RE APPLCIATION FOR LEAVE TO APPLY FOR JUDICIAL REVIEW

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HEADNOTE

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                Application for leave for judicial review by one of the creditors of the Bank of Credit and Commerce Hong Kong Limited. No arguable case established. Application for leave refused.

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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JUDGMENT

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1. On the 1st November I dismissed the application of Commodore Electronics Limited (the applicant) heard in chambers for leave to apply for judicial review and said that I would hand down my reasons later.  I am now handing down my reasons in court having regard to the public interest involved.

2. The application relates to the closure of the Bank of Credit and Commerce Hong Kong Limited by the Commissioner of Banking (the Commissioner) on the 8th July and the subsequent presentation of a winding up petition by the Financial Secretary. I shall refer to the Bank either as the Bank or BCCHK.

3. The applicant, is a substantial depositor with the Bank and has claims for sums in excess of US$10,000,000.

4. Upon an application for leave to apply for judicial review, the applicant is required to establish that there is an arguable case.

5. The evidence placed before me consists of an affidavit of Alice Tsui, the controller of the Hong Kong branch of the applicant with a number of exhibits including a policy statement made by the Financial Secretary at a meeting of the Legislative Council on the 9th April 1986, the report by the Commissioner to the Governor dated the 30th July pursuant to s.52(1)(D) of the Banking Ordinance, Cap.155 (the Ordinance) describing the events relating to the Bank up to the appointment of the provisional liquidator on the 17th July and various copies of newspaper and other reports relating to the closure of the Bank and subsequent events.

6. Having regard to the evidence and the importance of the application, I directed that there should be an oral hearing upon notice to the Attorney General. As a result I have had the benefit of submissions by Mr Clifford Smith, counsel for the applicant and by Miss Hartstein on behalf of the Attorney General.

7. The report of the Commissioner reveals that the Bank of Credit and Commerce group consists of a holding company, B.C.C. Holdings based in Luxembourg which owns a number of banking operations around the world. The Bank is a direct subsidiary of the Luxembourg holding company. The Government of Abu Dhabi became the majority shareholder of the group and therefore of BCCHK in 1990. During 1990, BCCHK recorded a loss of $431,000,000 which resulted in its capital adequacy ratio being reduced below the minimum ratio of 11% applied to the Bank under the Ordinance. However, the position was restored in the last week of June by the injection of $125,000,000 of capital by the Abu Dhabi shareholders in the form of a subordinated loan. At that time BCCHK had complied with all the requirements under the Ordinance with regard to capital adequacy and liquidity.

8. During this period the Commissoner was directing his efforts to ensure that the Bank's assets were realistically valued, that it had sufficient capital and liquidity and that its exposure to the rest of the group was limited.

9. The crisis that led to the closure of BCCHK arose very suddenly when the Commissioner's representative in London was informed on the 2nd July that the Bank of England had received a report from the Bank's auditors Price Waterhouse of suspected fraud in the two main subsidiaries of BCC Holdings, BCCI SA which is incorporated in Luxembourg and BCCI Overseas which is incorporated in the Cayman Islands.  Neither of these companies Operates in Hong Kong. NO mention, however, was made that BCCHK was involved in the suspected fraud.

10. On the 3rd July, the Commissioner briefed the Secretary for Monetary Affairs and the Financial Secretary about the situation and thereafter kept them informed. On the 5th July, the Commissioner wrote a memorandum to the Financial Secretary Stating that upon the information available BCCHK was "solvent and viable", but nevertheless, through no fault of its own, could become caught up in the wider problems of the rest of the group. He therefore considered that it might be necessary to exercise his powers under s.52 of the ordinance, to place restrictions on the Bank, appoint persons to advise it in the conduct of its business or even as an ultimate step to assume control of the business either directly or indirectly. The Financial Secretary replied the same day that he considered it was in the public interest for the Commissioner to exercise his powers under s.52 of the Ordinance both for the Bank and its deposit taking subsidiary, BCCI Finance International Ltd.

11. It will now be convenient to set out the relevant parts of s.52 which are as follows :-

                "52.    (1)    Where -

                 (a)       ...

                 (b)      ...

                 (c)     ...

 

the Commissioner, after consultation with the Financial Secretary, may exercise such one or more of the following powers as may from time to time appear to him to be necessary -

 

(A)	to require the institution forthwith to take any action or to do any act or thing whatsoever in relation to its business as he may consider necessary;
(B)	to appoint a person to advise the institution in the proper conduct of its business;
(C)	to assume control of and carry on the business of the institution, or direct some other person to assume control of and carry on the business of the  institution;
(D)	to report the circumstances to the Governor in Council.

