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MBf Bank Ltd v Filipe [2005] TOLawRp 9; [2005] Tonga LR 218 (17 March 2005)

IN THE SUPREME COURT OF TONGA

MBf Bank Ltd

v

Filipe

Supreme Court, Nuku'alofa
Ford J
CV 500/02

23 and 24 February 2005; 17 March 2005

Contract law – loan agreement – company loan not personal loan

The plaintiff bank claimed to have entered into a loan agreement with the defendant personally on or about the 18th day of April 1997. The plaintiff sought judgment in the sum of $493,068.88 (together with interest) being the outstanding balance under the agreement. The defendant disputed liability and contended that the loan was made not to him personally but to Filcorp Ltd a duly incorporated company in which, at all material times, his two sons were the sole directors and shareholders and he was only the manager.

Held:

1. It was for the plaintiff to prove on the balance of probabilities that the loan in question was, as alleged, made to the defendant personally trading as Filcorp and not to the company, Filcorp Ltd. The plaintiff failed to satisfy the Court in that regard.

2. (Obiter) The Court did not hear argument on the application of the contra proferentem rule but it said that, if applicable, that also would clearly count against the plaintiff who drafted the letters of offer in question.

3. The Court found that the loan was made by the plaintiff bank to the company Filcorp Ltd and not to Mr Filipe personally. The plaintiff's claim failed. The defendant was entitled to costs to be agreed or taxed.

Counsel for plaintiff: Mrs Vaihu
Counsel for defendant: Ms Tonga

Judgment

In this proceeding the plaintiff seeks judgment in the sum of $493,068.88 (together with interest) being the outstanding balance under a loan agreement it claims to have made with the defendant personally on or about the 18th day of April 1997.

The defendant disputes liability and contends that the loan was made not to him personally but to Filcorp Ltd a duly incorporated company in which, at all material times, his two sons were the sole directors and shareholders and he was only the manager.

Two witnesses were called to give evidence of behalf of the plaintiff. The first was Nunia Hala'api'api who has been with the bank for 10 years. Ms Hala'api'api is currently Head of Credit, a position she has held for three years. The witness was not, however, involved in the loan transaction in question.

40 The other witness was a Mr Yeoh who has been General Manager of the plaintiff bank since October 1999. Although Mr Yeoh has been in Tonga since March 1997 he was not involved in the loan transaction giving rise to these proceedings but, as it happens, indirectly he did play a background role. One of Mr Yeoh's first tasks with the bank was to redraft various documentation including the bank's standard letter of offer form. The loan in question was one of the first made by the bank utilising Mr Yeoh's newly drafted letter of offer and, as it turns out, the document plays a crucial role in the case for both sides. The letter of offer, dated 18 April 1997, was addressed to:

"Sione Mateialona Filipe

T/A Filcorp

Nuku'alofa."

The company, Filcorp Ltd, principally an importing and exporting business, was incorporated on 30 June 1995. Mr Filipe's two sons who live in Foster City, California, USA, signed all the relevant papers for the formation of the company on 21 February 1995 but Mr Filipe told the Court that he did not trade as Filcorp at any stage prior to the company's formation.

Mr Filipe said in evidence that 99% of his dealings with the plaintiff bank were conducted with Mr Ghee Heng Hock who was General Manager with the bank at the time the company was incorporated and he was also the officer responsible for lending.

The defendant explained how the plaintiff had agreed to lend working capital to the company on overdraft but Mr Hock was not prepared to advance any money until the company had been incorporated and the bank had copies of all the relevant loan documentation including the company's memorandum and articles of association, the certificate of incorporation, the necessary directors' resolutions and the company's business licence. Mr Filipe said that he handed Mr Hock all the documents he required relating to the company and it was not until Mr Hock was completely satisfied in this regard that the bank drew up its first "Letter of Offer for Accommodation" letter which was dated 31 October 1995.

The "borrower" is not specifically defined but the letter is addressed to:

"Mr Sione Mateialona Filipe

T/A Filcorp

Fakafanua Centre

Maúfanga

Nuku'alofa

Tongatapu."

The opening paragraph states:

"We are pleased to advise that the Bank has approved your application for the following facility, subject to the following 80 terms and conditions." the total advance is shown as $480,000 made up of "Term Loan $30,000, Overdraft $300,000" and "Additional Overdraft $150,000."

That initial letter of offer is only just over two pages long. Two of the conditions refer to specific obligations of "the Company". Thus:

"(d). Negative pledge by the Company not to incur further liabilities without the bank's consent which shall not be unreasonably withheld, if the need arises.

(e). The audited (certified) financial statements of the company is to be submitted to the Bank within six months after each financial closing."

The letter of offer was signed by Mr Hock and Valeti Tuúholoaki, Credit Officer on behalf of the Bank and Mr Filipe "For Filcorp".

