GUANGZHOU FINANCE COMPANY LTD v. CHUNG KIN HOLDINGS COMPANY LTD AND OTHERS

HCA 2815/2016

[2023] HKCFI 2398

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2815 OF 2016

________________________

BETWEEN

________________________

________________________

J U D G M E N T

________________________

A. INTRODUCTION

1.  This is a debt recovery claim of the plaintiff (“GF”) against the 1^st defendant debtor (“CK”), and against the 2^nd and 3^rd defendants who are guarantors of CK’s debt (respectively “D2” and “D3”). The core dispute turns on limitation.

2.  It is GF’s case that the debt is not time-barred because, within 6 years before this action, CK had twice acknowledged the debt in writing and partly repaid its indebtedness. The Guarantors are liable under a 1998 Guarantee; alternatively, for a lesser sum under a 1996 Guarantee.

3.  CK denies the alleged acknowledgements and part payment. The Defendants’ case is that all the claims are time-barred. Further, it is D2 and D3’s case that they have been discharged under the Guarantees due to agreement, frustration, or material change of indebtedness.

B. UNDISPUTED FACTUAL BACKGROUND

4.  The facts in this section are taken from the helpful summaries of counsel on both sides.

B1. Parties

5.  GF and CK are companies incorporated in Hong Kong. Both D2 and D3 are and were the directors and shareholders of CK.

6.  Ming Guang Industrial Co Ltd (“MGI”), Poly Wood Holdings Ltd (“PWH”), and Poly Wood Investment Ltd (“PWI”) (collectively “Associated Companies”) were associated companies of CK, with D3 and his wife being directors and shareholders. D2 has no interest in the Associated Companies, which had been dissolved.

B2. Investment loans: the 1996 Agreement and the 1996 Guarantee

7.  From 1995 to 1997, CK and the Associated Companies had borrowed substantial loans from GF and GF’s parent company, Guangzhou International Trust and Investment Corporation (“GZITIC”). A Mr Lin Song represented GF in all of the loan agreements prior to September 1997.

8.  The loans included the sum advanced by GF to CK under the following circumstances:

(1) On 12 June 1996, GF and CK entered into an investment agreement titled “有關廣州越中房地產發展有限公司之合作投資協議” (“1996 Agreement”) under which GF agreed to invest a sum of HK$484,140,000 into a “中建廣場項目” (the “CK Mall Project”). The CK Mall Project was a joint venture between CK and another state-owned company called “廣州市越秀區北秀實業有限公司” (“Chinese Party”) for the development of a property in Guangzhou to be named “中建廣場” (“CK Mall”). CK was to provide the capital for the construction of the CK Mall, whereas the Chinese Party was to provide the necessary land use rights in Guangzhou. CK and the Chinese Party would each be entitled to a 60% and 40% interest in the CK Mall Project respectively.

(2) By virtue of the 1996 Agreement, as a funder, GF was to obtain 83.3% of CK’s interest in the CK Mall Project.

(3) The 1996 Agreement provided that if the development of the CK Mall was not completed by 1 June 1998, CK would have to repay to GF HK$484,140,000 within 7 days thereof with interest at the rate of 15% per annum accruing from the date of the advancement of the investment principal. D2 and D3, being the two directors of CK, shall execute a guarantee in favour of GF to guarantee the obligations of CK under the 1996 Agreement.

(4) On 12 June 1996, D2 and D3 duly executed a guarantee titled “有關與中建集團有限公司的合作投資資金達HK$484,140,000之擔保書” (“1996 Guarantee”).

9.  On 31 August 1998, 4 acknowledgments were executed, under which the respective borrowers acknowledged and admitted that they still owed to GF or GZITIC the following debts (“1998 Admission Agreements”):

Debtor	Creditor	Amount owed
CK	GZITIC	RMB228,629,943
CK	GF	HK$504,236,661.36
MGI	GF	HK$10,763,303.28
PWH & PWI	GF	• HK$92,820,108.01 • HK$113,865,757.32 • HK$8,839,207.94
		Total: HK$944,197,881.84[1]

10.  At this point, the various debts were still owed by individual companies to either GF or GZITIC without consolidation.

B3. Consolidation of loans: 1998 Agreement and 1998 Guarantee

11.  By 1 June 1998, CK Mall had not been completed. Both GF and GZITIC were keen to transform the debts into gainful assets.

12.  Thus, on 10 October 1998, GF and CK entered into an agreement titled “關於廣州越中房地產發展有限公司的權益轉讓協議” (“1998 Agreement”). It took the form of a sale and purchase of CK’s interest in the CK Mall Project to GF for a consideration of HK$944,197,881.84, which would fully settle the indebtedness of CK and the Associated Companies under the 1998 Admissions.

13.  On the same day, D2 and D3 executed a guarantee (“1998 Guarantee”) to guarantee CK’s obligations under the 1998 Agreement.

B4. Assignment of 2004 Arbitral Award and share transfers

14.  CK was unable to perform its obligations under the 1998 Agreement, because the land on which CK Mall was to be built was unconditionally surrendered to the government by the Chinese Party on 24 May 2000. So CK commenced arbitration against the Chinese Party for compensation (the “Arbitration”) on 31 August 2001.

15.  D2 and D3 allege that there was an oral agreement with Mr Lin Song of GF and Mr Li Wing Lun of GZITIC in August 2000 whereunder GZITIC/GF agreed that the 1998 Agreement need not be performed (“2000 Oral Agreement”). This is disputed by GF. In my view, the dispute is insignificant in view of the subsequent 2002 and 2004 Agreements.

16.  On 15 January 2002 and 6 February 2002 respectively, GF and CK entered into two agreements (the “2002 Agreements”). The recitals stated that CK owed to GF the indebtedness in the amount of HK$944,197,881.84 under the 1998 Agreement (“the Indebtedness”). It was agreed that CK shall appoint GF to handle the Arbitration, and that the rights and interests derived from the Arbitration shall be used to repay the Indebtedness.

