CITIBANK, N.A. v. KCL CHEMICAL LTD AND OTHERS

HCA 1635/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1635 OF 2016

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R E A S O N S   F O R   J U D G M E N T

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The background

1.  The plaintiff in this action is a bank in Hong Kong.  The 1^st defendant, which is a Hong Kong company, is the borrower to whom moneys were advanced by the plaintiff pursuant to various facility letters.  The 2^nd and 3^rd defendants are guarantors of the obligations of the 1^st defendant.

2.  In the case of the 2^nd defendant, the guarantee is what is known as an “all moneys” guarantee, while in the case of the 3^rd defendant, the guarantee is limited to a principal sum of RMB2.8 million.

3.  The plaintiff originally advanced facilities to the 1^st defendant in 2010 pursuant to facility letters and under the Hong Kong Government scheme for guaranteed advances to small and medium enterprises.  As will appear later in this judgment, the existence of such a guarantee from the Government is a material matter in this case.

4.  Having said that, the facilities advanced by the plaintiff to the 1^st defendant pursuant to the terms of facility letters both dated 17 June 2010 have now been repaid.

5.  On 17 September 2012, the plaintiff and the 1^st defendant entered into facility letters in respect of three different types of banking facilities.  The first facility letter, which has been referred to in these proceedings as the 3^rd facility letter, related to a revolving short‑term credit facility with an aggregate limit of $3.5 million.  This was broken down into an overdraft of $1.5 million and a trade facility of $2 million.

6.  The second, or 4^th, facility letter, as again it has been referred to, involved trade finance facilities up to a sum of $11 million.

7.  The third, or 5^th, facility was for a sum of $1 million represented by a non‑revolving term loan.

8.  Each of the facility letters was in identical form as to its terms.  The only material difference was the rates of interest, which changed for each separate facility.

9.  In the case of the 3^rd facility, interest was to be charged on the overdraft at a rate of 1.25% per annum over the higher of either the plaintiff’s prime rate or the plaintiff’s cost of funds.  Interest was to be charged on the trade facility at a rate of 0.5% over the higher of either the plaintiff’s Standard Bills Rate or its cost of funds.

10.  For the 4^th facility, interest was to be charged at a rate of 0.5% per annum over the higher of either the plaintiff’s Standard Bills Rate or its cost of funds.

11.  Finally, interest was chargeable on the 5^th facility at a rate of 1.5% per annum over the higher of either the plaintiff’s prime rate or its cost of funds.

12.  In each case, the facility letter was signed by the 1^st defendant as principal obligor and by its guarantors.

13.  In April 2015, the plaintiff and the 1^st defendant entered into what was described as the 6^th facility.  This, in effect, was a replacement facility for the 3^rd facility, ie the loan of $3.5 million.  The only material difference between the 3^rd facility and the 6^th facility is that the interest rate chargeable to the 1^st defendant was reduced to 0.25% per annum over the higher of the plaintiff’s prime rate or cost of funds, in the case of the overdraft, and in the case of the trade facility, 0.25% per annum over the higher of the plaintiff’s Standard Bills Rate or its cost of funds.

14.  The 1^st defendant defaulted in repayment of these facilities, which amounted in total, as at 14 June 2016, to $15,017,258.38.  Demand was duly made for repayment upon the 1^st defendant as principal obligor and on the 2^nd defendant and 3^rd defendant as guarantors.

15.  Proceedings were issued and an application has been made for summary judgment by the plaintiff.  The application for summary judgment is supported by the first affirmation of Ng Hong‑wai.  The application for summary judgment is opposed by all three defendants.

16.  The 1^st defendant and 3^rd defendant were represented by the same counsel, Mr Oscar Sin.  Essentially, three defences were advanced upon which Mr Sin submitted leave should be granted to the 1^st defendant and 3^rd defendant to file a defence.  I will deal with each of these defences substantively later in the judgment, but in summary, at this stage, the defences are as follows:

(1) fraudulent misrepresentation;

(2) mistake;

(3) unconscionability.

