FIRST PACIFIC FINANCE LTD v. READY GAIN LTD AND ANOTHER

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JUDGMENT

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1. This is an appeal by the defendants against a decision of Master Hansen made on the 1st February 1985 when he gave judgment for the plaintiff under Order 14 for the sum of $4,704,070.10 with interest and costs.

2. The plaintiff is a deposit taking company. The 1st defendant company is wholly owned by the 2nd defendant who is a director. The 2nd defendant has been described as the 1st defendant's alter ego. The 2nd defendant was also the director of Rich Lake Limited (Rich Lake) and chairman and managing director of Century City Holdings Limited (C. C. H.).

3. As a result of negotiations that took place in May 1982 the plaintiff entered into a loan agreement with the 1st defendant on the 10th June 1982. The terms and conditions of the agreement were set out by the plaintiff in a letter dated the 21st May 1982 addressed to C. C. H. for the attention of Mr. Lawrence Kan a director and Deputy General Manager. Interest was stated to be two per cent above Hong Kong prime rate. By the agreement the plaintiff made available to the 1st defendant a two year Hong Kong dollar prime rate revolving credit facility in the sum of HK$5,000,000.00. Clause 5.01 of the agreement defines interest as Prime Rate plus the Margin which is 2%. Under the agreement the 1st defendant pledged shares held in C. C. H. to the value of $8,350,000,00 and agreed to furnish additional shares if the value fell below this figure. The 2nd defendant signed the loan agreement on behalf of the 1st defendant. He also signed a personal guarantee in favour of the plaintiff. Further security was provided by a debenture creating a floating charge over the present and future assets of the 1st defendant.

4. By an amended agreement dated the 1st August 1982 made between the plaintiff the 1st defendant and Rich Lake it was agreed that Rich Lake would pledge the shares in C. C. H that were originally provided by the 1st defendant, up to a value of $9,000,000.00. The 2nd defendant was not a party to this agreement, but he signed it on behalf of the 1st defendant and also signed as one of the directors of Rich Lake.

5. On the 28th May 1983 the plaintiff wrote to the 1st defendant for the attention of Mr. Herman Fung requesting that additional shares be furnished because the value of the charged shares had fallen below $8,350,000.00. The same request was made by the plaintiff at a meeting with the 2nd defendant on the 4th June 1983. As a result of this meeting the 2nd defendant submitted to the plaintiff a statement of his assets and liabilities. The plaintiff wrote to the 2nd defendant on the 21st June 1983 informing him that default had been made under the loan agreement, but set out fresh terms which included an extension of the termination date by one year at a revised rate of interest of four per cent above the Hong Kong dollar prime rate. The 2nd defendant acknowledged the new terms by signing the letter as guarantor and as director on behalf of the 1st defendant. The terms were subsequently incorporated into a supplemental agreement on the 30th September 1983 which was signed by the 2nd defendant as guarantor and as director of the 1st defendant.

6. After various payments had been made under the supplemental agreement a further default arose at the end of June 1984. The amount due from the 1st defendant on the 26th July 1984 was $4,752,117.53.

7. A second supplemental agreement was then entered into by a letter dated the 26th July 1984 whereby the plaintiff extended the final maturity date to the 31st October 1984. However, the 1st defendant defaulted under this agreement on the 28th September 1984. Although the 2nd defendant denies that the letter is a contract it is abundantly clear that the contents confirm details agreed with the 2nd defendant on the 1st July 1984. There was no further correspondence from the 1st or 2nd defendant disputing these terms nor did the 2nd defendant provide any evidence on this matter in his affirmation.

8. Mr. Dicks who appeared for the defendants levelled several criticisms at the statement of claim. In particular he said that the terms of the agreement and how the acts of default arose had not been pleaded whilst there was no consideration for the supplemental agreements. He also submitted that the calculations of the interest payments had not been set out. Mr. Dicks further asserted that the reference to the loan agreement for its full terms and effect, at the trial was a bad pleading. He placed reliance on Citibank N. A. (Nominees) Ltd. (formerly known as F. N. C. B. Nominees Ltd.) v. Deacon Te-ken Chiu (1983) H .K. L. R. 121 where it was held: -

"The formula: the plaintiff will refer to certain documents at trial "for their full terms, true meaning and effect" has no place in modern pleading. If the precise words of the document are material they must be stated. Otherwise the effect of the document must be briefly stated.".

