BANK OF CHINA (HONG KONG) LTD v. KEEN LLOYD ENERGY LTD AND ANOTHER

HCA 9309/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 9309 OF 2000

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BETWEEN

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(Heard Together)

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D E C I S I O N

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Introduction

1.  I have before me 2 actions.  A High Court Action in which the Plaintiff, Bank of China (Hong Kong) Ltd, claims against the 1^st Defendant as borrower and the 2^nd Defendant as mortgagor outstanding banking facilities and interest totalling HK$564,896,223.78 as at 9 June 2009 with further interest accruing since that date.  A winding-up petition in which the Petitioner, who is the Plaintiff in the High Court Action, seeks a winding-up order against the Company, which is not one of the Defendants, but granted a legal charge over property in respect of the debt claimed in the High Court Action.

2.  The Plaintiff seeks an order striking out paragraphs 3 to 32, 47 to 49 and prayer (1) of the 1^st Defendant’s Re-Amended Defence and Counterclaim on the grounds that they disclose no reasonable defence and cause of action, are frivolous and vexatious, may prejudice or embarrass or delay a fair trial of the action or are otherwise an abuse of process.

3.  There is no serious dispute that the 1^st Defendant borrowed the sums claimed from the Plaintiff/Petitioner, which I shall refer to as “Bank”, pursuant to various facility agreements and that those sums have not been repaid by the Defendants.  The 1^st Defendant and the Company are controlled by the same individual, Chin Kam-chiu.  The Defendants allege that Bank is not entitled to enforce the facility agreements with the 1^st Defendant because:

(1)   The facility agreements were tainted with illegality and were void by reason of an alleged contravention of Article 39(4) of the Commercial Banking Law of the People’s Republic of China (“CBL”), which states that the ratio of the loan to a single borrower and the capital base of a commercial bank shall not exceed 10%, and the Hong Kong court should not enforce them: Re-Amended Defence and Counterclaim § § 16, 19(2), 20-22.

(2)   Alternatively, by reason of (1) the facility agreements and the facilities and the securities provided in relation thereto were void for mistake, and the 1^st Defendant is entitled to such “restitutionary relief as this Court may deem just to grant in accordance with the applicable principles”: Re-Amended Defence and Counter-Claim §§25-26, 47-49.

4.  The Bank’s case is that the new defences and counterclaims in the High Court Action should be struck out on the following grounds:

(1)   The 1^st Defendant is barred from raising these new defences and counterclaims, which have previously been repeatedly raised and adjudicated upon in previous proceedings between the Bank and the 1^st Defendant, by the doctrine of issue estoppel; alternatively these issues could and should have been raised in previous proceedings and it is an abuse of process for the 1^st Defendant to seek to litigate them now.

(2)   The allegation of illegality is unsustainable as:

(a)   The place of performance of the facility agreements is Hong Kong, so no question of enforcing performance at a place where it would be illegal to do so arises;

(b)   Further, there is cogent evidence to show that even if CBL 39(4) had been applicable and contravened, under PRC law that would not have any impact on the enforceability of the facility agreement made in relation thereto and the recoverability of the facilities advanced;

(c)   In any event, the sum the Bank seeks to recover from the 1^st Defendant in the High Court Action at no time exceeded 10% of the Bank’s capital base, and so this Court is not asked to enforce the facility agreement in a way which may contravene CBL 39(4).

(3)   The argument on mistake is patently misconceived.

Factual Background

5.  The Bank is the successor-in-title to Sin Hua Bank Hong Kong Branch (“Sin Hua HK”).  Sin Hua Bank was incorporated in the PRC.  Sin Hua HK was registered in Hong Kong under Part XI of the Companies Ordinance, carried on banking and was subject to the supervision of the Hong Kong Monetary Authority (“HKMA”).

6.  Sin Hua HK had been doing business with Mr Chin and the 1^st Defendant since about 1993.  Sin Hua HK had advanced significant sums until late 1998 at which time the Keen Lloyd Group ran into financial difficulties.  Between November 1998 and April 1999, Mr Chin conspired with others to defraud Sin Hua HK by applying for and negotiating letters of credit when there was no underlying commercial transaction behind them.  Mr Chin was convicted of conspiracy in HCCC 158/2003 on 24 March 2004 and was sentenced to 6½ years imprisonment, which he has served.

7.  From March 2000, the Keen Lloyd Group was in default in making repayments to Sin Hua HK.  When Sin Hua HK threatened to sue, the parties agreed a debt restructuring between Sin Hua HK, the 1^st Defendant and the 2^nd Defendant.  Under the agreement dated 14 April 2000 Sin Hua HK agreed to withhold proceedings and the 2^nd Defendant agreed to sell or surrender their mortgaged properties and repay part of the debt.  The Defendants defaulted on the agreement and Sin Hua HK commenced, amongst other proceedings, this High Court Action to recover the indebtedness.  Receivers were also appointed to take enforcement action against the security held by Sin Hua HK.

