SHANGHAI COMMERCIAL BANK LTD v. JETCO FREIGHT LTD AND ANOTHER

HCA1822/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1822 OF 2004

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J U D G M E N T

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1.  In this action, the plaintiff claims against the 1^st defendant for repayment of overdraft facilities granted to it and against the 2^nd defendant as guarantor for the indebtedness.

2.  The action was set down for trial on 14 October 2008.  Until then, the 1^st and 2^nd defendants were legally represented in these proceedings.  Their solicitors subsequently applied for and were granted permission to cease acting for them.  As from 27 October 2008, the defendants has become unrepresented.  They have since not participated in the action and were also absent at the trial.

3.  The only witness at the trial is Mr Cheng Wai Kai Richard, the Assistant Relationship Manager of the plaintiff. He has since April 2003 worked at the plaintiff’s North Point Branch.

The facts

4.  The plaintiff is a bank carrying on business in Hong Kong.

5.  The 1^st defendant is a company incorporated in Hong Kong in 1996 and carried on the business of cargo forwarding.  It is a customer of the plaintiff’s North Point Branch.

6.  The 2^nd defendant is a director of the 1^st Defendant.  Until 31 August 2005, Mr Derec Chu was also a director of the 1^st defendant.

7.  By a facility letter dated 7 April 2001 (“the Facility Letter), the plaintiff offered to grant overdraft facility to the 1st defendant on the terms and conditions set out therein.

8.  The terms and conditions of the Facility Letter included the following:

(1)   Under clause 2, the overdraft facility is secured by a First Fixed Charge on all account receivables of the 1^st defendant in connection with the sale of goods and/or supply of services whether present or future.

(2)   Under clause 3, the 2^nd defendant shall execute a personal guarantee for HK$ 3 million. 

(3)   Under clause 4, the overdraft limit shall be HK$ 3 million, but not more than 60% of the eligible account receivables of the 1^st defendant.

(4)   Under clause 5, the indebtedness is repayable on demand and subject to periodic review.

(5)   Under clause 6(a), interest is chargeable at 2% above prime lending rate.

(6)   Under clause 6(b), the plaintiff may in its sole discretion grant overdraft in excess of the above limit.  Interest on the excess amount is charged at such rate as the plaintiff may from time to time determine on a daily basis.  The rate prevailing at the date of the Facility Letter was 5% above the prime lending rate. This was subsequently varied to 8% above prime lending rate, effective from 1 August 2001 and to 10% above prime lending rate, effective from 3 May 2005. 

(7)   Under clause 9(a), the 1^st defendant shall deliver to the plaintiff on a monthly basis a compliance certificate, an aging report and a list of account receivables identifying the amount of each receivable and the respective debtor.

9.  Pursuant to the Facility Letter, the following documents were executed:

(1)   A Facility Agreement dated 7 April 2001 by the 1^st defendant (“the Facility Agreement”).

(2)   A Charge of Receivables dated 18 April 2001 by the 1^st defendant (“the Charge”).

(3)   A personal guarantee dated 7 April 2001 by the 2^nd defendant, which was for a limit up to HK$ 3 million.  

10.  Subsequently, the 2^nd defendant also executed another personal guarantee dated 31 March 2003 in connection with, inter alia, banking facilities that the plaintiff shall continue to provide to the 1^st defendant.

11.  The Facility Letter together with the Facility Agreement form the agreement between the plaintiff and the 1^st defendant for the extension of overdraft facility to the 1^st defendant through the current account no. 33882-04821-3 (“the Account”). 

12.  As for the Charge, it contained the following provisions that are relevant for the present purpose:

(1)   Under clauses 3.01(i) and (iii), a first fixed and floating charge was created over all the Receivables, which was defined as, inter alia, the 1^st defendant’s right, benefit and interest in invoices that it issued to the Customers from time to time. A list of the relevant customers is set out in Schedule 1 to the Charge.   

(2)   Under clauses 3.01(ii) and (iii), a first fixed and floating charge was created over all credit balance from time to time in the account that the plaintiff may from time to time specify. Clause 1.01 further required the 1^st defendant to pay all the Receivables into the account.

