BANK OF CHINA (HONG KONG) LTD v. COSAN LTD AND OTHERS

CACV 331/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 331 OF 2006

(ON APPEAL FROM HCA 1600 OF 2004 )

______________________

--------------------------

JUDGMENT

----------------------------

Hon.  Yuen JA:

1.  This is an appeal from a judgment of Sakhrani J dismissing the 2^nd Defendant’s appeal from a decision of Master Kwang giving summary judgment to the Plaintiff in the sum of more than $6 million together with interest and costs.

2.  The 2^nd Defendant was the guarantor for the 1^st Defendant’s indebtedness to the Plaintiff.  The 3^rd Defendant, the 2^nd Defendant’s brother who was a practising solicitor at the time, was also a guarantor.

3.  The factual background has been set out in detail in Sakhrani J’s judgment and I will not repeat it here.

Defence

4.  The only defence proffered at the hearing before the judge (at which the 2^nd Defendant was represented, although not by Mr Jerry Chung who appeared in this court) was that the 2^nd Defendant’s immediate liability to repay the entire amount of indebtedness had been varied by what was called “the 1^st Settlement Agreement”.  According to the pleaded defence, that agreement was as follows (para. 5):

“By an agreement made around the end of March 2003 the Plaintiff agreed, in consideration of:-

(a)    the 1^st Defendant selling the Charged Property ... forthwith and paying the proceeds thereof to the Plaintiff and

(b)    the 2^nd and 3^rd Defendants, as guarantors, agreeing to pay the balance of the outstanding indebtedness to the Plaintiff by monthly installments of $3,500.00 to be deducted from the 1^st Defendant’s savings account No.031-362-1-0317998 with the Plaintiff (‘the said Account’),

to withhold all legal proceedings or other actions against the 1^st, 2^nd or 3^rd Defendants to recover the outstanding balance of the said indebtedness then owing by the 1^st Defendant to the Plaintiff (‘the Outstanding Indebtedness’) (‘the 1^st Settlement Agreement’)”.  (Emphasis added). 

5.  After correctly stating the relevant principles to be applied in Order 14 proceedings (of which the 2^nd Defendant makes no complaint), the judge then tested the 2^nd Defendant’s case against those principles.  He found that the 2^nd Defendant’s case was “wholly incredible” and that in any event the defence raised was unsustainable in law.

2^nd Defendant’s argument - judge did not consider consistent evidence

6.  On appeal the 2^nd Defendant’s counsel has argued that in rejecting the defence the judge had failed to take into account evidence which was consistent with the alleged 1^st Settlement Agreement. 

7.  It has to be said however that some of the evidence relied on by Mr Chung is so neutral in nature as to be consistent with anything, e.g. the Plaintiff’s lack of written reply to the 1^st Defendant’s proposals, or the time taken to issue proceedings (which was in fact explained by the Plaintiff in its affirmations).  And there was actually no evidence in support of some other scenarios which are said to be consistent with the defence, e.g. that the market was rising, or that there “could” have been ongoing oral agreements.

8.  The one piece of real evidence that the 2^nd Defendant emphasized was the Plaintiff’s debit from the 1^st Defendant’s account of a sum of $3,500 on 5 August 2003.  At the time of that debit, the balance was $3,595.53.  Mr Chung argues that the debit of $3,500 only and not the entire balance was consistent with the Plaintiff having agreed to the 1^st Settlement Agreement.

9.  However the Plaintiff has explained on affirmation why it debited only $3,500 and not the entire balance.  In an affirmation made on 20 January 2006 and filed on 23 January 2006, Mr Wong Yan Ian, formerly the Plaintiff’s Senior Officer of the Local Corporate Non- performance Loans Division of the Special Assets Management Department said (para. 7):

“On 1^st  August 2003, I phoned the 3^rd Defendant again to chase him for repayment of the instalment loan.  The 3^rd Defendant told me that he could only repay HK$3,500.00 and had already deposited the money into the 1^st Defendant’s account.  I told him that the Plaintiff would not  accept any condition imposed by the Defendants for any repayment and the Plaintiff would only treat the said payment as a partial repayment which would not relieve him of his debtor’s obligation and the default status of the 1^st Defendant’s account.  I further told him that the Plaintiff would deduct the said sum of HK$3,500.00 from the account.  As the 3^rd Defendant did not raise any objection to this, the Plaintiff subsequently deducted HK$3,500.00 from the credit balance of the 1^st Defendant’s account”.

10.  That explanation for the debit of $3,500 was given on affirmation. It was not contradicted by any evidence from the 3^rd Defendant, with whom Mr Wong said he had spoken.  It was not even contradicted by hearsay evidence from the 2^nd Defendant, notwithstanding the fact that he made his 3^rd affirmation on 8 August 2006, more than 6 months after Mr Wong’s affirmation was filed.

