XCHRX ABN AMRO BANK N.V. v. CHIYU BANKING CORPORATION LTD. AND OTHERS

HCMP 2793/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 2793 OF 1999

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D E C I S I O N

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1. The Plaintiff in these proceedings, ABN Amro Bank N.V. ("ABN"), issued an Originating Summons seeking determination of the issues of whether the Defendants were entitled to exercise a right of set-off in respect of various fixed deposits placed by Readen Company Limited (in liquidation) ("Readen") with the Defendants or whether the sums of money represented by the deposits should be paid to the receivers or liquidators of Readen as secured by or otherwise available in settlement of the outstanding sum due and owing by Readen to ABN.

2. At the outset of the hearing, a compromise was reached between ABN and Generale Belgian Bank, the 3rd Defendant herein, and I made an order in terms of the consent summons. The 3rd Defendant took no further part in the proceedings.

3. The relevant facts and matters leading to the dispute between ABN and the first two Defendants may be summarised as follows.

4. On 19 September 1994, Readen executed a debenture in favour of ABN ("the Debenture") whereby a first floating charge was created to secure all monies which may from time to time be owing by Readen to ABN. The scope of the charging clause in the Debenture is a matter in contention. On 28 September 1994, the charge created in favour of ABN was duly registered at the Companies Registry pursuant to Section 80 of the Companies Ordinance, Cap. 32.

5. On 10 July 1997, Readen placed a fixed deposit with Chiyu Banking Corporation Limited, the 1st Defendant herein ("Chiyu"), in the sum of HK$1,300,000.00. On 11 July 1997, a further fixed deposit of HK$550,000.00 was placed by Readen with Chiyu. On the same day, Readen entered into a deed of charge on deposits and set-off with Chiyu in respect of these two deposits in the total sum of HK$1,850,000.00. It is ABN's contention that these monies were already charged by and subject to the Debenture. By the deed, a fixed charge was created by Readen in favour of Chiyu to secure all monies. Chiyu's deed of charge was likewise registered with the Companies Registry.

6. On 27 August 1997, Readen executed a letter of pledge and set-off agreement in favour of Wing Hang Bank Limited ("Wing Hang") for securing all monies and liabilities over the deposits not less than HK$3,000,000.00 under a fixed deposit account with Wing Hang in the name of Readen. Upon execution of the document and on the same day, a shareholder of Readen, Chanberg Holdings Limited ("Chanberg") transferred HK$3,000,000.00 to Readen's fixed deposit account with Wing Hang as security for Readen's indebtedness. Wing Hang's charge was also registered with the Companies Registry. There is dispute between the parties whether Wing Hang's charge was a fixed charge or a floating charge.

7. On 1 September 1997, Readen executed a further deed of charge on deposits and set-off in favour of Chiyu over all monies in respect of another fixed deposit with Chiyu for HK$2,000,000.00. On the same day, a fixed deposit for HK$2,000,000.00 was created by Readen with Chiyu. As in the previous instance, this was a fixed charge and was duly registered with the Companies Registry.

8. Following a letter of demand dated 28 February 1998 from the solicitors for Chiyu to Readen, Chiyu exercised its right to set-off under the deeds mentioned above on 5 March 1998 (the amount set-off was HK$2,076,052.70) and on 16 March 1998 (the amount set-off was HK$1,942,717.70).

9. On 25 June 1998, ABN exercised its right under the Debenture and appointed Mr Nicholas Hill and Mr Alan Rennie as the receivers of Readen. The claim of ABN against Readen was in excess of HK$5.4 million as in May 1999, when Mr Hill filed his affidavit in these proceedings. Also on 25 June 1998, Mr Todd Bourse and Mr Geoff Bourne were appointed joint and several provisional liquidators of Readen. The receivers gave notice to Readen of their appointment under the Debenture by a letter dated 26 June 1998.

10. On 29 June 1998, Wing Hang issued a demand letter to Readen demanding repayment of HK$4,507,338.32 and US$89,988.08. On 21 July 1998, Wing Hang exercised its right of set-off under the letter of pledge dated 27 August 1997 to debit the credit balance of Readen's fixed deposit account in the sum of HK$3,653,441.97 and applied the same towards part payment of Readen's indebtedness to Wing Hang.

11. The shareholders of Readen passed a special resolution to wind-up the company voluntarily on 29 July 1998.

12. On 23 September 1998, the receivers wrote to the liquidators and copied their letter to, inter alia, Chiyu and Wing Hang. The receivers asserted that by the terms of the Debenture, the floating charge created by the Debenture had crystallised directly once Readen had charged, pledged or otherwise encumbered any of the undertaking, property or assets charged to ABN or had attempted to do so without the prior written consent of ABN. The prior written consent of ABN was not obtained when Readen created subsequent charges in favour of Chiyu and Wing Hang. The receivers claimed that as the floating charge had crystallised automatically into a fixed charge, this gave the charge in favour of ABN priority over any right of set-off asserted by Chiyu or Wing Hang. Replies were received from Chiyu and Wing Hang asserting that they had no liability to return the deposits and rejecting ABN's claim. As a result, the Originating Summons was issued by ABN on 11 May 1999.

The issues

13. There are two principal issues in these proceedings:

(1) whether the deposits charged by Readen to Chiyu and Wing Hang in the subsequent charges in 1997 would fall within the scope of the floating charge created in favour of ABN upon the true construction of the Debenture;

(2) if the answer to (1) is yes, whether the subsequent charges created in favour of Chiyu and Wing Hang would have priority over the charge in favour of ABN because the subsequent chargees did not have actual, inferred or constructive notice of the restrictive clause or the automatic crystallisation clause in the Debenture.