(3)   Under clause 3.02, the 1^st defendant assigned to the plaintiff by way of security all its rights, title and interest in and to the Receivables and credit balance referred to in clauses 3.01.

(4)   Under clause 6.01(iii), the 1^st defendant was required to indorse on all invoices, notes and documents to the Customer in respect of the Receivables, stating that such Receivables had been assigned and were payable to the plaintiff.  The form of the notice was further provided in the clause. 

(5)   Under clause 8.01(vi), the 1^st defendant was required to do or cause to be done all acts and things necessary or desirable for the performance of all its obligations under the Charge. 

(6)   Under clause 8.02, if the 1^st defendant shall default in its obligations or liabilities under clause 8.01, the plaintiff may, inter alia, do such acts as it may in its absolute discretion think fit to remedy such default.

(7)   Under clause 9.01(i), failure on the 1^st defendant’s part to comply with the provision of the Charge is an event of default. 

13.  The Charge of Receivables was registered with the Companies Registry on 17 May 2001.

14.  In July 2003, the 1^st defendant began to default in its obligations under the Facility Letter and Facility Agreement and also the Charge.  The evidence of Mr Cheng shows that the 1^st defendant failed to deposit payments received under the relevant invoices into the Account. According to Mr Cheng, this was contrary to an oral agreement made between the plaintiff and the 1^st defendant at the time of the application for the overdraft facility in March or April 2001. It would also appear that this is contrary to the 1^st defendant’s obligation under the Charge.  By letter dated 25 July 2003, the plaintiff reminded the 1^st defendant of its obligation to instruct the Customers to forward payments under the relevant invoices into the Account. 

15.  On 25 July 2003 and 10 June 2004, the plaintiff served notices on 21 customers of the 1^st defendant that are covered by the Charge.  The notice informed the customers that: (i) under the Charge, the 1^st defendant had assigned to the plaintiff its rights, title and interest in the relevant invoices; (ii) payment under these invoices should be made directly to the plaintiff with the number of the Account given; and (iii) they should continue to deal with the 1^st defendant on the invoices in all other respects, until further written notice to the contrary was given by the plaintiff.

16.  By separate letters dated 27 April 2004 to the 1^st and 2^nd defendants, the plaintiff’s solicitors gave notice of the exercise of the right of set-off against all balances in the Account and further demanded payment of the outstanding indebtedness.  By another two letters dated 23 June 2004, the plaintiff’s solicitors made final demand of payment to the 1^st and 2^nd defendants.

17.  On 26 and 28 July 2004, the plaintiff’s solicitors also issued five letters to the 1^st defendant’s customers informing them that payments under the invoices issued by the 1^st defendant should be made directly to the plaintiff instead of to the 1^st defendant and requesting them to supply details of the amounts due from them to the 1^st defendant.

The defence

18.  The Writ herein was issued on 6 August 2004.  On 23 September 2004, the defendants filed a Defence and Counterclaim.

19.  The 1^st and 2^nd defendants do not dispute that the plaintiff had extended overdraft facilities to the 1^st defendant or that the 2^nd defendant had signed the two guarantees.  Both defendants also admit receiving the letters of demand from the plaintiff’s solicitors.

20.  The defendants however deny being indebted and/or liable to the plaintiff as claimed.  Specifically, the Defence pleaded that the plaintiff has since July 2003 and without informing the 1^st defendant, sent letters to the 1^st defendant’s customers to demand payment of freight and other charges due from them to the 1^st defendant.  The defendants said that the plaintiff’s act had caused the 1^st defendant’s customers to refuse paying and not patronizing it, in consequence thereof the 1^st defendant’s business had declined.  By way of counterclaim, the 1^st and 2^nd defendants’ claim against the plaintiff for loss arising from the plaintiff’s letters.  

21.  It should be noted that there is no plea of a set-off by the defendants.  Further, the counterclaim of damages has not been particularised.

The indebtedness

22.  As of 4 August 2004, the overdraft limit as per clause 4 of the Facility Letter is HK$1,652,000. The 1^st defendant had, however, overdrawn to the extent of HK$2,545,983.50.  Accordingly, the amount of overdraft in excess of the authorised limit was HK$893,983.50 (HK$2,545,983.50 less HK$1,652,000).  In addition, there was an accrued interest of HK$28,585.22. 

