ARMCO PACIFIC LTD v. JULIANO LIM

1988, No. A2177

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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J U D G M E N T

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1. In June 1982, Chartwell Shipping Co. S.A. negotiated for the purchase of a Panamanian registered vessel "Hunter" at the price of about US$2.5M. A valuation report had previously been obtained. The market value given was US$3.45M as at the 2nd June 1982. For financing the purchase, under a Loan Agreement dated the 25th June 1982, a secured floating rate loan of US$2,182,500 was granted by the plaintiff to Chartwell Shipping Co. S.A. which I shall call "the Borrower", with the defendant and one Johnson Lam as guarantors. As financier, the plaintiff also became the mortgagee of the ship renamed "Chartwell".

2. The defendant is now being sued by the plaintiff as such guarantor. The liability of the defendant allegedly arose in this way : after the purchase, "Chartwell," was registered in Panama and the Philippines. On the 17th February 1984, "Chartwell" was arrested in Hong Kong in an Admiralty action in rem, viz. Admiralty Jurisdiction Folio 40 of 1984. On the 1st June, 1984, pursuant to a Court Order it was sold to Caribou Shipping Corp. for US$576,923. I shall call it "Caribou". The sale was a sale pendente 1ite. On the 27th July 1984, judgment was obtained in the said Admiralty action against the owners of "Chartwell", the Borrower. Under the said Loan Agreement, the plaintiff duly certified the outstanding balance of US$2,564,134.32 as being payable by the Borrower as at the 12th February 1986. On the 4th March 1986, the plaintiff made a formal demand of the said sum from the defendant as one of the two guarantors. The writ in this action was served in the Phillipines on the defendant on the 11th August 1988. After the, return of the defendant's Acknowledgement of Service, the plaintiff successfully obtained leave to sign judgment, against the defendant on an 0.14 application. This is an appeal against that decision of the master.

3. A number of issues canvassed before the master were abandoned at the commencement of this appeal. I need mention only two first, in High Court Action No. A1546 of 1986 commenced in March 1986, the plaintiff claimed against, inter alia the defendant and the said Johnson Lam under the said Loan Agreement. Johnson Lam was served and summary judgment was sought against him. The 0.14 application against Johnson Lam was not proceeded with. The said High Court Action No. A1548 of 1986 has been dormant for more than 2 years. The defendant was never served in that 1986 action and solicitors for the plaintiff have undertaken not to apply to extend the validity of the writ which has long expired. Secondly, when "Chartwell" was arrested in Hong Kong, laden with cargo by agreement with the cargo owners they were unloaded and removed at their respective expense. Therefore, duplicity in proceedings and adverse effect of a laden vessel on the sale price as originally alleged are no longer live issues.

4. After her arrest, a commission for appraisement and sale of "Chartwell" was issued and thereafter lodged with the Bailiff for execution. "As a matter of set practice, "Chartwell" was appraised by two local surveyors. Thus, the arrested vessel was in the hands of the court, the commission of sale was directed to the Bailiff and in order to prevent her from being sold below the proper price, appraisement was as a general rule, procured. The Bailiff received two valuations one, for US$1.65M plus bunkers at US$42,500 and another for US$1.05M. Sealed public tenders were solicited in the local press and on the 27th April 1984, the tenders were opened. There were two biddings, one equivalent to US$253,333 and another from Fuji Marden & Co. Ltd. for the equivalent of US$297,179. They did not reach the appraised value. The Bailiff returned to the Admiralty Judge who ordered further local advertisement for fresh public tenders. On the 18th May 1984, the three sealed tenders put in were opened. One came from the solicitors for the plaintiff bidding for Caribou in a sum equivalent to US$576,923, another tender was for the equivalent of US$450 000, and one of the two former tenderers Messrs Fuji Marden & Co. Ltd., made a lower bid at the equivalent of US$293,166.

