The Bank of East Asia Ltd v Tan Chin Mong Holdings (S) Pte Ltd and Others

• Jurisdiction: Singapore
• Judge: G P Selvam J
• Judgment Date: 27 November 2000
• Neutral Citation: [2000] SGHC 250
• Docket Number: Suit No 1263 of 1999
• Date: 27 November 2000
• Published date: 19 September 2003
• Year: 2000
• Plaintiff Counsel: Joseph Hoo Chun Hee and Lawrence Khoo (Joseph Hoo Morris & Kumar)
• Citation: [2000] SGHC 250
• Defendant Counsel: Tan Chuan Thye and Bianca Cheo (Allen & Gledhill)
• Court: High Court (Singapore)
• Subject Matter: Judgment against joint and several guarantors,Default judgment,Liability of remaining guarantors,Guarantee,Setting aside,Civil Procedure,Judgments and orders,Joint and several guarantee,Effect of setting aside,Settlement between creditor and one guarantor,Contract

: Introduction

This case concerns, first, the rights and obligations of a mortgagee bank in relation to its power of sale of its mortgaged security. Next, it concerns the circumstances under which obligations of joint and several sureties may be extinguished. The context in which they arise is a claim against two out of six sureties for the shortfall of money due and payable by the principal debtor, Tan Chin Mong Holdings (S) Pte Ltd (`the company`). The company mortgaged a residential property owned by it, 40 Jansen Road, to the plaintiffs.

The plaintiffs, The Bank of East Asia Ltd, are based in Hong Kong and have a branch in Singapore. They brought this action against seven defendants. The first defendant was the company. The second defendant was Tan Chin Mong. The third defendant was his wife. The other four defendants were his sons. Two of them have to be named. The sixth defendant was Jeffrey Tan Keok Hng. The seventh defendant was Andrew Jerry Tan Keok Kiang (`Jerry Tan`). All the individuals were shareholders in the company.

The facilities

In 1993 the company became a customer of the plaintiffs. The plaintiffs extended an overdraft facility to the company. In addition, at the request of the company, the plaintiffs issued bank guarantees to Acma Ltd at the request of a related company, Symbolic Technologies Pte Ltd. The aggregate amount of the guarantees in February 1998 was $1.5m. The total line of credit available to the company in 1996 was $6.2m. When granting the facilities, the bank `reserved its customary overriding right of repayment on demand`.

The securities

The facilities were secured by (a) a joint and several guarantee for $6.2m signed by the six individual defendants, and (b) the legal mortgage of 40 Jansen Road, Singapore.

The guarantee

The guarantee that was signed on 9 December 1996 by the individual defendants was an `all money guarantee`. Clauses 16 and 17 of the guarantee read as follows:

16 You shall be at liberty to release or discharge any one or more of us from the obligations of this guarantee or to accept any composition from or make any other arrangements with any one or more of us without thereby prejudicing or affecting your rights and remedies against the other or others of us.

17 Our liability hereunder shall be joint and several and all covenants, agreements, undertakings and other provisions herein shall be deemed to be made by and be binding on us jointly and severally.

Cancellation of the credit facilities

The unsatisfactory financial position of the company forced the plaintiffs to cancel the facilities on 27 April 1998. The plaintiffs further asked the company to seek refinancing by 27 July 1998 to repay the outstanding debt.

On 5 May 1998 the company responded saying that they were unable to effect refinancing and stated that the plaintiffs `may proceed with the auction sale at the best price`. On the same day the lawyers for the company wrote to the plaintiffs, stating that the company would like to place the property for sale, and seeking the plaintiffs` consent to the sale price of $4.8m. The plaintiffs were prepared to permit a sale by the company provided that the price was not less than $5m. That amount was less than what was owing to them on the overdraft on 22 May 1998. On 7 May 1998, the overdraft account showed a debit of $4,457,794.64. On 31 May, the company withdrew $34,899.93. This increased the debit to $4,492,694.57. There was, also, the exposure on the Acma bank guarantees. The company without raising any objection to the minimum price of $5m went ahead and appointed Knight Frank, auctioneers, to sell the property. Knight Frank sent out mailshots and advertised the property in the press on 3, 10, 12, 15 and 18 June 1998 for an auction sale on 18 June 1998. The opening price was $4.2m but there was no bid even at that level. So there was no sale. The market then was in the trough of a recession in the wake of the Asian financial crisis.

On 17 July 1998 lawyers retained by the plaintiffs issued a demand letter to the company for payment of $4,542,821.24 being the debit balance on 13 July 1998. The letter further stated that if the bank guarantee issued to Acma Ltd were called, the plaintiffs would look to the company for indemnity with interest. The letter was copied to all six guarantors with a covering letter.