12. Following the information that he had received and to the fact that the Bank of England was about to make an announcement concerning the problems of the rest of the BCC group, the Commissioner had to make a decision whether BCCHK should be allowed to open on Saturday morning, the 6th July. The Commissioner's guiding principle in reaching his decision was to act in the best interests of the depositors of the Bank and as to how best to preserve the general stability of the Hong Kong banking system. In deciding to allow the Bank to remain open, he took into account, amongst other matters, that BCCHK appeared not to be involved in the suspected fraud that applied elsewhere and that upon the information available, BCCHK seemed to be financially sound and had the backing of the Government of Abu Dhabi who had provided a letter of comfort on the 27th June and had, injected further capital of $125,000,000 to which I have referred. Taking all matters into consideration and having regard to his assessment that BCCHK was sound and viable, he decided to allow the Bank to open, The decision to open was supported by the general manager of the Bank and its auditors.

13. During Saturday the 6th July, the Commissioner received information that Visa International had decided to block BCCHK credit cards. On the following day, the Bank's examiners price Waterhouse reported that additional provision might be required to cover various liabilities and a sum of $100,000,000 was agreed with the auditors. Requests were then made to the Abu Dhabi Government for a statement to be made in support and to make a further injection of capital. In the absence of such support, it was feared that there might be a run on the Bank on the following Monday having regard to the growing publicity about the problems concerning the rest of the group. The Government of Abu Dhabi however did not furnish a statement of support nor was any further capital injected. This left the Bank without any source of long-term financial support.

14. In his report, the Commissioner at paragraph 33 addressed the issue as to whether the Exchange Fund should be used to provide support which reads :-

15. The Commissioner states that no commitment was given to the public that the Exchange Fund would be used to rescue the bank in paragraph 35 which reads, where relevant, as follows :-

16. The decision to close the bank was taken at a meeting on Monday, the 8th July at 7 a.m. at the Commissioner's office in the presence of member of his staff, advisers appointed from price Waterhouse, the Hong Kong Bank and the General Manager of BCCHK. All those present agreed that the Bank should not open for business. Accordingly the Commissioner took control of the business of the Bank and ordered its closure.

17. The Commissioner then took the necessary steps required under s.52 of the Ordinance that led to the Governor in Council directing the Financial Secretary to present a petition to wind up the Bank.

18. In accordance with s. 52(2) of the Ordinance BCCHK submitted written representations to the Commissioner on the 15th July which were placed with the Commissioner's report before the Governor in Council on the 17th July. After considering the report and taking the advice of members of the Executive Council, the Governor in Council under s .53(1)(c)(iii) of the Ordinance directed the Financial Secretary to present a petition to wind up the Bank. In accordance with the direction a petition was presented on the 17th July to wind up the Bank on the grounds that it is in the public interest. The Official Receiver was appointed to be the provisional liquidator of the Bank on the same day.

19. Since the closure of BCCHK negotiations have taken place with a view to effecting a sale of the Bank which negotiations are still continuing. Meanwhile the hearing of the petition stands adjourned until the 9th December.

20. By the notice of application for leave to apply for judicial review which was filed on the 7th October, the applicant seeks to quash the decisions taken by the Commissioner on the 8th July to close the Bank referred to as the "closure decision" and the decision taken by the Commissioner on the 17th July to make a report to the Governor in council under s.52(1)(d) of the Ordinance referred to as the "report decision". The applicant also seeks to quash the decision of the Governor in Council on the 17th July to direct the Financial Secretary to present a petition to wind up the Bank referred to as the "winding up decision".  The grounds on which relief is sought are as follows :-

