RE HANG FUNG JEWELLERY CO LTD

HCCW 503/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 503 OF 2008

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D E C I S I O N

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The issue

1.  This is a summons issued by the provisional liquidators of Hang Fung Jewellery Company Limited恆豐珠寶首飾有限公司 (“the Company”) under section 200(3) of the Companies Ordinance, Cap. 32 for determination of the following issue:

“Whether, and if so to what extent, Standard Chartered Bank (Hong Kong) Limited (‘the Bank’) has any proprietary interest/right over or in any of the gold bars found inside the Safe Box of the Company situated at 2/F, Kaiser Estate, Phase II, 28 Man Lok Street, Hung Hom, Kowloon on 22 October 2008, which is to say, those 60 1 kg 9999 gold bars bearing serial numbers H53991 to H54010 and H54801 to H54840.”

2.  Provisional liquidators were appointed for the Company on 17 October 2008. They took control of the Safe Box on 22 October 2008. The Bank claims it is entitled to possession of 40 of the 1 kg gold bars aforesaid, as their purchase by the Company was financed by a letter of credit drawn under the facility provided by the Bank. The provisional liquidators have taken a neutral position and made submissions to address concerns they have identified in this complex issue.

The background

3.  The background matters are not controversial and may be stated as follows.

4.  The Company was an indirect wholly owned subsidiary of 3D-Gold Jewellery Holdings Limited金至尊珠寶控股有限公司 and the key asset-holding subsidiary in the group. The subsidiaries in the group were engaged in the manufacture, wholesale, trading and retailing of gold products, other precious metal products and jewellery products. Provisional liquidators were appointed for the Company and its ultimate parent company not long after the death of the group chairman. A creditor’s petition to wind up the Company was presented on 17 October 2008.

5.  By an order made on 7 July 2009, schemes of arrangement were sanctioned whereby an investor acquired certain companies within the group and other assets. The Company and the gold bars to which this application relates are not affected by the schemes. On 7 September 2009, the Company was wound up by this court.

6.  By facilities letters dated 26 March 2008 and 28 May 2008, the Bank granted facilities to the Company. I set out below the material provisions in the facilities documentation:

Facilities letter dated 26 March 2008

“D.  Security and Conditions Precedent:

The availability of the Facilities is conditional upon the Bank’s receipt of the following documents, items and evidence (both in form and substance) satisfactory to the Bank:

…

6.  Such other documents, items or evidence that the Bank may request from time to time.

F.  Other Terms and Conditions:

3.  The Bank’s Standard Terms and Conditions for Banking Facilities and Services (including the Trade Finance Supplement) and Terms and Conditions for Foreign Exchange Business (‘Standard Terms and Conditions’) attached and/or referred to in this letter forms an integral part of this letter and the Customer agrees to observe and be bound by such Standard Terms and Conditions.”

Standard Terms and Conditions for Banking Facilities and Services

“6.  Security

6.1  The Bank holds all Assets of the Customer including those Assets held to the Bank's order or for account of the Customer (whether for safe custody, collection, security or for any specific purpose or generally) as continuing security for the payment and discharge of all the Customer's obligations and liabilities to the Bank.

6.2  The Bank may (at any time, without prior notice to the Customer or any other person and in such manner as the Bank thinks fit) sell, dispose of or otherwise deal with any of the Assets of the Customer the subject of the security hereby created.

6.3  The Bank may apply the net proceeds of any sale, disposition or dealing in or towards discharge of the Customer's obligations to the Bank in whatever priority that the Bank may determine.

6.4  The Customer shall, upon demand by the Bank: -

(a)  provide such further security in form and value as may be required in the opinion of the Bank sufficient to secure any of the Customer's obligations to the Bank; and

(b)  execute and deliver to the Bank any documents in form and substance satisfactory to the Bank over any of the Customer's Assets as the Bank specifies in any such demand.

12.  Lien and Power of Sale

The Bank shall have a lien on all property of the Customer coming into the possession or control of the Bank, for custody or any other reason and whether or not in the ordinary course of banking business, with power for the Bank to sell such property to satisfy any obligations owed by the Customer to the Bank.

15.  Authorisation

15.2  To secure due performance of obligations by the Customer under the Agreement, the Customer irrevocably and unconditionally authorises the Bank to be the Customer's true and lawful representative (with full power of delegation and substitution) to execute, sign and do all documents, acts and things (in the name of the Customer or otherwise) for carrying out any of the Customer's obligations or for exercising the Bank's rights under the Agreement.

18.  Continuing Agreement, Waivers and Remedies

This is a continuing agreement and the rights of the Bank hereunder: -

(a)  may be exercised as often as necessary;

(b)  are cumulative and not exclusive of its rights under any other agreement and the general law; and

(c)  may be waived only in writing and specifically.

Delay in exercising or non-exercise of any such rights is not a waiver of that right.”

Trade Finance Supplement

“3.  Pledge of Goods

3.1  In consideration of the Facilities and/or Services, the Bank shall have a pledge on (i) the goods and (ii) the documents, bills of exchange, negotiable instruments, documents of title, transport documents, insurance policies, delivery orders, godown warrants and any other documents processed or handled through the Bank (‘Documents’), until all the obligations owed by the Customer to the Bank have been fully discharged.

3.2  The pledge shall be a continuing security in addition to any other security held by the Bank and the Bank is authorised to sell, dispose of or otherwise deal with any of the goods or Documents subject to the pledge.

3.3  The risks in the goods shall be with the Customer and the Bank shall not be responsible for any loss or damage or depreciation in value of any goods or Documents held by the Bank as security.

9.  Release of Pledged Goods

If any goods or Documents relating to goods pledged to the Bank are released to the Customer or to its order, the Customer shall execute and deliver to the Bank trust receipts in form and substance satisfactory to the Bank together with any other documentation that the Bank may require.

10.  Trust Receipts

10.1  For shipping or other documents in respect of such pledged goods which have been handed over to the Customer, the Customer shall hold such goods, bills of lading or other transport documents, certificates or receipts on trust for the Bank and shall sign a trust receipt agreement in the form required by the Bank.  The Bank and/or its agent may at any time inspect such goods and take possession thereof and the Customer shall arrange for the inspection and possession by the Bank.

