XCHRX SIN HUA BANK LTD., HONG KONG BRANCH v. GOLD COLOUR INVESTMENTS LTD. AND OTHERS

HCA 9056/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 9056 OF 2000

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J U D G M E N T

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1. This is an appeal against the master's order dated 1 March 2001 giving the defendants unconditional leave to defend on the plaintiff's application for summary judgment under Order 14. Pursuant to the consent Order of Deputy Judge Woolley dated 19 March 2001, the plaintiff filed 2 more affidavits and the defendants filed 1.

The claim and the defence

2. It is common ground that the plaintiff is a banker and the 1st defendant is one of its customers. By its Statement of Claim endorsed on the Writ issued on 19 September 2000, the plaintiff claims that the 1st defendant has defaulted under a time loan and was indebted to the plaintiff in the total sum of $7,409,803.84, comprising of principal of $7,290,056.23, interest in the sum of $119,165.23 and overdue interest of $582.15. The plaintiff claims against the 2nd and 3rd defendants as guarantors of the 1st defendant's liabilities under their respective Deeds of Guarantee both dated 21 January 2000.

3. By their Defence dated 20 November 2000 signed by their solicitors, M/s Katherine Y. W. Or & Co., the defendants aver that :

"6. By reason of the Arrangement stated in paragraph 3 hereof, the Defendants avers (sic) that the outstanding indebtedness owned (sic) to the Plaintiff by the Defendants are not due pending the disposal of the Properties. Paragraphs 6 to 8 of the Statement of Claim are denied.

7. In the premises, the Defendants avers (sic) that the said sum of HK$7,409,803.84 are (sic) not due to be payable to the Plaintiff until all the Properties are disposed of."

4. On 19 December 2000, the plaintiff issued a summons asking for summary judgment against the defendants. The summons came before the master on 1 March 2001 and he granted the defendants unconditional leave to defend. The plaintiff appealed and both parties filed further affidavit evidence. The draftsman of the 2nd Affirmation of Lo Kit Sang seemed to have overlooked the difference between affidavit evidence and submission. Needless to say, the further affidavits were not before the master when he granted the defendants unconditional leave to defend.

5. The defendants' pleaded case is that by reason of "the Arrangement" $7,409,803.84 is not due until all "the Properties" are disposed of.

6. The defendants must "condescend upon particulars" and formulate "the Arrangement". There are 3 versions.

First version of "the Arrangement"

7. The first version is pleaded in paragraphs 3 and 4 of the Defence in these terms :

"3. By an arrangement made between the Plaintiff and the Defendants in or about end 1999 ("Arrangement"), the Plaintiff had agreed that the properties as particularised herebelow ("the Properties") which were/are charged in favour of the Plaintiff be disposed of and the proceeds thereof shall be applied for payment of all outstanding indebtedness due and owning (sic) to the Plaintiff by the Defendants.

Particulars of the Properties

A. Flat 33 on 7th Floor of Tower 4 and Car Parking Space No. 281 of Parkview Court, Hong Kong Parkview, 88 Tai Tam Reservoir Road, Hong Kong ('Property A').

B. Shops Nos. 25, 26, 38, 40 and 43, Basement Shop, Causeway Bay Ginza, 501 - 515 Jaffe Road, Causeway Bay, Hong Kong ('Property B').

C. Shops Nos. C, D and E, Ground Floor, Marble Court 9 - 15 Marble Road, North Point, Hong Kong ('Property C').

4. Property A had been disposed of in or about end 1999 and the proceed thereof had been paid by the Defendants to the Plaintiff in partial settlement of their indebtedness due and owning (sic) to the Plaintiff, whereas the other properties, namely Properties B and C are remained to be sold pursuant to the Arrangement."

Whether reasonable defence

8. Since "the Properties ... were/are charged in favour of the Plaintiff", the plaintiff had a power of sale under the charge(s) and to apply the proceeds in discharge of the secured indebtedness. I asked Miss Doris To, counsel for the defendants, what the consideration was for the plaintiff's agreement that "the Properties ... be disposed of and the proceeds thereof shall be applied for payment of all outstanding indebtedness due and owning (sic) to the Plaintiff by the Defendants". Miss To conceded that, as pleaded, consideration was "missing" and submitted that the plaintiff wished to keep the defendants as customers. There is no allegation anywhere that any of the defendants agreed to remain a customer for any period of time. Although this is not a point raised by Mr Kenneth W.H. Ng, counsel for the plaintiff, in the absence of consideration and in the absence of any contention by Miss To of any estoppel, "the Arrangement" discloses no reasonable defence.