                "The closure and report decisions

1.     The closure order was outside the scope of the powers granted by section 52(1)(A) or (C) of the Ordinance, namely:   '(A) to require [BCCHK] to take any action or to do any act or thing whatsoever in relation to its business as he may consider necessary;   ....   (C) to assume control of and carry on the business of [BCCHK], or direct some other person to assume control of and carry on the business of [BCCHK]'.   2.    The effect of the closure order was tantamount to revocation of BCCHK's banking licence, for which special provision is made in the Ordinance: (sections 29 and 30). The powers given by section 52(1)(A) and (B), on the proper construction of that section, are to be exercised only in circumstances where the business of the relevant institution continues.   3.    The Commissioner was required by section 52(1) of the Ordinance to consult with the Financial Secretary before exercising any of the powers given by that sub-section. The Commissioner failed to consult with the Financial Secretary before he made either the closure decision or the report decision. Both decisions were purportedly made pursuant to the powers given in that section and, in the premises, both decisions were made in excess of the jurisdiction conferred by the Ordinance.   4.    Further the report decision was made in excess of the said jurisdiction by reason of the fact that the Commissioner failed to provide BCCHK with a statement in writing of his reasons for exercising the power conferred by section 52(1)(D) as is required by section 52(2).   5.    Over the course of last decade or so the government of Hong Kong has not allowed any bank to collapse to the detriment of its depositors. On 5th July 1991 the Commissioner announced publicly, in response to the crisis affecting Bank of Credit and Commerce International, that-
	(i)	BCCHK was entirely separate from the BCC Group and the operations of BCCHK remain sound and viable;
	(ii)	the office of the Exchange Fund was willing to place funds with BCCHK if required;
	(iii)	in order to protect the interests of depositors advisers were appointed to advise BCCHK in the prudent conduct of its business.
6.    In the premises there existed on the part of the depositors of BCCHK, including the Applicant, a legitimate expectation that if BCCHK were in a financial crisis the government would act in the best interests of the depositors and would not allow the depositors to suffer as a result of such crisis.   7.    In arriving at both the closure decision and the report decision the Commissioner failed to give any or sufficient weight to such legitimate expectation and thereby acted unfairly and/or unreasonably and/or abused the power or powers conferred by the Ordinance. In the premises the said decisions were made in excess of jurisdiction: see generally Wade on Administrative Law, 6th edition, pages 423-4.   8.    Further the said decisions were made unreasonably having regard to the fact that BCCHK was at all material times solvent; that its total assets and deposits were of the order of HK$11 billion as compared with a shortfall in provisions of only HK$100 million; that the Exchange Fund was ready to, and did, provide assistance; that the majority shareholders in Abu Dhabi had made a cash injection of HK$125 million into BCCHK on 5th July 1991 and had provided a letter of comfort demonstrating a continued willingness to support BCCHK if necessary. In the premises the said decisions are in excess of jurisdictions: see generally Wade, op. cit., at pages 407 et seq.   The winding-up decision   9.    The Applicant relies on the grounds 5, 6, 7 and 8 above in relation to the winding-up decision as well as the closure and report decisions, (mutatis mutandis). In addition the applicant relies on the further ground appearing below.   l0.    In making the winding-up decision the Governor in Council acted unreasonably and/or on the basis of a false assumption by taking into account the supposed fact that the majority shareholder of BCCHK, namely the government of Abu Dhabi, had refused to confirm its letters of comfort referred to above when in fact it had never been requested so to do."

21. I reject the submission put forward by Mr Smith that the closure order was outside the scope of the powers of s. 52(l)(A) or (C) for the ordinary and natural meaning of the words clearly cover any action taken by the Commissioner upon taking control. Further, the interpretation that the powers conferred by s.52(1)(A) and (B) are restricted to the continuation of the business can only be described as unrealistic and wrong.

22. By ground 3 it is contended that the Commissioner did not consult with the Financial Secretary under s .52(1) before he made the closure decision and the report decision. In fact this assertion was contrary to the evidence for the Financial Secretary authorised the Commissioner to take action under s.52 by his letter of the 5th July see ex. ATWY3 enclosure IB. Ground 4 which alleges that the Commissioner failed to comply with s.52(2) by failing to provide the Bank with a statement in writing of his reasons for exercising the power conferred by s.52(1)(D) is again contrary to the evidence for the Bank in its letter of the 15th July which sets out the written representations that were placed before the Governor in Council acknowledged a letter from the Commissioner dated the 9th July and makes specific reference to the section under which the Commissioner exercised his powers, see ex. ATWY3 enclosure VIII.

23. Grounds 5, 6 and 7 relate to a legitimate expectation on the part of the depositors of the Bank including the applicant that the Hong Kong Government would act in the best interests of depositors and would not allow the depositors to suffer as a result of the crisis. In support of his argument, Mr Smith referred to the speech made by the Financial Secretary at the meeting of the Legislative Council on the 9th April 1986 which included the following statements:-

