BANCA DI ROMA SOCIETA PER AZIONI v. LEE KAI and Another

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

1997, No. 176
(Civil)

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J U D G M E N T

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Godfrey, J.A. :

Introduction

1. This is an appeal from an order of Stone, J. made on 1 August 1997. The action in which the judge made his order, as constituted at the date of his order, was an action in which the only plaintiff was Banca Di Roma Societa Per Azioni ("BDR"). The defendants in the action were Lisgold Holdings Ltd ("the debtor") and Lee Kai and Chan Kueng Un ("the guarantors").

2. The order under appeal was made by the judge on BDR's application for summary judgment, under Order 14 of the Rules of the High Court, against all the defendants. The judge ordered that judgment be entered in favour of BDR against the debtor for HK$6,044,630.45 together with interest and costs. There is no appeal by the debtor against that order. The judge further ordered that the guarantors should be granted unconditional leave to defend the action. Dissatisfied with that, BDR has appealed to this court, claiming that judgment should be entered against the guarantors as well as against the debtor.

3. At the hearing of the appeal, it became apparent that there might be difficulties in BDR's way and it asked for and was granted an adjournment to file further evidence. When the appeal was restored for hearing today, we were further asked to grant BDR leave to amend, by adding Banca Nazionale dell'Agricoltura ("BNA") as a co-plaintiff in the action. So, we must now treat this appeal as an appeal by BDR and BNA against the judge's grant to the guarantors of unconditional leave to defend .

4. The question for this court is whether on the material before us the guarantors have demonstrated that there is an issue between the guarantors on the one hand and the plaintiffs on the other hand, and that that is an issue which ought to be tried. The guarantors say that they have raised such an issue, and that it ought to be tried, not determined summarily.

The facts

5. Before I attempt to explain what the issue is, it will be convenient to refer to the facts.

6. Before the events took place which gave rise to this action, the debtor was a customer of BNA, with its liabilities to BNA secured in part by the guarantors under guarantees, expressed to enure for the benefit of its "successors or assigns", dated 18 August 1994. It appears that in 1995 BDR took over BNA, an event which affected the rights of the debtor against BNA in relation to the deposits of the debtor held by BNA, and the rights of BNA against the debtor in relation to the moneys owed by the debtor to BNA. It also affected the rights of the guarantors. On 20 March 1996, BNA revoked the debtor's facilities. Shortly after, BNA dispatched two letters, dated 1 April 1996, one addressed to the debtor and the other to one of the guarantors. The facts as recited in the letter from BNA to the debtor give rise to what the guarantors claim is the issue which ought to be tried and I must, I think, therefore read it more or less in full :-

"Forthcoming wind-down of Banca Nazionale dell'Agricoltura's Hong Kong Operations

As you are aware, early in April 1995 Banca di Roma ("BDR") took over Banca Nazionale dell'Agricoltura ("BNA").

BNA has, therefore, become part of the wider Gruppo Bancario Cassa di Risparmio di Roma, which has allowed BNA to increase and diversify its capacity to offer services in both the domestic and the international markets, thus ensuring a return to its traditional values.

As a result of the take-over, it has been necessary to carry out a review of the internal organisation of the Group's business activities, in order to restructure the Group in the way most suited to the business diversity and experience of the various components of the Group.

As far as BNA is concerned, its international presence has been strengthened particularly with regard to the London and New York branches. However, given BDR's significant presence in the Far East, including the high-profile Hong Kong branch, we have decided to close the BNA branch in Hong Kong, with effect from 30 April 1996.

In order to effect an orderly wind-down of BNA's operations, it is intended that customer business will be transferred to BDR during the period from 11 April 1996. It is also intended that any security given to BNA in respect of customer business shall be transferred at the same time as the corresponding customer account(s). The transfer of your account(s) and other agreements shall therefore be conditional upon BNA receiving all relevant consents in respect of the transfer of any security given in respect of your obligations (the date of the transfer of your account(s) shall be referred to as the "Transfer Date").

On and from the Transfer Date, all obligations owed to you by BNA will be novated to BDR so that all obligations will be owed to you by BDR. On and from such date, you will have exactly the same rights in respect of such obligations against BDR as you previously had against BNA, in each case on exactly the same terms as applied between yourself and BNA immediately before the Transfer Date.

