CLH GROUP (HK) LTD AND OTHERS v. STANDARD CHARTERED BANK AND ANOTHER

HCA 1622/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1622 OF 2016

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And

HCMP 2687/2016

MISCELLANEOUS PROCEEDINGS NO 2687 OF 2016

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And

HCMP 2688/2016

MISCELLANEOUS PROCEEDINGS NO 2688 OF 2016

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(Heard Together)

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DECISION

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1.  There are 3 parallel applications by summonses issued in 3 sets of proceedings before the court. The applicants are the plaintiffs in HCA 1622/ 2016 (“the writ action”), the 1^st and 2^nd defendants in HCMP 2687/2016 (“the 1^st mortgage action”) and all 3 defendants in HCMP 2688/2016 (“the 2^nd mortgage action”) (collectively “the applicants”). At the conclusion of the hearing the decision was reserved which I now give.

Background facts

2.  On 20 June 2016, the plaintiffs, namely, CLH Group (HK) Ltd (“CLH”), Hunter Socks & Apparel International Limited (“Hunter”), Wu Wing Che Deven (“P3”), Wu Tik Yan Terence (“P4”) and Ease Keen International Limited (“Ease Keen”) commenced the writ action against Standard Chartered Bank (“the London bank”) and Standard Chartered Bank (Hong Kong) Limited (“SCBHK”) for rescission and/or damages in respect of certain foreign exchange derivative agreements (“the FX derivative agreements”) into which either CLH or Hunter had entered with the London bank.

3.  P3 and P4 are siblings (collectively “the siblings”).  P3 is the sole shareholder and director of CLH a company incorporated in Hong Kong engaged in the business of trading garment products. The siblings were all times equal shareholders and directors of another Hong Kong company, Hunter, engaged in the business of trading knitted socks.  The siblings are also directors of Ease Keen, a Hong Kong company which is their vehicle for holding investment properties.

4.  According to the plaintiffs, since about 2010 SCBHK has been one of the main bankers for CLH, Hunter and also their related companies, namely, Hunter Socks Knitting Factory (HK) Ltd (“Hunter Knitting”) the 3^rd defendant in the 1^st mortgage action and Chong Luen Hing Garments Limited (“Chong Garments”) the 3^rd defendant in the 2^nd mortgage action.

5.  The banking relationship between CLH and SCBHK dates back to at least February 2010 as there is a credit facilities letter issued by SCBHK on 25 February 2010 to CLH.  Shortly thereafter, on 1 March 2010, CLH entered into an ISDA 2002 Master Agreement following oral representations made by one of SCBHK’s representatives (Ms Tracy Cheng).  The counterparty to the Master Agreement was the London bank.  Hunter entered into a similar agreement on 12 May 2012.

6.  It was said that the representations made orally were to the effect that the FX derivative product was of extremely low risk and would help their trading businesses through reducing foreign exchange costs (“the 1^st set of representations”).  According to CLH/Hunter, in fact the FX derivative product was highly risky with unlimited downside risks when potential returns were capped.

7.  On 22 March 2010, SCBHK as lender, Ease Keen as mortgagor and Hunter Knitting as borrower entered into a tri-partite legal charge over a flat in Mei Foo Sun Chuen (“the flat”) owned by Ease Keen to secure all indebtedness owing by Hunter Knitting to SCBHK.  It was subsequently varied by a deed of variation dated 11 August 2011 adding Hunter as additional borrower for facilities granted to Hunter which confirmed that the flat was security for all monies owed by Hunter Knitting and Hunter to SCBHK.

8.  On the same day, 22 March 2010, SCBHK as lender, Ease Keen as mortgagor, CLH and Chong Garments as borrowers entered into a similar tri-partite legal charge over a flat and car park situated in The Waterfront, 1 Austin Road West (“the Waterfront property”).

9.  Then over the course of 2010 to 2014, a succession of SCBHK’s relationship managers represented on various occasions that the FX products would not affect the trade facilities of, inter alia, CLH and Hunter with SCBHK, that they were tailored to suit their requirements to pay PRC suppliers in CNY currency, drew parallels with other SCBHK’s customers in the manufacturing/trading industry and assured them that there would be no downside risk for CNY even if it depreciated over time.  They represented that the London bank or SCBHK would be prepared to roll over the FX derivative products thus deferring FX losses arising from any depreciation (“the 2^nd set of representations”).  Those representations were also said to be false.

