XCHRX SIU CHI FUNG PETER v. THE HONGKONG AND SHANGHAI BANKING CORPORATION LTD.

HCMP 2468/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 2468 OF 2000

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D E C I S I O N

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1. There are two applications before me. The first is an application by way of a Notice of Originating Motion in HCMP No. 2468 of 2000. The 3 Applicants are companies in the same group. The 1st Applicant, The World Enterprises (Holdings) Limited is the holding company of the group. The 2nd Applicant (whose name should be China Fleet Investment Limited and there is an error in the title of the action) and the 3rd Applicant are property holding companies. They are customers of the Respondent, the Hongkong and Shanghai Banking Corporation Limited ("the Bank"). The Applicants seek an injunction to restrain the Bank from presenting any petition for the winding up of the Applicants based on the amounts claimed in 3 statutory demands dated 3 May 2000 totalling HK$9,080,792.62. The second set of applications are the applications in HCSD Nos 17-22 of 2000. They are taken out by 6 individuals to set aside the statutory demands dated 1 May 2000 served on each of them by the Bank claiming the same amount of total indebtedness as in the case of the companies. The liability of these individuals rested on various guarantees they had given to the Bank. I shall refer to the Applicants in HCMP No. 2468 of 2000 as the 1st, 2nd and 3rd Applicants and collectively as "the Companies". The Applicants in HCSD Nos 17-22 of 2000 shall be referred to by their names and collectively as "the Individual Applicants".

2. On 25 May 2000, directions were given for the two applications to be heard together as the same evidence would be relied on by the Companies and the Individual Applicants in their applications. The Bank gave an undertaking not to present any petition based on the statutory demands before the adjourned hearing and an early date was given for the adjourned hearing.

3. The ground for seeking an injunction and for setting aside the statutory demands against the Individual Applicants is the same. It is on the basis that there is a bona fide dispute on substantial grounds in respect of the debt claimed in the statutory demands and that the Companies and the Individual Applicants have an arguable and substantial counterclaim which equals or exceeds the total amount of the debts specified in the statutory demands. It is alleged by the Companies and the Individual Applicants that in exercising the power of sale in respect of various properties mortgaged to the Bank by the Companies, the Bank had failed to take reasonable care to obtain proper prices for the properties and had thereby acted in breach of its duty as a mortgagee.

4. On 17 March 2000, an action was commenced in HCA No. 2856 of 2000 against the Bank with an Indorsement of Claim claiming an inquiry whether the money produced by the sale of one of the mortgaged properties was a fair and proper price. The Writ of Summons has since been amended to add as plaintiffs the mortgagors of other properties mortgaged to the Bank, the borrowers and guarantors. I understand that the plaintiffs in that High Court Action have undertaken to file the Statement of Claim by 14 June 2000.

5. The relevant facts and matters that are not in dispute may be described as follows.

6. Various properties were mortgaged by the Companies to the Bank between July 1988 and September 1997 and guarantees were given by the Individual Applicants during this period when facilities were extended by the Bank. The mortgaged properties I am concerned with are as follows:

(1) Rooms 1505-9, Kodak House II, 321 Java Road, Hong Kong ("Units 5-9");

(2) Factory 8, 15/F, and Private Car Parking Spaces Nos 20, 21 and 22 on LG2, Roof No. 39 on the Main Roof, Hong Man Industrial Centre, 2 Hong Man Street, Hong Kong ("the Hong Man Properties"); and

(3) Rooms 1502-4, Kodak House II ("Units 2-4").

7. Following re-structuring negotiations with the Bank in 1999 and in order to reduce their liabilities towards the Bank, the Companies delivered up vacant possession of the aforesaid properties to the Bank for sale. In respect of Units 5-9 and the Hong Man Properties, vacant possession was delivered up on 19 July 1999. For Units 2-4, vacant possession was delivered up in early December 1999.

8. The prices obtained by the Bank on the sale of the mortgaged properties are set out in the table below:

9. The manner in which the above properties were sold by the Bank to various purchasers was as follows:

(1) In respect of the Hong Man Properties, the Bank placed advertisements in a newspaper on various dates in August, September and October 1999 and circulated an internal notice to departments of the Hong Kong Bank Group for promotion of the sale of the Hong Man Properties to potential customers. Response from the advertisements was poor and only one offer was received from an estate agent at HK$1.6 million in September 1999, which the Bank regarded as far below the market price. The Bank obtained a valuation from Jones Lang LaSalle Limited on 19 October 1999, which gave an open market value of HK$2.3 million and forced sale value of HK$1.7 million. The Bank decided to hold a public auction for the Hong Man Properties and they were sold separately to 4 different purchasers securing a total of HK$2.25 million.

