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Pan Oceanic Bank Ltd v Zome Enterprises Ltd [2023] SBHC 176; HCSI-CC 283 of 2021 (30 October 2023)

HIGH COURT OF SOLOMON ISLANDS

IN THE HIGH COURT OF SOLOMON ISLANDS
CIVIL JURISDICTION

Civil Case No. 283 of 2021

BETWEEN

PAN OCEANIC BANK LIMITED
Claimant

AND:

ZOME ENTERPRISES LIMITED
1^st Defendant

AND:

SHEROL WILSON PAZA
2^nd Defendant

AND:

MAMU HEBALA PAZA
3^rd Defendant

Date of Hearing: September 2023 (Further Materials)
Date of Judgment: 30 October 2023

Counsel: Mr Fakarii for the Claimant
Counsel: Mr Jonga for the 1^st, 2^nd and 3^rd Defendant

Keniapisia; PJ

JUDGMENT ON A CLAIM TO RECOVER OUTSTANDING LOAN ARREARS FROM LOAN GUARANTORS

Introduction and background

1. Claimant filed an amended Category A claim on 2/06/2021. Claimant (the bank), seek the sole relief to recover from the defendants the balance of loan arrears in the sum of $1,617, 637.37 million dollars. Interest would have accrued since the filing of the amended claim. The bank pleads that it wants to recover the arrears from the defendants either jointly or severally, meaning either from Zome Enterprises Limited (“ZEL”) alone or from Wilson Paza alone or from Hebala Paza alone or from all of the defendants jointly.
2. Trial was set for 15/11/2022. Trial was vacated. Counsel agreed that trial will be by submissions only because facts are substantially undisputed. Most of the facts are agreed and contained in the agreed facts and issues filed on 20/05/2022 (see pages 1 - 3 of court book 1). Court made directions for filing of written and oral closing submissions. Defendants’ closing written submission came in by 30/01/2023.
3. The background facts to the $1,617,637.37 million dollars balance of loan arrears claimant is pursuing in this amended claim are: -
   • (i) On 26/09/2019, the bank instituted a recovery action in cc 542/2019 against the 1^st defendant – ZEL to recover its loan arrears and to sell PN 192-004-1063 (“PN 1063”) to satisfy ZEL’s loan arrears. The total amount of loan arrears pursued in the said recovery lawsuit was $4,921,125.47 million dollars. ZEL was the sole defendant in cc 542/2019.
   • (ii) On 17/03/2020, the bank obtained default judgment against ZEL. The judgment ordered the bank to recover from ZEL the sum of $5, 421 665.91 (inclusive of interest and arrears). Court also ordered the bank to recover its loan arrears by selling PN 1063.
   • (iii) ZEL (1^st defendant in this amended claim), did not pay as the Court ordered. To recover the $5,421,665.91, Court subsequently ordered the sale of PN 1063 by public tender.
   • (iv) The bank advertised for sale by public tender PN 1063. Tender was publicly put out through Solomon Star and Island Sun twice. The winning bidder was Solomon Islands Public Employees Union (“SIPEU”). The tender was made twice. Yet SIPEU remained the preferred bidder from the competitive tendering process. This was around October 2020. SIEPU got PN 1063 for $4000, 000.00 million dollars.
   • (v) ZEL attempted to set aside the judgment orders in cc 542/2019 but was unsuccessful by order of the Court perfected on 18/12/2020. First recovery lawsuit against ZEL did not recover the full loan arrears because PN 1063 was sold for $4,000,000.00 only due to unfavourable market conditions. Balance still outstanding against ZEL loan account arrears after sale was $1,617,637.37.
   • (vi) On 2/06/2021, the bank instituted its second recovery lawsuit in this amended claim (cc 283/2021). Directors of ZEL, Wilson Paza and Hebala Paza were named as 2^nd and 3^rd defendants respectively herein. The bank joined the two directors because 2^nd and 3^rd defendants were the (guarantors) for the loan that ZEL (borrower) took from the bank (lender). By joining the 2 directors’ (guarantors of ZEL loan), in this amended claim, the bank is adamant it will recover the balance loan arrears of $1, 617,637.37 million dollars, by enforcing the loan guarantor’s obligation.

