BANK OF INDIA v. MINERAL RESOURCES (CHINA) COMPANY LTD AND OTHERS

HCA 1457/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1457 OF 2011

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BETWEEN

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D E C I S I O N

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1.  This is an appeal by the 2^nd defendant from an order of Master Levy dated 20 June 2012 entering summary judgment against him for US$1,874,243.61, interest of US$1,030,578.61, accruing at 10.26% from 1 August 2011 until 9 March 2012 and thereafter at judgment rate until payment, and costs on a party‑to‑party basis.

Background facts

2.  The plaintiff (“the bank”) began granting banking facilities to the 1^st defendant (“the company”) and a related company, the 5^th defendant, in 2000.  The initial limit of facilities of US$1 million granted to each of the company and the 5^th defendant was increased to US$2 million in 2002.  The bank allowed cross‑utilization in May 2002, thus increasing the potential extent of indebtedness to US$4 million.

3.  The 2^nd defendant was a 95% shareholder and a director of the company.

4.  On 24 May 2002, the company passed certain resolutions in respect of the bank’s offer of banking facilities set out in its letter dated 23 April 2002.  Like facilities granted to the 5^th defendant were specifically mentioned.

5.  Also on 24 May 2002, the 2^nd defendant executed two personal guarantees, one in respect of the company and the other in respect of the 5^th defendant and in each case it was limited to the amount of facilities granted to the relevant borrower.

6.  The company began defaulting on 30 October 2006.

7.  Following the company’s request, on 25 July 2007, the bank provided a detailed list of the company’s indebtedness totalling US$2.2 million as at 19 July 2007 (“the list”) and requested immediate payment.  In pertinent part, the document reads:

“PACKING CREDIT LOAN

”

8.  The bank’s evidence is to the effect that the 2^nd defendant in his capacity as director of the company sought an extension of time and, on 24 August 2007, the 2^nd defendant proposed a repayment schedule not only to discharge the indebtedness of the company but also that of the 5^th defendant.  It requested the bank to waive interest as from September 2007 as a favour.

9.  By letter dated 29 September 2007, the bank accepted the proposed repayment plan but refused the waiver of interest request.

10.  In an e‑mail dated 24 November 2007 to the chief executive of the bank, the 2^nd defendant stated that:

“Same as I mentioned during my mail the day before yesterday that I will take possible measures to pay back the loan all by us, we just need a little more time.”

11.  There is no evidence of further correspondence until late March 2009 when a further exchange took place.  On 31 March 2009, the 2^nd defendant sent an e-mail to the bank stating:

“I am still trying hard to organise money to pay for the company.

It has been very hard to sell operation and the few interested groups had all postponed for further negotiation.

Since you have no interest in having some shares of the operation.

I will just work hard and keep on concentrating on selling the operation to get money to pay.

Sorry for the bad news.”

12.  Apart from an internal set off made by the bank on 9 October 2007, no repayment has been made.

13.  On 9 March 2012, the bank obtained final judgment against the company for US$1,874,243.61 plus interest and costs.

14.  The bank claims against the 2^nd defendant as guarantor. On 9 March 2012 its solicitors sent the bank’s statement of indebtedness consisting of 3 pages (“the statement”) to the 2^nd defendant’s solicitors.  The first two pages are dated 23 September 2006 and the third page, which is dated 7 March 2012, showed the outstanding indebtedness including interest as at 31 July 2011.

15.  The bank’s letter of demand which crystallised the 2^nd defendant’s liability as guarantor was issued on 14 March 2012. Judgment was entered in the bank’s favour on 20 June 2012 as stated above.

This appeal

16.  The 2^nd defendant takes issue with the extent of indebtedness.  There is a subsidiary issue relating to interest.  As the bank is content with the costs order made by the Master, the question whether indemnity costs should have been awarded does not arise.

Extent of indebtedness

17.  The defence advanced by Mr Wong, counsel for the 2^nd defendant, centres on several entries in the statement.  The statement shows the state of the company’s account from 24 September 2005 to 8 September 2006.  During that period, the bank made no fewer than 24 loans to the company.  As the statement is central to this case, the entries shown on the first two pages of the statement (being pp.749‑750 of bundle B2) are reproduced as a schedule to this judgment.

18.  The thrust of Mr Wong’s submissions is that while the bank has produced supporting documentation for virtually all the loans featured in the statement, it has failed to do so in respect of the two debit entries for 9 November 2005.  Those two loans amount to US$2,004,000.  The point made was that without the underlying documentation, there is no means of knowing whether those loans fall within the six categories of facilities itemised in the facilities letter.  It was Mr Wong’s submission that, as the claim is being made against the 2^nd defendant as guarantor, the burden is on the bank to show that they fall strictly within the terms of the guarantee.

