THE HONGKONG AND SHANGHAI BANKING CORPORATION v. TANG KAR HUNG AND OTHERS

Action No. 6934 of 1984

IN THE HIGH COURT OF JUSTICE

HONG KONG

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JUDGMENT

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1. This is an action by the Plaintiff bank to enforce joint and several guarantee alleged by the bank to have being signed by the three Defendants in a document dated the 3rd of February 1978. Before I deal with the facts I am going to deal with matters relating to the pleadings which arose at the beginning in this hearing.

2. I allowed an application by the 1st Defendant to amend his defence and counterclaim by adding what is the new paragraph 11. The allegation he makes there is an entirely new one. It took the Plaintiff entirely by surprise and it was made in relation to happenings on the 8th of March 1978. Many Judges would have refused that application. I thought it right to allow it so that the 1st Defendant would be able to present such case as he had in relation to this matter.

3. I also allowed the 2nd and 3rd Defendants to put in what is described as an additional defence; a handwritten document signed by them (they are not represented) setting out certain matters upon which they sought to rely.

4. The heistory of this matter is as follows. The three Defendants were directors of Tang Tak Son Construction Co. now in liquidation. The company was incorporated in January 1971. The 2nd and 3rd Defendants were the original directors. In October 1972 the 1st Defendant, having put capital into the company, became managing director. Later in about September 1973 Stephen Ho became a director and in August 1977 James Lam, who was also an employee of the company, became a director. The company had been banking with the Plaintiff since about December 1972 and had first asked for financial facilities, which were granted, in 1974. Part of the security for the facilities which existed in late 1977 was a personal guarantee for $500,000 given by the 1st Defendant.

5. In October 1977 the 1st Defendant asked for further facilities in relation to a contract for the Tai Wo Hau Estate. He asked for $1 million for the purpose of financing that project. In the course of discussions about that advance the matters concerning this case arose. The company became interested in tendering for a number of Home Ownership Projects which were being carried out by the Government. The 1st Defendant approached Mr. Langley, the then manager of the Mongkok Branch, to see whether he would agree in principle to give the company further facilities in order that these Home Ownership Schemes could be undertaken. It seems that Mr. Langley was agreeable in principle; it is likely that he consulted his superiors because his powers in this regard were limited. The result was that the company tendered for five projects and was successful. On Mr. Langley's advice only three were accepted. That advice was probably sound.

6. The company then wanted a further advance of $5 million in order to finance these Schemes. The company's concern was to get those increased facilities; of course, the bank's concern was to have appropriate security for them. I should say appropriate additional security, the bank already had certain security, part of which I have mentioned. During negotiations for this additional security from the company it was suggested by Mr. Mosley at Head Office (who had to approve these matters) that the 1st Defendant should give additional security on a personal guarantee for $5 million. (That is to be found on p.16 of the Agreed Bundle of Documents. Where Mr. Mosley refers in the last line to Mr. Tang Tak Son. He is making reference to the 1st Defendant. )

7. The agreement for security had to be made by Mr. Langley. It appears that Mr. Langley considered that the overall facilities granted to the company would be better secured, not by a personal guarantee by the 1st Defendant only, but by joint and several guarantees from all the directors of the company. The purposes of asking for joint and several guarantees from all the directors are well known; it is to ensure that if the company fails that the bank can go against those who give such guarantees personally and such security is taken by banks even if they are not sure that individually such guarantors are worth the money. The reason is that by having personal; joint and several, guarantees from the directors they ensure the personal commitment of those directors to the company's affairs.

8. The offer of facilities to the company was set out in a letter of the 31st January 1978. It was intended to list all the facilities that were going to be granted by Mr. Langley but an error was made because the Tai Wo Hau Estate facility was omitted. So far as the facilities that were mentioned are concerned, the sentence appears "As additional security to cover the advances, we would require" and then there are 3 matters set out; a Further Charge against the company; a Letter of Undertaking to execute a Further Charge; and a Joint and Several Guarantee from the five directors of the company. The advances referred to in that sentence are set out in the letter. They include, for example, an increase of $2 million on the company's general account; the continuance of facilities in relation to two other accounts, the Ngau Chi Wan Estate account and the Kwai Chung Estate account, $1 million and $½ million respectively; and for the Home Ownership Schemes, a new facility of $5 million. There are others to which I need not refer.

