S.H. LOCK (HONG KONG) LTD v. THE OFFICIAL TRUSTEE IN BANKRUPTCY

IN THE COURT OF APPEAL

Civil Appeal
No. 112 of 1987

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J U D G M E N T

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(This judgment was read by Cons V.-P., Clough J.A.
being out of Hong Kong.)

Clough, J.A. :

1.  This is an appeal by S.H. Lock (Hong Kong) Limited (“the appellant”) from the order of Jones J. in Chambers made on the 10^th July 1987 setting aside, on appeal under Order 58, the order made by Master Boa on the 17^th June 1987 pursuant to the powers conferred by Order 92 rule 5 (exercisable by a master by virtue of sections 37 and 38 of the Supreme Court Ordinance (Cap. 4) and Order 32 rule 11) directing that the sum of $231,312.4, being the surplus proceeds of sale of mortgaged property be paid out of court to the appellant.

2.  The mortgaged property in question was a workshop in Kwai Chung in the New Territories the leasehold interest in which had been owned by a Mr. Stamatellos (the “bankrupt”) and mortgaged by him to the Bank of Canton on the 27^th November 1980 to secure banking facilities.  No question arises regarding the validity of that mortgage.  The bankrupt petitioned for bankruptcy in the State of Queensland in Australia on the 7^th March 1986.  It is common ground that he became bankrupt there on the 24^th March 1986.  His interest is represented in these proceedings by the Official Trustee in Bankruptcy of Queensland (“the Official Trustee”) who is the trustee of his estate.

3.  The bankrupt having defaulted on the mortgage, the Bank exercised its power of sale under its mortgage on the 14^th August 1986.  After discharging the indebtedness of the bankrupt out of the proceeds of sale of the mortgaged property the Bank was left with a surplus of $231,000 odd which, in the ordinary way, it would have held on trust for the bankrupt.

4.  However, there were competing claims for the surplus made by the appellant and the Official Trustee.  Faced with these claims the Bank did not bring interpleader proceedings under Order 17 or proceedings for the determination of the claims under Order 85.  Instead it exercised its right to obtain an order pursuant to section 62 of the Trustee Ordinance (Cap. 29 and Order 92 rule 2 for the payment into court of the surplus moneys.  Payment into court was made on the 28^th January 1987.

5.  On the 10^th April 1987 the appellant applied under Order 92 rule 5 for payment out to it of the surplus moneys in court.  The effect of Order 92 rule 5(2), in the circumstances of this case was that the application should have been made by originating summons.  The appellant did not follow this procedure but issued a Chambers summons.  This was unfortunate because if the proper procedure had been followed it may have occurred to the master or the parties that the proceedings should have been directed under Order 28 rule 8 to continue as if begun by writ.  If such a direction had been given and pleadings had been ordered it would have been more likely that the issues arising between the competing parties would have been more clearly defined.

6.  As a matter of practice money is not lightly paid out of court.  The applicant must establish his title to the satisfaction of the court in accordance with the rules of evidence if his title has not already been established in previous proceedings resulting in an order of court or certificate of a master. However, in the present case the appellant was permitted, evidently without objection by the court or by those acting for the Official Trustee, to rely on hearsay affirmation evidence which in many instances flouted the important provisions of Order 41 rule 5.

7.  The appellant relied on the affirmations of its manager, Mr. Chiu, and of Mr. Magennis, the solicitor who had the conduct of the proceedings on the appellant’s behalf.  It was claimed, on the strength of this evidence, that the bankrupt was liable to pay the appellant a total of (A)$74,365.61 on four bills of exchange.  The bills in question were all 119 day fixed date bills drawn between the 17^th August and the 19^th November 1985.  They were all drawn by S.H. Lock (Australia) Limited (“the Australian company”) (an associated company of the appellant) on, and accepted by, a Queensland Company called Stamatellos Export/Import Pty. Ltd. (“the bankrupt’s company”).

8.  The bills were expressed to be payable to the order of the Australian company. They had been indorsed in blank by the bankrupt.  The indorsement was updated but it was alleged to have been made at the time they were drawn.  The bills were also indorsed in blank by the appellant.  The appellant’s indorsement was also updated.  It appeared underneath that of the bankrupt being expressed to have been made by the Australian company as the attorney for the appellant.