5. The Bailiff sought directions from the Admiralty Judge and on the 23rd May 1984, "Chartwell" was ordered to be sold to Caribou. On the 1st June 1984, the sale was implemented. On the 20Ch July 1984, Caribou resold "Chartwell" to Terminal Navigation Co. Ltd. for US$710,000. A profit of some US$140,000 less legal and other expenses was made.

6. Caribou was taken over by Armco pacific Financial Corporation on the 29th May 1984. The plaintiff is Armco Pacific Limited. On the same day, Caribou gave a power of Attorney to three solicitors of Messrs Johnson Stoke & Master, solicitors for the plaintiff for purchasing and reselling "Chartwell". It is conceded that Caribou was a subsidiary of the plaintiff at the time of its purchase of "Chartwell" under the said Order of the Court.

7. On behalf of the defendant, Mr Yu called in aid the principle that as mortgagee of "Chartwell" not only had the plaintiff an implied obligation to take reasonable care in exercising its power of sale (see Cuckmere Brick Co. Ltd. v. Mutual Finance Ltd., [1971]Ch.949), but in seeking to uphold a sale to its subsidiary, the plaintiff had also the burden of proving that it had used its best endeavours to secure the proper price reasonably obtainable (see Tse Kwong Lam v. Wong Chit Sen and Others (P.C.), [1983] 1W.L.R. 1349). That a mortgagee must shoulder this onus in respect to the mortgaged property operates also in favour of a guarantor. Standard Chartered Bank v.Walker [1982] 1 W.L.R. 1410; [1982] 3 A.E.R. 938. Insofar as they are sought to be applied to mortgaged property in a sale by or on behalf of a mortgagee to a company with which he is closely connected, these principles are not open to challenge. The real nub of the defendant's case in this appeal rests on the contention that these impediments would also arise in the sale of the mortgaged "Chartwell" by the Court though initiated in an action in rem by the plaintiff mortgagee.

8. It was submitted that the plaintiff had not even begun to discharge the said burden. In a case such as this where "Chartwell" was valued before purchase in 1982 at US$3.45M and appraised before tender in 1984 at US$1.65M plus bunkers US$42,500 and US$1.05M and where the bailiff's sale to the plaintiff's admitted subsidiary in June 1984 was some US$140,000 lower than the resale a month and a half later, there is all the more reason for the defendant to show, so Mr argument proceeded, that these figures do not reflect a sale at a gross undervalue. Mr Yu contended that as such was the threshold onus to discharge - the burden on the plaintiff of proving the validity of the sale to Caribou at this stage the defendant did not need to question the order for sale made by the Admiralty Judge or, for that matter, to be active at all.

9. It is alleged that in January 1984 Mr Johnson Lam, the defendant's co-guarantor, reached an oral agreement with the plaintiff's then General Manager, Mr Banks. In that oral agreement, the plaintiff allegedly consented on terms to the Borrower accepting a voyage charter for "Chartwell" from India to China. The plaintiff is said to have breached that alleged oral agreement by arresting "Chartwell" on the 17th February 1984 in Hong Kong en route from India to China.

10. In his opening of this appeal, Mr Yu, counsel for the defendant confined his complaints to these two issues: the contended initial onus of the plaintiff as mortgagee and the alleged 1984 oral agreement. It was submitted that on either of these two fronts the defendant ought to have been given unconditional leave to defend.

11. It would be more convenient to take the second issue first. For the alleged oral agreement in January 1984, the defendant relies principally on paragraph 66 of an affirmation of the said Johnson Lam filed in May 1936 in the moribund High Court Action No. A1548 of 1986. The defendant, however, claims in his own affidavit filed herein on the 24th October 1988 that Mr Johnson Lam had related to him what transpired subsequent to the alleged oral agreement. But Mr Johnson Lam has not chosen or been invited to repeat on affirmation his assertions made nearly three years ago in another action. There is no documentary evidence before me in support of the allegation. On the other hand, when "Chartwell" was arrested in Hong Kong on the 17th February 1984, the Borrower did not resist the Admiralty proceedings. No Acknowledgement of Service was returned by the Borrower. Mr Johnson Lam was in charge of its affairs and he had registered no protest, but instead seven days after the arrest of "Chartwell" in a letter of the 24th February 1984 signed by Mr Johnson Lam on behalf of the Borrower, it was suggested to the plaintiff to sell the vessel by private treaty. The Borrower took no advantage under 0.75 r.12 (3)R.S.C. of its right to apply to Court for directions with respect to the vessel under arrest. One of the alleged terms for the Borrower to accept the voyage charter from India to China was to allow the vessel to complete the voyage and thereafter to return to Hong Kong in ballast for a Jointly negotiated private sale at a price acceptable to both. The Borrower had absolutely abstained from the Admiralty action. Mr Johnson Lam himself could have intervened under 0.75, r.17 but he did not.