8.  The Defendants commenced HCA 1319/2001 on 23 March 2001 against Sin Hua HK and the receivers alleging breach of the agreement and obtaining an interim injunction to prevent further enforcement against Sin Hua HK’s security.  An injunction was initially granted and then discharged on 16 April 2004 by which time Mr Chin had been convicted and the 2^nd Defendant wound up.  The receivers sought to enforce the security and Mr Chin procured his companies to resist the possession actions, which led to a series of new High Court Actions: 926, 928, 929/2004 (“receivers’ actions”).

9.  In the receiver’s actions the 1^st Defendant alleged that Sin Hua HK had fraudulently misrepresented to the Keen Lloyd Group that it would grant further facilities to it.  This allegation was dismissed by Chu J on 17 December 2004 as “incredible and untenable”.  The Bank says that Mr Chin and the 1^st Defendant have been recycling this allegation with slight variations to commence proceeding against the Bank for unparticularised losses.  Each of these actions has been struck out.  The Bank says that the Defendants now seek to rely on essentially the same allegations to resist the Bank’s claims in the present High Court Action.

10.  In the receivers’ actions the 1^st Defendant alleged that a fraudulent misrepresentation made in mid-1997 was in relation to an agreement to increase facilities from HK$1.827 billion to HK$2.3 billion, and the falsity was based on restrictions imposed by the HKMA.  Chu J dismissed this defence and entered summary judgment in favour of the receivers in December 2004.

11.  On 1 June 2004 the 1^st Defendant commenced HCA 1299/2004 (“2004 Action”) with an indorsement alleging fraudulent misrepresentation in December 1997 that Sin Hua HK could and subsequently had increased facilities from HK$1.8 billion to HK$2.3 billion.  The 1^st Defendant sought damages of HK$5 billion.

12.  On 21 December 2005 the 1^st Defendant amended its writ in the 2004 Action and filed a statement of claim (“1^st 2004 SOC”) in which it made a number of new allegations.  First, that there was a misrepresentation from July to December 1997 that Sin Hua HK would increase the facilities from HK$1.656 billion to HK$2.4 billion.  Secondly, that there was a 2^nd misrepresentation from early to late 1998 that the facilities would be further increased to HK$3.08 billion.  Thirdly, that there was a contract between Sin Hua HK and the 1^st Defendant that Sin Hua HK would further increase the facilities to HK$3.08 billion.   The 1^st 2004 SOC was struck out by Deputy High Court Judge L Chan on 12 April 2006 on the grounds that the 2^nd misrepresentation and the contract claims were time-barred and the 1^st and 2^nd misrepresentations were promises and not actionable.

13.  On 22 May 2006 the 1^st Defendant commenced High Court Action 1092/2006 (“High Court Action”) and filed a statement of claim (“2006 SOC”).  The 1^st Defendant made the following allegations.  First, that there had been a misrepresentation from early to late 1998 that Sin Hua HK and Sin Hua Bank Shenzhen Branch (“Sin Hua SZ”) could and would jointly further increase the facilities to HK$3.1 billion.  Secondly, that there was a contract between Sin Hua HK, Sin Hua SZ and the 1^st Defendant, that Sin Hua HK and Sin Hua SZ would increase the facilities to HK$3.1 billion.  The ground on which the alleged representation was alleged to be false was that Sin Hua HK and Sin Hua SZ could not lawfully or properly increase the facilities to HK$3.1 billion for that would be in excess of 10% of Sin Hua HK’s capital base and contrary to the CBL.

14.  At the same time, the 1^st Defendant amended its writ in the 2004 Action and filed a new statement of claim (“2^nd 2004 SOC”) alleging a misrepresentation from July to December 1997 that Sin Hua HK could and would increase the facilities from HK$1.656 billion to HK$2.6 billion, which was subsequently reduced to HK$2.4 billion.  The reason the representation was said to be false was that Sin Hua HK could not lawfully increase the facilities to HK$2.4 billion without exceeding the 10% capital to loan ratio.

15.  The 2^nd 2004 SOC, the 2006 SOC, the 2004 Action and the 2006 Action were struck out and dismissed by Poon J on 11 January 2008 on a number of grounds.  The 1^st Defendant appealed the judgment.  The appeal was dismissed by the Court of Appeal on 23 September 2009.  The Court of Appeal held that under the terms of the facility agreements between Sin Hua HK and the 1^st Defendant, Sin Hua HK was entitled to withdraw the facilities and call in any loan or overdraft at any time, and any representation that it would allow further facilities was not a commitment which could be said to have extended over any specific period of time.  Leave to appeal was refused by the Court of Appeal and the Appeal Committee of the Court of Final Appeal.