Further, on and from the Transfer Date, the benefit of all of BNA's right, title and interest (legal and equitable, present and future, actual or contingent) in and to all obligations owed by you to BNA in respect of your account, any remaining obligations in respect of the repayment of your facility and under all agreements entered into between you and BNA, will be assigned to BDR and its successors and assigns, substituting BDR in its full right and place in respect thereof."

7. I shall read two further paragraphs :

"At the same time, in consideration of its performing such commitments, BDR will become the sole holder of the corresponding rights against you, without limitation of any sort."

And :

"This letter shall in relation to each assignment and novation provided for hereunder, be governed by and construed in accordance with the law governing the benefit, right, title, interest or obligation so assigned or novated."

8. The letter concludes by asking for the debtor's consent to the transfer of its accounts and associated obligations to BDR on the transfer date, to be evidenced by the debtor's signing and returning the attached copy of the letter. The debtor in due course returned to BNA the signed copy of the letter as it had been asked to do, and accordingly thereby consented to the arrangements which had been proposed.

9. The second letter to which I have referred again mentions BNA's decision to close its Hong Kong branch and set out the machinery by which that was to be effected. It contains the following paragraphs which are significant :-

"On and from the Transfer Date, the benefit of all BNA's right, title and interest (legal and equitable, present and future, actual and contingent) under, in and to the security documents referred to above will be assigned to BDR and its successors and assigns, substituting BDR in its full right and place in respect thereof.

Further, on and from the Transfer Date, all obligations owed to you by BNA will be novated to BDR, so that all obligations which may be owed to you by BNA will be obligations owed to you by BDR. On and from such date, you will have exactly the same rights in respect of such obligations against BDR as you previously had against BNA, in each case on exactly the same terms as applied between yourself and BNA before the Transfer Date.

This letter shall, in relation to each assignment and novation provided for hereunder, be governed by the law governing the benefit, right, title, interest or obligation so assigned or novated."

10. The addressee of this letter was invited to acknowledge its receipt and was asked to signify its agreement to the "transfer and novation" by signing and returning the attached copy letter to BNA. However, this did not happen; and neither of the guarantors consented to what was proposed in the letter.

The issue

11. The issue which arises, say the guarantors, is as follows.

12. Did the arrangements made here operate so as to discharge the debtor from its debt to BNA and substitute, for that debt, a debt due from the debtor to BDR by way of novation of the contract between the debtor and BNA; or did they operate to effect what has been called "a mere assignment" of the debt owed by the debtor from BNA to BDR?

The law

13. If the arrangements to which I have referred operated to effect a novation in a sense in which I have used that expression, the liability of the guarantors may well have been discharged. If, however, BNA has merely assigned to BDR the benefit of the debt owed to it by the debtor, then the liability of the guarantors has not been discharged.

14. To make this good, I propose to read certain extracts from one of the authorities cited to us, which gives some guidance as to the approach of the court to a question such as that which has arisen here. I refer to Bradford Old Bank Ltd v. Sutcliffe [1918] 2 KB 833. I take the facts from the headnote :-

"In 1894 the plaintiffs agreed to grant to a company a fixed loan of 3600l and to allow an overdraft of 2,500l on the company depositing debentures for 6100l and procuring a guarantee from two of its directors. The debentures were deposited, and the directors gave a guarantee (which was expressed as being given to protect the plaintiffs from loss on the realization of the debentures) agreeing to pay to the plaintiffs on demand all sums owing by the company, the amount ultimately recoverable under the guarantee not to exceed 6100l with interest 'from the time of default of payment by the company or from the time of your demanding payment thereof from us.' In 1898 F. Sutcliffe, one of the guarantors, became insane, and the plaintiffs had notice of this in 1899. The company continued to bank with the plaintiffs until 1907, when the plaintiffs amalgamated with another bank under the name of the United Counties Bank, Limited, selling to the new bank all its debts and the benefit of all securities and guarantees. The 6100l debentures remained registered in the name of the plaintiffs. The new bank continued to use the books of the old bank, a note being made therein to the effect, 'United Counties Bank, Limited, as from February 13, 1907.' The company's accounts were transferred in those books to the name of the new bank, and the company paid interest on the loan account by cheques drawn on the current account in favour of the new bank. In 1912 the plaintiffs demanded payment from the company of the amounts owing and commenced an action to enforce the debentures, in which they realized a certain sum; and in 1915 they commenced an action on the guarantee against the defendant as the committee of F. Sutcliffe for the amounts accrued due on the loan account and current account less the amount realized on the debentures. Lawrence J. held that so far as F. Sutcliffe was concerned the guarantee ceased as a continuing guarantee in 1899, when the plaintiffs had notice of the lunacy, though the liability for the accounts then accrued due continued; that as regards the current account it had been satisfied by subsequent payments in; but that the defendant was liable for the amount then accrued due on the loan account."

