HOLYROOD LTD v. BANK OF CHINA (HONG KONG) LTD AND OTHERS

HCCL 35/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMMERCIAL ACTION NO.35 OF 2003

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J U D G M E N T

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The background

1. The plaintiff, Holyrood Ltd, is the owner of a site on the Peak known as No's 10-12 Peak Road, Hong Kong. It is, or rather was, in the process of redeveloping this site for resale. I am told that it is building thereon two ten storey blocks and a number of town houses.

2. This redevelopment is being financed by monies borrowed from the 1st defendant, Bank of China (Hong Kong) Ltd. By a loan agreement dated 5 September 1997 (as supplemented by three supplemental agreements of 27 February 2001, 12 April 2001 and 31 July 2002) made between Holyrood as borrower and the Bank of China as lender, a term loan facility of up to HK$735 million was made available to the plaintiff.

3. By a debenture dated 11 September 1997 (as supplemented on 15 June 2001) the Peak property was charged to the bank as security for the loan.

4. There has been a default in repayment. There is some incidental controversy over whether the date of such default is 30 April 2003 or 31 May 2003, but for present purposes it matters not. It is accepted that there has been such default.

5. We now come to the nub of the present dispute. On 30 June 2003, pursuant to the terms of the debenture held by the bank over the property, the Bank of China appointed two employees of Messrs Ernst & Young as the joint and several receivers and managers of the plaintiff and of the property. These are the 3rd and 4th defendants, Messrs Yeo Boon Ann and Stephen Liu, whom I am told arrived at the plaintiff's office at 11:10 a.m. on 30 June 2003 stating that they had been appointed as receivers to take over the company.

6. In practical terms this meant that the receivers moved into the Peak site, which, as I have said, remains under development, and the staff of Holyrood moved out. I understand, also, that some construction work remains ongoing, but to say the least there appear to have been significant delays, involving allegations of unpaid contractors, and completion seems still to be some way off, a matter which has involved payment to the Government of premiums upon each three monthly time extension required under the Conditions of Grant.

7. In this situation, the Bank wishes to sell the property, and wishes to do so as a matter of urgency given the bank's concern as to the state of the luxury property market. The details do not greatly matter at this stage, but the broad picture is that the amount of money that is thought likely to be recouped upon an 'as is' sale falls short of the sum presently owed to the bank by the site owner/developer, Holyrood, which itself is a subsidiary of a company known as Paladin Limited, whose unaudited results for the six months ending 31 December 2002 reported not insignificant losses.

The application

8. The foregoing, therefore, is the stage against which the plaintiff, Holyrood, mounts the application with which the court presently is seized.

9. By summons dated 8 August 2003 the plaintiff seeks an interim injunction restraining sale or disposal of the property, and second, seeks to terminate the receivership and management of the plaintiff.

10. In practical terms, therefore, the plaintiff wishes to re-enter the site and to continue with the development pending trial of this action. The relief claimed in the writ, which was issued on 1 August 2003, mirrors at paragraphs 1 and 2 thereof the relief now sought in the present application for an interim injunction. There are several other claims for relief, in terms of a declaration, an account and so forth consequent upon what is asserted to be the wrongful invocation of the current receivership, but in essence the substantial matter for trial is precisely that with which this court now is seized.

11. The sole live issue for debate in this case is the validity of the appointment of the receivers.

Circumstances of the Receivers' appointment

12. The factual matrix requiring attention is in narrow compass. Much is common ground, and, at bottom, the present dispute focuses upon that which occurred at or about 8:20 a.m. on Monday 30 June 2003.

13. Negotiations between the bank and Holyrood had been taking place during May and June 2003 regarding a further extension of the repayment date of the loan consequent upon construction delays. A meeting took place between representatives of the Bank and of Holyrood on the morning of Saturday 28 June 2003. This meeting ended in impasse, however, and no agreement was reached as to any such extension; it is said by the plaintiff that this was the result of the bank's insistence that the premium payment required by Government in the sum of HK$5,082,100, which was not due for payment until 30 June 2003, be made by 10:30 a.m. that Saturday morning.

