DBS BANK (HONG KONG) LTD v. HANLOY LTD

CACV 207/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL No 207 OF 2014

(ON APPEAL FROM HCMP NO 165 OF 2014)

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D E C I S I O N

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1. This is an application for security for costs in relation to an appeal which is to be heard in August this year. The applicant is the respondent in the appeal, DBS Bank (Hong Kong) Limited. The appellant is Hanloy Limited, which was the 2nd defendant in the proceedings below.

2. The proceedings below concerned an application under Order 88 for summary judgment in respect of originating summons proceedings for the enforcement of a mortgage over a property in Prince Edward Road in Kowloon. 

3. The underlying facts are fairly straightforward.  In essence, the bank lent money to the 1st defendant in the proceedings below, a company called Yue Li (HK) Engineering Limited.  The loan to the 1st defendant was secured by a mortgage over the property that was provided by the Appellant, and also by guarantees by persons by the name of Lee Kin-wah and Lee Hing-tong, who were respectively the 3rd and 4th defendants in the proceedings below. 

4. This appeal is brought by the 2nd defendant alone.  Following a hearing on 28 August 2014, Mr Justice Suffiad handed down the decision on 26 September 2014 in which he granted the bank’s application for summary judgment under Order 88.  He entered judgment in favour of the bank in the amount of slightly over HK$11.5 million in respect of the outstanding principal amount of the loan plus accrued interest down to the date of the judgment.  He also ordered that interest should accrue on the judgment sum at the judgment rate thereafter, and that costs should be awarded to the bank.

5. Initially, the costs order nisi provided for costs to be awarded on a party and party basis.  However, following an application by the bank to vary that costs order nisi, the 2nd defendant agreed to the costs order nisi being varied to provide for the costs below to be awarded to the bank on the indemnity basis, having regard to the terms of the mortgage which provided for complete indemnification to the bank in respect of the costs of enforcing the mortgage.

6. In the court below, the 2nd defendant essentially ran three points in opposition to the application for summary judgment.  The first was an argument that there had been an element of undue influence in relation to the circumstances in which the 2nd defendant came to execute the mortgage, in that its sole shareholder, who had executed a resolution approving the taking out of the mortgage, happened to be the wife of the sole director of the company, did so under the undue influence of her husband who, it was said, had not explained to her at all any of the reasons for or terms of the proposed mortgage.  It was also suggested that there was an element of conflict of interest between the interest of the 2nd defendant mortgagor, and the 1st defendant borrower, in relation to the loans in question. 

7. The second defence that was put forward was a suggestion that it was not open to the bank to advance further funds beyond the amount originally agreed, which was intended, it was said, to consist only of an instalment loan of some HK$3.5 million, so that any excess over that loan should not be properly recoverable under the mortgage.

8. The third argument run at first instance related to the validity of the director’s resolution by which the mortgage was authorised, it being said that since the company’s memorandum and articles of association, which were public documents, provided that a quorum for a director’s meeting should consist of two directors.  The fact that it was executed by a single director, albeit at a time when the company had, on the basis of the records lodged with the Companies Registry, only one director, meant that it was nonetheless an invalid resolution and so not binding on the company.

9. The judge below rejected all of these arguments, and entered summary judgment in the bank’s favour, as I have noted.

10. The arguments that have been raised in the notice of appeal are essentially the same, although there is a slight variation to the second argument.

11. The first argument is, as it was below, the argument based on alleged undue influence. 

12. The second argument is a slight variation of the argument based on the increased loan.  In addition to suggesting that there might be some questions as to whether it was open to the bank to increase the facilities beyond those initially indicated, and to fail to explain to the sole director of the company the fact that the mortgage was an all moneys mortgage, it is now said, in addition, that there may have been an element of, at least, negligence, and perhaps something more serious in the way of a conspiracy between the bank and the 1st defendant borrower, to enable the 1st defendant to obtain substantially larger facilities than had originally been envisaged, without properly considering the interest of the mortgagor and guarantors, and without considering the wisdom of increasing the amount of loans outstanding to the borrower, having regard to the security that was actually available.

