STANDARD CHARTERED BANK (HONG KONG) LTD v. CHAN KWOK WAH, ANDY AND ANOTHER

CACV 161/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 161 OF 2008

(ON APPEAL FROM HCA 1762 OF 2004)

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J U D G M E N T

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Hon Cheung JA :

1. The plaintiff sued the defendants as guarantors of money advanced by the bank to two companies, namely Sino Trade Asia Limited (‘Sino Trade’) and Surplus Trader Limited (‘Surplus Trader’).  The sum claimed was US$17,860,028.72.  The plaintiff obtained summary judgment against the defendants in the sum of US$17,357,505.53 from Master Yu.  The defendants’ appeal to Fung J was dismissed.  The defendants now appeal against Fung J’s judgment to this Court.   

The background

2. The 1^st defendant was a shareholder and a director of Sino Trade and Surplus Trader.  The 2^nd defendant was a shareholder in Sino Trade. 

3. Sino Trade and Surplus Trader were wound up on the application of the plaintiff in HCCW 826/2004 and HCCW 827/2004 by Kwan J on 10 May 2005.  The background relating to the money advanced by the plaintiff and events leading to the winding up was summarized in judgment of Kwan J dated 10 May 2005.  I would gratefully adopt the summary from the judgment :

‘ 2.    The debt in both petitions is in the amount of US$17,860,028.72, calculated up to 26 July 2004.  This arose out of advances made by the [plaintiff] pursuant to trade finance facilities granted by the [plaintiff] to the Companies.

3.    The [plaintiff] first offered to provide Sino Trade with a trade finance facility on 20 May 2003.  This was increased on various occasions, most recently to US$20 million on 17 February 2004 and offered to both Companies.  The offer required the Companies to sign various agreements:

(1) General customer agreements (“GCA”). The GCA signed by Sino Trade was dated 20 June 2003 and the GCA signed by Surplus Trader was dated 19 February 2004.

(2) Unlimited cross guarantees given by each company in respect of the liabilities of the other.  The guarantees given by both Companies were dated 19 February 2004.

(3) Receivables purchase agreements (“RPA”).  The RPA executed by both Companies were dated 19 February 2004.

(4) Personal guarantees by Mr Chan Kwok Wah (“Mr Chan”) [i.e. the 1^st defendant] and his wife [i.e. the 2^nd defendant].  They were both dated 19 February 2004.

4. The facility offered was for purchase of documents against acceptance bills of exchange with approved insurance cover up to 90%.  This allowed the Companies to draw down up to US$20 million against accepted bills of exchange drawn on approved buyers in Korea that had purchased mobile phone parts from the Company.

5. The facility was only available in respect of bills drawn on and accepted by buyers that had been pre-approved by the [plaintiff], as a result of such customers having been accepted by the [plaintiff’s] creditor insurer with the acronym COFACE.

6. Pursuant to the trade finance facility, the [plaintiff] advanced in excess of US$30 million to the Companies.

7. In May 2004, a number of bills that had fallen due went unpaid.  As in July 2004, the total amount of the unpaid bills came up to US$19.5 million.  Resulting enquiries suggested that the transactions underlying the bills were bogus and that the relevant approved customers had not accepted the bills.

8. Mr Chan had been investigated by the Commercial Crime Bureau in relation to his actions on behalf of Sino Trade.  Sino Trade’s  representative in Seoul is serving a term of imprisonment for embezzlement and the branch manager of Sino Trade’s bank in Korea has been convicted of corruption.

9. The agreements signed by the parties allowed the [plaintiff] to demand immediate payment by the Companies of the sums drawn down under the facility generally and, in particular, if a bill was to be dishonoured.  The relevant provisions are in the facility letter under the “Availability and Repayment” section; the GCA, clauses l(a) and (b), 6(c); and the RPA, clauses 8 and 10.