The second letter of offer is dated 18 April 1997. By that stage Mr Hock was no longer with the bank in Tonga and the new general manager and officer in charge of lending was a Mr Choo. Mr Choo was not called as a witness for the plaintiff and it was not clear from the evidence exactly why the second letter of offer was necessary. It is said to have followed on from a review. The letter, in the new format devised by Mr Yeoh, is 15 pages long. It defines the "borrower" as "Sione Mateialona Filipe T/A Filcorp." The "Credit facility and Limit" is described as:

"(I) Total Overdraft --$400,000.00 (Increment of $100,000)

(II) Term Loan --$30,000.00

Total --$430,000.00"

The "Purpose" of the loan is stated to be: "Overdraft for additional Working Capital Requirements."

The letter is signed by Mr Choo on behalf of the bank and by Sione Filipe. Mrs Hala'api'api witnessed Mr Choo's signature but she admitted that she had nothing to do with the loan arrangements and discussions.

Because neither Mr Hock nor Mr Choo were called to give evidence for the plaintiff, there is no direct evidence before the Court relating to the loan transaction apart from that given by the defendant, Mr Filipe. As noted earlier, Mr Filipe's position right from the outset has been that the loan was made to the company and not to himself personally and he claims that the bank's General Managers were perfectly aware of that.

When asked in examination-in-chief why the letters of offer had been addressed to himself "trading as Filcorp", Mr Filipe responded that he had given Mr Hock all the documentation he had requested regarding the formation of the company and all the other necessary paperwork such as the board resolutions relating to the loan and he had then relied entirely upon the general manager to produce whatever documentation the bank required in connection with the loan transaction. That seemed to me to be a reasonable response to the question. I found Mr Filipe to be a convincing witness on these matters and, in the absence of any direct evidence to the contrary, I accept what he told the Court in this regard.

The plaintiff's case relies very heavily on the wording of the letter of offer dated 18 April 1997. Mrs Hala'api'api said in evidence, and repeated the comment numerous times, that the letter of offer is "the standard letter of offer used by the bank" and the same letter is used whether the borrower is a company or an individual. The thrust of her evidence, as I understood it, was that if the loan had been intended to be for Filcorp Ltd then the letter would not have been addressed to Sione Filipe trading as Filcorp but, to the company itself and on the signature page at the very end of the letter of offer provision would have been made for two directors of the company to sign and affix the company seal.

In cross-examination by Ms Tonga, it was put to the witness that the letter of offer form should not be used for loans to individuals because the wording is clearly designed for companies. Some of the examples appearing in the letter which were referred to by counsel in this regard were:

"REPRESENTATIONS AND WARRANTIES

(a) The Borrower is a company duly incorporated and validly existing under the Laws of Tonga as a separate legal entity and has full power and authority to own its assets and carry on its business as it is now being conducted;

. . . .

(d) The execution, delivery and performance of this Letter of Offer will not exceed the powers granted to the Borrower, or violate the provisions of: (1) .... (2) it's Memorandum and Articles of Association.

CONDITIONS PRECEDENT AND AVAILABILITY

The credit facilities will be made available subject to the following:

(a) a receipt of a copy of the Borrowers' Board Resolution approving the acceptance of terms and conditions of the Letter of Offer;

(b) receipt of specimen signature of person authorised to accept this Offer and to operate the facilities.

EVENTS OF DEFAULT

. . . .

(e) a winding up petition is presented against the Borrower."

There were numerous other similar examples referred to by Ms Tonga and counsel emphasised, in particular, the very last paragraph in the letter of offer which reads:

"Acceptance should be accompanied by your Board Resolution authorising (inter alia) such acceptance."

When faced with this evidence which, on the face of it, clearly supports the defendant's claim that the loan was made to the company rather than to him as an individual, Mrs Hala'api'api, rather surprisingly, continued to maintain that the loan was not made to the company Filcorp but to Sione Filipe personally. The following exchange in cross-examination illustrates her stand:

"Q. Wouldn't it be rather strange for a bank to use wording intended for a company when dealing with individual borrowers?

A. As I said, this is the standard letter of offer that we use in overdraft loans and we have been using this form from 1997 to the present.

Q. Are you saying that the terms vary regarding each borrower?

A. It is standard --it never varies.

Q. Do you save this on the computer and only print it out when a borrower accepts the offer?

A. Yes.

Q. And would I be correct if I put up to you that if it is saved on the computer, you have to change the wording to suit the nature of the borrower?

A. We change the reference at the top, the name of the borrower, the credit facility and also variation of interest rates starting from there up to the very last page of the 15 pages we do not change anything. That's the standard form used by the bank.

Q. I put it to you it is very unprofessional of a bank to use such wording --to have the wording in the letter of offer for a limited company used on a loan to an individual?

A. Not everything here is for a limited company. There are clauses here for individuals but for limited companies we need board resolutions and also the certification.

Q. Would it be very hard for the bank to cross out the clauses for a limited company when individual borrowers are borrowing from the bank?

A. No, we want to maintain the same clauses in every offer that we make."

Mrs Hala'api'api was not an entirely convincing witness and her claim that the same letter of offer form is used for loans to companies and individuals defied credibility. Her evidence in this regard can be contrasted with the evidence given to the Court subsequently by the current General Manager, Mr Yeoh. He was asked during examination-in-chief about the letter of offer and he responded:

"A. This letter of offer is made for the purpose of business lending and business here would cover all the respective types of business constitutions --that's sole proprietor, partnerships and limited companies.

