BANK OF CHINA (HONG KONG) LTD v. CHAN YEUK WAI AND ANOTHER

HCA3156/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.3156 OF 2002

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AND BETWEEN

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(By original writ and order to carry on)

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D E C I S I O N

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1. For the purpose of this Decision, I will refer to the Reasons for Decision that I handed down in HCMP3254/2002 on 29 November 2002 and adopt the abbreviations used there.

2. The circumstances leading to the present action may be briefly stated as follows.

The debt and the security

3. Ananda Holdings Limited and Ananda Enterprises Limited (“the Borrowers”) were companies in the Ananda Group.  On 15 October 1996, they entered into a loan agreement with Kwangtung Provincial Bank (“KPB”).  This loan agreement was subsequently varied by a supplementary agreement dated 15 September 1997 and two facilities letters dated 17 November 1997 and 5 January 1998.  The loan was secured by :

(1)	the Mortgage; and
(2)	five personal guarantees executed by the defendants herein, who were shareholders and directors of the Borrowers (“the Guarantees”).

4. Particulars of the Guarantees are as follows :

HCMP3254/2002 and judgment

5. On 16 August 2002, Bank of China (Hong Kong) Limited (“BOCHK”) commenced two actions.  The first was HCMP3254/2002, by which BOCHK sought to enforce the Mortgage against the Borrowers and the two mortgagors.  On 6 November 2002, I entered judgment in favour of BOCHK, including monetary judgment against the Borrowers for HK$980,112,001.60 with interest.  (The Reasons for Decision was, as noted, handed down on 20 November 2002.)

6. The Borrowers and the mortgagors then brought an appeal in CACV443/2002.  By order of Rogers VP dated 1 November 2004, it was ordered, inter alia, that Zhong Gang was added as a co-plaintiff to HCMP3254/2002; that Umbrella Finance Company Limited (“UFC”) was made a party to HCMP3254/2002 to substitute BOC and Zhong Gang as the plaintiff; and that, by consent, the appeal against the judgment be dismissed.

The present action and Order 14 application

7. The other action that BOCHK commenced on 16 August 2002 was the present action to enforce the Guarantees against the defendants herein.  By order dated 3 January 2005, it was ordered that UFC be made a party to these proceedings and that these proceedings be carried on as if UFC had been substituted for BOCHK as the plaintiff.

8. UFC now applies for summary judgment against the defendants herein on the Guarantees.

UFC’s case

9. UFC’s case is briefly this.  By virtue of a sale and purchase agreement dated 14 June 1999 (“the 1^st SPA”), another sale and purchase agreement dated 10 November 2003 (“the 2^nd SPA”) and an assignment dated 23 December 2003 (“the Assignment”), it has derived title to the Guarantees.  Pursuant to each of the Guarantees, the judgment entered against the Borrowers in HCMP3254/2002 will be binding and conclusive against the defendants as guarantors.  They are therefore liable and have no defence to UFC’s claim herein.

UFC’s title to the Guarantees

10. The defendants take a number of matters in defence.  For present purpose, I need only look at their attack on UFC’s title to bring this action.  In essence, they argue that UFC does not have any title to sue on the Guarantees.  This argument calls for a closer look of the 1^st SPA, the 2^nd SPA and the Assignment.

11. The 1^st SPA is made between KPB and Zhong Gang for the sale of KPB’s right, title, benefit and interest of and in the Loans and the Related Securities for a consideration of HK$2,250,000,000.  “Loan” is defined as the outstanding principal sum of and interest accrued and to be accrued on any of those loans granted to the borrowers by KPB as set out in the Schedule, which includes the Borrowers’ indebtedness owed to KPB.  “Related Securities” is defined to mean in respect of any Loan, “any mortgage … given to [KPB] as security for, inter alia, the Loan …and /or such guarantee, indemnity or undertaking for payment of, inter alia, the Loan, given by any third party”, which included the Guarantee.  In short, under the 1^st SPA, KPB’s interest in the Borrowers’ Indebtedness and the Guarantees are sold to Zhong Gang.

12. The 2^nd SPA is made between Bank of China, Cayman Islands Branch (“BOC Caymen”) and Zhong Gang as sellers, BOCHK as trustee and Citigroup Financial Products Inc. (“CFPI”) as purchaser.

13. Clause 2.1(d) of the 2^nd SPA provides that Zhong Gang agreed to sell to CFPI all its “legal (unperfected) and beneficial right, title and interest in the Unrestricted Loans referred to as IIIA … in Schedule 1 and the Loan Security of the Unrestricted Loans referred to as IIIA … in Schedule 1”.  “Loan Security” means “any Security securing the payment of any Liability under any Specified Loans (which by definition included Unrestricted Loans) shall where the context permits, include any Guarantee…”.

14. Ms Ismail, appearing for UCF, submits that by virtue of Clause 2.1(d), Zhong Gang’s interest in both the IIIA Loans and the Loan Security (which includes guarantee) are sold to CFPI.  The Borrowers’ indebtedness is categorized in Schedule 1 as IIIA Loans.  Thus both the interest in the Borrowers’ indebtedness and the Guarantees are sold to CFPI.

15. However, Mr Griffiths, SC, appearing for the 2^nd defendant refers to Clause 2.3.1, which provides that :

“Schedule 1 contains a list of, among other things, all of the Specified Loans and certain related Loan Security Mortgages and certain other Loan Security for each Borrower that are to be sold to the [CFPI] pursuant to the terms and conditions hereof…”

16. Mr Griffiths then points out that in Schedule 1, the entry for the Loan Security relating to the Borrowers’ indebtedness is simply left blank.  He therefore submits that the Guarantees are not included as the Loan Security to be sold under Clause 2.1(d).

17. Ms Ismail counters Mr Griffiths’ submission by arguing that there is no requirement in the definition for “Loan Security” that the Loan Security must be specified in Schedule 1.

18. This being an Order 14 application, I do not need to form a definitive view on the construction of Clause 2.1(d), read together with the definition for “Loan Security” and Clause 2.3.1.  In my judgment, Mr Griffiths’ construction of the relevant clauses is arguable.  Thus is it arguable if the interest in the Guarantees has been sold to CFPI under the 2^nd SPA.

19. Under Clause 2.2.1 of the 2^nd SPA, the sale was to be effected by execution and delivery by the applicable parties of the applicable assignments.  However, before the completion date, CFPI has assigned all its interest acquired under the 2^nd SPA to UFC, which is its wholly owned subsidiary.  The parties thus executed the Assignment in favour of UFC instead of CFPI to effect the terms of the 2^nd SPA.  See the letter of the plaintiff’s solicitors dated 9 June 2005, at paragraph 12 where the effect of the Assignment was summarized.

20. Since it is arguable if the interest in the Guarantee has been sold to CFPI under the 2^nd SPA, it follows that it is arguable if UFC has acquired the interest in the Guarantee under the Assignment.  In the circumstances, it is arguable that if UFC is entitled to sue on the Guarantees.

21. This is sufficient to dispose of the present application for summary judgment.  I do not think it is desirable for me to deal with other matters that the defendants rely on in their defence.  If need be, they will be canvassed and disposed of at trial.  I shall leave them as they are.

Conclusion

22. For the above reasons, I will give the defendants unconditional leave to defend.  I will also make an order nisi that the costs of the present application be costs in the cause.