10.  When CLH found itself unable to meet certain settlement obligations in relation to certain FX derivative transactions in February 2016, SCBHK’s representatives initiated negotiations with the siblings for settlement and assured them that whilst the negotiations were ongoing, SCBHK would continue to support CLH and Hunter’s businesses and would defer enforcement of the banking facilities (“the Assurance”).  In early March, SCBHK also agreed to restructure the facilities extended to CLH and Hunter so that their combined financial resources could be considered together (“the Common Agreement”).

11.  The proposed restructure was more complicated than had been anticipated.  On 23 March 2016, SCBHK came up with a global settlement proposal (that is to say, one that encompassed both the London bank and SCBHK) and requested documents for credit review.

12.  Meanwhile, in reliance on the Assurance and the Common Agreement that existing trade facilities would continue, CLH and Hunter had accepted new orders.

13.  The following events then occurred:

(a) SCBHK abruptly terminated all banking facilities of CLH and Hunter without notice on 1 April 2016, and demanded immediate repayment by CLH/Hunter;

(b) the London bank unilaterally terminated on 29 April 2016, the outstanding FX derivative agreements as of 4 May 2016, unilaterally assessing (on 10 May 2016) early termination costs (which were significant) against Hunter and CLH respectively; and

(c) SCBHK wrongfully debited the accounts of the siblings on 6 June 2016 to set off the outstanding amount of CLH and/or Hunter’s trade facilities.

14.  CLH/Hunter’s case is that they suffered loss and damage including consequential losses arising from the disruption of cash flows and, but for SCBHK’s acts, they would have been able to pay or settle any indebtedness as may have fallen due.  The alleged indebtedness of CLH/Hunter had in fact arisen out of the wrongful acts of SCBHK.

15.  Approximately 4 months after the commencement of the writ action, on 6 October 2016, SCBHK brought the 2 mortgage actions, one against Ease Keen (the mortgagor) and Hunter and Hunter Knitting (the borrowers) and the other against Ease Keen (the mortgagor) and CLH and Chong Garments seeking to enforce the mortgages.

The 3 summonses

16.  The plaintiffs’ consolidation summons seeks an order:

(a) that the writ action be consolidated with the 1^st and 2^nd mortgage actions with the writ action being the lead action; or

(b) that the 3 actions be tried at the same time; or

(c) that the writ action be tried in such manner as the court should think fit.

17.  In the 1^st mortgage action, Ease Keen and Hunter (being respectively P5 and P2 in the writ action) seek an order that:

(a) the 1^st mortgage action be stayed pending determination of the writ action; or alternatively

(b) the 1^st mortgage action be converted into a writ action and the actions consolidated with the writ action being the lead action; or

(c) the 3 actions be tried at the same time; or

(d) the 1^st mortgage action be tried immediately after the writ action before the same judge; or

(e) as the court may deem fit.

18.  In the 2^nd mortgage action, the defendants (being respectively P5, P1 and Chong Garments) seek relief that is similar to the relief sought in the 1^st mortgage action.

19.  In brief, the applicants’ case for consolidation is that (1) there is significant overlap of the parties to the writ action and the mortgage actions; (2) common questions of law and/or facts arise in all 3 actions; and (3) the right to relief claimed in respect of the writ action and in respect of the mortgage actions arise out of the same series of transactions.

20.  Mr Kok, counsel for the applicants submitted that, in any case, the 2 mortgage actions should be converted into writ actions because of the factual disputes involved.

21.  The applicants relied heavily on the judgment of DHCJ Sakhrani in DBS Bank (Hong Kong) Limited v Hunter Socks & Apparel International Limited & Ors, HCMP 2241/2016 (unreported, 4 September 2017) (“the DBS case”) for their consolidation application.  It was submitted that that case involved a materially identical application on essentially the same set of facts.  The factual similarity is apparent from a perusal of the facts of the DBS case alongside the statement of claim in the writ action.  While there are minor differences in one or two respects mentioned below, they are immaterial for present purposes.

22.  In the DBS case, the judge held that DBS’s claim under the mortgage action by an originating summons could not be summarily determined and ordered that (i) the originating summons should be converted into a writ action and (ii) the mortgage action be consolidated with the writ action for the determination of the disputes as to the relevant FX derivative agreements.  The applicants seek similar relief.

The London bank’s opposition

23.  Mr Li, counsel for the London bank, explained that SCBHK is not a branch of the London bank.  There is no parent/subsidiary relationship between the London bank and SCBHK.  Both the London bank and SCBHK are HK licensed banks, held separately under Standard Chartered plc the listed entity in London.

24.  Mr Li took issue with the applicants’ submission that the operation of the FX derivative agreements was “inextricably linked” to the banking facilities granted by SCBHK to CLH/Hunter for their trading business.  He sought to demonstrate that there was no such linkage from the operations of the accounts.