17.  On 28 March 2004, CK obtained an arbitral award in its favour against the Chinese Party in the sums of HK$189,000,000 and RMB14,620,000, with legal costs of RMB1,380,000 (“2004 Arbitral Award”). The 2004 Arbitral Award also held that:

(1) The resumption of the land by the government was mainly due to construction work having ceased and that the Chinese Party was mainly responsible for the work cessation; and

(2) The unconditional surrender of the land to the government by the Chinese Party had caused loss to CK and the Chinese Party was liable to compensate CK.

18.  On 10 September 2004, GF and CK entered into an agreement (the “2004 Agreement”):

(1) The recital stated that the Indebtedness remained outstanding.

(2) GF noted that the failure to construct CK Mall was not the fault of CK.

(3) CK agreed to assign to GF the rights and interests derived from the 2004 Arbitral Award, subject to setting aside (a) a sum of RMB10,561,852.80 to cover GF’s legal expenses, arbitration fees and the legal expenses to enforce the 2004 Arbitral Award; and (b) a sum of RMB2,500,000 for CK’s urgent cash flow needs (collectively “the Set-Aside Sum”).

(4) A sum of at least HK$191,771,836.98 would be used to set off the Indebtedness. If more money was realized from the enforcement of the 2004 Arbitral Award, the actual sum realized would be applied towards the part repayment.

19.  The details of any enforcement were only made known to the Defendants in the course of this action. According to GF’s pleaded case in the Reply, the following assets were realized on various dates: -

	Date	Value Recovered (RMB)
1	19 April 2006	33,737,563.90
2	3 December 2010	Properties in an aggregate value of 39,921,039.00
3	20 September 2011	Properties in an aggregate value of 68,401,505.00
4	18 June 2012	Properties in an aggregate value of 62,207,000.00
		Total value: 204,267,107.90

20.  Apart from the assignment of the interests of the 2004 Arbitral Award, D2 and D3 also agreed, as part payment of the Indebtedness, to assign to GF 8.23% shares in Hong Kong Riviera Golf Industrial Co. Ltd (“HK Riviera”) and 3% shares in 鶴山高爾夫鄉村俱樂部有限公司 (“He Shan”). The share transfers were completed on 25 March and 20 November 2008 respectively.

21.  On 24 October 2007, CK wrote to CITIC (“2007 Letter”) setting out the history of the Indebtedness and the assets given to CITIC. CITIC averred that the assets had markedly increased in value, which should have set off all indebtedness of GF and CITIC. CK queried if both parties should not owe each other and would not pursue / increase the relevant indebtedness (“CK’s Query”). There is, dispute as to whether this Letter was written pursuant to an agreement under which GZITIC told D3 that GF had no intention to recover any money from CK (“2007 Oral Agreement”).

B5. Proposals and confirmations

22.  In about April 2010, the auditors of GF, Messrs RSM Nelson Wheeler sent an audit confirmation to CK in respect of the financial year ending on 31 December 2009 (“2010 Audit Confirmation”). This Audit Confirmation showed that no amount was due from CK to GF. Instead, a sum of HK$15,302,265 was stated to be due from GF to CK.

23.  By a letter dated 18 May 2010, GF wrote to CK (the “18 May 2010 Letter”), referring to the longstanding indebtedness between the two companies and CK’s efforts to repay the same since 1998 by assigning its interests in HK Riviera and He Shan to GF and GZITIC. Since the parties had not agreed on the valuation of those shares, GF proposed that:

(1) the 8.23% shares in HK Riviera be taken to offset HK$30,944,800 of the Indebtedness; and

(2) the 3% shares in He Shan be taken to offset HK$13,270,588.24 of the Indebtedness.

24.  By a letter dated 28 October 2010, CK agreed to GF’s proposal (the “28 October 2010 Letter”). GF is now relying on this Letter as one of the two acknowledgements and/or part payment of the Indebtedness for the purpose of section 23(3) of the Limitation Ordinance (Cap 347) (“LO”).

25.  On 8 March 2011, GF sent CK a letter (“8 March 2011 Letter”):

(1) It referred to the Set-Aside Sum. The legal costs and arbitration fees were RMB7,791,117.77. However, CK did not draw down the RMB2,500,000 set aside for its use. So there was a balance left of the Set-Aside Sum.

(2) GF sought CK’s confirmation to its proposal to apply the balance of RMB5,090,735.03[2] (equivalent to HK$5,989,100.04 at the agreed exchange rate of HK$1 : RMB0.85) to offset part of the Indebtedness.

26.  On 15 March 2011, CK agreed to GF’s proposal by appending its company chop on the 8 March 2011 Letter, with the following words “兹确认同意上述事项”, (the “15 March 2011 Confirmation”). This is another acknowledgement and part payment that GF relies on.

B6. Audit confirmations

27.  Every year from 2010 (except for 2013) until the commencement of this action, GF had sent CK an audit confirmation, summarized below:

Date of audit confirmation	Year ending	CK owed GF (HK$)	GF owed CK	Remarks on audit confirmation
April 2010	31.12.2009 (“2010 Audit confirmation”)	Nil	HK$15,302,265
6 April 2011	31.12.2010 (“2011 Audit confirmation”)	509,791,513.24	RMB 5,090,735.03 (equivalent to HK$5,989,100.04)	Re the RMB sum: “此數已核無誤” Re the HK$ sum: “此數尚未核實，正核對中”
13 April 2012	31.12.2011 (“2012 Audit confirmation”)	503,802,413[3]	Nil	“此數尚未核實，正核對中”
(not produced)	31.12.2012	?	?	?
9 April 2014	31.12.2013	503,802,413.60	Nil	“此數尚未核實，正核對中”
20 Jan 2015	31.12.2014	717,475,257.53	Nil	Not signed by CK

28.  On 27 October 2016, GF commenced the present action:

(1) Claiming against CK for the outstanding debt of HK$701,418,712.36; and

(2) Claiming against D2 and D3 a sum of HK$701,481,712.36 under the 1998 Guarantee, alternatively a sum of HK$484,140,000 under the 1996 Guarantee.