Defendants defence and counter claim

4. Defendants filed their defence and counter claim 20/09/2021. They did not dispute the outstanding loan arrears the bank is attempting to recover in this amended claim. They however alleged in their defence and counter claim that, had the bank taken prudent measures, by selling PN 1063 at its real market value ($7,085 million dollars), it would have recovered all its arrears from ZEL ($5,421,665.91). And then any balance proceeds from sell of PN 1063 would have reverted to ZEL or 2^nd and 3^rd defendants, such balance, the defendants quantified at $3,085.00 million dollars.
5. Defendants are seeking to recover the $3,085.00 million dollars in their defence and counter claim. Additionally, they also seek relief for this Court to reject the amended claim relief for $1,617,637.37 saying had their property (PN 1063), being prudently sold by the bank, they would not be required to pay any more outstanding arrears. The value of PN 1063 exceeded the total loan arrears of $5,421,665.91 pursued in the first recovery lawsuit (cc 542/2019).

Issues

6. There are four issues agreed for determination in this amended claim. I will recite them as they appear at page 2, of court book 1: -
   • (i) Whether the claimant is entitled in law to receive the sum of SBD 1,716,637.37, plus interest at the claimant’s prevailing rate, in outstanding debt from the 2^nd and 3^rd defendants?
   • (ii) Whether the sale of PN 192-004-1063 at the public offer of SBD 4,000.000 million dollars following several public tenders’ invitations contravenes Section 13 of the Consumer Protection Act, Section 16 (1) (2) Financial Institutes Act 1998 and Clause 2.27 and 14 of the Prudential’s Guidelines No. 9?
   • (iii) Whether the 2^nd and 3^rd defendants are liable to make good of the 1^st defendant’s default pursuant to the director’s personal guarantee to the claimant?
   • (iv) Whether the defendants/counter-claimants are entitled to receive in payment from the claimant the sum of SBD 3,085,000 million dollars?

Amended claim is connected to cc 542 of 2019 – “loan agreement” the common denominator

7. This amended claim has its origin to the first loan recovery lawsuit in cc 542 of 2019. I requested to see the loan agreement from which these 2 recovery lawsuits have been premised. The issues before me here are derived from the loan agreement. That is the starting point to understand and to resolve the issues in this amended claim. The loan agreement comprised of 2 contractual documents namely Memorandum of Common Provisions General Conditions Booklet and Banking Facility. The bank and 2^nd and 3^rd defendants signed the loan agreement on the 11/10/2017 and 28/02/2018 for and on behalf of ZEL.
8. One of the actions available to the bank under the loan agreement is to recover its loan arrears, through civil lawsuit, if ZEL should default on paying its loans. You can see this in Clause D3 of the Memorandum of Common Provisions General Conditions Booklet. The relevant clause in D3 states: -
   • “At any time, after a default event, which has not been waived (whether or not it is continuing), the lender can do any one or more of the following to the extent permitted by law - take legal action (for example sue you for any money which you have not paid when due), or commence mortgage enforcement proceedings, if required by law”.
9. The loan agreement was executed between ZEL and the 2^nd and 3^rd defendants. The 2^nd and 3^rd defendants executed in dual capacities – (i) as “directors” of ZEL (borrower) and (ii) in their personal capacities as “guarantors” of the loan. So far as ZEL (borrower) was concerned, the bank had already made its first recovery attempt, through which the bank had recovered $4,000,000 million dollars, by selling PN1063. Unfortunately for the 2^nd and 3^rd defendants (“guarantors”), in their personal capacity, the story does not end there.

2nd and 3rd defendants are guarantors – legal effect of being guarantors to the loan agreement

10. The 2^nd and 3^rd defendants (the Pazas) also sign the loan agreement as guarantors. You can see this under the clause on Security, paragraph (b) of the Banking Facility. I will recite that section on Security in full: -
    • “Security”
    • “ (a) Existing mortgage for SBD $4.0 million to be increased by SBD$1.50 million over a property located at Henderson as described in fixed term estate in parcel number 192-004-1063 to be with market value of SBD$7.085 million. The same property was also secured for existing liabilities under personal name of Mamu Hebala Paza for SBD$3.72million”.