25.  The Hunter facility letter for example showed that SCBHK offered Hunter facilities for (1) overdraft; (2) trade finance; and (3) short-term money market loans. (1) and (3) were loans made in HKD whereas facilities for trade finance were expressed in USD.  As at the date of the 1^st mortgage action, the amounts due in respect of overdraft and short-term loans constituted roughly ⅓ of the total amount owing to SCBHK and the remaining ⅔ for trade finance.  Mr Li then proceeded to make good his proposition that trade finance facilities are not necessarily routed through the customer’s bank account.  For example, letters of credit would not appear in the customer’s bank statements. 

26.  Whilst I would accept that loans for trade financing would not necessarily be routed through the customer’s account, it does not mean that it never happened.  As Mr Li fairly acknowledged, CLH’s USD savings account statement for November 2015 shows a deposit made on 23 November that corresponds exactly to the amount advanced by SCBHK under the facility for trade finance.  2 other entries made on 24 November taken in the aggregate also correspond exactly to the amount shown in respect of a “new deal” shown in the table of interest calculations prepared by SCBHK and might possibly be taken to be another instance.

27.  I note in passing that the entries recorded under the column headed “Description” in the bank statement as regards the 3 deposits referred to in §26 above appear to be transaction references.  What is striking is that all the transaction references start with the initials “TF” followed by a series of numbers which (possibly because of the proximity of the dates) are sequential.  The other striking feature is that one finds the digits “315…” immediately after the initials “TF” and that the same series of 5 alphabet/numbers appear in each of the 3 deposits to which reference was made.  In fact, a perusal of CLH’s USD savings account statements that constitute exhibit “WWCD-8” to P3’s affirmation dated 8 February 2017 reveal many other transaction references that commence with “TF315…”.

28.  It may be coincidental but one possibility is that “TF” could well be an abbreviation for a trade finance transaction and the 3 numbers immediately following (315) being referable to CLH’s account for trade financing.  There is no evidence regarding this at this stage.  No doubt, when the matter goes further, an explanation will emerge.

29.  The court was then shown a typical FX derivative transaction confirmation the London bank had sent Hunter.  Clause 3 provided for payment to Hunter “in accordance with standard settlement instructions currently held by [the London bank] or as otherwise notified by [Hunter].

30.  Mr Li explained that a FX derivative transaction is a contract.  The settlement under a particular transaction takes place on the settlement date specified.  Meanwhile, there is a periodic (such as monthly) netting of the FX transaction.  The September 2015 USD current account statement for Hunter shows a deposit of US $3.8 million odd made on 8 September and a withdrawal of US $4 million out of the same account the following day.  There is a handwritten annotation alongside that reads “Net US$ 193,507.92” linking that amount to those 2 entries.

31.  It was accepted that that was one single instance of settlement under the FX derivative transactions that was done through Hunter’s USD current account with SCBHK.  Mr Li emphasised that settlements for FX derivative transactions were not tied to a particular bank account.

32.  Since the hearing, I have had the opportunity of considering exhibit WTYT-9 to P4’s 1^st affirmation dated 8 February 2017 more fully.  It comprises 7 monthly statements for Hunter’s CNY and USD accounts including that referred to in §30 above.  Similar manuscript annotations of differing amounts appear on each of those statements.  As no submissions were made to show that those other manuscript annotations should not be similarly interpreted or that they are wrong and ought to be disregarded, there was clearly more than a single instance of a FX settlement made through Hunter’s accounts with SCBHK.

33.  It was said that Hunter/CLH have refused to pay early termination costs and other FX losses from unsettled derivative transactions (which undeniably are payable under the terms of the Master Agreement and the FX transactions).  Pausing here, it is to be observed that early termination costs are not penalties but an assessment of the loss/gain of a particular derivative transaction had it not been brought to a premature end.  It involved an assessment of inter alia market trends subsisting at the time.   

34.  While the early termination losses and other FX losses that had already occurred formed the subject matter of the London bank’s claim in the writ action, it is to be observed that first, unlike the situation in the DBS case, the present case does not involve the type of rollover discussed at §48 of the DBS judgment and, secondly, they do not form part of and have nothing to do with the indebtedness that founds the mortgage actions.  In connection with the latter observation, reference was made to the 2^nd affirmation of Steven Li filed on behalf of SCBHK affirming that the indebtedness for the mortgage actions is not related to FX transactions.

