BANK OF CHINA (HONG KONG) LTD v. CHAN YEUK WAI AND ANOTHER

CACV 26/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 26 OF 2006

(ON APPEAL FROM HCA NO. 3156 OF 2002)

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BETWEEN

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(By original writ and order to carry on)

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J U D G M E N T

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Hon Cheung JA :

The appeal

1. The plaintiff, Umbrella Finance Company Limited (‘UFC’), sued the defendants under five personal guarantees and sought summary judgment against them.  Deputy High Court Judge Jeremy Poon granted the defendants unconditional leave to defend.  The plaintiff now appeals. 

2. Originally, the plaintiff in this action was Bank of China (Hong Kong) Limited (‘BOCHK’).  The action was first commenced on 16 August 2002.  By an order dated 3 January 2005, UFC was made a party to these proceedings and these proceedings were ordered to be carried on as if UFC had been substituted for BOCHK as a plaintiff.

Background

3. By a loan agreement dated 15 October 1996 (‘the loan agreement’) Kwangtung Provincial Bank (‘KPB’) agreed to lend funds to Ananda Holdings Limited and Ananda Enterprises Limited (‘the borrowers’).  There were subsequent variations to this agreement which are not relevant to this appeal.  The loan granted by KPB was secured by a mortgage and five personal guarantees executed by the defendants in favour of KPB.  The defendants were the shareholders and directors of the borrowers.  The particulars of the guarantees are as follows :

Guarantee	Date	Liability guaranteed
The 1st Guarantee	2/10/1996	HK$236,000,000
The 2nd Guarantee	15/10/1996	HK$630,000,000
The 3rd Guarantee	15/10/1996	US$200,000
The 4th Guarantee	15/10/1996	SG$4,000,000
The 5th Guarantee	15/10/1996	Unlimited

4. On 14 June 1999 KPB sold its interest in all the loans and related securities in the loan agreement to Zhong Gang (Cayman) Company Limited (‘ZG’).  This was part of the arrangement whereby KPB, a bank in Hong Kong with Mainland interests, was merged together with other banks of similar status with BOCHK.  BOCHK was appointed by ZG to service and administer the loans and related securities under the loan agreement. 

5. On 16 August 2002 BOCHK commenced High Court proceedings, namely, HCMP 3254 of 2002 in which it sought to enforce the loan agreement against the borrowers and the two mortgagors under the mortgage.  Deputy Judge Poon also handled that action.  He entered judgment in favour of BOCHK against the borrowers for, among other things, HK$980,112,001.60.  The appeal against the judgment was by consent dismissed.  There was a further order that ZG be added as a co-plaintiff to HCMP 3254 of 2002 and UFC was made a party to that proceeding in substitution for BOCHK and ZG as the plaintiffs.

Title to sue

6. The entitlement of UFC to sue on the guarantees is based on an assignment dated 23 December 2003 (‘the Assignment’) from ZG to UFC.  UFC claims that it acquired its interests in the following manner :

(1) By a sale and purchase agreement dated 14 June 1999 (‘1st SPA’) KPB agreed to sell to ZG its interests in respect of the loans and guarantees.

(2) By another sale and purchase agreement dated 10 November 2003 (‘2nd SPA’) ZG agreed to sell to Citigroup Financial Products Inc (‘CFPI’) its interests in the loans and guarantees.

(3) Before the completion of the sale under the 2nd SPA CFPI sold its interests in the loans and guarantees to UFC.

(4) ZG then assigned those interests to UFC by the Assignment dated 23 December 2003.

Guarantees not included?

7. The first issue raised by the defendants is that the guarantees had not been sold or assigned to UFC.  The argument is that under clause 2.1(d) of the 2nd SPA the guarantees needed to be identified in a schedule, however the schedule did not identify the guarantees.  Likewise under the Assignment the guarantees needed to be set out in the schedule to the Assignment.  Again the schedule attached to the Assignment did not refer to the guarantees.

Construction of documents

8. This point involves a construction of the terms of the 2nd SPA and the Assignment.  Although it has been submitted that the matter can only be resolved after discovery of documents it has not been shown how additional documents would assist this construction exercise. 