Relevant clauses in the Debenture

14. I am concerned with the construction of three clauses in the Debenture. I shall refer to them as the charging clause (clause 3.01), the automatic crystallisation clause (clause 3.02) and the restrictive clause (clause 7.01(h)). These provisions are as follows:

15. The charging clause

"3.01 In consideration of the premises and with the object and intent of affording to the Lender a security for the Secured Indebtedness and the due fulfilment by the Company of the agreements, covenants and conditions contained in this Debenture, the Company as Beneficial Owner doth HEREBY CHARGE to the Lender by way of FIRST FLOATING CHARGE Firstly all stocks shares bonds and securities of any kind whatsoever whether marketable or otherwise and all other interests including but not limited to loan capital of the Company both present and future in any company firm consortium or entity wheresoever situate including all allotments accretions offers rights benefits and advantages whatsoever at any time accruing offered or arising in respect of or incidental to the same and all stocks shares rights money or property accruing thereto or offered at any time by way of conversion redemption bonus preference option or otherwise in respect thereof; and Secondly all book and other debts revenues and claims both present and future (including things in action which may give rise to a debt revenue or claim) due or owing or which may become due or owing to or purchased or otherwise acquired by the Company and the full benefit of all rights and remedies relating thereto including but not limited to any negotiable of [sic] non-negotiable instruments guarantees indemnities debentures legal and equitable charges and other security reservation of proprietary rights rights of tracing liens and all other rights and remedies of whatsoever nature in respect of the same; and Thirdly the stock in trade of the Company wheresoever both present and future (hereinafter collectively called 'the undertaking, property and assets hereby charged')."

16. The automatic crystallisation clause

"3.02 Notwithstanding anything herein contained, if the Company charges pledges or otherwise encumbers (whether by way of fixed or floating security) any of the undertaking, property and assets hereby charged or attempts so to do without the prior consent in writing of the Lender or if any creditor or other person attempts to levy any distress execution sequestration or other process against any of the undertaking, property and assets hereby charged, the floating charge hereby created over the such undertaking, property and assets the subject thereof shall automatically without notice operate as a fixed charge instantly such event occurs."

17. The restrictive clause

"7.01 THE COMPANY HEREBY FURTHER COVENANTS WITH THE LENDER that during the continuance of this security the Company will and shall procure that each of its subsidiaries will at all material times:-

...

(h) not (without prior consent in writing of the Lender) create or agree to create or permit to arise any mortgage, charge, debenture, pledge, lien or other encumbrance upon the undertaking, property and assets hereby charged or any part thereof comprised in this security ranking in priority to or pari passu with this Debenture nor shall the Company sell, transfer, lease or in any way dispose of or part with possession of any of the undertaking, property and assets hereby charged or any part thereof comprised in this security (whether by way of fixed or floating charge or otherwise) or enter into agreement so to do either by a single transaction or by a number of transactions, whether related or not (except in the case of stock in trade charged by way of floating charge only as aforesaid which may be sold at market value in the usual course of trading as now conducted and for the purpose of carrying on the business of the Company);"

The scope of the charging clause

18. Mr Peter Graham, counsel for ABN, contended that the fixed deposits charged to Chiyu and Wing Hang were within the scope of the charging clause. He relied on these words in the clause:

"all book and other debts revenues and claims both present and future (including things in action which may give rise to a debt revenue or claim) due or owing ..."

He submitted that by the language used in the charging clause, the scope of the property and assets that were to be subject to the floating charge was cast in wide terms, intending to embrace all of Readen's assets and undertaking. He said it should be borne in mind that the relationship between Readen and each of its banks was that of a creditor and debtor. The fixed deposits placed by Readen with its banks are clearly "claims" and "choses in action" on a legal analysis. The Debenture is a legal document and in construing it, this should be approached on the basis of legal language instead of business usage.

19. Mr Graham recognised the difficulty that it would render the floating charge unworkable if it was to cover all bank balances including current accounts required for the day to day operation of Readen's business. He sought to draw a distinction between fixed deposits over which Readen had created specific charges and bank balances in Readen's current operating accounts. He submitted that the former was covered by the floating charge under the Debenture but not the latter.

20. Mr Graham referred me to two decisions of Hoffmann J (as he then was) in Re Brightlife Ltd [1987] 1 Ch. 200 and Re Permanent Houses (Holdings) Ltd [1988] BCLC 563. In both cases, Hoffmann J held that on the true construction of the debentures he was concerned with, the phrases of "book debts" and "other debts" did not cover a credit balance in a bank account. Mr Graham drew my attention to Re Permanent Houses, supra. at 566i-567a in which Hoffmann J stated clearly that he did not decide in those two cases that a credit balance at a bank could not in any context be a "book debt" or "other debt" and that the two cases were merely concerned with the construction of particular debentures.

21. Lastly, Mr Graham referred me to Section 15A of the Law Amendment and Reform (Consolidation) Ordinance, Cap. 23, the effect of which is that a chose in action such as a fixed deposit could clearly be the subject of a legal or equitable charge.

22. Mr Warren Chan, SC counsel for Chiyu, did not make any verbal submission on this point although he dealt with this briefly in his written submissions. He was content to rely on the submissions made on behalf of Wing Hang by Mr Horace Wong. Mr Wong urged me to approach the matter by construing the charging clause with the other provisions in the Debenture, in particular the restrictive clause in clause 7.01(h). He submitted that it would be unjustifiable to draw any distinction between the balance in a current account and a fixed deposit in this instance as both would be "claims" against the banks on a legal analysis and that one would be driven by "the extreme commercial improbability of such an arrangement" as in Re Brightlife Ltd to conclude that the scope of the charging clause did not include the fixed deposits with Chiyu and Wing Hang.