10.  On 22 July 2004, the [plaintiff] sent letters of demand to the Companies requiring the provision of cash collateral in the amount of the debt being US$17.8 million odd by the close of business the same day.  On 27 July 2004, the [plaintiff’s] solicitors sent letters to the Companies demanding payment of the debt by 28 July 2004.  As the demand was not met, the petitions were presented on 29 July 2004 and provisional liquidators were appointed the same date.’

The guarantee

4. In respect of the present action the relevant terms of clause 1 of the guarantee entered into by the defendants in favour of the plaintiff provided that the defendants

‘unconditionally guarantee, undertake and agree on written demand by the Bank [i.e. the plaintiff]

(a)   to pay and discharge the following (hereinafter called the “Liabilities”):

(i)   all moneys now or hereafter advanced to or paid for or on account of the Customer [i.e. Sino Trade and Surplus Trader] (whether alone or jointly with any other person) by the Bank and/or any other company of the Standard Chartered group (each a “Bank Group Company”) being the parent or any subsidiary or associated company of the Bank; and

(ii)  all other liabilities of the Customer to the Bank and/or any Bank Group Company whatsoever, whether actual or contingent, present or future and including, without limitation, liabilities incurred as a guarantor or surety together with all interest thereon and commission, costs, charges and expenses chargeable by the Bank and/or any Bank Group Company to the Customer (including legal fees), from time to time remaining unpaid and undischarged;

  (b)   to pay interest, in the currency in which such sums are denominated in the Bank’s books, on all sums due from me/us to the Bank under this Guarantee (hereinafter called the “Guaranteed Sums”) or the outstanding balance thereof from time to time during the period from the date of demand by the Bank as aforesaid or from the date of discontinuance of this Guarantee by me/us until the date when the Guaranteed Sums are discharged in full (after as well as before judgment) at a rate or rates per annum conclusively certified by the Bank to be one and one half of one per cent.  (1-½%) above the rate or rates at which the Customer would have been liable to pay interest on the amounts demanded by the Bank under the facilities or other accommodation extended by the Bank to the Customer (and to the extent permitted by law the Bank shall be entitled to compound such interest monthly);

to pay all costs and expenses which are of reasonable amount and were reasonably incurred (whether directly and indirectly) by the Bank in connection with the recovery or attempted recovery by the Bank of moneys due to the Bank under this Guarantee (including without limitation legal costs on an indemnity basis).

......

3. I/We shall be deemed to be liable as the sole or principal debtor(s) for the Liabilities and this Guarantee shall be binding on me/us notwithstanding that the Customer is not so bound either because the Customer is an infant or under a disability or is an unincorporated body which is under no liability to discharge obligations undertaken or purported to be undertaken on its behalf or for any reason whatsoever.’

The demand

5. AsSino Trade and Surplus Trader did not respond to the plaintiff’s demand for payment, the plaintiff demanded the defendants to pay the sum of US$17,860,028.72.  The defendants failed to pay as demanded.

The defence

6. The defendants denied that they are indebted to the plaintiff.  The thrust of the defence is that the plaintiff had assured them that the plaintiff would not seek recourse against them.

The test

7. The test in summary judgment application is whether the defence raised is credible.  If it is, then the defendant should be entitled to defend the claim.  If it is not, then judgment should be entered in favour of the plaintiff.  In deciding whether the defence is credible or not, the judge is not confined to the assertion by the defendant but tests his defence by reference to, among other things, contemporaneous documents.  The Court has to consider the inherent probability of the assertion.

Issue before Kwan J

8. In the winding up hearing before Kwan J, although counsel for the companies did not oppose the winding up of the companies he took the point that there was a bona fide dispute of the debt on substantial grounds.  Among the defence raised by the companies was the ‘no-recourse defence’ now relied upon by the defendants.  Kwan J summarised the defence as follows :