9. The judge held that the argument raised by the defendants was arguable and the matter should proceed to trial.  I disagree.  As a matter of construction, my view is that the guarantees do not need to be specified in the schedule.

The 2nd SPA 

10. Under Clause 2.1(d) of the 2nd SPA, ZG agreed to sell to CFPI,

‘ all ZG’s legal (unperfected) and beneficial right, title and interest in the Unrestricted Loans referred to as IIIA, IIIB, IIIC and IIID in Schedule 1 and the Loan Security of the Unrestricted Loans referred to as IIIA, IIIC and IIID in Schedule 1.’  (emphasis added)

11. The definition of ‘Unrestricted Loans’ is

‘ in respect of ZG, all those loans which are described as IIIA, IIIB, IIIC and IIID in Schedule 1 and the related Loan Agreements and Collections received on or after the Cutoff Date (subject to Clause 2.4.6).’ 

12. ‘Loan Security’ means

‘ any Security securing the payment of any Liability under any Specified Loans and shall where the context permits, include any Guarantee and the related Loan Security Documents and Collections received on and from the Cutoff Date in respect of any such Liability under a Specified Loan, but for the purpose of the representations and warranties includes only that Loan Security more particularly described in Schedule 1.’ 

13. In my view the words of Clause 2.1(d) are clear.  Sale by ZG to CFPI are in respect of the loans referred to as IIIA, IIIB, IIIC and IIID in Schedule 1 together with the Loan Security of those loans that had been identified as IIIA, IIIC and IIID in the schedule.  The words are not capable of meaning that the loan securities of the unrestricted loans must be identified in the schedule as well.  This is made clear by the meaning of ‘Loan Schedule’ as defined in Clause 2.3.1 which stated that

‘ Schedule 1 contains a list of, amongst other things, all of the Specified Loans and certain related Loan Security Mortgages and certain other related Loan Security for each Borrower that are to be sold to the Purchaser pursuant to the terms and conditions hereof and certain other information relating thereto (the “Loan Schedule”).’  

14. Schedule 1 therefore consists of, amongst other things, the following three types of assets that were sold :

(1) all of the specified loans;

(2) certain related loan security mortgages; and

(3) certain other related loan security for each borrower. 

This means the list of assets in the schedule is not exhaustive.  The definition of ‘Loan Security’ makes it clear that those loan securities particularly described in the schedule are for the purpose of the representations and warranties only.  This does mean that all the loan securities must be specified in the schedule. 

The Assignment

15. Clause 1(d) of the Assignment stated that:

‘ ZG hereby, as absolute legal (unperfected) and beneficial owner assigns unto the Purchaser all of ZG’s rights, interests, titles and benefits (present and future, actual and contingent) in, to, under and in respect of each of the Specified Loans referred to as IIIA and IIIB and the Loan Security of the Specified Loans referred to as IIIA in the Loan Schedule.’

16. In my view the same construction is to be applied in respect of the Assignment. 

Other defences

17. The judge held that since he had granted leave to the defendants to defend on the construction point it was not necessary for him to consider the other defences raised by the defendants.  In this appeal the defendants relied on other defences.   I now proceed to consider these defences. 

Subject matter of the assignment

18. Mr Jeremy Cheung, counsel for the 1st defendant, associated himself with two defences raised by the 2nd defendant.  First he argued that the guarantees were not capable of being assigned to UFC in the first place.  He argued that prior to the assignment BOCHK had already terminated the loan agreement, obtained judgment against the borrowers and commenced proceedings against the defendants.  He argued that therefore the assignment is an assignment of a mere right of action.  He relied on an Australian case, Hughes v Fresh Pack Fruit & Vegetable Market Pty Ltd [1965] W.A.R. 199.