17.  The 2^nd defendant, represented by Mr Ryan Law, also opposed the summary judgment application.  Its basis for seeking leave to appeal was that the 6^th facility letter, which was entered into in April 2015, was signed, purportedly on behalf of the 2^nd defendant, by Mr Tang Kan‑shing.  Mr Tang Kan‑shing, along with Mr Jie Ci Pok, had previously been the owners and directors of the 2^nd defendant, but they had disposed of their shares to Mr Cai Sheng Qing in 2014.

The Law

18.  The principles surrounding an application for Order 14 judgment are well‑settled.  They are in fact articulated in the notes at Order 14/1/1 of Hong Kong Civil Procedure (2017).  Essentially, what has to be shown for the defendant to be given leave to defend is that there is a triable issue or an arguable defence to the claim which is made. This defence has to be a bona fide one in the sense that it must be credible or believable in the light of the evidence before the court.

19.  In assessing whether a defence is credible or believable, the court must have regard to the evidence filed and all contemporaneous documents.  It is also a requirement that the defendant should condescend as far as possible to full particulars of his defence in order to establish the credibility of such a defence.

20.  In terms of proceedings under a guarantee, the dictum by Godfrey JA in Bank of Credit and Commerce (HK) Limited (In Liquidation) v Quadrutec Hotel Management and Development Limited [1994] 4 HKC 316 bears repeating:

“These are Order 14 proceedings, and while, on the one hand, I would take this opportunity to reaffirm that such proceedings are quite unsuitable for resolution of genuine commercial disputes in which the facts call for investigation, I would also stress that, on the other hand, Order 14 proceedings are eminently suitable for claims on dishonoured guarantees when the primary facts are not in doubt and the only result of letting the case go to trial would be to delay the plaintiff further in the recovery of the money plainly due to him.”

21.  I turn now to consider the defences advanced by the 1^st defendant and 3^rd defendant.

Fraudulent misrepresentation

22.  The basis of this defence appears at paragraph 9 of the affirmation of Jie Ci Pok which was filed in opposition to the summary judgment application.  I should quote directly the evidence which is before the court:

“In or about May 2009, I got acquainted with a male staff, who is a member of staff of the Plaintiff’s, through telephone and subsequently face to face meeting. Upon enquiries, he told me that the Plaintiff could offer loan facilities to the 1^st Defendant whereby the Government of Hong Kong would act as surety, guaranteeing 80% of the total debt incurred (‘the Hong Kong Government guarantee’).”

This is said to be the fraudulent misrepresentation.

23.  The argument advanced by Mr Sin is that the reference to total debt is a reference to any facilities which might be advanced to the 1^st defendant at any time by the plaintiff, presumably until infinity.

24.  I have to say I cannot read this sentence as being a misrepresentation in any way, let alone a fraudulent one.  It seems to me the unidentified member of staff of the plaintiff was saying no more than a customer could apply for a loan facility which would be backed by the Government whereby 80% of the total debt incurred would be guaranteed.  I do not see how one can construe from the term “total debt” that this was a promise that the plaintiff would at all times provide loan facilities which came within the provisions of the Government guarantee scheme.  I am fortified in this conclusion by reference to the various contemporaneous documents which show that a separate formal application had to be made in writing to the Government for approval for a loan under this scheme, which application was duly made by the 1^st defendant.

25.  Later in his submissions, Mr Sin resiled from the suggestion that the misrepresentation was fraudulent, but still maintained that the misrepresentation was negligent.  I think he was well advised to do so.  The authorities are replete with statements that allegations of fraud are serious ones and they must be supported with the most detailed particulars possible; that neither a litigant nor those who represent him should advance a case based on fraud with all the necessary implications for the person accused of fraud unless they are confident of the ground upon which they stand.

26.  In the present case, I can see no basis whatsoever for this serious allegation.  Even if it could be said that the statement by the member of staff of the plaintiff constituted some sort of misrepresentation, I do not see this avails the 1^st defendant in the slightest.  The 1^st defendant was not induced to enter into a contract which was somehow to its disadvantage.  Instead, it entered into a contract whereby it received a significant sum of money by way of the advance of loan facilities.

27.  At one point in his submissions, Mr Sin said that his clients’ understanding of the arrangement was that the 1^st defendant was only liable to repay to the plaintiff 20% of the amount advanced because the Government would pay the remainder of the 80%.

