NANYANG COMMERCIAL BANK LTD v. SANKO TECHNOLOGY LTD AND OTHERS

HCA 5407/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 5407 OF 2001

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J U D G M E N T

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1. This is a claim originally brought by a bank against a customer in default in repayment of moneys due, and against those who for consideration of advances and other facilities being granted the customer guaranteed repayment thereof. The bank in question is the plaintiff (Nanyang Bank); the customer is the 1st defendant (Sanko Technology). Those who guaranteed repayment did so by a deed of guarantee dated 30 September 1998. They were at the material time directors of Sanko Technology. They are the 2nd to 7th defendants. Sanko Technology has taken no steps to defend the claim. Nor have the 2nd and 4th to 7th defendants. Judgment has been entered against them by default. The 8th defendant was joined because it became an additional guarantor of debts due by Sanko Technology to the Nanyang Bank by a subsequent deed of guarantee. It took no steps either, and judgment was entered against it also. Thus I am left with the claim against the 3rd defendant (Mr Liu) whose grounds for opposing liability for Sanko Technology's debt I shall come to.

2. It is common ground that Nanyang Bank is a Hong Kong registered bank and that Sanko Technology, a Hong Kong based company dealing in generators, was a customer of it since 1988. Over the years since then Nanyang Bank provided banking facilities to Sanko Technology secured, inter alia, by guarantees executed by its directors in the usual way. Mr Liu was one such director who committed himself severally and jointly with his fellow directors. By all accounts there was compliance without incident.

3. In September 1998, as a result of a request made on behalf of Sanko Technology, Nanyang Bank offered accommodation on revised terms. The letter of offer, dated 14 September 1998, required as a condition of the advance that the directors, including Mr Liu, provide a joint and several guarantee to the extent of the sum of $26.73 million and interest thereon and the cost of collection thereof. Sanko Technology agreed the terms and responded to that effect. All the security documents were completed, including the deed of guarantee of 30 September 1998 (hereafter referred to as the Deed of Guarantee) to which I have made reference already.

4. On four further occasions thereafter, as a result of applications by Sanko Technology, Nanyang Bank offered revised facilities.

5. The first of these was by letter of 4 June 1999. A condition was that the directors, including Mr Liu, provide guarantees to the extent of $26.73 million, as before. It was also a condition that the 8th defendant provide an additional guarantee. The terms were accepted; as far as the directors' commitment was concerned Nanyang Bank relied on the terms of the Deed of Guarantee. The 8th defendant signed a further deed of 27 August 1999 default under which gave rise to its involvement in this action. Two further offers followed, by letters of 2 November 1999 and 12 May 2000. In both cases a condition was a guarantee as before on the same terms. In both cases the offer was accepted. As far as the directors' obligations as guarantors of the revised terms, Nanyang Bank relied on their continuing commitment under the Deed of Guarantee. On all three occasions Nanyang Bank wrote to the directors to the effect that the Deed of Guarantee remained binding upon the signatories and received back an acknowledgement of receipt. Mr Liu's signature is on each acknowledgement.

6. One further loan offer was made to Sanko Technology pursuant to a request for revised terms, by letter of 17 October 2000, the conditions as before including a guarantee from the directors, this time for $11.23 million. In the event this matter did not proceed because one of the directors, the 2nd defendant, declined to commit to the guarantee.

7. The inability of Sanko Technology to provide the required security and thus benefit from the proferred terms of the 17 October offer led to default. By letter of 11 January 2001 Nanyang Bank called in the debts. But the parties negotiated a settlement the effect of which was to defer the demand and permit Sanko Technology to continue trading. This provided for payments by monthly instalments to reduce the debt and the sale of two properties that Sanko Technology owned to release further funds.