9.  It was claimed that the appellant was the holder in due course of the bills and that it had given value for them in that the amount of the bills had actually been paid by the appellant to the Australian company after the bankrupt’s company had defaulted as the acceptor of the bills.  In these circumstances it was claimed that the bankrupt was liable to the appellant as the endorser of the bills.  The judge was evidently told by counsel for the appellant, but it was not in evidence, that the Australian company had obtained judgment against the bankrupt and his wife in Queensland for (A)$221,000 odd on the 31^st January 1986.

10.  On the basis of the bankrupt’s alleged liability on the bills it was further claimed that the appellant was entitled to enforce its security for that liability under a Legal Charge dated the 30^th January 1985 made without the consent of the Bank and in breach of clause 7(j) of the Bank’s prior mortgage.  Reliance was placed in the evidence on clause 1(d) of the Legal Charge by which the bankrupt had covenanted that in consideration of general credit facilities to an unlimited extent in Hong Kong currency provided or to be provided (“the Facility”) by the appellant to the bankrupt he would pay, on demand by written notice, to the appellant all money which might from time to time be owing to the appellant or its group of companies.

11.  At the hearing before the judge counsel for the appellant evidently relied also on clause 1(e)(vii) of the Legal Charge under which the bankrupt had also covenanted in wide terms to pay, on demand by written notice, to the appellant any other liability incurred by the bankrupt to the appellant.

12.  I mention that a further claim by the appellant for payment allegedly due from the bankrupt under a guarantee was not pursued on the appeal.

13.  To counter reliance by the Official Trustee on the definition of “moneylender” in section 2(1) of the Money Lenders Ordinance (Cap. 163), and on section 23 of that Ordinance (which precludes the recovery by an unlicensed moneylender of money lent or interest in respect thereof or the enforcement of any agreement made or security in respect thereof) the appellant relied on the evidence of Mr. Magennis (the admissibility of which was evidently not challenged) to the effect that the Legal Charge had been executed under the seal of the bankrupt and had been signed and delivered by him.

14.  Reliance was also put on Mr. Magennis’ s evidence to the effect that, as he put it in his affirmation, “I am instructed and verily believe” that whilst the Legal Charge had been entered into in anticipation of letters of credit facilities being provided, none were ever provided.

15.  The evidence filed on behalf of the Official Trustee was that of Mr. Cotterill, the solicitor who had the conduct of the proceedings on behalf of the Official Trustee.  Apart from dealing with the effect of the bankrupt’s bankruptcy in Australia, which was not in dispute, Mr. Cotterill’s evidence was forensic in nature and contended that the evidence filed on behalf of the appellant had not established any valid interest of the appellant in the surplus proceeds of sale of the mortgaged property.

16.  The record of the proceedings before Jones J. was not included in the appeal bundle, but Mr. Allman-Brown, who represented the Official Trustee below and on the appeal, informed this court that he had taken numerous points below regarding the inadequacy of the evidence in support of the appellant’s claim to be entitled to payment by the bankrupt on the bills of exchange, including reliance on the absence of any evidence concerning the giving of notice of dishonour to the bankrupt.

17.  Jones J. rejected the appellant’s claim.  He found that the appellant’s Legal Charge was illegal because, in his judgment, it clearly envisaged unlicensed money lending transactions being carried out by the appellant.  He also based his decision upon his conclusion that the Legal Charge was unenforceable for want of consideration, and upon the fact that Hong Kong currency only was referred to in the Legal Charge, whereas the bills were expressed to be drawn in Australian currency.  He mentioned that other arguments were canvassed before him upon which he found it unnecessary to express any views having regard to the decision he had made.

18.  On appeal it was contended by Mr. Fisher (who did not appear below) that the judge’s decision, in so far as it was based on his finding that the appellant’s Legal Charge was illegal because it infringed the Money Lenders Ordinance, was erroneous because the appellant had not sought to recover money lent by it to the bankrupt nor did it seek to enforce any security in respect of such loan.  He also challenged the judge’s decision in so far as it was based on want to consideration, contending that as the Legal Charge was executed under the seal of the bankrupt it took effect even in the absence of consideration.

19.  On the first day of the hearing of the appeal this court raised the question of the manifest lack of any evidence concerning notice of dishonour to the bankrupt against whom a claim had been made as the indorser in blank of the relevant bills.  It seemed to us that, although no respondent’s notice had been served on this point, unless the apparent lacuna in the appellant’s evidence could be filled or explained away it would be unjust to the Official Trustee to ignore such an obvious and important point.