23.  Further as a result of a charge of HK$300 for audit confirmation, the amount in excess of the authorized overdraft limit became HK$894,283.50 on 15 September 2004.  And the total principal sum due from the 1^st defendant to the plaintiff therefore became HK$2,546,283.50.

24.  As a result of the 1^st defendant’s failure to supply monthly ageing reports and lists of receivables, the plaintiff formally terminated the overdraft facility on 20 December 2004.  Prior to that date, the interest rate applicable to HK$1,652,000 is as provided under clause 6(a) of the Facility Letter and the rate applicable to HK$894,283.50 is as stated under clause 6(b) of the Facility Letter. As from 20 December 2004, the total principal sum became unauthorized overdraft and subject to interest rate as provided in clause 6(b) of the Facility Letter.

25.  According to Mr Cheng, as at the date of the trial, the total interest accrued on the principal sum of HK$2,546,283.50 is HK$2,013,623.04.

Decision on the plaintiff’s claim

26.  On the basis of the evidence before the court, I am satisfied that the 1^st defendant is indebted to the plaintiff as claimed. In this regard, it should be noted that the Facility Agreement provided that in respect of the amount due from the 1^st defendant to the plaintiff, the books and records of the plaintiff shall be final and conclusive evidence.

27.  I am also satisfied that the 2^nd defendant is liable to the plaintiff under the two guarantees as claimed.

28.  The defendants were absent at the trial and no evidence was adduced to support the allegations pleaded in the Defence.  In any case, what was alleged in the Defence could not have given rise to a valid defence to the claim. First, there is no plea of a set-off.  Second, the complaint raised in the pleading (i.e. the plaintiff’s letters to the 1^st defendant’s customers) is not related to the subject matter of the plaintiff’s claim, which is liability arising under the Facility Letter and Facility Agreement and the two guarantees.  The loss alleged is also not particularised and not liquidated in amount.  No legal or equitable set-off could have arisen. 

29.  The plaintiff is therefore entitled to judgment on the claim.

Decision on the defendants’ counterclaim

30.  As to the counterclaim, apart from the fact that the defendants were absent and had not adduced any evidence to support it, it is plainly unsustainable. 

31.  In the first place, it is unclear whether it is a claim in contract or tort.  Secondly, given that the Charge was registered with the Companies Registry, hence a public document available for public inspection, and that clause 6.01(iii) of the Charge obliged the 1^st defendant to give notice of the assignment of the Receivables in the invoices and documents to the customers, the notices or letters from the plaintiff and its solicitors to the 1^st defendant’s customers, insofar as they are customers covered by the Charge, cannot conceivably cause any loss to the 1^st defendant’s income or business. There is simply no apparent connection between the notices or letters and the decline in the 1^st defendant’s income and business.  Thirdly and most importantly, the plaintiff was entitled to give notice of the assignment of the Receivables to the 1^st defendant’s customers, not least as a protection of its rights under the Charge.

Costs

32.  Applying the normal rule of costs follow event, the 1^st and 2^nd defendants should pay the plaintiff the costs of the action.  On my direction, the plaintiff has on 16 June 2009 provided a statement of costs for the purpose of gross sum assessment.  The plaintiff seeks a total sum of HK$317,900.

33.  Having regard to the duration and the progress of the action and the amount of work involved, I am of the view that a gross sum costs order in the amount of HK$300,000 would be appropriate. The adjustment is principally because I consider the amount of time spent on preparation of documents ought to be reduced, since the documentation in this action is not that many nor complex. 

Conclusion

34.  For the reasons stated above, there is judgment for the plaintiff against the 1^st and 2^nd defendants for the principal sum of HK$2,546,283.50 together with interest thereon in the sum of HK$2,013,623.04 up to and including 15 June 2009 and thereafter at judgment rate until full payment.  The counterclaim of the 1^st and 2^nd defendants is dismissed. 

35.  There is also an order that the 1^st and 2^nd defendants pay the plaintiff the costs of this action assessed at the sum of HK$300,000.