28.  I find this submission astonishing.  There is ample evidence that the 1^st defendant is and was a company of some substance, and its directors men of business.  For it to be suggested that they thought the 1^st defendant could obtain from the plaintiff an advance of many millions of dollars and be obliged to repay only 20% thereof is simply unbelievable.

Mistake

29.  The case advanced in respect of mistake was, to a large extent, a variation on the misrepresentation theme I have previously dealt with.  Because of the alleged misrepresentation as to the availability of a Government guarantee, it was submitted that the 1^st defendant entered into the loan contract with the plaintiff in circumstances which gave rise to a mutual mistake.

30.  Just as I am not satisfied there was any misrepresentation which induced the 1^st defendant to enter into the contract of loan with the plaintiff, so I am not satisfied that the 1^st defendant was under any misunderstanding as to the terms of the contracts of loan.  These terms were manifestly evident in the facility letters which were signed by directors of the 1^st defendant, as well as the general customer agreement which was entered into and signed by the 1^st defendant. I note the general customer agreement has both an English and a Chinese version, so this is not one of those cases where it can be said a non‑English speaking person signed documents which he did not understand.

31.  As for the 3^rd defendant, it signed a guarantee, and this document similarly is in both English and Chinese.  I should add at this point that the opening lines of the guarantee make it clear that the guarantee is an important legal document, and it should not be signed before it had been read carefully. In addition, the plaintiff recommended that the would‑be guarantor should seek independent legal advice before signing the guarantee.

Unconscionability

32.  The last alleged triable issue which was raised was unconscionability.  It was conceded by Mr Sin that the 1^st defendant was not a consumer for the purposes of the Unconscionable Contracts Ordinance (Cap 458), and that the defence of unconscionability was therefore based upon common law principles.  Those principles are summarised neatly in the 32^nd edition of Chitty on Contract at paragraph 8.133, which reads as follows:

“Scope of the Doctrine. The doctrine of unconscionable bargains seems to be limited in three ways. The first is that the bargain must be oppressive to the complainant in overall terms; the second that it may only apply when the complainant was suffering from certain types of bargaining weakness; and the third that the other party must have acted unconscionably in the sense of having knowingly taken advantage of the complainant.”

33.  There are, of course, numerous cases in common law jurisdictions where the doctrine of unconscionable bargains has been ventilated.  In my view, however, none of these authorities has any relevance to the present case.  I do not see how it can be said the bargain was oppressive to the 1^st defendant in overall terms.  Far from being oppressive, the 1^st defendant was lent money at, by reference to market terms, reasonably generous rates of interest.  In addition, I do not consider the 1^st defendant, which was and is a company of some substance, was necessarily in a position of bargaining weakness with the plaintiff.  There are numerous banks in Hong Kong, and the 1^st defendant was perfectly capable of going to an alternative bank if it was unhappy with the terms proposed by the plaintiff. Lastly, I can see nothing in any of the documents or indeed in the evidence filed on behalf of the 1^st defendant to show that the plaintiff had acted in an unconscionable way.  Indeed, the transaction seems to have been conducted on exemplary commercial lines.

34.  As a last point on unconscionability, Mr Sin referred to numerous paragraphs of the general customer agreement and the guarantee which he said were unconscionable.  Even if it could be shown that any of these paragraphs was in some way unfair, I still doubt whether this would, in any way, vitiate the contract of loan between the plaintiff and the 1^st defendant.

35.  However, having looked at the various paragraphs complained of, these appear to be relatively standard terms in commercial documentation entered into between a bank and its customers.  Unsurprisingly, the bank seeks to cover numerous eventualities and to preserve its rights wherever it can to seek repayment of amounts which are or have been advanced.

36.  In conclusion, I find nothing in any of the three defences advanced which even starts to suggest that a triable issue has been made out.

Apparent authority

37.  Turning to the 2^nd defendant, the argument advanced by Mr Law is an ingenious one.  It is to the effect that where a director of a company resigns and notice of such resignation is lodged at the Companies Registry by the filing of the requisite form, ND2A, those dealing with the company have been put on constructive notice that the individual is no longer a director.  In essence, it is said that once the public notice has been filed, one deals with the former director, if he purports to act on behalf of the company, at one’s peril.

