XCHRX CHEKIANG FIRST BANK LTD. v. HENG HING ENTERPRISES (HK) LTD. AND OTHERS

HCA19725, 21101 & 21102/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NOS.19725, 21101 & 21102 OF 1998

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J U D G M E N T

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1. This is an appeal by the 1st and 4th defendants from an order by the master whereby summary judgment was entered against the 1st and 4th defendants in the total sum of some $4 million odd in respect of the banking facilities granted by the plaintiff bank to the 1st defendant whereby such debt in the amount aforesaid was incurred. The 4th defendant, being the major and controlling shareholder of the 1st defendant, was the guarantor of the indebtedness of the 1st defendant company to the plaintiff bank.

2. At the hearing of this appeal, a large number of the points which were canvassed before the master had been abandoned, and there are presently two points raised by Mr Li who appears in his personal capacity as the 4th defendant and also speaking on behalf of the 1st defendant.

3. The two points raised are firstly, that the foreign exchange transaction which resulted in a loss of $300,000 odd is a separate matter, not the subject of the loan facility, not mentioned in the Statement of Claim of the plaintiff, and therefore should not be included in the summary judgment sum. The position in relation to the foreign exchange is clearly set out in the plaintiff's various affidavits. This was not a matter that was covered before the master, but what is clear from the affidavits and it is not disputed at the hearing by Mr Li that the 1st defendant company had entered into these foreign exchange forward contract which resulted in this loss. The quantum is not disputed. What is disputed is that they should not be lumped together with the overdraft sum of $700,000 odd, which is the subject of the claim.

4. To my mind, this is not a defence. Page 329 of the Bundle clearly shows the course of the dealings between the parties in relation to foreign exchange transactions - there were numerous transactions over a period of something like a year (from late 1997 to late 1998) - and the losses and gains were debited or credited to the current account. It is true that the losses and gains with the previous transactions had been smaller in scale. That is most probably because the movements of the foreign exchange at the earlier time were not substantial. But when it came to the last transaction, i.e. the contract entered into in relation to the forward selling by the 1st defendant company to the plaintiff bank of a large sum of Japanese Yen, the foreign exchange market moved substantially, resulting in a very large loss - of something like $300,000 odd as I indicated before - to the 1st defendant company. There is no basis for the 1st defendant to contend that such loss should not be debited to its current account and that loss would have to be paid for. Even if Mr Li is correct that that loss should not have been credited into the current account, nevertheless, it would have to be paid for separately, and the company would still be liable. But I do not think there is any substance in the point because the dealing clearly shows that this is how the parties have proceeded. I therefore conclude that there is no merit in the first point taken by Mr Li.

5. I now go on to deal with the second point. The second point is a complaint by Mr Li that the bank, having the benefit of a deposit of something like $2 million odd from, I believe, the 4th defendant, the bank ought to realize that security. And if it had done so, and set-off that deposit against the indebtedness of the 1st defendant, it would result in an interest difference of something like $300,000 odd. The reason for this interest difference is, of course, because under the deposit, the bank pays to the depositor interest, which I imagine is lower than prime. Under credit facilities, whether they be TR or OD, the bank, of course, would charge the 1st defendant an interest rate which would be considerably higher than prime. So the difference between the two interest rates comes to something like over $300,000. Mr Li's point is that the bank should realize the security of the deposit, set it off against the indebtedness and that thereby the total judgment sum should be reduced by something like $300,000 odd.

6. The trouble with this point is that the law is totally against such contention. I think it is well known that the banks have the right not to realize their securities. The famous passage in the judgment of Lord Hoffmann in In re Bank of Credit and Commerce International S.A. (No.8) [1998] AC 214 at 222 sets out the position very clearly. The position is that a secured creditor is not obliged to resort to its security and he has cumulative remedies. This case is a prime example of the working out of the cumulative remedies. The security documents in fact also clearly reinforce this right of the plaintiff bank. Mr Jat has helpfully pointed to those particular provisions and it seems to me that both contractually as well as generally under the law of securities, the plaintiff has the right to refrain from realizing the securities. In the circumstances, there is also no substance in Mr Li's second point.

7. I regret therefore to conclude that there is no merit in the 1st and 4th defendant's appeal which, therefore, must be dismissed with costs.