First version of "the Arrangement"

9. There are 3 noteworthy points about the first version. The first is that "the Properties" comprised 3 properties, i.e. Property A, Property B and Property C. The second is that what was to be made available to the plaintiff was "the proceeds", not "the net proceeds", and "not the proceeds less the secured indebtedness". The third is that the proceeds were to be applied in discharge of the indebtedness of all 3 defendants.

Second version of "the Arrangement"

10. After the plaintiff had filed and served affidavit evidence showing that Property B was neither owned by any of the defendants nor charged to the plaintiff, the 3rd defendant said this in his first affirmation :

"Other Facilities

5. Properties A and C were mortgaged to the Plaintiff for certain banking facilities, details of such banking facilities I no longer recall. However, I can confirm that the loan amount granted under such banking facilities were converted into Time Loan under the Arrangement.

6. Property B referred to in the Defence in fact was owned by Eastford International Investment Limited, a related company of 1st and 2nd Defendants, which was also at the time mortgaged to the Plaintiff.

Discussion regarding the Arrangement

7. In or about September/October 1999, I was approached by one Mr. Tang ("Mr. Tang"), an officer of the Plaintiff, to discuss matters relating to the Defendants' late payment of the mortgage instalments relating to Property A and C as referred to in the Defence. Mr. Tang put forth to me that I should at least dispose of Property A so as to reduce my indebtedness owed to the Plaintiff at the time.

8. I was reluctant to concede to Mr. Tang's suggestion for the reason that at the time I was actively engaged in negotiating with other financial institutions to refinance the whole properties portfolio in the name of the Defendants and/or their related companies including those pledged to the Plaintiff as set out in the Defence (except Property B which has been wrongly included in the Defence) and that if Property A was sold, the chance to find another bank to offer re-financing would be substantially reduced as the size of the Defendants' properties portfolio would become less attractive since among all the properties pledged to the Plaintiff and other financial institution, Property A was of the best quality both in terms of location and demand in the market.

9. Knowing that the Defendants had the intention to procure other bank for refinancing as stated in paragraph 8 above, Mr. Tang then said to me that the Plaintiff could be very supportive to its customers who suffered financial set back in view of the down-turn in the property market and that the 1st Defendant would be better off if it continued the use of the Plaintiff's service. Mr. Tang then suggested that he would let me have a proposal of the loan restructuring for my consideration.

Arrangement

10. Few weeks later and in or about October/November 1999, Mr. Tang brought along a proposal to my office to explain how the Plaintiff would re-arrange the loan structure.

11. Mr. Tang said to me that the Plaintiff is facing many delinquent in mortgages repayments and in order to reduce the exposure of the Bank in mortgages granted in general, the Plaintiff would suggest to convert part of the mortgage loan to time loan subject to the following conditions:-

(i) The Defendants would procure purchasers for acquiring Properties A and C, the proceed thereof would be payable to the Plaintiff in settlement of the indebtedness due form (sic) the 1st Defendant to the Plaintiff;

(ii) The 1st Defendant would agree to transfer part of the money owed under the mortgage loan to Time Loan;

(iii) The 2nd and 3rd Defendants would agree to act as guarantors for the Time Loan;

(iv) The Plaintiff would agree not to institute any legal proceedings against the Defendants if the Defendants complied with the terms of the Arrangement;

(v) The 1st Defendant would be responsible to settle the balance of the Time Loan (after deducting all proceed of the properties) by way of instalments, the payment of which would commence once the actual balance of the amount due and owing to the Plaintiff by the 1st Defendant was ascertained after the sales of the properties.

12. Upon the belief that the Plaintiff will not take action against the Defendants, I have caused the 1st and 2nd Defendants to perform the Arrangement by disposing Property A in or about early December 1999, the proceed of which was paid to the Plaintiff. Thereafter the 1st Defendant executed the Undertaking Agreement (exhibit 'HHMS-1') and the 2nd and 3rd Defendants executed the Guarantees (exhibit 'HHMS-2') pursuant to the Arrangement, all those documents were prepared by the Plaintiff and dated 21st January 2000. The Time Loan account, being the subject of this action, was then opened at around the same time."

11. There are 4 noteworthy points. The first is that "the Properties" comprised only 2 properties, i.e. Property A and Property C. The second is that what was to be made available to the plaintiff was "the proceed", not "the net proceeds", and "not the proceeds less the secured indebtedness". The third is that the proceeds were to be applied in discharge of the indebtedness of the 1st defendant, and the 1st defendant only. The fourth is that the 3rd defendant saw fit to depose on oath that "Property B ... was also at the time mortgaged to the Plaintiff", without disclosing any document in support of his assertion and despite the land search records indicating that Property B was mortgaged to another bank.