11.  In the light of Mr Wong’s affirmation, the debit of $3,500 on that one occasion was no more than one factor in the whole of the circumstances which the judge would consider when determining whether the 2^nd Defendant had discharged his burden on an Order 14 application. 

12.  It is clear however that there were many more factors which entitled the judge to come to the conclusion that the defence was incredible.

Contemporaneous documentary evidence

13.  First and foremost, I would refer to the contemporaneous documentary evidence.

14.  First there is the fact that the “1^st Settlement Agreement” was never reduced to writing, even though the 3^rd Defendant was a solicitor and therefore likely to know the importance of having a written record of such a significant agreement.

15.  Secondly, what correspondence there was from the Defendants was written in terms of a unilateral offer only.  On 29 March 2003 the 1^st Defendant wrote:

“We refer to our telephone conversation with you this morning and would like to apply for the terms of repayment of the outstanding mortgage loan by the guarantors as follows:-

(1)   The guarantors will pay in the sum of HK$3,500.00 per month for the first 12 months after the completion of the sale of the above property [which occurred in June 2003].    

(2)   The amount of the above monthly payment will be revised thereafter.

(3)   The guarantors will provide their Income Tax Demand from the Inland Revenue to the Bank when requested.

We enclose copy of the Tax Demand Note of Mr Kwan Hin Chu and Mr Kwan Hin Kee for your reference.

We would be most grateful if you could consider our above application as soon as possible so that we could proceed to sell the above property on or before the 31^st March 2003 without further delay”.  (Emphasis added).

It would be noted that the terms proposed are different from the alleged 1^st Settlement Agreement, a matter which I will discuss later in this judgment.

Further, although the 2^nd Defendant says the 1^st Settlement Agreement was made at the end of March 2003, even as at 2 April 2003 the 1^st Defendant was still writing in suppliant terms after entering into a Provisional Sale and Purchase Agreement of the property:

“We refer to our telephone conversation of today and enclose copy of the Provisional Agreement for Sale and Purchase for your reference.

We would be most grateful if you could let us have your reply to our application for the terms of re-payment of the outstanding mortgage loan as soon as possible so that we could proceed to sell the above mentioned property forthwith”.  (Emphasis added).  

16.  Thirdly, when the Plaintiff issued demand letters to the Defendants on 15 April 2003, i.e. half a month after the alleged 1^st Settlement Agreement was made, the Defendants never objected or stood on their rights under the alleged Agreement by insisting on proceeding with sale of the property followed by payment of $3,500 monthly instalments.  Instead there was repayment of $64,203 on 13 May 2003 followed by the 1^st Defendant’s letter of 15 May 2003 proposing redemption of the property.

17.  The 2^nd Defendant alleges that in a letter of 3 June 2004, there was a reference to the 1^st Settlement Agreement.  However this letter was addressed to a Mr Wilson Wong, but the Plaintiff has said on affirmation that there was no person called “Wilson Wong’ on their staff and that letter had never been received (Lee Wai Ling, para.

11).  Even if the letter is assumed to be authentic, it was marked “Without Prejudice” which is unusual if it was meant to confirm a previous agreement.  Further still, the terms of the letter were hardly assertive of a prior settlement agreement.  It said:

“We refer to the above and would like to negotiate with your Bank about the payment of the above outstanding debt.

Last year Cosan Limited sold the property of G/F 112 Cheung Sha Wan Road Kowloon on the understanding that Cosan Limited could repay the outstanding loan by instalment payment in the sum of HK$3,500.00 per month to your Bank.  Cosan Limited is willing, able and ready to continue to repay the Bank by instalment payment. 

We would be most grateful if you could allow us to continue our obligation to repay out debt accordingly instead of repaying the debt in a lump sum immediately as requested by your solicitors’ letter dated 20^th May 2004".  (Emphasis added).

Again, the letter (assuming its authenticity) only asked the Plaintiff for negotiations, referred to the sale of the property on the basis of  the 1^st Defendant’s understanding only and did not assert that the 1^st Settlement Agreement had been concluded.

18.  In other words, all the contemporaneous documentary evidence militated against the 2^nd Defendant’s argument that the parties had entered into the 1^st Settlement Agreement.  

2^nd Defendant’s inconsistent versions of Settlement Agreement

19.  Moreover, the 2^nd Defendant’s own case revealed inconsistencies in his own allegations.

20.  I have reproduced the pleaded defence in para. 4.  That allegation was that the 2^nd and 3^rd Defendants would repay the outstanding balance by $3,500 a month (for the sake of convenience I will refer to this as “Version 1"). 

