CHINA MERCHANTS BANK v. HUANG JINCAN

HCA2268/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.2268 OF 2002

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J U D G M E N T

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1. This is an Order 14 application by the China Merchants Bank ('the Bank") against the defendant for enforcement of a guarantee.

2. The guarantee came about this way. The Bank, in 1996, gave a loan to the borrower, Englong International Limited ("the Company"), with a guarantee from the defendant, Huang Jincan, who was of course the principal shareholder as well as the controlling director of the Company.

3. The Company got into trouble soon afterwards and default arose in 1997 and, eventually, it led to the borrower Company being wound up. Judgment was obtained against the borrower Company which was then in liquidation. That was in December 2001. The amount that was outstanding as of 15 May 2002 was in the sum of some HK$376 million.

4. Proceedings were issued in June 2002 by the Bank against the defendant guarantor under the guarantee. An Order 14 application was issued and extensive affidavits have been filed. The principal and only real defence that had been raised (after a great deal of huff and puff and after the abandonment of much of the various allegations) comes down to this : that the Bank had realized the securities held by it in the form of borrower's interests in 12 joint venture companies, entered into between Beilong Holdings Company Limited ("Beilong") and Beitai Steel & Iron (Group) Company Limited ("Beitai"), at an undervalue.

5. The sale and purchase agreement between Beilong (which had a 60% interest in the joint venture) with Beitai (which had a 40% interest in the joint venture) was entered in late December 2002 at a price of RMB333 million, with the payment being made over a period of some two or three years and with an initial deposit that had been received of RMB10 million.

6. The true nature of the dispute at present between the guarantor and the plaintiff bank is really over the sale. It was not alleged that the sale was not genuine or not bona fide. What is alleged is that the sale had been effected by the majority shareholder (i.e. Beilong) to the minority shareholder (i.e. Beitai) at too low a price.

7. The chart at page 338 shows the borrower Company's investment in the joint venture. The nature of the joint venture was a very curious one. Beitai, being experts in the steel and iron area, was acknowledged to be in control, to be in possession of the business and to be running the show at all times. Beilong, as 60% investors in the business, was not in control, although the defendant was, at all material times up to November 2001, the managing director of 10 of the joint venture companies (and legal representative of two of those). From very early on, with the built-in invidious nature of the structure of the joint ventures, there were constant disputes between the two partners, i.e. Beilong and Beitai.

8. The defence raised is that Beilong in selling to Beitai, realized a price too low. But it has not been suggested anywhere in the affidavits, what else the Bank could have done with a much better result. If one looks at the chronology, the Bank had lived with this loan for some time and must have done a great deal to try to recover the loan debt. In June 1998, it was said in a Beilong resolution that the accounts receivable and accounts payable of the business were in "precarious" state. The defendant who was the nominal head of the joint ventures had full knowledge of this. The 1998 audit report by Zhonghua Enterprises Consultation Company to the Bank again showed a negative picture.

9. There was, in 1999, a restructuring attempt to relist the borrower Company and there was reference to writing-off all the investment in all 12 joint venture companies. The restructuring however did not succeed, leading eventually to the borrower Company being wound-up.

10. In late 2001 and early January 2002, there were prepared for the Bank the Shanghai audit reports giving an extremely negative picture which showed the joint venture as being in a seriously disastrous position. It is not necessary for me to go into all the details except, perhaps, to refer to the figures in the table at page 756 of the bundle that the net asset value of the business had gone down from end of 1998 of RMB403 million to the figure of RMB210 million by the end of June 2001. That decline was consistent with the poor situation on the production side. Contrary to what the defendant had alleged, page 755 showed that the production had hardly increased and certainly the production figure shown there was very different from what the defendant had alleged. The picture of the business that had been built up for the Bank in early 2002 was an extremely negative one.

11. Complaint was made that the Bank could have done more, vis-à-vis the minority Beitai. Although there could be claims by the majority against the minority, these courses of action must be judged in the context of the difficulty and uncertainty of litigation under the immature and uncertain legal system in China. The advice of the Chinese lawyers of the Bank was negative. It is with that as a background that one had to view in a broad way the substance and the credibility of the defence now raised by the defendant guarantor. The picture which comes out from the affidavits and the materials before me was that there were the Shanghai audit reports for the Bank in January 2002, there was apparently negotiation with Beitai which led to an initial agreement in April 2002 between the Bank's side (representing the Beilong 60% majority interests) and Beitai for the sale of the majority interests to Beitai at RMB333 million. That figure of RMB333 million is almost 3 times the net asset value of RMB210 million stated in the 2002 Shanghai Reports (taking into account that RMB333 million was for 60% of the business).

12. Then there were further discussions which led to the October oral agreement culminating in the December written agreement, with payment by instalment terms which somewhat diluted the value of the sale price of RMB333 million. That was the broad picture that was given to this court.

