CHONG HING BANK LTD v. LAU AND CHENG INVESTMENT LTD AND ANOTHER

HCMP 1574/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1574 OF 2009

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BETWEEN

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D E C I S I O N

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Introduction

1.  This is the hearing of the Plaintiff’s application to amend its statement of claim against the 1^st and 2^nd Defendants.  The Plaintiff is a banking corporation.  In this action, the Plaintiff seeks to recover loans advanced to the 1^st Defendant under an instalment loan in 2004 (“2004 Instalment Loan”) and a revised overdraft facility letter dated 2 August 2004 signed by the 2^nd Defendant on behalf of the 1^st Defendant (“2004 Facility Letter”) which are allegedly secured by a mortgage of a property belonging to the 1^st Defendant (the “Property”) and guaranteed by the 2^nd Defendant; and an order for possession of the Property.

2.  On 18 January 2013, the Plaintiff issued a summons seeking leave to amend the statement of claim (“the Summons”).  On 7 February 2013, the 1^st Defendant through its solicitors tendered payment of $2,145,425.35 and $890,000 in settlement of all outstanding principal and interest under the 2004 Instalment Loan.  The payment was accepted by the Plaintiff.  On 9 April 2013, the Plaintiff issued a second summons seeking leave to withdraw the draft amended statement of claim attached to the Summons and to replace it with the second draft amended statement of claim incorporating consequential amendments to the first draft occasioned by the recent payment tendered by the 1^st Defendant.  The present application is concerned with this second draft amended statement of claim.

Background and the parties’ case as presently pleaded

3.  The 1^st Defendant was the corporate vehicle which the 2^nd Defendant and his ex-wife Cheng Miu Har Stella (“Cheng”) used to hold the Property.  It is owned by Cheng and another company, Lau and Co (Holdings) Limited, which in turn is owned by Cheng, their daughter and until 7 September 2000 by the 2^nd Defendant as to 0.01%.  The 1^st  Defendant is now in members’ voluntary liquidation. 

4.  The 2^nd Defendant and Cheng were married in 1978.  They were formally divorced in 2000, but reconciled from early 2001 to late 2006.  At all material times, the 2^nd Defendant was a director of the 1^st Defendant, except during the period between 31 August 2000 and 1 July 2002.    

5.  The Property was mortgaged to the Plaintiff by the 1^st Defendant under a charge and a further charge to secure various loans and general banking facilities granted by the Plaintiff to the 1^st Defendant since about 1985.  At the time of issue of the statement of claim, all loans had been repaid except for the 2004 Instalment Loan of about $2,500,000 and the overdraft facilities advanced under the 2004 Facility Letter.  The documents relating to the 2004 Instalment Loan and 2004 Facility Letter were signed by the 2^nd Defendant on behalf of the 1^stDefendant.  

6.  The 1^st Defendant pleads three defence.  First, it admits that the charge and further charge were duly executed by Cheng to secure banking facilities advanced or to be advanced by the Plaintiff but alleges that all loans secured by the charge and further charge were fully repaid by November 1996 and July 2001 respectively whereupon these charges were impliedly redeemed or discharged and became defunct.  I call this the “implied redemption argument”.

7.  Second, the 1^st Defendant denies the validity of the 2004 Facility Letter and all sums due and payable by it under the 2004 Instalment Loan and 2004 Facility Letter, alleging: (i) that the 2004 Facility Letter and an earlier facility letter executed in 2001 (“2001 Facility Letter”) were executed by the 2^nd Defendant without authority of the 1^st Defendant and in breach of his fiduciary duty owed to the 1^st Defendant; and (ii) that the plaintiff had actual or constructive knowledge of the 2^nd Defendant’s lack of authority and breach of fiduciary duty.  I call this the “lack of authority argument”.

8.  Third, the 1^st Defendant makes the further allegation that the plaintiff knowingly assisted the 2^nd Defendant in his breach of duty owed to the 1^st Defendant and in defrauding the 1^st Defendant by drawing on the overdraft facility in the current account of the 1^st Defendant in sums totalling about $2.86 million to pay himself (the “fraudulent transactions”).  I call this the “breach of mandate argument”.