8. In June 2001 Sanko Technology was in need of financial assistance of a specific kind. It was in the process of purchasing four diesel generators from a supplier on the Mainland for US$263,200. A condition of the purchase was that Sanko Technology arrange a bank guarantee in favour of the vendor in the sum of US$52,640. At Sanko Technology's request Nanyang Bank provided the bank guarantee on the security of a charge on a US cash deposit lodged in an account in Mr Liu's name for $53,140.41. Mr Liu signed the requisite document called hereafter the Charge on Deposit. In the event the guarantee was not called upon. Mr Liu requested a return of his deposit. But, come September 2001, with Sanko Technology in default in meeting the terms of settlement, Nanyang Bank purported to exercise its right under the Charge on Deposit and seized by set-off the US$53,140.41 it was holding in Mr Liu's account. But that was not enough to settle Sanko Technology's debt. As at 14 November it owed $3,910,587.56 plus $36,989.89 being accrued interest. Interest was thereafter to accrue at 13.25 p.c. p.a. being $1,419.60 per day. By 8 separate letters sent out the following day, the addressees being those who are now the eight defendants, Nanyang Bank by its solicitors sent out demands for full settlement. There being no compliance, it issued a writ on 17 December 2001.

9. Following the writ there were further reductions made. In April 2002 another property owned by Sanko Technology was sold, yielding proceeds of $670,000. And on 11 September 2002 a total of $28,330.99 was seized from the accounts of the 1st, 4th and 8th defendants by way of set-off.

10. Recalculated to 31 December 2002 the total indebtedness was $3,681,439.52 with interest on the recalculated principal sum of $3,446,877.15 accruing daily at prime (5% p.c. p.a.) plus 5.5 p.c. p.a.

11. As I have stated Mr Liu was the only defendant not to submit to judgment by default; I come to his pleaded defence next. There are a number of grounds, pleaded together or in the alternative, as follows:-

Discharge by Variation of the Banking Facilities of 1998

12. Under this head he pleads that because there were material differences in the facilities offered to and accepted by Sanko Technology in June 1999 not consented to by him, he was discharged from all liabilities under the Deed of Guarantee. When there were further revisions offered and accepted in November 1999 and May 2000 Mr Liu similarly did not consent to those further variations.

Misrepresentation

13. Mr Liu pleads that he was induced into signing the Deed of Guarantee under the belief that his liability was limited to the facilities offered and accepted in September 1998. He was not aware, because he was not told, that his liability would be extended to future facilities granted to Sanko Technology.

Breach of the Code of Banking Practice

14. Under this head Mr Liu pleads that there was material breach of the Code of Banking Practice in that before he signed the Deed of Guarantee he was not provided with a copy or summary of the terms of the facility offered to Sanko Technology; similarly in respect of the offers of June 1999 and May 2000. By these omissions he was deprived of knowledge of the extent of his liabilities to which he should thus not be held liable.

Discharge by Agreement to give time

15. Mr Liu pleads that the indebtedness of Sanko Technology to Nanyang Bank and thus of himself as guarantor was crystallized by the letter of demand of January 2001. The subsequent negotiation and settlement terms were entered into between Sanko Technology and Nanyang Bank without notice to him and consent by him; by virtue of that his liability was as a result discharged.

Discharge by Releasing Funds to Sanko Technology

16. Under this head Mr Liu pleads that by the terms of banking facilities agreed between Sanko Technology and Nanyang Bank, Nanyang Bank was entitled, in the event of default, to set-off against the indebtedness due any credit balance or other asset held by Sanko Technology in the Nanyang Bank. The letter of January 2001 constituted an event of default. But between 9 May and 21 August 2001 on five occasions Nanyang Bank collected a total of $7.6 million for and on behalf of Sanko Technology and released such funds to Sanko Technology, thus failing to satisfy the indebtedness due. In the premises Mr Liu was thereby released from his personal liability.

Full payment of Sanko Technology's indebtedness

17. Since the letter of January 2001 crystallizing Sanko Technology's indebtedness, Nanyang Bank had redeemed and received on behalf of Sanko Technology a total of $11.4 million, more than enough to meet that indebtedness; by this means there is no remaining liability due by Mr Liu.

18. In addition to disputing liability collectively and in the alternative under the above heads, he also counterclaims to recover the US$53,411.75 and interest thereon he alleges was misappropriated from his own deposit with Nanyang Bank.