19.  Mr Wong submitted that those loans could have been granted in circumstances which amount to a variation which would discharge the surety, citing HSBC v Norman John Martel, unreported, CACV 54/2003, 3 June 2005.  Or, one or more of the loans could have been owed by the 5^th defendant.

20.  The first entry on the statement is dated 24 September 2005 and shows a zero balance.  Each loan granted was assigned a number, depending on the date and time the loan made by the bank.  The loan numbers are in chronological order. The two loans made on 9 November 2005 are loans bearing numbers 012002 and 012042 respectively.  It will be seen that they were repaid on 17 November and 22 November 2005 respectively.  There is therefore no question of those loans being outstanding.

21.  I have carried out the exercise of matching each loan shown on the statement with its repayment (if any).  On some occasions, the loans were repaid much later and sometimes in instalments.  Several ‘past due’ entries can be found on the statement.  While several entries (debit or credit) may be for similar amounts, as each repayment also bears the loan number (even in the case of a partial repayment), there is no scope for confusion.

22.  The end result confirms what the bank’s counsel, Mr Leung, submitted to the court: 7 loans made between 24 July 2006 and 8 September 2008, identical to those shown on the list supplied by the bank on 25 July 2007 (see §7 above) totalling US$2.2 million, have not been repaid.

23.  It was Mr Wong’s submission that when the underlying documentation (ie the company’s requests for packing credit loans being exhibits “NJM 65” and “NJM 124”) is read with the statement, the loans requested by the company were all repaid, save to the extent of US$196,000.  Having carried out the analysis as described in §21 above, I cannot accept Mr Wong’s submission.

24.  It would appear that his approach was to deduct the two loans aggregating US$2,004,000 from the sum of US$2.2 million purely on the basis of the absence of underlying documentation for the two loans.  In my view, that approach is flawed.  One cannot simply ignore the fact that each repayment was in respect of a particular loan, identified by the number assigned to that loan.  When the repayments are matched against the relevant loans, the outstanding loans are easy to identify.  While loans 012002 and 012042 made on 9 November 2005 and other loans made prior to 24 July 2006 have been repaid as appears from the statement, there is no evidence that any of the 7 loans appearing on the list has been repaid.

25.  In assessing the credibility of the 2^nd defendant’s defence, it has to be borne in mind that the negotiations with the bank after the company fell into arrears were conducted by the 2^nd defendant with the bank.  It is highly significant that the extent of indebtedness was never questioned.  Rather, the tenor of the documentary evidence shows the 2^nd defendant proposing a repayment schedule and, generally, pleading for time to make repayment.  By March 2009, the 2^nd defendant was trying to sell the company.

26.  It is now said that requests for better and further particulars of the loans were made on 7 December 2011 but were ignored and, instead, the bank sought summary judgment.  But it has to be remembered that the list was provided as long ago as July 2007.  The 2^nd defendant was well aware which of the loans were said to be outstanding.  No issue has ever been taken.

27.  As regards the submissions mentioned in §19 above, they too should be rejected because they are based on pure speculation.  First, there is nothing in the statement or, for that matter, in the court bundles that suggests that the indebtedness shown is other than the company’s.  The 5^th defendant is simply not in the picture.  Second, the 2^nd defendant was not only a director of the company but a 95% shareholder.  Had the banking facilities been varied in any manner, it defies belief that he would not have been involved or known about it since, at all material times, he was and remains one of the company’s directors.  The 2^nd defendant has not filed any evidence at all regarding variation.  The notion of a variation remains pure speculation.

Interest

28.  This is a subsidiary issue which was not addressed in oral argument.  In his written submissions, Mr Wong stated that while default began at the end of October 2006, the bank has not provided an explanation for its inaction between 26 July 2007 and March 2011.  He referred to the principles stated in Birkett v Hayes [1982] 1 WLR 816 at 825E‑F and Claymore Services Ltd v Nautilus Properties Ltd [2007] BLR 452 at §§49‑60, and submitted that there has been unreasonable delay on the part of bank in commencing proceedings such as would trigger the court’s discretion to disallow interest for a period or to reduce the rate of interest.

29.  It will be seen from §§8‑11 above that even as late as March 2009, the 2^nd defendant was pleading for time to enable him to sell the company.  That coincided with the worldwide financial crisis.  I do not consider that the bank could be criticised for holding its hand while that crisis was unfolding.  After all, the banking relationship had lasted almost a decade.  On the facts of this case, I do not consider that the principles on which Mr Wong relies are engaged.

Order

30.  The appeal is dismissed.  There is to be an order nisi of costs in favour of the bank, such costs to be taxed if not agreed.