THE HONGKONG CHINESE BANK LTD. v. LAI WAI NAM WINDSOR AND OTHERS

HCMP 3363/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 3363 OF 1998

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J U D G M E N T

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1. These proceedings arise out of credit facilities granted by the Plaintiff bank, The Hong Kong Chinese Bank Limited, to the 3rd Defendant, Kim-Tronic (Hong Kong) Limited, of which the 1st and 2nd Defendants were directors and shareholders.

2. Two mortgages were executed to provide the bank with security for these facilities.

3. The first mortgage was executed by the 1st and 2nd Defendants as mortgagors and the 3rd Defendant as the borrower on 30 July 1993. The property concerned was commercial premises at Wing Fong Mansions, Nos 107,109, 111, 113, 115 and 117, Second Street and Shop B on the ground floor.

4. The second mortgage was executed by the 1st Defendant as mortgagor and the 3rd Defendant as borrower on 14 June 1996. The property concerned was domestic premises, a flat on the 12th floor of Maiden Court and a car-parking space.

5. On 27 April 1998, the Plaintiff froze the accounts of the 3rd Defendant and on 14 May 1998 issued a letter of demand to all 3 Defendants demanding repayment of all loans. The letters to the 1st and 2nd Defendants threatened that unless the sums outstanding and interest and other charges were paid within one month the bank would take legal action to enforce its security.

6. On 17 July 1998, the Plaintiff brought these proceedings for possession of the two mortgaged properties and repayment of the moneys due under the mortgages.

7. There is no dispute as to the amounts due from the Defendants to the Plaintiff. They are set out in paragraph 5 of the 4th affidavit of Chan Sze Chit dated 5 April 2000.

8. What is disputed in the only affirmation filed on behalf of the defence, namely that of the 1st Defendant dated 21 January 1999, is the right of the Plaintiff to freeze the accounts of the 3rd Defendant, demand repayment of outstanding loans and bring these proceedings. Only the 1st Defendant has appeared at the trial. He gave evidence and was cross-examined.

The terms

9. The Plaintiff's case that it was entitled to freeze the accounts of the 3rd Defendant, make demand for repayment of sums outstanding and bring these proceedings is based on the written terms of its agreements with the Defendants including the 2 relevant mortgage agreements. These terms gave the Plaintiff the right to require payment on demand and to withdraw facilities from the Defendants as well as to require repayment if there was any default by the Defendants.

10. The Plaintiff relies inter alia on the following terms:

11. Clause 1(A) and (B) of the original general agreement, signed by the 3rd Defendant when it opened its account in August 1989, made such terms part of its general terms of dealing with the 3rd Defendant.

12. Clause 2 of the two mortgage agreements provides that the mortgagor(s) and borrower are liable to pay on demand all liability and indebtedness to the Plaintiff. Clause 10 of the two agreements provides that the security shall become enforceable forthwith upon default in compliance with a demand for sums owing or upon any other breach of the terms of the mortgage agreement.

13. The facility letter issued by the Plaintiff to the 3rd Defendant on 7 November 1996, which specifically refers to the charges on the two mortgaged properties being a condition of the facilities, specifies that the bank "reserves the overriding right of repayment on demand plus interest" and that the bank "may at any time cancel the outstanding commitment in respect of any undrawn portion of any facility". This letter was signed by the 1st and 2nd Defendants on behalf of the 3rd Defendant and on their own behalf as mortgagors. A facility letter in similar terms was issued by the Plaintiff to the 3rd Defendant on 19 February 1998. The Plaintiff's case is that this letter was never signed by the Defendants. For the first time when giving evidence, the 1st Defendant alleged that it had been signed. In any event the relevant terms are identical to that in the facility letter of 7 November 1996 and therefore govern the relationship between the Plaintiff and the Defendants.

Default

14. The Plaintiffs further allege, and this is not disputed by the 1st Defendant, that at the time the 3rd Defendant's account was frozen, it had been and was still in default both in relation to trust receipts and instalments under the instalment loan.

15. Three trust receipts which had fallen due in July, August and September 1997 respectively had not been settled until dates in December that year. Two other trust receipts totalling $280,000.00 which had fallen due in September 1997 had still not been settled by the time the Plaintiff froze the 3rd Defendant's account in April 1998. Two other trust receipts one for US$39,000.00 and the other for HK$300,000.00 had fallen due in November 1997. Despite at least 3 written demands to settle these trust receipts they have never been settled. Moreover two instalments under the instalment loan due on 18 March 1998 and 18 April 1998 had not been repaid despite a reminder in respect of the 1st instalment sent on 28 March 1998.

The defence

16. In his affirmation of 26 January 1999 which defines the issues in these proceedings, the 1st Defendant advances three grounds for opposing the Plaintiff's application.

17. The first is that the 3rd Defendant had all along been a good customer and made regular payments to the Plaintiff and that even at the time the Plaintiff froze the 3rd Defendant's account, its business performance and banking transactions were stable (see paragraph 4). This ground was not seriously sustainable in view of the defaults of the 3rd Defendant to which I have referred and was not pursued the hearing.

