INDUSTRIAL AND COMMERCIAL BANK OF CHINA (ASIA) LTD v. FONG WAI NAM WILLIAM

HCA 1799/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1799 OF 2011

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R U L I N G

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1.  This is an appeal against the decision of a master contained in an order of 9 September 2013 refusing the defendant’s application to set aside a summary judgment entered against him. The summary judgment is itself dated 27 February 2012.

2.  The appeal has been argued before me this morning.  I have heard oral submissions from both counsel.  In addition, I have had the benefit of very full and well-researched written submissions.

3.  In my judgment, this appeal should be refused.  The consequence is that the judgment stands. 

4.  I set out very briefly the background in order to give context to my reasons for refusing the appeal.  The plaintiff is a bank.  It lends money to clients, including small businesses.  In July 2009, it entered into an agreement with a company called Gamze Limited to provide banking facilities to that company.  Gamze Limited, I am told, manufactures electric toys.  The defendant, Mr William Fong, is a director of Gamze, it appearing to be, for all practical purposes, his company. 

5.  Gamze had had the benefit of banking facilities with the plaintiff bank for an extended period of time.  It appears that in or about mid-2009, however, like a great many other businesses at that time, Gamze was facing financial difficulties.  When new banking arrangements were entered into in terms of a letter dated 6 July 2009 between the bank and Gamze, therefore, the terms were not as generous as they had been in the past.  This, it has been said, and I accept, put pressure on Gamze.  However, as there was a long-standing business relationship between the plaintiff bank and Gamze and as Gamze was not in the most viable of positions to negotiate with other banks, it agreed to the banking facilities that were offered. 

6.  Part of the agreement was that the new facilities would be guaranteed by the defendant.  The new banking facilities were agreed and the written document giving evidence to that agreement was duly signed.  The document is the letter of 6 July 2009.  I observe in passing that the authorised signature on behalf of Gamze Limited is the signature of the guarantor, that is the defendant in this case.  In short, the defendant signed on behalf of the company and personally as guarantor.

7.  Looking to the broader economic landscape, it is apparent that in the very troubled times that had enveloped the capitalist world in or about 2008 and 2009, the flow of money from financial institutions to businesses to oil the wheels of those businesses became restricted.  There was a shortage of money.  Banks became cautious as they had an obligation to ensure that they themselves remained viable.  To assist business to stay viable, it appears, on the papers before me, that the Hong Kong Government entered into an arrangement with a number of banks, one of those banks being the plaintiff bank, to effectively underwrite loans given by the banks to businesses. 

8.  In the very broadest of terms, the arrangement was that government would underwrite 80 per cent of any risk taken on by a bank in lending money to any particular business.  The bank itself would have to carry the 20 per cent risk.  As between the government and the banks, therefore, if any company to which funds were lent was unable to repay the bank, a time would arrive when government, in honouring its underwriting, would have to make good to the banks 80 per cent of the bad debt.

9.  What must be emphasised is that the agreement - which, for ease, I will call the SME agreement, that is an agreement seeking to support small and medium enterprises - while it was obviously for the benefit of Hong Kong’s economy, was essentially nothing more than an underwriting agreement between government and the banks.  The banks were not expected to lend money foolishly.  Ordinary banking prudence remained.  The arrangement under the SME policy was between the banks and government and there were, of course, certain conditions.  These conditions were contained in written documents.

10.  The reason why I have spent some time looking to this arrangement is because it is at the centre of the defendant’s proposed defence.  I shall come to that proposed defence shortly.  Before doing so, however, let me look at the two gateway principles that govern the setting aside of summary judgments. 

11.  The judgment obtained in this case was a regular one.  The defendant does not argue otherwise.  That being the case, the defendant must satisfy this court of two things.  First, that there was a reason for his non-attendance at the Order 14 hearing, summary judgment being granted in his absence.  Second, he must show that he has a case that possesses a real prospect of success.  A real prospect of success has been defined and I have been referred to authorities which contain those definitions.  What emerges, in my view, is that a case which has some foundation, but a suspect foundation, is not sufficient. 

12.  As I have said, there are two matters that this court must be satisfied with.  First, why was it that the defendant did not attend the summary judgment hearing.  It is clear that the defendant was served with the relevant papers.  The defendant had entered appearance to defend, of course, and had put in homemade grounds of defence.  The defendant is unable to give any satisfactory reason why he did not attend the summary judgment hearing.  He is able to say only that he did not think that a judgment would be granted without a trial as he had already entered a defence and that he could not remember what he was doing on the day when the summary judgment hearing in fact took place in his absence. 