Although the statement of claim includes a clause to this effect the material terms upon which the plaintiff relies are in fact set out. I am also satisfied that the statement of claim sets out sufficient particulars of the calculations of interest. The acts of default quite clearly refer to the non-payment of the amounts due whilst consideration for the supplemental agreements was afforded by the acts of default. Accordingly, I find no merit in the argument that the statement of claim is defective.

9. A further criticism was made by Mr. Dicks that the statutory affirmation in support of the summons for summary judgment should not have been made by Mr.A.K.S.Leung a Vice President of the plaintiff for he did not have personal knowledge of the facts. He referred to Mr. Leung's second affirmation which revealed that the negotiations that led to the loan agreement were made by Mr. R.T.P.Cheng on behalf of the plaintiff with Mr. Lawrence Kan and Mr. Herman Fung two employees of C. C .H. This evidence was not challenged by the defendants. There was no evidence to indicate that Mr. Leung did not have knowledge of the defendants' indebtedness at the time he made the statutory affirmation although it appears he did not have the conduct of the original negotiations. I do not consider that the affirmation was defective.

10. The 2nd defendant concedes that the loan agreement and other documents substantially incorporate all the terms and conditions that were agreed in the negotiations, but contends that the agreement for interest was to pay at prime rate and not at prime rate plus 2%. Consequently the defendants now claim that an overpayment in excess of $100,000.00 has been made to the plaintiff which would be the subject matter of a counterclaim if unconditional leave is granted. Nevertheless, payments of interest were made at prime rate plus 2% until the first act of default.

11. Mr. Dicks submitted that upon the evidence a triable issue had been raised on the grounds that the loan agreement did not reflect the true agreement between the parties, and oral evidence is therefore necessary to determine whether the court should make an order for rectification on the grounds of mistake. However, the documentary evidence clearly shows that interest was to be paid at 2% over prime rate. There is no ambiguity in the agreement as contended by the defendants. Indeed it is pertinent to enquire as was submitted by Mr. Clayton, counsel for the plaintiff why the 2nd defendant should have signed the loan agreement if the rate of interest was incorrect. It is also significant that payments were made at this rate of interest until the first default. There are no grounds to support the argument that there was either mutual mistake or that there was a unilateral variation of the agreement by the plaintiff. The 2nd defendant's evidence was most unconvincing.

12. Mr. Dicks contended that the revised rate of interest at 4% over the prime rate should in any event have commenced on the date of the first supplemental agreement the 30th September 1983 and not the 21st June 1983. However, this is wrong because the act of default occurred on the earlier date.

13. Mr. Dicks submitted that the amendments made subsequent to the agreement were not binding upon the 2nd defendant because he was not a party. However, the' 2nd defendant signed the agreement on behalf of the 1st defendant and Rich Lake as a director and obviously he had full knowledge. Such an argument on the facts of this case is unrealistic and without merit.

14. A further argument was put forward that an equitable defence is available to the 2nd defendant for the plaintiff failed to sell the shares pledged as security at a time when they were worth more than the debt outstanding. The shares subsequently declined to a value well below the debt due to the plaintiff. The 2nd defendant claims that he requested the plaintiff to sell the 9 million shares when the proceeds of sale would have been sufficient to discharge the whole debt due to the plaintiff. Apart from this bald assertion the 2nd defendant gave no particulars of this request.

15. In support of his argument that the plaintiff should have sold the shares when the price was favourable Mr. Dicks cited two authorities. The Mutual Loan Fund Association v. Sudlow (1858) 5 C. B. (N. S.) 449 and Standard Chartered Bank v. Walker (1982) 1 W.L.R. 1410 where the facts in both cases related to a power of sale exercised in circumstances that resulted in insufficient funds being raised to satisfy the defendant's debt. However, in the instant case the power of sale contained in the agreement was not exercised, and in any event it was a matter of discretion for the plaintiff to determine for there is no obligation to sell. The allegation that the plaintiff wilfully omitted or neglected to enforce its right of sale under Clause 10.07 of the loan agreement has no merit. That plaintiff was perfectly entitled not to exercise the power of sale.

16. In my judgment the defendants have not established that they have an arguable defence on any of the grounds that have been raised. Accordingly, the appeal will be dismissed with costs to the plaintiff.