14. Be that as it may. At 2:30 p.m. on the same day Mr Liang Zhong Hong, who is an adviser and consultant to the plaintiff, and who had attended the meeting that morning, received a telephone call from Mr Lau Pak Hon of the bank asking that he return to the bank to collect a letter. This he did. However, the letter was not ready, and Mr Zhong had to leave for Beijing. Later that afternoon Mr Zhong was telephoned and asked whether the letter, now completed, could be sent to Ms Lilian Oung, the director in charge of the plaintiff, but it appears that this was not possible as Ms Oung was uncontactable.

15. In the event, the letter ultimately was faxed to Mr Liang in Beijing, whom it is agreed received it at 2:30 p.m. on the following day, that is Sunday 29 June 2003. Mr Liang appears to have indicated at that stage that if, as he anticipated, he could not get hold of Ms Oung, the matters outlined in this letter would have to wait until the following day, Monday 30 June 2003, in order that it could be dealt with by the plaintiff.

16. This letter, dated 28 June 2003, is a significant document in terms of the argument advanced in this case. It is addressed to Ms Oung of the plaintiff and sets out twelve matters constituting that which the bank calls a "proposal for your consideration". The letter speaks for itself. The main planks deal with the appointment of a Project Manager for the site, an undertaking that Holyrood settles "all your indebtedness to us" within three months of the issuance of the Occupation Permit or 31 December 2003, "whichever is earlier", and, at paragraph 11, the following :

"The condition precedent to the above is your payment of HKD5,082,100 payable to the Government of Hong Kong Special Administrative Region on June 30,2003 at 11:00 am."

The letter concluded by asking that acceptance of the contents be signified by signing and returning a copy of the letter by fax "on or before June 30, 2003 at 8:00am latest."

17. On the morning of 30 June, shortly after 8:00 a.m., Mr Liang received a phone call from Mr Lau of the bank. There are differing versions of what transpired. The essence of Mr Liang's evidence is that although he had not yet been able to liaise with Ms Oung, he said that the premium could be paid on that day, and that the other conditions were acceptable, although as a matter of formality they could not be enshrined in a formal board resolution by the deadline in the letter. Mr Liang asserts that Mr Lau said : "that'll be fine if you can pay the money".

18. For his part Mr Lau disputes this version. He says that he used his colleague, Fonnie Lau's, telephone at about 8:20 a.m. in order to contact Mr Liang in Beijing because he had been told by Fonnie Lau that she had not received the plaintiff's acceptance of the terms in the bank's letter by the stipulated 8 00 a.m. deadline. He says that he told Mr Liang that this was the case and that Mr Liang "mumbled incoherently". He says that he told Mr Liang that the first action that was required was for the plaintiff to pay the extension premium to the government before 11:00 a.m., although Mr Liang would not say whether payment would be made by that date but that it would be made on that day. As to the other conditions in the letter, Mr Lau says that Mr Liang said "vaguely" that the plaintiff would accept some of the conditions, but would not specify which were acceptable and which were not. Mr Lau disputes that he said to Mr Liang the words ascribed to him, namely "that'll be fine if you can pay the money", or anything to similar effect.

19. It is a matter of record that the relevant government premium was paid by the plaintiff at 11:02 a.m. on Monday 30 June 2003.

20. Mr Lau says that shortly after 11:00 a.m. he received a call from Mr Liang informing him that someone had been sent to pay the extension premium to the government, and that he reported it to Fonnie Lau, who told him that receivers already had been appointed. It appears similarly to be a matter of record that the receivers entered the plaintiff's offices at 11:10 a.m.

21. There appears to have been a meeting on 11 July between Mr Liang and the bank's general manager Mr Mao Xiao Wei, who is said to have indicated that the bank had taken the action that it did because it had no evidence that the premium had been paid, not having received the fax payment receipt until around noon on 30 June 2003.