10.2  For goods held by the Customer on trust for the Bank, the Customer shall dispose of such goods only to bona fide buyers for full value and on normal commercial terms.  Proceeds of the goods shall be received and held by the Customer on trust for the Bank.

12.  Customer's Undertakings

The Customer represents and undertakes to the Bank that: -

(f)  it will not encumber, transfer, sell, dispose of or otherwise deal with the Documents and/or the goods except as directed by or with the prior consent of the Bank;

(g)  it will not take any action which might prejudice the value of the goods and/or the effectiveness of the pledge;

(h)  it will keep the goods and/or the sales proceeds of the goods separate from any other property or accounts respectively of the Customer or other persons;

(i)  it will, at the request of the Bank, provide the Bank with such information concerning the Documents and any sales proceeds of the goods shall be held on trust for the Bank;

(j)  it will keep the Bank informed of the whereabouts of the goods and of any change in the condition, market price, quality or quantity of the goods; and

(k)  it will execute such documents and perform such acts as the Bank may consider expedient in connection with the exercise of its powers and rights hereunder.”

7.  On 2 October 2008, the Company placed a purchase order for 40 1 kg 9999 gold bars with a gold bullion supplier, Heraeus Limited (“Heraeus”), at the total price of HK$8,756,240.

8.  On the same day, the Company prepared an Application for the Issuance of a Letter of Credit to the Bank for HK$8,756,240 in favour of Heraeus for the purchase of the gold bars aforesaid and by way of local delivery. This letter of credit was applied for by way of utilisation of the facilities, and it was issued dated 2 October 2008. The term of payment of the letter of credit was “at sight” and the documents required to be produced to draw under the credit were “Cargo Receipt issued and signed by authorised signatory(ies) of Applicant … evidencing receipt of the goods … in good order and condition” and “signed invoices in three originals.”

9.  The Company’s trust receipt loan records were updated to reflect the transaction. It could be seen from these records that the Bank was one of several banks that had provided similar facility to the Company for the purchase of gold bars. The Bank was the last party that had provided financing to the Company for that purpose.

10.  Also on 2 October 2008, Heraeus delivered 40 gold bars to the Company at the address mentioned aforesaid. An invoice was issued by Heraeus stating that payment was to be by “irrevocable L/C at sight”. The purchasing manager of the Company acknowledged receipt of the 40 gold bars on the purchase acquisition form, signed on the invoice to acknowledge storage of the bars, and he was responsible for putting the bars into the Safe Box. The purchase acquisition form and invoice were then passed to an accountant of the Company who in turn passed the documents to a director for approval. After approval, the invoice was returned to the accounting department and the accountant updated the gold purchase movement records. These 40 gold bars were the last purchase made before the appointment of provisional liquidators.

11.  The Company issued a Cargo Receipt dated 2 October 2008 which stated that the Company had received from Heraeus the gold bars “in good order and condition in trust for [the Bank] (under [the Bank’s] L/C no. 315011445457-S)”. In accordance with its normal procedure, and to reduce the documentary burden on its customers, the Bank did not request the Company to issue a trust receipt pursuant to clause 10.1 of the Trade Finance Supplement, as the terms of the letter of credit did not require a trust receipt to be presented. The Bank’s right to require a trust receipt to be issued by the Company to protect its interest in the goods or proceeds of sale was reserved in the provisions in the facilities documentation.

12.  On 3 October 2008, the negotiating bank, Bank of China (Hong Kong) Limited, presented the original invoices of Heraeus and the Cargo Receipt for payment by the Bank.

13.  On 16 October 2008, the Company confirmed its acceptance of the documents presented and instructed the Bank to transfer the bill to “TR Loan, the relative TR/LAI Application Forms are enclosed …”. On the same day, the Bank issued the Import Bills Credit/Debit Advice to the Company advising it of the particulars of settlement of the relevant bill in the amount of HK$8,756,240.

14.  Provisional liquidators were appointed on 17 October 2008. On 22 October 2008, the provisional liquidators took control of the Safe Box and found 60 gold bars inside. They were arranged in six separate rows, each with ten gold bars. 20 gold bars are numbered sequentially H53991 to H54010 and 40 gold bars are numbered sequentially H54801 to H54840.

15.  The Company’s accountant and directors have confirmed that the purchase of 40 gold bars was funded by the letter of credit drawn under the Bank’s facility and that the 40 gold bars had not been used in the production of jewellery since the purchase and had remained in the Safe Box.

16.  Although the Bank has not been able to match the serial numbers on the gold bars with serial numbers recorded at the time the bars were delivered under the letter of credit, it is highly likely that the 40 gold bars numbered sequentially H54801 to H54840 were the shipment delivered by Heraeus on 2 October 2008.

17.  On 20 November 2008, the Bank by its solicitors notified the provisional liquidators of its claim that the 40 gold bars are legally and beneficially owned by the Bank pursuant to the facilities letters.

18.  The Bank decided to exercise its rights under the facilities documentation to obtain further security from the Company, pursuant to clauses 6.4 and 15.2 of the Standard Terms and Conditions for Banking Facilities and Services, and clauses 10.1 and 12(k) of the Trade Finance Supplement. On 26 November 2008, it signed a Pledge and Trust Receipt on behalf of the Company and on 24 December 2008, this document with the Standard Terms and Conditions for Banking Facilities and Services and the Trade Finance Supplement were filed with the Companies Registry for registration pursuant to section 80 of Cap. 32. The Registrar of Companies issued a certificate of registration of charge on the same day.

19.  The terms of the Pledge and Trust Receipt relevant to the present matter provided as follows:

“1.  The Documents [as specified in the schedule therein] and the goods to which they relate (the ‘Goods’) have been and will continue to be in pledge to you [the Bank] as a continuing security.

2.  We [the Company] will hold the Documents, the Goods and their sale proceeds in trust for you and solely to your order.  You may at any time take possession of the Goods and/or the Documents and/or their proceeds.  We shall pay the sale proceeds of the Goods to you immediately upon receipt without set-off or any deduction.