15. On those facts, a number of points arose, into only one of which I need to go.

16. I will start with the judgment of Pickford, L.J. at p. 841, where he mentions what he calls "the last defence". Pickford, L.J. says this :-

"The last defence with which I have to deal is that the surety was discharged by a novation of the debt by which the liability of the company to the plaintiffs was discharged and another bank called the United Counties Bank became the creditors."

The judge set out the facts and continued :-

"I think it doubtful whether such a novation were effected, but I do not think it necessary to decide this, as I am of opinion that, even if there were such a novation, it does not discharge the surety. There can be no doubt that a novation by which the original debtor is released from his debt discharges the surety, but a transfer of an existing and ascertained debt to another creditor stands on a different footing. In order to discharge the surety it must effect a material alteration in his position."

He continued :-

"It has been clearly decided in a case by which we are bound that an assignment of the debt does not discharge the surety : see Wheatley v. Bastow 7 D.M. & G. 261. In that case no notice of the assignment was given to the surety, but the Court seems to assume that if notice had been given the argument in favour of his discharge would have had even less strength. It seems to me that for all purposes, so far as the interests of the surety are concerned, a novation by which the original creditor releases the debtor has no greater effect than an assignment of the debt with notice to the surety. In either case the transferee of the debt, whether by novation or assignment, is the person with whom the surety has to deal, and, as the liability is already ascertained, it is a matter of no consequence to the surety to whom he has to pay it. The case would be different if it were sought to make the surety liable for a debt arising out of dealings between the new creditor and the debtor, but no such case arises here. I think such a novation, if it existed, does not make any material alteration in the surety's position. It may be that, if it existed, the United Counties Bank, and not the plaintiffs, ought to sue, but this is a mere matter of form, as the two banks are, for this purpose, the same, and an amendment would have been made at the trial if necessary."

17. I think I need read only short extracts from the other two judgments. At page 846, Bankes, L.J. said this :-

"The last point for consideration is whether there has been any such alteration in the position of the parties as releases the surety."

18. He set out the facts, and continued by referring to Wheatley v. Bastow (supra), pointing out that there it was expressly held by Turner, L.J. that the position of the surety was in no respect altered by such an assignment.

19. The judge concluded his judgment by saying this :-

"If, therefore, a surety is not discharged by the assignment of the security, and if it makes no difference to his position whether notice is or is not given to him of the assignment, I cannot see that he can be in a better position because the principal debtor has assented to the assignment, which in substance is the only difference, so far as the surety is concerned, between an assignment of the security with notice and a novation of the original debt."

20. Scrutton, L.J. at p. 849 refers to what he calls "the third defence" . He says this :-

"The third defence alleged was that the facts gave rise to a novation by which the principal debtor, Sutcliffe & Son, released the original creditor, the Bradford Bank, and undertook a new obligation to a new creditor, the United Counties Bank, whereby the surety of the original obligation was released."

He continued :-

"Novation means this : 'that there being a contract in existence, some new contract is substituted for it, either between the same parties (for that might be) or between different parties; the consideration mutually being the discharge of the old contract'; and, I may add, the undertaking of rights and duties by the new party : see per Lord Selborne in Scarf v. Jardine (1882) 7 A.C. 345 at p.351. But where the suggested form of novation is that the obligation is transferred to a new creditor it is necessary to distinguish between a mere assignment and an assignment which amounts to a novation. Novation introduces a new contract and requires to assent of all parties; mere assignment transfers rights acquired under the old contract, and may be made without the assent of the debtor."