22. In addition, after the events of 30 June two letters were sent by the plaintiff to the bank. The first is dated 2 July 2003, stating the fact of payment to the government, and that in respect of the other items in the letter of 28 June "we would convene a board meeting immediately and once the resolution is passed, we shall revert". The second is dated 12 July 2003 and contains a commentary on the bank's 12 requirements in its letter of 28 June; the requirement for a project manager on site in items 1-6 of that letter is subject to a request that the project continue to "be managed by our original management team", although items 7-12 appear to be accepted, the point being made that the construction company had now been paid, as had the government.

The argument

23. It is common ground that the principles on which this court should act are those enshrined in American Cyanamid v. Ethicon [1975] AC 396. The difference between the parties lies in that which is regarded as the appropriate application of those established rules.

24. On behalf of the plaintiff, Mr Sussex SC took strong issue with the validity of the appointment of the receivers. He asserted that clearly there was a serious issue to be tried, that this situation involved infringement of the right to enjoy land, and that in the present circumstance damages should not automatically be considered an adequate remedy, notwithstanding that the defendant was the Bank of China, and further that in terms of the balance of convenience the needle inevitably swung toward preservation of the status quo pending trial, which in this instance required restoration of the plaintiff to the affairs of the company. For his part Mr Fung SC took issue with each of these contentions, thus in effect disputing each element within the Cyanamid equation.

25. In terms of a serious issue to be tried, Mr Sussex put his case on four bases: first, that there was a concluded contract entered into at or about 8:20 a.m. on 30 June 2003 in terms of the letter of 28 June, as orally varied, in order to permit payment of the premium within the day, the consequence being that there could not have been an event of default for the purpose of appointing receivers; second, if and in so far as this construction was incorrect, there was indeed such a concluded contract, but that time was not of the essence, and so payment at 11:02 a.m., as opposed to 11:00 a.m., was acceptable; third, that there was such a contract, but that if time nevertheless is to be regarded as of the essence, the undisputed fact of payment at 11:02 a.m. entitles the plaintiff to invoke the equitable principle of relief against forfeiture; and fourth, that in the event that there was no concluded contract, the circumstances and the statement of Mr Lau in terms of the words "That'll be fine if you can pay the money" sufficed to raise against the defendant bank a promissory estoppel or an estoppel by representation.

26. Mr Fung SC forcefully attacked this application root and branch, his initial contention being that demonstrably no serious issue to be tried arose; a "fanciful" issue could perhaps be demonstrated, he said, but the hard fact was that the plaintiff could not even surmount this first essential hurdle.

27. In this connection Mr Fung submitted that on the available evidence Mr Liang had contradicted himself, and was in any event in no position to bind the company, of which he was not even an employee. Nor had Holyrood accepted the bank's terms of offer, even by the 2 July, citing here the letter of that date from the plaintiff. Not only had there been no acceptance, he argued, but in any event time clearly had been made of the essence, both in terms of the payment of the premium and in terms of the time limit for acceptance of the cumulative terms, that is by 8:00 a.m. on 30 June 2003. It was incumbent upon the plaintiff, in circumstances in which clearly it was in default, to establish variation of the terms of payment, and, asserted Mr Fung, the failure to discharge even this initial burden had been conspicuous.

28. I confess that this is an argument that occasioned considerable reflection. Ultimately, however, I do not consider that it gets home in light of the words alleged to have been used by Mr Lau, and the circumstances in which they are alleged to have been said to Mr Liang; at this stage I decline to become drawn into an issue regarding the ambit of his authority to act on behalf of the plaintiff, although in the circumstances he would appear to have had ostensible authority in any event. Moreover, as Mr Sussex also reminded me, the hard fact is that the money in question was paid.