23. In the more usual form of debenture, a fixed or specific charge would be created by a company over certain types of assets, usually assets that the company would not be expected to use in the ordinary course of its business. A floating charge would be created over all the other assets of the company with a provision that it would be at liberty to deal with such assets and undertaking in the ordinary course of its business. This form of debenture was found in Re Brightlife, Re Permanent Houses, Siebe Gorman & Co. Ltd v. Barclays Bank Ltd [1979] 2 Lloyd's Rep. 142, which were all cases referred to by Mr Graham. As submitted by Mr Wong, there were two special features about the Debenture:

(1) In the charging clause, a first floating charge was created over three categories of assets only, it was not a floating charge over all the assets and undertaking of the company. The assets being the subject of the charging clause were collectively called "the undertaking, property and assets hereby charged" in the charging clause.

(2) Under the restrictive clause, an absolute prohibition was imposed on Readen to the effect that without the prior written consent in writing of ABN, Readen was not to dispose of or part with possession of any of "the undertaking, property and assets hereby charged". The only exception was in the case of stock in trade which might be sold at market value in the usual course of trading and for the purpose of carrying on the business of the company.

24. On the wording of the charging clause and the restrictive clause, I am unable to see any justification for a distinction to be drawn between a fixed deposit and a credit balance in an ordinary account in this situation. If "claims" and "things in action" in the charging clause were to be construed to cover fixed deposits on a legal analysis of the relationship between Readen and its banks, I see no reason why the same reasoning should not be applied in respect of monies in other types of bank accounts. Both would be monies or credit balances in a bank account. I was also referred by Mr Graham to the accounting records prepared by the receivers and the statement of affairs which showed that the fixed deposits were treated differently from cash and bank balances. I do not think I can derive much assistance from these documents which came into existence after the Debenture was executed and which were for specific purposes unconnected with the Debenture. Because of the virtually absolute prohibition in the restrictive clause, it would be commercially unworkable if the "undertaking, property and assets hereby charged" were to include bank balances so that Readen would have to obtain the prior consent in writing of ABN whenever it had intended to withdraw money from any bank account. I am of the view that on the true construction of the Debenture, the fixed deposits charged by Readen did not fall within the scope of the charging clause.

25. My conclusion on this first issue would be sufficient to determine the question whether Chiyu and Wing Hang were entitled to exercise a right of set-off in their favour. In case I err on this and since I had the benefit of full and wide ranging submissions from counsel of all parties, I should address the second issue whether Chiyu and Wing Hang had actual, inferred or constructive notice of the restrictive clause or the automatic crystallisation clause in the Debenture so that they would be entitled to take their interests free of the charge created in favour of ABN.

Evidence on notice

26. The burden of proof is on a subsequent chargee to establish that he took his interest without actual notice of the restriction in the earlier charge (Fire Nymph Products Ltd v. Heating Centre Pty Ltd (in liquidation) (1992) 7 ACSR 365 at 373-4 per Gleeson CJ).

27. On the evidence produced by Chiyu, Chiyu had not conducted any search in the Companies Registry on Readen before Readen executed the two deeds of charge in favour of Chiyu in July and September 1997. Chiyu's case is that it only came to know about the Debenture in September 1998 when it received a letter from the liquidators of Readen.

28. As for Wing Hang, two days before Readen executed a charge in favour of Wing Hang, the bank had conducted a "general" company search to obtain some information about the company such as the names of the directors, the shareholders, the registered office and the name of the company as registered. The "general" search conducted by Wing Hang did not reveal the existence of any charge or floating charge created by Readen.

29. Mr Graham acknowledged that he was not in a position to dispute the assertions of Chiyu and Wing Hang that they did not have actual knowledge of the terms of the Debenture when Readen executed the charges in their favour. However, he urged me to treat their evidence with intense scepticism as it was inherently incredible that banks would lend substantial sums of money to a company without making any search for charges and encumbrances filed with the Companies Registry.

30. On behalf of Chiyu, Mr Chan submitted that Chiyu's evidence that it did not have notice at the material time was the only evidence before the court and this evidence should not be rejected in view of the course that these proceedings had taken. Chiyu's evidence was filed on 10 September 1999. On 21 September 1999, the parties appeared before Ribeiro J (as he then was) and directions were given for ABN to file and serve evidence in reply within 21 days thereof. ABN filed 2 affidavits out of time in March 2000. In the evidence in reply, ABN did not raise any point that the evidence of Chiyu was inherently incredible or adduce any evidence of any practice followed by banks to make searches in the Companies Registry and the extent of such searches before accepting a fixed deposit as security for a loan. Moreover, if ABN had really intended to challenge Chiyu's evidence on this, ABN should have taken one or more of these steps, such as seeking discovery of documents from Chiyu to see whether there was any record of company searches; administering interrogatories on Chiyu and making appropriate investigations thereafter; and applying for leave to cross-examine Chiyu's deponents. None of the above steps had been taken. Mr Wong made similar submissions on behalf of Wing Hang.

31. I accept the submissions made on behalf of Chiyu and Wing Hang. I do not think it would be right in the circumstances to reject their evidence. I find that neither Chiyu nor Wing Hang had actual notice of the relevant terms of the Debenture at the material times when Readen executed the charges in their favour.

Relevant povisions of the Companies Ordinace

32. Before I deal with constructive notice and inferred notice, it would be appropriate to give a summary of the relevant provisions relating to the registration of charges in the Companies Ordinance, Cap. 32. There is no material difference between the local legislation and the relevant provisions in the Companies Act 1985 in the U.K. The amendments to the 1985 Act provided in the Companies Act 1989 have not been brought into operation.

