RE NANIK DAYARAM

HCB 7651/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS NO 7651 OF 2011

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Re:              NANIK DAYARAM

Ex Parte:     THE HONG KONG AND SHANGHAI BANKING CORPORATION LIMITED

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J U D G M E N T

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1.  This was a bankruptcy petition dated 7 December 2011 presented by the petitioner, The Hongkong & Shanghai Banking Corporation (“the bank”) against Nanik Dayaram (“the debtor”). At the conclusion of the hearing judgment was reserved which I now give.

BACKGROUND FACTS

2.  The petition has been adjourned on a number of occasions.  Its protracted history is not relevant to the central issues in this case and it is not necessary to go into the question of which party was responsible for the adjournments.

3.  The debtor was a director of Days Impex Limited (“Days Impex”) and Days International Limited (“Days International”) (collectively “the companies”).

4.  On 23 November 1988 and 18 June 2004, the debtor provided unlimited guarantees in respect of all monies due and owing to the bank by Days Impex and Days International respectively.

5.  In the course of trading, the companies took out various loans and facilities from the bank and were unable to repay the same.

6.  The debtor failed to comply with a statutory demand served by the bank on his former solicitors Tanner de Witt on 1 November 2011 based on a debt comprising the sums of HK$39,217,885.47 and US$23,557,733.80.  Following non-payment, the bank issued this petition against the debtor.  Service was by way of substituted service on 7 December 2011.

7.  On 12 December 2011, winding up petitions presented by the bank against the companies were heard.  The debtor was represented at the hearing and representations to resist the winding up of the companies were made on his behalf.  However he was unsuccessful and winding up orders were made.

THE ISSUES

8.  The debtor who appeared in person opposed the bankruptcy petition on the ground that he had a bona fide defence on substantial grounds, namely, that the bank had acted in breach of mandate in making various loans; and further, that he had a cross claim.

9.  The liability of the companies to the bank mainly arises from the drawdown of 59 import loans and the financing of 12 export bills.  In summary, according to the bank, as at the date of the winding up orders, Days Impex’s indebtedness amounted to HK$5,219,274.97 and US$19,886,891.27 and Days International’s indebtedness amounted to HK$34,735,047.38 and US$3,966,457.43. 

(1) Whether loans made were in breach of mandate

10.  This depends solely on whetherthe loans and facilities were granted in breach of mandate.  I propose to deal with Days International and Days Impex in turn. 

Days International

11.  The signature card for Days International unequivocally states:

“ANY ONE TO SIGN SINGLY WITH COMPANY CHOP”

This was followed by 5 names and in-specimen signatures of the 5 individual signatories as well as a sample of the company chop.

12.  During the mid-morning adjournment just prior to hearing the debtor’s submissions, the court was handed a copy of the debtor’s skeleton that belatedly recognised and acknowledged that the debtor was not in a position to challenge the amounts owing under the guarantee he had provided in respect of the debts of Days International as having been made in breach of mandate.

13.  As regards Days International, only the cross-claim against the bank is left.  That will be considered at §§39-44 below.

Days Impex

14.  The documentary evidence and material events relating to the signatory mandate is set out below in chronological order.

The facts

15.  On 1 June 1994, Days Impex submitted a “Mandate for Accounts of a Limited Company” (“the 1994 mandate”) to the bank.  Clause 1 provided that

“a current account and savings accounts/savings account/call/time deposit account be opened or continued (as the case may be) with [the bank] … and any other account or accounts as may be subsequently directed by [the debtor,] MR MAHESH DAYARAM – ANY ONE SINGLY OR MS SHEILA DAYARAM, MS PITTY K W KWOK, MR GNANADORAI D SATHIARAJ, MR LAL V VASWANI – ANY TWO JOINTLY”.

16.  Days Impex operated a series of export/import accounts including account 567-776703-095 for export bills and account 567-776703-120 for import loans.  Numerous sets of application forms and drawdown documentation in respect of these two accounts form exhibit “ND-2” to the debtor’s 3^rd affirmation. The signature card of Days Impex for the Imports/Export Department is dated 1 June 1994.  7 sets of suffix numbers: #095, 120, 129, 130, 132, 140, 144 were written in manuscript in the box bearing the description “IMP/EXP Account Number (For Bank Use Only)”.

17.  Days Impex advised the bank by letter dated 21 June 1994 of an amendment board resolution of 1 June 1994 “changing signing instructions for ‘all’ Bank accounts” as opposed to just current accounts.  The board minutes attached, in pertinent part, read:

“BANKING ACCOUNT:

RESOLVED: that all the Company bank accounts will be operated on the individual signature of the following signatories:

            [The debtor]

Mr Mahesh Dayaram

FURTHER RESOLVED: that any two jointly of the following signatories are authorized to sign on all the Company bank accounts viz:

Ms. Sheila Dayaram

Ms. Pitty Kwok Kwai Wah

Mr Lal Vaswani; and

Mr. Gnanadorai D Sathiaraj

FURTHER RESOLVED: that all signatories can sign individual on Export/Import accounts.”