Third version of "the Arrangement"

12. The version put forward by the 3rd defendant in his 2nd affirmation filed and served after the hearing before the master is as follows :

"2. I crave leave to refer to paragraph 4 of my 1st Affirmation filed on 10th January 2001 ('my 1st Affirmation') where I mentioned about the Arrangement proposed by Mr. Tang of the Plaintiff. The Arrangement leading to the Time Loan did not only involve the 1st Defendant's banking facilities with the Plaintiff, the 2nd Defendant's banking facilities with the Plaintiff also formed part of the loan restructuring scheme.

3. At all material time and before the Arrangement came about, Property A (Flat 33 on 7th Floor of Tower 4 and Car Parking Space No. 281 of Parkview Court, Hong Kong Parkview, 88 Tai Tam Reservoir Road, Hong Kong) was mortgaged by the 1st Defendant to the Plaintiff. Property C (Shops Nos. C, D and E, Ground Floor, Marble Court, 9-15 Marble Road, North Point, Hong Kong) and the property known as 6th Floor, Kam Sang Building, 255-257 Des Voeux Road central, Hong Kong ('the Kam Sang Property') were mortgaged by the 2nd Defendant to the Plaintiff. As I have already clarified in my 1st Affirmation, I confirm that the property known as Shops Nos. 25, 26, 38, 40 and 43, Basement Shop, Causeway bay Ginza, 501-515 Jaffe Road, Causeway Bay, Hong Kong was mistakenly mentioned and was irrelevant to this action.

4. In late 1999 the 1st and 2nd Defendants were in some short-term financial difficulties, so payment for the mortgage instalments had been late. When Mr. Tang of the Plaintiff talked to me about the late payment, he also told me that since the value of Property A, Property C and the Kam Sang Property has dropped, the 1st and 2nd Defendants were required to reduce the outstanding mortgage amount because the Plaintiff under its business policy would not allow the mortgages to be maintained at a level which the outstanding amount exceeded the market value of the properties. I frankly told Mr. Tang that the 1st and 2nd Defendants were not able to pay any sum to reduce the outstanding mortgage amount. As mentioned in paragraphs 7 - 11 of my 1st Affirmation, Mr. Tang then put forth to me a proposal which subsequently led to the Arrangement under which the outstanding mortgages would be reduced by transferring part of the outstanding mortgage loan into the form of a time loan.

5. I crave leave to refer to paragraph 11 of my 1st Affirmation and shall elaborate and supplement on the terms of the Arrangement. It was agreed that the Defendants would procure purchasers to acquire the said properties, and upon disposal of the same the Plaintiff would be able to ascertain the exact amount of indebtedness under the mortgages as well as the Time Loan. It was agreed that the 1st and 2nd Defendants did not have to make instalment repayment until the said properties were disposed of. I would not have committed the 1st and 2nd Defendants to immediate repayment of the Time Loan since they had no ability to do so.

6. Pursuant to the Arrangement, Property A was disposed of. Upon completion of the sale on 28 January 2000, the sale proceeds thereof was paid to the Plaintiff which would be taken into account when ascertaining the actual indebtedness. The Defendants were unable to find purchasers for Property C and the Kam Sang Property. Between about February or March 2000 to about July 2000, the 2nd Defendant was able to lease Shops D and E of Property C on short term basis. The duration of the tenancies ranged from couple of weeks to 1 or 2 months where the shop premises were operated in the form of flea market stalls. Like sale proceeds, the rental income generated did not belong to the 2nd Defendant and hence was paid to the Plaintiff which would be taken into account when ascertaining the actual indebtedness."

13. There are 2 noteworthy points. The first is that "the said properties" is not defined. If "the said properties" included the Kam Sang Property, they comprised 3 properties, i.e. Property A, Property C and the Kam Sang Property. The second is that upon disposal, the plaintiff would be able to ascertain the exact amount of indebtedness under the mortgages as well as the Time Loan. Property C and the Kam Sang Property were mortgaged by the 2nd defendant and "the indebtedness under the mortgages" must refer to the 2nd defendant's indebtedness. It would seem that the proceeds would be used to discharge the 1st defendant's indebtedness and the 2nd defendant's indebtedness.