4.  You are entitled to demand and receive the sale proceeds of the Goods from buyer(s) or any person(s) and give valid receipt for the same without reference to us.

5.  We shall upon your request forthwith return the Documents to you and comply promptly and fully with any instructions which you may give as to the manner of dealing with the Goods or any of them.

6.  The Goods shall be stored in your name and any warrants for the Goods shall be delivered to you.  We will keep you informed of the whereabouts of the goods and of any change in the condition, market price, quality or quantity of Goods.  You are authorised to enter into any premises so as to inspect or secure possession of the Goods, to remove and dispose of the Goods by sale or otherwise to deal with the Goods as you may consider appropriate.

7.  We shall keep this transaction, the Documents, the Goods and all relevant sale proceeds separate from any other transactions and shall not permit the Goods to be processed or altered without your prior consent.

10. This agreement is subject in all respects to your Standard Terms and Conditions for Banking Facilities and Services, General Customer Agreement and any other agreements previously signed and delivered to you by us, if any."

20.  On 2 February 2009, the Bank’s solicitors informed the provisional liquidators’ solicitors that the Pledge and Trust Receipt had been registered with the Companies Registry and provided them a copy of the charge certificate dated 24 December 2008.

21.  On 7 July 2009, the provisional liquidators sold the 40 gold bars numbered sequentially H54801 to H54840 for HK$9,202,462.74 and paid the proceeds into a segregated account pending the determination of this application. By an agreement dated 18 September 2009 made between the provisional liquidators on behalf of the Company and the Bank, the parties agree not to take any issue at the hearing of this application in respect of the change of the state of the gold bars as a result of the sale.

The case of the Bank

22.  The primary case of the Bank as submitted by Mr. Roger Beresford is that the gold bars were pledged to it as security and a pledge does not require registration as a bill of sale under the Bills of Sale Ordinance, Cap. 20.

23.  The agreement for pledge was contained in clause 3 of the Trade Finance Supplement. To be complete, an agreement for pledge requires actual or constructive delivery of the goods. The Bank relies on constructive delivery in that the cargo receipt was presented to it on 3 October 2008 for payment under the letter of credit, not as a document of title, but as evidence of the Company’s assent to hold the gold bars for the Bank. The Company, being in physical possession of the gold bars, gave constructive possession to the Bank by acknowledging that it held them for the Bank. The cargo receipt evidenced a change in the character of the Company’s possession and effected an attornment of the Company, being an overt and positive acknowledgment by the Company that it held the gold bars for the Bank. It completed the pledge agreed to be given in the prior agreement.

24.  If, contrary to the Bank’s contention the cargo receipt does not fall within the general words in the definition of “bill of sale” in section 2 of Cap. 20, the security is immune from registration because the cargo receipt is excepted from inclusion in the term “bill of sale” as “any other documents used in the ordinary course of business as proof of the possession or control of goods” in section 2.

25.  The alternative case of the Bank is that an equitable charge was created by the cargo receipt. It falls within the exemption from registration in Cap. 20 as a document “used in the ordinary course of business as proof of the possession or control of goods” in section 2.

26.  Mr. Beresford submitted the Pledge and Trust Receipt neither adds to nor detracts from the Bank’s case.

The principal concerns of the provisional liquidators

27.  Mr. William Wong and Mr. Harry Liu submitted on behalf of the provisional liquidators there are strong arguments that:

(1)  The Bank’s security does not amount to a valid pledge because:

(a)  the agreement for a pledge is void for want of registration under section 80 of Cap. 32and Cap. 20;

(b)  the cargo receipt and the Pledge and Trust Receipt do not effect any possession required for a pledge, whether actual or constructive or by way of attornment;

(c)  even if the cargo receipt and the Pledge and Trust Receipt were effective in placing the gold bars in the constructive possession of the Bank, these documents can at best confirm, but not create a pledge. As the agreement for a pledge is void for want of registration, there is nothing for the cargo receipt and the Pledge and Trust Receipt to confirm;

(d)  the cargo receipt is void for want of registration under Cap. 32 and Cap. 20;

(e)  the Pledge and Trust Receipt was made and registered after the presentation of the winding-up petition. Even if it is prima facie effective to create a pledge, it will nevertheless be void under one or other of the three avoidance regimes, being (i) a void disposition under section 182 of Cap. 32; (ii) a void floating charge under section 267 of Cap. 32; (iii) an unfair preference under section 50 of the Bankruptcy Ordinance, Cap. 6 and sections 266 to 266B of Cap. 32.

(2)  The security interest of the Bank is by way of equitable charge only, or to be more specific, by way of equitable floating charge only. The consequences of this are:

(a)  it is void for want of registration under sections 80(2)(c) and (f) of Cap. 32and Cap. 20; and

(b)  it can be avoided or potentially avoided in the Company’s liquidation under one or other of the three avoidance regimesmentioned above.

The legal issues

28.  The legal issues arising out of the arguments advanced on both sides may be formulated in this way:

(1)  if there was constructive delivery to complete the agreement for pledge;

(2)  if the agreement for pledge would require registration under Cap. 32 and Cap. 20;

(3)  if the cargo receipt would require registration as a bill of sale;

(4)  alternatively, if the cargo receipt is exempt from registration as within the statutory exception;

(5)  if the Pledge and Trust Receipt is void; and

(6)  if the security interest by way of equitable charge is void.

29.  Both sides have made extensive reference to the decision of the Court of Appeal in Re Far East Structural Steelwork Engineering Ltd.(In Liquidation) (“Far East”), CACV No. 348 of 2004, unreported, 15 June 2006, which is an appeal from my decision reported in [2005] 2 HKC 18, in which the court considered the nature and validity of the security interest held by a bank in the form of cargo receipts and trust receipts, in respect of advances made in the issuance of local letters of credit for the purchase of goods delivered locally. On appeal by the bank, it was contended that the trust receipt and the cargo receipt fell within the statutory exception such that the equitable charge created in its favour (as found by the court below) did not constitute a bill of sale so as to require registration. Further, there was in any event a valid pledge. The appeal was dismissed by a majority (Le Pichon and Chueng JJA, Yuen JA dissenting) on a factual issue not relevant for present purpose. Members of the Court of Appeal gave separate judgments as they had arrived at different views on a number of legal issues.