18.  Resolutions in similar terms were passed on 11 November 1994 except that Mr Sathiaraj was removed as a signatory.

19.  A copy of the signature card for the import/export account dated 1 June 1994 is attached as an annex to this judgment.  It will be seen that under “Imports Account” and “Exports Account”, the number “1” has been typed into most of the boxes.  That would reflect the position obtaining after the resolutions passed on 1 June 1994 and notified to the bank under cover of the company’s letter dated 21 June 1994, namely, that a single signatory could operate those accounts.

20.  Mr Tam Kai Ming, a senior loan management manager of the Asia-Pacific Risk Department of the bank has filed various affirmations on behalf of the bank.  In his 2^nd affirmation dated 10 July 2012, Mr Tam exhibited (as exhibit TKM-4) a complete set of signing instructions with board resolutions, company mandate and in-specimen signatures for the company.  His explanation at § 19 (1) is reproduced below:

“(a) … those instructions related to various banking accounts (i.e. current accounts, saving accounts, etc.), as well as the specific trade accounts (i.e. import/export accounts, letter of credit accounts, etc).

(b) The arrangement reflected in the above instructions was that any one of Group A signatory or any two of Group B signatories were required to operate the Days Impex Current Account (i.e. one of the normal banking accounts) (“Days Impex Banking Accounts Mandate”).

(c) However, there is a board resolution dated 1st June 1994, which expressly indicates that “all signatories can sign individual[ly] on Export/Import Accounts” (“Days Impex Trade Accounts Mandate”).

(d) There is a letter dated 21st of June 1994 from Days Impex enclosing an amendment Board Resolution in which it was resolved that the Days Impex Banking Accounts Mandate would apply to all bank accounts, but not to the trade accounts.

(e) On 1st December 1994, there is a letter enclosing a Board Resolution removing Gnanandorai D Sathiaraj as a signatory.

(f) On 30th March 1999, there was a new mandate submitted for the banking accounts, but not the trade accounts.

(g) On 26th April 1999, the Imports/Exports Department of the [bank] received an “Additional Signature Card” which included in-specimen signatures of two new signatories.”

21.  The new mandate mentioned in subparagraph (f) (“the 1999 mandate”) provided as follows.  In clause 1, in the “Types of Account” box were the typewritten words:

“HKD Current A/c, USD Current A/c, TDD Call Deposit A/c, USD Statement Savings, HKD Statement Savings”.

Clause 1 (in standard printed form) provided that those accounts:

“be opened or continued (as the case may be) with [the bank] and any other account or accounts as may be subsequently directed … by any one (A) or any two (B)’s.”

22.  There is a manuscript annotation on the top right hand corner of the 1999 mandate: “567-776703-001, 201, TMD” corresponding to the current account, the USD account and time deposit.

23.  Clauses 2 and 4 then provided:

“2. That [the bank] be instructed to honour and comply with all cheques, promissory notes and other orders drawn, and all bills accepted on behalf of the Company, whether the current account be in credit or overdrawn, to comply with all directions given for or in respect of any account or accounts of any kind whatsoever on behalf of the Company, and to accept and act upon all receipts for monies deposited with or owing by [the bank] on any account or accounts in the name of the Company, provided that such cheques, promissory notes, orders, bills, directions or receipts are signed by … any one (A) or any two (B)’s

…

4.  That any one (A) or any two (B)’s be authorised to arrange with the [bank] for advances to the Company by way of discount, loan, overdraft or otherwise, and for the granting of foreign exchange facilities, credits and the issue of guarantees by the [bank] from time to time as required, and to sign on behalf of the Company any form of deposit or withdrawal …”

24.  The Business Account Signature Card attached to the 1999 mandate required “Any one (A) or any two (B)’s” but that only applied to the operation of the company’s current account and time deposit account.  Trade accounts were not mentioned.

The rival contentions

25.  Before and after the 1999 mandate, the import/export accounts were operated as they had been after the bank was notified of the resolutions of 1 June 1994.  Throughout the period, the debtor was involved in the business and operations of both companies.  Until recently in these proceedings, there has never been any complaint that the bank has made unauthorised loans or that the bank was acting in breach of mandate in making any of the loans.  Even during the winding up proceedings in 2011, the debtor never disputed liability.

26.  The bank’s position is that the 1999 mandate did not affect the arrangements put in place by the resolutions of 1 June 1994 (and re-confirmed on 11 November 1994) because the 1999 mandate did not apply to the Trade Accounts Mandate.  Rather, it only applied to the Banking Accounts Mandate, specifically, to the accounts named in clause 1 of the 1999 mandate. 

