XCHRX BANK OF CREDIT AND COMMERCE HONG KONG LIMITED (In Liquidation) v. LEUNG KWOK KWONG AND ANOTHER

1993 No. A6959

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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J U D G M E N T

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1. This is an appeal by the Plaintiff against an Order made by Master C.B. Chan on 9th May 1994 by which she gave the Defendants unconditional leave to defend.

2. The Plaintiff sues, inter alia, upon two continuing unlimited guarantees signed by the Defendants for money owed to the Plaintiff by the principal debtors, namely Kam Kui Trading Company Limited and Keep-On-Go International Limited.

3. The defence raised at the Order 14 hearing was that the Plaintiff had furnished no consideration as the amount owed by the principal debtors were all past debts incurred prior to the signing of the guarantees. However, the Plaintiff now accepts as common ground that no further advances or credit had been given since the guarantees were signed.

4. The present appeal rests upon two issues. First, whether the Plaintiff allowing time to the principal debtors to repay the debts amounts to sufficient consideration under the guarantees. Second, whether the 1st Defendant's affidavit, at the eleventh hour, raises an additional/alternative defence in alleging that the guarantees had in fact been executed in escrow subject to the approval of the Plaintiff's head office.

5. The two guarantees were made in consideration of the Plaintiff's "giving time credit and/or banking services and accommodation" to the respective principal debtors. Mr. Warren Chan, Q.C., Counsel for the Plaintiff, submitted that the Plaintiff allowing negotiations on re-structuring to go on amounted to a forbearance to sue, thus providing sufficient consideration for the guarantees. Mr. Chan, Q.C. further submitted that this explained why the unsettled trust receipts were converted to overdraft after the guarantees were signed.

6. Mr. Ronny Wong, Q.C., Counsel for the Defendants, contended otherwise. First, the two guarantees were signed during the process of negotiations on the re-structuring of the debts. The principal debtors had made numerous proposals for re-structuring and none had been accepted by the Plaintiff. The Plaintiff had, both before and after the signing of the guarantees, been demanding payment from the principal debtors and a month or so after the guarantees were signed had threatened legal action against the Defendants. He drew my attention to the following passage in Rowlatt on Principal and Surety, 4 Ed., p. 11 :

"Following some uncertainty it was finally decided that the mere fact of forbearance per se will not constitute consideration for a surety becoming liable for payment of the debt by the debtor : there must be in addition either an undertaking to forbear or an actual forbearance at the surety's express or implied request."

7. He submitted that the mere fact of forbearance to sue does not per se constitute consideration. Secondly, he submitted that the conversion of unsettled trust receipts to overdrafts was nothing more than a ploy to charge a higher rate of interest.

8. On the second question of whether the Defendants demonstrated a triable issue by raising the point that the guarantees had not taken effect since no subsequent approval from the Plaintiff's head office had been received, Mr. Chan, Q.C. submitted that this was a totally different story arising out of an affidavit sworn just two days before the present appeal and was quite inconsistent with the contemporary documents as well as the Defendant's conduct throughout. He cited a number of cases, including National Westminster Bank v. Daniel [1993] 1 WLR 1453 and of course, Murjani v. Bank of India [1990] 1 HKLR 586 in support of his contention. Mr. Chan, Q.C. suggested that this second story was "unbelievable", to quote from the Murjani case. Had the Defendants' allegation been true (namely, that the guarantee would not take effect unless and until approval was given by the Plaintiff's head office), the Defendants would at very latest have raised this point when litigation started. On the contrary, despite repeated demands for payment under the guarantees by the Plaintiff, the Defendants, who were experienced and competent businessmen, made no objection to the validity of the guarantees (see Banque de Paris v. Costa de Naray [1984] 1 Lloyd's Rep. 21).

9. Further, Mr. Chan, Q.C. submitted that the Defendants were indeed implicitly accepting the validity of the guarantees as the defence first raised was one of past consideration and, in particular, the allegation that no further advances were granted since the signing of the guarantees. Mr. Chan, Q.C. maintained that the burden was upon the Defendants to satisfy the court, on the balance of probabilities, that there was a fair or reasonable probability of them having a real or bona fide defence because the mere assertion of fact in an affidavit is not enough. And, given that the Defendants had given two totally different stories which were inconsistent with both their own behaviour and contemporary documents, the Defendants, Mr. Chan, Q.C. contended, must fail for lack of credibility.

10. Mr. Ronny Wong, Q.C. made the following points. Firstly, he said that there has been no discovery and that the Plaintiff's liquidator, Mr. Gabriel Tam, had no personal knowledge of the matters to which he had deposed. As a result, the Defendants alleged that they had suffered prejudice as a result of non-disclosure of relevant material. Mr. Wong, Q.C. contested most strongly the Plaintiff's argument relating to inconsistency with contemporary documents and the Defendant's behaviour. As the guarantees were signed during the negotiations for re-structuring, Mr. Wong, Q.C. asked rhetorically whether the Defendants would sign such guarantees when no agreements on re-structuring had yet been made. Mr. Wong, Q.C. contented that the facts were consistent with the allegation that the guarantees were executed in anticipation of the acceptance of re-structuring proposals and subject to the Plaintiff's head office approval.