I should mention that Mr Johnny Mok, who appeared for the Companies and the Individual Applicants, stated that for the purpose of the applications before me, no complaint is made in respect of the conduct of sale and the price realised by the Bank for the Hong Man Properties. The purpose of his referring to the Hong Man Properties is to bring out the difference in the conduct of sale for Units 5-9 and Units 2-3 and to back up his submissions that the Bank could and should have taken similar action to market the other properties as in the Hong Man Properties.

(2) Units 5-9 were advertised in 2 newspapers for sale as a single unit with a floor area of 19,852 square feet on various dates in August and September 1999. There was also an internal notice of sale among the Hong Kong Bank Group for promotion to potential customers. Response from the advertisements was poor. Only one offer was received from an estate agent in mid September 1999 to purchase as a single unit at HK$20 million which the Bank regarded as below the open market value.

On or about 27 September 1999, HSBC Property secured an offer from a purchaser at HK$21.4 million and recommended to the Bank to accept the offer. After taking into account the valuations of the properties as a single unit obtained by the Bank from 3 valuers in or around mid September 1999, the Bank decided to accept the offer at HK$21.4 million.

(3) For Units 2-4, the Companies had tried to sell the properties separately or as a single unit since about July 1999 and various offers for Units 2 and 4 separately, and for the properties as a single unit, were received from estate agents. There is dispute on the affidavits whether the Bank was informed of the various offers received by the Companies. It is not in dispute that Mr Steve Siu, one of the Individual Applicants, had faxed to the Bank on 2 December 1999 a confirmation of purchase dated 1 December 1999 signed by the estate agent and the Companies whereby an offer to purchase the properties as a single unit at HK$13.8 million was accepted. The Bank informed Mr Steve Siu that the offer was not acceptable because this was below the Bank's valuation at HK$14 million. On the same day, the Companies delivered the keys of the properties to the Bank.

On 3 December 1999, the Companies sent to the Bank under cover of a letter of the same date an agreement dated 2 December 1999 for sale of the properties at HK$13.8 million as well as the deposit cheques of the purchaser, and requested the Bank to approve the transaction. The Bank again declined to approve the transaction as it was below the Bank's valuation of HK$14 million and returned the cheques and the agreement to the Companies.

Eventually, on or about 23 December 1999, HSBC Property was able to secure the sale of Units 2-4 as a single unit to the same purchaser but at the higher price of HK$14.1 million. The Bank accepted that offer.

10. The point taken by Mr Johnny Mok in these applications is that the Bank had failed to discharge its duty as a mortgagee in realising the properties in that Units 5-9 and Units 2-4 could and should have been sold separately. They are separate adjacent properties and each of the units was separately owned. Although the partition walls of Units 5-9 had been knocked down so that the units were used as a single office unit, the 5 units could be sold separately. In respect of Units 2-4, it was accepted by the Bank that Unit 4 was and is a separate unit all along. There is some dispute as to the extent to which the partition wall between Units 2 and 3 was demolished. But regardless of that dispute, there is no reason why Units 2-4 could not have been sold as separate units because each of the units was separately owned. If Units 5-9 and Units 2-4 had been sold separately, according to the valuation obtained by the Companies from CB Richard Ellis dated 17 March 2000, the open market value of Units 5-9 as at 11 October 1999 (the date of the sale and purchase agreement entered into by the Bank) on a break-up basis was HK$27.8 million whereas the open market value of Units 2-4 on 11 October 1999 on a break-up basis was HK$16 million. The difference between the actual selling prices and the valuations of Richard Ellis for Units 5-9 and Units 2-4 would be HK$8.3 million in the aggregate.

11. It is for the Companies and the Individual Applicants to satisfy me on the evidence there really is substance in the dispute which is raised. They cannot satisfy the test by arguing hypotheses of fact on which it is said that their case exists or could exist. They must adduce "sufficiently precise factual evidence" to satisfy the court that they have a bona fide dispute on substantial grounds (Re ICS Computer Distribution Ltd [1996] 3 HKC 440 at 444B-E).

