BANK OF CHINA (HONG KONG) LTD v. FREE FORTUNE INVESTMENT LTD AND ANOTHER

HCA 4808/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 4808 OF 2002

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J U D G M E N T

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1. This is an appeal from the decision of Master Rimsky Yuen SC made on 29 August 2003 giving summary judgment in favour of the Plaintiff against the Defendants.

2. The Plaintiff's case against the two Defendants is based on a Deed of Guarantee dated 7 June 2001. The guarantee covers the indebtedness of a company beneficially owned and controlled by the 2nd Defendant, Bestime Investment Limited (Bestime). The indebtedness in question arose out a term loan of 1 year up to the extent of HK$6.2 million. There can be no doubt that upon the expiry of the 1-year period, Bestime was in default in repaying the term loan. In those circumstances, after unsuccessful demands were made on both Bestime as well as the two Defendants as guarantors for repayment of the outstanding loan, the present action was commenced against the Defendants.

3. In a nutshell, the Defendants' case or purported defence is that there was an oral agreement reached by the 2nd Defendant with a bank officer of the Plaintiff in or around August 2000 to the effect that a property in Redhill owned by the 1st Defendant would be let and the rental income plus a further sum of $50,000 per month would be paid to the Plaintiff as payment of the accruing interest in respect of the then outstanding indebtedness of the two Defendants as well as Bestime to the Plaintiff.

4. According to the Defendants, pursuant to the oral agreement, after some renovation, the property was let in October 2000, and the rental income plus the monthly sum of $50,000 were thus paid over to the Plaintiff. The Defendants' case is that in due course a restructuring arrangement would be reached by the parties for both the repayment of the outstanding principal and the payment of the accruing interest.

5. Under those circumstances, the term loan in question which was offered under a facility letter dated 29 May 2001 came into being. The gist of the Defendants' case is that for so long as the rental income plus the sum of $50,000 per month were so paid to the Plaintiff, pending the parties reaching an agreement on the method of repayment by instalments of the outstanding principal and barring any special circumstances, the Plaintiff would not take any action against the Defendants for repayment of the outstanding principal. That, in gist, is the way the Defendants have invited this Court to view the facility letter, the term loan of 1 year as well as the Deed of Guarantee.

6. It is trite that in an application for summary judgment, it is for the defendant to show an arguable defence or demonstrate some other reason for letting the case go to trial. Insofar as a purported defence on facts is put forward, the well-known test is whether the version of facts put forward by the defendant is believable, as opposed to whether it should be believed which would be dealt with at the trial if there should be a trial. What is or is not believable may be judged by reference to the contemporaneous documents and conduct of the parties, as well as the undisputable facts or circumstances of the case. Of course, very often, one needs to go further and see whether the factual defence put forward, even if believable, would, as a matter of law, arguably give rise to a good defence to the plaintiff's claim. With those principles in mind (which have been set out and discussed in detail in Hong Kong Civil Procedure 2002 vol. 1 para. 14/4/2 et seq.), I proceed to examine the defence put forward by the Defendants.

7. In relation to that part of the alleged oral agreement regarding the letting out of the property and the payment of the rental income plus the monthly sum of $50,000 to the Plaintiff, I agree that it is to some extent reflected or evidenced in clause 9(d) and (e) of another facility letter dated 29 May 2001 issued by the Plaintiff to the 1st Defendant. However, I note that the main plank of the Defendants' argument based on this alleged oral agreement, namely, that so long as the rental income and the monthly sum of $50,000 are so paid, pending the reaching of an agreement between the Plaintiff and the Defendants regarding the repayment of the outstanding principal and barring any special circumstances, the Plaintiff shall not, in the meantime, require repayment of the principal, is nowhere evidenced by any of the contemporaneous documents. (It is not very clear from the Defendants' submissions whether this actually constitutes part of the oral agreement reached or is the unspoken intended effect of the oral agreement. For the sake of convenience, I will simply refer to it as the alleged effect of the oral agreement in the following paragraphs.)

8. In particular, I note that neither the facility letter issued to the 1st Defendant nor the facility letter issued to Bestime contains any reference to that effect. Nor can one find any reference to the alleged effect of the oral agreement in any of the contemporaneous documents, whether they came into being before or after the two facility letters. Moreover, the alleged effect of the oral agreement does not even appear in the two statements of defence filed by the two Defendants after commencement of the present action.