“(b) Personal guarantees of Mamu Hebala Paza and Sherol Wilson Paza, as company directors.”^[1] (My underlining)

11. The legal effect of guaranteeing ZEL’s loan under the loan agreement (contract) is, the Pazas as the guarantors, are promising or giving an undertaking that they will be responsible to pay back the entire loan, if the borrower (ZEL) can’t repay the loan. A guarantor is often required, if the lender does not feel secure to lend the money to a borrower alone. This is the banking practice that explains the loan agreement between the bank (lender) and ZEL (borrower), to which, the Pazas have signed as (guarantors) in their personal capacity.
12. By implication, the bank (lender) did not feel secure to lend money to ZEL (borrower) alone. The Pazas put up their hands to guarantee the loan. In the eyes of the law, the Pazas were legally bound by the loan agreement through the promise or undertaking they gave to guarantee ZEL’s loan from the bank. That means the Pazas promised to repay the loan given to ZEL, in the event that ZEL is in default.
13. The primary responsibility to pay the loan rests with ZEL. However, if ZEL can’t afford or is in default, then as guarantors, the Pazas promised to pay back the entire loan. This is why the bank instigated this second recovery attempt (this amended claim). The bank wants the Pazas to honour their undertaking made in the loan agreement. The bank did not recover in full the default loan arrears in the first lawsuit (cc 542/2019), through the sale of PN 1063.

Arguments the defendants advanced

14. Defendants ran many arguments in their submissions on the issues for determination. It is not easy to follow defendants’ arguments because they neglect the terms of the loan agreement and run their arguments based on Consumer Protection Act, Financial Institution Act and Prudential Guidelines. Defendants multiple arguments are problematic to the extent that they attempt to criticize or challenge the Court orders for sale of PN 1063 made in cc 542 of 2019. I will summarise defendants’ multiple arguments to demonstrate how they challenge the Court orders in cc 542 of 2019: -
    • (i) Defendants argue that the Court order in cc 542 of 2019 to sell PN 1063 to SIPEU for $4,000,000.00 million dollars, contravened the Consumer Protection Act and the Prudential Guidelines, in that, the bank failed to take prudent measures to sell PN 1063, at its real market value, when it sold PN 1063 to SIPEU for a mere $4,000,000.00, whereas the real market value is $7,085,000.00. Defendants alleged this was a scrap or giveaway and negligent sale.
    • (ii) Had the bank sold PN 1063, at its real market value ($7,085,000 million dollars), ZEL’s loan arrears would have been fully recovered and the balance proceed of $3,085,000.00 million dollars would revert to ZEL. And the 2^nd and 3^rd defendants’ personal guarantees would not have to be enforced. Defendants actually made a counter claim to recover the $3,085,000.00 alleged loss due to the bank’s alleged negligent and under value sale of PN1063.
    • (iii) Defendants also argue that this amended claim is tantamount to an abuse of Court process, or is frivolous and vexations because the same issues here were already agitated in cc 542 of 2019, between the same parties.

Non-viability of defendants’ numerous arguments

15. Defendants’ arguments in 13 (i) and (ii) are inviting me to make a review of the orders in cc 542 of 2019 pursuant to which PN 1063 was sold. In other words, defendants are criticizing the Court’s orders for sell of PN 1063 in cc 542 of 2019. That criticism, I am not allowed to take on board. I cannot review or criticize an order by a brother Judge in the High Court. The only way is for the defendants to appeal against the said Court order. Sale was made under the said Court order and dictated by market forces (demand and supply) with the aim of reducing loan arrears and accumulation of interests.
16. Defendants’ argument in 13 (iii), if properly made, should be argued on the principle of law called res judicata and issues estoppel. Defendants would be arguing that the issue of ZEL’s loan arrears have been fully litigated and closed in cc 542 of 2019 between the same parties in this amended claim. Therefore, the bank cannot come again in this amended claim to litigate the same issues, this Court already litigated and closed between the same parties in cc 542 of 2019. That argument is flawed. Res judicata and issues estoppel will not apply because the issues and parties here are different from the issues and parties in cc 542 of 2019.

Issues and Parties in cc 542 of 2019

17. The bank was attempting to recover its loan arrears of $4, 921,125.47 from ZEL alone. The Pazas were not parties to the first recovery attempt in cc 542 of 2019. The bank failed to recover its loan arrears through sale of PN 1063 in cc 542 of 2019. The market was not good at the time of sell. The action in cc 542 of 2019 was between lender (the bank) and borrower (ZEL) to recover loan arrears of $4, 921, 125.47.

Issues and Parties in cc 283 of 2021 - Amended Claim

18. Because of the unfavourable market condition, the bank did not recover its full loan arrears from sell of ZEL’s PN 1063. In this amended claim, the bank has now turned its’ focus to recover the balance of ZEL’s loan arrears by calling upon the Pazas as the guarantors of the loan to honour their promise. The action in this amended claim is between lender (the bank), borrower (ZEL) and guarantors (the Pazas) to recover the balance of the loan arrears in the sum of $1,617, 637.37.