30.  The differing views on relevant issues of members of the Court of Appeal in Far East may be summarised as follows.

31.  Le Pichon JA did not consider the cargo receipt and/or the trust receipt could be proof of the possession or control of goods for the purposes of the statutory exception to be exempted from registration as bills of sale, so the equitable charge created was void for non-registration (para. 22). No valid pledge had been created, as there was no attornment by virtue of the trust receipt or the cargo receipt (paras. 28 and 29). Even if a pledge were created, it could not be established without reference to a document and was void for want of registration of that document (para. 30).

32.  Cheung JA was of the view the trust receipt and cargo receipt were clearly used for the purpose of proof of possession or control of the goods (para. 50) and were not required to be registered as they came within the statutory exception (para. 73). The appeal failed on a factual issue, as there was no evidence to establish that the sums in the company’s account debited by the bank represented the proceeds of sale of the goods (paras. 82, 83 and 85). On an obiter basis, he expressed the view there was a valid pledge as there was attornment by the company to the bank by the trust receipt and cargo receipt (paras. 86 and 89).

33.  Yuen JA did not think an equitable charge was created by the trust receipt and cargo receipt and took the view that a pledge had been created over the goods with the trust receipt imposing a trust on the proceeds of sale in favour of the bank (paras. 92 and 93). The cargo receipt was evidence of an attornment that the company held the goods for the bank under the pledge in the general letter of hypothecation (paras. 105 and 109). The trust receipt preserved the efficacy of the pledge after the pledgee had parted with possession (para. 102). She agreed with Cheung JA the cargo receipt and trust receipt came within the statutory exception, being documents used in the ordinary course of business as proof of the possession or control of goods, and did not require registration (paras. 95 and 127). She would allow the appeal as the question whether the sums debited by the bank were the proceeds of sale was not in issue in view of a concession by the liquidators in the court below (paras. 136 and 140).

34.  I will come back to the reasoning given by members of the Court of Appeal in support of their views as outlined above and their discussion of the authorities. I turn to consider the legal issues in the order I have set out.

If there was constructive delivery to complete the agreement for pledge

35.  It is the Bank’s contention that the cargo receipt issued by the Company on 2 October 2008 and presented to the Bank by the negotiating bank the following day for payment under the letter of credit constituted an attornment, in that the Company, which was in physical possession of the goods, acknowledged that it held them in trust for the Bank under the specified letter of credit. If there was an attornment, this would complete the pledge agreed to be given under the facilities letters.

36.  “An attornment consists of an overt or positive acknowledgment by a possessor that he now holds goods as bailee for someone other than the party who originally bailed them to him”. “An attornment gives rise to a form of estoppeland cannot subsequently be denied or qualified by the attornor. Accordingly, it requires a concrete expression of fact by the bailee, directed to the alleged attornee or his servant or agent, to the effect that the goods are now held as that person’s and that the attornor is now his bailee” (Palmer on Bailment, 2^nd ed., pages 1368, 1369 to 1370). So “to raise an estoppel there must be somethingof which the party setting up the estoppel has notice, and which influences his conduct” (Laurie and Morewood v. Dudin & Sons [1926] 1 KB 223 at 237, per Scrutton LJ). Subject to the aforesaid, an attornment may take various forms and “very little will suffice to create an attornment” (Laurie and Morewood, supra. at 237).

37.  It is not in dispute that there can be an attornment without a third party and that it can take place between a pledgor and a pledgee (Martin v. Reid (1862) 11 C.B. (N.S.) 730 at 734 to 735, per Erle, CJ; Meyerstein v. Barber (1866) LR 2 CP 38 at 52, per Willes J; Dublin City Distillery Ltd. v. Doherty [1914] AC 823 at 852, per Lord Parker of Waddington; Goode on Legal Problems of Credit and Security, 4^th ed., para. 1-54).

38.  By clause 3 of the Trade Finance Supplement, the Company agreed to pledge goods to the Bank in consideration of the facilities provided from time to time. The cargo receipt identified the goods being the subject of the pledge with reference to the letter of credit. It served the dual purpose of appropriating the goods and acknowledging that the Company had taken possession of them in good order and condition and in trust for the Bank.

39.  In a similar situation in Far East, Yuen JA and Cheung JA took the view the above would suffice to create an attornment.

40.  Mr. Wong referred to paras. 28 and 29 in the judgment of Le Pichon JA to demonstrate why there should be no attornment here. The reasoning of Le Pichon JA may be summarised as follows:

(1)  In Far East, the company did not have possession of the goods in question at the time it signed the trust receipt in favour of the bank. There could not have been any attornment by the trust receipt because of the lack of actual possession.

(2)  The cargo receipt was signed after the trust receipt. Given the sequence of events and the terms of the cargo receipt, arguably the company’s possession of the goods was never as beneficial owner but as trustee only. So there could not have been any attornment by the cargo receipt.

(3)  If there was a scintilla of time during which the company assumed possession as beneficial owner, there was no attornment by the cargo receipt as the attornment was made to the seller not to the bank.

(4)  There was an interval of four days in one instance and seven days in the other instance between the giving of the trust receipt by the company and the presentation of the cargo receipt to the bank by the seller’s negotiating bank. Given that an attornment is an immediate transfer of constructive possession to the creditor which forthwith divests the debtor of the right to use or deal with the asset except as authorised by the creditor, the court was reluctant to resort to the artificiality of stretching the pledge over a period of four to seven days so as to conclude there had been delivery of constructive possession.

41.  The reason in (1) does not apply to the present case, as there is evidence the Company did have actual possession of the gold bars when it issued the cargo receipt. As for (2), I would agree with Mr. Beresford the cargo receipt should be considered with other contractual documents that governed the parties’ relationship. It is clear from the Trade Finance Supplement that the parties had intended to create a pledge. There was no deposit of documents of title with the Bank and no transfer of beneficial ownership in the goods to the Bank.