33. The relevant provisions in Section 80 are as follows:

"80. Registration of charges created by companies

(1) Subject to the provisions of this Part of this Ordinance, every charge created after the fixed date by a company and being a charge to which this section applies shall, so far as any security on the company's property or undertaking is conferred thereby, be void against the liquidator and any creditor of the company, unless the particulars of the charge (which must include those specified in subsection (1A) and be in the specified form), together with the instrument, if any, by which the charge is created or evidenced, are delivered to or received by the Registrar for registration in manner required by this Ordinance within 5 weeks after the date of its creation, but without prejudice to any contract or obligation for repayment of the money thereby secured, and when a charge becomes void under this section, the money secured thereby shall immediately become payable.

(1A) The particulars referred to in subsection (1) are, the date and description of the instrument creating the charge, the amount secured, short particulars of the property mortgaged or charged, names, addresses and description of mortgagees or persons entitled to the charge, details of any commission, discount or allowance payable to any person in consideration of his agreeing to subscribe to any debenture.

(2) This section applies to the following charges:-

(a) a charge for the purpose of securing any issue of debentures;

...

(e) a charge on book debts of the company;

(f) a floating charge on the undertaking or property of the company; ..."

34. I should point out that Section 80(1A) relating to the particulars of the charge required to be registered was added to Section 80 in 1997 and did not come into operation until 10 February 1997. Hence, it was not in operation when ABN registered the particulars of the Debenture in September 1994. There is however no material difference as to the particulars required to be registered before the enactment of Section 80(1A) because under the previous legislation, the particulars required to be registered were prescribed by the relevant form in the Companies (Forms) Order. The particulars required to be registered are the same except for the "details of any commission, discount or allowance payable to any person in consideration of his agreeing to subscribe to any debenture" provided in the last part of Section 80(1A).

35. It should be noted that the particulars of the charge required to be registered under Section 80(1A) do not include any particulars relating to a restrictive clause or an automatic crystallisation clause. In the particulars submitted for registration by ABN's solicitors in the prescribed form, ABN attached an additional sheet to the prescribed form and set out on the additional sheet the terms of the charging clause, the automatic crystallisation clause and the restrictive clause, something which it was not required to do under the Ordinance.

36. It should also be noted that although the Debenture was submitted by ABN's solicitors to the Companies Registry together with the particulars of the charge in the specified form for registration, as ABN was required to do under Section 80(1) of the Ordinance, after the registration of the charge, the Debenture was returned to ABN's solicitors for their retention. The system of registration of company charges as provided in the Ordinance is the registration of particulars, not the registration of documents or copy documents creating the charges, unlike the situation in Australia and New Zealand.

37. Under Section 81(1), it is provided that it shall be the duty of a company to send to the Registrar for registration the particulars of any charge created by the company requiring registration under Section 80. By Section 83(1), the Registrar shall keep with respect to each company, a register in a form determined by him of all the charges requiring registration and enter in the register with regard to such charges the following particulars in the case of any other charge under subsection (b):

"(i) if the charge is a charge created by the company, the date of its creation, and if the charge was a charge existing on property acquired by the company, the date of the acquisition of the property; and

(ii) the amount secured by the charge; and

(iii) short particulars of the property charged; and

(iv) the persons entitled to the charge."

38. By Section 83(3), the register kept in pursuance of Section 83 shall be open to inspection by any person on payment of the prescribed fee. Under Section 88, it is provided that every company shall cause a copy of every document creating any charge requiring registration to be kept at the registered office and under Section 89, it is provided that every company shall keep a register of charges at the registered office and enter therein all charges specifically affecting property of the company and all floating charges on the undertaking or any property of the company, giving in each case a short description of the property charged, the amount of the charge, and except in the case of securities to bearer, the names of the persons entitled thereto. In Section 90(1), it is provided that the copies of instruments creating any charge requiring registration and the register of charges kept pursuant to Section 89 shall be open during business hours to the inspection of any creditor or member of the company without fee, and the register of charges shall also be open to the inspection of any person on payment of a fee not exceeding HK$2 for each inspection as the company may prescribe.

39. The following matters should be noted about the aforesaid provisions in the Companies Ordinance:

(1) The statute makes no provision for a priority system based on the order of registration of particulars of charges in the Companies Registry.

(2) There is no provision to the effect that registration of the particulars of a charge should constitute deemed notice of the existence of the charge or of the relevant stated particulars to all persons for all purposes.

(3) There is no provision imposing a duty on lenders to search the Companies Registry or the register of charges kept by the company at the peril of losing priority over their charges.

40. These limited features of the charges registration system provided in the statute should be borne in mind when one comes to consider constructive notice in this context. The doctrine of constructive notice as applied to company charges was not a creation of statute but was developed by judges both before and after 1900 (when the charges registration legislation was enacted in the Companies Act in the U.K.) so as to regulate priorities. It has been criticised as the most confusing and least efficient means of regulating priorities and that the conceptual basis for this doctrine is ill-defined, uncertain and inexplicit (see Gough on Company Charges, 2nd ed. p. 834-6).

The nature of the charges

41. Before dealing with priorities and constructive notice, one must be clear about the nature of the charges created in favour of Chiyu and Wing Hang. There is no dispute that the two charges created in favour of Chiyu in July and September 1997 were fixed or specific charges. However, it was contended by Mr Graham that the charge created in favour of Wing Hang was not a fixed charge but merely a floating charge so that the Debenture would have priority over Wing Hang's charge regardless of whether Wing Hang was fixed with constructive notice of the restriction in the Debenture. Mr Graham contended that because the floating charge of ABN had crystallised and had become a fixed charge as at the date of the creation of the Wing Hang charge, ABN's fixed charge would take priority over Wing Hang's floating charge irrespective of any question of notice. He further submitted that in any event, a registered floating charge would retain priority over a subsequent floating charge.