9.  The 1^st Defendant counterclaims for declarations: (i) that the charge and further charge had been redeemed, discharged and/or rescinded; and (ii) that the 2001 Facility Letter and 2004 Facility Letter were not authorized by the 1^st Defendant and were invalid.  It also counterclaims against the Plaintiff for damages for breach of a banker’s duty of care or knowingly assisting the 2^nd Defendant in effecting fraudulent transactions mentioned above.

10.  The Plaintiff denies that the charge or further charge were impliedly redeemed or discharged or became defunct and says that the loans and overdraft facilities granted subsequent to the full repayment of the loans secured by the charge and further charge, including those under the 2001 Facility Letter and 2004 Facility Letter, were granted on the security of the charge and further charge.  The 2001 Facility Letter, 2004 Instalment Loan and 2004 Facility Letter were granted for the purpose of settling the principal and interest owing under the earlier loans secured by the charge and further charge.  It was in that connection that the facility under the 2001 Facility Letter was reduced from $5 million to $3 million under the 2004 Facility Letter.

11.  The Plaintiff also denies that the allegation of knowing assistance in the 2^nd Defendant’s breach of duty and fraud by asserting: (i) that the 2^nd Defendant had the 1^st Defendant’s actual and/or apparent authority to apply for and execute the 2001 Facility Letter and 2004 Facility Letter; and (ii) that the other directors of 1^st Defendant had actual and/or constructive knowledge of the existence and commercial purposes of the 2001 Facility Letter and 2004 Facility Letter.  It relies on the fact that from 1997 up to at least 2005, the loans and/or banking facilities obtained by the 1^st Defendant from the Plaintiff or part thereof were advanced to related companies of which Cheng and their daughter were shareholders and/or directors; and that Cheng had to obtain the Plaintiff’s written consent as mortgagee bank before executing a tenancy agreement in respect of the Property in November 2004 on behalf of the 1^st Defendant.

12.  As for the counterclaim in respect of the fraudulent transactions, the Plaintiff says that the written and/or oral instructions purportedly given by Cheng on behalf of the 1^st Defendant in an attempt to change the mandate were defective and the overdraft facility under the 2004 Facility Letter continued to be available to the 1^st Defendant until 27 April 2007 when it was suspended by the Plaintiff.

The amendments

13.  The Plaintiff has proposed many amendments.  Ms Wong, counsel for the Plaintiff, admits that the Plaintiff is seeking to introduce a new cause of action based on unjust enrichment in proposed paragraphs 21 and 22 and paragraph (C) of the prayer for relief and if the Plaintiff may not plead this new cause of action, the other proposed amendments are not necessary.  These proposed amendments are rigorously objected by the 1^st Defendant.  I shall therefore deal with the proposed new cause of action first.

14.  The proposed paragraphs 21 and 22 are in the following terms:

“21. Alternatively, in purported defence to the Plaintiff’s claim herein, the 1^st Defendant alleges in its Defence and Counterclaim filed herein on 6^th May 2011, inter alia:-

(a) under paragraph 12 that the Charge had been impliedly redeemed or discharged or otherwise rendered defunct in August 1996 by the full repayment of an earlier instalment loan granted by the Plaintiff to the 1^st Defendant in August 1985;

(b) under paragraph 15 that the Further Charge had been impliedly redeemed or discharged or otherwise rendered defunct in July 2001 by the full repayment of another earlier instalment loan granted by the Plaintiff to the 1^st Defendant in November 1996; and

(c) under paragraphs 20(2) and (4) that the execution of the 2001 and 2004 Facility Letter by the 2^nd Defendant on behalf of the 1^st Defendant was without authorisation by the 1^st Defendant and/or in breach of the 2^nd Defendant’s fiduciary duty owed to the 1^st Defendant.

22. Even if (which is denied) the Charge or Further Charge had become defunct or either of the 2001 or 2004 Facility Letters was unauthorised or executed by the 2^nd Defendant in breach of his fiduciary duty owed to the 1^st Defendant:-

(a) the Plaintiff repeats paragraphs 11A to 11D and 13(b) above and avers that the 1^st Defendant has been unjustly enriched with the monies overdrawn under the Current Account utilising the 2004 Revised OD Facility since 27^th August 2004, and the Plaintiff is entitled to and claims against the 1^st Defendant restitution of the sum of HK$2,868,743.24 being the outstanding principal overdrawn sum as at 2^nd May 2007, after the final withdrawal or attempted withdrawal was made by the 1^st Defendant under the Current Account; and

(b) the Plaintiff will also claim interest on the sum pleaded in sub-paragraph (a) above at such rate and for such period as the Court may think fit pursuant to section 48 of the High Court Ordinance (Cap 4).”