13. The third argument that is put forward is the same as the third argument below in relation to the validity of the resolution by the sole director authorising the company to enter into the mortgage. 

14. Mr Kwan, who appears as a director of the 2nd defendant before me today by leave granted for the purpose of this hearing only by the Master, sought to persuade me that each of these three grounds, either singly or together, were so strong that prospects of success on appeal would be very high, such that it would not be appropriate to order security for costs at all. 

15. I have given careful consideration to each of the points that has been put forward, but with respect, I am unable to see that any of the points are such as can properly be described as “very strong”.  It would not be appropriate for me to express any views one way or another as to the actual merits of these points, and I refrain from doing so. However, I am quite satisfied that it cannot be said that the prospects of success in relation to these points, even though they may be arguable, are not such as to justify the court in refusing to make an order for security if it should seem to the court that absent such security, the respondent might be left at real risk of having in its hands an unenforceable order for costs, if it is to succeed in resisting this appeal.

16. The second point that was raised by Mr Kwan for the 2^nd defendant was that the existing value of the property that was the subject of the mortgage was sufficient to provide effective security for the amount of costs that would be likely to be incurred in relation to this appeal.  In support of this, the 2^nd defendant put forward a valuation by a valuer commissioned by it, which suggested that the open market value of the property was some HK$13 million. 

17. Against this, the bank has indicated that its own valuation, based on a forced sale, is substantially lower, in the amount of some HK$9.78 million.  The bank also points out that the amount of the judgment below is just over HK$11.5 million, by the time that the appeal is heard, interest would have accrued on that amount at judgment rate for a period of just under one year, adding a further $800,000-odd on the basis that the sum is not paid beforehand,  Finally, the bank points out that its costs in the proceedings below, which it is going to recover on an indemnity basis, came to some HK$650,000-odd.  These sums, added up, come to HK$13 million-odd which exhausts the value of the property even on the valuation put forward by the appellant.

18. In answer to this, Mr Kwan suggested that it would be inappropriate to take account of the $650,000 in costs that were incurred below.  With respect, I cannot see why this should be so.  At the end of the day, whether or not there is any value left in the property after all the debts owing to the bank are satisfied is a question that has to be assessed on the basis of the amount of those debts.  The costs that are incurred below are provided for under the mortgage to be part of the sums recoverable under the mortgage.  The bank would therefore appear to me to be entitled to deduct the costs that it has incurred in enforcing its rights under the mortgage out of the proceeds of sale.  Those costs, which are to be taxed on the indemnity basis, have been stated by the bank to be $650,000, and for present purposes, I think it appropriate to proceed on the basis that they will recover that amount.  But even if there were to be some reduction in that amount, it would provide, at best, a relatively small reduction below $13 million when the judgment sum, interests and costs are added up.

19. It is also fair to bear in mind that the estimate of value by the valuer appointed by the appellant is no more than that, an estimate of the price that the property is likely to fetch if sold on the open market.  There is no certainty that it will actually achieve that sum.  It would therefore be unfair to and unsatisfactory for the bank to be left in a situation where it might run the risk, very possibly a real one, that the amount of money it might obtain at the end of the day from the sale of the property may not be sufficient to provide adequate security for the costs of this appeal, given that I have held that it is, in principle, entitled to such security. 

20. It also seems to me that the valuation put forward by the company, being, as it is, a valuation on an open market, willing buyer, willing seller basis, is not the appropriate valuation to use for present purposes.  It cannot be disputed that the property is subject to a mortgage which is in force, and if the property is sold at the end of the day, which it presumably will be if the appeal is unsuccessful, this will be on a mortgagee sale basis, that is, a forced sale.  It is well known that a property sold under forced sale conditions is likely to fetch less than one sold in the open market as between a willing buyer and willing seller, not least because there is not the luxury of time to wait for a more attractive offer to come along, but also because the fact that it is a forced sale is something that is known to buyers, and that is, in itself, likely to depress to some extent the price that buyers are prepared to pay for the property.