12. I also bear in mind that the duty of a mortgagee in exercising a power of sale under a mortgage is a duty to take reasonable care to obtain a proper price or the true market value for the mortgaged property at the time of sale. That duty is not tortious in nature but one recognised by equity as arising out of the particular relationship between a mortgagee and a mortgagor (Cuckmere Brick Co. Ltd v. Mutual Finance Ltd [1971] Ch. 949 at 965G-966A, 966C-F, 968H-969A, per Salmon LJ; Parker-Tweedale v. Dunbar Bank Plc. [1990] 3 WLR 767 at 773, per Norse LJ; and AIB Finance Ltd v. Debtors [1998] 2 All ER 929 at 936, per Nourse LJ).

13. I turn to consider the evidence relied on by the Companies and the Individual Applicants to establish their claim against the Bank for breach of duty.

The evidence in respect of Units 5-9

14. I have already mentioned that the Applicants have obtained a valuation from Richard Ellis on a break-up basis at the relevant time of HK$27.8 million, giving a difference of HK$6.4 million compared to the actual selling price of HK$21.4 million. The most cogent piece of evidence relied on by the Applicants is that the Bank had obtained a valuation from Jones Lang LaSalle on 5 August 1999 ("the August Valuation"). In the August Valuation, the surveyors gave an open market value of the units on a single unit basis at HK$22 million and a forced sale value at HK$17 million as at 5 August 1999. The relevant part of the report reads as follows:

"In addition, as requested by you, our valuations of the respective workshops in their existing state, as at today's date [5 August 1999], assuming sale with vacant possession, are stated in the following sums:

Workshop		Open Market Value (HK$)
5		3,200,000
6		6,100,000
7		6,600,000
8		6,100,000
9		7,200,000"

(emphasis supplied)

15. Thus, on the August Valuation, the estimated open market value on a break-up basis was HK$29.2 million, HK$7.2 million more than the open market value on a single unit basis. And this is on the Bank's own valuation.

16. The August Valuation was not disclosed by the Bank to the Companies at all material times. Mention was made of the August Valuation in a subsequent report of Jones Lang LaSalle dated 2 June 2000 in which the open market value for each of the 5 units as given in the August Valuation was set out. That report in June 2000 was exhibited to an affirmation filed on behalf of the Bank on 2 June 2000. This alerted the Applicants' solicitors to the August Valuation and they requested a copy of it from the Bank's solicitors. A copy was only received by the Applicants' solicitors on 10 June 2000.

17. On the evidence adduced by the Bank, it would appear that no attempt was made to market Units 5-9 as separate units for sale. Apparently, the Bank was alive to the possibility of marketing these properties as separate units and it was aware that this method of sale would yield an additional sum of HK$7.2 million according to the August Valuation. No or no satisfactory explanation was given by the Bank in the evidence they filed as to why no attempt was made to sell these properties separately. No reason was given by the Bank why they had not arranged for a public auction to be held to sell the properties separately just as what they had done for the Hong Man Properties which were disposed of by the Bank at the same time. All that the Bank had said on affidavit was that if the units were to be split up for sale, the Bank would have to retain an architect to submit plans to the Building Authority for partitioning the units and to engage contractors to carry out the partitioning work. Further, the Bank would have to reinstate the common corridor outside Units 5-9. This would result in additional expenses and delay.

18. In answer, the Applicants have filed evidence to demonstrate that it would be a relatively simple operation to reinstate the partition walls in accordance with the original floor plan, that it was not necessary to obtain the approval of the Building Authority and that they had previously obtained a quotation from a contractor on the reinstatement works. The estimated cost was about HK$100,000.00 and the work would be completed within 7 to 10 days. The point was also made by Mr Johnny Mok that vacant possession was delivered up as early as mid July 1999, the agreement for sale and purchase was only entered into by the Bank on 11 October 1999 with completion on 30 November 1999. Hence, there was more than ample time for the necessary reinstatement work to be carried out.

19. In my judgment, the Applicants have demonstrated on sufficiently credible evidence that they have a claim against the Bank for acting in breach of its duty as a mortgagee in the sale of Units 5-9 on substantial grounds. I was referred by Mr Chan Chi Hung, who appeared for the Bank, to a letter dated 3 December 1999 from the Companies to the Bank in which the Companies sought the Bank's understanding to allow them to pay the indebtedness by monthly instalments of HK$600,000.00 and no complaint was made in that letter of any improper conduct by the Bank in selling Units 5-9. Mr Chan also drew my attention to the provisions in the mortgage documents giving a power of sale to the Bank to sell the mortgaged properties together or in parcels and by public auction or tender or private contract. I do not think these matters should affect materially the Applicants' case against the Bank.

20. As for the value of the Applicants' claim against the Bank, I shall deal with this after I have considered the evidence relating to Units 2-4.

