TAN KHAY CHUEN AND ANOTHER v. KO PING SHUN BENSON

CACV 238/2015

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 238 OF 2015

(ON APPEAL FROM HCA NO. 1814 OF 2014)

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JUDGMENT

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Hon Cheung JA:

1. I agree with Chu JA and the orders she proposes to make.

Hon Yuen JA:

2. I agree with the judgment of Chu JA.

Hon Chu JA:

Introduction

3. This is the defendant’s appeal against the judgment of Deputy High Court Judge Seagroatt (“the Judge”) given on 24 September 2015 whereby summary judgment was entered for the 2^nd plaintiff against the defendant for the sum of HK$ 10.3 million with interest.

4. The 1^st plaintiff and the defendant had been good friends since 1983. The 1^st plaintiff is the majority shareholder and one of the two directors of the 2^nd plaintiff. 

5. In the action below, the 1^st plaintiff seeks payment of US$ 1.5 million from the defendant pursuant to a guarantee whereas the 2^nd plaintiff’s claim is for HK$ 10.3 million being the amount of a cheque drawn by the defendant, which was countermanded.

6. The core argument of the defendant in the appeal is that in the light of the factual and legal disputes arising from the parties’ pleaded case and their accounts in the affirmations, summary judgment should not have been granted.  Accordingly, in order to understand the arguments engaged in this appeal, it is necessary to firstly set out in some details the parties’ respective case as pleaded and as stated in their affirmations filed in the summary judgment application. 

The plaintiffs’ claim as pleaded

7. In respect of the claim on guarantee, the plaintiffs’ pleaded case is that[1]:

(1) The guarantee is dated 11 February 2014 and evidenced by a letter from the defendant to the 1^st plaintiff.

(2) The consideration for the guarantee is the 1^st plaintiff granting a bridging loan of US$ 1.5 million to Vista Housing Construction Private Co (“Vista”) for a housing development project in South Korean (“Wanju Project”).

(3) The terms of the guarantee is that the defendant “guaranteed and undertook to pay to the Plaintiff all sums of money which may now be or which thereafter may from time to time become due and owing to the 1^st plaintiff by Vista on any account whatsoever”.

(4) Relying on the guarantee, the 1^st plaintiff entered into a loan agreement[2] with Vista under which he was to lend to Vista a loan of US$ 1.5 million for four months at the monthly interest rate of 2.5% (“the Loan Agreement”).

(5) On around 11 February 2014, the 1^st plaintiff caused the 2^nd plaintiff to transfer US$ 1.5 million to Vista.

(6) Vista has defaulted in repaying the loan.

(7) Despite demands, the defendant has failed or refused to honour the guarantee.

8. In respect of the claim on dishonoured cheque, the plaintiffs’ pleaded case is that:[3]

(1) Pursuant to the guarantee, the defendant issued and gave to the 1^st plaintiff a cheque dated 24 August 2014 drawn in favour of the 2^nd plaintiff in the sum of HK$ 10.3 million.

(2) The cheque was in partial settlement of the outstanding balance under the Loan Agreement.

(3) The cheque was dishonoured upon presentation, being countermanded by the defendant. 

The Defence

9. The defendant’s case in respect of the Loan Agreement is that:[4]

(1) Through the defendant’s introduction, the 1^st plaintiff came to learn of the Wanju Project, and knew Vista required a bridging loan of US$ 1.5 million for the project.   

(2) After a meeting on or about 15 December 2013 attended by the 1^st plaintiff, the defendant and Kim Sun Tae (“Kim”), the majority shareholder of Vista, the 1^st plaintiff entered into the Loan Agreement which was dated 28 January 2014.  The 1^st plaintiff and Kim also entered into a Share Transfer Agreement dated 28 January 2014 (“Share Transfer Agreement”).

(3) The Loan Agreement expressly provided that in the event Vista failed to repay to the 1^st plaintiff the principal and interest within the repayment period, Vista would transfer the business right of the Wanju Project to the 1^st plaintiff or any party designated by him.

(4) Under the Share Transfer Agreement, Kim agreed to transfer to the 1^st plaintiff 51% of the shares in Vista for the price of US$ 1.5 million on 29 January 2014 or on a date agreed between them.

(5) The transfer of the shares from Kim to the 1^st plaintiff as a security for the US$ 1.5 million loan was approved at a general assembly of the shareholders of Vista held on or about 28 January 2014. The 1^st plaintiff has since held the shares as a shareholder of Vista.