13.  On his behalf, it has been urged that the defendant lives in a remote part of Hong Kong and often travels.  I do not find these last two matters of any assistance.  The mail reaches all parts of Hong Kong and if a person enters into the serious business of litigation and receives documents clearly related to that litigation, then whether or not he understands the language of the document, a clear obligation arises to do something about it, that is, to find out what the documents intend and to make sure that that intention is understood and dealt with. 

14.  With respect, counsel for the defendant has accepted that he has some difficulties in this regard.  He makes the valid point, however, that the primary focus of this court must always be focused on whether or not the defence offers some real prospect of success.  In this regard, two matters have been raised.  First, it is said that what occurred in this case amounted to a material variation of the banking facilities that were granted, to the extent that it acted to release the defendant from the obligation of his guarantee. 

15.  At the centre of this matter lies the issue of what I will describe for ease of reference only as ‘the variation’. It appears that after the agreement for less generous banking facilities had been entered into between Gamze Limited and the plaintiff bank, those facilities and obligations under them being guaranteed by the defendant, the bank requested Gamze Limited to supply extra security.  This security was clearly to reinforce the bank’s position in respect of the banking facilities. The request made by the bank was that Gamze Limited was to supply to it a sum of $600,000 which was to be held on fixed deposit by the bank, that deposit to remain until further agreement or until the banking facilities themselves fell away. 

16.  I am told, and it does appear in the defendant’s affirmation, that the defendant was aggrieved by this request.  He saw it effectively as a demand that he could not refuse.  He says that he was required to pay in the $600,000 prior to the banking facilities being granted, that is prior to any ability to draw down.  Because of his financial circumstances, the defendant has asserted in his affirmations that the $600,000 in cash, even if not directly, certainly indirectly acted to reduce the amount that was offered to him by way of the banking facilities.  Indeed, having regard to the details of those banking facilities, it is argued - and that argument has not been seriously challenged - that the amount of $600,000 required as extra security equalled 20 per cent of the loan facilities offered by the bank.

17.  On behalf of the defendant, it is said that this request for an extra form of security, as it, for all practical purposes, reduced the amount of the money available to Gamze Limited, acted as a variation of the banking facilities agreement.  The variation, it is argued, was of such substance that it has acted to release the defendant from his guarantee.

18.  The difficulty with this argument, as counsel for the bank points out, is that the guarantor, that is the defendant, was at all times in the driving seat in respect of the arrangements reached between Gamze Limited and the bank in respect of the supply of this extra security.  He not only had full knowledge of this request for extra security, he was the one who, on behalf of the company, made the decision to provide that extra security.  As such, the authorities are clear that the guarantee entered into by him does not fall away or is not thereby vitiated as it would be perhaps with an entirely independent guarantor.  In this regard, I have been referred to several authorities, one being a recent judgment of Deputy High Court Judge To, as he then was, dated 16 October 2000, in the matter of Lai Kwok Man v Hongkong & Shanghai Banking Corporation, HCB 2318/1999.  I would add that the guarantee itself contained a provision to the effect that the guarantee would not be vitiated by any change in the banking facility arrangements.

19.  I am satisfied, therefore, that established authority is against the defendant in this regard. 

20.  This brings me to the second proposed defence, one which counsel for the defendant argues is his primary defence.  It is based on assertions of illegality and/or undermining of public policy.  In this regard, I have been pointed to certain documents.  I look first to a form dated 20 August 2009 which is headed ‘Statement by Lender’.  It appears to be a document completed by the bank on the basis that the moneys lent to Gamze Limited were lent pursuant to what I have earlier described as the SME scheme. The statement contains, in section 13, a declaration concerning securities or guarantees and, in particular, it says the following:

“Whether the borrower has procured or shall procure, or both, any security or guarantee (in addition to those as specified under Part B of this application) to be given in favour of, or held by, the lender regarding the facility?”

21.  Two boxes are provided.  The one has ‘yes’ next to it; the other has ‘no’ next to it.  The bank has ticked the box saying ‘no’.  This is, it is accepted, incorrect.  Shortly after this declaration was made by the bank, the bank sought security from Gamze Limited by way of the deposit of $600,000.  On behalf of the defendant, it is said that this incorrect declaration, or perhaps more specifically, the failure to rectify this declaration which became incorrect after the security was certified, is of such importance that it should be held to reach out to the defendant as guarantor.