9. There have been a number of submissions made to me about the meaning of that letter. It is suggested by each of the Defendants that that letter offers facilities in relation to the Home Ownership Scheme and that the joint and several guarantee from the directors was to relate to the Home Ownership Schemes only.

10. Those submissions by the Defendants are simply wrong. The letter clearly asked for this security in relation to all the facilities granted to the company. On the wording of the letter there is simply no room for doubt.

11. Consequent upon that offer (which was accepted by the company; the 1st Defendant's signature appears on a copy of that letter returned to the bank signifying his acceptance) a joint and several guarantee form was signed. It is Exhibit P1. As can be seen from that document four directors signed but Mr. Stephen Ho did not.

12. I had evidence about this matter from witnesses from the bank which I accept. The situation was this. Mr. Stephen Ho would not sign the guarantee and although Mr. James Lam had signed he did so reluctantly; after all he was only an employee as well as being a director.

13. It was necessary for the company to have the new facilities if it was to undertake the Home Ownership Scheme Contracts. At the same time it was necessary to have the other facilities which were offered in the letter of the 31st January. After discussion with the bank it was agreed that the bank would not insist upon having a joint and several guarantee from Mr. Stephen Ho and Mr. James Lam but would be satisfied with such from the three Defendants only. After that had been agreed the letter of the 3rd February 1978 was written to the company for the attention of the 1st Defendant. It sets out that arrangement. A fresh guarantee form was sent. (It is Exhibit P2. ) It was signed by the three Defendants. There was only space for three signatures upon it. It bears the date, the 3rd February 1978 although some of the Defendants have raised an issue as to whether that date is correct. Whether that date is correct or not cannot influence any decision of this court.

14. Having been signed by the three Defendants it was returned to the bank and acknowledged in the letter dated the 14th February from the bank to the company signed by Mr. Hornell-Scott, the accountant at the Mongkok BranCh. The agreement made by those who signed it is set out in the document itself. It is quite clear to what the parties were agreeing. It appears in paragraph 1. The company was Tang Tak Son Construction and it is named in the paragraph which reads:-

"We, the undersigned, hereby agree to pay to you (that is the bank) on demand all sums of money which are now or shall at any time be owing to you anywhere on any account whatsoever whether from the Principal solely or from the Principal jointly with any other person or persons or from any firm in which the Principal may be a partner ......"

On the face of it a perfectly straightforward agreement to guarantee the facilities advanced to the company by the three Defendants jointly and severally.

15. Later, the mistake in relation to the Tai Wo Hau omission was discovered. It was brought to the attention of the bank and the bank put it right, asking for necessary security in relation to that matter. It was brought to the attention of the bank by the 1st Defendant on behalf of the company in a letter of the 3rd February 1978 which appear on p. 25. The bank's answer was made on the 8th March 1978 in a letter signed by Mr. Hornell-Scott, the copy of which was returned to the bank signed by the 1st Defendant. It dealt with the overdraft required in he Tai Wo Hau Account and also two other guarantees given on behalf of the company and asked for additional security for those matters.

16. There appears (p.36 of the bundle) a paragraph in that letter upon which considerable reliance is placed by the Defendants. The paragraph reads:-

"Apart from the foregoing, all other terms and conditions as stated in our letter of 31st January 1978 to you remain unchanged. ".

At the end the company was asked to return a copy of the letter as the company's understanding and acceptance of the terms and conditions under which the facilities were granted. The paragraph upon which considerable reliance is placed was repeated in a letter of the 12th April which appears on p.50. There was confirmation of overdraft facilities in relation to the general account and offering overdraft facilities in relation to each of the three Home Ownership Schemes. The details do not matter but again having set those matters out the bank said in the last paragraph: -

"Apart from the foregoing, all other terms and conditions governing your facilities as mentioned in our letter of 31st January 1978 remain unchanged. '".