42.  As for point (3) that the cargo receipt was not issued directly to the Bank but was presented to it via the seller’s negotiating bank, I do not think this should pose a problem. The acknowledgment was directed to the Bank although not issued directly to it. The essence of an attornment is that it gives rise to an estoppel, and what matters is there should be somethingof which the party setting up the estoppel (the Bank in this instance) has notice, and which influences his conduct. The fact that the Bank did not receive notice of the acknowledgment directly from the Company is immaterial, so long as all the parties involved knew the cargo receipt would be presented to the Bank and would be relied on by it as a condition for releasing payment under the letter of credit.

43.  Unlike the situation in Far East, the documents required under the letter of credit were presented to the Bank the day after the cargo receipt was issued. I am also inclined to agree with Mr. Beresford that the reason in (4), namely, delay in presentation of the cargo receipt, should not be a valid objection to the existence of an attornment. The Company assented on 2 October 2008 to hold the gold bars for the Bank, and the Bank had undertaken in its letter of credit to pay against a cargo receipt evidencing that assent. In a pledge of goods, it is not essential that the advance and delivery of possession should be contemporaneous. It is sufficient if possession is delivered within a reasonable time of the advance in pursuance of the contract to provide the pledge (Hilton v. Tucker (1888) 39 Ch D 669; Snell’s Equity, 31^st ed., para. 41-02).

44.  On the first issue, I hold there was constructive delivery by an attornment effected by the cargo receipt to complete the agreement for pledge. There was therefore a valid pledge. The only question is whether the pledge was void for want of registration.

If the agreement for pledge would require registration under Cap. 32 and Cap. 20

45.  Under section 80(1) of Cap. 32, every charge being a charge to which the section applies shall, so far as any security of the company’s property or undertaking is conferred thereby, be void against the liquidator and any creditor of the company, unless the particulars of the charge with the instrument by which it is created or evidenced, are delivered to the Registrar of Companies for registration within five weeks after its creation. By section 80(2)(c), sub-section (1) applies to “a charge created or evidenced by an instrument which, if executed by an individual, would require registration as a bill of sale”. In section 2 of Cap. 20, bills of sale are defined to include “licences to take possession of personal chattels as security for any debt, and also any agreement, whether intended or not to be followed by the execution of any other instrument, by which a right in equity to any personal chattels, or to any charge or security thereon, is conferred”.

46.  Mr. Wong submitted that the agreement for pledge in the Trade Finance Supplement created an equitable charge, in that the Bank acquired the right to have a designated asset of the Company appropriated to the discharge of its indebtedness and this right was to be satisfied out of the proceeds of sale of the asset (Commercial Law by Roy Goode, 3^rd ed., page 587). He contended that the agreement for pledge in this instance was a bill of sale requiring registration, as this was a licence to take possession of the gold bars as security for the facilities provided.

47.  I do not think these submissions are right.

48.  The agreement for pledge in the Trade Finance Supplement was not in respect of any specific chattel. No right was created in favour of the Bank to have a designated asset appropriated to the discharge of the Company’s indebtedness. I do not think the agreement in itself without more gave rise to an equitable charge. There was nothing in the terms of the Trade Finance Supplement that would have enabled the Bank to take possession of the gold bars against the will of the Company. As submitted by Mr. Beresford, the Company’s transfer of possession of the gold bars was entirely voluntary. It could have chosen not to transfer possession in them to the Bank, in which case the Bank would not have granted the facilities by making payment under the letter of credit; or it could have pledged the gold bars to another bank, as it often did in other cases recorded in its trust receipt loan register. There was no licence to take possession of the gold bars as security for any indebtedness to the Bank (Ex parte Hubbard, In re Hardwick (1886) 17 QBD 690 at 696 to 697, per Lord Esher, MR).

49.  The case of Ex parte Parsons, In re Townsend (1886) 16 QBD 532 cited by Mr. Wong is distinguishable in that the document addressed by the debtor to the creditor and held to be a bill of sale stated that the creditor was authorised and empowered to take immediate possession of the debtor’s goods and chattels as specified and to sell the same to discharge his debt.

50.  As for the formal requirements for a bill of sale prescribed under section 15 of Cap. 20 and Form 2 in the schedule thereto, Mr. Wong accepted the formal requirements do not apply to companies. Section 80(2)(c) of Cap. 32 applies only to an instrument which would require registration as a bill of sale, if executed by an individual, but does not import the formal requirements of Cap. 20.

51.  On the second issue, I hold that the agreement for pledge in the Trade Finance Supplement would not require to be registered as a bill of sale.

If the cargo receipt would require registration as a bill of sale

52.  Next, I need to consider if the cargo receipt is caught by the general words of the definition of a bill of sale in section 2 of Cap. 20.

53.  Section 2 provides that in the ordinance, unless the context otherwise requires, “bill of sale” includes “bills of sale, assignments, transfers, declarations of trust without transfer, inventories of goods with receipt thereto attached, or receipts for purchase moneys of goods, and other assurances of personal chattels, and also powers of attorney, authorities, or licences to take possession of personal chattels as security for any debt, and also any agreement, whether intended or not to be followed by the execution of any other instrument, by which a right in equity to any personal chattels, or to any charge or security thereon, is conferred”.

54.  In Far East, Le Pichon JA expressed the view at para. 30 that even if a valid pledge were created, it could not be established without reference to a document and that rendered the document a bill of sale, citing Dublin City Distillery, supra. at 854 to 855, per Lord Parker and Gough on Company Charges, 2^nd ed., at pages 659 and 665.

55.  Cheung JA in para. 45 thought that the trust receipts and cargo receipts in question at first sight clearly came within the ambit of a bill of sale as being one or more of these documents in the statutory definition: a declaration of trust without transfer; an assurance of personal chattels; an authority or licence to take possession of personal chattels as security for a debt; an agreement by which a right in equity to any personal chattels or to any charge or security thereon is conferred.

