THE WING ON FINANCE CO. LTD. v. STEPHEN LAM SOU WING

1985, No. A7516

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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J U D G M E N T

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1. The plaintiff's claim against the defendant is based on a continuing guarantee dated the 11th December, 1980 signed by the defendant and another, who is not a party to these proceedings, guaranteeing inter alia "all advances and/or credit granted by the plaintiff to Whitehall Finance Limited (hereinafter referred to as 'Whitehall') to the extent at any one time of $5,000,000.00". It seeks to recover from the defendant a sum of $840,568.72, inclusive of interest at the rate of 12.25%, being the unpaid balance of the indebtedness due and owing by Whitehall of an advance made to it of $3,00,000.00, as at the 31st October, 1985, after taking into account the total dividends which the plaintiff had received on the 40,000 shares of Hang Chong Investment, Ltd. pledged by the defendant to the plaintiff as further security for his "due performance" of the guarantee, interest paid by the plaintiff on such dividends at the rate of 12.25% and the proceeds of sale of those shares at $71.00, such payment's being respectively appropriated first towards wiping out the accrued interest on the amount of the advance to Whitehall and the balance towards part payment of the principal amount. In addition the plaintiff also claims further interest accruing on the unpaid balance at the rate of 12.25% per annum.

2. Learned Counsel for the defence abandoned the issue of misrepresentation raised in para. 4 of the amended defence and counter-claim, so that the substantive defence is that Whitehall, having been wound up by Court Order on the 28th January, 1983, by virtue of Clause 7 of the guarantee the defendant was liable to the plaintiff "at most to the extent of $3,006,045.16 which was the amount due and owing by Whitehall to the plaintiff at the date of the winding-up order" -para.5 (v) of the defence. The defendant maintained that as the proceeds of sale of the pledged shares together with the dividends collected by the plaintiff and the interests accrued on the said dividends amounted to $3, 148,197.50, his liability under the guarantee was extinguished. Further, the defendant maintained that there was never any agreement between the parties as to the payment of interest. In his counter-claim the defendant seeks an account and payment of the " amount held by the plaintiff in excess of the amount of liability of Whitehall immediately before its insolvency after the realisation of the pledged shares."

3. In its reply to the defence and counter-claim, the plaintiff maintained that under the terms of the guarantee the defendant's liability included also the payment of interest, which is mentioned in its letter of the 27th November, 1982 and subsequent letters, including the Deed of Pledge.

4. The issues framed by the parites were: first, whether the guarantor is liable for interest accruing after the bankruptcy or insolvency of Whitehall; secondly, whether the rate of interest should have been a flat rate of 12.25% throughout from 4th January, 1983 until now.

5. The consideration for the guarantee is stated thus:

"........ in consideration of your from time to time making advances to or coming under liabilities or discounting bills or otherwise giving credit or granting banking facilities or granting time to or on account of Whitehall Finance Limited. ......"

6. In so far as are relevant, the other clauses mentioned in pleadings and argument he fore me are:

Clause 1 - "The Guarantor will pay you on demand and hereby guarantees repayment to you on demand of all sums of money which now are or shall hereafter become due to you from the Principal ....... together with all interest, costs, commission and other banking charges and expenses which you may in the course of your business as bankers charge against the Principal and all costs, charges and expenses which you may incur in enforcing or obtaining payment the sums of money due to you from the Principal...... ."

Clause 2 - "The guarantee shall continue in force and be a continuing guarantee (subject to such notice of withdrawal as is hereinafter mentioned) to the extent at any one time of HK$5,000,000.00 (Hong Kong Dollars Five Million Only) in addition to such further sum for interest thereon and other banking charges in respect thereof and costs and expenses as shall accrue due to you within six months before or at any time after the date upon which payment shall be demanded by you from the Guarantor or any one or more of the persons constituting the Guarantor and shall (subject to the aforesaid maximum limit of the liability of the Guarantor) be applicable to the whole ultimate balance that may become due to you from the Principal either alone or in conjunction as aforesaid and not merely to a portion coextensive with the amount of the said limit. "

Clause 7 -"The bankruptcy or insolvency of the Principal shall not affect or determine the laibility of the Guranator under this guranatee but such liability shall continue in full force and effect until you shall have been repaid all monies due to you from the Principal immediately before the bankruptcy or insolvency of the Principal."