17. The bank submits that as shown in those documents supported by the evidence of Mr. Langley and Mr. Hornell-Scott the agreement between the bank and each of the Defendants is clear beyond a peradventure that the offer was made in relation to all the advances made to the company. The bank originally asked for joint and several guarantees from all the five directors but because one director would not sign and another was reluctant about his undertaking, it agreed to reduce the number of joint and several guarantors to the three Defendants. That was agreed upon and the three Defendants signed the joint and several guarantee which clearly relates not just to the three Home Ownership Schemes but to all the facilities which the bank was granting. It submits that is an end of the matter for it is proved; that the company has failed and ewes the bank a considerable sum of money far in excess of the joint and several guarantee; the money has been called in and the company has failed to pay and therefore the three Defendants are liable under those guarantees.

18. Let me turn to each of the Defendants. In doing so I wish to make this clear; recognising, as I do, that there are certain difficulties which face those who undertake contracts in a language which is not their native language and the difficulties which the 2nd and 3rd Defendants face in presenting their case to me without legal advice, I have allowed all the Defendants considerable latitude in what they have advanced to the court. By that I mean I have allowed them to advance many matters which are strictly irrelevant to a proper consideration of this case and to the issues involved. I have done that out of a measure of excessive caution so that if there was any matter which they raised which I could see (or indeed which Mr. Lim as counsel for the 1st Defendant could see) might have a bearing upon the validity of these joint and several guarantees it could then be ventilated.

19. The 1st Defendant admits that he signed the guarantee concerned in this case, (that is the one dated the 3rd February (Exhibit P2)) but he contends as do the others that the guarantee related only to the Home Ownership Schemes and that was his understanding.

20. I am going to digress a little. Of course, the reason why the company approached the bank for additional facilities which led to these joint and several guarantees being signed was in particular to obtain facilities so that the Home Ownership Schemes could be completed. It may be that being the primary purpose these three Defendants have persuaded themselves that their guarantees should be limited to those accounts. It may be that was said in discussions between themselves; it may be that the company secretary indicated to them that was his view of the matter before they signed. None of these Defendants nor the company secretary can ever be an agent for the Plaintiff bank in this case. If that is the view they took they were totally in error.

21. In fact, I do not believe at the time when they signed this guarantee that they did take that view. They are individually extremely intelligent people; they all had advice available to them if they wished to take it; the documents are absolutely clear in their meaning and so even if there was not a full understanding of English there is really no room for a mistake. Even if the Defendants now consider that their signatures on the guarantee related only to the Home Ownership Projects and the guarantee related only to those accounts, I do not believe they took that view at the time when they signed. I totally reject their account in relation to that matter.

22. Let me turn then particularly to the 1st Defendant's case. Apart from the point with which I have dealt, his case is this; that on the 8th of March or shortly afterwards when he received the letter from the bank dealing with the Tai Wo Hau Acccount and two other guarantees and saw the paragraph which I have read out referring to the other terms and conditions being as stated in the letter of the 31st of January, he says that he was surprised. Because he was used to considering the detailed wording of letters in his business, (he referred to variations of contracts) he was led to believe that they, the company, would have to stick to the terms of the letter of the 31st. In particular what he had in mind was the bank's requirement in that letter that the joint and several guarantee should be signed by five people, the five directors. So he says he went to see Mr. da Roza. Mr. da Roza was Mr. Hornell-Scott's number 2 in the Accounts Department of the Mongkok Branch. The 1st Defendant says that he was used to dealing with Mr. da Roza, he would speak to Mr. da Roza who was representing the bank and Mr. da Roza would speak to the bank on his behalf and Mr. da Roza was easily available to him because their offices were across the road one from the other. He arranged to go and see Mr. da Roza and he says he asked Mr. da Roza why was there a correction to go back to the terms and conditions in the letter dated the 31st of January. Mr. da Roza, he says, told him that the overdraft ceiling had been increased on the Tai Wo Hau Account and because the Tai Wo Hau Account was now included and also there were guarantees for the two Electric Companies the bank was asking again for the guarantee to be signed by five persons. His contention is that an agreement was made with Mr. da Roza that the bank now required five signatures and therefore the guarantee already signed (Exhibit P2) was at an end. It is agreed that nothing happened thereafter to indicate that the bank were asking for more signatures or a new joint and several guarantee. The 1st Defendant says that he chased up Mr. da Roza once or twice but did not hear anything further. He says that he told the other directors that another form would have to be signed because the overdraft limit had been increased.