56.  Yuen JA held that the cargo receipts and the trust receipts came within the statutory exception to be exempted from registration as bills of sale. She did not discuss in what respect these documents should be regarded as falling within the definition of a bill of sale in the first place.

57.  The relevant passage in Lord Parker’s judgment in Dublin City Distillery at 854 to 855 read as follows:

“It remains to be considered whether the warrants in question are bills of sale at all. On the principle laid down in Ex parte Hubbard (1886) 17 QBD 690 and Charlesworth v. Mills [1892] AC 231 it was argued that they were not. I do not, however, think that those principles have any application to the present case. They apply only when the pledge at common law is complete without any assistance from the document said to constitute a bill of sale. In the present case, however, it would, I think, be hopeless to contend that apart from the warrants, there was a good pledge at common law. The question, therefore, whether the warrants are or are not bills of sale depend entirely on the definition of a bill of sale contained in s. 4 of the Irish Bills of Sale Act of 1879. It appears to me that a document, the effect of which is to complete a common law pledge by passing to the pledgee the possession of the goods the subject of the pledge, is an assurance of personal chattels within the definition, even if it be not also a licence to take possession of the goods.”

58.  See also Halsbury’s Laws of England, 5^th ed., Vol. 50, para. 1640.

59.  Mr. Wong submitted on the above authorities, the cargo receipt would come within the definition of a bill of sale and would require registration unless exempted by the statutory exception.

60.  Mr. Beresford’s counter argument has two main strands.

61.  Firstly, he contended that a pledge does not require registration as a bill of sale, citing Halsbury’s Laws of Hong Kong, 2008 Reissue, Vol. 19(2), para. [280.192], which reads:

“The Bills of Sale Ordinance does not specifically by name exempt pledges; but, as the essence of a pledge is that it derives from delivery of possession, and a mere agreement for pledge has no legal effect by itself, pledges are outside the Ordinance.  Even if the terms are recorded in a document, the pledgee's rights do not derive from the document; it merely regulates the terms on which possession is to be retained by the pledgee."

62.  Among the authorities cited in support of the last sentence are Ex parte Hubbard, supra. and In re David Allester Ltd. [1922] 2 Ch 211.

63.  Mr. Beresford argued that the principle laid down in Ex parte Hubbard should apply to the present case. He further argued the Bank’s pledge and its rights as pledgee arose under clause 3 of the Trade Finance Supplement as completed by delivery, not from the cargo receipt, so that the latter is not a bill of sale and this situation is comparable to In re David Allester Ltd. I reject his arguments here.

64.  In Ex parte Hubbard, the debtor deposited the goods with the creditor as security on four occasions and on each occasion signed a document recording the transaction and regulating the rights of the creditor as pledgee to the sale of the goods. Each of the transaction began with the giving of possession of the goods voluntarily by the pledgor to the pledgee. Possession of the goods, which was essential to the validity of a pledge, was already given to the pledgee before the documents were executed. A pledge clearly came into existence independently of the documents. None of these documents was held to be a bill of sale. The Bills of Sale Acts apply to documents, not to transactions.

65.  Here, as I have held, the pledge was completed by constructive delivery through the written attornment in the cargo receipt issued by the Company. It did not come into existence independently of any document, as where the debtor physically delivers the goods to the creditor (as in Ex parte Hubbard) or orally attorns to the creditor. The pledge in this instance was derived from the cargo receipt. I do not think the principle in Ex parte Hubbard should apply here.

66.  The situation in In re David Allester Ltd. was similar to Ex parte Hubbardin that there was already in existence a valid pledge. There, the debtor deposited documents of title being bills of lading with a bank to secure an overdraft. When the debtor was in a position to sell the goods, it obtained the bill of lading from the bank under a letter of trust, which recorded the terms on which the debtor was authorised to realise the goods on the bank’s behalf. The letter of trust was held not to be a bill of sale, applying the principle in Ex parte Hubbard.

67.  In In re David Allester Ltd., the pledge rights of the bank were complete on the deposit of the bills of lading. Hence, the bank’s pledge and its rights as pledgee did not arise under the letter of trust but under the original pledge (at 216). In the present case, the pledge rights of the Bank were not complete under clause 3 of the Trade Finance Supplement. It cannot be said the Bank’s pledge arose under the Trade Finance Supplement.

68.  I do not think the aforesaid passage in Halsbury’s Laws of Hong Kong would advance Mr. Beresford’s argument. That passage is concerned with the situation where a pledge comes into existence independently of any document. As stated in Halsbury’s Laws of England, 5^th ed., Vol. 50, para. 1640, the position is otherwise where the pledge is effected by way of constructive delivery through the debtor’s written attornment.

69.  The other strand of Mr. Beresford’s argument is to examine the various kinds of documents mentioned in section 2 as within the definition of a bill of sale. He contended that the cargo receipt does not fall within any of these kinds of documents and does not therefore constitute a bill of sale.

70.  The statutory definition divides bills of sale into three broad categories, namely: (1) instruments transferring legal or beneficial ownership of personal chattels; (2) instruments conferring a right to take possession of personal chattels as security for any debt; and (3) agreements by which a right in equity to any personal chattels, or to any charge or security thereon, is to be conferred (Halsbury’s Laws of England, 5^th ed., Vol. 50, para. 1639).

71.  Some of the classes of documents mentioned in section 2 may be ruled out quickly. It is clear the cargo receipt would not be an assignment, transfer, inventory of goods with receipt thereto attached, or receipt for purchase moneys of goods. That leaves the four kinds of documents mentioned by Cheung JA in Far East at para. 45: a declaration of trust without transfer; other assurance of personal chattels; an authority or licence to take possession of personal chattels as security for a debt; an agreement by which a right in equity to any personal chattels or to any charge or security thereon is conferred.