35.  Mr Li submitted that his client would be prejudiced if consolidation were ordered.  It was said that it would be wrong in principle for the London bank to have to sit through another party’s dispute but if consolidation were to be ordered, there are at least 2 disputed matters, one between Hunter and SCBHK (in relation to certain structured products which form part of the general banking facilities) and the other is between Hunter Knitting and SCBHK (in relation to Hunter Knitting’s intention to strike out SCBHK’s claims against it in the 2^nd mortgage action).

36.  Those matters as well as the “inextricably linked” point will be addressed later.

SCBHK’s opposition

37.  Mr Khaw SC who appeared for SCBHK opposed consolidation on a number of grounds.  SCBHK made the point that it had granted 3 types of facilities only to CLH/Hunter: for trade finance, short-term money market loans and overdraft. The claims made in the mortgage actions stand alone and are in respect only of debts due and owing under the general banking facilities granted.  It was said that the operations of the accounts show that SCBHK had made no advances in respect of forex transactions.

38.  It was then contended that the DBS case is distinguishable.  First, in that case, all the transactions involved only a single bank whereas the present case involves two banking entities, namely, the London bank and SCBHK.  As earlier noted, they are separate entities, each of which has a banking licence to operate in Hong Kong.  Second, the total indebtedness upon which DBS founded its claim in the DBS case incorporated a FX claim (in respect of an early termination amount payable under the Master Agreement in the sum of US$2.6 million odd).  That is not the case here.

39.  Insofar as the two-bank argument is concerned, there is no evidence to show that the applicants had any direct interface with anyone from the London bank.  The introduction to the FX products from inception were made by staff of SCBHK.  All contact, interface and communication the applicants ever had concerning FX derivative agreements were with SCBHK staff and not staff of the London bank, whether based in London or Hong Kong (if any).

40.  Other than the London bank being a signatory as the formal contracting party to the Master Agreement with Hunter/CLH and the fact that transaction confirmations and termination letters originated from the London bank or were issued by the London bank to Hunter/CLH, there is nothing in the hearing bundles to show any face to face dealings/contact between the applicants and the London bank and its staff.

41.  Then there are the tripartite legal charges.  The recital shows that SCBHK was covenanting as trustee for itself and the other “Secured Parties”. That term is defined as including “every SCB Group Company”. “SCB Group Company” is itself defined to mean “each of [SCBHK], Standard Chartered Bank (including all its branches), the parent or any subsidiary or associated company of Standard Chartered Bank”.

42.  It was accepted that the London bank is a “Secured Party” for the purposes of the legal charges.  In those circumstances, the fact that, technically, the London bank and SCBHK are separate legal entities is neither here nor there and is not a sufficient basis for distinguishing the DBS case.

43.  As to the second distinction sought to be made, it is clear from §18 of the DBS case that while the alleged indebtedness claimed in that case included the FX early termination amount, DBS only sought summary determination in respect of the outstanding banking facilities and interest, and not as regards the FX early termination amount because the latter being an assessed amount involved a factual issue.

44.  While the judge in the DBS case considered that the court’s jurisdiction under the rules enabled it to grant summary judgment in relation to part of the claim only (at §19) such that it was open to the court to make a summary determination in respect of the outstanding banking facilities and interest part of DBS’s claim, nevertheless, he declined to do so on the basis that there were triable issues (§82).

45.  In my view, that fact necessarily undermines the relevance and significance of the second distinction SCBHK sought to make.  In my judgment, the 2 distinguishing factors do not materially affect the relevance of the DBS case for present purposes.

46.  As earlier noted, the applicants dispute the alleged indebtedness under the mortgage actions because it arose out of SCBHK’s wrongful acts.  The borrowers in the mortgage actions maintain that the extent of indebtedness under each of the 2 mortgage actions cannot be crystallised unless and until the FX disputes are finally resolved. The applicants submitted that the observations made in §§69 – 71 of the DBS case are particularly relevant in the present context.  

47.  At the hearing, Mr Khaw’s principal argument concerned the issue of equitable set-off and cross claims arising from the FX disputes.  The court was referred to Mobil Oil Company Limited v Rawlinson (1982) 43 P & CR 221 which established that the existence of a cross claim even if it exceeds the amount of mortgage debt will not defeat the right to possession of the legal chargee.  That principle applies to a cross claim which is a mere counterclaim or a cross claim for unliquidated damages.

48.  Reference was then made to National Westminster Bank plc v Skelton [1993] 1 WLR 72 as well as True Peace Company Limited v On Kwok & Ors, HCMP 3715/1997, unreported, 29 October 1998.  Those 2 authorities were the subject of extensive analysis and submissions by counsel for SCBHK and counsel for the applicants which I do not propose to rehearse here.  Suffice it to briefly state what each case decided.