11. Courts have approached defences to claim under written guarantees given to Banks with a fair degree of scepticism. This is amply demonstrated by observations made by the courts in Murjani and also Banque de Paris. Experienced business persons are, however, prepared to do some very strange things when pressed by bank managers.

12. As to the second point in this case, namely, that the guarantees were held in escrow pending head office's approval, even taking into account all that Mr. Wong, Q.C. has said, I just cannot believe that this would not have been said earlier if it were true. In my judgment, I find this point unbelievable. I would not give leave to defend on this point alone.

13. As to the point about consideration, I have found this a little more difficult. The guarantees do not state that the guarantors have requested the "giving time credit and/or banking services and accommodation to ...". However, one has to approach the matter from a standpoint of commercial reality and, on this basis, the giving of time etc., must surely have been at the express or implied request of the guarantors. Had the guarantees not been given, I think it pretty clear that the Plaintiff would have taken steps to recover against the principal debtors and this the guarantors most certainly did not want. Mr. Wong, Q.C. has put his case as attractively as possible, but at the end of the day I am not able to agree with him that time was not given or that this was just a mere forbearance to sue and thus there was no consideration for these guarantees.

14. Mr. Wong, Q.C. also took a technical point relating to the verification of the re-re-amended Statement of Claim.

The writ was issued on 3rd August 1993.

The Statement of Claim was amended on 20th January 1994.

The Order 14 Summons was dated 20th January 1994.

The Affidavit of Mr. Tam in support of Order 14 Summons was dated 2nd February 1994.

Master Jennings gave leave to the Plaintiff to re-amend the Statement of Claim on 18th February 1994.

Mr. Tam's second verification Affirmation was dated 2nd May 1994.

Master C.B. Chan dismissed the Order 14 Summons on 9th May 1994.

The notice of appeal was dated 13th May 1994.

Mr. Registrar Betts gave the Plaintiff leave to re-re-amend the Statement of Claim on 9th June 1994.

15. The simple point made by Mr. Wong, Q.C. is that Mr. Tam has not verified the contents of the re-re-amended Statement of Claim and that this is contrary to the provision of Order 14 rule 2 (1) which states :

"An application under rule 1 must be made by summons supported by an affidavit verifying the facts on which the claim, or the part of a claim, to which the application relates is based and stating that in the deponent's belief there is no defence to that claim or part, as a case may be, or no defence except as to the amount of any damages claimed."

16. It is important to note the nature of the re-re-amendments of the Statement of Claim, In paragraph 7 the words "various loans" were deleted and the word "time" was inserted making the sentence read "the Plaintiff granted time and banking facilities to and were utilised by ...".

17. The other re-re-amendment was one relating to the calculation of interest by taking a date two months earlier and calculating it from the 17th of the month in order, as I understand it, to tie in with the way the account was operated, i.e. interest added at monthly rests on the 17th of each month.

18. Mr. Tam's affirmation in support of the Order 14 Summons in paragraphs 7 and 12 even though prior to the re-re-amendment Statement of Claim makes perfectly plain that the Plaintiff was prepared to and did give time to the principal debtors. He produced the relevant bank statements and the documents showing the conversion from unsettled trust receipts to overdraft. His affirmation was directed to showing that there was in fact good consideration.

19. As to the figures, no change has been made in relation to the outstanding principal sums, but for some reason the amount of interest has been reduced. Mr. Wong, Q.C. has made no criticism of the figures in this case, but has rested his case on the point solely in relation to the absence of an affirmation of Mr. Tam, or someone else on behalf of the Plaintiff, post the re-re-amendment.

20. It seems to me that Mr. Tam has verified the major change in the re-re-amended Statement of Claim regarding the allegation of time. It does not appear to me to be crucial that his verification pre-dates the latest amendment. The rule requires verification by affirmation and this was done. The notes to the White Book of Order 14/2/4 make it clear that defects or omissions in the original affidavit may be cured or supplemented or supplied by an affidavit made subsequently and the court looks at the matter both on jurisdiction and on merits "at the end of the day on the affidavits which have been filed". The slight difference here was that the verification affidavit pre-dated the amendment and I cannot for myself see that this makes any real difference.

21. In my judgment, there is nothing in Mr. Wong, Q.C.'s technical point concerning verification.

22. It follows, therefore, that the appeal must be allowed in relation to the claims made under the guarantees relating to Kam Kui Trading Company Limited and Keep-On-Go (International) Limited. In respect of these two guarantees I award judgment against both Defendants as follows :

23. In relation to Kam Kui, judgment for $8,975,238 together with interest at the rate of 6.5% per annum with monthly rests on the 17th day of each month from the 17th July 1993 until judgment and thereafter at the judgment debt rate.

24. In relation to Keep-On-Go, judgment for $4,475,275 together with interest at the rate of 6.5% per annum with monthly rests on the 17th day of each month from the 17th July 1993 until judgment and thereafter at the judgment debt rate.

25. This appeal was also brought in relation to a guarantee relating to a company called Tai Fung Hong where the liability of that company as at 17th July 1993 was $22,452,839. However, Mr. Chan, Q.C. has abandoned his appeal in relation to that guarantee, so that issue must go to trial.

26. I propose to make a costs order nisi that the Plaintiffs do have the costs in this appeal together with the costs below.