XCHRX HUA CHIAO COMMERCIAL BANK LTD. v. KEEN LLOYD INTERNATIONAL (HOLDINGS) LTD. AND ANOTHER

HCMP7183/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO.7183 OF 1999

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J U D G M E N T

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1. This is an appeal by the defendants from the judgment given by the master against the defendants in favour of the bank for the sum of HK$10 million odd. The appeal is brought by the defendants against that judgment and at the hearing before me a number of points have been made by the counsel for the defendants. It might be helpful if I set out briefly the history that leads to the dispute.

2. The bank in question granted, in 1998, pursuant to a revised facility letter dated 23 February 1998, to the borrower, the 2nd defendant facilities stated in the facility letter. The loan was granted based on securities which included a charge/mortgage on the property owned by the 1st defendant. The facility letter contained a provision under clause (5) of "Others Terms and Conditions" which said :-

"(5) Our bank has absolute right from time to time to vary, amend and cancel the terms and conditions of the aforesaid banking facilities. The aforesaid banking facilities are subject to our customary overriding right of repayment on demand and our periodic reviews."

The facility letter was countersigned and returned by the 1st and 2nd defendants to the plaintiff as their agreement to the terms set out therein.

3. The Charge was then executed on 8 June 1998 pursuant to the revised facility letter and the Charge contains some key provisions. Clause 2.01 provides that :-

"... the Mortgagor and the Borrower HEREBY JOINTLY AND SEVERALLY COVENANT with the Lender that subject as hereinafter provided, they will ON DEMAND by notice in writing of the Lender made to the Borrower and/or the Mortgagor PAY make good and discharge to the Lender the Secured Indebtedness, that is to say :-

... "

The "Events of Default" provision under clause 5 said that :-

"5.01 It is hereby agreed and declared that if :-

(i) either the Borrower or the Mortgagor makes default in the payment of the Secured Indebtedness or any part thereof following demand duly made; or

... "

Demand was made, pursuant to the provision to the Charge, by a letter of 26 October 1999. There are two separate letters, one to the 1st defendant and one to the 2nd defendant. As no payment having been made, an originating summons in this action was commenced on 19 November 1999.

4. What then followed after the issue of the originating summons was that some discussions between the plaintiff and the defendants leading to the payment to the bank on 26 November 1999, a payment of US$125,206.82, and another payment of almost the same amount was made but on 10 December 1999. The property was sold in late 2000 for HK$10.38 million and this sale took place after an independent valuation was obtained which showed the property to be valued at HK$8.5 million. The shortfall after the sale of the property is now the subject of the claim in the sum of about $10 million odd by the plaintiff against the two defendants. It should be pointed out that the property was sold as a result of the surrender of the mortgaged property by the defendants to the plaintiff around mid-June 2000.

5. The case for the defendants was argued by Mr Sussex primarily on the basis that the court should not give judgment under the procedural regime of originating summons because there is a serious issue of fact which ought to be tried. The issue of fact or the issue of defence raised by the defendants is the allegation that, in 1997 or some time before the actual granting of the loan, there was an oral promise or agreement given by the bank officer of the plaintiff, Mr Ho, to Mr Chun of the defendants, to the effect that the plaintiff would be pleased to grant the facilities, should the defendants acquire this property from its existing customer and that a five-year facility would be given. It is the reliance on this five-year facility which forms the central plank of the defence of the defendants.

6. It is said that, having regard to this oral promise and agreement, the defendants purchased the property and were granted the loan and believed that the loan was on the basis of a five-year definite term. It was said that an oral assurance was given by Mr Ho of the plaintiff after the receipt of the revised facility letter by the defendants that the demand provision in the facility letter would not be relied upon or, in other words, that the defendants would have a five-year loan facility. Reliance was placed not only upon the affidavit of Mr Chun but also on an affidavit of Mr Leung.

7. The question before the court is whether the allegation that had been made is a bona fide fact which is believable. The commercial reality at the time is that the defendants were not customers of the plaintiff. They came to the plaintiff as a result of their being found to want to buy the property from the plaintiff's other customer, the previous owner of the property. Is it credible that in these circumstances, a bank officer would give an oral promise and say "I will give you facility for a definite five-year term"? I do not believe that it is capable of belief, and that is clearly borne out by the facility letter which makes it very clear that the bank, like most banks in Hong Kong, adopted the practice of having its overriding right to terminate the facility on demand.

8. The allegation is that there was oral assurance given that the facility letter provision of payment on demand can be ignored. This was followed by a subsequent lawyer-prepared Charge where the same demand provision was clearly set out. I think those surrounding circumstances clearly show that this bold allegation even though made by two separate persons is not capable of belief. I think that view of mine is reinfored by the subsequent conduct of the parties. When the demand letter was made, not a single word was said by the defendants about this oral promise of definite five-year term. If there had been an agreed five-year term, that would have become the forefront of a response by the defendants to the demand. Instead, arrangements were made by the defendants to pay by instalments. The first time this allegation surfaced was when the plaintiff decided to proceed with this Action after there was a substantial shortfall following the sale of the property.

9. Having regard to all the circumstances, I have no doubt that there is no bona fide fact to dispute. I am of course aware that on an interlocutory matter such as this, it is not the function of a court to indulge in a mini-trial on affidavits and that I must warn myself against being too robust or not having sufficient regard to the interests and arguments advanced on behalf of the defendants. But on the other hand the court must have regard to commercial reality and the realities of life. I think the allegation of the oral promise is simply incredible and, I reject that defence totally. As there is no factual basis for this defence, it is not necessary for me to consider the interesting but difficult question of the collateral agreement which seeks to circumvent or to undermine the main written agreement, namely the Charge and I would not be so.

10. Mr Sussex also raised in defence the question that there had been a sale at an undervalue. I think the material before me clearly shows that the bank had acted properly. There was a difficult market. The bank had taken the appropriate step to obtain a proper valuation. It is within its powers under the Charge to sell by private treaty and I find no sufficient material to say that it had acted negligently or in breach of the contract. I therefore also reject any defence based on undervalue.

11. There is finally a slight suggestion about the quantum of the final figure claimed by the plaintiff. The amount claimed is verified on affidavit by the plaintiff. There is nothing from the defendants to suggest why these figures are incorrect. There is no correspondence and no material which the court can rely on to reach a conclusion that judgment should be withheld against the plaintiff on this matter of quantum.

12. I therefore conclude that the judgment in the court below is correct and that the appeal of the defendants therefore must be dismissed with costs.