21. Mr Kwan suggested that it would be possible to set a reserve price for the property, and that that reserve price should be set on the basis of the market value in order to be fair to the mortgagor.  But with respect, at the end of the day, the question of the way in which the property is sold is a matter for the mortgagee.  The mortgagee is not generally bound to pay full regard to the interest of the mortgagor.  It must act reasonably and prudently in selling the property, and bearing in mind that it is a forced sale, it is likely that the reserve price would be set by reference to the forced sale rather than the open market value. 

22. It might be set slightly higher than that value if it is thought appropriate to do so, but unless the sale is conducted in such a way as to amount to a negligent sale, which I have no reason to think it will be, there is no guarantee that the sale by the mortgagee would fetch anywhere near the $13 million that the appellant suggests that the property is worth.  In those circumstances, it seems to me that the value of the property does not provide any basis for declining to make an order for security. 

23. That leads to the question of the quantum of the security that should be ordered.  The initial amount sought by way of security was some HK$780,000, subsequently revised to some HK$719,000, split more or less evenly between the costs of this application and the costs of the appeal proper.

24. With respect, it seems to me that that is an extremely large amount even allowing that the basis for taxation, or the basis on which the costs should be estimated, would be on the assumption that the bank will succeed in obtaining an order for indemnity costs on the appeal, just as it did below. 

25. On this point, Mr Kwan suggested that there was no reason why indemnity costs should be ordered in respect of the appeal, pointing out that the basis of taxation of costs was a matter within the discretion of the court, and the Court of Appeal would generally only order indemnity costs if the appeal was one which should not properly have been brought, or was prosecuted in an unreasonable way.

26. With respect, this seems to overlook the fact that the terms of the mortgage provide, by agreement, for an indemnity in relation to the costs of enforcing the mortgage.  In this case, that would seem to me to extend the costs of an appeal, which is forced upon the bank by the mortgagor seeking to appeal against the judgment that the bank has obtained in the court below.

27. That being the case, I think it is appropriate to proceed on the basis that there will be an indemnity costs taxation in seeking to assess the amount of the costs for which security should be ordered.  

28. As to that, having considered the very detailed skeleton bill, and the very detailed objections and replies thereto that have been lodged by the appellant and the bank respectively,  I have come to the view that the appropriate amount of security to order in this case should be arrived at by allowing for about two days, or 13 hours, of time on the part of one partner (in this case, the junior of the two partners mentioned in the Bank’s skeleton bill, who appears to be the person who has the primary conduct of the matter), at the rate that is claimed, $5,000, for the costs of the banks’ solicitors, in respect of the costs of this particular application, with an additional 13 hours in respect of the appeal proper. 

29. As far as counsel’s fees are concerned, I have indicated that these appear to me to be reasonable.  There will also be a small amount in respect of scale costs coming to a total of approximately HK$5,000.

30. By my reckoning, the total amount of security to be ordered, including security in respect of the costs of this application, would be $330,000, representing $195,000 in total for two briefs for counsel; $130,000 in respect of the solicitors’ costs and charges, and $5,000 in relation to scale costs. 

31. I will therefore order that security be provided by the 2^nd defendant to the bank for the costs of this appeal in the amount of HK$330,000.  As far as the precise terms as to the time within which, and the form in which, such security is to be provided, are concerned, I will hear the parties.

32. In relation to the costs of this application, as I have indicated in the course of argument to Mr Man, the appropriate order, I think, would be that costs of this application should be costs in the appeal, notwithstanding the fact that there has been a fairly substantial reduction in the amount of the costs for which security has been ordered, having regard to the fact that the application was resisted fully by the 2^nd defendant.