18. The second was an alleged oral assurance from Mr Leung Lai Biu, the customer manager of the Plaintiff in relation to the 3rd Defendant's account (which allegedly accorded with the normal course of dealing between the Plaintiff and the 3rd Defendant) and which was allegedly given at the time in February 1993 when the 3rd Defendant was offered the new facility that if the 3rd Defendant's business remained stable "it will be a normal course of dealing that there will not be any review of (D3's) banking facilities until February 1999". (see paragraphs 5 and 8 of the 1st Defendant's affirmation).

19. The Plaintiff has been unable to locate Mr Leung Lai Biu who emigrated to Canada after his retirement in January 1999 but even in the absence of any evidence from him I think it highly unlikely that he would have made any unqualified representation to the effect that the 3rd Defendant's banking facilities would not be reviewed until February 1999. It must be borne in mind that in offering to renew the facilities at the time of this alleged discussion, the bank expressly stated in its letter of 19 February 1998 that it reserved "the overriding right of payment on demand plus interest" and that "in any event (it might) at any time cancel the outstanding commitment in respect of any undrawn portion of any facility". Those words expressly contradict any assertion that the bank was binding itself not to review the 3rd Defendant's facilities until February 1999. It is most unlikely that Mr Leung on behalf of the Plaintiff would have bound the bank to any such undertaking, particularly as the bank was aware of the past default by the Plaintiff in respect of trust receipts but had been persuaded nonetheless to renew the facilities in the light of part payment made by the 3rd Defendant as well as D3's past banking history. I find it was not binding itself to continue the facilities regardless of the circumstances.

20. It does appear however that even on the 1st Defendant's evidence the alleged representation by Mr Leung was not unqualified but conditional upon the state of the 3rd Defendant's business. As the 1st Defendant put it, the facility would not be revoked if the 3rd Defendant was not "too naughty". As I have pointed out, the 3rd Defendant was already in default in February in respect of two trust receipts which had become due five months previously and two trust receipts which had become due two months previously. Reminder letters had been sent to the 3rd Defendant. By 27 April, the date the Plaintiff froze the 3rd Defendant's account, a further 2 months had elapsed without any attempt by the 3rd Defendant to meet its liabilities under these trust receipts and despite at least one reminder letter on 20 February. Furthermore, since the facility letter of 19 February, the 3rd Defendant had started to default on another part of its facility with the Plaintiff, namely instalments under the instalment loan. There was in my view ample justification for the Plaintiff to withdraw the facilities of the 3rd Defendant and later on 14 May demand repayment of outstanding loans.

21. Although not strictly raised as an issue on the affirmation, the 1st Defendant has suggested at the hearing that by virtue of the prior dealings between the 3rd Defendant and the Plaintiff, there was an implied term that the 3rd Defendant should be given reasonable notice before its banking facilities were withdrawn. This implied term he suggests arose because on previous occasions when the 3rd Defendant had been in default the bank had tolerated what he described as the 3rd Defendant's "bad habit". Indeed he alleged that the offer of a new facility in the letter of 19 February 1998, despite the existing default of the 3rd Defendant confirmed this situation. The 1st Defendant's evidence was that in the past Mr Leung Lai Biu would warn him when he was in default and make arrangements with him to remedy the default. The 1st Defendant did not give evidence of particular situations in which this had occurred.

22. Even if Mr Leung had in the past given warnings to the 3rd Defendant when it was in default and a measure of tolerance had been shown to the 3rd Defendant to enable it to remedy such default, I do not find that there arose any legal obligation on the Plaintiff specifically to warn the 3rd Defendant before its facility was withdrawn and repayment was demanded. The express written contractual terms governing the relationship between the parties reaffirmed as recently as 19 February 1998 in the facility letter of that date made clear that the Plaintiff was under no such obligation.

23. In conclusion, the Plaintiff's bank was entitled, in my view, on 27 April 1998 to withdraw the facilities it had offered in its letters of 17 November 19996 and on 19 February 1998 in the light of the terms of those letters and clause 1(B) of the general agreement of 29 August 1989 and (i) the continuing failure of the 3rd Defendant despite reminders to make any attempt to settle the outstanding 4 trust receipts between the 19 February and 24 April and (ii) the new default of the 3rd Defendant to pay two instalment repayments due on 18 March and 18 April despite a reminder sent on 28 March 1998.

24. I do not find that there was any implied legal obligation to give any more specific warning that it would withdraw the 3rd Defendant's facilities.

25. The Plaintiff was also entitled on 14 May 1998 to demand repayment of all sums due and interest in accordance with the terms of clauses 1(A) and (B) of the general agreement of 29 August 1989, clauses 2 and 10 of the mortgage agreements and the facility letters of 7 November 1996 and 19 February 1998.