72.  Mr. Beresford submitted the cargo receipt is not a declaration of trust without transfer although this may be the literal meaning of the document. On its true construction, the cargo receipt was an attornment evidencing an assent of the Company to hold the gold bars for the Bank to complete the pledge agreed to be given in the prior agreement. The trust denoted in this context is not a trust in the normal equity sense, but a trust agency by which a pledgor holds the legal title to the goods as fiduciary agent for sale (Far East, at para. 103, per Yuen JA, citing Halsbury’s Laws of England, 4^th ed. 2002 Reissue, Vol. 4(1), para. 661, now Halsbury’s Laws of England, 5^th ed., Vol. 50, para. 1680). I would accept this submission.

73.  I also agree with him the cargo receipt is not an authority or licence to take possession of personal chattels as security for a debt. There was an attornment by the Company in issuing the cargo receipt, which was presented to the Bank for payment. The delivery of constructive possession by the cargo receipt was made voluntarily. As Lord Esher, MR stated in Ex parte Hubbard, supra. at 697: “If the real transaction does not depend on the power of the one party to take possession against the will of the other, but on the one voluntarily giving and the other receiving possession – if the transaction does not begin at all until the grantor voluntarily gives possession of the goods to the grantee – that is not an ‘authority or licence to take possession of personal chattels.’ ” See also 701 to 702 per Fry LJ. In contrast, the document in Ex parte Parsons, supra. was held to be a licence to take possession of the goods and required to be registered as a bill of sale. There was no transfer of possession effected by the document but merely an agreement in writing which gave the creditor immediate power to seize the goods (at 536, per Cave J; at 542 to 543, per Lord Esher, MR).

74.  Mr. Beresford submitted the cargo receipt is not an agreement by which a right in equity to any personal chattels or to any charge or security thereon is conferred. In Ex parte Hubbard, supra. at 700 and 702, Bowen LJ and Fry LJ rejected a contention that the documents under consideration came within this class of documents in the definition of a bill of sale. Bowen LJ said as follows at 700: “The answer is that these documents do not confer any right in equity, but only regulate the exercise of a legal right. I think that those words were intended to bring within the Act documents which create a right in equity as distinct from a right at law.” In the present case, a valid pledge came into existence by the attornment in the cargo receipt. The cargo receipt did not confer any equitable right. I would accept the submission here.

75.  This leaves the possibility of other assurance of personal chattels. In Dublin City Distillery, supra. at 855, Lord Parker regarded a document, the effect of which was to complete a pledge by passing to the pledgee the possession of the goods being the subject of the pledge, to be an assurance of personal chattels within the definition of a bill of sale. Lord Halsbury agreed with the judgment of Lord Parker (at 851). The cargo receipt in the present case would appear to be a document of the same kind.

76.  Mr. Beresford pointed out the other two Law Lords in the case took a less positive view on this issue. Lord Atkinson and Lord Sumner held no valid pledge was created by the warrants. Lord Atkinson said at 850 to 851 he entertained some doubt whether the warrants came within the words of the statute as assurances of personal chattels, although his doubt was not sufficiently serious to induce him to differ from the conclusions on this point which Lord Halsbury, Lord Parker and Lord Sumner had arrived. Lord Sumner said at 866 the warrants “may also be ‘assurances of personal chattels’ or ‘authorities or licences to take possession of personal chattels as security for any debt’. The question turns on the wording of these instruments themselves and the circumstances under which they were created in this case.”

77.  Mr. Beresford also referred to Stroud’s Judicial Dictionary of Words and Phrases, 6^th ed., Vol. 1 for the meaning given to “assurance”. Among the cases mentioned were the following in which the courts considered whether a document was an “assurance” of the goods and hence a bill of sale requiring registration: Roberts, Evans v. Roberts(1887) 36 Ch D 196; Newlove v. Shrewsbury(1888) 21 QBD 41; Charlesworth v. Mills [1892] AC 231; and Ramsay v. Margrett [1894] 2 QB 18. The document in Roberts, Evans v. Roberts was held to be an assurance as without it the transaction of sale and purchase would be void. In contrast, the documents in the other three cases were held not to operate as assurances, as the grantee in possession of the chattel was able to defend his possession by proof of a complete oral agreement without reference to such document (in Newlove v. Shrewsbury), or the document was not a part of the bargain to pass the property in the goods (in Charlesworth v. Mills and Ramsay v. Margrett).

78.  I am inclined to think where a written attornment is given to complete a pledge, the document operates as an assurance of chattels and comes within the definition of a bill of sale. The legal position is as stated by Lord Parker in Dublin City Distillery and adopted by Le Pichon JA in Far East.

79.  On the third issue, I hold that the cargo receipt is an assurance of chattels and would require to be registered as a bill of sale unless it comes within the statutory exception.

If the cargo receipt is exempt from registration as within the statutory exception

80.  The only relevant statutory exception for the cargo receipt to be exempted from registration as a bill of sale is: “any other documents used in the ordinary course of business as proof of the possession or control of goods”. I will first set out the evidence adduced by the Bank and the liquidators in this respect.

81.  Under the letter of credit, the cargo receipt required to be presented “must be in conformity with the specimen held by [the Bank]”. The facilities granted by the facilities letters were subject to standard terms as mentioned earlier and standard form documents were used, including the cargo receipt.

82.  According to the information provided to the liquidators by the senior accountant of the Company, the procedure described earlier in applying for a letter of credit for the purchase of the gold bars was the ordinary procedure adopted by the Company and the Bank in terms of the purchase of gold bullion and funding of a purchase by recourse to the facilities granted. This was confirmed by the Bank.

83.  The Bank is a major player in the trade finance market in Hong Kong. A senior account manager of the Group Special Assets Management Division of the Bank deposed that in her experience, cargo receipts and trust receipts are regularly and frequently used in local trade finance transactions in Hong Kong as proof of a bank’s right to possession and control over the goods identified therein and their proceeds, and, in this instance, each of the Standard Terms and Conditions and the Trade Finance Supplement is a document used in the ordinary course of business as proof of the possession or control of goods.

84.  The senior accountant of the Company also mentioned that under the previous trust receipt arrangements provided by the Bank, no prior consent from or notice to the Bank was required when the Company needed to use the gold bars for making jewellery. The senior account manager of the Bank confirmed that in many cases, after the purchased goods have been delivered to the company and a cargo receipt has been issued acknowledging that the goods are held on behalf of the Bank, the Bank will not require the company to seek its consent before utilising the goods. However, the Bank routinely reserves the right to require a trust receipt to be issued by the company to protect its interests in the goods and/or the proceeds derived from that utilisation or sale.