42. The basis for Mr Graham's contention that the Wing Hang charge was a floating charge was that the deposit charged to Wing Hang was a "revolving" arrangement. Under the letter of pledge and set-off agreement in favour of Wing Hang, Readen was obliged to maintain an amount of not less than HK$3,000,000.00 or its equivalent in a specified fixed deposit account or other fixed deposit accounts. Readen could draw on any of its accounts with Wing Hang so long as that obligation was fulfilled.

43. I am quite unable to see how this arrangement would render Wing Hang's charge a floating charge. I was referred by Mr Wong to Cresswell on the Encyclopaedia of Banking Law, 1999 ed., paras E (2485) to (2488), in which the author set out the clauses one would normally find in a "triple cocktail" security document which creates a fixed charge over a deposit in a named bank account together with contractual set-off (such as clause 4 in the Wing Hang charge) and a flawed asset arrangements (i.e. a term providing that the deposit is repayable only if and when the sums owed to the bank have been paid, such as clause 2(B) in the Wing Hang charge). I am satisfied that the charge created in favour of Wing Hang was a fixed charge.

44. The other aspect about the nature of the charges created in favour of Chiyu and Wing Hang is whether these fixed charges were legal or equitable charges. As far as notice of the restrictive clause in the floating charge of the Debenture is concerned, the rule requiring notice of the restriction to bind a subsequent chargee would apply in the same way whether the subsequent specific charge is legal or equitable. This was explained in Reynolds Bros (Motors) Pty Ltd and Ors v. Esanda Ltd (1984) 8 ACLR 422 by Mahoney JA as follows:

"Where the interest which the assignee has acquired in the assets is a legal interest and not merely equitable, and that interest has been acquired without notice, actual or constructive, of the existence of the equitable floating charge, then the assignee will hold the interest free of the equitable charge. This follows from the ordinary rules as to priority between legal and equitable interests. Where he has acquired his legal interest with notice of the existence of a floating charge but without notice, actual or constructive, that his acquisition is inconsistent with such a restriction as I have referred to, then he will hold his interest free of the floating charge ...

Where the assignee acquires his legal interest with notice, not merely of the floating charge but of the fact that his acquisition of it is inconsistent with the relevant term of the charge, the assignee has been held to take subject to the floating charge ...

The position of an assignee who takes not a legal but an equitable interest is, I think, to be determined upon somewhat different principles. In determining the priorities of equitable interests, the interest which is prior in time will prevail unless the subsequent interest is a better equity or there is otherwise a reason for preferring it. The fact alone that the subsequent equity has been acquired without notice of the prior equity will not allow it to prevail. However, where the prior equity is a floating charge, the subsequent equity will prevail if acquired in the ordinary course of business because, as I have said, it is of the nature of a floating charge to allow of the creation of such subsequent equities." (at 427; emphasis supplied)

45. In so far as notice of the automatic crystallisation clause is concerned, it will make a difference whether the subsequent specific charge is a legal charge or an equitable charge. The effect of this provision is that prior to the creation of the subsequent adverse interest which is prohibited under the floating charge, the floating charge would crystallise and the asset subject to the floating charge would become subject to an equitable assignment by way of charge on crystallisation. If the subsequent adverse interest is a legal charge, the subsequent chargee would take free of the crystallised charge provided he has no notice of the automatic crystallisation clause, applying the ordinary rule of priority between legal and equitable interests. If, however, the subsequent adverse interest is an equitable charge, in the case of two competing equities, the crystallised charge would take priority in equity on grounds of time unless the prima facie rule that the first in time prevails is displaced by estoppel or the rule in Dearle v. Hall (1828) 3 Russ 1, in the case of book or other debts.

46. Mr Chan made no submission whether the two charges in favour of Chiyu were legal or equitable. Mr Wong accepted that the Wing Hang charge was an equitable fixed charge in his written submissions. Under the charges to Chiyu, there was no assignment or conveyance of the chose in action. What Chiyu acquired was an equitable right to have the deposit applied in satisfaction of the secured liabilities. I am satisfied that the charges in favour of Chiyu were equitable fixed charges.

Constructive notice

47. I have been referred by counsel to a long line of cases on constructive notice in this context. They included the following: English and Scottish Mercantile Investment Co. Ltd v. Brunton [1892] 2 QB 700; Re Castell & Brown Ltd [1898] 1 Ch. 315; Re Valletort Sanitary Steam Laundry Co. Ltd [1903] 2 Ch. 654; Re Standard Rotary Machine Co. Ltd (1906) 95 LT 829; Wilson v. Kelland [1910] 2 Ch. 306; G and T Earle Ltd v. Hemsworth RDC (1928) 44 TLR 605; Dempsey and National Bank of New Zealand Ltd v. Traders' Finance Corporation Ltd [1933] NZLR 1258; and Siebe Gorman, supra.

48. The general effect of the above cases may be summarised as follows:

(1) Prior to the 1900 legislation in the U.K. which established the charges registration system, a subsequent specific chargee would take priority over a floating charge in spite of notice of the prior floating charge, provided that he did not have notice of the restrictive clause. The subsequent chargee would not be fixed with constructive notice of any restrictive clause merely by reason of the fact of notice of the existence of the floating charge.

(2) After the introduction of the charges registration system in 1900, a subsequent chargee is fixed with constructive notice of the existence of a registered floating charge by reason of its registration. However, he is not fixed with constructive notice of the contents of a restrictive clause in the floating charge. In this respect, the law is the same as the case law before 1900.

