XCHRX TAILY GROUP LTD. v. LEUNG PAK MING and Others

1995 No. A9068

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. INTRODUCTION

In this action, the Plaintiff claims the balance of various sums due under a deed of assignment between it and the 1st and 2nd Defendants. It has obtained judgment in default against them. That judgment debt has not been paid. The sums payable to the Plaintiff under the deed of assignment were guaranteed by the 3rd Defendant. The 3rd Defendant has not honoured his guarantee. Accordingly, the Plaintiff sought summary judgment against the 3rd Defendant for the sums still due. On 2nd May 1996, Master Cannon gave the 3rd Defendant unconditional leave to defend the action. The Plaintiff now appeals against the grant of leave to defend.

2. Both the Plaintiff and the 3rd Defendant have filed further evidence since Master Cannon's order. However, in addition to that evidence, the Plaintiff wished to file an affirmation of one of its directors, Chen Xiaojia. The Plaintiff applied for leave to do so. It was not necessary for the Plaintiff to seek leave because there had not been an order limiting the evidence on which the parties could rely. However, on 10th October, Mr. Registrar Betts refused the Plaintiff leave to file the further affirmation. The Plaintiff filed a notice of appeal against that order, but that appeal has been withdrawn because Mr. Erik Shum for the 3rd Defendant has sensibly not objected to the Plaintiff relying on the further affirmation on the appeal from the order of Master Cannon.

THE FACTS

3. The 3rd Defendant and his wife at one time owned all the shares in the Plaintiff. In 1990, they sold 60% of their shares in the Plaintiff for a sum in excess of $15m. However, on 6th April 1991, while the 3rd Defendant and his wife still owned 40% of the shares in the Plaintiff, a number of documents were executed relating to two wholly-owned subsidiaries of the Plaintiff, Taily Hong Kong Traders Ltd. ("THKT") and Taily Kowloon Traders Ltd. ("TKT").

4. Three of the documents which were executed related to THKT. By those documents, the Plaintiff sold its shares in THKT to Leung Pak Keung for $257,114.00. However, THKT owed the Plaintiff the sum of $1,375,989.44. The Plaintiff assigned that debt to Leung Pak Keung in consideration of the payment by Leung Pak Keung to the Plaintiff of the sum of $1,375,989.44. The bulk of these two sums was payable by instalments over 36 months, and interest was payable on that part of the debts which remained outstanding. The aggregate amount of the instalments and interest amounted to $1,998,919.08, and the 3rd Defendant executed a guarantee in favour of the Plaintiff guaranteeing payment of this amount. The 3rd Defendant has not been called upon to honour that guarantee, because the two debts to which the guarantee related were paid.

5. The other three documents which were executed related to TKT. By those documents, the Plaintiff sold its shares in TKT to the 1st and 2nd Defendants for the sum of $227,423.00. However, TKT owed the Plaintiff the sum of $6,716,812.00. The Plaintiff assigned that debt to the 1st and 2nd Defendants in consideration of the payment by the 1st and 2nd Defendants to the Plaintiff of the sum of $6,716,812.00. The bulk of that sum was payable by instalments over 36 months, and interest was payable on that part of the debt which remained outstanding. The aggregate amount of the instalments and interest amounted to $8,499,840.48, and the 3rd Defendant executed a guarantee in favour of the Plaintiff guaranteeing payment of that amount. That is the guarantee which the Plaintiff is now seeking to enforce against the 3rd Defendant, because it is the balance of the debt to which that guarantee related which the Plaintiff claims is unpaid. Eight instalments are alleged not to have been paid by the 1st and 2nd Defendants. They amount to $1,888,853.44. Interest on that sum up to the date of the issue of the writ amounts to $413,186.69, and the amount of the default judgment which the Plaintiff obtained against the 1st and 2nd Defendants is the aggregate of those sums, namely $2,302,040.13.

THE DEFENCE TO THE CLAIM

6. It is not disputed by the 3rd Defendant that these facts are what the executed documents show. I have not found it entirely easy to follow what the 3rd Defendant's case is, but I think he is saying that he realised that the shares in THKT and TKT were the subject of a management buy-out, that he was guaranteeing the payments to be made to the Plaintiff by the purchasers of the shares in THKT and TKT (as well as the payments to be made by them for the assignment of the loans), but that he thought that the total sale price was in the region of $8.4m. The documents show that the total of the sums payable to the Plaintiff (excluding interest) was not far off that amount:

THKT	Purchase of shares	$257,114.00
	Discharge of loan	$1,375,989.44
TKT	Purchase of shares	$227,423.00
	Discharge of loan	$6,716,812.00
		$8,577,338.44
		=============

What the 3rd Defendant claims he did not realise was that the guarantees he was signing also made him liable for the interest payable on those sums. The amount claimed in the action is less than the total interest payable on that part of the sum of $6,716,812.00 which was payable by instalments.