23. I leave aside the question whether that discussion could possibly have been an agreement to consider whether I accept what the 1st Defendant says about this meeting with Mr. da Roza. It is of considerable importance in considering whether I accept him first, that there was no suggestion by him in any correspondence with the bank either at the time or since that such a conversation took place; second, after this claim was brought there was no such suggestion by him either in correspondence or in any pleadings (and he has been represented by solicitors since December 1984. ); third, he signed prepared minutes dated the 18th of March 1978 and the 10th of April 1978 which set out the joint and several guarantee dated the 3rd February 1978 signed by the three Defendants as part of the security of the bank without any proviso. Those were documents which were prepared on the instructions of the bank. Also, later there was considerable correspondence between the bank and Samuel Montagu & Co. Ltd. At no time in any of that correspondence was it ever suggested that there had been an agreement to this effect between the 1st Defendant and Mr. da Roza. (Digressing for a moment I wish to make it clear that although there are statements in that correspondence in which Samuel Mortagu writing on behalf of the 1st Defendant accepts that the 1st Defendant is liable under the guarantee, I do not take that into account in any way in my decision. But it is of some importance that in that considerable amount of correspondence no suggestion is made that there was any agreement between the 1st Defendant and Mr. da Roza. )

24. I am driven in the light of these matters to reject entirely the 1st Defendant's account of having made some kind of agreement with Mr. da Roza. It is not necessary in the circumstances to decide whether such agreement if made would have had any legal force. I only say that it would have been very difficult to persuade me that such agreement would have had any legal force.

25. The next question I am going to consider is whether those statements in the letters (p.36 and at p.50) where the bank referred to all other terms and conditions in their letter of the 31st of January 1978 remaining unchanged have any kind of effect upon the validity of the joint and several guarantee. All the Defendants rely upon this point. As an argument that the bank were thereby going back on the clear agreement that they had made with the three Defendants in Exhibit P2, (the guarantee signed by the three of them after the bank's letter of the 3rd of February) the point is simply untenable. The bank are referring back in correspondence to those terms and conditions but so far as the guarantee was concerned there had been in my judgment a clear variation of what was set out in the letter following the receipt of the letter and the happenings that I have already described. The arguments in relation to this matter I entirely reject.

26. I turn to the 2nd Defendant.

27. In addition to matters I have dealt with he says that he cannot remember which of the two guarantee documents he signed first but he says that at all times he was under the impression that it was necessary for all 5 directors to sign. He says that he signed a second one because Mr. Lau, the company's secretary, came to him and said that because of some error in relation to the first one it had to be signed again. He says that he never saw the letter of the 3rd of February. He has considerable reservations as to whether the date is correct. He even has gone as far as to say that he has some doubts as to whether the bank sent it.

28. Put in legal language he is saying this; that any agreement that he personally made with the bank was subject to the condition precedent that all five directors would sign. Well, that is an account which I reject. He is clearly an intelligent man. He has conducted his defence here in court with great skill and he has put the points he wishes to make with force and (I add) with great courtesy as well. But he would see in the drafted minutes to which I have referred dated the 18th of March 1978 and the 10th of April 1978 reference to the joint and several guarantee as being part of the security and the joint and several guarantee signed by only three.