85.  My attention was also drawn to the trust receipt loan register kept by the Company, which showed that the Company had dealt with a number of banks which granted loans of this nature.

86.  On the above evidence, there should be no difficulty that the cargo receipt does satisfy the first aspect that it is a document “used in the ordinary course of business”. As Cheung JA and Yuen JA had stated in Far East at paras. 49 and 123, to establish a document was used in the ordinary course of business, evidence of prevailing business practice should be adduced, but it is not necessary to prove it as a trade custom for which the law makes higher demands because an established custom obtains the force of law.

87.  The question that remains is whether the cargo receipt is “proof of the possession or control of goods”.

88.  The cargo receipt is in similar terms to that in Far East. Cheung JA and Yuen JA were satisfied that the cargo receipt and the trust receipt were used for the purpose of proof of possession or control of the goods. Cheung JA dealt with this on first principles and was of the view that these documents must be the clearest form of proof the bank had possession and control of the goods, at the very least they must be proof the bank had control over the goods (at para. 50). Yuen JA remarked on the evidence before the court, “the use of cargo receipts and trust receipts used in the present case to assert control over the goods which were security for money advanced for their purpose was common and widespread throughout the commercial community in Hong Kong” (at para. 124).

89.  In re Hamilton Young & Co. [1905] 2 KB 772 was considered by all three members of the Court of Appeal in Far East. The letters of lien coupled with the deposit of the bleachers’ receipts in that case were held to be documents used in the ordinary course of business as proof of the possession or control of goods and thus within the exception in the Bills of Sale Act 1878. It is pertinent to note that the management and direction of the goods covered by the letters of lien, for the purposes of bleaching, dyeing, and shipping, rested entirely with the company, until the bills of lading were handed over to the bank, and that no property, other than by way of lien or charge, was passed to the bank until the bills of lading were handed over. The bank’s right was a right in equity to an injunction restraining the company from doing anything inconsistent with their holding the goods on account of the bank and under lien to the bank. The bank also had such rights as the possession of the bleachers' receipts might give them, but there was nothing to show that the bleachers would have given up the goods to the bank on the production of the receipts (at 784). The goods were held to be subject to a lien or charge in favour of the bank (at 785), not a pledge. It was in this context that the court considered whether the letters of lien with the accompanying receipts were used as proof of possession or control of goods.

90.  The argument advanced to the Court of Appeal in Far East was also in the context of an equitable charge (at para. 15). Counsel for the bank relied on Hamilton Young as authority for the proposition that a document which creates an equitable charge over goods is a document used as proof of possession or control (at para. 22). In rejecting the submission that the trust receipt and/or cargo receipt could be proof of possession or control, Le Pichon JA was concerned primarily with the situation where there was an equitable charge. In the present case, I have held there was a valid pledge, in that constructive delivery of possession was made by the attornment in the cargo receipt. I accept Mr. Beresford’s submission the cargo receipt is evidence of the Bank’s possession in law as a result of its pledge. Further, it is evidence of the Bank’s control in that the trust denoted in the cargo receipt is a trust agency by which a pledgor holds the legal title to the goods as fiduciary agent for sale. As Cheung JA had stated at para. 71, if the meaning of the document is to confer possession and control on the chargee (the pledgee in the present case), then provided there is evidence on “the ordinary course of business”, the document will fall within the statutory exception.

91.  On the fourth issue, I hold that the cargo receipt is within the statutory exception and is exempt from registration as a bill of sale.

92.  The next two issues may be disposed of briefly, as the Bank has placed no particular reliance on the Pledge and Trust Receipt and an equitable charge was advanced as an alternative argument only if the primary contention of a pledge was rejected.

If the Pledge and Trust Receipt is void

93.  The Pledge and Trust Receipt is an instrument which is sui generis and its function is to preserve the efficacy of the pledge after the pledgee has parted with possession, whilst at the same time establishing a trust agency by which the pledgor holds the legal title to the goods as fiduciary agent for sale (Halsbury’s Laws of England, 5^th ed., Vol. 50, para. 1680). It recorded the terms of and continued the existing pledge.

94.  As the Pledge and Trust Receipt was registered within the time stipulated under section 80(1) of Cap. 32, the argument whether it is a document required to be registered as a bill of sale does not arise.

95.  As for the contention that the Pledge and Trust Receipt is void under section 182 of Cap. 32 as a disposition made after the commencement of the winding up of the Company, there was in substance no disposition made by this document, which was merely to preserve the efficacy of the pre-existing pledge.

If the security interest by way of equitable charge is void

96.  It is not strictly necessary to consider if the security interest by way of equitable charge is void, as I have held in favour of the Bank there was a valid pledge.

97.  I do not think a floating charge was created, as the goods being the subject of the security interest are specific goods and there is no question that the goods could be substituted by other goods. Even though the Company could use or sell the gold bars, it was obliged to execute trust receipts and hold the proceeds of the goods on trust for the Bank. The proceeds would be specific proceeds of specific goods. The Company could not dispose of the goods at will and prevent its being any longer a security, or substitute something more or less for it.

98.  I also reject the contention that the equitable charge may be avoided as an unfair preference. I agree with Mr. Beresford the effect of the cargo receipt could not have been to prefer the Bank, since without it the Bank would not have advanced the purchase money.

Conclusion and orders

99.  I would answer the issue for determination set out at the beginning of this decision in this way.

100.  A pledge was created in favour of the Bank in respect of the 40 gold bars numbered sequentially H54801 to H54840 for the advance made to the Company in the purchase of the same, by virtue of which the Bank is entitled, in default of payment, to use the proceeds thereof, which have been paid into a segregated account, to discharge the indebtedness arising out of the advance.

101.  I make an order nisi that the Bank’s costs in this application are to be paid out of the assets of the Company and that the liquidators’ costs are to be costs in the liquidation.