9. More importantly, in a letter dated 12 May 2001 written by the 2nd Defendant to the Plaintiff, the 2nd Defendant specifically admitted in the 4th paragraph on p. 3 of the long letter that the Plaintiffs had the right to take legal action at any time to recover the outstanding principal. That is wholly inconsistent with the alleged effect of the oral agreement, i.e. that the Plaintiff shall not take any action to recover the outstanding principal pending the reaching of an agreement for the repayment of the principal and barring any special circumstances, provided that the rental income and the monthly sum of $50,000 are paid to the Plaintiff.

10. Furthermore, turning to the contemporaneous banking documents signed, it cannot be denied that in none of the two facility letters, nor the Deed of Guarantee signed and executed by the parties in mid-2001 following which the term loan of 1 year was drawn down, was there any mention of the alleged effect of the oral agreement.

11. As I said, in one of the two facility letters, there was a reference to the payment over of the rental income and the payment of the monthly sum of $50,000. Yet it did not say that so long as those payments were made, the Plaintiff would not take any action to recover the outstanding principal. Rather the two facility letters specifically and clearly say that the two term loans offered under them for the specific purpose of enabling the repayment of the past indebtedness were for a period of 1 year only and upon maturity, the term loans would have to be repaid in full. Again, the alleged effect of the oral agreement is wholly inconsistent with the contemporaneous banking documents signed.

12. I have not forgotten that in the 2nd Defendant's letter dated 12 May 2001, there was a suggestion or some contemplation that ultimately the Defendants could reach an agreement with the Plaintiff for the repayment of the outstanding principal. However, in my judgment, on a fair reading of the letter, at most that only represented a unilateral proposal or hope on the part of the Defendants. On the evidence, nothing concrete was reached between the parties and all that one has got is the two facility letters together with the Deed of Guarantee which, as I analysed above, are wholly inconsistent with any suggestion of a binding agreement with the Plaintiff whereby the Plaintiff agreed to compromise its right to demand payment of the outstanding indebtedness, save and except that as per the two facility letters, the two term loans would only be repayable in 1 year's time.

13. The above analysis of the position is also consistent with a review of the subsequent conduct of the parties, including their subsequent correspondence.

14. In my judgment, on the evidence, the allegation of an oral agreement to the extent asserted by the Defendants in this appeal (i.e. the alleged effect of the oral agreement) is quite inconsistent with the subsequent receivership set in motion by the Plaintiff after the 1st Defendant and Bestime failed to repay the term loans upon their maturity, the repeated demands for payment of the outstanding indebtedness and interest, and the sale of the Redhill property and a related office premises. When the Plaintiff took those actions in enforcement of payment of the outstanding indebtedness, the Defendants, according to the contemporaneous documents that have been placed before the Court, did not make any protest based on the alleged oral agreement or the alleged effect of the oral agreement at all.

15. In this regard, given that the 2nd Defendant is a highly educated and experienced professional, the absence of any protest based on the alleged oral agreement or the alleged effect of the oral agreement is most surprising and goes a long way towards reinforcing one's view that the alleged oral agreement or (more importantly) the alleged effect of the oral agreement is wholly unbelievable. C.f. Banque de Paris v de Naray [1984] 1 Lloyds Rep. 21, 23-24 per Ackner LJ.

16. As I said, the alleged oral agreement only first surfaced when the Defendants filed their respective statements of defence in this action, whereas the alleged effect of the oral agreement did not become apparent until after the taking out of the summary judgment application by the Plaintiff.

17. So for all these reasons, in my judgment, the two Defendants have not been able to show an arguable defence to the Plaintiff's claim.

18. In other words, the learned Master came to the right conclusion in granting summary judgment for the outstanding indebtedness. (As to the outstanding amount, there is more than sufficient evidence before the Court to establish it.) This appeal is therefore dismissed.

[Submissions on costs]

19. As regards costs, having heard the parties further, the normal rule should apply in the present case, i.e. costs should follow the event. The Plaintiff asks for costs to be taxed on a full indemnity basis. This is based on clause B of the Deed of Guarantee. Indeed, the learned Master has also ordered that costs of the action be paid by the Defendants to the Plaintiff on a full indemnity basis based on such provisions. I agree that this is the correct basis for taxation of costs. Therefore, I order that the costs of this appeal be paid by the Defendants to the Plaintiff; such costs, if not agreed, are to be taxed on a full indemnity basis.