16.  The Company had pursuant to Legal Charges dated 18 July 1996 and 15 November 1996 and a Debenture dated 17 October 1998 agreed to charge its properties and assets to secure the 1^st Defendant’s debts and be liable as primary debtor for all of the 1^st Defendant’s debts.  The Bank’s solicitors demanded repayment and then issued a statutory demand on 21 July 2009.  The Petition was presented on 17 August 2009.

17.  The Bank obtained leave to lift the stay in the present High Court Action and to amend its Statement of Claim to update the amount of the outstanding indebtedness.  In the order giving leave to amend, the 1^st Defendant was given leave to make consequential amendments.  The Bank says that in breach of that order the Defendants are trying by their amendments to the Re-amended Defence and Counterclaim to resurrect the complaints that have already been dismissed to resist the Bank’s recovery in the present High Court Action and the Petition to wind up the Company.

Principles governing a strike out application

18.  The applicable principles are well known and I do not understand them to be in dispute.  The Court should only strike out a pleading under O18 r19 if satisfied by the applicant that it is a plain and obvious case.  This means that it must be demonstrated that the pleaded case in issue is unsustainable.

19.  Mr Horace Wong SC, who appeared for the Defendants and the Company, submitted that the jurisdiction should not be exercised if it required a minute and protracted examination of the documents or resolution of difficult questions of law: Hong Kong Civil Procedure 2010, vol. 1, §18/19/4 and cases cited therein.  I accept that the Court should be wary of being drawn into determining summarily cases, which require more thorough examination than the strike out procedure envisages.  However, in my view the Court should not take the line of least resistance and refuse an application simply because the subject matter is complicated particularly where the amount at stake is large and prolongation of an unmeritorious defence would put pressure on the other side to settle: Bank of Credit and Commerce International (Overseas) Ltd. v Price Waterhouse [1999] BCC 351.  Similarly I accept that if the Court comes to the conclusion after argument that it has before it a plain and obvious case, it should not decline to strike out on the ground that the issues are difficult and complicated: Byjoy Ltd. Thorogood Estates Ltd. [1985] 2 HKC 746 at 758F-I.

The Bank’s Case

20.  The Bank says that the new defences cannot be sustained on 4 grounds.  First, it says that issue estoppel applies in respect of the defence of illegality arising from contravention of CBL 39(4).  Secondly, if issue estoppel does not apply, it is an abuse of process for the 1^st Defendant to try and relitigate issues which should have been raised in the 2004 Action and the 2006 Action.  Thirdly, the alleged illegality is in any event irrelevant.  Fourthly, the mistake argument is parasitic on the illegality argument and in any event makes no sense.  I deal with each of these arguments below.

Issue estoppel

21.  This issue turns on identifying the case advanced by the 1^st Defendant in earlier proceedings and what was decided in them.  The representations alleged by the 1^st Defendant in the 2^nd 2004 SOC were pleaded to be false and untrue in paragraph 10(1):

“10. (1) As a result of the matters pleaded in the preceding paragraph, the Plaintiff has since discovered for the first time (as is the fact) that the Representation was false and untrue in that SHHK at all material times could not lawfully or properly increase and/or did not have the requisite approval, capacity or power to increase the GBF to the said level of HK$2,400 million in that:

(a) the said level of HK$2,400 million was in excess of 10% of SHHK’s capital base, and thus the grant of the increased GBF was contrary to Article 39(4) of the CBL;

(b) further or in the alternative, the said level of HK$2,400 million was in excess of 25% of SHHK’s capital base and that SHHK did not have the requisite approvals from HKMRO or HKMA to grant the same.”

22.  In the 2006 SOC claim the representation alleged by the 1^st Defendant was pleaded to be untrue in paragraphs 11 and 12(1)(a):

“11. As a result of the matters pleaded in the preceding paragraph, the Plaintiff has since discovered for the first time (as is the fact) that the Representation was false and untrue in that SHHK and SHSZ at all material times could not lawfully or properly increase and/or did not have the requisite approvals, capacity or power to increase the GBF to the said level of HK$3,100 million in that:

(1) the said level of HK$3,100 million was in excess of 10% of SHHK’s capital base, thus contrary to Article 39(4) of the CBL;

(1) further or in the alternative, the said level of HK$3,100 million was in excess of 25% of SHHK’s capital base and that SHHK did not have the requisite approvals from HKMRO or HKMA to grant the same.

12. The Representation was made fraudulently by Mr. Wu on behalf of SHHK and SHSZ knowing it to be false in that Mr. Wu at all material times knew full well that SHHK and SHSZ could not lawfully or properly increase and in any event did not and could not have the requisite approvals to increase the GBF to the said level of HK$3,100 million.

Particulars of Knowledge

(1)   (a)  As the General Manager of SHHK and a seasoned banking professional with extensive experience in managing banks in the PRC, Mr. Wu was familiar with the provisions in the CBL (including Article 39(4) thereof) and/or the Control Regime to which SHHK and SHSZ were subject to and thus knew of the extent to which SHHK and SHSZ could lawfully or properly grant GBF to its customers (including the Plaintiff, KLM and KLR) and the circumstances where prior approvals by HKMRO and/or HKMA were necessary.”