Difference between cc 542 of 2019 and this amended claim cc 283 of 2021

19. In cc 542 of 2019 the bank (lender) pursued recovery actions against ZEL, as the principal borrower party to the loan agreement entered into on 11/10/2017 and 28/02/2018. Amount pursued for recovery was $4,921,125.47. Due to unfavourable market conditions sale of PN 1063 did not recover the full loan arrears plus accumulated interests. In this amended claim the bank is attempting to recover the balance loan arrears after sale of PN 1063, by calling upon the guarantors to honour their promise. Their promise was made pursuant to the loan agreement (repeat paragraphs 9, 10, 11 and 12 above). The amount pursued for recovery here is $1,617,637.37.
20. The issues (2 different loan arrears amounts) and parties (borrower, lender and guarantors) being different in the 2 cases, the principle of res judicata and issues estoppel do not come in to make this amended claim an abuse of Court process or is frivolous and vexations.
21. The arguments defendants make in reliance on the 3 legal instruments or statutes are very weak because they challenge a Court order made previously by this Court that I cannot touch. Defendants did not base their arguments on the terms of the loan agreement that legally binds them as guarantors against the bank as lender in relation to the loan that ZEL took as the borrower. I will repeat what I say above in paragraphs 9, 10, 11 and 12 to conclude that, as guarantors of the loan agreement between the bank and ZEL, the Pazas are bound by the terms of the loan agreement, to make good the default by ZEL.
22. The other argument defendants make is they had financial problems due to Covid-19 and were unable to service ZEL’s loan arrears. They should have pleaded that in their defence or counter claim and refer to the terms of the loan agreement that the bank breached. That would make their defence and argument viable. Defendants should plead their case on the terms of the loan agreement to argue that the bank dealt with them unfairly in selling PN 1063 at scrap value, because of unexpected financial difficulties. They could have raised breach of good faith or unfair dealing, which are possible implied terms of the loan agreement. That parties (borrower, lender and guarantors) have an implied obligation to deal fairly and in good faith with each other. Hence the bank should consider leniency in view of Covid-19 financial crisis. Whatever arguments defendants raise in defence, they must connect back to breach of the terms of their binding legal relationship in the loan agreement.
23. Even the case authority^[2] defendants relied on does not help their arguments. One of the main issues in that case is wrong calculation of interest rate inflating the loan arrears pursued by the bank. Other issue is the bank did not consider the financial hardships the borrower was facing in not servicing its loan. Again, any such argument must be premised on obligations and rights of the parties in the loan agreement and not on Consumer Protection Act, Financial Institution Act and Prudential Guidelines as the defendants advanced herein.

Conclusion and Orders

24. In the final analysis, I will answer the issues posed for determination as follows: -
    • (i) Claimant is entitled under the loan agreement to recover the $1,617,637.37 million dollars without any more interest added on it.
    • (ii) Sale of PN 1063, at $4 000 000.00 million dollars was lawful under Court orders in cc 542 of 2019 and did not contravene any provisions of the Consumer Protection Act, Financial Institutions Act and Prudential Guidelines.
    • (iii) The Pazas (2^nd and 3^rd defendants) are liable to make good ZEL’s default pursuant to the promise they make in the loan agreement to guarantee ZEL’s loan.
    • (iv) Defendants/Counter-Claimants are not entitled to claim the sum of $3,085,000.00 million dollars from the bank. To do so would be to challenge the Court orders in cc 542 of 2019.
25. Claimant’s amended claim is granted. Defendants counter claim is refused. Parties will meet their own costs. The bank will recover from the Pazas $1,617,637.37 million dollars without further accumulating interest from the time the amended claim was filed. Court make this order in recognition of the hardship that defendants faced from Covid-19, as a matter of discretion, not in pursuance of any binding obligations and rights argued under the loan agreement. Order accordingly.

THE COURT
JUSTICE JOHN A KENIAPISIA
PUISNE JUDGE

^[1] See the Banking Facility executed on 11/10/2017 and 28/02/2018 disclosed in sworn statements of Firibae filed 7/09/2023 and 13/09/2023. See also pages 42 and 43 of court book 1.
^[2] Credit Corporation (SI) Ltd v Charisma Shipping and Logistics Ltd & Others, HC-CC 222 of 2022.