49. Mr Graham did not dispute these propositions. He submitted that the doctrine of constructive notice should be extended to embrace any matter which would have come to the notice of the subsequent chargee if reasonable inquiries had been made. When the restrictive clause in a debenture was first considered in Brunton in 1892, restrictive clauses were not common provisions in floating charges. Nowadays, they are usual provisions one would expect to find in these charges. Mr Graham relied on Siebe Gorman by way of analogy and submitted that as it was decided in that case there was no constructive notice of unusual or special provisions in a debenture, he reasoned that the opposite conclusion should be reached in respect of usual clauses and that a subsequent chargee should be fixed with constructive notice of usual clauses the particulars of which were registered in the Companies Registry. Mr Graham acknowledged that there was no decided case to that effect but there was also no decision to the contrary. As for textbook authorities in support of his proposition extending constructive notice in this context, he referred me to Buckley on the Companies Acts, 14th ed. p. 265 in which the author queried whether a subsequent chargee with knowledge of a prior floating charge but not of the restrictive notice would still not be fixed with constructive notice of the restriction in present times, in view of the fact that restrictive provisions are now very common and the present practice in the U.K. of noting in the register the existence of the restriction. The other textbook authority relied on by Mr Graham is "Equity: Doctrines and Remedies" by Meagher Gummow and Lehane, 3rd ed., para. [854]. It was submitted by the authors that the English cases which established that notice of the floating charge does not constitute notice of the restrictive clause should no longer be regarded as good law. I do not find this particularly helpful because the authors' comments were apparently made in the context of the Australian registration system, in which one is obliged to register the entire document constituting a charge.

50. I am not persuaded that constructive notice should be extended in the present case as suggested by Mr Graham, having considered the decided cases and textbook authorities which Mr Chan and Mr Wong had referred me to. On going through the cases and textbook authorities, it does not seem to me that the doctrine was developed on the basis of what a subsequent party could reasonably be expected to search in the charges register. In the context of constructive notice as applied to company charges, it is only where a document which must necessarily affect the title of third parties that notice of its existence would constitute constructive notice of the contents of that document. Notice of a document which may or may not but does not necessarily affect the title of third parties would not amount to constructive notice of its contents. I set out below the relevant dicta in these cases:

(1) English and Scottish Mercantile Investment Co. Ltd v. Brunton [1892] 2 QB 700

"I think the doctrine has been accurately deduced from the various cases, and is accurately stated, in the notes to Le Neve v. Le Neve 2 Tu. L. C. 6th ed. p. 26:- '... where a party has notice of a deed which does not necessarily affect the property, and is told that in fact it does not affect it, but relates to some other property, and such party acts fairly in the transaction, believing the representation to be true, he will not be fixed with notice of the contents of the instrument.' Now that is the doctrine formulated in equity: It is not to be carried farther; it is to be construed according to its true meaning, and not to be added to or diminished. What is the true meaning of 'must affect the property,' as distinguished from 'does not necessarily affect the property'? The expressions are not mathematical terms; they must be treated according to their meaning as a legal statement of principle. If it would be wholly unreasonable to suppose that the instrument in question did not affect the property, then it 'must affect' it within the meaning of the enunciation; but if it be an instrument such as may or may not affect the property - if any reasonable man might say, 'it is just as likely not to affect the property as to affect it' - then it 'does not necessarily' affect it within the meaning of the enunciation ...

That reduces the question in the present case to this: Were the debentures issued by such a company as this - a company which had the power of issuing debentures, and had also the power of mortgaging its property - instruments of such a nature as might or might not affect the transaction with respect to the mortgage which was given. As I have said, I am not dealing with any question of title to land; the question here, in my opinion, is, were the debentures such as would necessarily affect the plaintiffs' title to the mortgage, or were they such as might or might not affect it?" (at 709-711, per Lord Esher, MR; emphasis supplied)

(2) Wilson v. Kelland [1910] 2 Ch. 306

"The evidence proves that the vendor-mortgagees had no actual notice of the debentures and the trust deed, but had I come to the conclusion that the priority of their mortgage depended upon the question whether or not they had any notice, I should have been prepared to hold that the particulars registered in this case pursuant to s. 14 of the Companies Act, 1900, amounted to constructive notice of a charge affecting the property but not of any special provisions contained in that charge restricting the company from dealing with their property in the usual manner when the subsisting charge is a floating charge." (at 313, per Eve J)

(3) G and T Earle Ltd v. Hemsworth Ltd (1928) 154 TLR 605

"But it has never been held that the mere fact that persons in the position of the plaintiffs have constructive notice of the existence of debentures also affects them with constructive notice of the actual terms of the debentures or that the debentures are subject to the restrictive condition to which these debentures were subject. No doubt it is quite common for debentures to be subject to this limiting condition as to further charges, but that fact is not enough in itself to operate as constructive notice of the actual terms of any particular set of debentures. That again has been recognised in a great many cases, and it is enough for me now to refer to one only. There are many others, but it is enough for me to refer to Wilson v. Kelland [1910] 2 Ch. 306." (at 608, per Wright J; emphasis supplied)

(4) Dempsey and National Bank of New Zealand Ltd v. Traders' Finance Corporation Ltd [1933] NZLR 1258

"The reason for this view is that a floating charge belongs to a class of documents which may or may not, but does not necessarily, affect the title to property and the Court will not, in respect of such documents which affect commercial transactions, apply the doctrine of constructive notice though it is sought to found it on the public registration of such document." (at 1290, per Smith J; emphasis supplied)

(5) Siebe Gorman & Co. Ltd v. Barclays Bank Ltd [1979] 2 Lloyd's Rep. 142

Here, Slade J was concerned with a restrictive clause restricting the rights of a company to deal with its equity of redemption under a specific charge of present and future book debts. This was held to be a special provision in a specific charge. Slade J referred to three cases on floating charges (Re Valletort Sanitary Steam Laundry Co. Ltd, Re Standard Rotary Machine Co. and Wilson v. Kelland) as they provided assistance by way of analogy. In the course of his judgment, he had this to say:

"The question however arises whether it had constructive notice of those provisions. For this purpose, adapting the language of s. 199(1)(ii) of the Law of Property Act, 1925, I treat constructive notice as embracing any matter which would have come to Siebe Gorman's knowledge if such inquiries and inspections had been made as ought reasonably to have been made by it or would have come to the knowledge of its solicitors if such inquiries and inspections had been made as ought reasonably to have been made by them. ...