23.  As I have already mentioned the 1^st 2004 SOC was struck out on the grounds that the 2^nd misrepresentation and the contracts claims were time-barred and the 1^st and 2^nd misrepresentations were promises and not actionable.  Poon J summarised the position as follows in paragraph 26 of his judgment of 11 January 2008:

“26. On a proper and careful reading of the Decision, the Deputy Judge had plainly determined that:

(1) The limitation period for the cause of action based on the 2^nd Misrepresentation in its Original Form would have expired before 12 December 2005 when the Amendment Application was taken out and Energy had failed to show that BOC had no reasonably arguable defence of limitation to it.

(2) The limitation period for the cause of action based on the Contract in its Original Form would have also expired before 12 December 2005 when the Amendment Application was taken out on 12 December 2005 and Energy had failed to show that BOC had no reasonably arguable defence of limitation to it.

(3) It was plain and obvious that the alleged representations relied upon to ground the 1^st Misrepresentation in its Original Form and 2^nd Misrepresentation in its Original Form were mere promises and did not disclose any reasonable cause of action.

Determinations (1) and (2) were made in connection with BOC’s appeal and Determination (3), BOC’s striking out application.”

24.  The Judge went on to conclude (paragraph 34) that what he referred to as Determinations (1) to (3) did give rise to issue estoppel, precluding the 1^st Defendant from raising them again in either the 2004 Action or the 2006 Action.  He further concluded that the 1^st Defendant’s current claims based on the 1^st Misrepresentation in the 2^nd 2004 SOC  and the 2^nd Misrepresentation and the contract pleaded in the 2006 SOC were caught by issue estoppel.  His reasons were set out in paragraphs 36 and 37 of his judgment:

“36. The 1^st and 2^nd Misrepresentations are each virtually identical to their Original Forms. In the 1^st Misrepresentation, “would and could” is there to replace “would” in its Original Form. In the 2^nd Misrepresentation, “in return for additional securities” and “could and would” are added. Mr Chow, SC for BOC submitted that those slight differences are introduced to meet the various objections raised in the Decision. But they remain the same misrepresentations in substance as their Original Forms. So is the case for the Contract. I entirely agree.

37. In my view, the 1^st Misrepresentation, the 2^nd Misrepresentation and the Contract are all caught by the issues estoppel created by the Decision.  Energy is debarred from raising them again in the New 2004 SOC and the 2006 SOC.  For this reason alone, the New 2004 SOC and the 2006 SOC must be struck out.”

25.  So far as the decision of the Court of Appeal is concerned, as it is short, it easiest if I recite paragraphs 14 to 19, which contains the material parts of the judgment of Rogers VP.

“14. On this appeal Mr Yuen SC, who appeared on behalf of the plaintiff, argued that the decision of the Deputy Judge did not debar the bringing of HCA 1096 of 2006. In this respect his argument was that the decision of the Deputy Judge had been in relation to the effect of an amendment to the writ but that it did not prevent the issue of a new writ in which the limitation point could be argued on a different basis, without the complication of the validity of the amendment having to be taken into consideration.

15. The argument went further that the first and second misrepresentations did involve factual assertions namely that the bank had been in a position to increase the general banking facilities whereas the letters sought to be relied upon demonstrated that it had not been in such a position.

16. In relation to the admission of the new evidence it was said that the judge had erred in principle, and that the letters were clearly relevant and would not have caused any prejudice or embarrassment to the defendant since they were letters which formed part of a chain of correspondence in which SHHK had been involved.

17. In my view, the first difficulty which the plaintiff must face is that whatever agreement or promise might have been made to provide general banking facilities it is quite clear that those facilities could have been withdrawn at any time. The bank documentation in this case was no different from any other bank documentation and provided for the bank to be able to call in any loan or overdraft. Hence any representation that the bank would allow general banking facilities was not a commitment which could, in any event, be said to have extended over any specific period of time.

18. That matter is a fundamental difficulty which exists in addition to the fact that the statements relied upon were promises and not statements of fact. The approach of the judge that there was no actionable loss pleaded is, in my view, correct. Indeed it is said that following investigations by the HKMA, SHHK had to take measures to reduce the general banking facilities granted to the group. This highlights the point that general banking facilities are not something which would exist in perpetuity. It is not suggested that the HKMA could by itself legislate or create a law by any other means, nor could it alter a contract between a bank and its client. All it could do would be to give advice to a bank. Technically, a bank was free to accept and act on that advice or take other action as it deemed fit.

19. With regard to the new action, RCA 1096 of 2006, I can see no basis other than that the action must be statute barred.  No real reason to the contrary was suggested in argument.  The simple point must be that even if the representations had been made it must have been quite clear that they were not being honoured when the bank called in the various loans and overdrafts.  In those circumstances, as the Deputy Judge held and the judge agreed, it would be inevitable that the plaintiff had the necessary knowledge to bring any action well before the writ in the action was issued.”