29. At the end of the day, looking at the situation in the round, I do not consider that the plaintiff's case in this regard can be castigated as, in effect, frivolous and vexatious. As Mr Sussex reminded me, the threshold for the establishment of a 'serious issue' is not high, and it seems to me that unless the matter really can be seen, at this stage, to be demurrable on its face, there is no justification for knocking the application out on this basis absent the opportunity of seeing and hearing the witnesses who presently are recounting contradictory stories on affidavit/affirmation.

30. Accordingly I find that in all the circumstances of this case that there is a serious issue to be tried.

31. I move now to the other elements within the Cyanamid formulation, namely considerations of the adequacy of damages and that of the balance of convenience.

32. The issue of the adequacy of damages provided Mr Fung SC with what at first blush appears a decisive argument. With this Mr Chan SC, appearing on this application for the receivers, fully agreed, pointing out to the court the observation of Lord Diplock in Cyanamid, op cit at 408, to the effect that "if damages in the measure recoverable at common law would be adequate remedy and the defendant would be in a financial position to pay them, no interlocutory injunction should normally be granted, however strong the plaintiff's claim appeared to be at that stage".

33. This, said Mr Fung, was the end of this particular matter. His client was the Bank of China, and whatever else may be said in this case its ability to pay whatever damages may be awarded should it subsequently become clear that the receivership was wrongly founded, could not be in issue.

34. There is a good deal in this argument, and once again it was tempting to accede to it, the plaintiff thus being left to proceed to trial in normal course and, if its case be proven, to its damages remedy.

35. Once again, however, I decline to decide this application on this basis. Mr Sussex suggested that injuries, threatened or anticipated, to land constituted a special case, and that as a result the courts should be far more ready to grant injunctive relief in such circumstances. I will not here dwell upon his colourful analogies with a Monet painting or a Faberge egg, but that certainly was the drift of one of his arguments. The answer, it seems to me, is that everything depends upon the particular circumstances, and whilst there are guidelines there is no hard rule one way or the other. The short and irrefutable point here, and one made by both Mr Fung and Mr Chan, is that this is what realistically can be considered to be a pure money case. This site was purchased at the height of the property boom in 1997 with a view to redevelopment and onsale at a profit. This scheme, like so many others, has come crashing to earth with the demise of the Hong Kong property market, but for present purposes this is nothing to the point.

36. To his credit Mr Sussex eschewed reference, in oral submission at least, to this case falling within a special category by reason of the fact that it is said that Ms Oung wishes to live in one of the houses which are being built upon the site, and that for this reason the court should be more ready to grant the injunction sought. Mr Chan SC submitted that any suggestion along these lines was nonsense. For myself I would categorise any such argument, in the particular circumstances of this case, as ambitious and simply unsustainable.

37. The alternative approach, however, struck me as having more substance in the context of a debate as to the adequacy of damages. In my view Mr Sussex was justified in suggesting that, if at trial the plaintiff's case was to be vindicated, and thus it was decided that the receivers' appointment lacked validity, it by no means followed that the ascertainment of the damage accruing to the plaintiff would be an easy matter; indeed, he said, such assessment might be very difficult indeed, and at the least was, or very likely would be, beset with significant imponderables.

38. The essence of the point is thus that damages are not necessarily to be considered an adequate remedy if their ascertainment is, or well may be, so replete with speculation or conjecture in terms of such assessment that such remedy may not constitute a genuine remedy at all, and that as a consequence there is a real danger of justice not being able to be done in terms of the party who duly is found, after trial, to have been wronged.

39. Conceptually, I suppose, it is certainly possible to posit a damages construct whereby a plaintiff's quantum of damage would be, for example, the difference between a current sale of the site on an 'as is' basis (which is precisely that which the bank currently has in mind), and the value of the current site on a completion basis. But I suspect that this area is rather easier in theory than in practice. There may be no completion of that which already exists. What of the situation, for example (and apparently this is a possibility that has already arisen) whereby a putative buyer wishes to purchase the site upon a 'as is' basis, and then to knock down everything that is there and start all over again?