29.  At the trial, there is no dispute as to quantum. GF sensibly abandoned a claim for interest pursuant to a separate loan agreement dated 12 June 1996. It does not rely on the unpleaded payment of HK$565,234.94 on 31 December 2010 as part payment made by the Guarantors (§§5.2-5.4 of ASOC). CK also sensibly abandoned the entirety of its counterclaim.

C. PARTIES’ RESPECTIVE CASE

30.  Under section 4(1)(a) of LO, a claim founded on simple contract is barred after the expiration of 6 years from the date on which the cause of action accrued, ie when the breach of contract occurred.

31.  For a debt or other liquidated pecuniary claim, under section 23(3) of LO, a fresh right of action will be considered to have accrued when an acknowledgment or part payment is made after a right of action has accrued. The effect of this is to restart the limitation period for that action from the date of that acknowledgment or payment. A limitation period may be repeatedly extended if further acknowledgments or payments are made.

32.  It is GF’s case that its claim against CK is not time-barred, because CK had twice acknowledged the Indebtedness by either the 28 October 2010 Letter or the 15 March 2011 Confirmation, and had partly repaid its Indebtedness pursuant to the 15 March 2011 Confirmation.

33.  GF further claims that D2 and D3 are liable as principal debtor for the claimed amount under the 1998 Guarantee. If that claim fails, GF resorts to the 1996 Guarantee to hold D2 and D3 liable for HK$484,140,000 due from CK under the 1996 Agreement.

34.  Further, it is GF’s pleaded case that D2 and D3, who controlled CK, had acknowledged the Indebtedness and made part payments in their personal capacity.

35.  All the Defendants rely on the limitation defence and deny any acknowledgment or part payment. CK, in particular, denies that the amound owed at the time of the alleged acknowledgments and part payment was sufficiently certain to constitute “a debt or other liquidated pecuniary claim” under section 23(3) of LO in the light of GF’s ongoing enforcement of the 2004 Arbitral Award. Subject to this limitation defence, CK accepts that it is liable under the 2004 Agreement.

36.  It is D2 and D3’s case that the 1998 Agreement was discharged by agreement or was frustrated. As fairly accepted by GF, if the 1998 Agreement was discharged or frustrated, so would the 1998 Guarantee be. In such case, D2 and D3 would not be liable thereunder.

37.  Further, it is the D2 and D3’s case that the 1996 Guarantee was discharged by material changes in the terms of the Indebtedness under the 1996 Agreement which prejudiced D2 and D3.

D. ISSUES

38.  The parties have agreed upon a list of issues. I reclassify them into the following:

(1) Limitation Issue:

(a) Whether this is a claim for a debt or other liquidated pecuniary claim;

(b) Whether there was an acknowledgement or part payment by the 28 October 2010 Letter;

(c) Whether there was an acknowledgment or part payment by the 15 March 2011 Confirmation; and

(d) Whether the claim under the 2002/2004 Agreements where all liabilities were subsumed by CK is time-barred.

(2) 1998 Agreement Issue:

(a) Whether the 1998 Agreement had been discharged by agreement;

(b) Whether the 1998 Agreement had been frustrated;

(c) Whether CK’s liability under the 1998 Agreement is time-barred; and

(d) Whether CK acted in breach of the 1998 Agreement and if so, for what amount.

(3) 1998 Guarantee Issue:

(a) Whether D2 and D3 are liable under the 1998 Guarantee; and

(b) Whether those liabilities are time-barred.

(4) 1996 Guarantee Issue:

(a) In the alternative, whether D2 and D3 are liable under the 1996 Guarantee;

(b) Whether the 1996 Guarantee had been discharged by material changes in the terms of the indebtedness under the 1996 Agreement which prejudiced D2 and D3; and

(c) Whether their liabilities are time-barred.

E. EVIDENCE

39.  The material events took place as far back as 25 years ago. It would be unrealistic to expect the witnesses to have a clear recollection of minute details. Fortunately, the court is assisted by the contemporaneous documents which are either not in dispute or indisputable and on which great weight should be attached.

40.  I shall consider the inherent probabilities and logicality of the witnesses’ evidence, and the witnesses’ tendency to lie. Here, the factual accounts of the witnesses on matters which they had personal knowledge were not diametrically opposite, but they did differ in their perception of facts.

41.  GF has only one witness, Mr Lu Yimin (“Mr Lu”), its director. It was apparent that Mr Lu had no direct personal knowledge of events that occurred before 2010. I am satisfied that he in fact participated in drafting the 18 May 2010 Letter and the 8 March 2011 Letter. He had also represented GF when dealing with Mr Wong Wai Kee (“Mr Wong”) of CK since 2011. While testifying, Mr Lu always referred to the documentary evidence, and was very careful in answering questions. He has tried to tell the court the facts as best as he could. I find Mr Lu credible.

42.  The Defendants have 3 witnesses as to facts, namely D2, D3 and Mr Wong. D2 had ceased to participate in dealings with GF and/or GZITIC after 2004, as he had mostly been away from Hong Kong. So his evidence related mainly to events occurring prior and up to 2004 that were largely not in dispute. The major challenge to D2’s evidence was in relation to the 2000 Oral Agreement. For reasons given in Section G1 below, I do not accept his evidence on the existence of an Oral Agreement.

43.  D3 was clearly the major person in control of CK and heavily participated in the dealings with GF and/or GZITIC. I do not agree with some of his views, in particular, the existence of the 2000 and 2007 Oral Agreements. I only accept those views that are supported by documentary evidence.

44.  As for Mr Wong, he was and is the manager of CK. His evidence mainly concerned how CK responded to the audit confirmations from 2011 onwards. He was not shaken in cross-examination. He was steadfast on CK’s stance not to confirm any indebtedness. I find him to be generally credible.