‘17(1)  No debt is due from the Companies to the [plaintiff], because in granting the trade finance facilities to the Companies, the [plaintiff’s] staff had orally represented to Mr Chan that in no circumstances would the [plaintiff] have recourse to the Companies and that the Companies would not be exposed to any default or financial risks.  The Companies were merely “handling agents” for the approved buyers in Korea and the [plaintiff] had never attached importance to the financial standing of the Companies.  The [plaintiff] would have recourse against the approved buyers in Korea as acceptors of the bills of exchange, and any credit risks associated with these buyers were covered by the [plaintiff’s] export credit insurance policy.  So the [plaintiff] was in substance lending to these approved buyers and had regarded them as its debtors, not the Companies.  It was on this basis that Mr Chan had executed various documents for the Companies when the facility was granted, with the agreement of the [plaintiff] that the cross guarantees and the personal guarantees would not be enforced and the documents executed were merely for formality.  I call this the “no-recourse defence”.’

9. Kwan J rejected this defence.  She accepted the submission of counsel for the plaintiff.  This is what she said :

‘ 19.   I turn to the no-recourse defence.  Mr Harris for the [plaintiff] submitted that despite considerable evidence filed by the Companies, the following matters do not appear to be in dispute :

(1)   The agreements mentioned earlier were validly executed.

(2)   The [plaintiff] credited considerable sums to the accounts of the Companies.

(3)   A very considerable amount is outstanding.

(4)   On their face, the agreements allow the [plaintiff] to demand repayment of all outstanding sums.

(5)   Neither Company is able to repay the sums outstanding. 

20.   Mr Harris also made these submissions :

(1)   The alleged oral representation is clearly inconsistent with the provisions of the various agreements signed by the Companies, clauses 8 and l0 in the RPA and the “entire agreement clause” in clause 24 of the RPA.

(2)   The no-recourse defence was raised for the first time in the 3^rd affirmation of Mr Chan filed on 27 September 2004, two months after the petitions were presented.  There is no suggestion he had told the [plaintiff] that this was his understanding before that.  Moreover, this was contrary to the clear admission in the statement of affairs filed on 28 August 2004, affirming that considerable sums were owed to the [plaintiff].  For Sino Trade, it was in the amount of HK$68.8 million odd; for Surplus Trader, it was in the sum of HK$70 million odd.  Mr Chan filed a number of affirmations subsequently, seeking to correct errors and omissions in the statement of affairs.  However, there is no specific withdrawal of the admission of liability in respect of the debts to the [plaintiff], at least not clearly, in my view.  I was also referred to the observations made by the Court of Appeal in Re ICS Computer Distribution Limited, CACV No. 95 of 1996, 8 November 1996, on the admission of liability in the statement of affairs.

(3)   If the facility had been non-recourse, there would have been no reason for the shareholders to give personal guarantees; there would be no need to include in the facility letter provisions for repayment; and no reason to include in the facility letter provisions for accrual of interest on overdue bills.

(4)   Even if the facility were non-recourse, it cannot sensibly be suggested that if the Companies did not deliver what they had agreed to “sell” the [plaintiff], namely, genuine bills drawn on approved buyers in Korea, the [plaintiff] is not entitled to recover what it had paid for them.  The Companies do not appear to dispute some of the bills were bogus and drawn against buyers with whom they had not signed contracts for the sale of goods.  No evidence was advanced by the Companies to demonstrate they had signed genuine contracts of sale, other than a bare assertion of belief in Mr Chan’s 6^th affirmation that the contracts were genuine.

(5)   As for the suggestion that the [plaintiff] had become a creditor of the approved buyers in Korea, Mr Chan did not explain in his affirmations how this could be the case if these buyers did not in fact accept the bills.’

The ‘non-recourse defence’

10. In this appeal the defendants argued that the ‘non-recourse defence’ is supported by the plaintiff’s own documents.  They seized upon a handwritten endorsement on the profit and loss account presented by Sino Trade to the plaintiff.  The endorsement stated that :

‘ factoring on without recourse basis with SCB should not be classified as bank debt at most contingent liability.’