19. Nanyang Bank's pleaded reply deals with all of the above defences and counterclaim in turn as follows:-

Discharge by variation

20. The Deed of Guarantee by its terms spelt out that the guarantors including Mr Liu agreed to pay all debts by Sanko Technology to Nanyang Bank then or at any time thereafter due. No guarantor including Mr Liu was discharged from his obligation under the Deed of Guarantee by virtue of the principal party's agreeing to revised terms.

Misrepresentation

21. Nanyang Bank never represented to Mr Liu that his obligation under the Deed of Guarantee was limited to the terms of the banking facilities offered and accepted in September 1998.

Breach of the Code of Banking Practice

22. The code was effectively complied with, in the event that failure to do so might relieve Mr Liu from his obligations. He executed the Deed of Guarantee having received the letter of offer made to Sanko Technology and having its contents explained by the officer having conduct of the same on behalf of Nanyang Bank, a Mr Ricky Chan (Mr Chan). By its terms he was committed to guarantee repayment by Sanko Technology for all accommodation thereafter made available. As a director of Sanko Technology he was a seasoned businessman, much experienced in signing guarantees and the consequences thereof.

Discharge by agreement

23. Nanyang Bank denies that the settlement entered into released Mr Liu from his guarantee, citing the terms of the Deed of Guarantee dealing specifically with this.

Discharge by releasing funds

24. Nanyang Bank accepts that certain bills drawn on various banks were collected and paid to Sanko Technology. But it denies that this constituted a release of Mr Liu's obligations under the Deed of Guarantee, citing the terms in support thereof.

Full Payment of Sanko Technology's Indebtedness

25. Accepting that it had redeemed and received on behalf of Sanko Technology funds as pleaded Nanyang Bank denies that in doing so Sanko Technology's indebtedness was thereby fully satisfied, or that Mr Liu's personal liability was thereby extinguished.

26. In respect of the counterclaim, Nanyang Bank denies liability, citing terms of the Charge on Deposit and Deed of Guarantee giving it the right of set-off against Mr Liu's deposit.

27. I come now to the evidence, adduced on behalf of Nanyang Bank by Mr Chan, and on his own behalf by Mr Liu. Both adopted their witness statements as evidence in chief.

28. Mr Chan described himself as a senior officer of the Yau Ma Tei branch of the Nanyang Bank, having conduct of the affairs of the customer Sanko Technology. At all material times Mr Liu was not only a shareholder and director but tended to be the one who represented Sanko Technology in its dealings with Nanyang Bank, dealings which began in 1988, and which on many separate occasions required as a condition of advances offered that the same be secured by personal guarantee. At all times Mr Liu and his fellow directors were parties to these guarantees.

29. Referring to the offer to provide banking facilities of September 1988, he stated that Sanko Technology signified its acceptance by endorsing the loan offer to that effect. He produced the Deed of Guarantee upon which the proferred accommodation was dependent. Directed to Nanyang Bank it begins by binding the parties thereto in consideration for the provision of banking facilities from time to time made to Sanko Technology to repaying on demand jointly and severally all moneys due by Sanko Technology to Nanyang Bank. It further provides that the guarantee shall continue notwithstanding any payment in whole or in part of any debt and shall thus extend to cover any balance at any given time outstanding. It acknowledges that Nanyang Bank may at any time without notice to or consent from the parties do the following namely:-

(a) determine or reduce or limit or restrict or enlarge or increase or vary or continue or renew or grant any banking or credit facilities, loan and/or advance to Sanko Technology;

(b) settle or compound with, grant indulgence, give time for payment or other accommodation, accept compositions from and make any arrangements with Sanko Technology;

(c) generally grant to Sanko Technology any time or indulgence without affecting Nanyang Bank's rights as against the parties.