20.  Mr. Allman-Brown informed the court that he had, perhaps mistakenly, assumed that he would be entitled, without a respondent’s notice, to rely on appeal on his arguments advanced below (but not dealt with by the judge) to support the Official Trustee’s contention that the appellant’s evidence did not establish a valid claim to entitlement to payment by the bankrupt on the Australian bills of exchange.  Clearly a respondent’s notice was necessary if the Official Trustee was to seek to support the judge’s decision on a ground not relied on by the judge.

21.  However the court had already taken the point of its own initiative, as it is entitled to do:  see Parnell v. Great Western Railway Co. (1)at p.640 cited in the notes in the Supreme Court Practice, Volume 1, at paragraph 59/3/1.  We therefore adjourned the hearing of the appeal to enable Mr. Fisher to consider his position.  On the second day of the hearing of the appeal we were informed that counsel who had represented the appellant below did not agree that Mr. Allman-Brown had taken any point below on notice of dishonour. Examination of the judge’s note in manuscript did not assist.  As Mr. Fisher had notice of the point, we gave Mr. Allman-Brown (who reiterated that he had taken the point below) leave to serve a formal respondent’s notice out of time raising the point, together with other matters upon which he sought to rely in upholding the judge’s decision.

22.  At the end of the hearing Mr. Fisher informed the court that his instructing solicitors did not know of any evidence of notice of dishonour having been served on the bankrupt in relation to the bills.  In those circumstances no question remained whether leave should be given to the appellant to file evidence of such notice.

23.  For my part, I would have been inclined, on the arguments we heard, to allow the appeal had it not been for the issue raised by the court on notice of dishonour. It seemed to me that the Legal Charge, being a deed under seal, as required by section 44 of the Conveyancing and Property Ordinance (Cap. 210) derived its validity as a legal charge (independently of any question of unenforceability under the Money lenders Ordinance) from its character as a deed which bound the bankrupt and his property notwithstanding the absence of any binding consideration of the kind necessary to create a contractual bargain.  The distinction between a deed under seal creating liability on the one hand and a contract based on consideration on the other hand is historical and real:  see Halsbury’s Laws of England, 4^th edition, paragraphs 1353 and 1355 and c.f. Cheshire, Fifoot and Farmston’s Law of Contract, 11^th edition, at p.27.

24.  In the present case Mr. Allman-Brown did not advance any argument to support the judge’s finding under the Money Lenders Ordinance because he was confident that he would succeed on the consideration and other issues.  In substance he contended on the consideration issue that the Legal Charge was expressed to be subject to consideration moving from the appellant which was unfulfilled.  There could, he contended, be no charge until facilities were provided by the appellant, and the charge did not provide the avenue for bringing in an unassociated debt.  This appears to have been the argument which the judge accepted when he observed in his judgment that the charge could not be enforced for there was no consideration. 

25.  In my view it is strongly arguable that the consideration referred to in clause 1 (provision of general credit facilities to an unlimited extent in Hong Kong Currency provided or to be provided by the appellant to the bankrupt) of the Legal Charge was rendered illusory by the qualifications introduced by clause 11(a) and (b).  Clause 11(a) provided that the appellant should “be at liberty at any time without prior notice to determine or limit or restrict or vary the Facility given” to the bankrupt.  Clause 11(b) (which appears to have been part of a common form intended to be used in a Legal Charge which contained a defined maximum value for the Facility in clause 1) stipulated that the appellant was not bound to make advances or payment or to incur liabilities under the Legal Charge beyond such sum as the appellant in its absolute discretion considered safe.

26.  However, even if clause 11 did render the consideration expressed in the Legal Charge illusory the charge was effective if inchoate and once an appropriate liability was incurred, otherwise than in breach of the Money Lenders Ordinance, the charge would become operative.  The position was indeed similar under the Bank’s mortgage mentioned above which was executed under seal to secure banking facilities agreed to be provided by the Bank subject to the right of the Bank under clause 3 of the Mortgage Deed not to be bound to grant any facilities beyond what the Bank considered safe, and subject to the right of the Bank under clause 5 to determine or vary any credit granted by it under the Mortgage Deed.

27.  In the present case no facilities had been granted to the bankrupt under the Legal Charge but clause 2 was sufficiently widely framed to provide security for any money owing, for whatever reason, by the bankrupt to the appellant.  I accept that until a lawful liability of the bankrupt to the appellant arose after the examination of the Legal Charge there could be no security and the bankrupt could have called for the discharge of the charge, but once such a liability did arise I can see no reason why the charge, being under seal, as it has to be under section 44 of the Conveyancing and Property Ordinance, should not come into operation.