19. Very briefly the facts of the case showed that the lessor of a property granted a lease to the 1st defendant (‘the lessee’) for a term of five years with an option to renew.  The lease contained a guarantee by the 2nd defendant (‘the guarantor’) who was a director of the lessee guaranteeing to the lessor the performance of lessee’s covenants.  In March 1963 the plaintiff acquired the interest of the lessor in the lease.  After the plaintiff acquired the interest of the lease the lessee rescinded the lease and vacated the premises in July 1963.  The plaintiff was only able to let out the premises again in November 1963.  On 27 February 1964 the lessor assigned the guarantee to the plaintiff.  The plaintiff claimed against the lessee for arrears of rent between April and November 1963, the difference between the rent payable under the lease for the remainder of the term and the rent payable under the new lease and some other charges.  The plaintiff also claimed against the guarantor under the guarantee.  Jackson J found for the plaintiff against the lessee but dismissed its case against the guarantor.  He held (at p. 204) :

‘ But there was no assignment of the guarantee until 27 February 1964, by which time the lease itself had been surrendered by operation of law when the plaintiff in November 1963 relet the shop to the new tenant; and when the lease was thus terminated, the guarantee also came to an end.  Had there been any existing liability under the guarantee to Property Holdings Pty. Ltd. (i.e. the lessor), this would have been non-assignable as being a mere right to litigate.  But, in any case, there was no such liability, because the lessee’s default arose after, and not before, the plaintiff acquired the reversion, so that Property Holdings Pty. Ltd. sustained no loss or damage which could be the subject of a claim under the guarantee.  Thus in February 1964 the assignment of the guarantee to the plaintiff was meaningless, as there was nothing to assign.  The claim against the second defendant must, therefore, be dismissed.’

20. It is clear from this passage that the judge decided that

(1) the damage was sustained by the plaintiff due to the lessee’s default after the plaintiff acquired the premises;

(2) the lessor did not suffer any damage because it had already disposed of its interest to the plaintiff before the lessee’s default occurred.

21. This being the case, the lessor had nothing to assign to the plaintiff since it had disposed of the property the subject of the lease and had sustained no loss or damage which could be the subject of a claim under the guarantee.  The judge’s comment that ‘Had there been any existing liability under the guarantee to (the lessor) this would have been non-assignable as being a mere right to litigate’ in my view was said by way of observation only and was not the issue he had to decide. 

22. In any event, I do not regard the comment made by the judge as strictly accurate.  If liability had already accrued under the guarantee, it does not necessarily mean that the assignment of the guarantee is merely in the form of a ‘mere right to litigate’ : see the discussion on Trendtex Trading Corporation v. Credit Suisse [1982] A. C. 679 at paragraph 28 of this judgment.  

23. Mr Cheung also referred to The Modern Contract of Guarantee (English Edition) by Donovan and Phillips at para. 10–175 which stated that :

‘ A guarantee or the security for it cannot be assigned without the benefit of the principal obligation because otherwise “a creditor could effectively divorce the guarantor’s liability from that of the principal debtor”.  Similarly, an assignment of the guarantee is ineffective once the principal contract is determined, for example, by the creditor terminating the principal contract for the principal’s breach.’ 

24. The footnote in respect of the last passage is as follows :

‘ Hughes v Fresh Pack Fruit & Vegetable Market Pty Ltd [1965] W.A.R. 199 at 204, where it was held that such an assignment constituted a mere right to litigate in respect of accrued liabilities.’

Valid assignment

25. Once the judgment of Hughes is properly understood, I cannot see how it or the passage in the textbook will assist the 1st defendant.  In this case both the loan and guarantees were assigned to a single party namely, UFC.  By the time of the Assignment the loans had been advanced to the borrowers.  In other words the debt had already been incurred by the borrowers.  This is a classic situation of an assignment of a debt or chose in action to UFC.  As Donovan and Phillips observed at para. 10–173 a contract of guarantee is assignable as a legal chose in action.  Such an assignment is effective to transfer the right to the assignee as expressly provided for by section 9 of the Law Amendment and Reform (Consolidation) Ordinance (‘LARCO’) (Cap. 23) :

‘ Any absolute assignment, by writing under the hand of the assignor (not purporting to be by way of charge only), of any debt or other legal chose in action, of which express notice in writing has been given to the debtor, trustee or other person from whom the assignor would have been entitled to receive or claim such debt or chose in action, shall be and be deemed to have been effectual in law (subject to all equities which would have been entitled to priority over the right of the assignee if this section, section 11 of this Ordinance and sections 25 and 49 of the Conveyancing and Property Ordinance (Cap 219) had not been enacted) to pass and transfer the legal right to such debt or chose in action from the date of such notice, and all legal and other remedies for the same, and the power to give a good discharge for the same, without the concurrence of the assignor:

Provided that ....’