26.  The Defendants argue that the subject matter of the strike out application before Poon J was whether the causes of action relied on by the 1^st Defendant were caught by issue estoppel as a result of Deputy Judge L Chan’s decision.  The 2004 Action and the 2006 Action were only concerned with the 1^st Defendant’s claims for misrepresentations and breach of contract.  No issues of illegality or mistake had been raised.  Validity of the facility agreements was not an issue before the Court of Appeal.

27.  In the Re-amended Defence the Defendants plead in paragraphs 16 and 20 that the facility offered to the 1^st Defendant was unlawful and improper because it exceeded 10% of Sin Hua HK’s capital base.  In paragraph 15 it pleads that if the 1st Defendant had known this at the time the representations were made it would not have accepted or used the additional credit facilities offered during the meetings pleaded in paragraph 7 to 14 of the Re-amended Defence and provided the additional security referred to in paragraph 15, including the Debenture, which gives rise to the claim against the Company.  In paragraph 21 the Defendants plead that any advance in excess of 10% of Sin Hua HK was void ab initio.  What is not clear is how much of the debt claimed is said to be tainted.  The Re-Amended Defence goes on to plead that the facilities should not be enforced on the grounds of public policy (paragraph 22) or because the relevant contracts are void for mistake (paragraph 25).

28.  As I read Poon J’s judgment he decided that the claims introduced in the 2^nd 2004 SOC and the 2006 SOC were the same as those in 1^st 2004 SOC and as those claims had been struck out issue estoppel applied to them.  The Court of Appeal in its judgment does not address the issue estoppel issue in any detail.  The judgment of Rogers VP focuses on a different point, namely, that it mattered not what representations as to the limit of the credit facility had been made under the facility agreements, Sin Hua HK could call in loans at any time and, therefore, in practice whatever commitment may have been made Sin Hua HK could change it at its discretion at a later date.

29.  In the Re-amendments to the Defence the 1^st Defendant seeks to challenge the enforceability of the facility agreements on which the Bank relies as entitling it to recover the sums that were advanced by Sin Hua HK.  The Bank argues that the allegation that the agreement was unenforceable in the light of the alleged failure to comply with CBL 39(4) was a necessary element of the cause of action advanced by the 1^st Defendant in the 2004 Action and the 2006 Action.  Issue estoppel may arise, it submits, where a necessary element of a cause of action has been litigated and decided and in subsequent proceedings between the same parties one of the parties seeks to reopen the issue: Arnold v National Westminster Bank Plc [1991] 2 AC 93 at 105E; Gleeson v J. Wippell & Co. Ltd [1977] 1 WLR 510 at 513H-514C.  The Banks says that the 3 elements of issue estoppel are present in this case: the same parties, the same subject matter and a final judgment in earlier proceedings determining an issue which is raised in the new proceedings.

30.  The Defendants submit that this is to misunderstand both the operation of the doctrine of issue estoppel and its application in a case such as the present.  Issue estoppel does not arise unless the determination of the issue is necessary for the decision and is fundamental to it.  In Blair v Curran (1939) 62 CLR 464, Dixon J explained this at pages 531 to 533:

“… The principle upon which the parties are precluded from denying to the clause an operation and effect sufficient to catch the undisposed of share of income is called estoppel by record or issue-estoppel.

A judicial determination directly involving an issue of fact or of law disposes once for all of the issue, so that it cannot afterwards be raised between the same parties or their privies. The estoppel covers only those matters which the prior judgment, decree or order necessarily established as the legal foundation or justification of its conclusion, whether that conclusion is that a money sum be recovered or that the doing of an act be commanded or be restrained or that rights be declared. The distinction between res judicata and issue-estoppel is that in the first the very right or cause of action claimed or put in suit has in the former proceedings passed into judgment, so that it is merged and has no longer an independent existence, while in the second, for the purpose of some other claim or cause of action, a state of fact or law is alleged or denied the existence of which is a matter necessarily decided by the prior judgment, decree or order.

Nothing but what is legally indispensable to the conclusion is thus finally closed or precluded. In matters of fact the issue-estoppel is confined to those ultimate facts which form the ingredients in the cause of action, that is, the title to the right established. Where the conclusion is against the existence of a right or claim which in point of law depends upon a number of ingredients or ultimate facts the absence of any one of which would be enough to defeat the claim, the estoppel covers only the actual ground upon which the existence of the right was negatived. But in neither case is the estoppel confined to the final legal conclusion expressed in the judgment, decree or order. In the phraseology of Coleridge J. in R. v. Inhabitants of the Township of Hartington Middle Quarter, the judicial determination concludes, not merely as to the point actually decided, but as to a matter which it was necessary to decide and which was actually decided as the groundwork of the decision itself, though not then directly the point at issue. Matters cardinaI to the latter claim or contention cannot be raised if to raise them is necessarily to assert that the former decision was erroneous.