(6) On 11 February 2014, the 1^st plaintiff caused US$ 1.5 million to be transferred to the account of Vista in South Korea.

(7) On or about 15 February 2014, the 2^nd plaintiff and Vista entered into an Amended Loan Agreement (“Amended Loan Agreement”) which amended and varied the Loan Agreement by substituting the 2^nd plaintiff as the lender of the US$ 1.5 million loan.

(8) As a result, the Loan Agreement has ceased to be of any legal effect, the 1^st plaintiff has ceased to be the lender of the loan, and the 2^nd plaintiff has become the lender of the loan.

10. In respect of the claim on guarantee, the defendant denies providing any guarantee or undertaking to the 1^st plaintiff in the terms as pleaded in the Statement of Claim (see paragraph 7(1) to (3) above). His case is that:[5]

(1) On 11 February 2014 at 5:06 pm, and after the 1^st plaintiff had made the loan to Vista, the defendant sent an email to the 1^st plaintiff (“the Email”). In the last paragraph of the Email, the defendant stated:

“Since the project is outside your usual business practice and zone of comfort, I would like to offer you an additional level of comfort. Should there be any issues arise Vista’s effort default in their payment on your investment, I will personally cover any shortfall of your initial investment after all reasonable effort’s been made to recover the investment from Vista.”

(2) On or about 2 March 2014, the defendant sent to the 1^st plaintiff a letter dated 11 February 2014 (“the Letter”), the content of which is identical to that of the Email.   

(3) The Email and/or the Letter do not amount to any guarantee in that there was no intention to create any legal obligation or they are imprecise and/or ambiguous.

(4) Alternatively, if the Email and/or the Letter were held to constitute a guarantee, it is void or of no legal effect, being not supported by consideration or the consideration for it is past.

(5) Further and in the alternative, any guarantee constituted by the Email and/or the Letter is addressed solely to the 1^st plaintiff and does not extend to the 2^nd plaintiff.  By reason of the Amended Loan Agreement, such a guarantee has become void and of no legal effect in that its subject matter (i.e. a loan from the 1^st plaintiff to Vista) is non-existent, and/or has become discharged or released.   

(6) In the further alternative, any guarantee constituted by the Email and/or the Letter is limited to the extent that the defendant would only cover any shortfall of the 1^st plaintiff’s initial investment after all reasonable effort has been made to recover from Vista.  The 1^st plaintiff has neither pleaded nor showed reasonable effort has been made to recover from Vista and/or there is any shortfall when (i) hehas obtained 51% shares in Vista as security; and (ii) under the Loan Agreement/ Amended Loan Agreement, Vista was to transfer to the 1^st or 2^nd plaintiff or their nominated party the business right of the Wanju Project.

11. As for the claim on dishonoured cheque, the defendant does not dispute having issued the cheque and that payment of it was countermanded by him.  His defence is that:[6]

(1) The cheque was not to be presented for payment.  It was drawn solely for the 1^st plaintiff’s accommodation and there is no consideration for it in that it was only to be shown to the 1^st plaintiff’s brother-in-law for the purpose of convincing him to allow the 1^st plaintiff more time to repay a debt owed to him.

(2) The defendant has no dealing with the 2^nd plaintiff, and no consideration for the cheque has moved from the 2^nd plaintiff.

(3) The cheque was not issued pursuant to the guarantee pleaded in the Statement of Claim.

The 1^st plaintiff’s affirmations 

12. By summons filed on 8 April 2015, the 2^nd plaintiff applied to enter summary judgment against the defendant for the sum of HK$ 10.3 million, based on the dishonoured cheque claim. 

13. The 1^st plaintiff had made three affirmations in support of the application.  In these affirmations, he gave the following account in respect of the guarantee and the Loan Agreement:

(1) The guarantee in question was given orally by the defendant to the 1^st plaintiff in the afternoon of 10 February 2014 and was evidenced by the Email.  This was because at the time, the 1^st plaintiff was having reservation about making the US$ 1.5 million bridging loan to Vista.  In order to induce him to make the loan, the defendant gave his personal guarantee and offered to email him a written memorandum the following morning.

(2) As a result of the defendant’s guarantee and his offer of a memorandum, the 1^st plaintiff executed the Loan Agreement and the Share Transfer Agreement in the afternoon of 10 February 2014.

(3) In the afternoon of 11 February 2014, the 1^st plaintiff filled up a telegraphic transfer application for remitting US$ 1.5 million from his account to Vista.  He later withdrew the application to await the defendant’s memorandum on the guarantee.  At 5:06 pm, he received the Email.