38.  Mr Lok, on behalf of the plaintiff, submitted that the 2^nd defendant had held out in 2012 Mr Jie and Mr Tang as being its directors when board resolutions were signed authorising the 2^nd defendant to sign the various facility letters.  There is no dispute that Mr Jie and Mr Tang, as directors of the 2^nd defendant at that time, had the actual authority to act on behalf of the 2^nd defendant.

39.  Mr Lok further submitted that, notwithstanding the resignation of Mr Tang as a director, the plaintiff was entitled to treat Mr Tang as continuing to be an authorised signatory of the 2^nd defendant until such time as it received formal notice from the 2^nd defendant that he was no longer so authorised.

40.  It seems to me this must be right.  I cannot see that the law imposes on a person who deals with a company a continuing obligation to check at the Companies Registry to see whether a person remains as a director of the company and that his previous actual authority is therefore somehow withdrawn.  This flies in the face of the indoor management principle identified in Turquand’s case (Royal British Bank v Turquand [1856] 6 El & Bl 327) and would impose an intolerable burden on the efficient conduct of business.

41.  Mr Law referred me to authorities, including the cases of Irvine v Union Bank of Australia (1877) 2 App Cases 366 and Zanda Investment Limited v Bank of America [1994] 2 HKC 409.  The Irvine case is an old and distinguished authority on company law.  It is authority for the proposition that when a person deals with a company, he is deemed to have notice of the company’s memorandum and articles of association, although under the provisions of the new Companies Ordinance in Hong Kong, the concept of a memorandum of association has now disappeared.

42.  If, therefore, there are restrictions in the articles on what a company can do, then a person who deals with the company is deemed to have constructive notice thereof.  However, to extend this principle to find that a person who deals in good faith with a company is deemed to have constructive notice of every filing at the Companies Registry made by the company is undesirable as a matter of commerce and untenable as a matter of legal principle. If specific authority be needed for this proposition as it relates to directors, then it is to be found in POW Services Ltd v Clare [1995] 2 BCLC 435 where the court ruled that the fact a person is registered as a director at Companies House (the English equivalent of the Hong Kong Companies Registry) does not determine whether a person actually is or is not a director.

43.  Accordingly, the argument that the execution by the 2^nd defendant of the 6^th facility letter somehow acted to discharge the 2^nd defendant from liability because of a lack of authority on the part of Mr Tang seems to me not to be made out.

44.  In any event, as Mr Lok submitted, the liability of the 2^nd defendant arises under the guarantee rather than the facility letter.  There is nothing in the guarantee to suggest that the 2^nd defendant should be discharged from liability in the circumstances of the execution of a new facility letter.  Indeed, the guarantee contains the usual provisions which allow the plaintiff to enter into arrangements or accommodations with the principal obligor company without undermining or defeating the liability of the guarantor.  This is to overcome the common law principle that a surety may be discharged from his surety obligation if the creditor and the principal debtor enter into some form of accommodation which is not agreed and approved by the surety.

45.  In conclusion therefore, I find that, as with the 1^st and 3^rd defendants, no triable issue has been made out on legal principles.

46.  Mr Law’s final ground upon which he said leave to defend should be granted was that the 2^nd defendant was in no position to verify the accuracy of the amounts claimed by the plaintiff.  He pointed out the absence of any formal certificate which the plaintiff was entitled to serve pursuant to the general customer agreement and which certificate by virtue of that agreement would constitute conclusive evidence of the amount due.

47.  Mr Law was unable, however, to point to any particular basis upon which the figures claimed and pleaded by the plaintiff were in error.  Instead, he asserted his client should have some general right of discovery to verify the figures and that this somehow meant the case came within the proviso in Order 14 RHC that there is some other reason for trial.

48.  In the present case, the amounts claimed by the plaintiff are pleaded in paragraph 19 of the statement of claim.  Helpfully, there has been a further breakdown of the outstanding indebtedness at paragraph 15 of the second affirmation of Mr Ng Hong‑wai.  Whilst the affirmation of Mr Ng does not constitute a certificate under the general customer agreement, there are provisions in the general customer agreement and the guarantee which allow the plaintiff to make a determination as to the amount which is due.