The purpose of these proposed amendments, Ms Wong submits, is to cater for a possible situation where the 1^st Defendant succeeds in the implied redemption argument and lack of authority argument, but fails in the breach of mandate argument.  In that scenario, without this amended plea, even if the Plaintiff had not acted outside the mandate in honouring cheques drawn on the 1^st Defendant’s current account signed by the 2^nd Defendant (ie the fraudulent transactions), it would be left with no remedy and no security.  Hence, the Plaintiff wishes to raise a partial alternative case of unjust enrichment.  Ms Wong quotes Goss v Chilcott [1996] AC 788 in support of the Plaintiff’s claim in unjust enrichment.

15.  Mr Barlow, counsel for the 1^st Defendant, argues otherwise.  He submits that the court should focus on what is wrong and what is impossible.  Under the first limb of his argument, he argues that the entire action is based on contract and the law relating to the contractual relationship between a bank and its customer was well settled in Tai Hing Cotton Mill Ltd and Liu Chong Hing Bank Ltd and Others [1986] AC 80.  There, the Privy Council held that the relationship between a bank and its customer is contractual and that the business of banking is the business not of the customer but of the bank.  It is the bank’s duty to ensure that the cheques it honours are authorised in accordance with the mandate and if it pays out cheques which are unauthorised it may not debit its client’s account.  Then, Mr Barlow argues that the 1^st Defendant’s case is that there were seven cheques in question signed by the 2^nd Defendant when his authority had been withdrawn and despite that the Plaintiff had been put on notice of the forgery it chose to ignore that notice and made payment under the cheques to the 2^nd Defendant between 17 and 23 April 2007.  Under the circumstances, Mr Barlow argues, there cannot be a claim of unjust enrichment against the 1^st Defendant.  Mr Barlow also refers me to Reyes J’s finding of the 2^nd Defendant’s fraudulent conduct in another action between the 1^st Defendant on the one part and the 2^nd Defendant and their daughter on the other part.  This and the question whether the Plaintiff acted outside its mandate are factual issues to be canvassed at trial and are irrelevant for the present purpose.

16.  Tai Hing Cotton Mill Ltd was a decision of the Privy Council in an appeal from Hong Kong and is binding on this court.  Ms Wong has no dispute with the principles of law stated by the Privy Council in that case.  Indeed, she also agrees with Mr Barlow that if the Plaintiff acted outside the mandate, it must fail in its claim against the Defendants and in its defence to the 1^st Defendant’s counterclaim. But, she reiterates that as clearly set out in the proposed paragraphs 21 and 22, the proposed amendment is directed at a scenario where the Plaintiff had acted within its mandate.  As Mr Barlow’s submission is wholly premised on the Plaintiff’s breach of its mandate, it clearly provides no answer to the issue raised by the Plaintiff in this proposed amendment. 

17.  Under the second limb of his argument, Mr Barlow argues that the proposed amendment is an impossible plea because the overdrafts credited to the 1^st Defendant’s account become the 1^st Defendant’s debts owed to the Plaintiff.   He argues that the 1^st Defendant did not receive anything and could not have been enriched; and that the 2^nd  Defendant is the party enriched.  He says that the proposed amendment only seeks to uphold a wrongful debit.  He repeats his argument that the issue is whether the Plaintiff is entitled to debit the 1^st Defendant’s account in respect of sums it chose to wrongfully pay the 2^nd Defendant in breach of its mandate.