7. It is not disputed that on the19th November, 1982 the plaintiff wrote to Whitehall:

"We refer to the overnight funds of HK$3,000,000.00 made available to your company on November 16, 1982 and shall he pleased if you will settle the principal amount together with interest thereon amounting to HK$3,006,045.16 by return post. Interest is calculated @121/2% p.a. from November 16, 1982 to November 22, 1982. "

8. On 27th November, 1982, the plaintiff wrote to the defendant and the co-guarantor, forwarding a copy of its letter to Whitehall and stated:

"As the said company did not settle the principal and interest as demanded in our said letter to them, notice is herevy given to you to repay the same immediately pursuant to the terms of the Continuing Guartantee dated December 11, 1980, a copy of which is also enclosed for you reference.

9. This without doubt was the first demand that was made of the defendant for repayment of the amount mentioned in the plaintiff's letter to Whitehall, which clearly stated the rate of the interest.

10. On the 28th January, 1983 Whitehall was wound-up, and on the 11th February, 1983 the plaintiff filed its proof of debt in the sum of $3,024,164.38 being the

"outstanding principal amount of loan in the sum of HK$3,000,000.00 together with interest thereon as from 4/1/1983 to 28/1/1983 (24 days) in the sum of HK$24,164.38. ie. at the rate of 121/4% p.a."

11. On the 22nd April, 1983 the defendant deposited with the plaintiff, his 40,000 shares in Hang Chong Investment Co. Ltd. with instrument of transfer and bought and sold note(s) thereof in blank duly signed by him and attested as "security for the due performance on the part of LAM to be observed and performed under the said continuing Guarantee"; the pledge of the shares being subject to the terms and conditions set out in the Deed of the Pledge.

12. On the 28th March, 1984 the plaintiff wrote to the defendant concerning the guarantee, advising him that on the 19th March it had received a dividend amounting to $160,000.00 on those shares, the net dividend after deduction of the handling charges being $159,200.00. The letter continued:

"As the liabilities due from Whitehall to us remain outstanding to the extent of $3,442,796.38 as at 19th March 1984 being as to principal in the sum of $3,000,000.00 and accrued interest amounting to $442,796.38, we propose to apply the dividend received on the said shares towards partial settlement of the accrued outstanding interest on the liabilities due from Whitehall to us. In this respect, please confirm your agreement to the application of the dividend on the said shares for the purpose and in manner aforesaid by signing and returning copy of this letter to us. "

13. The manner in which the defendant was required to signify his agreement is stated at the end of the letter as follows:

"I, Lam Sou Wing Stephen, hereby confirm that I agree to have the dividend received by your company on the 40,000 shares of Hang Chong Investment Company Limited pledged by me to your company applied towards partial settlement of the accrued outstanding interest on the liabilities due from Whithall to your company. "

14. This the defendant did not do and in the plaintiff's next letter of the 12th April, 1984 there is reference to a telephone conversation between the parties as a result of which the plaintiff decided not to apply the net amount of the dividend towards partial settlement of the outstanding indebtedness of Whitehall; instead it decided to exercise its rights under Clause 3(d) of the said Deed to continue to hold the dividend as "further security against the indebtedness of Whitehall Finance Ltd, and/or your liabilities to us under the said joint and several guarantee", without prejudice to its rights to so appropriate the dividend as and when it deemed fit. Again, the defendant was asked to confirm his agreement by signing the following:

"I, Lam Sou Wing Stephenm, hereby agree to have the dividend received on the shares mentioned above treated as further security against the indebtedness due from Whitehall Finance Limited and/or myself to the Wing On Finance Company Limited on the basis and subject to matters above-mentioned. "

15. Again the defendant did not give any such confirmation.

16. On the 25th March, 1984, the defendant filed his proof of debt for $3,006,045.16, attaching a copy of the plaintiff's letter of demand of the 27th November, 1982. The Liquidator advised him to furnish evidence of the discharge of his guarantee and also notice of subrogation form the plaintiff.