11. The handwritten endorsement was made by Ms Daniella Koo of the plaintiff.  In her affirmation dated 11 October 2004 filed in the winding up proceedings Ms Koo, first of all, denied that any misrepresentation had been made to the defendants.  Paragraphs 21 and 24 of her affirmation dealt with the non-recourse issue :

‘21. From paragraph 55 through to paragraph 57, Chan makes various allegations that I stressed to him that no obligation would rest on the Company (or him as personal guarantor) to repay monies received from the Bank under the Facility.  As stated in the general introduction of this Affirmation, that is simply not true.  He asked no questions about the guarantee or the receivables purchase agreement documentation.  We did talk about the structure of the Facility and how the Bank could only allow a drawdown under the Facility once a relevant draft had been accepted by a relevant buyer.  In this regard, I would add that the use of the words “without recourse” is a standard template used within the Bank where insurance cover is in place.  It is made clear within the Bank that such facilities are only “without recourse” to a limited degree and not unconditionally. I believe the documentation makes this clear and that Chan was aware of this.

……

24.     At paragraph 81, Chan refers to a handwritten note appearing in the Bank’s copy of some management accounts of the Company for the year ended 31 December 2003.  I confirm that the handwriting is mine.  The notation does not mean that I (and the Bank) considered that the Company had no obligation whatsoever, in any circumstances, to repay the monies received by it.  In my experience of working with customers who operate a facility such as that operated by the Company, the items are dealt with “off balance sheet”.  This is what I have been told by other customers and, in certain cases, their auditors.  It is for this reason I made the notation, which was made for internal purposes.  I did not discuss this issue with Chan.’  (emphasis added)

12. The issue of insurance in this case is covered in the judgment of Kwan J and its relevance is further explained by the affirmation of Guy Roland Isherwood dated 29 July 2004 filed in the present action :

‘9.   The insurance cover referred to above is in place through a credit insurance policy issued by Compagnie Francaise d’Assurance pour le Commerce Exterieur S.A. (“Coface”) in favour of the Bank through Coface UK (the “Coface Policy”).  Under the Coface Policy, the Bank notifies Coface of the identity of buyers (Sino Trade having “applied” in relation to a named buyer) and Coface either rejects or sets a credit limit for sales to that buyer.  It should be noted that if Coface does not ‘accept’ a buyer, the Bank will not make advances to Sino Trade under its facility in respect of Bills drawn on such a buyer, even after such Bills are accepted.  However, assuming a buyer is acceptable to Coface and the transaction with Sino Trade proceeds, with the Bank purchasing the relevant Bill, Coface will pay to the Bank 90% of the Bill amount in the event of non-payment by the buyer; (ie. the risk covered is the credit risk of buyer) such cover attaching (in the case of sales of goods) from the time the goods are handed to a third party for carriage to their destination.  It is for that reason that under the facility, in addition to the Bill, Sino Trade is required to present a transport document (for example bill of lading or air waybill) as evidence that the goods have been sent for shipment.  There is now produced and shown to me marked “GRI-4” a copy of the Coface Policy.

10. For the Bank (or indeed any bank), financing of this nature is intended to be relatively low risk.   Advances will only be made in relation to transactions where the buyers of the Bank’s customer are major corporations (otherwise Coface would refuse to grant any credit limit) and the Bank has recourse against those corporations as the acceptors of the Bills in addition to the cover provided by the Coface Policy against the risk of non-payment by those acceptors.’

13. The defendants also relied on an undated document from the plaintiff which was a credit proposal to grant facilities to Sino Trade for a ‘non-recourse DA line of US$2m’.  This is one of the earlier documents that the plaintiff had prepared because the plaintiff later granted facilities of US$20 million as recorded in the facility letter of 17 February 2004.  The part relied upon by the defendant in the proposed is Clause 4 :

‘4.  Repayment source

§  Primary     :  payment proceeds from buyers with insurance cover - Strong and stable.

§  Secondary  :   operating cash flow - adequate on projected basis.  Structured back to back transactions conducted by customer with a margin charged.

§  Tertiary  :   Personal guarantee from shareholder - for commitment only.’