45.  It is not necessary to recite every piece of evidence or counsel’s submission. I shall focus on the material parts. Other disputed evidence not referred to, however decided, will have no bearing on my decision.

F. LIMITATION ISSUE

F1. Legal principles on debt, acknowledgement or part payment

46.  Section 23(3) of LO provides that:

“(3) Where any right of action has accrued to recover any debt or other liquidated pecuniary claim, …, and the person liable or accountable therefor acknowledges the claim or makes any payment in respect thereof, the right shall be deemed to have accrued on and not before the date of the acknowledgment or the last payment…” (emphasis added)

47.  Section 24 of LO imposes the formal requirements for an acknowledgment – it must be in writing and signed by the person making the acknowledgment (or his agent) and made to the person whose claim is being acknowledged (or that person’s agent).

48.  A claim may be liquidated even though extrinsic evidence (the veracity of which may be disputed by the parties) has to be adduced for the purpose of ascertaining the amount of the claim with reference to the agreed formula under a contract. The focus should be on the nature of the claim, and not the means by which the claim will need to be proved at the trial: Lee Kwok Wing v Chung Chuen Hei [2012] 4 HKLRD 917, §§70-71, DHCJ Lisa Wong SC (as she then was).

49.  The principles for establishing an acknowledgement have been set out in New World Development Co Ltd & Ors v Sun Hung Kai Securities Ltd & Anor (2006) 9 HKCFAR 403, §§88-93, Ribeiro PJ:

(1) Whether a document is an acknowledgement is one of construction (§90).

(2) In construing the document relied on, the court will look at connected documents (not necessarily expressly referred to in the document relied on) to ascertain its proper meaning (§91).

(3) The object of the construction exercise is to decide whether, fairly read, the document relied on constitutes an acknowledgement by the debtor of a liability to pay outstanding amounts to the creditor. There is no need for the document to specify the amount of the debt so long as it can be ascertained by other means, including resort to extrinsic evidence, without requiring the parties’ further agreement (§92). Ribeiro PJ cited with approval the principle articulated by Lord Denning MR in Good v Parry [1963] 2 QB 418 at pp 423-424:

“… there must be an admission that there is a debt or other liquidated amount outstanding and unpaid. … In order to be an acknowledgment, however, the debt must be quantified in figures or, at all events, it must be liquidated in this sense that it is capable of ascertainment by calculation, or by extrinsic evidence, without further agreement of the parties. … But if the debt is not quantified and is not ascertainable without further agreement, then there is no acknowledgment sufficient to satisfy the statute.

No doubt a promise in writing by a debtor to pay whatever sum is found due on taking an account is a good acknowledgment today just as it was before the Act, provided always that the amount is a mere matter of calculation from vouchers, or can be ascertained by extrinsic evidence, and is not dependent on the further agreement of the debtor.” (underlines added)

(4) It is not a sufficient acknowledgement for the purpose of the section if it is accompanied by words which nullify or materially qualify that acknowledge, for instance by confessing and avoiding the debt or asserting a set-off or cross-claim which renders the document in effect a denial of liability (§93, citing Surrendra Overseas Ltd v Government of Sri Lanka [1977] 1 WLR 565, 575).

50.  To determine whether there was a part payment of a debt for the purpose of section 23(3), one must look at the act of payment and the intention of the debtor to see whether the payment was made in respect of the debt in question: Lee Kwok Wing at §86.

51.  This certainty requirement is often mixed up with the hallmark of a “debt or other liquidated pecuniary claim”. The difference between the two is crucial, particularly in cases where the debtor only wishes to accept some liability to pay but not to the full amount claimed by the creditor.

52.  The line can be thin between, on the one hand, an acknowledgment accepting full liability but disputing the quantum of the claim and, on the other hand, an acknowledgment accepting only part of the liability of the claim. This is a factual question to be resolved by construction.

53.  The burden is on GF to prove that its right of action against CK is to recover a “debt or other liquidated pecuniary claim” and that CK had acknowledged the debt or made a part payment in respect of it. There is no dispute that the formal requirements are met in this case.

F2. Is this a claim for a debt or other liquidated pecuniary claim?

54.  The amount owed was not stated on the face of either alleged acknowledgements. Mr Lu accepted in the witness box that the outstanding amount could not be sufficiently ascertainable at the time of the alleged acknowledgments and/or part payment. CK submits that the outstanding indebtedness was not sufficiently certain, in the light of GF’s ongoing enforcement of the 2004 Arbitral Award, to constitute “any debt or other liquidated pecuniary claim”.

55.  CK submits that the effect of Clauses 3 and 6 of the 2004 Agreement was that at least HK$191,771,836.98 would be used to set off the Indebtedness. If the amount realized from the enforcement of the 2004 Arbitral Award was more than HK$191,771,836.98, the actual sum realized would be applied towards the part repayment of the outstanding Indebtedness. The completion of the enforcement process was thus a key event. According to the Reply, the enforcement process went on until 18 June 2012 (after the alleged acknowledgments and part payment).

56.  GF objects to this issue as not being raised on the pleadings. However, I consider this to be a legitimate point of law taken by CK, although I do not agree with CK.

57.  All the debts owed by CK and its Associated Companies were consolidated into one liquidated sum of HK$944,197,881.84 under CK’s liability in the 2002 Agreements. As and when the 2004 Arbitral Award was realized, the debt would be reduced, but it would not change the liquidated nature of the Indebtedness.

58.  Accordingly, whether the actual amount due was known on 28 October 2010 or 15 March 2011 was irrelevant. It was enough if there was an acknowledgement of “general” indebtedness under the original Indebtedness to pay whatever sum is found on taking the account. The taking of the account can be done by a mere calculation based on extrinsic evidence, like receipts showing the proceeds of realization, without further agreement from CK. The enforcement process was completed in June 2012. CK does not dispute the actual calculation of the amount due at the trial.

59.  I am satisfied that the claim is for a debt or a liquidated claim.

F3. Whether there was an acknowledgement or part payment by the 28 October 2010 Letter

60.  One has to consider the effect of the transfers of the HK Rivieria and He Shan shares, the 18 May 2010 Letter and 28 October 2010 Letter (§§20 - 24 above).