26. By virtue of Clause 10 of the mortgage agreements the security under the mortgage agreements became enforceable.

27. The third ground of opposition raised by the 1st Defendant in his affirmation was that in early June when he was attempting to negotiate the settlement with Mr NC Tang, an assistant manager of the Plaintiff, Mr Tang had assured him that if he made partial payment to the account, no legal action would be taken against that Defendants. The 1st Defendant said that he had made payments representing 5% of the 3rd Defendant's indebtedness. At the trial, the 1st Defendant put this assertion to Mr Tang in cross-examination in significantly different terms. He suggested that he had asked Mr Tang whether there was any possibility that the Plaintiff would withhold legal action because he was looking for another bank and that Mr Tang had replied that there was some possibility if he "performed good". Mr Tang agreed that he had said that if the Defendants paid all amounts outstanding by way of trust receipts and instalments he would relate the matter to his superiors and that normally they would withhold legal proceedings. The payments subsequently made by the Plaintiff had simply met the overdue instalment payments but not the amounts due under the trust receipts. I accept Mr Tang's account of the conversation but even on the 1st Defendant's account there was no binding undertaking not to take legal proceedings.

28. I find therefore that the Plaintiff is entitled to the relief it seeks.

29. I make the following order:

1. Judgment be entered:-

(a) against the 1st, 2nd and 3rd Defendants for HK$6,396,462.28 and US$38,096.49 (or the Hong Kong dollar equivalent at the time of payment) together with further interest on Overdraft Principal Outstanding in the sum of HK$2,787,357.25, the first HK$2,000,000.00 at the rate of 12.5% per annum and the balance of HK$787,357.25 at the rate of 16% per annum (i.e. HK$1,030.07 per day); on Instalment Loan Principal Outstanding in the sum of HK$1,053,291.50 at the rate of 13.04% per annum (i.e. HK$376.41 per day); on Bills Items Principal Outstanding in the sum of HK$1,314,675.20 at the rate of 16% per annum (i.e. HK$576.30 per day) and on Bills Items Principal Outstanding in the sum of US$28,873.48 at the rate of 15.5% per annum (i.e. US$12.43 per day) respectively from 6 April 2000 until today and thereafter the interest to accrue at the rate and in the manner provided in the General Agreement by customer dated 29 August 1989, the 1st mortgage and the 2nd mortgage below;

(b) against the 1st and 2nd Defendants for possession of the property comprised in the mortgage dated 30 July 1993 and registered in the Land Registry by Memorial No. 5731952 ("the 1st Mortgage"), namely ALL THAT one equal undivided 68th part or share of and in ALL THOSE pieces or parcels of ground situate lying and being at Victoria, Hong Kong and respectively registered in the Land Registry as SUBSECTION 2 OF SECTION A OF INLAND LOT NO. 677 and SUBSECTION 3 OF INLAND LOT NO. 677 ("the Land") and of and in the messuages erections and buildings thereon known as "WING FONG MANSION" Nos. 107, 109, 111, 113, 115 and 117 Second Street ("the Building") TOGETHER with the full and exclusive right and privilege to hold use occupy and enjoy ALL THAT SHOP "B" on the Ground Floor of the Building ("the 1st Property");

(c) against the 1st Defendant for possession of the property comprised in the Mortgage dated 14th June 1996 and registered in the Land Registry by Memorial No. UB6665298 ("the 2nd Mortgage), namely ALL THOSE 36 equal undivided 8,290th parts or shares of an in ALL THAT piece or parcel of ground registered in the Land Registry as INLAND LOT NO. 8364 And of and in the messuages erections and buildings thereon known as "MAIDEN COURT (萬德閣)" ("the Building") TOGETHER with the sole and exclusive right and privilege to hold use occupy and enjoy FIRST ALL THAT FLAT "B-6" on the TWELFTH FLOOR of the Building AND SECONDLY ALL THAT CAR PARKING SPACE NO. 136 of the Building ("the 2.nd Property");

2. Upon the 1st Defendant, the 2nd Defendant and 3rd Defendant paying to the Plaintiff the money hereby ordered to be paid and all other monies (if any) secured to the Plaintiff by the 1st and 2nd mortgages, the Plaintiff (subject and without prejudice to the due exercise of any power of sale for the time being vested in it) do deliver to the 1st Defendant and 2nd defendant possession of the 1st and 2nd Properties referred to in paragraphs (2) and (3) hereto and release to the 1st and 2nd Defendants the security constituted by the 1st and 2nd mortgages as the 1st and 2nd Defendants may agree or this Honourable Court may direct;

3. The 1st, 2nd and 3rd Defendants, do pay the costs of these proceedings on full indemnity basis to be taxed if not agreed;

4. The 1st and 2nd Defendants do within 14 days after service of this Order upon them deliver to the Plaintiff vacant possession of the 1st Property;

5. The 1st Defendant do within 28 days after service of this Order upon him deliver to the Plaintiff vacant possession of the 2nd Property.