29. I don't accept for a moment that he did not know exactly what he was doing and exactly what he was signing when he signed Exhibit P2 on or about the 3rd of February 1978. It is to be noted also that on 9th January 1984, he wrote a long letter to the Plaintiff setting out why he should not be held liable under the guarantee. On p.105 paragraph 5 he said this (He was cross-examined on it and the point was made by Mr. Bleach);

"Actually before I signed as a guarantor it was explained to me by my brother and Mr. Eric LAU Kwok-hung, the the Accountant/Financial Controller, that my signature was only to 'push' the matter of financial credit arrangement to success. Since I did not want to foil my brother's (TANG Kar-hung) business endeavours, I signed. "

30. It is clear to me that he knew exactly what he was signing.

31. The 3rd Defendant made the same point about the necessity for 5 signatures. In legal language she says the same about there being condition precedent to the validity of the guarantee. She says that she would not have been so silly as to sign unless the others were going to sign because she knew that Mr. Stephen Ho was intelligent; he came from a good family; he was well-educated; he was running his own businesses and she thought that if he would sign she would be safe to do so and she certainly would not have signed if she had known that he was not signing.

32. I am afraid to say that I cannot accept her evidence on that matter. She also saw the minutes drafted by the bank which set out the nature of this security. Later she raised no point about it. In her letter to the bank on the 28th November 1983 she never raised any question as to the necessity for there being 5 signatures on the document before it became effective. In 1979 both the 2nd and 3rd Defendants went to the bank with Mr. Chiu, their then solicitor. They went to make inquiries about the situation in relation to the guarantee they had signed. They saw Mr. Hornell-Scott and the documents were shown to them. They were shown a copy of Exhibit P2 signed by them and the 1st Defendant. It was long time ago and Mr. Hornell-Scott found it very difficult to remember the details of what was said. According to the 3rd Defendant when she was shown the documents she raised the question about whether there should not have been 5 people signing and she discussed this with him. Again I reject her evidence about that. If that was a matter which was of importance to her at that time then she would have raised it in correspondence earlier than she did.

33. I now deal with a matter which is out of context. She says that she left the meeting with the impression that Mr. Hornell-Scott was agreeing that the guarantee only related to the 3 Home Ownership Projects. Mr. Hornell-Scott said that whatever else he said at that meeting he could not have said anything of the kind. To be fair to the 3rd Defendant she said that she cannot remember anything being actually said to her about it.

34. Those are the main matters raised by the Defendants.

35. In passing, the 2nd Defendant made some allegations about the bank's solicitors as to the way in which they had drafted the minutes of the company meetings saying that as those solicitors were also solicitors for the company they had not protected his interests as they ought to have done. That, in so far as it is an allegation against the solicitors, is totally without foundation.

36. Having regard to the findings that I have made about the way in which the guarantee came into existence there were also suggestions that the bank had been negligent in not communicating direct with the individuals who were signing the joint and several guarantee. Again, this is an allegation which I reject. Each of them were directors of this company and had been directors for many years. It was perfectly in order for the bank to send the forms for their signatures to the company.

37. I am not going to leave this matter without a word about the background and the way which these 3 signed. The situation in this case is one which arises not infrequently. At the time when there is much confidence and directors have much confidence in their firm and they want further money from bankers, they sign joint and several guarantee making themselves personally liable. They do so knowing exactly what they are doing, but not believing that at any time in the future those guarantees will be called in. Later realizing how silly they had been to make such an agreement they very much regret what they have done. This case is such a case. If lawyers are consulted they would rarely advise anyone to sign such a document but in the end it is a matter for the individual who can make such contracts as he or she wishes.

38. In the result the Plaintiff's claim succeeds. It is an overwhelming case. The defences advanced by each of the defendants are misconceived and the factual basis upon which they seek to base them I reject.

39. In the result therefore there must be judgment in the sum of $5 million with interest at the rate of 16% from the 4th of September 1984 to today and thereafter at judgment rate. So far as the figures are concerned and the amount of the best lending rate at the date when it starts I will give liberty to apply.

40. The counter-claims are dismissed.

41. Having regard to the allegations that are made in the defences of the 1st Defendant and the other defendants, and my decision on the facts; and those allegations made in the pleadings which have not pursued in evidence, I regret to say this is a proper case in which the costs should be ordered on a common fund basis.