26. In any event the terms of the guarantees precluded any argument that the liability of the guarantors was determined by the actions of the lender towards the borrowers.  The guarantees were stated to be binding on the guarantors as a continuing security (clause 3).  Clause 5 provided that

‘5(a)  Any admission or acknowledgment in writing by the Principal or by any person authorized by the Principal of the amount of indebtedness of the Principal to you and any judgment recovered by you against the Principal in respect of such indebtedness shall be binding and conclusive on and against me/us in all courts of law and elsewhere.’

Clause 6 further provides that :

‘ You shall be entitled without notice to and/or consent of me/us and without thereby discharging or affecting my/our liabilities hereunder at any time at your sole and absolute discretion to deal freely with the Principal or any other party or parties liable in respect of any debts and/or liabilities guaranteed hereunder whether jointly, severally or jointly and severally with the Principal or as surety or as provider of securities including but not limited to:-

(a) to determine reduce limit restrict grant enlarge increase vary continue renew or regrant any banking facilities to the Principal; and/or’

Champerty

27. Mr Cheung also relied on the defence that the assignment to UFC may amount to maintenance or champerty. 

28. The principle is that where an assignee has by the assignment acquired a property right and the cause of the action was incidental to that right the assignment is effective and the court should not strike down such an assignment as one only of a bare cause of action.  Thus Lord Roskill in Trendtex Trading Corporation, after disagreeing with the statement by the Master of Rolls who had stated in the Court of Appeal that ‘the old saying that you cannot assign a bare right to litigate is gone’, held at p. 703 : 

‘I venture to think that that still remains a fundamental principle of our law.  But it is today true to say that in English law an assignee who can show that he has a genuine commercial interest in the enforcement of the claim of another and to that extent takes an assignment of that claim to himself is entitled to enforce that assignment unless by the terms of that assignment he falls foul of our law of champerty, which, as has often been said, is a branch of our law of maintenance.’

29. See also Camdex International Limited v Bank of Zambia [1998] Q.B. 22 where it was held that an assignment of a bona fide debt in accordance with the provisions of section 136 of the Law of Property Act 1925 (i.e. section 9 of LARCO) was valid and no question of maintenance or champerty arose even if the necessity for litigation to recover the assigned debt was contemplated.  Any objectionable element alleged to invalidate the assignment had to be proved independently and distinctly. 

30. In this case the defendants had not showed any objectionable elements which may invalidate the Assignment.  Mr Cheung argued that the consideration of the Assignment to UFC was only stated to be $10.  The situation is that CFPI had assigned its interest to UFC before the assignment of 23 December 2003.  According to the evidence, this assignment was not for a nominal value but because of commercial confidentiality the exact amount was not disclosed.  In any event the $10 consideration must be viewed in the context.  I do not see how this point could assist the defendants.

Compromise

31. I will now deal with the defences raised by the 2nd defendant.  The 2nd defendant alleged there was a compromise between the parties whereby BOCHK agreed not to sue the defendants on condition that the defendants put up further securities.  This defence is simply not credible by reference to the contemporaneous documents.  In fact the same defence was relied upon by the borrowers in HCMP 3254 of 2002.  In that case the evidence also came by way of an affidavit from the 2nd defendant.  The judge examined the allegations in detail by reference to the contemporaneous documents and also rejected the defence. 

32. It is not necessary for me to consider the argument raised by Ms Ismail, counsel for the plaintiff, that this is a collateral attack on an earlier decision of a court of competent jurisdiction and may amount to an abuse of the process of the court by reference to the cases of Secretary of State for Trade and Industry v Bairstow [2004] Ch 1 and China North Industries Investment Limited v Chum, HCCL 10 & 54/2003.

Personal contracts and material variation of guarantee by change of creditor

33. The 2nd defendant seemed to argue that the guarantees were in the nature of personal contracts.  But as pointed out in Chitty on Contracts 29th Edn. Vol. 1 para. 19–054, prima facie, contractual rights to the payment of money do not involve personal considerations and are capable of assignment.  I accept that the benefit of a contract is only assignable in ‘cases where it can make no difference to the person on whom the obligation lies to which of two persons he is to discharge it’ but the question whether any assignment makes any difference to the debtor must be decided by the court on objective grounds, having regard to the nature of the contract and of the subject matter of the rights assigned : Chitty para. 19–053. 