49.  I am certainly prepared to accept that the indebtedness owed to a bank which is verified on oath in an affirmation can stand as prima facie evidence in the absence of manifest error of the amount due to the bank.  I do not consider it is desirable that a defendant should be able to defer the entry of judgment against him by asserting some general right to investigate the amount of the claim against him.  It is common for guarantors, unlike principal obligors, not to have necessarily received communications from the bank as to the indebtedness owed by the principal obligor.  That is one of the perils of entering into a guarantee.  The remedy for the guarantor is to seek the relevant information and verification from the principal obligor, against whom he has, of course, a recourse claim in the event he discharges his guarantee liability to the creditor.

Quantum

50.  While I was prepared to accept the figures provided in the statement of claim, I was concerned as to the contractual basis for the plaintiff to claim interest at what I understand to be its default rate of 10% above prime rate.  Mr Lok sought to persuade me that on a proper reading of clause 1(d) of the general customer agreement, the plaintiff is entitled to charge a higher rate of interest.  The material sentence from clause 1(d) is as follows:

“I/we acknowledge that a higher rate of interest may be charged on amounts in default or on accounts which the Bank has permitted to become overdrawn where no specific arrangement has been agreed by the Bank with me/us regarding rate(s) of interest to be charged.”

51.  Mr Lok submitted that the proviso as to no specific arrangement as to the rate of interest was a qualification to the earlier part of the sentence.  In other words, if the parties had not agreed a default rate of interest, then the plaintiff was entitled unilaterally to prescribe an amount.  There is an alternative reading of this clause, which is that the proviso cross‑refers to the interest provision in a facility letter.  On balance, I think the latter construction is more appropriate.  The charging of default interest at a rate of 10% above prime rate is a severe penalty on a defaulting customer.  I think any bank should make it very clear to a customer the potential consequences of being in default and the likely amount of default interest which might be charged if such a claim is to be maintained.

52.  I therefore prefer to confine the claim for continuing interest to the contractual amounts in the facility letters.

53.  Since the issue of the writ and the filing of the statement of claim, the plaintiff has uplifted deposits in the name of the 1^st defendant in set‑off and partial reduction of the indebtedness owed to it.  In his 2^nd affirmation Mr Ng set out the amounts due under the various facilities which amounted as at 24 November 2016 to HK$12,891,670.64.

54.  Accordingly I give judgment for the plaintiff against the 1^st defendant and 2^nd defendant in the sum of HK$12,891,670.64 together with interest on the sum of HK$11,492,707.39 at the rate of 0.5% per annum over the plaintiff’s Standard Bills Rate (which I understand to be 5.75% per annum) and interest on the sum of HK$300,028.00 at the rate of 1.5% per annum over the plaintiff’s prime rate (which I understand to be 5.25% per annum) from 25 November 2016 until today, 18 January 2017, and thereafter interest at the judgment rate.

55.  Turning to the 3^rd defendant, the liability of the 3^rd defendant under its guarantee dated 15 June 2015 is limited to RMB2.8 million.  Clause 3 of the guarantee makes provision for payment of default interest from the date of demand on the guarantee at the rate of 2% above the plaintiff’s cost of funds. As there is no evidence before the court of the plaintiff’s cost of funds, I propose to use the same rate of interest as that which applies to the trade facility although interest will commence to run from the date demand was made on the 3^rd defendant which was 17 May 2016.  I therefore give judgment for the plaintiff against the defendant in the sum of RMB2,800,000 together with interest thereon at the rate of 6.25% per annum from 17 May 2016 until 18 January 2017 and thereafter interest at the judgment rate.

Costs

56.  Turning now to costs, paragraph 18 of the general customer agreement gives to the plaintiff a right to recover fees and expenses paid to its legal advisers on a full indemnity basis.

57.  The guarantees do not use the term indemnity. The material provision in paragraph 13 reads:

“The Guarantor will pay on demand all legal and other costs and expenses … incurred by Citibank and each Affiliate in preserving or protecting its rights under this Guarantee.”

The word “all” seems to me to be the important one.  This is a contractual commitment by the guarantor in effect to indemnify the bank for everything it spends in enforcing the guarantee.

58.  In those circumstances, I do not consider that the defendants can resist an order that the costs of this action be paid by them to the plaintiff on an indemnity basis.

59.  I therefore order that the costs of the action be paid by the defendants to the plaintiff on an indemnity basis to be taxed if not agreed, with a certificate for counsel.