14. Ms Koo in fact had addressed this issue :

‘ Indeed, although at paragraph 41, Chan is correct to say that at Section 4 of the Credit Proposal the Bank regarded the primary source of repayment to be from the proceeds from buyers with insurance cover, the same section also refers to secondary and tertiary repayment sources.  The secondary repayment source referred to is “operating cash flow [i.e. of the Company] - adequate on projected basis”.  The tertiary repayment source is stated to be “personal guarantee from shareholder - for commitment only”.  The words “for commitment only” is, by way of explanation, common wording used in relation to personal guarantees.  The reason is that, particularly when dealing with a business such as the­ Company where only one (or perhaps a few) individual(s) is/are involved in the running of the Company, the Bank seeks to ensure such individual(s) does/do not simply walk away from the business and, further, that it is not simply a case of the Bank financing the whole operation of a limited liability company.  Further, and in any event, a guarantor may have of course have some money or other assets available to make at least partial repayment.’

My view

15. As Fung J observed in the present case, the term ‘non-recourse’ does not appear in the documents signed by the two companies.  In fact the RPA contained an entire contract clause with no mention of the non-recourse against the borrowers. 

16. In my view the handwritten note or the terms of the proposal provide no support for the defendants’ argument that they had been assured by the plaintiff that it would not seek recourse against them.  While the plaintiff accepted that, to an extent, it is correct to say for a structure such as the facilities granted to the two companies, the primary source of repayment is indeed the proceeds from the relevant trade transactions, this does not mean that the plaintiff’s customers are free from liability. 

17. The term ‘non-recourse’ in a sense may mean that the plaintiff may not seek recourse against the defendants.  But the term cannot be considered in isolation and must be understood in the context of the case.  This is a case where insurance is involved and where there are different sources from which the plaintiff may seek repayment.  Clause 4 of the proposal obviously is an assessment by the plaintiff on the credit risk of the facilities to be granted.  It has identified the various sources of repayment and assessed their respective priority in terms of repayment to the plaintiff.  It is not credible that the plaintiff having required the defendants to provide their personal guarantees would at the same time inform them that the plaintiff should seek no recourse against them.  This does not make commercial sense.

The specific transactions

18. The defendants at the appeal also relied on two specific transactions to support their case on the ‘non-recourse defence’.  This matter was not raised before Fung J.  The 1^st defendant who appeared before us admitted that the documents on these two transactions which he included in the supplemental written submission were not in the appeal bundles.  This Court declined to accept submissions on this point.  In any event the defendant’s case on ‘non-recourse’ was based on representations by the plaintiff at the time of granting facilities to the companies.  The subsequent transactions would not advance their case further.

Other matters

19. Fung J also dealt with the other defence raised by the defendants, namely

‘ 30.   As to the alleged breach of duty by the collecting banks, fraud was practiced on the banks including the plaintiff by Sino Trade’s agent in ­Korea.  I wholly fail to see how the defendants, being shareholders of Sino Trade, can begin to say that the plaintiff is vicariously liable for the non-­detection of the fraud by collecting banks.

……

32.   [The 2^nd defendant] said she was only a nominee for the 1^st defendant because of the requirement two then two shareholders rule.  This is a bare assertion.  Be that as it may, she held the shares in order that the 1^st defendant could achieve corporate limited liability in trading, and she signed the guarantee when one was required for lending to the companies.  Her shareholding is not de minimis.  There is no reason for the bank to go behind the registered shareholding and be suspicious of any trust, even if there were one.

33. As mentioned, the Guarantee was in both English and Chinese, and the 2^nd defendant also signed a Form of Third Party Acknowledgment.  I find the allegation that the 2^nd defendant was misled of the 1^st defendant in signing the Guarantee as mere formality as unbelievable.’

20. I agree with the views of Fung J. 

21. As the defendants have not raised any credible defence to the plaintiff’s claim, summary judgment was properly entered against them. 

Conclusion

22. Accordingly, the appeal is dismissed with costs to the plaintiff.

Hon Yeung JA :

23. I agree and have nothing to add.