22.  Before moving onto this issue, I would refer to the terms of the SME agreement, more particularly paragraph 6.9 which says that the lender - in the present case, the lender being the bank - shall not, without the government’s prior written consent, vary, release, waive or discharge or allow any variation, release, waiver or discharge of any obligations of a borrower under a relevant facility in any way which may adversely affect any of the rights, interests, obligations or liabilities of the government. 

23.  The argument is made that the $600,000 required by way of security amounted to 20 per cent of the facilities granted, that being the exact amount which the bank retained as its proportion of the risk in the facilities.  Effectively, therefore, so it is argued by Mr Lam, the bank had reduced its risk in these facilities to zero while the government’s risk remained at 80 per cent.  The government was not informed of this.

24.  On behalf of the defendant, it is argued that the bank’s actions amounted to undermining the public policy which was the initiative for the SME scheme in the first place.  The bank’s failure to advise government that it had sought this extra security rendered the agreement illegal.

25.  The whole issue of public policy and illegality is a complex one but, in my view, in this regard, a helpful underlying principle is contained in Chitty on Contracts, the 30th edition, volume 1, ‘General Principles’, at page 1090, and it reads as follows:

“The diversity of the fields with which public policy is concerned and of the circumstances in which a contractual claim may be affected by it combine to make this branch of the law of contract inevitably complex - a complexity which has been aggravated by lack of systemisation and by confusing terminology which has often been adopted. Much difficulty would be avoided, if whenever a plea of illegality or public policy were raised as a defence to a contractual claim, the test were applied: does public policy require that this claimant, in the circumstances which have occurred, should be refused relief to which he would otherwise have been entitled with respect to all or part of his claim.”

26.  As between the government and the bank, it is plain to me - and indeed Mr Cheung, counsel for the bank, does not dispute otherwise - that the failure of the bank to advise government that it was taking this extra security which had the effect of reducing its risk to zero may be grounds for the bank, in the event of the banking facilities becoming a bad debt, to fail in any claim against government.  But we are not looking to the enforcement of the SME scheme as between the bank and government.  What is suggested is that somehow the bank’s default under this scheme, if it can so be called, reaches out to the defendant. 

27.  I do not agree.  As Mr Cheung has said, there is no privity of contract in this regard between the bank, the government, Gamze Limited and the defendant.  Earlier in this judgment, I was at pains to emphasise the fact that the agreement reached was, on an overview, a simple underwriting agreement.  Banks were not prevented from lending money to businesses according to tried and trusted formula.  The agreement did no more than encourage banks to lend money to try and improve the general economic situation on the basis that banks would only have to bear 20 per cent of the risk of any loans so granted. 

28.  For myself, I fail to see how an agreement between the plaintiff bank and the government of this kind, even if between the plaintiff bank and the government it created particular rights and obligations, is of such a nature that it reaches out to the defendant, relieving him of his obligations under his guarantee.  One has to look at the circumstances of each case, and to return to Chitty, the question to be asked is does public policy require, in this case, that this defendant, in the circumstances which I have set out, should be entitled to be released from his guarantee. 

29.  I do not think so.  Whether or not the banking facilities granted to Gamze Limited were generous, the fact remains that an agreement was entered into according to standard banking principles in terms of which those facilities were lent to the company.  The defendant was the force behind the company.  He signed the agreement concerning those facilities and he agreed to guarantee.  The fact that there was a demand for security which undermined an entirely independent agreement between the bank and government does not affect this defendant.

30.  In this regard, I need do no more than look to the fundamental principle, namely, the common law doctrine of privity means, and means only, that a person cannot acquire rights or be subjected to liabilities arising under a contract to which he is not a party.  In this particular instance, the defendant was not made subject to any liabilities under the agreement between the plaintiff bank and government, nor did he acquire any rights.  Even if there are sophisticated aspects of the argument - and I have turned my attention to them in the very full written submissions - in my judgment, they are not of such strength that I can hold that the defendant has a real prospect of success at trial.  I do not say that the arguments advanced very professionally on his behalf are bereft of merit.  What I do say, however, is they do not reveal, in my judgment, a case that promises any real prospect of success at trial. 

31.  These are the reasons why, in my judgment, the summary judgment must stand.

(Submissions on costs)

32.  There will be an order that costs are to follow the event and are to be awarded to the bank.

(Submissions on summary assessment)

33.  My direction is, therefore, that if the parties are able to agree a summary assessment of costs, then there will be an order in accordance with that summary assessment as to the amount.  If the parties are unable to agree, then the matter will have to go to taxation.