30. Mr Chan went on to record that on the day of execution he attended the offices of Sanko Technology. He read and explained the terms and conditions of Nanyang Bank's loan offer and that it was conditional upon the directors' jointly and severally guaranteeing repayment of such advances to be made to the extent of $26.73 million. Beyond that he made no representation concerning its scope and effect. Mr Liu read the Deed of Guarantee himself before signing it.

31. Referring to the subsequent revised terms, he said that the request for assistance in each case was made by Mr Liu, for and on behalf of Sanko Technology, and that it was he and one other director who accepted the terms when they came to be offered each time. On every occasion he, along with his fellow directors, acknowledged the validity and subsistence of the guarantee evidenced by the Deed of Guarantee by signing an acknowledgement to that effect. He denies that at any stage he or the Nanyang Bank departed from compliance with the Code of Banking Practice if, indeed, the same has any legal effect. He went on to record the subsequent history of events including the letters of demand of January 2001, the negotiated settlement, the recovery of some of the debt by payments made and sale of mortgaged realty.

32. He then dealt with Sanko Technology's request for the bank guarantee that was a necessary prerequisite for the purchase from the Mainland supplier. Mr Chan produced the Charge on Deposit which revealed in its terms that it was a continuing security (clause 6.1) with express powers of set-off in the event of default by the principal debtor (clauses 4.1, 4.3, 4.4(b)). There was also a power of set-off in the Deed of Guarantee (clause 13). He did not represent to Mr Liu that the deposit would be released to him as soon as Nanyang Bank's risk under the guarantee had passed. Nanyang Bank in fact by registered letter sent to Mr Liu dated 24 September 2001 gave notice of its intention to set-off the fixed deposit against the Sanko Technology indebtedness. There being no response, the set-off was carried out on 4 October 2001.

33. As to the Nanyang Bank releasing to Sanko Technology the bills between May and August 2001; Mr Chan explained this was part and parcel of the settlement by which Nanyang Bank agreed to allow Sanko Technology to continue to trade upon its commitment to reduce the overall indebtedness by instalments. It was Mr Liu who negotiated the settlement for Sanko Technology and who was thus well aware of the terms. When the bills were paid out to Sanko Technology he knew of it and raised no objection; indeed it was he who more often than not signed the cheques.

34. I come now to Mr Liu's account. He confirmed his position of director of Sanko Technology; however, he was dismissed from office in October 2001. He said that Mr Chan attended on the parties when he and his fellow directors signed the Deed of Guarantee. On this he stated:

"Mr Ricky Siu Kai Chan has never mentioned to me prior to the Deed of Guarantee being signed by me that the scope of my liability in the Deed of Guarantee would extend beyond the said facilities letter dated 14th September 1998 or the Banking Facilities 1998. I therefore on signing the Deed of Guarantee truly believed that my liability under the Deed of Guarantee would expire on 31st August 1999, which date was the expiry date of the Banking Facilities 1998. The Plaintiff has never given me any copy of the said facilities letter dated 14th September 1998."

35. When it came to the revised terms offered and accepted in June 1999, terms which were materially different, he stated:-

"I have never given any personal guarantee to secure the repayment of the Banking Facilities June 1999. I as a guarantor have never consented to the terms of the Banking Facilities 1998 be revised by the Plaintiff either. The Plaintiff has never given me any copy of the said facilities letter dated 4th June 1999."

36. He said the same concerning the further revisions negotiated and agreed in November 1999 and May 2000.

37. He went on to deal with the demand letter of 11 January 2001 and subsequent settlement. He said:-

"The 1st Defendant paid in accordance with the settlement proposal until September 2001. As a guarantor I have never assented to such repayment proposal. The Plaintiff has never sought my consent to the said settlement proposal."

38. Referring to the bills received by Nanyang Bank and paid out to Sanko Technology for its own use, he stated:-

"The total value of the above bills released to the 1st Defendant is over HK$7.6 million. The Plaintiff is now claiming HK$3,947,577.45 plus interest against the 1st Defendant and me and other guarantors in this action. Had the Plaintiff not released the said sum of HK$7.6 million to the 1st Defendant, the 1st Defendant's debt owed to the Plaintiff could have been distinguished (extinguished)."