49.  Skelton was a case where the mortgagee creditor sued the mortgagors and the borrower and claimed possession from the mortgagors.  The mortgage in Skelton contained a deeming provision to the effect that the mortgage was to be deemed to be a primary security and the mortgaged property was to be deemed to stand charged with monies/liabilities secured as if they were primarily due from the mortgagor.

50.  Skelton decided that: (1) a mortgagor on being sued by a mortgagee creditor for possession cannot avail himself of any right to set off or counterclaim available to the borrower (at 79H); (2) the effect of the deeming provision is that in any dispute between the bank and the mortgagors, it is not open to the mortgagors to rely on any right of cross-claim or set-off to which the principal debtor might be entitled as against the creditor bank (at 80B–C).

51.  True Peace was a mortgage action brought by the bank against the mortgagors (D1 and D2) and the borrower (D3).  The defendants sought to rely on D3’s equitable set-off claim as one of their defences.  Yuen J (as she then was) did not consider that there was any equitable set-off made out on the facts before her and that as against D1 and D2 (the mortgagors) the Mobil Oil principle applied such that even if there was an equitable set-off, that was not a defence to the bank’s claim for possession.

52.  What is clear is that Skelton did not decide that the defence of equitable set-off and/or a cross-claim is not available to a borrower.  True Peace also did not decide that a borrower’s equitable set-off claim can never be a defence in the mortgage action brought against the mortgagor and the borrowers.  In that case the borrower failed because the borrower was unable to make out a prima facie case that it had an equitable set-off claim.

53.  As Mr Kok submitted, the present application is not for summary determination; rather, the application is for consolidation and/or conversion of the originating summonses in the mortgage actions into writ actions.  I am satisfied that the borrowers in the present case are not precluded by either Skelton or True Peace from raising equitable set-off and/or a cross-claim by way of defence in the 2 mortgage actions.

54.  I would add one further point: although it was not pursued in oral argument, SCBHK’s written submissions suggested that the present applications are premature.  But given the terms of the Master’s order dated 20 April 2017 that provided for the substantive hearing of the consolidation application with directions for the filing of evidence, I confess that the objection eludes me.

Conclusion

55.  In my view, the principal factual issues that arise for determination in the writ action also arise in the mortgage actions. The applicants’ contention that the operation of the FX derivative agreements was “inextricably linked” to the banking facilities granted by SCBHK to the borrowers (Hunter/CLH) for their trading business is sufficiently borne out by the following:

(a) for the purposes of the legal charges, both SCBHK and the London bank are “Secured Parties” within the definition of that term;

(b) although the London bank was legally the party with whom the FX accounts and derivative transactions were entered into, the representations concerning FX products/derivative transactions were made to Hunter/CLH by SCBHK staff;

(c) in making the 2^nd set of misrepresentations SCBHK staff made reference to trade facilities already granted by SCBHK and gave assurances that the FX derivative agreements would not affect trade facilities already provided;

(d) in connection with Hunter/CLH’s difficulties in settling FX liabilities in February 2016, SCBHK staff gave assurances that trade facilities granted would not be affected; and

(e) while the trade finance advances and FX transactions were not tied to specific bank accounts as such, a number of such transactions did go through Hunter/CLH’s various accounts held with SCBHK.

56.  I agree with the applicants that on the facts of the present case, it would be wrong in principle to allow the mortgage actions to proceed and determined before the writ action.  That course would prejudge the issues to be determined at trial.

57.  As to how the matter should not proceed, I have considered the various options open to the court and make the following order:

(1) the mortgage actions (HCMP 2687/2016 and HCMP 2688/2016) be converted into writ actions;

(2) the writ action and the mortgage actions be tried before the same trial judge in such order and manner as he shall direct.

(3) For the purposes of carrying into effect §1 of order made herein, it is directed that in each of HCMP 2687/2016 and HCMP 2688/2016,

(i) the plaintiff do file its statement of claim within 28 days of this order;

(ii) the defendants do file their defence(s) and counterclaim(s) (if any) within 20 days thereafter;

(iii) the plaintiff do file its reply and defence to counterclaim (if any) within 28 days thereafter.

(4) The parties do comply with the provisions of Order 25, rule 1 of the Rules of Civil Procedure within 28 days of the close of pleadings of the writ action and the mortgage actions.

58.  The trial judge will be in a better position to address Mr Li’s concern (see §36 above) when directions are given for trial.

59.  There is to be an order nisi that costs be in the cause.