21. He said (at p.852) that he did not wish to express a final opinion on the question whether even a novation would necessarily have discharged the surety.

The pleadings

22. The claim in the action, as I have already indicated, was a claim made by BDR alone. The plaintiffs have now sought, and been granted, leave to amend, so as to include BNA as a plaintiff so that it will be bound by the result. We have also given leave for an amendment designed to put right another point; that is to say, that in its original form, the statement of claim did not plead that notice of the assignment had been given to and demand for payment had been made against the guarantors.

Conclusion

23. I conclude, as did the judge, that there is here an issue as to whether what took place in this case did amount to a novation discharging the guarantors as distinct from "a mere assignment" which did not.

24. The more difficult point, I think, is whether that is an issue which is fit to be tried, or whether we have here a short and simple point which we can and should now decide ourselves, even though these proceedings come before us by way of appeal from a judgment under Order 14, and not from a judgment given at trial.

25. Having regard to the way in which the plaintiffs have developed their case since the issue of the writ, and that there has been no discovery in the action, so that not all the documents which may be material to the conclusion to be reached upon the issue are yet available, I conclude, though with no great enthusiasm, that this is not a case suitable for summary judgment, and that we have to let it go to trial. There is an issue which ought to be tried. I say nothing as to the chances of success of the guarantors in fending off the plaintiffs' claim at such a trial. It is sufficient to say that, the defendants having raised an issue which ought to be tried, we have no alternative but to dismiss this appeal.

Le Pichon, J. :

26. For the reasons given by my Lord Mr. Justice Godfrey, I, too, would dismiss this appeal.

Mortimer, V.-P.:

27. I also would dismiss this appeal.

28. On 9 August 1994 the BNA granted facilities to the debtor for up to US$3m. On 18 August 1994 the guarantors signed guarantees which supported those facilities personally. In April 1995 BDR took over BNA but BNA continued to be the debtor's banker. In January 1996 BNA suspended the facilities they had granted and later in March 1996 they revoked them. But in April 1996 BDR took over the business of BNA. On 1 April BNA wrote the letter which has been referred to by Godfrey JA. This was a proforma letter to all BNA's former customers to seek their agreement to bank with the new bank. In accordance with that aim, the letter sought the agreement of the debtor in the terms set out. I do not intend to refer to all the passages. It suffices for me to say that that letter contained the following :

"In order to effect an orderly wind-down of BNA's operations, it is intended that customers' business will be transferred to BDR during the period from 11 April 1996. It is also intended that any security given to BNA in respect of customer business shall be transferred at the same time as the corresponding customer account(s). The transfer of your account(s) and other agreements shall therefore be conditional upon BNA receiving all relevant consents in respect of the transfer of any security given in respect of your obligations (the date of your account(s) shall be referred to as the 'Transfer Date'.

On and from the Transfer Date, all obligations owed to you by BNA will be novated to BDR so that all obligations will be owed to you by BDR. On and from such date, you will have exactly the same rights in respect of such obligations against BDR as you previously had against BNA, in each case on exactly the same terms as applied between yourself and BNA immediately before the Transfer Date.

Further, on and from the Transfer Date, the benefit of all BNA's right, title and interest (legal and equitable, present and future, actual or contingent) in and to all obligations owed by you to BNA in respect of your account, any remaining obligations in respect of the repayment of your facility and under all agreements entered into between you and BNA, will be assigned to BDR and its successors and assigns, substituting BDR in its full right and place in respect thereof. ..."

Later, there appears:

"You consent and agree to BNA passing information relating to you in the operation of your accounts to BDR. And finally you should note that if you do not agree BNA shall be entitled to revoke any agreements which it has entered into with you in accordance with their terms."

As invited, the debtor agreed to those terms.

29. The guarantors, however, although invited to make new guarantees in respect of the debts to BDR never did so. BNA held a deposit for the debtor. That deposit was transferred to BDR and in due course was set off against the debtor's overdrawn account which had also gone to BDR. In due course the debtor was unable to pay. Letters of demand were sent both to the debtor and to the guarantors. The remaining sums outstanding were not paid and so the plaintiff sued all three and applied for summary judgment under O14.