27.  It is common ground that Pitty Kwok was a (B) signatory.  Her signature together with the company chop appeared on all the import loans and export financing of Days Impex that are now challenged.  All of this indebtedness was incurred in 2011.

28.  The debtor relied on the 1999 mandate contending that the wording of the mandate (in particular clauses 2 and 4) was sufficiently wide to encompass all accounts.  The debtor also placed reliance on manuscript annotations appearing on the 1 June 1994 signature card. 

29.  The debtor submitted that the bank knew that the 1999 mandate changed the mandate arrangement.  His submission was based on the following matters.

30.  First, it was said that the manuscript annotation “Any one (A) and any two (B)” against the number of signatures required appearing on the lower half of the card and the designation of either (A) or (B) added in manuscript against the names of the signatories could only have been made by the bank after the date of the 1999 mandate which created the A and B classification.  Previously, before the bank was notified of the 1 June 1994 resolutions, there had been a requirement for a single signature or two signature(s) depending on the identity of the signatory, but never an A and B classification.  Second, against Mr Vaswani’s in-specimen signature which appears on the reverse side of the card, there is a manuscript annotation: “(not on the revised signing list)”.  It was said that the manuscript amendments must have been made post the 1999 mandate when Mr Vaswani ceased to be a signatory under the 1999 mandate.  Third, the original signature card had been a single card with the authorised signatures appearing at the back of the card.  After the 1999 mandate, it was numbered in manuscript as “1/2” and an additional signature card numbered “2/2” in manuscript and bearing a date stamp of 26 April 1999 came into existence and contains on its reverse side, the in-specimen signatures of the 2 new (B) signatories.  Implicit in the second and third matters mentioned is the suggestion that all manuscript amendments were made post the 1999 mandate and on the same occasion.

31.  The updating of a signature card for internal use to reflect changes made from time to time is hardly uncommon.  I do not consider the second and third factors to be of any moment.  In my view, the only manuscript entry that perhaps might give rise to a query is the first factor described in the preceding paragraph. 

32.  While I take the point that A and B classification was not used in the 1994 mandate and was first used by Days Impex in the 1999 mandate, in substance, it captures and reflects the single/2 signature requirement used in the 1994 mandate.  It does not follow from the fact that such a classification was not used by Days Impex in 1994 that it could not have been used by the bank internally to reflect the single/2 signature requirement in 1994 before it was notified of the 1 June resolutions on 21 June 1994 because, as already noted, the effect is the same.  There is no evidence to support the inference that the manuscript entry in question could only have been made post the 1999 mandate.  Further, the debtor’s submission is premised on all the manuscript entries on the signature card as having been made on a single occasion and/or by the same person.  There is no evidential basis for making such an inference.  Contrast the manuscript entry “sign singly” next to the “Name of Authorised Signatures” on the reverse side of the signature card.

33.  I accept the evidence of Mr Tam that the company resolutions of 1 June and 11 November 1994 sent to the bank differentiated between the banking accounts mandate and the trade accounts mandate such that, until expressly altered, it would continue to have effect.  In any event, the undoubted existence of the import/export accounts in operation for many years, and the fact that the 1994 mandate was restricted to the accounts specifically named (ie the current account, the US dollar account and the time deposit account) which did not include import/export accounts further weakens the debtor’s submissions.

The bank’s additional responses

34.  The bank has put forward 3 additional responses if there were to be any doubt on the question whether there had been a breach of mandate.  The first and third responses can conveniently be considered together.

 (i) Apparent authority and estoppel

35.  Ms Lam, counsel for the bank, relied on Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480.  It is a fact (and I so find) that since June 1994, Pitty Kwok has been operating the import/export accounts as a single signatory without any issue having been raised.  At the very least, Days Impex has held her out as having authority to do so.  In those circumstances, I agree that the Freeman & Lockyer principle applies and Days Impex remains bound in respect of indebtedness incurred on the import/export accounts attributable to Ms Kwok’s transactions with the bank.

36.  This principle is little different from saying that the company is estopped from denying the apparent authority of Pitty Kwok. On either analysis, the company is bound and the debtor remains liable under his guarantee.

 (ii) Ultra vires transactions

37.  It is well established that a director’s guarantee of a contract ultra vires the company is enforceable by the creditor. So, even if the principal obligations were void vis-à-vis Days Impex, the debtor as guarantor remains liable.  See Yorkshire Railway Wagon Company v Maclure (1881) 19 Ch D 478 and Andrews & Millet, Law of Guarantees, 6^th edition, at § 6-021.  I see no reason why this principle should not apply in the present case to render the debtor liable.