40. It strikes me that assessment of damages, if this is an exercise which ultimately is necessary to be undertaken, by no means would be as straightforward as often is the case in commercial disputes, and may well be fraught with imponderables, and in the present circumstances I see no reason to submit the plaintiff to such imponderables if it is practically possible (as I believe is the case) to avoid the possibility of such difficulties arising.

41. Accordingly, therefore, the assertion that damages are an adequate remedy, and that in itself this is sufficient reason to dismiss this application, is a submission with which the court is not totally comfortable.

42. This brings me to the last head for consideration, which is the issue of the balance of convenience. In this Mr Fung SC may be correct when he suggests that the balance of convenience only swims into focus when there is doubt as to the adequacy of damages, but I am unable to agree with his further submission that the possibility of a 'speedy trial' only comes into play "if the court has difficulty in tackling the balance of convenience". With respect, the question of when the dispute may finally be determined cannot, and indeed should not, be so neatly isolated from consideration of the 'balance of convenience' as it is perceived to exist in the circumstance of any particular case.

43. As all counsel are aware, the initial instinct of the court in this case was to sidestep the pitfalls inherent in interim injunctions, and to proceed to hear the case immediately. This is, after all, the Commercial Court which should strive, if at all possible, to produce a speedy resolution to urgent commercial disputes. To this end all parties were, I think, in favour, although the immediate possibility foundered given the apparent unavailability of the plaintiff's key witness, Mr Liang Zhong Yong, to give evidence; however I have been informed that Mr Liang indeed will be available for a trial commencing on 2 October 2003, that is two weeks from today.

44. Although in the event (and after some delay investigating the possibility of such immediate hearing) the court proceeded to hear the plaintiff's interim injunction application in normal course, it remained a signal part of Mr Sussex's concluding submissions that the trial of what on any basis is a very narrow issue, namely the validity of the appointment of the receivers consequent upon the events of the 28 to 30 June 2003, with the focus therein on the Liang/Lau telephone call at or about 8:20 a.m. on 30 June, should nevertheless be the course that should be adopted, and that in the 14 day interim period the plaintiff should have the injunctive relief it now seeks.

45. The defendants do not, I think, oppose a speedy trial in principle indeed until the revelation of Mr Liang's unavailability Mr Fung and his team had been helpfully pro-active in exploring the possibility of holding an immediate trial - and I have recorded Mr Fung's only objections to a trial commencing on 2 October for three days (or, if necessary, four) to be that there had been, as he put it, "not a peep" that the plaintiff would pay the further extension premium of some HK$5 million to the government, which sum is due on 30 September 2003, and further that in the interim additional construction costs would of course be accruing.

46. The best point here, it seems to me, is the fact of payment of the further premium, and Mr Sussex now has stated unequivocally on behalf of his client, a statement which I accept, that his client is prepared to pay this further premium which falls due on 30 September. This objection is thus removed.

47. Whilst I appreciate, of course, the fact that the Bank, having now embarked upon the course that it has in the appointment of the receivers, is concerned about recovery pursuant to its security as Mr Fung has stressed, if the government ultimately refuses further to extend then the right exists under the Conditions of Grant to enter and forfeit, in which case the bank loses its security in a situation wherein the borrower is not worth powder and shot - I do not consider that a delay of an additional two weeks is likely to cause insurmountable difficulty, nor is there any evidence, or any submission, before me to demonstrate that this will be the case. To the contrary. If there is going to be a trial in any event, it seems to me that it is entirely appropriate, and in the interests of all parties, that this matter finally is resolved in the immediate future.

48. Accordingly, I have decided that this matter is to be tried commencing on Thursday, 2 October, with 3rd, 6th and 7th reserved, which decision obviously precludes the necessity for extensive reflection in terms of the balance of convenience. If this approach be correct, as I believe it is, the only matter which requires further resolution is whether any relief should be granted, in terms of the present application, in the 14 day intervening period between now and 2 October, 2003?