28.  Furthermore I can see no reason by a liability arising within the very wide terms of the Legal Charge but outside the ambit of the Money Lenders Ordinance should not be secured by the Legal Charge.  An apt example given by Mr. Fisher was a liability under a cheque discounting transaction, which would not infringe the Money Lenders Ordinance:  Chow Yoong Wong v. Choong Fah Rubber Manufactory(2).

29.  However I feel constrained to rest my decision on this appeal on the firm ground that the appellant failed to establish any valid claim to entitlement to payment on the Australian bills by the bankrupt as indorser to blank.

30.  It is well settled in English law that the effect of the relevant provisions of the Bills of Exchange Act 1882 (and therefore of the similar codes comprised in the Bills of Exchange Ordinance and the Australian Bills of Exchange Act 1909-73) is that in an action on a dishonoured bill it is an essential constituent in the action, which must be pleaded (and proved if not admitted), that due notice of dishonour has been given or that facts are relied on which show that such notice was waived or excused:  see Bullen & Leake, 12^th edition at pp.43 and 255;  cf. Byles or Bills of Exchange 25^th ed. at p.158.

31.  The bills in question were inland bills within the meaning of section 9 of the Australian Bills of Exchange Act.  Under section 53 of that Act when a bill has been dishonoured by non-payment notice of dishonour must be given to each indorser, and any indorser to whom such notice is not given is discharged.  Furthermore section 60(2)(a) of the Act provides that the obligation of an indorser of a bill to the holder or to a subsequent indorser who is compelled to pay it are subject to the proviso that the requisite proceedings on dishonour are duly taken.

32.  Section 55 provides statutory excuses for non-notice and delay but there was no evidence filed on behalf of the appellant to indicate any facts permitting reliance on that section.

33.  Indeed the only evidence of any form of notice being given to the bankrupt was contained in the evidence of Mr. Chiu who had this to say in paragraph 8 of his affirmation:

“By demands and notices dated 10^th May 1986 copies of which are produced to me and marked PC3 S.H. Lock (Hong Kong) Limited demanded payment from Antonios Stamatellos of all amounts due under the said Charge.”

34.  The notice exhibited to Mr. Chiu’s affirmation was a letter dated the 10^th May 1986 (by which time the bankrupt was in bankruptcy and the due date for payment of the bills was long past) from the appellant’s solicitors in Hong Kong addressed to the bankrupt at addresses in Kowloon, the New Territories and Queensland.  The letter was headed with a reference to the bankrupt’s mortgaged workshop, referring to the appellant as “the mortgagee” and requiring the bankrupt to pay “to the Mortgagee on the 10^th day of June 1986 the principal moneys now owing to the mortgagee under the Indenture Mortgage dated the 30^th January 1985”.

35.  The letter included a threat to enforce the mortgage if payment was not made within one month.  It was clearly referable exclusively to the mortgage and sent in compliance with the proviso to clause 8 of that instrument which made default of compliance with a one month’s notice of demand a prerequisite to the exercise of the mortgagee’s powers under that clause.  The letter could not possibly be regarded as a notice of dishonour in relation to the bills of exchange.

36.  The appellant’s claim was therefore fundamentally flawed and should have been dismissed on the notice of dishonour point alone.  Accordingly I do not consider that any useful purpose would be served by taking more time considering the other cogent matters raised by Mr. Allman-Brown regarding the gaps and deficiencies in the evidence relied on by the appellant to support its claim.  I should also say that no submission was advanced before us to support the third ground of the judge’s decision, that recovery was precluded by the difference between the currencies in which the bills and the facility were expressed.

37.  I also mention that, to the extent that it is permissible to consider at this stage the judgment obtained by the Australian company against the bankrupt and his wife in Queensland, clause 2 of the Legal Charge is so framed as to extend only to money owing to the appellant.

38.  I would therefore dismiss this appeal but add that the order made by Jones J. seems to result in the surplus moneys remaining in court.

Cons, V.-P.:

39.  I agree with all that my Lord has said.

Power, J.A:

40.  I also agree and have nothing to add.

(1) [1876] 1 Q.B.D. 636

(2) [1962] A.C. 200 (P.C.)