The company made proposals to the plaintiffs for restructuring the credit facilities. On 2 September 1998 the plaintiffs replied that they were not agreeable to the restructuring and asked for the keys to the property to enable them to sell it by way of public auction. On 4 November 1998 the plaintiffs were given the keys. The plaintiffs were thus placed in a position to exercise their power of sale as mortgagees.

Sale of property by the plaintiffs

The plaintiffs appointed Jones Lang LaSalle to sell the property by public auction. The property was advertised in the newspapers on some 21 days during the period of December 1998 to 13 May 1999. The property was put up for auction three times - on 16 December 1998, 18 March and 15 May 1999. There was an agreement for sale on 15 May 1999. The sale was completed on 22 July 1999. The sale price was $3.8m.

Judgment against the guarantors

Meanwhile, on 17 June 1999, Acma Ltd called on the bank guarantees issued by the plaintiffs. By then, the only amount outstanding on the bank guarantees was $1.25m. The plaintiffs honoured it on 30 June 1999. Consequently, after giving credit to the sale proceeds, the balance due to the plaintiffs on 29 July 1999 was $2,423,230.33. In the event, the plaintiffs commenced the present action. No one filed an appearance. For that reason the plaintiffs entered default judgment on 26 October 1999. There was a joint judgment against all seven defendants. The plaintiffs then commenced winding-up proceedings against the company and bankruptcy proceedings against the guarantors.

The next relevant event was a settlement between the plaintiffs and Jerry Tan, the seventh defendant. In that settlement the plaintiffs agreed to accept $400,000 in settlement of their claim against him and to withdraw the bankruptcy proceedings against him.

The second and the sixth defendants applied to set aside the judgment against them and succeeded in doing so. The default judgment against them was set aside on 17 May 2000, and they were given leave to defend the claims against them. There is an important implication in the setting aside of the judgment, in that it demerged the cause of action from the judgment in which it had merged. More about it later.

The defence

The defence filed by the two defendants made these assertions: The plaintiffs as mortgagees had a duty to act in good faith and to obtain the best price when selling the property. They had breached those duties because they insisted on a sale price of at least $5m for the property in May 1998, when the amount then outstanding on the facilities was $4,492,694.57. Further, they asserted that the plaintiffs had failed to obtain the best price when they sold the property in May 1999, as they had failed to properly or adequately advertise the sale of the property. When the two defending defendants discovered the settlement between the plaintiffs and the seventh defendant, they added another block to the defence against the plaintiffs. They amended their defence by adding the following paragraph:

7 Further or in the alternative, the second and sixth defendants will contend that they have been released from any liability under the guarantee by virtue of a settlement reached between the plaintiff and the seventh defendant. [Emphasis is added.]

Limit to mortgagee`s power in exercising power of sale - The law

I shall now consider the defence relating to the sale of the mortgaged property. The falls in property prices in the past decade and a half have spawned a plethora of reported cases on mortgagee`s power of sale. It would, therefore, be salutary to take stock and sum up the salient principles of law.

George Jessel MR in Nash v Eads [1880] 25 Sol Jo 95 set out the duty of a mortgagee to a mortgagor in these general terms:

Of course there were some limits to the powers of the mortgagee. He, like a pledgee, must conduct the sale properly, and must sell at a fair value, and he could not sell to himself. But he was not bound to abstain from selling because he was not in urgent want of his money, or because he had a spite against the mortgagor.

Pollock CB, referring to the duty of the creditor to the surety in respect of the security, spoke in terms of a triple duty in Watts v Shuttleworth [1860] 157 ER 1171:

The substantial question in the case is, whether the omission to insure discharges the defendant, the surety. The rule upon the subject seems to be that if the person guaranteed does any act injurious to the surety, or inconsistent with his rights, or if he omits to do any act which his duty enjoins him to do, and the omission proves injurious to the surety, the latter will be discharged: Story`s Equity Jurisprudence, sect 325. The same principle is enunciated and exemplified by the Master of the Rolls in Pearl v Deacon 24 Beav 186, 191, where he cited with approbation the opinion of Lord Eldon, in Craythorne v Swinburne 14 Vesey 164, 169, that the rights of a surety depend rather on principles of equity than upon the actual contract; that there may be a quasi contract; but that the right of a surety arises out of the equitable relation of the parties.

Lord Moulton in McHugh v Union Bank of Canada [1913] AC 299 at p 311 defined the mortgagee`s duty towards the mortgagor in these general terms:

It is well settled law that it is the duty of a mortgagee when realising the mortgaged property by sale to behave in conducting such realisation as a reasonable man would behave in the realisation of his own property, so

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