(4) In reliance onthe defendant’s guarantee, in the afternoon of 13 February 2014, the 1^st plaintiff caused the 2^nd plaintiff to remit US$ 1.5 million to Vista. The money was received by Vista on 14 February 2014. 

(5) On 2 March 2014, the defendant emailed to him a signed memorandum, the content of which is identical to the Email. This memorandum is the same document which is referred to as the Letter in the Defence (see paragraph 10(2) above).

14. In respect of the cheque given by the defendant, the 1^st plaintiff denied that it was not intended to be honoured.  He said this in his affirmations:

(1) After Vista defaulted in repayment, in July 2014, the 1^st plaintiff asked the defendant to seek assistance from his father so that he could honour his guarantee.  On about 8 August 2014, the defendant told the 1^st plaintiff that his father was not prepared to help out by issuing a cheque to the 1^st plaintiff.  The defendant then proposed to issue a post-dated cheque for the sum of HK$ 10.3 million so as to ease some of the pressure from the 1^st plaintiff’s brother-in-law, and said he was confident he could honour the cheque in a fortnight’s time. The plaintiff therefore directed the defendant to make out the cheque to the 2^nd plaintiff.

(2) After it was dishonoured, the defendant apologized in his WhatsApp messages to the 1^st plaintiff, saying he had to countermand the cheque because there were insufficient funds in his account.

The defendant’s affirmation

15. The defendant made one affirmation to oppose the summary judgment application, in which he reiterated the matters pleaded in the Defence.  Regarding the guarantee, he specifically denied giving any oral assurance or guarantee on 10 February 2014 or promising to send a written memorandum on the following day.  His account is that on 11 February 2014, at the 1^st plaintiff’s request, he sent him the Email so that the 1^st plaintiff could forward it to his wife to explain the nature of the bridging loan.  In order to provide some comfort to the 1^st plaintiff’s wife, the defendant added the last paragraph about him personally covering any shortfall of the 1^st plaintiff’s initial investment after all reasonable effort has been made to recover the investment from Vista (see paragraph 10(1) above).  The Email was not intended to be a guarantee.

16. With regard to the Amended Loan Agreement, the defendant further explained that on 14 February 2014, the bank in Korea would not release the remittance to Vista because the lender under the Loan Agreement was the 1^st plaintiff and not the 2^nd plaintiff.  Consequently, on 15 February 2014, the Amended Loan Agreement (which was also in Korean) was executed, under which the 2^nd plaintiff is the lender of the US$ 1.5 million loan.  Pausing here, there is one point about the Amended Loan Agreement that should be noted.  It is that the Amended Loan Agreement stated that the agreement was executed on 7 February 2014, and that the 2^nd plaintiff made the loan to Vista on 7 February 2014.  Plainly, the date of 7 February 2014 is at oddswith the plaintiffs’ account as to when money was remitted from the 2^nd plaintiff’s account to Vista.  Neither does the date of 7 February 2014 match with the defendant’s account of the circumstances leading to, and the date of, the execution of the Amended Loan Agreement.  There is no explanation for this date in the materials before the court.   

17. As for the cheque, the defendant said that he issued the cheque not because he owed money to the 1^st plaintiff.  Rather, it was a make-shift measure to help the 1^st plaintiff out of the desperate situation brought about by Vista’s default.

18. The Judge granted the 2^nd plaintiff’s application, being of the view that the defendant has no defence to the claim on the cheque as his explanations were not credible.  He also did not accept there are triable issues of law arising out of the substitution of the 2^nd plaintiff as the lender under the Amended Loan Agreement. 

The appeal

19. The various grounds raised in the Notice of Appeal can be summarized as follows:

(1) The guarantee pleaded in the Statement of Claim is at variance with the guarantee detailed in the 1^st plaintiff’s supporting affirmations, and relied on for the summary judgment application.

(2) The guarantee that the 2^nd plaintiff relied on as providing the basis for the cheque is to guarantee the US$ 1.5 million loan from the 1^st plaintiff to Vista.  As a result of the Amended Loan Agreement, the 2^nd plaintiff has become the lender of the loan.  This gives rise to triable issues as to whether the guarantee has been discharged or released.

(3) The guarantee pleaded and/or relied on by the 2^nd plaintiff is said to be given in favour of the 1^st plaintiff.  Even though the 2^nd plaintiff advanced a loan to Vista, it could not enforce the guarantee against the defendant.  This gives rise to triable issues as to whether the guarantee provides sufficient consideration for the cheque.