".... Let me, therefore, by way of illustration turn back to 1983 to indicate why a relatively small banking collapse could well affect directly or indirectly the exchange value of the Hong Kong currency. It is my judgement, which is fairly widely shared, that if the Government had not rescued Hang Lung Bank at that time, not only could other banks have collapsed as the ripples spread (which is an ever present consideration) but other important sectors of the economy would also have been set at total risk. Moreover such problems might not have been contained within Hong Kong and we have to have regard for our international responsibilities. In my view in the circumstances at that time not only would the currency have been affected but it would probably have collapsed altogether. Whatever the arguments of critics who cannot know the full facts of the situation, this would seem to me to be an absurd risk to take when it could be avoided quite simply by the prudent use of adequate reserves. The man in the street has been protected throughout.   ...........................................................           Sir, I state again that the Government is committed to preserving the prosperity and stability of Hong Kong. The reserves of the Exchange Fund in connection with the authorised powers and indeed express duties of the Commissioner of Banking and the Financial Secretary with regard to the Banking Ordinance and the Exchange Fund Ordinance respectively form a lender of last resort - a quasi central government bank such as exists in so many other places in the world. Such an institution in addition to many other confidential affairs must be ready when essential to consider support for local banks if and when they run into troubles. Each case is different and must be handled on an ad hoc basis. No banker and certainly no shareholder in a local bank should be lulled into an imprudent belief that if he gets into trouble Exchange Fund support is inevitable. A judgment must be made in each case, and it is the interests of depositors, not those of shareholders, directors or managers of banks which must take priority.  This judgment also has to take into account possible ripple effects. One day - and the sooner the better -  there will not be support for a small bank in trouble. We will be ruthless in this regard provided that it does not result in serious damage to the prosperity and stability of Hong Kong. We have all along taken this approach to the problems of DTC's.           There is no precedent. Each case stands on its own. My message is clear and will I hope be understood.   ..................................................................................           I have said many times that Hong Kong depends utterly on trade and industry. Sound banking is their backbone. The integrity of the economic system of Hong Kong could not withstand a series of major local banking problems. It is very difficult to differentiate between major and minor. The onus rests on the Financial Secretary. Hong Kong has come through a rough four years since the collapse of the DTC Dollar Credit in 1982 which was a harbinger of banking problems. During the difficult following years we have experienced minimum real trouble.  Certainly no depositor has suffered and we must be concerned about the savings of the man in the street.  Thanks in part to tight fisted and by no stretch of the imagination guaranteed use of the Exchange Fund, which nevertheless we can clearly well afford, Hong Kong seems now to be sailing into smoother waters. The Commissioner of Banking believes that we are about clear of serious local bank problems. I hope that he is right. There is no way of so guaranteeing   ..................................................................................           ......Depositors' interests are paramount."

24. The Financial Secretary quite clearly in that policy statement emphasised that there is no precedent for the government acting to rescue every bank in the event that it should encounter financial difficulties or collapse, but that each case would be considered on an ad hoc basis. Although the interests of the depositors are paramount, it is abundantly clear that no depositor could have a legitimate expectation that in the event of failure, the government would automatically come to the rescue and bail out every bank. Each case will depend upon its own circumstances.  Indeed the proposition that a legitimate expectation should arise each time that a bank finds itself in financial difficulties or collapses, having regard to the number of banking institutions operating in Hong Kong, defies sound common sense.

25. Although the Commissioner was of the opinion that the Bank remained sound and viable two days before the closure, that opinion was clearly based upon the information available to him at the time, but the situation changed during the course of the weekend when the Government of Abu Dhabi failed to give its support. It is further apparent that there was no commitment or undertaking given by the Commissioner to the public that the Exchange Fund would be used for the purpose of rescuing the Bank as has been contended in the grounds for relief. Any use of the Exchange Fund was limited to the provision of funds on normal commercial terms if it was considered to be necessary. There was no reference to the Exchange Fund being used to provide capital support as distinct from providing liquidity. Accordingly I reject the argument advanced that there was any legitimate expectation as contended.

26. By ground 8 it is alleged that the Commissioner acted unreasonably in closing the Bank for the reasons set out. However, there was not a tittle of evidence to support this allegation, but on the contrary clear evidence that all possible care had been exercised in reaching the decision which was as I have said supported by all informed parties including the general manager of the Bank.

27. As I have found that there was no merit in grounds 5, 6, 7 and 8 with regard to the closure and report decisions, ground 9 relating to the winding up decision must also fail.

28. In respect of the winding up decision, a further ground, the 10th ground, has been put forward that the Governor in Council acted unreasonably and/or on the basis of a false assumption by taking into account the supposed fact that the majority shareholder of BCCHK the Government of Abu Dhabi had refused to confirm its letters of comfort when it had only refused to provide a letter of support and a capital injection. This ground arises from a statement that the Governor made at Kai Tak airport on the 30th July when he was leaving Hong Kong to go on annual leave. On the assumption that the Governor was in error, it does not afford any evidence to justify the applicant's contention that the Governor in Council acted unreasonably in making the decision to direct the Financial Secretary to present the winding up petition. Whether or not the statement was correct is in any event a distinction without a difference. The reliance upon this evidence can be properly described as scraping the bottom of the barrel.

29. In coming to my decision I placed no reliance upon any of the newspaper reports that were exhibited to the affidavit of Alice Tsui which amounts to double hearsay and they are therefore inadmissible.

30. As the evidence adduced did not reveal an arguable case the application for leave was dismissed with costs.