BANK OF CHINA (HONG KONG) LTD v. WENLOY LTD AND ANOTHER

HCA 997/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 997 OF 2004

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J U D G M E N T

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1.  The defendants appeal against the summary judgment granted by Master Hui on 24 April 2006.

Background

2.  The plaintiff, (“the BOC”) is a bank.  By a facility letter dated 17 August 1999, it granted the 1^st defendant, Wenloy, a loan facility to the extent of $15,300,000.  The 2^nd defendant, Mr Kwan, is a shareholder and director of Wenloy, and he on 27 August 1999 executed a Deed of Guarantee in favour of the BOC, as security for Wenloy’s indebtedness.  In addition, Wenloy mortgaged a shop in Cheung Sha Wan Road, Kowloon, (“the mortgaged property”) to the BOC.

3.  By early 2001, Wenloy was in difficulties.  According to the BOC’s affidavit evidence, Wenloy was indebted to it in a total amount of $15,096,717.31 together with daily interest of $5,239 99 charged on the outstanding principal of $14,434,679.49 from 20 January 2001 to payment.  The BOC’s solicitors issued a demand letter to Wenloy on 31 January 2001.

4.  Wenloy sold the mortgaged property for $13,000,000 in April 2001, and the proceeds of sale were paid over to the BOC in reduction of Wenloy’s indebtedness.  Wenloy paid a further $100,000 to the BOC in May 2001, and $38,000 per month to the BOC from 21 May 2001 until 4 April 2002.  Payments then ceased.  The BOC took no action for some time.  These proceedings were commenced on 27 April 2004.

The action

5.  The BOC claimed that as at 6 April 2004, the defendants were indebted to it in the sum of $1,942,270.52, which included accrued interest of $305,654.80, plus contractual daily  interest at the BOC’s prime rate plus 4.25 per cent per annum until payment.  Wenloy was sued as debtor and Mr Kwan as guarantor.

6.  Mr Kwan, who in 1999 was a practising solicitor, who says he has since become a barrister, and who appeared before the Master and before me in person, filed a defence on the half of Wenloy and himself.  In it he pleaded that:

(1)     He was misled and he never intended to be a sole guarantee of Wenloy’s liabilities.  BOC’s staff failed to include the other shareholders of Wenloy as guarantors;

(2)     The terms of the facility letter were not properly explained to Wenloy or to himself

(3)     Wenloy and he were not aware of the overdue interest calculated at the rate of prime plus 4.25% per annum;

(4)     Mr Kwan was not aware that he was the sole guarantor of Wenloy’s liabilities:

(5)     The terms of the guarantee were never explained to either defendant;

(6)     The amount of the debt was denied, and BOC was put to strict proof;

(7)     In about April 2001, BOC and Wenloy agreed that the mortgaged property would be sold at a price of $13,000,000 and Wenloy would thereafter pay $38,000 per month towards the debt still owed, subject to reduction in April 2002.  In fact the market value of the mortgaged property was then $16,500,000.  BOC urged Wenloy to sell it as soon as possible because Wenloy had difficulty in repaying the mortgage loan, and this Wenloy accepted.

(8)     The BOC did not reduce the instalment payments in April 2002 as agreed;

(9)     The BOC’s sudden request for payment was in breach of the setttlement agreement;

(10)   Wenloy suffered a loss of $3,500,000, being the difference between the agreed sale price of the mortgaged property and its true market value.  Wenloy counterclaims for this sum.

7.  By way of Reply, the BOC pleaded that Mr Kwan intended to give a personal guarantee when he was executing the facility letter on the half of Wenloy, and also referred to his the status as a practising solicitor.  It pleaded that he knew and should have known the contents of the facility letter and guarantee when he executed the same.  It further denied that there was any settlement agreement or that it had urged Wenloy to sell the mortgaged property and stated that the purchase price and completion date were determined by Wenloy itself.

Evidence of the settlement agreement

8.  Mr Kwan affirms that in 2001, Wenloy had difficulty in keeping up the mortgage instalments.  The BOC urged Wenloy to sell the mortgaged property as early as possible, otherwise it would take legal action against Wenloy.  Specifically, the overseas officer, Mr Wong Yan Ian told Mr Kwan that the BOC wanted early payment and that Wenloy must sell even though the sale price was below the market price.  However the BOC would allow Wenloy to repay the outstanding loan by monthly payments of $38,000 without charging any interest.

9.  The BOC and has filed two affirmations by Mr Wong.  He says that it was Mr Kwan who approached him with a proposal that the mortgaged property be sold and the proceeds applied to partial repayment of Wenloy’s outstanding indebtedness.  Mr Kwan offered to pay $38,000 per month, but this was not acceptable to the BOC.  However when such payments were made, the BOC exercised its right under the facility letter and the mortgage to set off the credit balance from Wenloy’s account to partially repay the outstanding indebtedness.  He denies that there was any agreement that no further interest would be charged.