61.  It was D2 and D3’s evidence that shortly after entering into the 2004 Agreement, D2 and D3 had executed all the relevant documents for transfer of the HK Riviera and He Shan shares to GF and passed them to GF. Such evidence was never challenged in the 2 witness statements of GF’s witness and in cross-examination and I find it to be true. Any part payment pursuant to the share transfers would have occurred in 2004.

62.  The 18 May 2010 Letter did not mention the actual amount owed. Whatever Mr Lu might have in mind, under cross-examination, D3 agreed that he understood this Letter as referring to the Indebtedness which the parties had been dealing with since 1998.

63.  The 28 October 2010 Letter, stated twice that CK “欠貴公司 (GF) 債務”. Mr Phang, counsel for GF, submits that this Letter was not accompanied by words which nullify or materially qualify that acknowledgment of the Indebtedness.

64.  However, I am of the view that the 28 October 2010 Letter has to be read in the light of the then circumstances known to the parties, including the alleged 2007 Oral Agreement and the 2010 Audit Confirmation.

65.  The 2007 Oral Agreement was allegedly made by D3 of CK and Mr Li Wing Lun and Mr Fan Xin Min of GZITIC. Mr Li and Mr Fan allegedly told D3 that GF had no intention to recover any money from CK and that D3 should write to GZITIC to put the agreed position on record.

66.  As a result, on 24 October 2007, D3 on behalf of CK wrote the 2007 Letter, setting out the history of the Indebtedness and the assets given to GZITIC. The CK’s Query was raised.

67.  The header showed that the 2007 Letter was to be handed to the “governors” of GZITIC and a chop on this Letter showed that this Letter was received by GZITIC on 30 October 2007.

68.  There was no reply to the 2007 letter. That would not, of course, in itself signify GZITIC and/or GF’s affirmative answer to CK’s Query.

69.  However, I find it unlikely that the 2007 Oral Agreement existed:

(1) If there had been an oral agreement, the 2007 Letter would not have ended with a query but with more assertive wording.

(2) CK never chased for a confirmation to the 2007 Letter nor asserted the existence of the 2007 Oral Agreement in all subsequent correspondence (including the audit confirmations).

(3) GZITIC was a state enterprise and one would reasonably expect that waiver of such an enormous debt must have written approval from its governors. GZITIC’s lack of written response to the 2007 Letter was in sharp contrast to its mode of putting agreements or acknowledgements into writing.

(4) The Indebtedness was an enormous sum. There was no evidence of what the assets given as security were worth in 2007 after the marked increase in value and how much of the Indebtedness was reduced. And yet at this trial, CK did not dispute the quantum of Indebtedness, indirectly refuting the assertion of setting off of all the Indebtedness.

70.  Despite the preceding paragraph, GZITIC/GF’s silence in the light of CK’s Query was relevant to CK’s belief in 2010:

(1) For 3 years until the 28 October 2010 Letter, GZITIC or GF had not made any claim against CK in respect of the Indebtedness. Meanwhile, the transfers of the HK Riviera and He Shan shares had been completed on 25 March and 20 November 2008 respectively.

(2) What was more, the 2010 Audit Confirmation stated that the debt due from CK as at 31 December 2009 was “nil”, whereas an amount of HK$15,302,265 was due to CK. This could not have been a “mistake” as that Audit Confirmation was professionally prepared by RSM Mr Nelson Yu Wheeler.

71.  In the light of such circumstances, the Defendants’ evidence that they understood the 2010 Audit Confirmation to be in line with their 2007 Letter could not be dismissed outright as without bases.

72.  It was one month after the 2010 Audit Confirmation that GF’s 18 May 2010 Letter was issued. Under cross-examination, Mr Lu admitted that he wanted to tone down the letter in a way that would not provoke CK, although his intention was never communicated to CK. Mr Lu’s admission could not explain why GF would have gone to the extent of stating that CK owed GF nothing in the 2010 Audit Confirmation.

73.  Viewing the circumstances objectively and on balance of probabilities, I find the 28 October 2010 Letter to be equivocal. It was at best an acknowledgement of the value of the transferred shares and that CK owed the amounts purportedly set off and no more. It was not an acknowledgement that would have satisfied section 23(3) of LO.

F4. Whether there was an acknowledgement or part payment by the 15 March 2011 Letter

74.  GF claims that there was a part payment of HK$5,989,100.04 effected on 15 March 2011, signifying CK’s acceptance of an outstanding indebtedness as at that date.

75.  CK denies and submits that the repayment was not made on 15 March 2011 but earlier in time when all the proceeds of the 2004 Arbitral Award were assigned to GF under the 2002 Agreements and 2004 Agreement. There was no money passing between the parties for the alleged repayment of HK$5,989,100.04.

76.  The starting point for the analyses must be the 2004 Agreement. By that Agreement, CK had assigned to GF all its rights under the 2004 Arbitral Award, except the Set-Aside Sum, for the purpose of repaying the Indebtedness. The 2004 Agreement was silent on what was to happen to the Set-Aside Sum if it was not used up for the designated purposes.

77.  CK agreed to GF’s proposal to apply the balance to offset the Indebtedness by:

(1) Issuing the 15 March 2011 Confirmation.

(2) Confirming in the 2011 Audit Confirmation that as at 31 December 2010, an amount of RMB 5,090,735.03 was due from GF to CK (“CK Receivable”), precisely the balance of the Set-Aside Sum. A handwritten remark of Mr Wong of CK stated, “此數已核無誤” (This sum [ie RMB 5,090,735.03] is verified to have no error.) Mr Wong confirmed (§3 of his witness statement) that the sum was based on the “agreed treatment” in the 8 March 2011 Letter.

78.  I agree with Mr Phang that the preceding paragraph removes any doubt that CK had made a mistake in the 2011 Audit Confirmation, did not understand the practical effect of its agreement with GF’s proposal, or that the RMB 5,090,735.03 had already been assigned to GF.