7. There are three legal pegs on which the 3rd Defendant hangs his case in his Defence: undue influence, non est factum and misrepresentation. Undue influence and non est factum are, realistically in my view, no longer relied upon by Mr. Shum, but economic pressure is.

MISREPRESENTATION

8. In order to evaluate whether there is a fair or reasonable probability that misrepresentation represents a real or bona fide defence, it is necessary to identify on what the 3rd Defendant's understanding of what the guarantees provided was based. He claims that before he signed the guarantees, their contents were explained to him by two employees of the Plaintiff, Chow Siu Tong and Robert Li. However, the explanation they gave him was simply that he was guaranteeing, "to the extent of about $8m. odd", the sums payable to the Plaintiff for the shares in THKT and TKT. They did not tell him that he was also guaranteeing the payment of interest on those sums. The guarantees which he signed were in English. He claims that English is not a language which he can either read or write.

9. But for the allegation of misrepresentation, the 3rd Defendant's alleged inability to read or write English would not, of itself, have entitled him to have the guarantee set aside because of a special disability on his part. In the absence of misrepresentation, the 3rd Defendant would have had only himself to blame for signing a document which he could not read: see Barclays Bank Plc v. Schwartz, "The Times", 2nd August 1995. However, if he was told that he was only guaranteeing the payment of the sums payable for the shares in THKT and TKT (and by implication the sums payable for the assignment of the loans), and if he was not told that he was also guaranteeing the payment of interest on those sums, it is arguable that the contents of the guarantees were misrepresented to him. And if he signed the guarantees on the basis of what he was told, and if he would not have signed the guarantees if he had known that he was rendering himself liable for interest on any unpaid instalments, the defence of misrepresentation would have been made out. I note that Mr. Chow in his affirmation claims that he personally explained the nature and contents of the documents to the 3rd Defendant, but he does not say in terms that he told the 3rd Defendant that he was guaranteeing the payment of any interest payable.

10. I appreciate that there is nothing to support the 3rd Defendant's case as to what he was told apart from his own assertions. But his version of events, if true, is not one which could easily be corroborated by other evidence. Despite the claim that the 3rd Defendant is an experienced businessman with a knowledge of English far greater than he professes, I cannot discount the possibility of the 3rd Defendant being believed at the trial of the action. I do not of course say that the 3rd Defendant's assertions are to be believed. All I say is that they are believable.

11. But how believable are they? Two points have been taken by Mr. Benjamin Chain in his succinct submissions on behalf of the Plaintiff:

(i) The sums which the 3rd Defendant was guaranteeing, namely $8,499,840.48 and $1,888,853.44, were referred to in the guarantees in numerals. The 3rd Defendant therefore must have realised that he was guaranteeing a liability substantially in excess of $8.4m. That suggests that he must have realised that he was guaranteeing something more than the sums payable for the shares and for the assignment of the loans.

(ii) The 3rd Defendant does not assert that he did not realise that the bulk of the sums payable for the shares and the assignment of the loans were payable by instalments over 3 years. Nor does he assert that he did not realise that the transfer of the shares was not being deferred until payment had been finally made. He must therefore have realised that the indulgence of payment by instalments came at a price, and that that price would have been the charging of interest on such sums as remained due. If he was guaranteeing the purchasers' liabilities to the Plaintiff, he must have realised that he was guaranteeing the whole of their liability, including their liability for interest.

These two points persuade me that, although the 3rd Defendant's assertions are believable, they are not all that believable, and that the defence of misrepresentation is sufficiently "shadowy" to justify requiring the 3rd Defendant to pay the whole of the judgment debt into court as a condition of defending the action.

ECONOMIC DURESS

12. My view as to the defence of misrepresentation makes it unnecessary for me to address the question whether there is a fair and reasonable probability that economic duress represents a real or bona fide defence. Since there is to be a trial of the action in the absence of a negotiated compromise, the less I say about that defence the better. I merely record the fact that the 3rd Defendant claims that he had no practical choice but to sign the guarantees, because if he did not the Plaintiff would discontinue its operations in Hong Kong, and the consequence of that would be that the 3rd Defendant's home, which had been charged to the Plaintiff's bankers to secure banking facilities, would be at risk. I do not express any view whether in these circumstances the 3rd Defendant had no real option but to sign the guarantees, or whether he simply had an unpalatable commercial choice to make and elected for what he considered to be the lesser of two evils. I merely say that the fact that the 3rd Defendant may have an arguable defence based on economic duress does not persuade me to make the 3rd Defendant's leave to defend unconditional.

CONCLUSION

13. For the reasons I have given, I agree with Master Cannon that the 3rd Defendant should have leave to defend the action, but I allow the Plaintiff's appeal from her order only to the extent that the 3rd Defendant's leave to defend will be conditional on the 3rd Defendant paying into court the sum of $2.3m. I shall hear counsel on the amount of time which the 3rd Defendant needs to pay that sum into court.