13. Various criticism had been made by Mr Chain on behalf of the defendant. At the end of the day, it seems to me that Mr Chain's only hope of salvation rested on his contention that summary judgment should not be given because there is a dispute of undervalue sale even though he could not quantify the amount of the undervalue. The way Mr Chain tried to find an escape from the normal consequence of a guarantor being sued was to rely on an alleged principle (which I do not accept) that when a creditor bank has realized its security, it was for the creditor bank not merely to give credit for amount received by realization of security but to show that it had realized the security at the market price. Since he alleged there was no sufficient evidence of the market price produced by the Bank, therefore the defendant should be given leave to defend because the Bank could not properly state what was the credit amount which should be given in reduction of the loan (security having been realized).

14. The anchor sheet of Mr Chain's charming submission is the obiter dictum of Lord Justice Evans in the case of Skipton Building Society v. Brately and Anor [2000] CA Lloyd's L.R. 34 and, in particular, the passage at paragraph 28 which reads this :

" Questions might arise as to where the burden of proof lies in relation to an issue as to the current market value of property which the creditor has sold. In principle, it seems to me that the creditor has to give credit for the current market value and therefore he must show that he has obtained it; but the guarantor may have the burden of proving that the creditor was in breach of his obligation to obtain it. In practice, the burden is unlikely to be difficult for the creditor to discharge, if he had taken reasonable steps to market the property, and if his figure is challenged, then there will be evidence from both parties which will make the burden of proof academic, as in my judgment it is here."

15. Lord Justice Potter did not wish to go that far and did not wish to express a view on the burden of proof. He says :

".... The incidence of the burden of proof very rarely proves critical in a case of this kind, the question of market value depending on the rival evidence of surveyors. ...."

And he says that he agreed with what Lord Justice Evans said except in relation to paragraph 28.

16. Mr Justice Alliott says merely "I agree", with the ambiguity that this implies.

17. But it seems to me that whether it is the majority's or minority's view, it is nevertheless obiter because it was not necessary for the decision in that case. Nor do I know to the extent that point was even argued. For my present purposes, it seems to me that this is not a normal approach, as far as I am aware in Hong Kong on an Order 14, and I am not prepared to take the lead to say it applies. I leave it to the Court of Appeal or the Court of Final Appeal to make such reasoned analysis as they see fit on the point. For my part, the normal burden applies namely it is for the defendant guarantor to allege on proper evidence any undervalue sale, giving details of what ought to be the market price and how it could be realized, thereby leaving the plaintiff bank to come back to say why the sale effected was proper and that there was no undervalue sale.

18. It seems to me, therefore, at a practical level on an Order 14 application that if this defendant guarantor wishes to challenge that there have been an undervalue sale, then he must produce solid evidence and not rely on the burden of proof. It is for the Defendant to say : "These are the things that the creditor bank could have done and this was the value that would have been realized and if those steps have been taken, there would be this figure of sale at the end of the day?" This would then give to the court an undervalue figure, so the difference in value can then be clearly shown. The Bank in these circumstances could come back to say : "Why they disagree? In what way they disagree? What are their contrary figures?", so that the issue can be joined on the figure of the undervalue.

19. I do not have the benefit of any of that kind of approach or that kind of evidence. So, I have to do the best I can and taking the broad view I take of the matter that had been put to me, I have no doubt that the Bank, in order to protect its own interest, and being a PRC bank, and knowing of the local conditions, and of the difficulties to realize a security which was a hostage to the minority (because the minority was in management control, in physical control, and they were experts in their field, with the majority being really outsider, and the Bank even more so as outsiders) had done its best and sold to the only possible buyer (the minority) at the best possible price it could squeeze out of the buyer in the circumstances. This was done after the Bank had the benefit of legal advice and advice from audit reports.

20. The length of time taken for the Bank to realize its security showed that the Bank had used up all its alternatives and in my view, the figure realized for the business (RMB333 million), being at a discount because of payment by instalment and taking into account the borrower's interest in the business was only 51% (the other 49% being the Newbridge Investment Partners L.P. and Nomura Investment (HK) Ltd) was the best the Bank could achieve. If the sale agreement was fully honoured, the Bank would have realized almost 50% of the loan and I consider that the Bank had really done quite well and certainly a far cry from selling at an undervalue.

21. I do not know and there is certainly no evidence to suggest that the Bank could have done better, or that anyone could have done better. I have no evidence at all what better result could be obtained or what would have been the alternative higher sale figure so that this court could be given evidence of the quantum of the alleged undervalue.

22. I therefore conclude that the Bank's case has been fully made out even on the assumption (which I do not accept) that the burden is on the Bank to show that the sale was at a market value. I do not subscribe to the allegation that the Bank's case has not been fully made out and therefore the case ought to go to trial. In my view, it is a waste of time for the case to go to trial. I therefore give judgment to the plaintiff in the amount claimed, in the sum of HK$376,225,052.07 (stated in the Statement of Claim at page 6), together with interest on the sum of HK$326,120,058.32 from 16 May 2002 at the rate of 2% above prime until actual payment. I also give costs of the action including costs of the Order 14 to the plaintiff.

23. The plaintiff shall also have leave to take out the amount paid into court by the defendant in the sum of $250,000 with accrued interest.