In the phraseology of Lord Shaw, “a fact fundamental to the decision arrived at” in the former proceedings and “the legal quality of the fact” must be taken as finally and conclusively established (Hoystead v. Commissioner of Taxation). But matters of law or fact which are subsidiary or collateral are not covered by the estoppel. Findings, however deliberate and formal, which concern only evidentiary facts and not ultimate facts forming the very title to rights give rise to no preclusion. Decisions upon matters of law which amount to no more than steps in a process of reasoning tending to establish or support the proposition upon which the rights depend do not estop the parties if the same matters of law arise in subsequent litigation.”

31.  The Bank’s case is that in the 2004 Action and 2006 Action the 1^st Defendant put in issue the enforceability of the agreement and that the fundamental and primary basis upon which the Court of Appeal upheld Poon J’s judgment was that Sin Hua HK was entitled to withdraw the loan at any time.  A necessary basis for the Court of Appeal’s conclusion must have been, the Bank submits, that the agreement was valid and enforceable as demonstrated by paragraph 17 of Rogers VP’s judgment: “… the first difficulty which [the 1^st Defendant’s] must face is that whatever agreement or promise might have been made to provide general banking facilities it is quite clear those facilities could have been withdrawn at any time.  The bank documentation in this case was no different from any other bank documentation and provided for the bank to be able to call in any loan or overdraft.  Hence any representation that the bank would allow general banking facilities was not a commitment which could, in any event, be said to have extended over any specific period of time”.  I accept the logic of the Bank’s argument, although the point does not appear, at least from the judgment, to have been argued before Poon J.  I note that the question of enforceability of the facility agreements itself was not pleaded in the 2004 Action.  In the 2006 Action the principal claim was misrepresentation.  There is no express averment that the facility agreements were unenforceable.  In paragraphs 9 and 14 of the 2006 SOC it is pleaded as part of an alternative case that there was a legally binding agreement to provide credit facilities, although the “Contract” is obscurely pleaded in the early part of the pleading thus leaving it unclear to what extent the expressly pleaded “Contract” consists of the original facility agreements.  It would appear, therefore, that before Poon J and the Court of Appeal the 1^st Defendant was not alleging, as it now expressly does, that the facility agreements are unenforceable.  This being the case the debate before the Court of Appeal presumably proceeded, as the language of the judgment suggests, on the basis that the facility agreements were enforceable.  The 1^st Defendant’s claim of misrepresentation did not include an assertion that the opposite was true, on the contrary the pleaded case suggests that the 1^st Defendant accepted that it was enforceable or at least that this was not a live issue.  Presumably, if the Court of Appeal had held that the facility agreements were unenforceable it would not have made the finding in paragraph 18 of its judgment, although I accept that the Court of Appeal may still have dismissed the appeal on the basis that it was immaterial to the time bar defence.

32.  The consequence of this for the present case is that the Court of Appeal has determined as a result of the way in which the 1^st Defendant put its case the issue of enforceability of the facility agreements.  Consequently, issue estoppel applies in respect of that issue and it cannot be raised afresh in these proceedings.

33.  The Bank’s second argument was that even if issue estoppel in the classical sense did not apply, the present attempt to raise the enforceability issue was an abuse of process, because it could and should have been asserted in the earlier proceedings.  It necessarily follows from my analysis in the previous section that the enforceability issue was relevant to the issues as they revealed themselves as the 2004 Action and 2006 Action proceeded from the Court of First Instance to the Court of Appeal.  Both parties accept that in order for me to be satisfied that it is an abuse for the enforceability issue to be raised in the present proceedings I must be satisfied that the issue could and should have been raised in the 2004 Action and the 2006 Action.  I think it is clear that the issue could have been raised.  The more difficult question is should it have been raised?

34.  A broad, merits based approach is required when considering this question.  In Chiang Lily v Secretary for Justice [2009] 6 HKC 234, Ma CJHC explained the position in paragraph 57 of his judgment, citing with approval the judgment of Lord Bingham in Johnson v Gore Wood & Co [2002] 2 AC 1:

“57. It is unnecessary to dwell on these issues that arise on a consideration of the various facets of the doctrine of res judicata if one keeps firmly in mind the real issue that, in my view, has to be addressed, namely, the question of abuse arising from matters that ought properly have been litigated in previous proceedings. I emphasize here the existence of two elements that have to be demonstrated by the part alleging abuse: that there exist matters that could and should have been litigated in earlier proceedings. I am aware that in Yat Tung (in the passage quoted in para 55 above), Lord Kilbrandon did refer to ‘matters which could and therefore should have been litigated in earlier proceedings’ (my emphasis). However, despite the reservations expressed by the court in Chen Roy v Wan Ching Lam Anita [2006] 1 HKC 454 on whether this represents the law on this topic in Hong Kong (see in particular 463F-464E (paras 26 and 27)), I think it is now clear that just because a point could have been raised in earlier proceedings did not of itself mean that it should have been. This is consistent with the approach of this court in Tsang Yu v Tai Sang Container Cold Storage and Wharf Limited [2000]1 HKLRD 780, at 784A-I and Ngai Few Fong v Cheung Kwai Heung. In Johnson v Gore Wood & Co (a firm) [2002] 2 AC 1, Lord Bingham of Cornhill said at 31A-E:

‘But Henderson v Henderson abuse of process, as now understood, although separate and distinct from cause of action estoppel and issue estoppel, has much in common with them.  The underlying public interest is the same: that there should be finality in litigation and that a party should not be twice vexed in the same matter.  This public interest is reinforced by the current emphasis on efficiency and economy in the conduct of litigation, in the interests of the parties and the public as a whole.  The bringing of a claim or the raising of a defence in later proceedings may, without more, amount to abuse if the court is satisfied (the onus being on the party alleging abuse) that the claim or defence should have been raised in the earlier proceedings if it was to be raised at all.  I would not accept that it is necessary, before abuse may be found, to identify any additional element such as a collateral attack on a previous decision or some dishonesty, but where those elements are present the later proceedings will be much more obviously abusive, and there will rarely be a finding of abuse unless the later proceeding involves what the court regards as unjust harassment of a party.  It is, however, wrong to hold that because a matter could have been raised in earlier proceedings it should have been, so as to render the raising of it in later proceedings necessarily abusive.  That is to adopt too dogmatic an approach to what should in my opinion be a broad, merits-based judgment which takes account of the public and private interests involved and also takes account of all the facts of the case, focusing attention on the crucial question whether, in all the circumstances, a party is misusing or abusing the process of the court by seeking to raise before it the issue which could have been raised before.  As one cannot comprehensively list all possible forms of abuse, so one cannot formulate any hard and fast rule to determine whether, on given facts, abuse is to be found or not.  Thus while I would accept that lack of funds would not ordinarily excuse a failure to raise in earlier proceedings an issue which could and should have been raised then, I would not regard it as necessarily irrelevant, particularly if it appears that the lack of funds has been caused by the party against whom it is sought to claim.  While the result may often be the same, it is in my view preferable to ask whether in all the circumstances a party’s conduct is an abuse than to ask whether the conduct is an abuse and then, if it is, to ask whether the abuse is excused or justified by special circumstances.  Properly applied, and whatever the legitimacy of its descent, the rule has in my view a valuable part to play in protecting the interests of justice.’”

35.  It might be suggested that there is a degree of artificiality in an argument that the enforceability issue should have been raised squarely in the earlier actions as it appears that the outcome of the appeal would have been the same as the argument was probably irrelevant to the time bar case.  However, had it been raised it would either have had to have been addressed and the issue determined or there would have been a clear finding that the court took the view that it did not have to decide the issue.

36.  For reasons which are unclear the 1^st Defendant chose to start a series of separate actions against the Bank.  It did not try and consolidate the new proceedings with this Action.  It is unsatisfactory that the issue of enforceability was not addressed at the time the 2004 Action and the 2006 Action were subject to challenge.  The Bank is now faced with substantially the same complaint that was raised in the early action, albeit now in the form of a defence rather than a cause of action; although I note that a counter-claim has been included which relies on an allegation that the 1^st Defendant was misled into entering the facility agreements as a result of it being offered a facility that was greater than Sin Hua HK could lawfully advance.  Adopting a broad, merit based approach to the question in my view the 1^st Defendant should have litigated the enforceability issue in the earlier proceedings and it is an abuse of process for it and the 2^nd Defendant to try and do so now.

Illegality

37.  The Bank is bringing proceedings in Hong Kong to enforce facility agreements to provide facilities denominated in Hong Kong dollars, which were drawn down in Hong Kong to a Hong Kong company (the 1^st Defendant), which are governed by Hong Kong law and lawful under Hong Kong law.  The interest was payable with reference to Hong Kong prime rate and the fees were denominated in Hong Kong dollars.  Repayments were always made to Sin Hua HK in Hong Kong through the 1^st Defendant’s bank accounts.

38.  The 1^st Defendant argues that the governing law clause in the facility letter (clause 13) indicates a prima facie intention of the parties to select Hong Kong law but it is only one element in determining what the governing law of the facility agreements is. Whilst I accept that it is only one element it is a very important one.  All other factors that I have mentioned point compellingly to the conclusion that Hong Kong is the law that governs their contractual relationship.  The 1^st Defendant argues that despite this the fact that Sin Hua HK was a Mainland bank and its internal activities were governed by the law of the Mainland means that as a matter of Hong Kong law the facility agreement is governed by the law of the Mainland.  This is an extraordinary submission.  It means, if correct, that any agreement entered into in Hong Kong by a bank incorporated in the Mainland will, despite containing a Hong Kong governing law clause and relating to activities largely or even exclusively carried out in Hong Kong, be governed by the law of the Mainland.  In my view this is obviously wrong.  The facility agreements are unarguably governed by Hong Kong law.  The fact that an agreement governed by Hong Kong law is unlawful under a foreign law is irrelevant and the Hong Kong courts will not have regard to it: The Conflict of Laws in Hong Kong, Johnston (2005), §4.007.  Therefore, even if as a matter of Mainland law the facility agreements are void this provides no defence to the Defendants in these proceedings.