34. Further as pointed in Chitty at para. 10–175 :

‘Generally there is no restriction upon the creditor assigning the principal contract which is guaranteed.  It cannot be argued that this prejudices the guarantor because it is immaterial, from the guarantor’s point of view, to whom the guarantor owes the obligation.’

See also Wheatly v Bastow (1855) 7 De G.M. & G; 44 ER 102; Bradford Old Bank v Sutcliffe [1918] 2 KB 833 at 841; Banca Di Roma Societa Per Azioni v Lee Kai & Another [1998] 2 HKC 338.

Absence of notice of assignment

35. The 2nd defendant argued that it is a triable issue whether the 2nd defendant had received or had notice of the assignment.  The 2nd defendant had merely raised a bare allegation that he had not received the notice of assignment.  The plaintiff on the contrary had provided evidence of the service of the notice of assignment.  This is not a credible defence.

Duty not to mislead and duty to disclose

36. The 2nd defendant argued that the debts and the related securities were assigned to ZG on 14 June 1999.  However, KPB and BOCHK did not inform him that KPB was no longer the lender of the loan in the subsequent dealings between KPB and BOCHK and the defendants. 

37. Other than for the purpose of section 9 of LARCO, there is no need to give notice of the assignment to the guarantor.  The point was dealt with by Turner LJ in Wheatly :

‘The surety, it is said, has the right to know who is the assignee; but, admitting this right, the question still remains, is the right of the assignee against the surety destroyed because the fact of the assignment has not been communicated to him?  On whom does the law cast the onus of finding the creditor?  Generally speaking, as I conceive, upon the debtor; but, apart from this consideration, the surety, if he has no notice of the assignment, may pay the creditor, and the payment, as I apprehend, will be perfectly good against the assignee; and if, upon the payment being made or tendered, the creditor be required to deliver, and does not deliver any securities held by him, the surety would, no doubt, be entitled to reliefin this Court, and to stay any proceedings by the creditor. It is to be remembered in these cases, that a surety though a favoured debtor is still a debtor, and that he may at any time relieve himself by paying the debt; and further, that if notice to the surety of the assignment of the debt be held to be necessary, serious impediments to assignments by creditors may in many cases be created.’

38. Further unlike contracts such as insurance, guarantees are not contracts of utmost good faith and there is no general duty of disclosure to a guarantor.

Illegal business of ZG

39. The 2nd defendant argued that ZG did not hold any banking licence in Hong Kong.  When KPB assigned the loan and securities to ZG in June 1999 ZG did not have any capacity to continue any banking business, in particular the overdraft facilities.  It was submitted that ZG was performing illegal business in Hong Kong.  The contracts in relation to such business were illegal and unenforceable. 

40. It is incumbent upon the 2nd defendant to give particulars as to how ZG carried on banking activities in Hong Kong.  Like many of the other defences raised by the 2nd defendant, the attacks were couched in vague terms with no particulars being given.  In this case, ZG had appointed BOCHK as its serving agent and BOCHK itself had a banking licence.

41. Further banking business is defined in the Banking Ordinance, Cap. 155 as

‘“banking business” (銀行業務) means the business of either or both of the following-

(a) receiving from the general public money on current, deposit, savings or other similar account repayable on demand or within less than the period specified in item 1 of the First Schedule or with a period of call or notice of less than that period; (Amended 4 of 1997 s. 3)

(b) paying or collecting cheques drawn by or paid in by customers.’

42. The enforcement of the debt does not amount to banking business.

Conspiracy to defraud

43. It was alleged that the assignment of the loans from BOCHK to ZG and then to UFC was a sham.  This was done to ‘overinflate and overstate’ BOCHK’s financial conditions and performance so as to deceive the general public as well as the authorities.  The purpose was to obtain a listing status for BOCHK. 