21.  However in para. 6 of the 2^nd Defendant’s affirmation made on 8 July 2005 and filed on 16 July 2005, he said

“I have been informed by the 3rd Defendant and verily believe that the terms of the 1^st Settlement Agreement were that in consideration of the 1^st Defendant selling the charged property as soon as practicable and paying all net proceeds of sale thereof to the Plaintiff after the 26^th March 2003, the Plaintiff would accept all outstanding debts owing by the 1^st Defendant to be paid for by the 3^rd Defendant and myself by way of monthly instalment in the sum of 10% of the total annual income of the 3^rd Defendant and myself divided by two”.  (Emphasis added).

He then exhibited a letter from the 1^st Defendant to the Plaintiff dated 26 March 2003 proposing monthly instalments in the sum of 10% of the total annual income of the 2^nd and 3^rd Defendants divided by twelve, not two.  But even if it is assumed that there was a clerical error and that what the 2^nd Defendant meant was divided by twelve according to the letter, whichever it was, this was “Version 2" as this agreement was not repayment by a monthly instalment of $3,500. 

22.  In para. 7 of the affirmation, the 2^nd Defendant went on to say:

“I am further informed by the 3^rd Defendant that pursuant to the said letter, the income tax returns relating to myself and the 3^rd Defendant had been duly submitted to the Plaintiff and after inspecting the same, Ian informed the 3^rd Defendant that the said proposal was acceptable to the Plaintiff and we were informed to pay the sum of HK$3,500 per month to the savings account of the 1^st Defendant in the Plaintiff ...”.  

(Emphasis added).

This completely ignores the 1^st Defendant’s letter of 29 March 2003 (reproduced in para. 13 above) in which the monthly instalment of $3,500 was said to be for the first 12 months only after completion and thereafter to be revised (“Version 3"). 

23.  In any event 10% of the total income of the 2^nd and 3^rd Defendants (according to the tax demands attached to the 1^st Defendant’s letter dated 29 March 2003) divided by twelve came up to $4,758 which was about 35% more than $3,500.  There is no evidence proffered by the 2^nd Defendant to explain why a creditor (the Plaintiff) who had been offered more repayment ($4,758 per month) would then ask the debtor to pay less ($3,500 per month).

24.  Against that backdrop of contemporaneous documentary evidence and inconsistent versions from the 2^nd Defendant, the judge was certainly entitled to reject the defence as being “incredible”. 

Defence unsustainable in law for lack of consideration

25.  In any event the judge correctly found that the 1^st Settlement Agreement would have been unsustainable in law for lack of consideration. 

26.  Mr Chung has failed in challenging the principle of law articulated by Peter Gibson LJ in In re Selectmove Ltd [1995] 1 WLR 474, 480:

“Foakes v Beer has been followed and applied in numerous cases subsequently, of which I shall mention two.  In Vanbergen v St Edmunds Properties Ltd [1933] 2 KB 223, 231, Lord Hanworth MR said:

‘It is a well established principle that a promise to pay a sum which the debtor is already bound by law to pay to the promisee does not afford any consideration to support the contract’.

More recently in D&C Builders Ltd v Rees [1966] 2 QB 617 this court also applied Foakes v Beer, Danckwerts LJ saying at p626 that the case ‘settled definitely the rule of law that payment of a lesser sum than the amount of a debt cannot be a satisfaction of the debt, unless there is some benefit to the creditor added so that there is accord and satisfaction’”.

27.  Mr Chung referred us to Allridge (Builders) Ltd v Grand Actual Ltd 55 Con LR 91, 119-120, but that case did not challenge the authority of Selectmove.  Although in that case the issue was not allowed to be raised as it was not pleaded, the Recorder actually applied Selectmove when he went on to find that there was new consideration in the form of additional works which were ordered (p120).

28.  Mr Chung then argued that there was consideration in the present case in that the sale of the charged property constituted an acceleration of payment which was of commercial benefit to the Plaintiff and that the sale of the property by the 1^st Defendant rather than the Plaintiff under its mortgagee power of sale reduced the 1^st Defendant’s indebtedness without any extra cost to the Plaintiff.

29.  I do not agree that the sale of the charged property was an acceleration of payment.  The entire debt was already due and owing.  Further it is well-known that mortgagee sales attract lower prices and no doubt with that in mind, it was the 1^st Defendant who suggested that the charged property be sold by it by private treaty, a course of action with which the Plaintiff was prepared to agree.  I do not see how that sale can constitute consideration for the alleged 1^st Settlement Agreement.

Order

30.  In conclusion, the judge was plainly right in dismissing the 2^nd Defendant’s appeal from the master’s order and I would dismiss this appeal.

31.  The parties having agreed that the costs of the appeal should follow the event, I would order that the costs of the appeal be paid by the 2^nd Defendant to the Plaintiff.

Hon. Barma J:

32.  I agree.