OVERSEAS TRUST BANK LIMITED v. AIK SAN REALTY LIMITED

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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BETWEEN

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JUDGMENT

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1. In this matter Overseas Trust Bank Ltd, the plaintiff, is suing AIK SAN REALTY LTD, the defendant, for the return of US$8,286,934.24, together with interest. The plaintiff is a bank and the defendant is a customer to whom it granted banking facilities and to whom, in the course of business, it lent money. The plaintiff pleaded that at the close of business on the 8th July 1985 the defendant was indebted to it in the sum of US$8,296,934.24 and that it had, by a letter dated 11th July 1985, demanded repayment thereof.

2. The plaintiff applied to enter judgment under O. 14 relying upon an affidavit of Mr John Russel Kelting which stated that the debt was incurred and was still owing and that there was no defence to the action.

3. On the 23rd September Master Woolley gave judgment for the plaintiff and it is against that Order that the defendant now appeals. The defendant filed an affidavit, which was before the learned Master, by one Kenneth Chung Kin Shu stating that on the 13th December 1979 the managing director of the defendant wrote to the plaintiff to apply for a loan of $6,000,000 on the security of a mortgage on No. 90 Repulse Bay Road. He said that the terms of the application were agreed to by the plaintiff who then sent instructions to their solicitors to prepare a First Legal Mortgage ('KC-2') dated 14th September 1979. The deponent went on to say that pursuant to the agreement and the instructions given by the plaintiff a Loan Agreement was executed on the 9th January 1980 ('KC-3') which recited that one of the securities to be provided by the defendant was a Legal Mortgage of 90, Repulse Bay Road and that, on 31st January 1980, this Legal Mortgage ('KC-4') was executed by the defendant in favour of the plaintiff.

4. It is the contention of Mr Oswald Cheung, Q.C., who appears with Miss Ng for the defendant, that, because of O. 88, O. 14 has no application to a claim of the type brought by the plaintiff and that the Master was wrong in giving judgment thereon.

5. O. 88 r. 1(1) applies to any action by a mortgagee or mortgagor or by any person having the right to foreclose or redeem any mortgage being an action in which there is a claim for, inter alia, payment of money secured by the mortgage.

6. The order refers to actions to which it applies as 'mortgage actions' and sets out a number of provisions with regard to documents to be lodged and the evidence to be produced in such actions.

7. As O. 14, under which judgment in the present action was obtained, specifically states that it does not apply to an action to which O. 88 applies there can be no doubt that judgment cannot be obtained under it in a mortgage action.

8. Mr Chung submits that the facts show that the plaintiff is a mortgagee and a person with a right to foreclose for payment of the money secured. He argues that the present action is, in reality, a mortgage action and that O. 88 applies thereto. He submits that that Order provides an exclusive code with regard to mortgage actions and that the plaintiff must, if he wishes to pursue his action, do so under that Order. He submits that the plaintiff cannot rid himself for his character as a mortgagee by electing to proceed upon the Loan Agreement and omitting reference to the mortgage in his statement of claim.

9. Mr Bleach, who appears for the plaintiff, submits that O. 88 applies only to actions which are begun by a party who, in order to enforce his claim, relies upon his character as mortgagee or mortgagor or person having a right to foreclose or redeem any mortgage. He submits that O. 88 has reference only where a person seeks to enforce a right given to him under a mortgage and that, where the cause of action is grounded in a Loan Agreement, as it is in the present case, and where the plaintiff does not rely upon the mortgage, it has no application.

10. I was referred to Newnham v. Brown (1966) 1WLR 875 where the plaintiff was a second mortgagee of land which had been sold by the first mortgagee leaving the plaintiff as an unsecured creditor. In that case there was no Loan Agreement and the plaintiff was left with no recourse but to sue on the mortgage. It was held that, as the security was no longer in existence, he was entitled to take advantage, as any ordinary creditor, of the provisions of O. 14. This case addressed itself to the problem that arises when a creditor is a second mortgagee and not to the position which we have here where the creditor is a party to a Loan Agreement as well as to a mortgage. It is authority for the proposition that where a second mortgagee is suing for a debt which has become unsecured the Court must concern itself with the substance and not the form. However that may be I am satisfied that the decision has no application to the facts and fit the present case.

11. The solution to the present problem lies in O. 88 itself. O. 88 r. 5 provides that 'where in a mortgage action begun by an originating summons being an action in which the plaintiff is the mortgagee and claims delivery or possession or payment of money secured by the mortgage or both, any defendant fails to acknowledge service of the originating summons' the plaintiff must, inter alia, serve on the defendant a copy of an affidavit in support of the summons. O. 88 r. 6 provides that the affidavit must set out full particulars of the state of account between the mortgagor and mortgagee including the amount remaining due under the mortgage and that the plaintiff must, where he is claiming delivery or possession, give particulars both of every person who, to the best of his knowledge, is in possession of the mortgage property and of the termination of any tenancy created by the mortgage. It goes on to provide that 'where the plaintiff claims payment of moneys secured by the mortgage, the affidavit must proved that the money is due and payable' and give full particulars in relation thereto. The ambit of the Order is, I am satisfied, made clear by its opening words: "This Order applies to any action .... by a mortgage or mortgagor or by any person having the right to foreclose or redeem any mortgagee .... " The rule requires that a party seeking to rely upon a mortgage set out all of the particulars within his knowledge with regard thereto.

12. It seems to me clear, as Mr Bleach argues, that O. 88 has application to actions where a mortgagee or mortgagor or person having a right to foreclose or redeem any mortgage sues in his capacity as mortgagee or mortgagor or person having a right under the mortgage and relies upon the mortgage to enforce that right. When such a party seeks judgment after failure by the defendant to acknowledge service he must give full particulars of the state of the mortgage account and, in as far as he know them, of the situation with regard to the property mortgaged.

13. Why, if a person sues for a debt owing under a Loan Agreement and does not seek to rely upon the mortgage or to execute against the property mortgaged, should he be caught by the provisions before O. 88? I am satisfied that O. 88 has reference only to actions where the party is relying upon the existence of the mortgage to enforce his action. I am satisfied that it has no application where a party seeks to recover an amount owing under a Loan Agreement and does not plead or seek to rely upon the provisions of the mortgage which secures the loan. I am satisfied that the learned Master was correct in his decision and dismiss the appeal. The respondent plaintiff is to have his costs of the appeal to be taxed.