Evidence relating to Units 2-4

21. For these properties, Richard Ellis in a report dated 17 March 2000 gave a valuation of the open market value on a break-up basis as at 11 October 1999 at HK$16 million. The actual selling price in December 1999 was HK$14.1 million. It is not entirely clear why the valuation given by Richard Ellis was in respect of 11 October 1999 which was the date of the agreement for sale and purchase of Units 5-9. The gravamen of Companies' complaint is also that the properties could and should have been sold on a break-up basis and that this would have yielded an additional HK$1.9 million above the actual selling price based on the valuation of Richard Ellis.

22. The answer of the Bank is quite simple. Mr Chan pointed to the fax and letter from the Companies to the Bank dated 2 and 3 December 1999 which I have referred to earlier. It would appear from these documents that the Companies were urging the Bank to approve their intended sale to a purchaser at HK$13.8 million (Mr Steve Siu had attempted to deny this in his 2nd affirmation but I am not persuaded he has made out a credible case in that regard). The Bank however declined to approve the sale at HK$13.8 million and subsequently managed to sell the properties at the higher price of HK$14.1 million. Mr Chan submitted that there is no substance in respect of the claim regarding the sale of Units 2-4 that the Bank had acted in breach of its duty as a mortgagee.

23. I would start with the premise that there appeared to be no serious difficulty in selling Units 2-4 separately. It is not in dispute that Unit 4 was and is partitioned from the adjacent unit although there is dispute as to the extent of the demolition of the partition wall between Units 2 and 3. The Companies' conduct of urging the Bank in early December 1999 to approve an offer of sale of these properties as a single unit at the price of HK$13.8 million is a relevant factor to be taken into consideration in determining the question whether the Bank had properly discharged its duty as a mortgagee in exercising the power of sale. There are, however, other relevant factors which point the other way.

24. Firstly, as pointed out by Mr Mok, it is apparent from the language and tone of the letter of the Companies to the Bank dated 3 December 1999 that the Companies were in a vulnerable position at that time and had wanted desperately to cut their losses quickly by disposing of Units 2-4 at the price which the Companies were then able to secure. They did not have the benefit of any valuation of the properties on a break-up basis and might not have realised the extent of the difference in price between a sale as a single unit and a sale in separate units.

25. Secondly, there is evidence before me in the form of a newspaper report that the sale of Units 5-9 in October 1999 was regarded as having created a "historically low price" for the properties in Kodak House. Richard Ellis had commented in their report dated 17 March 2000 that the sale of Units 5-9 for the relatively low price of HK$21.4 million would have an "adverse effect" in the marketing of properties within Kodak House around that time and might result in a vendor accepting a lower bid. Mr Mok submitted that the adverse market condition in which Units 2-4 were sold was due to the fault of the Bank in the sale of Units 5-9 and this would be a relevant factor in determining whether the Bank had acted in breach of its duty in the sale of Units 2-4. My attention was drawn to the following passage in Cuckmere Brick, supra.:

"Once the power [of sale] has accrued, the mortgagee is entitled to exercise it for its own purposes whenever he chooses to do so. It matters not that the moment may be unpropitious and that by waiting a higher price could be obtained. He has the right to realise his security by turning it into money when he likes. Nor, in my view, is there anything to prevent a mortgagee from accepting the best bid he can get at an auction, even though the auction is badly attended and the bidding exceptionally low. Providing none of those adverse factors is due to any fault of the mortgagee, he can do as he likes." (at 965G-H, per Salmon LJ; emphasis supplied)

26. I am satisfied that the Applicants have established substantial grounds for their claim against the Bank in respect of the sale of Units 2-4.

The value of the Applicants' claim against the Bank

27. As stated earlier, the total amount of indebtedness in these statutory demands is in the region of HK$9 million. The discrepancy between the actual selling prices of Units 5-9 and Units 2-4 and the valuations given by Richard Ellis of these properties on a break-up basis is HK$8.3 million. There is still a shortfall of HK$700,000.00. The Applicants have to satisfy the court that they have a substantial counterclaim which equals or exceeds the amount of the debt.