17. There the matters rested until the 12th July, 1985 when the plaintiffs solicitors wrote to the defendant, stating Whitehall's indebtedness "due and owing" to the plaintiff as at 1st July, 1985 at HK$3,914,219.19 "together with interest accruing thereon at the rate of $1,006.85 per day being 12.25% per annum". After adverting to the guarantee and the Deed of Pledge, the solicitors demanded repayment of the said amount together with the accruing interest as aforesaid within 14 days, failing which the plaintiff threatened to take legal steps, including but not limited to exercising its right to sell the shares pledged with it.

18. On the 26th September, 1985, the plaintiff's solicitors again wrote to the defendant. This letter is headed "without prejudice" but was disclosed during discovery and is agreed by both sides. It referred to certain meetings between the parties, particularly one on the 2nd August, 1985 at which the defendant was said to have agreed to effect the sale of the shares towards partial settlement of the "current liabilities" of the defendant to the plaintiff. It referred to the defendant seeking the plaintiffs approval to the sale of those shares to a potential buyer @$70.00, and continued:

"Having now taken our client's instructions, we are informed that our clients may be able to effect the sale of the pledged shares to another intended purchaser for the price of $71.00 per share. In the circumstances, we are instructed to inform you that in an entirely without prejudice basis, our clients are prepared to enter into the following arrangements with you:

(1)    Our clients shall effect the sale of the said shares, with your specific consent thereto as hereinafter mentioned, for the price of $71.00 per share.

(2)    The proceeds of sale less all handling and other charges including stamp duty etc shall be applied towards partial repayment of the outstanding indebtedness due and owing by Whitehall Finance Ltd. to our clients and guaranteed by you ('the outstanding indebtedness') which is currently accruing interest at the rate of 12¼% per annum.

(3)    For your information the total amount of the outstanding indebtedness as at 15th September, 1985 is $3,990,739.74 together with interest thereon accrued at the rate aforesaid.

(4)    The dividend received by our clients on the pledged shares has throughout been held by our clients as additional security for the outstanding indebtedness. The total amount of such dividend payment received by our clients in or about April 1984 and subsequently in April 1985 is $318,400.00. As soon as we receive your confirmation of your agreement to matters herein set out, our clients will apply the said sum of $318,400.00 together with interest thereon at the rate hereinafter mentioned towards partial settlement of the outstanding indebtedness.

(5)    Subject to your confirmation of your agreement to matters herein set out, our clients will be prepared to pay interest on the said dividend received by them totalling $318,400.00 at the rat of 12¼% per annum as from the respective dates that such dividend was received by our clients until the date that the same shall be applied towards partial settlement of the outstanding indebtedness.

(6)    Any balance of the outstanding indebtedness shall accrue interest at the rate of 12¼% per annum (subject to fluctuation at our client's discretion) and shall be repayable by you to our clients on demand.

In the event that you should agree to the arrangements concerning the disposition of the pledged shares and the dividend thereon received by our clients in the manner as herein set out, we shall be obliged if you will confirm your agreement here to by signing and returning copy of this letter to us. ''

19. The confirmation of the agreement which the plaintiff sought from the defendant and was given by him the same day, ie. the 26th September, 1985, is set out at the bottom of the letter in the following terms:

"I, Stephen Lam Sou Wing, hereby agree and accept the arrangements for the disposition of the pledged shares and the dividend thereon held by you in the manner as set out in this letter. "

20. Those shares were sold by the plaintiff at the rate of $71.00 for a total of $2,840,000.00 of which a sum of $10,202.50 by way of stamp duty was debited to the principal amount of the advance.