49. Clearly the real thrust of the relief sought by the plaintiff lies in the first part of the summons which seeks restraint in terms, and I quote, of "commencing or continuing marketing, selling, conveying, assigning, letting or in any other way disposing of the property known as 10-12 Peak Road, Hong Kong, or any part thereof, whether by private treaty, public tender or otherwise".

50. In the circumstances, it may well be that the Bank of China will feel it appropriate to undertake to the court that in the two weeks between now and the completion of the trial (I anticipate that judgment will be quickly forthcoming) that it will not "sell, convey, assign, let or in any other way dispose of" the property now in receivership, and if this undertaking is, through its counsel, forthcoming it seems to me that that will be sufficient to protect the interests of the plaintiff.

51. Alternatively an injunction will issue in these limited terms. I see little point in going to the trouble of setting up a speedy trial, and hence an imminent resolution of this problem, if in the interim between now and such early resolution the property is sold. As a matter of completeness I would add that for my part I cannot see any basis presently to prevent the bank from canvassing, or continuing to canvass, potential purchasers on the basis that if it should succeed at trial (and I have no idea which party will succeed) it will be free to alienate the property as it wishes.

52. As to the second head of the injunction sought, I presently see no good reason, in the very short interim period between now and 2 October, to order the receivers to leave. I note that that when the idea of a speedy final resolution was initially mooted Mr Sussex clearly did not anticipate any change to the situation as it currently prevails, although he did indicate immediate concern about the possibility of interim alienation of the property by the bank prior to judgment absent any injunction or undertaking in lieu thereof.

53. The sole procedural matter outstanding is the issue of fortification of the plaintiff's undertaking in damages consequent upon grant of relief in the terms indicated. The issue of fortification arose only towards the end of Mr Sussex's submission it was not canvassed in his skeleton argument and he has indicated from the Bar that his client is willing to provide fortification, in terms of a guarantee from Citibank, on a staggered basis, the offer being so constructed that at the end of 14 days from 17 September the undertaking in damages would be fortified in the sum of HK$50 million.

54. Clearly, in light of the apparent financial situation of the plaintiff, and its parent, fortification is required in the present circumstances. Mr Chan warned darkly of difficulty over the wording of any bank guarantee, and expressed scepticism that no draft guarantee had been put in place for consideration. These are valid observations, albeit in terms of the wording Mr Sussex may well be correct when he says that he sees no reason why the wording of this particular bank guarantee should differ greatly from the standard form of undertaking. Be that as it may. In so far as agreement as to a suitable guarantee cannot be reached between the parties a matter which may become clear within the first three days from today, by which time a guarantee of the first tranche of HK$10 million is to be forthcoming on the basis of the timetable proffered by Mr Sussex the court will rule on the manner of provision of such security. At the end of the day, of course, such money, or part at least, can simply be ordered to be paid into court.

Order

55. On the basis of the foregoing, therefore, the substance of the court's decision upon the plaintiff's application may be summarized thus :

(i) there is to be a speedy trial of this matter before this court, commencing on Thursday, 2 October at 10:00 a.m., with 3rd, 6th, and 7th reserved;

(ii) pending judgment there is to be no sale/alienation of the property by the Bank, and an undertaking is to be given to this effect, alternatively an injunction in terms will issue;

(iii) consequent upon such undertaking/injunction the plaintiff is to fortify its undertaking in damages in the sum outlined by its leading counsel, and in a manner to be agreed, alternatively to be decided by the court;

(iv) the plaintiff is to pay the premium falling due to the government on 30 September 2003;

(v) the costs of this application are reserved to the trial.

56. A number of variables exist within the foregoing, and I should be grateful if counsel would confer and draft an Order appropriate for engrossment by the court.

57. The court naturally will make such further directions as are necessary prior to trial, and I will entertain submissions in this regard either now or at a time to be appointed.

58. I thank counsel for their assistance.