Whether believable

14. In view of my conclusion that "the Arrangement" discloses no reasonable defence, there is strictly speaking no need for me to consider whether "the Arrangement" is believable. In deference to the submission of Miss To who had argued every point which could be urged on behalf of the defendants, I turn to the question whether "the Arrangement" is believable.

15. The defendants have put forward 3 different versions. There is no indication which version is said to be the factually correct version. There is also no explanation for putting forward 3 different versions. My task is to consider whether any of the 3 versions is believable and I do so by looking at the documents which came into existence before, at and after "the Arrangement" but before the plaintiff's claim.

D1's sale of Property A

16. By a formal agreement dated 6 December 1999, the 1st defendant agreed to sell Property A. The sale was completed by assignment dated 28 January 2000.

D1's Undertaking for Repayment of Loan dated 21 January 2000

17. The Undertaking for Repayment of Loan dated 21 January 2000 is the subject matter of the plaintiff's claim in this action. It was signed by the 3rd defendant on behalf of the 1st defendant, by which the 1st defendant undertook to repay the loan of $7,317,297.42 by 300 equal monthly instalments of $58,920.86. This was on the footing of the principal being and remaining at $7,317,297.42. If the parties had agreed on the proceeds of sale being made available in reduction of the indebtedness, the 1st and 3rd defendants would and should have refused to agree to the Undertaking fixing both the number of instalments and the amount of each instalment. Surely the amount of each instalment and the number of instalments depend on the amount(s) of the proceeds of sale, assuming that the parties had agreed that the 1st defendant would have 25 years to repay.

Confirmation of facility limit(s) dated 31 January 2000 and 24 May 2000

18. By a letter dated 31 January 2000 from the plaintiff to the 1st defendant under the caption of "Re: Confirmation of facility limit(s)", the plaintiff advised that "the facility limit(s) under the following account(s) at the close business of 2000.01.31" was a time loan with "Limit up to" HK$7,317,297.42. In my judgment, this document set out the limit of the banking facility under the time loan and it is not arguable that it had anything to do with the actual amount of indebtedness by the 1st defendant to the plaintiff, whether by way of principal or otherwise.

19. The Confirmation of facility limit(s) dated 24 May 2000 is no different. In my judgment, this document set out the limit of the banking facility under the time loan as at 24 May 2000 and it is not arguable that it had anything to do with the actual amount of indebtedness by the 1st defendant to the plaintiff, whether by way of principal or otherwise.

D2's banking facilities letter dated 28 February 2000

20. By letter dated 28 February 2000 to the plaintiff, the 2nd defendant confirmed its agreement to an instalment loan of $25 million to be repaid by 300 equal monthly instalments of $205,535.91, secured by a all moneys legal charge of Property C and the Kam Sang Property and the 2nd defendant further confirmed the plaintiff's rights under the Legal Charge by the 2nd defendant in favour of the plaintiff dated 16 April 1997 to secure the 2nd defendant's indebtedness.

21. It is clear beyond peradventure that both Property C and the Kam Sang Property secured the 2nd defendant's indebtedness, not the 1st defendant's indebtedness.

22. Further, if the parties had agreed on the proceeds of sale being made available in reduction of the indebtedness, the 2nd defendant would and should have refused to agree to the letter fixing both the number of instalments and the amount of each instalment.

D2's Undertaking for Repayment of Loan dated 28 February 2000

23. The Undertaking for Repayment of Loan dated 28 February 2000 was signed by the 3rd defendant on behalf of the 2nd defendant, by which the 2nd defendant undertook to repay another loan of $13,870,062.30 by 28 February 2001. The undertaking to repay in one year's time was not expressed to be conditional upon the sale of any property of any of the defendants.

Whether Arrangement commercially realistic

24. On the defendants' case, at the time of "the Arrangement", both the 1st and 2nd defendants were in default in their repayments. Both Property C and the Kam Sang Property were the properties of the 2nd defendant and both had already been charged to the plaintiff to secure the 2nd defendant's indebtedness. The defendants' indebtedness exceeded the value of Property A, Property C and the Kam Sang Property. As at 28 February 2000, the 2nd defendant's indebtedness under the time loan and the undertaking to repay exceeded $38 million. It made no commercial sense for the plaintiff and it also made no commercial sense for the 2nd defendant to agree to the use of the proceeds of sale of Property C and the Kam Sang Property to discharge the 1st defendant's indebtedness. No reason has been offered why the plaintiff or the defendants would have wished to rescue the 1st defendant at the expense of the 2nd defendant. The "Arrangement" is commercially unrealistic.