 Conclusion on breach of mandate

38.  For the foregoing reasons, I conclude that the defence that the bank had acted in breach of mandate has no merit.

(2) The Cross Claim

39.  At the outset of the hearing the bank applied for the admission of Mr Tam’s 3^rd affirmation dated 25 September 2012 into evidence.  The purpose of the affirmation is to update the court on new developments, namely the realization of security held by the bank in respect of Days International’s debt to the bank and the set off of credit balance from Days International’s account in respect of Days Impex’s debt.

40.  The debtor was prepared not to oppose the application if the court were to grant him an opportunity to respond to Mr Tam’s affirmation.  The debtor submitted that he wished to adduce evidence to show that the bank’s appointment of provisional liquidators in respect of Days International was malicious because it knew that the value of the security it held far exceeded the amount of indebtedness of both companies.

41.  The court refused the debtor’s application and allowed Mr Tam’s affirmation into evidence.  First, the matters deposed to were purely factual, being realizations that have occurred since this matter last came before the court, reducing the debt owed by the companies.  Second, the debtor has had ample time to prepare a draft of any affirmation in response, even allowing for the fact that he applied for legal aid on 28 September 2012 and the certificate refusing legal aid is dated 10 January 2013.  I have difficulty in accepting that the debtor knew nothing about the certificate until 17 April 2013.  Even if there were any truth in the matter, it did not follow that nothing could have been done pending legal aid’s decision.  If he had a valid point to make that would assist his case, those defending him would have had an interest in the matter.  Preparing a draft was necessary whichever way the decision went.  Third, the debtor’s allegation that he had a cross-claim was first made back in June 2012.  That was well before Mr Tam’s 3^rd affirmation and the present application to admit that affirmation into evidence is not a reason to grant the debtor any adjournment. 

42.  As I understand it, the complaint is that the appointment of provisional liquidators had the effect of wiping out HK$200 million worth of assets in Brazil.  There is nothing presently before court except unsubstantiated allegations.  Further, it would appear that any loss suffered would be that of Days International and therefore it is Days International rather than the debtor who should be pursuing the cause of action.  18 months have elapsed since the winding up order and the liquidators have not seen fit to pursue any such cause of action. 

43.  The court was then referred to the House of Lords decision in OBG Ltd and another v Allan and others [2007] UKHL 21 and to a passage in the speech of Lord Hoffmann at [47] which dealt with the essence of the tort of causing loss by unlawful means.  As far as I can comprehend it, the debtor is now contending that the bank’s action in appointing provisional liquidators constituted an unlawful interference with the business of Days International in which the debtor had an economic interest, thereby causing loss to the debtor.

44.  Not only is the “unlawful means” relied on unclear, the evidential basis required to establish the requisite intention to cause loss to the debtor is also unclear.  The allegation that the appointment of provisional liquidators constitutes “unlawful interference” with the business of the company would need to be underpinned by cogent evidence.  In the present case, no evidence (much less cogent evidence) has been put forward. In those circumstances, I do not consider that the alleged cross claim meets the threshold of being genuine or as one of substance.

WHETHER A BANKRUPTCY ORDER SHOULD BE MADE

45.  As Mr Tam’s 3^rd affirmation shows, the net receipts from the realization of security of Days International from August 2011 to September 2012 total $66,584,200.24 which was more than sufficient to repay Days International’s indebtedness and interest accrued since the winding up order.  The surplus was $2,336,077.06.  As Days International had given a corporate guarantee to Days Impex, the surplus has been applied to reduce the debts of Days Impex.  The net balance still owing by Days Impex is HK$3,396,272.79 and US$21,201,337.67. 

46.  In view of the conclusions I have reached on the defence put forward by the debtor, he remains liable under his guarantee for those amounts which he is unable to repay.

47.  Further, even if (contrary to my view) there were any substance in the breach of mandate defence as regards Days Impex, the debtor has admitted that the sum of HK$20,425,419.41 as being due to the bank. Applying the set off of $2.3 million odd to that amount, a net sum of $18,089,342.35 remains due and owing.

48.  While in his 3^rd affirmation dated 4 June 2012, the debtor made an offer to repay the $20 million sum, that amount had to be raised from 20 relations, friends and business associates and payment would only be made 60 days following acceptance of his offer for repayment.  In other words, the debtor was not in any position to make immediate payment.  But implicit in that offer was an admission that the net amount of $18 million odd (after setting off the surplus) remained owing.  Ms Lam submitted (and I agree) that that admission is sufficient to warrant a bankruptcy order in any event.

49.  Accordingly, I have no hesitation in making the bankruptcy order sought against the debtor.  The debtor is adjudged bankrupt. I also make an order nisi of costs in favour of the bank.

Annex