They were nonetheless in my judgment special provisions which a third party, such as Siebe Gorman, would not necessarily have expected to find in a mortgage creating a specific charge on future book debts. ... In these circumstances, I do not think Siebe Gorman can be treated as having had constructive notice of the cl. 5(c) provisions at the date when it took its assignment." (at 160; emphasis supplied)

51. Most of the textbook authors are of the view that a subsequent chargee is not to be fixed with constructive notice of a restrictive clause in a floating charge as it is not among the particulars required to be registered in the Companies Registry. I propose to set out only two extracts:

(1) Lightman and Moss on the Law of Receivers of Companies, 1994 ed.

"Although registration of a floating charge at the Companies Registry will constitute constructive notice of the particulars required to be registered and disclosed on the register to those persons who would reasonably be expected to search in the ordinary course of business, notice of the existence of a floating charge does not give the third party constructive notice of a restrictive clause contained in the charge. The present requirements concerning registration of the charges under the Companies Act 1985 do not allow for the application of concepts of constructive or implied notice of restrictive clauses so as to bind third parties because the legislation does not require details of any restrictive clauses to be mentioned on the appropriate form. It has been argued that restrictions are now so common in floating charges that, even in the absence of any registration of a restriction or notice of the existence of a floating charge, a person will have what is tantamount to implied notice of a restriction, but this suggestion runs contrary to the current statutory scheme." (at paras 3-20; emphasis supplied)

(2) Pennington's Company Law, 7th ed.

"It has been held that a later mortgagee or chargee does not have constructive notice of the prohibition in a debenture or loan security agreement on the creation of later mortgages or charges merely because he knows of the existence of the debenture or loan security agreement, or has constructive notice of its existence because it is registered at the Companies Registry. This is because knowledge or notice of the existence of a debenture or loan security agreement does not necessarily imply knowledge or notice that any security created by it affects the property or asset which are later mortgaged or charged to him, and he is not bound at his peril to examine the debenture or loan security agreement to discover whether it does. Furthermore, the registration of the charge created by the debenture or loan security agreement at the Companies Registry gives merely constructive notice of its existence to persons dealing with the company; they do not thereby also have constructive notice of the restrictive provision contained in it. There is, in fact, no means under the present law by which the holder of a floating charge may ensure conclusively that all later mortgagees and chargees have notice of the contractual provision prohibiting the company from creating prior or equal ranking mortgages or charges." (at p. 577; emphasis supplied)

52. Similar statements are found in Gough on Company Charges, p. 225-6; Gower's Principles of Modern Company Law, 6th ed., p. 366; Farrar's Company Law, 4th ed., p. 640; and "Floating Charges and Priorities" by J. H. Farrar (1974) 38 Conv. N. S. 315 at 325.

53. In summary, having regard to the manner in which constructive notice was developed and applied in this context in the decided cases, that the equitable doctrine of constructive notice ought not be extended readily to commercial transactions, and that the particulars of a restriction such as the restrictive clause or the automatic crystallisation clause are not required by statute to be registered, I am not able to accede to Mr Graham's submissions that constructive notice should be extended in this instance to fix the subsequent chargees with deemed notice of the restrictive clause or the automatic crystallisation clause in a floating charge.

Inferred notice

54. The difference between constructive notice and inferred notice was explained by Lord Esher MR in Brunton, supra. as follows:

"The doctrine of constructive notice is wholly equitable; it is not known to the common law. There is an inference of fact known to common lawyers which comes somewhat near to it. When a man has statements made to him, or has knowledge of facts, which do not expressly tell him of something which is against him, and he abstains from making further inquiry because he knows what the result would be - or, as the phrase is, he 'wilfully shuts his eyes' - then judges are in the habit of telling juries that they may infer that he did know what was against him. It is an inference of fact drawn because you cannot look into a man's mind, but you can infer from his conduct whether he is speaking truly or not when he says that he did not know of particular facts. There is no question of constructive notice or constructive knowledge involved in that inference; it is actual knowledge which is inferred. ... [Constructive notice] is contrary to the truth. It is wholly founded on the assumption that a man does not know the facts; and yet it is said that constructively he does know them." (at 707-8; emphasis supplied)

55. Inferred knowledge or notice is a rebuttable rather than an irrebuttable presumption (Farrar's Company Law, p. 640; Palmer's Company Law, 24th ed., para. 45-08)

56. The argument advanced by Mr Graham is that by virtue of the charges registration system, there is already constructive notice of the existence of the charge. The restrictive provision in a floating charge is a common, if not, universal clause in modern practice. Further, it has been a common practice to include particulars of a restrictive clause in the particulars registered with the Companies Registry, notwithstanding that they are not among the particulars required to be registered under the Ordinance. He also pointed to the provisions in the Ordinance giving a right to any creditor (but not a potential creditor) or member of the company to inspect the copies of instruments creating any charge requiring registration and the register of charges and any member of the public to inspect the register of charges (though not the documents creating the charges) upon payment of a small fee. Mr Graham submitted that by the combination of the above matters, an inference could and should be drawn by the court that Chiyu and Wing Hang must have had actual knowledge of the restrictive clause and the automatic crystallisation clause, the particulars of which were given in the particulars registered, on the basis of wilful blindness. A similar argument was advanced by Professor Farrar in his works which I have cited earlier. Mr Graham also referred me to Palmer's Company Law at para. 45-08 and Gore-Browne on Companies, para. 18.14. Mr Chan and Mr Wong raised objection when this line of argument was advanced by Mr Graham. They pointed out that there was no evidence before the court of the alleged common practice of inserting provisions such as the restrictive clause or the automatic crystallisation clause in floating charges, or the alleged common practice of registering particulars of such provisions in the particulars of charges at the Companies Registry on a voluntary basis. Hence, there is no evidence of primary facts upon which any inference of notice might be drawn. Further, as the presumption of actual notice is an evidential presumption of fact which can be rebutted, even if any inference of the kind could be drawn, this would have been rebutted by the evidence before the court that the subsequent chargees did not in fact have any such notice.