79.  GF’s contemporaneous accounting records show that the part payment was booked on 1 April 2011. Hence, in the 2012 Audit Confirmation, the CK Receivable was reduced to nil.

80.  In the light of §§76-79 above, the pleaded defences that the Set-Aside Sum was a “separate debt” against which the sum of HK$5,989,100.04 was set off; or that the 15 March 2011 Confirmation was a confirmation for accounting purpose, are unsustainable on a proper analyses of the nature of the 2 sums.

81.  CK had thus acknowledged the Indebtedness on 15 March 2011 and made a part payment of the HK$5,989,100.04 effectively on 1 April.

82.  The fact that no money had changed hands was irrelevant. I agree with Mr Phang that the balance of the Set-Aside Sum (whilst in GF’s hands) was a debt owed by GF to CK. GF’s position was no different from a bank exercising a power of set-off, albeit with the customer’s consent, by applying an amount in the bank’s possession standing to the customer’s credit, to partly pay off the outstanding indebtedness owed by the customer: Hu Kee Pui v Others v Dah Sing Bank, Limited (unrep., HCMP 6841/1999, 9 November 2000, Waung J) at pp 7, 8 and 10.

83.  GF had provided consideration by reducing the Indebtedness by an amount equivalent to the CK Receivable, in return for CK not seeking payment of the CK Receivable from GF.

84.  There were other audit confirmations showing an outstanding sum due from CK after the part payment booked on 1 April 2011. A sum of just over HK$500,000,000 was said to be due from CK to GF suddenly appeared in the 2011 Audit Confirmation. By the time of the 2015 Audit Confirmation, the amount was even increased to over HK$700,000,000, due to a “mistake”, according to GF. See the table in §27 above.

85.  There is no dispute that CK had refused to confirm the amounts owed in those Audit Confirmations. However, the 15 March 2011 had taken effect as an acknowledgement with part payment on 1 April 2011. How much was actually owed, whether there was a mistake, whether Mr Lu had explained a chart to Mr Wong as to the amount owed, are irrelevant to the limitation issue.

86.  For the reasons given in Sections F3 and F4, I find that the 28 October 2010 Letter was not an acknowledgment but the 15 March 2011 Confirmation was. There was a part payment effected on 1 April 2011.

F5. Whether the claim under the 2002 Agreements or 2004 Agreement where all liabilities are subsumed by CK is time-barred

87.  Following from the preceding paragraph, the claim was not time-barred when this writ was issued. As there is no other defence and no dispute on quantum, GF is therefore entitled to judgment against CK in the amount of HK$701,481,712.36.

88.  Concerning pre-judgment interest, on a nisi basis, I order it to be prime + 1% from 19 June 2012 (day after completion of enforcement of the 2004 Arbitral Award) up to the date of judgment. Interest thereafter shall be at judgment rate until full payment.

G. 1998 AGREEMENT ISSUE

G1. Whether the 1998 Agreement had been discharged by agreement

89.  CK relies on the 2000 Oral Agreement to submit that the 1998 Agreement had been discharged.

90.  The existence of such an agreement would mean that the huge debt owed by CK was entirely waived, and yet there was nothing in writing.

91.  Further, the 2000 Oral Agreement could not have been validly made on behalf of GF because it was under provisional liquidation from 12 February 1999 to 11 December 2000. Neither Mr Lin nor Mr Li could have acted on behalf of GF during that time.

92.  D3 denied knowledge of the provisional liquidation. However, D2 admitted that he was aware of the provisional liquidation as it was widely reported on the television at that time. As both D2 and D3 participated in the discussions with Mr. Li[4], it was highly unlikely that D3 was not aware of GF’s provisional liquidation at the time. D3’s denial of knowledge was probably to boost the defence case.

93.  I am not satisfied that the 2000 Agreement existed to discharge the 1998 Agreement.

G2. Whether the 1998 Agreement had been frustrated

94.  There are 2 places in the 2002 Agreements that expressly referred to the 1998 Agreement:

(1) The preamble referred to the 1998 Agreement and stated that the 1998 Agreement confirmed that CK owed GF HK$944,197,881.84.

(2) Clause 3 stipulated the 2002 Agreements would not affect the existence of rights and liabilities (債權債務的存在) under the 1998 Agreement, that those Agreements did not affect the 1998 Agreement and would not affect the right of GF in recovering the debt from other lawful means.

95.  What were the rights and liabilities that existed? The 1998 Agreement was in fact a sale and purchase agreement whereby CK, as beneficial owner, was to transfer its interest in CK Mall to GF at a consideration of HK$944,197,881.84, on a date no later than 30 June 2000 and within 10 days of obtaining approval. There had never been consolidation of the debts under CK’s sole name, as evidenced by Annex 4 to the 1998 Agreement. The clear intention of the 1998 Agreement was that it would only be upon transfer of CK Mall to GF that the full indebtedness would be treated as repaid. In my view, therefore, the preamble in §94(1) above was erroneous but it does not affect the analyses.

96.  Clause 3.02 provided that if, for any reason, it was not possible to obtain “approval”, and the interests in CK Mall could not be lawfully transferred to GF, this Agreement would “immediately terminate” but the rights of GF to enforce the indebtedness would not be affected.

“3.02審批因任何原因，未能獲得，而該權益未能合法地轉讓至買方的名下，本協議應即時終止。本協議不論因任何原因終止時，買方在本協議終止後， 可行使其對該等債務的任何權利，但該權力的行使不影響買方向賣方追討其任何先前違反本協議任何條款的規定的權利。雙方於1996年6月7日簽訂的有關該公司之合作投資協議所約定的權益及責任仍按原約定執行。” (劃線後加)

97.  Applying Clause 3.02, the 1998 Agreement was terminated as soon as there was failure to obtain approval, because the Chinese party surrendered the land to the government. In Clause 4 of the 2004 Agreement, GF expressly acknowledged that the failure to complete the construction of the CK Mall was not the responsibility of CK. Accordingly, I find that the 1998 Agreement was frustrated.