30. The application came before Stone J on 28 July 1997 and on 1 August he gave judgment against the debtor and gave the guarantors unconditional leave to defend. The latter is the order against which the plaintiff appeals.

31. There is only one issue : Is it reasonably arguable that the debtor, BDR and BNA agreed that the original agreement between the debtor and BNA was at an end and the obligations between BNA and the debtor should be extinguished and be the subject of a new agreement between the debtor and BDR? Was the debt originally owed to BNA extinguished and replaced by a new debt to BDR? If extinguished by novation, there was no debt left to be the subject of the guarantees. The guarantors contend here as they did below that the terms of the letter of 1 April were such that it is at least arguable that the debt to BNA was novated.

32. After hearing counsel, the judge agreed and in part of his judgment he said this :

"Clearly this is both a difficult and an interesting area of the law. However, there was a tendency, I think, in the enthusiasm of the debate to overlook the fact that this is no more than an Order 14 application. In my view it cannot be said too often that unless a point is manifestly unarguable or is otherwise obviously 'moonshine', relief by way of summary judgment will not be attracted. And I do not intend to decide this point in the circumstances of the present application, albeit I am far from certain, at any rate at first blush, whether the guarantee in question indeed has the effect for which Miss Rattigan contends. But I will say no more at this stage ... that this case must be permitted to go to trial ..."

If the judge was right, that is an end of this appeal.

33. But Mr Smith submits that the legal consequences of the letter are clear beyond argument. He says that there was an assignment of the debts for which no consent or agreement of the debtor was necessary, but there was a novation of the obligations of BNA for which an agreement of all three parties was necessary. In respect of the provision of banking and the liability for the deposit that is what happened but he submits, as to the debt, it was a mere assignment.

34. The issue in this case is illustrated clearly by passages in Bradford Old Bank v Sutcliffe [1918]2 KB at 833 where Scrutton LJ at p 849 said:

"Novation means this: 'that there being a contract in existence, some new contract is substituted for it, either between the same parties (for that might be), or between different parties; the consideration mutually being the discharge of the old contract'; and, I may add, the undertaking of rights and duties by the new party: see per Lord Selborne in Scarf v Jardine. But where the suggested form of novation is that the obligation is transferred to a new creditor it is necessary to distinguish between a mere assignment and an assignment which amounts to a novation. Novation introduces a new contract and requires the assent of all parties; mere assignment transfers rights acquired under the old contract, and may be made without the assent of the debtor."

Later, at p.851, he says:

"Novation requires that the old bank, the new bank, and Sutcliffe & Son should agree that all rights of the old bank as against Sutcliffe & Son should cease in consideration of Sutcliffe & Son acknowledging their indebtedness to the new bank. ... Novation requires animus novandi, and the substitution of some other thing for the original obligation or debt: per Bacon VC in Wilson v Lloyd."

35. Considering the issue in this case and applying those principles, if I were to say that I would lean towards the plaintiff if I decided the issue here and now, is nothing to the point. BDR wanted the debtors' agreement to a novation of the former arrangements with BNA. Whether this was a mere assignment or an assignment which amounted to a novation of the debt is, in my view, not a concluded question. The terms set out in the letter are not plain beyond argument. They give rise to some difficulty. More light may be thrown upon the effect of that letter and those particular passages to which reference has been made if more is known of the surrounding circumstances and the dealings between the parties. Also more may come to light on discovery.

36. There is in my view reasonable doubt whether the plaintiff is here and now entitled to judgment. This issue is one which in my judgment should go to trial.

I agree with the judge.

I would dismiss the appeal, noting as I do so that we have granted leave to the plaintiff to re-amend its statement of claim. It has shifted its ground somewhat since the hearing before the judge.

In those circumstances this appeal is dismissed.

The defendants will have their costs of the appeal. That means the costs can be taxed and paid forthwith if they so choose.

So far as the leave to amend is concerned, there will be leave to amend the statement of claim and the writ. The costs of and occasioned by the amendments will be also to the defendant.