44. The complaint of conspiracy was again couched in the vaguest terms.  The 2nd defendant has not specified whether UFC was a party to the alleged conspiracy.  In my view the 2nd defendant has not shown that the assignment to UFC was not a proper commercial transaction.  This being the case, I do not see how this could become a triable issue in this case. 

Conclusion

45. Accordingly I would allow the plaintiff’s appeal, set aside the order dated 23 December 2005 and give judgment to the plaintiff as claimed in its Order 14 summons as amended on 4 July 2005.  I would dismiss the 2nd defendant’s respondent’s notice.  The plaintiff is entitled to the costs of the appeal and of the action (except for costs orders made in favour of the defendants prior to 23 December 2005) against the defendants.

Hon Yuen JA :

46. I have had the benefit of reading the draft judgments of Cheung JA and Stone J and I agree with their reasons for allowing this appeal.  I was initially troubled by Mr Jeremy Cheung’s arguments based on the Hughes v Fresh Pack case.  I think however that what Jackson J held at p.204 (reproduced in para. 19 of Cheung JA’s judgment) can be understood in light of the following facts in that case and the general law regarding the assignment of leases.

Guarantee

47. In September 1962, Property Holdings Pty Ltd ("PHP") as agent for the owners leased the property to the 1st Defendant for a period of 5 years from November 1962.  The 2nd Defendant signed a guarantee (in favour of PHP) of the 1st Defendant’s performance of its obligations under the lease.

Assignment of lease

48. In March 1963, the owners (PHP’s principals) assigned the property to the Plaintiff.  The agreement for sale included an express assignment of the benefit and interest of the owners (said to include PHP) in the lease.

Effect in law

49. It may be helpful at this stage to consider the effect of that assignment under the general law.  As I understand it, when an owner assigns a property with the benefit of a lease to a transferee, the right to recover rent (including any arrears accrued due before the transfer) passes to the transferee.  See Halsbury’s Laws of England 4th ed. Re-issue, Vol. 27(1) Landlord and Tenant, I - 12 Assignment and Devolution of Leases, para. 467 and fn. 11.

50. Therefore the effect of the assignment of the property with the lease in March 1963 to the Plaintiff was that as from that date, the right to recover rent (including any arrears) passed to the Plaintiff.  

51. However there was (at that time) no assignment to the Plaintiff by PHP of any rights under the guarantee.  (It was not suggested that the benefit of the guarantee ran with the land assigned). 

Entitlement to primary obligation divorced from entitlement to secondary obligation

52. Accordingly, the result was the "divorcing" of rights under the lease (held by the Plaintiff) from rights under the guarantee (held by PHP).  As from March 1963, the right under the lease to recover rent (including any arrears) from the 1st Defendant - the primary debtor - belonged to the Plaintiff.  But the right under the guarantee against the 2nd Defendant - the secondary debtor - still remained with PHP, even though this company and its principals no longer had anything to do with the property, and in particular, had no right to recover rent (not even arrears). 

Arrears

53. From April 1963, the 1st Defendant was in arrears of rent until November 1963 when the Plaintiff succeeded in re-letting the property to a new tenant and by re-entry terminated the 1st Defendant’s lease. 

54. The Plaintiff clearly had title to sue the 1st Defendant for the arrears under the lease.  But he wished to sue the 2nd Defendant under the guarantee as well.  

Assignment of guarantee

55. It was not until February 1964 that PHP purported to assign to the Plaintiff its rights under the guarantee.  The following month, the Plaintiff as assignee of the guarantee sued the 2nd Defendant.

Discussion

56. It is clear when one examines the facts and the general law set out above that the assignment of the guarantee was completely ineffective.  As Jackson J put it, "there was nothing to assign". 

57. The terms of the guarantee covered losses suffered by PHP in case of the 1st Defendant’s default under the particular lease.  But there was neither the possibility of future losses nor the actuality of past losses. 

58. There was no possibility of future losses, because by February 1964 (the time of the assignment) that lease no longer existed, as it had been surrendered in November 1963. 

59. There were no past losses either, because with the assignment of the lease, the right to recover rent (including any arrears) passed under the general law to the Plaintiff.  PHP no longer had the right to recover rent from the 1st Defendant (nor, for the same reason, did its principals), and thus PHP had no right against the 2nd Defendant as surety.