D1's current account statements

25. There is no allegation by the defendants that they had not received any of the current account statements exhibited and marked "LKS-3".

26. The statement at p. 194 showed that the sum of $7,317,297.42 (the amount of the principal claimed in this action) was credited into the 1st defendant's current account on 31 January 2000 turning an opening balance of an overdraft of $5,133,416.03 into a nil balance as at 31 January 2000.

27. The statement at p. 195 showed that the sum of $58,951.13 was debited from the account on 1 March 2000 upon the transfer into the account of $62,000. The plaintiff's case was that $58,951.13 was the amount of the first instalment. On the defendants' case, they should have objected to or at least queried the debit by the plaintiff, but there is no allegation or evidence that they had.

28. The statement at p. 196 showed that the sum of $60,156.34 was debited from the account on 31 March 2000 after the payment into the account of $62,000 on 27 March 2000. The plaintiff's case was that $60,156.34 was the amount of the second instalment. On the defendants' case, they should have objected to or at least queried the debit by the plaintiff, but there is no allegation or evidence that they had.

29. The statement at p. 197 showed that the sum of $61,777.92 was debited from the account on 15 May 2000 after the payment into the account of $61,000 on 12 May 2000. The plaintiff's case was that $61,777.92 was the amount of the third instalment. On the defendants' case, they should have objected to or at least queried the debit by the plaintiff, but there is no allegation or evidence that they had.

30. The statement at p. 198 showed that the sum of $61,465.03 was debited from the account on 2 June 2000 after the payment into the account of $61,000 on 1 June 2000. The plaintiff's case was that $61,465.03 was the amount of the fourth instalment. On the defendants' case, they should have objected to or at least queried the debit by the plaintiff, but there is no allegation or evidence that they had.

31. The defendants' explanation for the payments were that they were rental income from 2 of Property C's shops and "the rental income generated did not belong to the 2nd Defendant and hence was paid to the Plaintiff". To start with, they were paid into the 1st defendant's bank account, not to the plaintiff. Further there is no reason why rental income from the 2nd defendant's properties should be paid into the bank account of the 1st defendant.

Conclusion on "the Arrangement"

32. In my judgment, the defendants' case flies in the face of contemporary documents and is so contradicted by them that none of the versions of "the Arrangement" is believable.

Other points raised by the defendants

33. I turn now to the other points urged by Miss To on behalf of the defendants.

34. I see no point in the fact the due date of the first instalment is not stated in the 1st defendant's Undertaking for repayment of loan. The 1st defendant's current account statement showed that the loan was drawn down on 31 January 2000. The due date for the first monthly instalment would thus be the last day of February 2000.

35. It is clear from paragraph 7 of the Defence that there is no issue on quantum. Further, one must not lose sight of the fact that the amount drawn down was credited to the 1st defendant's account and on the defendants' case, they had not repaid a single cent. Miss Hui has never said that only 2 instalments had been made.

36. There is no tangible security for the time loan of $7,317,297.42. The fact that "related" persons, i.e. the 2nd and 3rd defendants, guaranteed the 1st defendant's liability is no reason for further enquiry.

37. The limit of $7.5 million under the Guarantee is only the maximum amount of the guarantors' liability. It does not mean that the guarantors' liability could or would exceed the amount of the principal debtor's liability.

38. I do not agree that the evidence of Mr Tang is essential for present purposes. The only possible relevance of his evidence is on "the Arrangement", which I have held to disclose no reasonable defence and to be unbelievable.

39. I do not think the plaintiff's documents on adjustment of the interest rate is relevant. The agreement is to pay interest at prime rate. The burden is on the defendants to condescend upon particulars. The defendants have not raised any issue on the interest rate(s) or the prime rate(s).

40. The claim by the plaintiff in this action is on the principal of $7,317,297.42 under the Undertaking for repayment of loan dated 21 January 2000. The defendants have not shown any reason why the amount of the defendants' indebtedness prior to that date is a reason for trial.

41. Miss To has not taken issue with the fact that the plaintiff sues in the name of a branch.

Order

42. For the reasons I have given, there is no triable issue and there is no other reason why there ought to be a trial. The appeal must be allowed and I order that :

(a) The Order of the master dated 1 March 2001 be set aside.

(b) Final judgment be entered in favour of the plaintiff against the defendants for the sum of $7,409,803.84, with interest on $7,290,056.23 at judgment interest rate(s) from 2 August 2000.

43. I make the following order nisi on costs :

(c) The defendants do pay the plaintiff the costs of this action including the costs of the application for summary judgment before the master and the judge.