57. I do not think I am able to take judicial notice of the alleged common practice put forward by Mr Graham. It does not seem to me that the alleged practice is so notorious as not to be the subject of serious dispute. Further, the matter is not capable of immediate accurate demonstration by resort to readily accessible sources of indisputable accuracy. Hence, on the facts of this case, it would not be appropriate for me to draw any inference of knowledge or notice of the relevant clauses in the Debenture on the basis of the alleged wilful blindness of Chiyu and Wing Hang.

58. For the sake of completeness, I should mention that even if the facts of the present case were such as to warrant an inference of knowledge to be drawn, there is contrary view expressed by Dr Gough in his work on Company Charges that the argument of Professor Farrar is not an effective solution to the difficulty of a subsequent chargee not being fixed with constructive notice of a restrictive clause (at p. 845-6). This view is shared by Professor R. M. Goode in "Legal Problems of Credit and Security", 2nd ed. at p. 43-4 and the authors in Lightman and Moss on Receivers, 1994 ed., at p. 43.

Automatic crystalisation clause and the rule in Dearle and Hall

59. I have held that the charges in favour of Chiyu and Wing Hang were equitable fixed charges. The priority results of these equitable fixed charges as against the equitable fixed charge which had crystallised by virtue of the automatic crystallisation clause in the Debenture would appear from the following exposition in Gough on Company Charges:

"An express crystallisation clause does not confer an absolute priority on a floating chargee. Its effectiveness depends on, and is generally co-extensive with, the priority afforded to any equitable interest under the priority rules of the general law. In relation to priority against third parties, certain propositions apply in respect of an express crystallisation clause, reflecting the principle that under a floating charge an equitable proprietary interest arises upon crystallisation:

...

(3) If the floating charge crystallises automatically on the attempted creation of a subsequent specific equitable charge, the floating chargee takes priority in equity on grounds of time.

...

(5) Priority under proposition (3) could be reversed in the case of book or other debts, including credit bank balances, if the subsequent specific chargee or absolute purchaser gives first notice to the debtor under the rule in Dearle v. Hall. This represents some improvement for the floating chargee, since it has been held that the floating chargee during the floating phase is incapable of giving notice under the rule. A floating chargee under an express crystallisation clause can seek to preserve priority of time by giving first notice and at the same time overcome any detrimental priority effect due to delay involved in appointing a receiver." (p. 253-4)

60. Under the rule in Dearle v. Hall, in the case of a debt, the first equitable assignee of a debt to give notice to the account debtor is given priority, provided that the assignee does not have actual or constructive notice of a previous assignment when he advanced his money. Here, fixed deposits were maintained with Chiyu and Wing Hang and these deposits were the subject of the charges in their favour. Applying the rule in Dearle v. Hall, the position would be as stated in Palmer's Company Law:

"As the holder of a valid charge-back, the bank's position as against other chargees should be considered. If the appropriate priority rule is the rule in Dearle v. Hall, it would presumably not need to notify itself as the account debtor in order to acquire priority against subsequent chargees. If it knew of an earlier charge, or had constructive notice of it arising out of its registration of a company charge, then it should rank behind the earlier charge." (para. 13.108)

61. In the present case, when the charges were created in favour of Chiyu and Wing Hang, these banks had not been given notice by ABN of its rights to the monies represented by the fixed deposits under the equitable fixed charge which had crystallised in favour of ABN. As Chiyu and Wing Hang did not have notice of the crystallised charge, the charges in their favour had priority under the rule in Dearle v. Hall.

Other arguemnts advanced by Wing Hang

62. Arguments of a right to set-off unaffected by crystallisation and of estoppel were advanced by Mr Wong in his written submissions. It would not be necessary for me to deal with them having regard to the conclusions I have reached in favour of Wing Hang.

63. Mr Wong also advanced an argument that the deposit provided to Wing Hang was subject to a primary trust in Wing Hang's favour, as the deposit was provided by Readen's shareholder, Chanberg, for a special purpose, i.e. to stand as security for the facilities granted by Wing Hang to Readen. Relying on Barclays Bank Ltd v. Quistclose Investments Ltd [1970] AC 567, he submitted that the deposit was impressed with a primary trust as soon as it was created and did not form part of the general funds of Readen owned by it beneficially. Hence, any crystallisation of the floating charge could not affect the deposit which was subject to a primary trust in favour of Wing Hang.

64. I accept Mr Graham's submissions that this argument should be rejected on the evidence in this case. According to the evidence filed by Wing Hang, new shares in Readen were issued to Chanberg upon payment of HK$3,000,000.00 by Chanberg. This amount being the newly injected capital of Readen was subsequently deposited with Wing Hang. It was money beneficially owned by Readen and there was simply no analogy to be drawn with Quistclose.

Conclusion

65. For the reasons given above, I determine the issue in the Originating Summons in favour of Chiyu and Wing Hang that they were entitled to exercise a right of set-off in respect of various fixed deposits placed by Readen with them. I make an order nisi that Chiyu and Wing Hang should have the costs of these proceedings against ABN.