INTERNATIONAL BALLY CHEMICAL CO. LTD. and Another v. LAU TAK and Others

IN THE COURT OF APPEAL

No. 69 of 1995
(Civil)

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J U D G M E N T

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Keith, J.

Introduction

1. This is an appeal from part of an order made by Deputy Judge Bokhary on 28th September 1994 on the Plaintiffs' summons for summary judgment under Ord. 14. The judge entered summary judgment for some of the claims against the 1st Defendant, but she gave the 1st Defendant unconditional leave to defend the claim brought against him by the 2nd Plaintiff. This appeal by the 2nd Plaintiff relates only to that claim, because the 2nd Plaintiff contends that the judge should have entered summary judgment against the 1st Defendant on that claim.

The 2nd Plaintiff's Case

2. The 2nd Plaintiff ("Mr. Cheung"), the 1st Defendant ("Mr. Lau") and a third man were the three shareholders in a private limited company ("the Company"). They had each guaranteed the indebtedness of the Company to its bankers ("the Bank"). On 8th September 1993, the Bank's solicitors demanded payment of the Company's indebtedness to the Bank. Letters of demand were sent to the Company and to each of the three guarantors. The indebtedness to the Bank as at that date amounted to over $10 m.

3. By 19th October, the Company's indebtedness to the Bank had been reduced to just over $2 m. as a result of various set-offs and payments made to it. However, since an amount in excess of $2 m. was still outstanding, the Bank commenced proceedings on 30th October against both the Company and the three guarantors to recover that amount plus interest. Mr. Cheung's response to the issue of the writ was to discharge his liability under the guarantee by paying the sum of $2,030,000.00 to the Bank on 4th November. At that date, the Company's indebtedness to the Bank including interest had risen to $2,020,584.37 ("the debt"), and the Bank applied the sum of $2,030,000.00 paid by Mr. Cheung to discharge the Company's indebtedness in that amount.

4. Mr. Cheung was entitled to require his co-guarantors to contribute to his discharge of the Company's indebtedness since all co-guarantors are required to contribute equally to the discharge of the principal debtor's indebtedness. Accordingly, Mr. Cheung was prima facie entitled to recover one-third of the debt from his co-guarantors. However, he sought to claim only one-quarter of the debt from Mr. Lau because of what the three shareholders subsequently agreed on 1st December. They agreed that the Company should be wound up, and that, in the event of the Company's debts exceeding its assets after it had been wound up, its debts should be borne personally by them in proportion to their respective shareholdings in the Company. That agreement was reduced to writing and was signed by the three shareholders. Since Mr. Lau owned 25% of the shares in the Company, the sum which Mr. Cheung subsequently required him to contribute to the discharge of the Company's indebtedness to the Bank was $505,146.00.

The 1st Defendant's Case

5. For his part, Mr. Lau accepts that the three shareholders agreed that each of them would discharge the Company's debts in proportion to their respective shareholdings in the Company. Likewise, Mr. Cheung accepts that on 13th October Mr. Lau caused the sum of $500,000.00 to be credited to the Company's account with the Bank. What is in dispute is Mr. Lau's assertion that that payment was made by him (into the Company's account with the Bank, be it noted, rather than to the Bank itself) in his capacity as a guarantor of the Company's indebtedness to the Bank. The judge did not address that assertion in her judgment. The assertion is not supported by any of the contemporaneous documents, and therefore to make good that assertion, Mr. Lau makes three factual claims :

(i) The agreement that the three shareholders would discharge the Company's indebtedness to the Bank in proportion to their respective shareholdings in the Company was made prior to 13th October.

(ii) The proportion of the Company's then indebtedness attributable to his shareholding was $500,000.00.

(iii) That payment was made in response to a demand from the Bank, prior to October, for "about $2.5 m. said to be owed by [the Company] to the Bank".

The Credibility of the Defence

6. The third of these claims must be incorrect, as Mr. Andrew Chung for Mr. Lau realistically accepts. There could not have been a demand for only $2.5 m. by the Bank prior to October because schedules setting out the state of the Company's various accounts showed that, as at 30th September, the Company's indebtedness to the Bank was still in the region of $10 m. That must be why Mr. Lau has not obtained from the Bank a copy of the demand for "about $2.5 m". Indeed, by 13th October when the payment of $500,000.00 was made, the Company's indebtedness to the Bank had hardly been reduced at all, because the substantial sums which reduced its indebtedness to the Bank to $2 m. were only made on 19th October. It follows that if there had been no demand for about $2.5 m. by the date when Mr. Lau caused the sum of $500,000.00 to be paid to the Bank, the only demand to which the payment of $500,000.00 could have been a response to was the demand on 8th September for over $10 m. If that is right, the second of Mr. Lau's three claims must be incorrect because 25% of a sum in excess of $10 m. is very much more than $500,000.00.

7. As for the first of Mr. Lau's claims, if the agreement was made prior to 13th October (which is what Mr. Lau has to assert if the payment of $500,000.00 was Mr. Lau's response to the agreement), what was Mr. Lau doing acknowledging his liability on 1st December to pay the debts of the Company if his liability for the Company's debt to the Bank had been extinguished by the payment of $500,000.00 six weeks earlier ?

8. I note that Mr. Cheung asserts that the $500,000.00 paid by Mr. Lau represented the proceeds of sale of the Company's products to its customers which Mr. Lau had collected and for which he was obliged to account to the Company. That assertion is both vague and unsubstantiated. But whether the assertion is correct or not is immaterial, because Mr. Lau's claim as to what the payment was for is, in my view, simply not credible.

Conclusion

9. In these circumstances, I do not think that there is a reasonable probability of Mr. Lau having a real or bona fide defence to Mr. Cheung's claim. Accordingly, I would allow Mr. Cheung's appeal, I would set aside that part of the judge's order giving Mr. Lau unconditional leave to defend Mr. Cheung's claim for the sum of $505,146.00 by way of contribution as a co-surety, and I would give judgment to Mr. Cheung for that sum with interest. For my part, I would like to hear counsel on the rate of interest and from when it should accrue.

Liu, J.A.

10. This appeal falls to be decided, as my brother, Mr. Justice Keith, has said, on the lack of credible evidence in support of the 1st Defendant's main allegation. It is the 1st Defendant's allegation that payment of its agreed contribution had been made in a slightly smaller sum under a different arrangement reached at an earlier time for meeting a much more substantial demand. These are wholly different from the background particulars leading up to the 2nd Plaintiff's claim. The liability on the part of the 1st Defendant to contribute is a simple question and the discharge of that liability could easily have been demonstrated by credible evidence. I would also allow the appeal and make the orders Mr. Justice Keith proposes.

Litton, V.-P.

11. I agree. The result is that the appeal is allowed. The Deputy Judge's orders are discharged and we give judgment for the 2nd Plaintiff against the 1st Defendant in the sum of $505,146 and we will now hear submissions from counsel in relation to interest.