Order 14

10.  The principles are well-known and I need not set them out in detail.  The threshold onus is on the defendant to show that there is a triable issue.  The Court will test the credibility of an affidavit asserting a triable issue against the conduct of the defendant and contemporary documents.  There should not be a trial on affidavits.  The question is whether the defendant’s assertions are believable, rather than whether they are to be believed.  As Bokhary JA put it in Re Safe Rich Industries Limited, 1994 HKLY 83 :-

“The test at the summary stage is indeed as simple as whether the defendant’s assertions are believable.  But it must be recognised - because failure to recognise it would create a debt-dodgers’ charter - that whether the defendant’s assertions are believable is a question to be answered not by taking those assertions in isolation but rather by taking them in the context of so much of the background as either undisputed or beyond reasonable dispute.”

The defences

11.  There are two defences here.  The first relates to the alleged lack of knowledge or understanding on the part of the defendants.  In fact the knowledge and understanding would be that of Mr Kwan, for he all along acted for Wenloy.  The second relates to the alleged settlement agreement.  There is a third defence which appears to be that because the documents did not set out what the prime rate actually was, the defendants could not know the rate of interest, but I do not see that this merits consideration, because the BOC’s prime rate, like that of any bank, could be ascertained from time to time.

Lack of knowledge and understanding

12.  This allegation is one which must invariably be approached with a degree of scepticism.  If one is to consider whether a defence is ‘frivolous and practically moonshine’, to use the words of Lord Lindley in Codd v Delap (1905) 92 LT 510 at 511, this kind of allegation will always have the glint of moonshine about it, even when it comes from a person who presents himself as unsophisticated.  However, coming from a practising solicitor, it is simply incredible.

13.  There was no need for, or duty on, the BOC to explain that the terms of the facility letter or the guarantee to Mr Kwan.  He could read them for himself.  He can speak, read and write English.  The terms are perfectly clear.  In addition there was, among the account opening documents, a letter from the BOC to Mr Kwan as guarantor, explaining the terms of the guarantee and advising him to seek independent legal advice before entering into it.  Mr Kwan signed an acknowledgement to indicate that he had considered all relevant matters and was prepared to execute the guarantee.

14.  In effect, what is pleaded is non est factum.  In considering such a plea in the case of Wing Hang Bank Ltd v Liu Kam Ying[2002] 2 HKC 257, Ma J, as he then was, rejected such a plea, coming from a man of full age and capacity on the basis that if he did not read the terms, that was negligent on his part and the defence of non est factum was unavailable.  See also the judgment of Reyes J in Bank of China (Hong Kong) Ltd v Major Harmony Ltd & Ors, HCA 886 of 2002.

15.  In my view therefore, the defence of lack of knowledge and intention is incredible.

Settlement agreement

16.  In the first place, the agreement alleged is inconsistent with the contemporaneous documents.  If it had existed it would necessarily have appeared in correspondence between Wenloy’s solicitors, Baker and Mackenzie, and the plaintiff in relation to the sale of the mortgaged property.  But it did not.  One could also sensibly expect it to have been alleged in answer to demands made for payment rather than appearing for the first time in the Defence and Counterclaim.

17.  It is also noted that Mr Kwan is inconsistent as between his pleadings and his affirmation, in that only in the latter does the allegation surface that the monthly repayments were to be interest-free i.e. credited entirely to capital.

18.  In the second place, Mr Kwan was a practising solicitor, and it is inconceivable that he would not have caused an agreement such as that alleged to have been reduced into writing.  In another action by the BOC against defendants who included Mr Kwan as 3^rd defendant, Bank of China (Hong Kong) Ltd v Cosan Ltd & Ors, HCA 1600 of 2004, Sakhrani J made this comment also in respect of Mr Kwan at paragraph 36 of his judgment, and I respectfully agree with him.

19.  It is true that Wenloy paid $38,000 per month, over a period of 11 months, and the BOC accepted them.  Nevertheless, for the reasons given above, in my view the allegation of a settlement agreement is also incredible.

20.  If this is wrong, this defence is in any event unsustainable in law.  A creditor is not bound by a promise to accept part payment in full settlement of a debt.  There is no consideration.  A full discussion of the point appears in the judgment of Sakhrani J in Bank of China (Hong Kong) Ltd v Cosan Ltd at paragraphs 48-50.

The counterclaim

21.  There is no evidence to support the allegation that the true market value of the mortgaged property at the time of sale was $16,500,000.  But more importantly, the counterclaim stands or falls with the allegation of the settlement agreement.  If there was no settlement agreement, or one which was unsustainable in law, there could be no basis for the counterclaim.

Costs

22.  The plaintiff seeks indemnity costs, on the basis that the facility letter and the guarantee both provide for them, and it is normal for court to follow the contractual basis, Gomba Holdings v Minories Finance Ltd [1993] Ch 171; and also because the defence is unmeritorious; Sung Foo Kee v Pak Lik Co. [1996] 3 HKC 570.

23.  I tend to suspect that neither defendant is good for the judgment sum or the costs.  Nevertheless, indemnity costs are contractually provided for; and anyone who has been a practising solicitor should know that the defences put up in this case are a complete waste of time, particularly where something very similar has already been tried and has failed.  Indemnity costs are appropriate.

Result

24.  The appeal is dismissed with costs on the indemnity basis to be taxed if not agreed.