18.  Apart from missing the issue raised by the proposed amendment, Mr Barlow’s argument that the 1^st Defendant could not have been enriched is unconvincing.  Except for the fact that the present case involves an overdraft facility and not a loan, it is indistinguishable from Goss v Chilcott.  There are three elements to be proved in a claim in unjust enrichment: (i) that the defendant has been enriched; (ii) that this enrichment was gained at the expense of the claimant; and (iii) that the defendant’s enrichment at the expense of the claimant was unjust (see Goff & Jones, The Law of Unjust Enrichment, eighth edition, paragraphs 1-09 to 1-17).  An overdraft facility is a banking facility which gives a right to the person to whom the facility is given access to funds which he does not have  on conditions including repayment of capital and interest.  When the facility is drawn on, the amount drawn becomes a loan.  It is therefore arguable that this extra source of funds must be a benefit and the 1^st Defendant was enriched when given access to this extra source of funds which it otherwise did not have.  Furthermore, as succinctly put by Ms Wong, if she draws a cheque from her overdraft account to pay for her credit card, it was she who borrowed from the bank to pay the credit card company and not the bank paying the credit card company.  It is therefore wrong to argue that it was the 2^nd Defendant who was enriched and not the 1^st Defendant.  On the scenario which the proposed amendment is directed at, ie that the charge and further charge were impliedly redeemed and that the 2^nd Defendant had no authority to bind the 1^st Defendant under the 2001 Facility Letter and 2004 Facility Letter, the 1^st Defendant would not be contractually liable to repay the overdraft.  The enrichment was clearly at the expense of the Plaintiff and such enrichment must be unjust if the Plaintiff had not been in breach of the mandate.  It seems that Mr Barlow accepts this is the position as he agrees that unless the Plaintiff can overcome the mandate issue, there is no case of unjust enrichment.  That precisely is the scenario which the proposed paragraphs 21 and 22 are designed to address, ie the 1^st Defendant succeeds in the implied redemption argument and lack of authority argument but fails in the breach of mandate argument.

19.  Mr Barlow says that the alternative case pleaded is not a completely alternative case and criticises the Plaintiff for attempting to compartmentalise its pleading and creating a cause of action by having debited the 1^st Defendant’s account.  He suggests that this proposed amendment could be pleaded in the reply.  Properly understood, I do not think the criticism fair or relevant.  It is true that this amendment only seeks to introduce a partially alternative case.  At the time of filing the statement of claim, the Plaintiff could not anticipate the 1^st Defendant’s defence.  It is also not open to the Plaintiff to plead a new cause of action in the reply.     

20.  Mr Barlow argues that prior to the Civil Justice Reform (“CJR”), the court will not refuse an amendment simply because it introduces a new case, but after CJR it will do so unless there are exceptional circumstances.  He quotes Hong Kong Civil Procedure 2013 Vol 1, paragraph 20/8/28 in which the learned authors wrote:

“However, since the introduction of the precondition under r 8(1A) by the Civil Justice Reform, the court will only allow an amendment to a pleading to introduce a new case under exceptional circumstance, when it is satisfied that such proposed amendment is necessary either to dispose fairly of the cause or matter or for saving costs.”

He submits that as no exceptional circumstance having been shown by the Plaintiff, the proposed amendments pleading a new case should not be allowed.

21.  Ms Wong takes issue with Mr Barlow’s submission on the law.  She argues that the only pre-condition imposed by rule 8(1A) is that the amendment is necessary either for disposing fairly of the cause or matter or for saving costs.  The rule does not distinguish between amendments which have the effect of pleading a new case and those which do not.  There is also no requirement of exceptional circumstance.  Rule 8(1A) provides:

“(1) For the purpose of determining the real question in controversy between the parties to any proceedings, or of correcting any defect or error in any proceedings, the Court may at any stage of the proceedings and either of its own motion or on the application of any party to the proceedings order a pleading or any other document in the proceedings to be amended on such terms as to costs or otherwise as may be just and in such manner (if any) as it may direct.

(1A) The Court shall not under paragraph (1) order a pleading to be amended unless it is of the opinion that the order is necessary either for disposing fairly of the cause or matter or for saving costs.”

Ms Wong also points to the fact that no authority was quoted by the learned authors of Hong Kong Civil Procedure 2013 to support the requirement of exceptional circumstance when pleading a new case.  Hence, she submits that the requirement of exceptional circumstance when pleading a new case is no more than the learned authors’ opinion, which is unsupported by any authority.