Mistake

39.  The defence of mistake pleaded in paragraph 25 of the Re-amended Defence is dependent on the facility agreements being unlawful, which I have found they are not.

Winding up proceedings

40.  As I understand the Company’s position it submits that the Petition should not be determined until the High Court Action has been determined.  In other words it argues that it has a bona fide defence to the debt, namely, that it may not be due and owing.

41.  Having struck out the majority of the Re-Amended Defence and Counterclaim the remaining defence is limited.  The Defendants plead that on 14 April 2000 the Defendants and Sin Hua HK reached a settlement agreement whereby Sin Hua HK agreed that, subject to compliance with the terms of the agreement by the Defendants, it would not proceed with legal action, alternatively that the agreement gave rise to a collateral contract with the same effect.  The Defendants plead that they complied with their obligations and accordingly the Bank (formerly Sin Hua Bank) is not entitled to institute proceedings to recover the alleged indebtedness.

42.  The Bank has not sought to strike out this remaining defence and, therefore, for present purposes I can proceed on the basis that it gives rise to at least an arguable defence.  If the only issue was whether or not there was a bona defence to the claim by the Bank against the Defendants then it would follow that it was premature to issue the winding-up petition.  However, the Bank says that the legal charges executed by the Company make it liable for all monies advanced to the 1^st Defendant and which remain unpaid.  Therefore, says the Bank, the fact that Sin Hua HK may have agreed not to take enforcement proceedings against the Defendants has no bearing on its right to recover from the Company.

43.  Clauses 18.9 and 18.17 provides as follows:

“(18.9) the liability of the Mortgagor and the Borrower hereunder shall not be affected by the absence of or by any defective excessive or irregular exercise of the borrowing powers of the Borrower (if a company or body corporate) or by the Borrower being now or at any time hereafter under disability or incapacity or by reason of the Borrower being an unincorporated body not having a legal existence or by any other fact or circumstance (whether known or not known to the Lender and/or the Mortgagor and/or the Borrower) as a result of which any indebtedness or liability incurred or purported to be incurred by the Borrower or by any person purporting to act on behalf of the Borrower would otherwise become void or unenforceable by the Lender against the Borrower and the Mortgagor agrees that in any such case the security herein created shall not be affected vitiated or impaired and the Mortgagor shall be liable to the Lender as principal debtor amd this Legal Charge shall also be construed as an indemnity by the Mortgagor for the Secured Sum in favour of the Lender;

…..

(18.17) no payment to the Lender (whether under any judgment or court order or otherwise howsoever) shall discharge the obligation or liability of the Mortgagor or the Borrower in respect of which it was made unless and until the Lender shall have received payment in full in the currency in which such obligation or liability was incurred and to the extent that the amount of any such payment shall on actual conversion into such currency fall short of such obligation or liability, actual or contingent, expressed in that currency, the Lender shall have a further separate cause of action against the Mortgagor and/or the Borrower and shall be entitled to enforce the security hereby created to recover the amount of the shortfall;”

44.  The Bank submits that the language of clause 18.9 is clear and that the Company’s liability is not affected in any way even if the 1^st Defendant succeeds in its defence: The Modern Contract of Guarantee, O’Donovan and Philips, (English Edition), pp 37-43; Yeoman Credit Ltd v Latter [1961] 1 WLR 828 at 830-831; Heald v O’Connor [1971] 1 WLR 497 at 502E to 503C.

45.  The Company argues that the Petition should be stayed pending the outcome of the High Court Action on the grounds that if the facility agreements were tainted with illegality and void or otherwise unenforceable it is difficult to see how this would not affect the debentures. I did not understand Mr Wong to dispute that if I struck out the amendments the remaining defence was irrelevant because of the provisions of the debentures and the principles I have referred to above.  This being the case it follows from my judgment in the High Court Action that the Company does not have a bona defence on substantial grounds to the Petition and the Bank is entitled to the normal winding-up order.  I would add this, that if I had taken a differing view in relation to the re‑amendments I would have dismissed the Petition.

Conclusion

46.  I make an order in the High Court Action that paragraphs 3 to 32, 47 to 49 and prayer (1) of the 1^st Defendant’s Re-Amended Defence and Counterclaim be struck out and that the costs of the application be to the Plaintiff.

47.  So far as the winding-up petition against the Company is concerned I direct that it be relisted for hearing on 4 July 2011 at which time a winding-up order can be pronounced.