(4) In so far as the plaintiffs rely on the Email and/or the Letter as constituting the guarantee, the terms (as appeared in the last paragraph) show that it is limited to the extent that the defendant would only be liable for any shortfall of the 1^st plaintiff’s investment after all reasonable efforts had been made to recover from Vista.  In the light of the transfer of 51% of the shares in Vista to the 1^st plaintiff and the provision in the Amended Loan Agreement for the transfer of the business right of Vista, there are triable issues as to (i) whether all reasonable efforts had been made to recover from Vista; (ii) whether the 1^st plaintiff suffers any shortfall in his investment; and (iii) in turn, whether the defendant owes any liability under the guarantee.

(5) Additionally, as the plaintiffs rely on the guarantee as the basis for the giving of the cheque, there are triable issues as to: (i) whether the defendant owes an antecedent debt or liability capable of constituting a good consideration for the cheque; and (ii) whether there is a clear relationship between the receipt of the cheque and the antecedent debt or liability that can give rise to sufficient consideration for the cheque.

(6) In any case, there are hotly disputed factual issues relating to the circumstances leading to the drawing and giving of the cheque, including whether it was intended to be presented.  These disputes could not and should not be resolved on affidavits.   

Discussions

20. Notwithstanding that the 2^nd plaintiff’s claim is on a dishonoured cheque, this is not an appropriate case for summary judgment.  My reasons are as follows.

21. Firstly, there are material differences between the plaintiffs’ pleaded case and the 1^st plaintiff’s affirmations in support of the summary judgment application.  From the Statement of Claim, it would seem that the guarantee was in writing and contained or evidenced by a letter dated 11 February 2014.  The 1^st plaintiff’s affirmations, however, stated that the guarantee was given orally on 10 February 2014, and was evidenced by the Email, which was dated 11 February 2014.  It should also be noted that the subject line of this email was “Draft”.  The Letter, although also dated 11 February 2014 and identical to the Email in content, was admittedly sent and received later on in March 2014, after the loan had been advanced to Vista. More importantly, the Email or the Letter did not bear the terms pleaded in the Statement of Claim.  The last paragraph of the Email and the Letter, on which the 1^st plaintiff relied on as constituting the guarantee, was materially different from that pleaded in the Statement of Claim and relied on as supporting the plaintiffs’ claims (see paragraphs 7(3) and 10(1) above). 

22. There is, on the other hand, no evidence to support the guarantee pleaded in the Statement of Claim.  This is material.  Although the 2^nd plaintiff is suing on the cheque, and not on the guarantee, on its own case, the consideration underlying the cheque is the defendant’s liability to pay the 1st plaintiff, which stems from the guarantee.  It was pleaded in the Statement of Claim that the cheque was issued pursuant to the guarantee given by the defendant to the 1^st plaintiff.  The 1^st plaintiff’s affirmations also stated that the defendant was called upon to honour his promise or guarantee, and that it was at his direction that the defendant made out the cheque to the 2^nd plaintiff.   

23. It is trite that in an application for summary judgment, the statement of claim must be good and complete in itself; any defect or omission cannot be corrected or supplemented by the affidavit supporting the application: Hong Kong Civil Procedure 2016 vol. 1 § 14/1/5.  It is also a necessary condition for the grant of summary judgment that the supporting affidavit must verify the facts on which the claim is based, and state the deponent’s belief that there is no defence to the claim: Order 14 rule 2(1) of The Rules of the High Court, Cap. 4A.  

24. Applying these principles, if the 2^nd plaintiff’s claim is based on the guarantee as detailed in the 1^st plaintiff’s affirmations, then the Statement of Claim should have been amended before seeking summary judgment.  On the other hand, given that the 1^st plaintiff’s affirmations are materially different from the Statement of Claim in terms of how the guarantee was constituted and the extent of the defendant’s liability under the guarantee, they do not serve the purpose of verifying the facts pleaded in respect of the guarantee.  As such, the mandatory requirement for summary judgment is not met.  In any event, given the significant difference and the absence of explanations for it, summary judgment would not be appropriate.   