60. In any event, as a matter of fact, the 1st Defendant was not in arrears during the period when PHP’s principals were owners.  The 1st Defendant only started to be in arrears after the sale to the Plaintiff.  So the guarantee, which by its terms only covered any losses suffered by PHP, did not bite.

61. The passage in Jackson J’s judgment (at p.204):  

"Had there been any existing liability under the guarantee to [PHP], this would have been non-assignable as being a mere right to litigate.  But in any case, there was no such liability, because the lessee’s [1st Defendant’s] default arose after, and not before, the plaintiff acquired the reversion, so that [PHP] sustained no loss or damage which could be the subject of a claim under the guarantee"

should be understood in the context of the facts and general law I have discussed.  Even if there had been any arrears as at March 1963, and thus the 2nd Defendant had an "existing liability under the guarantee to PHP", once the lease was assigned to the Plaintiff, PHP no longer had the right to recover rent (including arrears) from the 1st Defendant.  Once that occurred, PHP had against the 2nd Defendant as surety nothing more than a mere right to sue, which was not property capable of assignment.  However, as I have noted above, there were in fact no arrears as at March 1963 so that in any event Jackson J’s remarks were obiter.  

Hon Stone J :

62. I have had the advantage of reading in draft the judgments of Cheung JA and Yuen JA, and respectfully agree, for the reasons they have given, that this appeal must succeed, and that judgment should be entered in favour of the plaintiff in terms of the amended application for summary judgment.

63. Notwithstanding the extensive amounts of forensic dust sought to be thrown up by each of the defendants to this application in an endeavour to raise triable issues, there clearly is no defence to this action, which at bottom is a relatively straightforward claim under personal guarantees.

64. In the circumstances I wish to add only a few words of my own about the ambitious argument advanced on behalf of the 1st defendant by Mr Jeremy Cheung based upon the Australian case of Hughes v Fresh Pack Fruit & Vegetable Market Pty Ltd [1965] W.A.R. 199, a case upon which Cheung JA and Yuen JA already have commented in some detail.

65. Suffice it to say that the proposition put forward by Mr Cheung, based upon that which clearly was an obiter dictum of Jackson J in Hughes, op cit., to the effect that the assignment of the five guarantees to the plaintiff is ineffective once the borrower’s contracts were determined by the Bank of China for breach of the borrower’s primary obligation to repay, is in my view simply incorrect as a matter of law.

66. As Cheung JA has pointed out, on the specific facts of Hughes the lessor had nothing to assign under the guarantee since no loss or damage had been sustained which could have been the subject of any claim under the guarantee, and the observation of Jackson J, together with the footnoted reference in Donovan and Phillips, op cit., must be read in this context.

67. However, this is a far cry from the startling argument that, in effect, prior determination of the primary obligation renders ineffective the purported assignment of the security collaterally underpinning that obligation – in this instance, the personal guarantees – as “a mere right to litigate.”

68. With respect, I fail to see the basis of such a general proposition which, were it to be accepted at face value, would, it seems to me, have the alarming effect of substantially emasculating the modern law of guarantees.

69. As the analysis of Yuen JA amply demonstrates, Hughes was a particular case decided on particular facts, and certainly does not justify the general proposition the 1st defendant now seeks to extrapolate therefrom.

70. In this connection I accept and agree with the observations of Ms Ismail, appearing on behalf of the plaintiff, to the effect that first, the terms of the guarantees in the present case indicate plainly on their face that these are continuing security instruments (see, for example, Clauses 3, 6 and also 17(f) of the Deed of Guarantee addressed to the Kwangtung Provincial Bank, which specifically refers to “your successors and assigns”), and second, that Hughes, op cit., in fact exemplifies the unexceptional proposition that a guarantee cannot be assigned once severed from its principal obligation, and that the principle now sought by the 1st defendant to be derived from Hughes, and its apparent approval in the footnoted passage in Donovan and Phillips, represents an unfortunate and inaccurate paraphase of that case.

71. At the end of the day there is nothing in this action which would merit the very considerable time and cost involved in sending it to trial, and with great respect to the learned judge below, in my view he erred too much on the side of caution in his grant of unconditional leave to defend.