28. Mr Mok addressed the shortfall by relying on reductions he contended should be made from the debt in the following sums:

(1) an amount of HK$224,975.34

29. This was the amount of interest overpaid by the Companies to the Bank at the rate of 8.5% per annum from November 1999 to January 2000 on the amount of HK$8.63 million. The figure of HK$8.63 million represented the difference between the actual selling prices of Units 5-9, Units 2-4 and the Hong Man Properties and the valuation of the 3 sets of properties by Richard Ellis. As Mr Mok had indicated that no complaint would be made in respect of the sale of the Hong Man Properties, it seems that the amount on which interest was alleged to have been overpaid during this period should be calculated on the basis of the figure of HK$8.3 million instead of HK$8.63 million. I have not worked out the exact figure as it would appear from Mr Mok's calculations that the figures are taken as approximate figures and as he had rounded down one of the figures in his calculations substantially, that would properly cancel out the over estimate for overpaid interest in the sum of HK$224,975.34.

(2) an amount of HK$350,000.00

30. This represented the amount of penalty interest overcharged by the Bank for the months of February to April 2000 at an average interest rate of 16% per annum.

(3) an amount of HK$60,000.00

31. This represented the accrued interest for one day being 1 May 2000 which was the date of the statutory demands served on the Individual Applicants.

32. Mr Mok rounded down the total of the figures in (1), (2) and (3) to HK$600,000.00. Deducting HK$8.3 million and HK$600,000.00 from the total debt in the statutory demand, the shortfall is reduced to HK$100,000.00.

33. Mr Mok informed me on instructions that the Applicants are able to pay the shortfall of HK$100,000.00 within a short time either by making a payment into court or paying the amount to the Bank. He urged the court to grant the reliefs claimed because it has been demonstrated that there is a substantial claim as to HK$8.9 million and the statutory demand of HK$9 million is shown to be wrong by a very wide margin.

34. After the hearing had been concluded, the Applicants' solicitors wrote to the Bank's solicitors on 15 June 2000 and copied their letter to the court stating that they were put in funds by their clients with HK$100,000.00 as "security" for their applications in such terms and conditions as the court may direct. The Applicants' solicitors also raised a dispute regarding HK$556,920.00 which was one of the amounts claimed in the statutory demand and enclosed more recent financial reports of the 1st Applicant. In the end, I do not find it necessary to order "security" as I shall explain below. There is also some doubt on the authorities whether I could order "security" as a condition for setting aside the statutory demand served on the Individual Applicants. I have not taken into consideration the other additional matters raised in the letter of the Applicants' solicitors dated 15 June 2000 as they were raised far too late.

35. The calculation of the value of the Companies' claim was based on Richard Ellis' valuation in that the open market value of Units 5-9 as in October 1999 was valued at HK$27.8 million. There is evidence before me that the August Valuation obtained by the Bank gave an open market value of these properties on a break-up basis as of 5 August 1999 in the sum of HK$29.2 million, which is HK$1.4 million more than Richard Ellis' valuation. It may be that some adjustment would have to be made to the valuation of Jones Lang LaSalle if the valuation date was taken to be 11 October 1999. Indeed, it would appear from the subsequent valuation of Jones Lang LaSalle dated 28 September 1999 that they gave a 3% downward adjustment to the August Valuation to take into account the time factor, as explained in their letter to the Bank dated 2 June 2000. There is, however, evidence from another firm of surveyors engaged by the Bank, Lawson David and Sung, that no adjustment is required to be made for the time factor because the industrial property market had fallen to its lowest level in 1999, that the price at the time was relatively stable, and the market was relatively inactive with few transactions that had taken place (see their report dated 27 May 2000). Hence, it is not entirely clear at present whether a downward adjustment ought to be made to the August Valuation. Even assuming that a downward adjustment is to be made, if 3% is to be used as proposed by Jones Lang LaSalle, the valuation of Units 5-9 would be reduced to HK$28,324,000.00, which is still HK$524,000.00 more than Richard Ellis' valuation. If the Applicants' claim against the Bank is calculated on the basis of the valuation of Jones Lang LaSalle instead of Richard Ellis, the claim would exceed the amount of the debt in the statutory demand.

36. Looking at the matter in the round, I find that the Applicants have established substantial grounds for a claim which may equal or exceed the total indebtedness in the statutory demand.

Reliefs granted

37. In respect of the applications in HCSD Nos 17-22 of 2000, I would grant each of the applications and I order that the statutory demands dated 1 May 2000 served on each of the Individual Applicants are to be set aside.

38. For the application by the Companies in HCMP No. 2468 of 2000, I would grant an injunction that the Bank be restrained, whether by itself, or by its servants or agents or otherwise howsoever, from presenting any petition for the winding up of the Companies, until after the trial of the action in HCA No. 2856 of 2000 or further order, based on the sums claimed in the 3 statutory demands dated 3 May 2000 and served on each of the Companies on or about 4 May 2000.

39. I would hear the parties on costs.