stage be certain at all that the Plaintiff would succeed against two of the 3rd Defendant's co-guarantors (the 2nd and 7th Defendants), so the determination of the 3rd Defendant's liability under the Guarantee had similarly to be postponed.  The justification was that, according to Mr Chain, the principle contained in James Graham was that where a guarantee was entered into on the basis that co-guarantors would be bound, a guarantor could not be held liable thereunder unless all other co-guarantors were ultimately and actually made liable as well.

11.  This is in my view an incorrect statement of the law.  The principle contained in cases like James Graham is that where a person (a guarantor) enters into a guarantee on the basis or understanding that other persons (co-guarantors) would also be bound by that guarantee, the guarantor will not be bound unless every one of those other co-guarantors also enters into the guarantee in the first place.  The rationale for this principle is that a guarantor is entitled to know the full extent of his potential liability under the guarantee.  The question is not whether a co-guarantor will ultimately be liable under the guarantee but whether he has entered into and become bound by the terms of it in the first place.

12.  Of course, the principle can be modified by express contractual provisions.  In James Graham, as in the present case, the guarantee was a joint and several one.  The defendant guarantor in that case had entered into a guarantee on the basis that three other persons would sign as co-guarantors.  One of those persons however did not : his signature on the guarantee was forged.  It is clear from the reasoning of the Court of Appeal that the principle is one that is related to the execution or entering into the relevant guarantee, and not the ultimate liability of a guarantor under it.  The authorities that were reviewed in the judgments of the court also reflect this.  The passage at 89G-90E dealing with the case of Ellesmere Brewery Co v Cooper [1896] 1 QB 75 (a passage which Mr Chain relied on) is consistent with this.  It is true that in the judgment of Browne-Wilkinson LJ at 93H, it is said that the defendant "only agreed to be bound on the footing that his co-sureties would also be liable" (emphasis added).  However, in context, it is clear that his Lordship was only referring to the aspect of the other co-guarantors entering into or signing the guarantee.

13.  In the present case, neither the 2nd Defendant nor the 7th Defendant has denied signing or entering into the Guarantee.  The 2nd Defendant states in an affirmation that he was aware he was signing a guarantee.  The 7th Defendant admits in his Defence and Counterclaim that he signed the Guarantee.  Rather, the complaints raised by them relate to the question of authority, a point that is, for the reasons already gone into (see paragraph 8 above), not available to the 3rd Defendant.

14.  There is no reason in principle why all co-guarantors must ultimately be liable before any one guarantor can be, unless there are contractual provisions to this effect or that this is somehow the common understanding.  In a joint and several guarantee, the creditor is able to sue one, more or all of the guarantors : - see Andrews and Millett at paragraph 4-011 and 7-026.  A creditor may even release one guarantor without discharging the liability of others : - see Andrews and Millett at paragraph 9-035, and in the present case, this is the effect of clause (4) of the Guarantee.

15.  Ultimately, it is important to consider the liability of the 3rd Defendant on the material before us, irrespective of the position of the other Defendants.  As stated above, it was up to the 3rd Defendant to demonstrate that he had a defence or defences to the Plaintiff's claim that had a real prospect of success.  There is no reason why the 3rd Defendant could not be liable even if the other defendants were not.

16.  Lastly, it was submitted by Mr Chain that fraud unravels all.  The factual basis for this was a combination of the fraud of the 5th Defendant and apparently also of a person named Shuen (formerly a clerk in the firm of solicitors said to have been acting for the 1st Defendant), the latter in persuading the 3rd Defendant to sign the authorization letter dated 19 June 2002 whereby the Plaintiff's solicitors were instructed to draw a cheque in the 5th Defendant's name (see paragraph 3(7) above).  Quite apart from this point not having been pleaded, there is no substance to it.  As far as the 5th Defendant was concerned, it was not argued that he was somehow an agent of the Plaintiff; similarly for Shuen.  In addition, as far as Shuen was concerned, there was no factual basis either for the assertion of fraud.  I should say that even if there was fraud, as between the 3rd Defendant and the innocent Plaintiff (as noted, neither the 5th Defendant nor Shuen was said to be the Plaintiff's agent), the law will prefer the latter.  As Scott LJ said in Norwich and Peterborough Building Society v Steed [1993] Ch 116 at 125G-H : -

"A person who signs a document at the request of another puts into circulation a document on which, depending on its contents, others may rely.  Where a fraudster has tricked, first, the signer of the document, in order to induce the signature, and then some third party, who is induced to rely on the signed document, which of the two victims is the law to prefer?  The authorities indicate that the answer is, almost invariably, the latter.  The signer of the document has, by signing, enabled the fraud to be carried out, enabled the false document to go into circulation."

17.  For the above reasons, I would allow the appeal, restore the default judgment that was entered against the 3rd Defendant on 30 September 2003 and make an order nisi that the Plaintiff should have its costs both here and in the courts below, to be paid by the 3rd Defendant, such costs to be taxed if not agreed.

Hon Barma J :

18.  I agree.