22.  I think, since CJR, as evidenced by many of the new amendments, the focal point is on the real question in controversy between the parties and the amendment will be allowed if it is necessary for the purpose of determining the real question in controversy, irrespective whether a new cause of action is pleaded.  Leave is readily granted to amend before the trial unless it can be demonstrated that the new claim based on the proposed amendment is bound to fail.  The power to allow an amendment is a discretionary one and will be exercised in such a way and on such term as best meets the interest of justice as between the parties.  In Natamon Protpakorn v Citibank NA, CACV 78 of 2008, a decision post-CJR, Cheung JA said at paragraph 25:

“25. It is well established that, generally speaking, all such amendments ought to be made ‘for the purpose of determining the real question in controversy between the parties to any proceedings or of correcting any defect or error in any proceedings’ (per Jenkins L.J. in G. L. Baker Ltd v. Medway Building and Supplies Ltd [1958] 1 WLR 1216 at 1231); see also paragraph 20/8/6 of Hong Kong Civil Procedure 2008. Leave is readily granted to amend before the trial unless it can be demonstrated that the new claim based on the proposed amendment is bound to fail (see Hancock Shipping Co. Ltd v. Kawasaki Heavy Industries Ltd [1992] 1 WLR 1025). While the Court is entitled to have regard to the merits of the case, it should only do so when the merits are readily apparent, and are so apparent as not to require prolonged investigation (see e.g. Kings Quality Homes Ltd v. A. J. Paints Ltd [1997] 3 All ER 267).”

Rule 8(1A) imposes no requirement of exceptional circumstance.  In my view, the words “exceptional circumstance” in paragraph 20/8/28 of Hong Kong Civil Procedure 2013 Vol 1 are surplus and simply refer to the phrase that follows, ie necessary either to dispose fairly of the cause or matter or for saving costs, which as I say is the focal point since CJR.

23.  In conclusion, I am satisfied that the proposed paragraphs 21 and 22 are necessary for the purpose of determining the real question in controversy between the parties.   In my view, this plea is sustainable.  The 1^st Defendant has not demonstrated that the new alternative claim based on the proposed amendment is bound to fail.  This proposed amendment should therefore be allowed.

24.  I now turn to consider the other proposed amendments.  Mr Barlow accepts that some are material and/or unobjectionable and does not oppose those amendments subject to the usual terms.  These are the new headings preceding paragraphs or proposed paragraphs 1C, 2, 12, and 17; and the proposed amendments at proposed paragraphs or paragraphs 14A, 18, 18A and paragraphs (A) and (B) of the prayer for relief.

25.  Mr Barlow argues that most of these other proposed amendments have been pleaded in the 1^st Defendant’s defence and counterclaim and which are either not admitted or denied in the Plaintiff’s reply and defence to counterclaim or have already been pleaded in that reply and defence to counterclaim.  He submits that there is no need for repetition.   With respect, that is not a good reason for refusing the proposed amendments.  Without the proposed amendment, one has to go backwards and forward in the statement of claim, defence and counterclaim, and reply and defence to counterclaim to ascertain what the Plaintiff’s case is.  That would be most confusing.  Besides, there are technical difficulties.  What is pleaded in the defence which is not admitted or denied by the Plaintiff may, arguably, not form part of the Plaintiff’s pleaded case.  There are instances even when read together the corresponding parts of the defence and counterclaim and reply and defence to counterclaim do not quite fully reflect the plea which the Plaintiff intended to convey in the corresponding proposed amendments.  In my view, the opposition not only serves no useful purpose but also prevents the parties from clearly identifying the real question in controversy.  There is nothing to suggest that the claims based on these proposed amendments are bound to fail or that the Defendants are prejudiced.  I allow these proposed amendments at paragraphs or proposed paragraphs 1A to 1C, 11A to 11D, 12A, 13, 14B, 21, 22, paragraph (C) of the prayer for relief, the sub-headings preceding those paragraphs and the 1^st, 2^nd and 3^rd Schedules.

Conclusion

26.  In conclusion, the proposed amendments ought to be allowed.  Accordingly, I grant the Plaintiff leave to amend its statement of claim in the manner as set out in the second draft amended statement of claim within seven days from the date hereof and dispense with service of the amended statement of claim on the 1^st and 2^nd Defendants.  I also make a costs order nisi that the costs of and occasioned by this application be to the 1^st and 2^nd Defendants in any event.

27.  I also give further directions that the 1^st and 2^nd Defendants shall file and serve their amended defence and counterclaim or defence and counterclaim as appropriate within fourteen days from the date of this decision and that the Plaintiff shall file and serve their amended reply and defence to counterclaim within fourteen days thereafter.