25. Secondly, the plaintiffs’ affirmation evidence is also at variance with the Statement of Claim in respect of the loan to Vista.  While the Statement of Claim pleaded that on 11 February 2014, pursuant to the Loan Agreement, the 1^st plaintiff caused the 2^nd plaintiff to pay US$ 1.5 million to Vista, the 1^st plaintiff’s affirmations stated that the remittance from the 2^nd plaintiff’s account to Vista took place on 13 February 2014.  More importantly, it is unclear from the materials before the court whether the remittance to Vista from the 2^nd plaintiff was pursuant to the Loan Agreement or the Amended Loan Agreement or some other arrangement.  It is the defendant’s case, both in the Defence and in the affirmation, that the Loan Agreement had been varied and superseded by the Amended Loan Agreement.  The plaintiffs have not disputed the execution of the Amended Loan Agreement, under which the 2^nd plaintiff was stated to be the lender.  The 1^st plaintiff, however, had said nothing about the purpose or intention underlying the Amended Loan Agreement in his affirmations, including his two reply affirmations.  Neither did he respond directly to the defendant’s contention that as a result of the Amended Loan Agreement, the Loan Agreement no longer has legal effect and he ceases to be the lender of the loan to Vista. 

26. In my view, summary judgment is unsuitable given these unresolved issues as to whether, despite the execution of the Amended Loan Agreement, the Loan Agreement remained effective or whether it had been superseded by the Amended Loan Agreement, and whether the 1^st plaintiff remained the lender of the loan to Vista or whether the 2^nd plaintiff has taken over as the lender of the loan.  If the position is as contended by the defendant, namely, the Amended Loan Agreement has superseded the Loan Agreement and the 2^nd plaintiff, not the 1^st plaintiff, was the lender of the loan, this will call into question whether there was any basis for the defendant’s liability under the guarantee, whether as pleaded or as detailed in the affirmation, to arise.  It also calls into question whether there was any consideration or antecedent liability to support the cheque that the defendant issued to the 2^nd plaintiff.  These are issues that cannot be determined on the basis of the affirmations filed in the summary judgment application. 

27. Thirdly, as can be seen from the respective summary of the 1st plaintiff’s affirmations and the defendant’s affirmations (at paragraphs 13 to 17 above), there are other disputes on the salient aspects of the case. Notably, to the extent that the plaintiffs rely on the last paragraph of the Email and/or the Letter as constituting a guarantee given by the defendant, the parties are in dispute as to whether the guarantee was limited to the extent contended by the defendant, namely, the defendant’s liability would only arise after all reasonable efforts had been made to recover from Vista, and that the 1^st plaintiff has suffered a shortfall in his investment.  And if the guarantee was thus limited, the parties are further in dispute as to whether the defendant’s liability under the guarantee has arisen as a matter of fact, particularly in the light of the Share Transfer Agreement and the defendant’s contention that Kim had transferred to the 1^st plaintiff 51% shares in Vista, as well as the 1^st plaintiff’s contractual entitlement to have Vista’s business interest in the Wanju Project transferred to him upon Vista defaulting in making repayment.  As indicated above, the defendant’s liability under the guarantee is material to the 2^nd plaintiff’s claim despite that it is a claim on the cheque.

28. There are at the same time substantial disputes between the parties as to the circumstances leading to the defendant giving the cheque to the 1^st plaintiff, and whether the cheque was intended to be presented and paid.  Mr Chan for the 2^nd plaintiff submitted that the truth can be discerned from some of the WhatsApp chats exchanged between the 1^st plaintiff and the defendant on 16 June and in August 2014[7]. 

29. A complete record of the chats exchanged between the 1^st plaintiff and the defendant at the material time was exhibited to the 1^st plaintiff’s affirmations.  From reading the record, it is readily apparent that a wide range of things had been covered in these chats, quite a lot of which were made casually, and that the meaning of some chats are less than obvious.  In my view, it is crucial to read the chats with care and in context, and that elaborations of some parts of them by the makers may be necessary in order to ascertain what in fact was said or discussed.  I do not agree that the extracts of chats relied on by Mr Chan can have the effect of conclusively showing the defendant’s case on the giving of the cheque to be utterly incapable of belief.  

30. Overall, the factual disputes raised by the defendant cannot and should not be resolved on affidavits.  The legal issues are also not unarguable.  This is not a case where the version of facts and the defence put forward by the defendant have been demonstrated to be plainly implausible, or evidently untenable or shadowy.  The defendant ought to have been given leave to defend unconditionally. 

Conclusion

31. For the reasons set out above, I would allow the appeal, set aside the judgment of the Judge, and grant the defendant unconditional leave to defend.  I would also make an order nisi that the 2^nd plaintiff pays the defendant the costs of the appeal and that the costs of the application below be made costs in the cause.