39. Then he referred to the circumstances giving rise to Sanko Technology's request for a bank guarantee, required to protect the transaction for the purchase of the generators. On the issue of recovery of the deposit he stated:-

"Mr Ricky Siu Kai Chan said to me clearly that my fixed deposit would be released to me when the bank guarantee expired on 31st August 2001 without being demanded by Qingdao Taiping Shipping Engineering Co. Ltd. In the circumstance, I did not pay any attention to the wordings of the Charge on Deposit(s) Third Party Obligations. I truly believed that the Thirty Party Obligations must mean the bank guarantee to the extent of HK$420,000 (equivalent to USD52,640) but not the 1st Defendant's indebtedness of HK$6.5 million which had already been demanded by the Plaintiff."

40. It was only subsequently that he came to realize that contrary to his belief Nanyang Bank had set-off the deposit and it was no longer available to him to uplift.

41. Of particular significance are contemporary documents that have been produced in evidence, many of which I have already alluded to. These include the following:-

(a) the letter from Nanyang Bank to Sanko Technology of 14 September 1998 setting out the revised facilities offered, which incorporated an overriding right of repayment on demand by 31 August 1999;

(b) the Deed of Guarantee. This is a comprehensive document being Nanyang Bank's standard form. Excerpts from it have already been reproduced. Mr Liu's signature thereon is not in dispute;

(c) the letter from Nanyang Bank to Sanko Technology setting out revised terms of facilities offered of 4 June 1999, which were dependent as before on the personal guarantees of the directors in the same terms. Mr Liu's signature as being one of two directors accepting the terms is not disputed;

(d) of the same date a memorandum from Nanyang Bank to the directors confirming the Deed of Guarantee to be 'valid subsisting and binding on you as the guarantor(s)', acknowledged by all the signatories; Mr Liu's acknowledgement is not in dispute;

(e) the same document at (c) and (d) in respect of the facilities offered and accepted on 2 November 1999 and 12 May 2000; Mr Liu's signatures as before are not disputed;

(f) the letter of demand from Nanyang Bank to Sanko Technology of 11 January 2001, copied to the guarantors;

(g) the minutes of a meeting of directors of Sanko Technology of 1 February 2001. Mr Liu was one of five present and was elected chairman. At the meeting was tabled a document called 'Settlement Letter' (see below). Those present declared an interest in the following terms:-

"LIU Chung Law Philip, Liu Hing Ping, LI Mun Keung, FUNG Ngai Wing and TAM Shoot Yung Alfred have given personal guarantee to the extent of Hong Kong Dollars Twenty-six Million Seven Hundred and Thirty Thousand (HKD26,730,000.00) to secure the Banking Facilities granted by the Bank to the Company. Also, Sanko Air-conditioning Engineering Limited, a subsidiary of the Company in which FUNG Ngai Wai and TAM Shoot Yung Alfred are directors, has given the corporate guarantee to secure the Banking Facilities granted by the Bank to the Company."

The meeting resolved to approve the sending of the Settlement Letter to Nanyang Bank for consideration. Mr Liu as chairman signed the minute as representing an accurate record;

(h) the Settlement Letter. This, dated 1 February 2001, from Sanko Technology to Nanyang Bank, proposed as a means of settling the outstanding indebtedness payment of the sum of $133,599.92 and then monthly instalments of $180,000.00;

(i) a board minute of 18 June 2001 signed by Mr Liu as chairman to signify its accuracy, at which the following was resolved:-

"RESOLUTION : ADDITIONAL BANK FACILITY

IT WAS REPORTED TO THE BOARD THAT the Company had applied to and Nanyang Commercial Bank Limited (hereinafter called "the Bank") had agreed to grant a Bank Guarantee of HKD420,000.00 (Hong Kong Dollars Four Hundred and Twenty Thousand Only) to the Company with a fixed deposit of Mr Liu Chung Law Philip director of the Company, to the extend of USD53,140.41 (hereinafter called "the fixed deposit") charged to the Bank as security. All handling charges related to this facility shall be deducted in our account with the Bank. The draft form of the Bank Guarantee issued together with the related documents were tabled thereon for the Board's discussion and approval.