G3. Whether CK’s liability under the 1998 Agreement, if any, is time-barred

98.  GF’s case is that CK acted in breach of the 1998 Agreement by failing to transfer to GF its rights in the CK Mall (ASOC §4.12). If CK was really in breach, I find that the cause of action would have accrued on 30 June 2000. By the time the writ was issued, the claim under the 1998 Agreement would have been time-barred. Any acknowledgment or part payment by CK was not in respect of the 1998 Agreement and hence could not extend the limitation period.

G4. Whether CK acted in breach of the 1998 Agreement; and if so, for what amount

99.  CK was not in breach of its obligation because its inability transfer the CK Mall to GF was due to reasons beyond its control. GF, having acknowledged that the failure to transfer was not the fault of CK, cannot turn round to say that CK was in breach.

100.  What Clause 3.02 meant was that after the termination, GF could still exercise its rights as creditor. In exercising its rights, it would not affect the right of GF to sue CK for any prior breach of the 1998 Agreement. There was no prior breach that GF identified.

101.  Upon termination of the 1998 Agreement, the Indebtedness did not disappear, just that the parties reverted to the pre-Agreement position. The rights of GF were to recover the debts from individual companies (including CK) that made up the Indebtedness. Any breach of CK was thus the failure to pay only HK$504,236,661.36 to GF pursuant to the 1998 Admissions. (§9 above)

H. 1998 GUARANTEE ISSUE

H1. Legal principles: governing liability of a guarantor

102.  The limitation period begins to run from the date when the cause of action arose. This is usually the date when the principal debtor defaults or when the creditor satisfies any conditions precedent to the guarantor’s liability (such as the issue of a demand for payment). This is a question of construction of the Guarantee.

103.  The effect upon the running of time in favour of a surety of a payment or acknowledgment by the principal must be considered with reference to the statutory provisions which apply to the liability of the surety. A distinction is drawn between acknowledgment and part payment.

104.  Section 25(5) of LO provides that:

“An acknowledgment of any debt or other liquidated pecuniary claim shall bind the acknowledgor and his successors but not any other person:

Provided that an acknowledgment made after the expiration of the period of limitation prescribed for the bringing of an action to recover the debt or other claim shall not bind any successor on whom the liability devolves on the determination of a preceding estate or interest in property under a settlement taking effect before the date of the acknowledgment.” (underline added)

105.  Section 25(6) of LO provides that:

“A payment made in respect of any debt or other liquidated pecuniary claim shall bind all persons liable in respect thereof:

Provided that a payment made after the expiration of the period of limitation prescribed for the bringing of an action to recover the debt or other claim shall not bind any person other than the person making the payment and his successors, and shall not bind any successor on whom the liability devolves on the determination of a preceding estate or interest in property under a settlement taking effect before the date of the payment.” (underline added)

106.  The “successor”, in relation to any person liable in respect of any debt or claim, means his personal representatives and any other person on whom the liability in respect of the debt or claim devolve, whether on death or bankruptcy or otherwise: Section 25(8) of LO.

107.  Therefore, when the acknowledgment or part payment was made by the principal debtor before the expiration of the period of limitation, only the part payment bound the surety, provided that the claim against the surety was not already barred by the date of the part payment: UCB Corporate Services Ltd v Brijinder Kaur Kohli [2004] EWHC 1126 (Ch), §§22, 31, 34-39.

108.  As for the position when the acknowledgment or part payment was made by the principal debtor after the expiration of the period of limitation, the surety’s liability would depend only on the contract between the surety and the creditor, and whether the limitation period has expired in respect of that contract.

H2. Contractual provision governing liability of D2 and D3

109.  Under the 1998 Guarantee, D2 and D3, as “principal debtors” or “persons involved” and “not just” as guarantors (以主債務人身份 (而不單只以擔保人身份)) unconditionally and irrevocably, jointly and severally undertook, upon demand of GF, to duly, timely and wholly perform (as if the guarantors replaced CK as the other party to the 1998 Agreement) or procure CK to perform CK’s liability under the 1998 Agreement. If CK did not perform or acted in breach of clause 5.03, D2 and D3 would pay compensation to GF arising from the breach.

110.  GF accepts that if the 1998 Agreement had been discharged or frustrated, so would the 1998 Guarantee. I also accept D2 and D3’s submission that the 2004 Agreement released CK from its obligations under the 1998 Agreement and put in place an alternative repayment method. The necessary consequence was that GF would not hold CK liable for non-performance of the 1998 Agreement. Therefore, I hold that D2 and D3 would equally not be liable under the 1998 Guarantee.

H3. Whether the claim under the 1998 Guarantee is time-barred

111.  GF’s claim against D2 and D3 would have been time-barred because the alleged breach would have occurred on 30 June 2000 but the only demand for payment was 16 years later, by the writ.

112.  GF, however, contends to the contrary because:

(1) The acknowledgment and/or part payment made by CK bind D2 and D3 (“1^st contention”);

(2) D2 and D3 had acknowledged and/or made part payment in their personal capacities under the 28 October 2010 Letter and the 15 March 2011 Confirmation (“2^nd contention”);

(3) Pursuant to Clause 1 of the 1998 Guarantee, [C2/537-541], D2 and D3 respectively undertook obligations as the principal obligor.

113.  Insofar as CK’s acknowledgement is concerned, it was not made in respect of the 1998 Agreement. Further, D2 or D3 were neither the acknowledgers nor successors of CK and hence not bound by CK’s acknowledgement. Insofar as CK’s part payment is concerned, it was made after the limitation period to sue D2 and D3 had expired. The payment was not made by D2 or D3 and not in respect of the 1998 Agreement. That payment would not bind them. The 1^st contention fails.