Q. Are there separate letters of offer for individuals?

A. We have a separate letter of offer for individuals that relates to personal loans and housing loans but the one that I have with me (the letter of offer in question) relates to business.

Q. In this case "Sione Filipe trading as Filcorp" --would you classify that as an individual loan?

A. It is a business loan. If you look into the purpose it is for additional working capital requirements. The bank also does not do any working capital financing for individuals as there is no such needs (sic) in so far as the bank's records that means."

Mr Yeo was then asked, still during examination-in-chief:

"Q. Who was the borrower in this case, looking at the documentation before you?

A. He'd be an individual trading as, so I would classify it as a sole proprietor."

In cross-examination the witness elaborated further on the subject:

"In any case where there is a "trading as" it has to be a business, it cannot be an individual and as I have mentioned earlier, if you look into one of the clauses under PURPOSE it says "overdraft for additional working capital requirements." The bank will not lend to an individual not in business for working capital requirements. Working capital requirements only relates to businesses."

Finally on this topic, Mr Yeoh told the Court:

"Working capital in our definition is solely dedicated to businesses whereby working capital is involved but not to individuals. For individuals it would have been for personal consumption, housing loans or it could be a case of refinancing from other banks. As a matter of record, the bank gives personal loans ranging from $2000 to as high as perhaps $15,000 in exceptional cases. Here I refer to personal consumption.

Q. The rest of the cases (lending) would only be to companies would it?

A. It has to be to a business.

Q. When you say business, do you mean a company?

A. Here, I would define it as a sole proprietor, a partnership or a limited company."

Mr Yeoh did not expand on what he meant by the expression "sole proprietor" but if he was intending to suggest that Filcorp was what is sometimes described as a "one-man company", effectively under the control of Sione Filipe, then not only do I reject that on the facts but, as a matter of law, the general position is that an incorporated company, no matter how controlled, is still a separate and distinct legal entity in its own right.

The statement by Mr Yeoh in cross-examination that a loan to an individual trading under a trade name is regarded by the bank as a loan to a business is something of a legal hotchpot. An individual trading under a trade name does not have some separate and distinct business personality from the individual as a person. In a company or partnership situation, of course, the position is different. The law recognises such entities and they can sue and be sued in their own right. A person trading under some trade name, however, remains an individual. In some jurisdictions, including New Zealand, there are specific Rules that permit an action against an individual trading under a firm name but that is not the common law position, nor is it the position in Tonga.

As in any civil case, the onus of proof is on the plaintiff. It is for the plaintiff to prove on the balance of probabilities that the loan in question was, as alleged, made to the defendant personally trading as Filcorp and not to the company, Filcorp Ltd. I say at once that it has failed quite spectacularly to satisfy me in this regard.

There has not been one scintilla of evidence produced to show that at any time, either before or after the company was incorporated, did the defendant trade, or purport to trade, as Filcorp and I am satisfied that the bank's General Managers were perfectly well aware of that all along. Mr Filipe told the court that during the initial stages, Mr Hock had insisted on sighting all the business invoices as they were issued and the invoices in turn were all in the company's name.

I accept that Mr Hock had also insisted on sighting all the company incorporation documents and other relevant documentation such as the required board resolutions and authorities before he authorised the initial advance. Why Mr Hock, and subsequently Mr Choo, then proceeded to issue the bank's letter of offer to Sione Filipe trading as Filcorp is something which could not be explored in evidence, of course, because neither former General Manager took the witness stand. Mr Yeoh did confirm, however, that Mr Hock apparently still works for the MBf Bank although he was uncertain whether he was presently based in the Malaysian head office or in one of the other six "MBf Groups". Nothing was said about Mr Choo's present whereabouts.

The point I am endeavouring to make in this regard is that the amount in dispute is not insignificant and if the plaintiff elects, for whatever reason, to proceed to trial without calling witnesses who obviously could be crucial to the case it is trying to make out then, almost inevitably, it runs the risk that the claim might fail. That is the reality of what has happened.

The plaintiff cannot suggest that it had no proper warning of the issues involved. From the outset, the defendant had made his position abundantly clear. In his statement of defence filed on 10 October 2002, Mr Filipe pleaded that the bank's General Managers were "well aware of the fact that the overdraft facility and term loan was not for the defendant but for Filcorp Ltd."

Against that background, the plaintiff's failure to call direct evidence in rebuttal of that clearly stated defence is somewhat puzzling. Neither Mrs Hala'api'api or Mr Yeoh were able to give reliable evidence about the loan transaction itself and, if anything, I found the evidence that was given by Mr Yeoh, coupled with the actual wording of both letters of offer, supportive of the defendant's case. I did not hear argument on the application of the contra proferentem rule but, if applicable, that also would clearly count against the plaintiff who drafted the letters of offer in question. My finding on the evidence is that the loan was made by the plaintiff bank to the company Filcorp Ltd and not to Mr Filipe personally.

For these reasons, the plaintiff's claim fails. The defendant is entitled to costs to be agreed or taxed.