21. A sub-accountant of the plaintiff - P.W. 1 - prepared a comprehensive statement of account (EX.P2) of the indebtedness of Whitehall which was for the benefit of the solicitors who had been instructed in the matter. She said that simple interest was charged, and the statement of account prepared on the basis of the common practice of the bank that interest was to be paid before the principal. Ex.P2 indicates that as at 1st October, 1985 the total interest that had accrued since 4th January, 1983 amounted to $1,007,856.18. On 2nd October, an amount of $358,216.96, representing the dividend of $318,400.00 on the shares and interest of $39,816.96 thereon, was credited towards the accrued interest, which was thus reduced to $649,639.22. Furhter interest accrued for the next seventeen days until the 18th October, amounting to $17,116.44, bringing the total accrued interest to $666,755.66. And on the 19th October, the position of the account appearing in Ex.P2 stood as follows:

22. On 2nd November, 1985 the plaintiff's solicitors demanded the balance of the amount of $840,568.73 (which was amended during the hearing to $840,568.72) due and owing by the defendant as at the 1st November 1985, together with interest.

23. On 11th April, 1986 an officer of the plaintiff filed an affirmation in the winding-up proceedings, to the effect that out of the money obtained from the defendant a sum of $2,163,041.84 had been applied towards partial repayment of the principal debt of Whitehall.

24. On 9th July, 1986 the defendant put in an amended proof of debt for the ''guarantee amount plus interest up to the date of winding-up" in the sum of $3,045,308.25.

25. The last document that I should mention is the Liquidator's letter dated 13th August, 1986 to the plaintiff, enclosing a schedule showing the detailed calculations, and informing the plaintiff that its claim "in respect of the Hong Kong Dollar Fixed Deposit with the company dated November 22, 1982 has been admitted to rank as an unsecured debt in the sum of $3,050,184.60 and HK$23,451.23 has been admitted to rank as a deferred debt.

" In continued:

"However, in view of the fat that you have recovered a total amount of HK$3,188,014.46 from the proceeds of sale of the shares pledged under a Deed of Pledge dated April 22, 1983 granted by Mr Stephen Lam Sou Wing, you are invited to withdraw your claim and subrogate your rights to the admitted debt in favour of the surety........"

On the 26th November, 1986 the plaintiff's solicitors drew the Liquidator's attention to Clause 8 of the guarantee whereby to Guarantor was "not entitled to be subrogated until our clients shall have received the entire principal amount due from Whitehall to our clients. "

26. It is not disputed that this was a continuing guarantee, which is expressed to be a guarantee for the whole of the principal debtor's obligations, followed by Clause 2 limiting the defendant's liability to a named sum in addition to interest and other bank charges.

27. It it trite that the extent of a surety's liability under a guarantee is essentially a matter of contractual interpretation, and where the provisions of the document under consideration are clear, effect will be given to those provisions.

28. It is also recognised that in certain cases, a surety may be discharged by an alteration in his position or the position of the principal debtor that is caused by operation of law, but the right of a surety to receive a discharge, whether or not by way of the release of the principal debtor, may be precluded by the express terms of the guarantee itself. Thus in Perry v. National Provincial Bank of England, (1910) 1 Ch. 468, Sir Cozens-Hardy, M.R. said at p.471:

"This is a curious case arising out of the law of principal and surety. It is important to distinguish clearly between the rights of a surety under an ordinary contract of suretyship not containing any special provisions and the right of a surety where the instrument creating the suretyship contains certain special clauses. It is elementary law that in a simple case of principal and surety the surety is discharged if the creditor gives time to the principal or does certain other acts; and a fortiori, if the creditor releases the principal debtor, of course the surety is released too. There are a certain number of acts which will not release the surety if, when the act in question is done, there is a reservation of rights against the surety. A common instance of this is giving time. When you find in the instrument of suretyship itself a provision that the surety shall be liable notwithstanding certain acts being done by the creditor which would otherwise release him, these doctrines have no application at all. It is not then a simple contract of suretyship. It is true that in one sense it is a contract of suetyship but it is a contract of suretyship containing special clauses which deliberately exclude certain rights which the surety would otherwise have had. "

29. It follows therefore that where the change in position is of a sort that must have been in the contemplation of the parties, there will be no discharge. Thus, a surety may agree in advance to remain liable though the debt of the principal debtor be discharged by other means than payment as, for example, by composition or insolvency.

30. Learned Counsel for the defendant, relying principally on Clause 7 of the guarantee, submitted that the defendant's liability crystallised or was discharged immediately before the bankruptcy or insolvency of the principal debtor. He argued that his liability was discharged on the 31st December, 1982, that being the date on which the petition of winding-up was gazetted, on which basis the amount outstanding was $3,000,000.00 which was due on the 16th November, 1982, plus interest form that date for 45 days to the 31st December amounting to $45,308.25 as set to in the defendant's amended proof of debt. Mr Allan submitted that as such the defendant had in fact overpaid.

31. For the plaintiff, Mr Suffiad said that the defendant was relying on a part only of Clause 7. He pointed out that whereas Clause 1 referred to

" all sums of money which now are or shall hereafter become due...........together with all interest...........",

32. Although it was not specifically mentioned during submissions, I may refer to s.32(4) of the Bankruptcy Ordinance (Cap. 6) which expressly provides that the discharge of a bankrupt does not affect the liability of any person who at the date of the receiving order was a surety for him. The reason for this is stated in the Modern Contract of Guarantee by James O'Donovan (1985 edn.) at P.232 as follows:

"The judicial explanation of why a discharge in bankruptcy does not operate to discharge the guarantor is that, although the discharge extinguishes the personal obligation of the principal to pay, the obligation continues to exist as a source of right to obtain payment out of certain assets of the debtor which were acquired or which devolved upon him prior to his discharge. The practical reason is that to release a guarantor in this situation would be to defeat the very purpose for which the guarantee was taken - the possible insolvency of the principal."

33. This general principle regarding discharge in bankruptcy or liquidation is subject to the effect of particular provisions in the guarantee. As already seen, the defendant guaranteed "repayment" on demand of "

all sums of money which now are or shall hereafter become due.........together with all interest........".

34. In In re FitzGeorge; Ex parte Robson (supra), the guarantee was for the regular payment of the interest in respect of a debenture until repayment by the company of the principal sum. The company having been wound up and dissolved, it was held that the fact that the debtor had ceased to exist did not release the guarantor form liability for interest, apparently on the ground that he had promised to pay interest until repayment of the principal sum.

35. In In re Moss; Ex parte Hallet, (supra), a guarantor, who did not guarantee repayment of the principal debt, joined with the debtor in giving a joint and several covenant to pay interest so long as any principal money remained due. The debtor became bankrupt and the creditor proved in the bankruptcy for the principal sum. It was held that the fact of a receiving order having been made in bankruptcy prevented any principal money form being any longer due from the debtor, and that therefore the guarantor came under no liability to pay interest as from the date of the receiving order; and so could not prove in respect of any such liability. In so far as reliance is placed by the defendant on this case, I may refer to the Australian case of Gutherie And Another v. Motor Credits Ltd. (1963) 37 A.L.J.R. 167 where a similar submission was made, Kitto J. said at p.168:

"Then there was some argument on the terms of the guarantee itself. Clause (1), as I have said, contained a general guarantee, guaranteeing moneys which were already due and owing and moneys which thereafter should become due and owing. It was said, that after the moneys now sued for had become due and owing, Auto Engineers Pty. Ltd. went into liquidation, so that thereupon any debt owing by it could not be enforced. On the authority of the case of Re Moss; Ex part Hallet. (1905) 2 K.B. 307, at p,312, it was said that therupon the guarantee ceased to have any application. The case does not support that proposition because the guarantee we have before us applies not so long a debt which has become due and owing continues to be due and owing, but whenever any debt becomes due and owing. The debts here sued for did become due and owing. They are therefore covered by the guarantee and the fact that liquidation of the principal debtor supervened is immaterial."