114.  Acting as a director of CK to issue the 28 October 2010 Letter or the 15 March 2011 Confirmation would not attract personal liability for D3. GF has not even challenged the evidence of D2 that he had not been involved in matters concerning the Indebtedness since 2004. Those 2 documents made no reference to the 1998 Guarantee at all. The 2^nd contention fails.

115.  If D2 and D3 are sued as principal debtors, the demand for payment was 16 years after the cause of action first arose and at a time when it was impossible for CK to perform its obligation to transfer the CK Mall. The 3^rd contention fails.

116.  I hold that D2 and D3 are not liable under the 1998 Guarantee. Attentively, the claim thereunder is time-barred.

I. 1996 GUARANTEE ISSUE

I1. Contractual provision governing liability of D2 and D3

117.  GF relies on clause 8 of the 1998 Guarantee such that if, for any reason, the 1998 Agreement was determined or ineffective, then D2 and D3’s obligations under the 1996 Guarantee would be revived. GF further submits that the claim under the 1996 Guarantee could not be time-barred because D2 and D3’s obligations only arose upon demand, ie upon the issuance of the writ in this action.

118.  On its face, clause 8 of the 1998 Guarantee was intended to survive termination of the 1998 Agreement.

119.  The 1996 Agreement was an agreement under which CK agreed to and did invest a sum of HK$484,140,000 for the development of the CK Mall.

(1) Recital (7) referred to CK’s obligation to repay the sum of US$31.3 million (equivalent to HK$241.8 million) to GF by 27 July 1996 pursuant to a 1993 Agreement and a 1994 Supplemental Agreement.

(2) Clause 4.1(b) provided that if the development of 6 levels of the CK Mall was not completed by 1 June 1998, CK would have to repay to GF HK$484,140,000 within 7 days thereof and interest at the rate of 15% per annum accruing from the date of the advancement of the investment principal.

(3) Clause 6.1(1) provided that D2 and D3 shall execute a guarantee in favour of GF to guarantee the obligations of CK under 1996 Agreement.

120.  On 7 June 1996, D2 and D3 duly executed the 1996 Guarantee. Clause 2(1) similarly provided that D2 and D3 were liable as principal debtors and not just as guarantors.

I2. Whether the claim under the 1996 Guarantee is time-barred

121.  According to Clause 4.1(b), CK would have been in breach by 8 June 1998, at the latest. The obligations of D2 and D3 would only arise upon demand and they would have to pay HK$484,140,000 within 7 days of the demand and interest at the rate of 15% per annum accruing from the date of the advancement of the investment principal.

122.  The only demand was issued only 18 years after the cause of action first arose. Whether sued as guarantors or principal debtors, D2 and D3’s liabilities must be time-barred. There was no acknowledgment or part payment in respect of the 1996 Agreement to extend the limitation period.

123.  The holding in §113 above regarding CK’s acknowledgment and part payment equally apply to the 1996 Guarantee.

I3. Whether the 1996 Guarantee had been discharged by material changes in the terms of the indebtedness under the 1996 Agreement which prejudiced D2 and D3

124.  It is well established that any variation in the terms of the agreement between the creditor and the debtor which could prejudice the surety will, unless he consents, discharge the surety from liability: Chitty on Contract (34 ed), Vol. 2, §§47-108. This principle is applied very strictly by the court: Brown-Forman Beverages Europe, Ltd v Bacardi UK Limited [2021] EWHC 1259 (Comm), at §66.

125.  In the present case, GF and CK agreed not to perform the 1996 Agreement, but to replace it with the 1998 Agreement and, subsequently, the 2002 Agreements and the 2004 Agreement. Those Agreements are in fundamentally different terms – from subject matter to the amount of debt due by CK and the provision of security.

126.  In the 2004 Agreements, (i) CK had assumed a greater liability of HK$944,197,881.84, compared to HK$484,140,000 envisaged by the 1996 Agreement and the 1996 Guarantee; (ii) the additional liabilities assumed by CK included those of CK’s Associated Companies, with which D2 has had no interest. Any repayment made by CK was not appropriated to satisfy the indebtedness under the 1996 Agreement. In such circumstances, D2 and D3 have clearly been prejudiced as guarantors.

J. CONCLUSION

127.  I find that the claim against CK is for a debt. It is not time-barred because CK had, by the 15 March 2011 Confirmation, acknowledged the Indebtedness and made a part payment by agreeing to apply the balance of the Set-Aside Sum to repay part of the Indebtedness. The limitation defence having failed and there being no other defence to the claim, CK is liable to GF for the debt claimed.

128.  CK did not breach the 1998 Agreement. Rather, the 1998 Agreement was frustrated. As a result, D2 and D3 are not liable under the 1998 Guarantee. Moreover, the 15 March 2011 Confirmation did not bind D2 and D3 who were not the acknowledgors or successors of CK. The part payment occurred only after the claim against D2 and D3 became time-barred and so it did not bind them.

129.  D2 and D3 are not liable under the 1996 Guarantee as the claim thereunder is time barred. CK’s acknowledgement and part payment do not bind D2 and D3 as those acts did not refer to the 1996 Agreement. D2 and D3 were not the acknowledgors or successors of CK.

130.  I order as follows:

(1) The 1^st Defendant shall pay the Plaintiff the sum of HK$701,481,712.36;

(2) On a nisi basis, interest on the awarded sum shall be at the rate of P+1% from 19 June 2012 to the date of judgment and thereafter at judgment rate until full payment;

(3) The claim against the 2^nd and 3^rd Defendants are dismissed;

(4) On a nisi basis, the 1^st Defendant shall bear the costs of the Plaintiff, apportioned as 50% of the costs of this action; and

(5) On a nisi basis, the Plaintiff shall bear the costs of the 2^nd and 3^rd Defendants, apportioned as 50% of the costs of this action.

131.  Last but not least, Mr Roger Phang and Mr Alexsander Wong have actively considered the issues from the pre-trial review to the trial, abandoning issues/causes that have no merits and focusing on the real ones. The Court greatly appreciates their professional approach, thorough preparation and great assistance.