After due consideration, it was then unanimously resolved that:-

1) the Board accepted the abovesaid application and the fixed deposit being charged as security be approved;

2) the form and substance of the draft of the said Bank Guarantee issued be approved; and

3) the following person(s) be hereby authorised and directed on behalf of the Company to sign all related documents in respect of the above banking facility:-

Mr Liu Chung Law Philip and Mr Li Mun Keung"

(j) the Charge on Deposit, in which in a prominent part of the document is a summary warning of the consequences of signing by the signatory. Therein it states that it is unlimited, that it renders the signatory liable on default, that it includes a right of set-off and that it is a continuing security. It also strongly enjoins independent legal advice before execution. The body of the document incorporates extensive rights and obligations, pertinent ones of which I have already reproduced; the execution by Mr Liu is not disputed;

(k) the letter from Nanyang Bank to Mr Liu of 24 September 2001 calling up the debt of Sanko Technology due under the Charge on Deposit;

(l) letters of demand from Nanyang Bank to Sanko Technology and to the guarantors all of 15 November 2001 calling up the debt then due.

42. That being the evidence I come now to my findings and rulings.

43. The starting point of establishing the liability of Mr Liu is the Deed of Guarantee. Mr Liu along with his fellow directors bound himself to the terms thereof comprehensively set out in what is Nanyang Bank's standard form of guarantee; further, though as a continuing guarantee it would not have been required, he acknowledged his continuing liability as the facilities provided the head debtor came to be reviewed. On the face of the document Mr Liu's various defences pleaded of discharge by variation, discharge by agreement to give time, discharge by release of funds and discharge by full payment all fall away. As to the defence of breach of the Code of Banking Practice this also fails because the code is a voluntary one with no force of law; see In the matter of Chit Lee Holdings Limited unreported HCCW 114/2000.

44. The remaining defence for consideration is misrepresentation. The burden falling on Mr Liu, it is incumbent upon him to establish that he was induced to sign the Deed of Guarantee by representations made on behalf of Nanyang Bank that the liability lasted until 31 August 1999.

45. I have to say that he has not begun to establish that. In fact although the misrepresentation as pleaded is as I have just recorded, Mr Liu's own evidence did not go that far, for it was to the effect that he was not told that what he signed in September 1998 was a continuing obligation. This is not misrepresentation at all, but simply an alleged failure not to point out one of the terms. Mr Chan at any event denies that he misled Mr Liu or any other signatory. There is support for this, in the documents signed at the time and thereafter. And there is the history preceding the execution of the Deed of Guarantee. There is the predominant role Mr Liu played in the pursuit of financial accommodation for and on behalf of Sanko Technology. In essence, I am satisfied Mr Liu at all stages knew the extent of the obligations he entered into. Thus he is now caught by them.

46. I come to the counterclaim. Once again the starting point is the document upon which Nanyang Bank relies, the Charge on Deposit. The document is similarly comprehensive; again a standard form. On this occasion the allegation in support is that Mr Chan told him the deposit would be released when the bank guarantee had run its course. I have Mr Chan's evidence there was no such misrepresentation. The contemporaneous documentation does nothing to displace that evidence; there is nothing to suggest that notwithstanding the contents thereof Mr Chan said otherwise. I reject Mr Liu's evidence and thus dismiss his counterclaim.

47. As to quantum; there is no challenge to the figures presented by Nanyang Bank.

48. The orders follow.

49. There will be judgment for the plaintiff in the sum of $3,681,439.52 together with interest at 10.5% p.a. on $3,446,877.15 from 1 January 2003 to the date hereof; thereafter at the judgment rate. The counterclaim is dismissed.

50. I come now to costs; this is nisi at first instance. Costs will follow the event and thus be to the plaintiff. Mr Liu bound himself contractually to meet the costs of recovery on a solicitor-client basis; that is the rate.