36. With respect this decision commends itself to me. Likewise I find the case of Bank of Adelaide v. Lorden, (1979) 45 A.L.J.R. 49 of great presuasive value. It dealt with the liability of a surety under a clause reserving the rights of the creditor in the event of composition by the debtor. At p.57 Walsh, J. elucidates the position of the surety in simple terms which, with due respect, is capable of being adapted and applied to that of the defendant in the instant case as follows. In so far as this guarantee was not merely a promise to pay upon demand whatever amount should be at the time of the demand due and payable by Whitehall, the promise extending (subject to the limit aforesaid) to all the company's debts and interest on them until repayment, Clause 7 had the effect that as between him and the plaintiff, the defendant continued to have the same liability to the plaintiff as he would have had if Whitehall had not been wound up. This would mean that he would be liable not only in respect of what was due by Whitehall when the order for its winding up was made, but also what would have become due by Whitehall for interest after that date if the winding up order had not been made.

37. Learned Counsel for the defendant further sought to rely on the proof of debt filed by the plaintiff to the extend that, because there the plaintiff had restricted its claim for interest up to the date of the winding up order and not thereafter, this relieved the guarantor form any subsequent liability for interest. With respect I find this argument supurious in view of s.71(1) of the Bankruptcy Ordinance. In any case, it is elementary as already stated that the extent of a surety's liability under a guarantee being essentially a matter of contractual interpretation, the proof of debt filed under the provisions of the relevant law cannot properly form the basis of such contractual rights and obligations.

38. It was argued for the defendant that in giving confirmation of his agreement to the various matters set out in the "without prejudice" letter of the plaintiff's solicitors dated the 26th September, 1985, the defendant had not agreed to pay further interest that accrued at the rate of 12.25% on any balance that remained unpaid after the disposition of the shares. Even if I were to hold in the defendant's favour on this issue, I do not see how such lack of his agreement to paragraph 6 of that letter would supersede or nullify his express contractual agreement under the terms of the guarantee to pay such interest as the plaintiff would raise by virtue of Clause 1 of the guarantee.

39. As I view Clause 7, there the surety had himself contracted that the rights under the guarantee should not be affected by any bankruptcy or insolvency of Whitehall and, for the reasons I have attempted to give, in view of such reservation of rights by the plaintiff, the defendant will remain bound and liable to the plaintiff until repayment in terms he had bargained for.

40. My answer to the first issue is in the affirmative.

41. For the second issue, it is clear that in Clause 1 st plaintiff was permitted to raise such interest as it may in the course of its business as bankers charge against Whitehall. The defendant was made aware of the rate of interest which the plaintiff had so charged in its first demand made of the defendant, and thereafter in the various subsequent communications as quoted above. There is nothing to indicate that the defendant had ever at any time objected to or remonstrated upon the interest so charged at the rate of 12.25%. I have no hesitation in reaching the conclusion that in all the circumstancses the defendant had acquiesced and indeed accepted that rate of interest. The plaintiff has throughout proceeded on the basis of charging simple interest on a daily basis on so much of the principal amount as remained unpaid; and in my judgment the plaintiff is entitled to such interest at the rate of 12.25% as claimed.

42. My answer to the second issue is also in the affirmative.

43. There will be judgment for the plaintiff in $840,568.72 with accrued interest thereon at the rate of 12.25% from 4th January, 1983 until repayment, with costs. The defendant's counterclaim is dismissed with costs to the plaintiff.