12. Mr Lyne, solicitor having the conduct of the plaintiff's action, has liaised with Mr Banks, the said former Managing Director of the plaintiff. Mr Banks has also not filed any affidavit in these proceedings, and the information supplied by him does not seem to have been properly verified. See 0.14, r.2(2). Apart from the technical omission, it is the understanding of Mr Lyne from such communication that Mr Banks had resigned from the plaintiff in November 1983 and permanently left Singapore before he launched his own business in Hong Kong in January 1984. Counsel took no point on verification and the defendant did not see fit to invite Mr Johnson Lam to further elaborate. Not only is there something suspicious in the defendant's mode of presenting his case, no effort was made to explain the, letter signed by him of the 24th February 1984 and the indifference that followed after the arrest of "Chartwell". These are wholly inconsistent with the alleged January oral agreement. The 1984 oral agreement simply cannot stand the defendant's alleged oral agreement is decidedly more vulnerable to criticism than what was regarded by Ackner, L.J. as a bald given situation advanced on affidavit in Banque de Paris v. de Naray [1984]1 L1.L. Rep. 21. At p.23 R.H.S., Lord Justice Ackner, as he then was, said:

" It is of course trite law that 0.14 proceedings are not decided by weighing the two affidavits. It is also trite that the mere assertion in an affidavit of a given situation which is to be the basis of a defence does not, ipso facto, provide leave to defend; the Court must look at the whole situation and ask itself whether the defendant has satisfied the Court that there is fair or reasonable probability of the defendants' having a real or bona fide defence."

13. I return to the first issue raised by the defendant. The principles relied upon by Mr Yu, counsel for the defendant, are well settled. What falls to be decided is whether these principles would apply to a sale of mortgaged property with the intervention of a commission for sale in the Admiralty proceedings.

14. A mortgagee is not a trustee of the power of sale for the mortgagor. However, the preparation and conduct of the mortgage sale would be 1eft wholly to the mortgagee. In the exercise of his power of sale, a mortgagee is under an implied legal obligation to take reasonable care to obtain the true market value in terms of "the proper price" or "the best price". The duty implied stems from the proximity of relationship between the mortgagor and the mortgagee. Cuckmere Co. v. Mutual Finance Ltd. (C. A.), supra. at p.965 Letter G and p.966 Letters D to E, per salmon L.J. Insofar as a claim of this nature is founded in contract, it is based on the mortgagee's implied duty to take reasonable care in exercising his power of sale. Actual negligence, if proved, may found a similar claim in tort. The "Jocelyne", [1984]2 Ll.L.Rep. 569 at p.571 R.H.S. per Lloyd, J. It is to be borne in mind that both a breach of such an implied duty or negligence must be proved by the one who makes the assertion. The mortagee himself has no burden of proving the absence of a breach or negligence.

15. It is sheer logic that no one can confer a title on himself. Hence he cannot sell to himself. A mortgagee is no different. Moreover, by virtue of his capacity, a mortgagee "cannot sell to himself either alone or with others or to a trustee for himself nor to any one employed by him to conduct the sale". See p.393 Fisher and Lightwood on the Law of Mortgage, 10th Edn. Such prohibition may he circumvented by a mortgagee purchasing the mortgaged property from a sale in execution of a money judgment against the mortgagor on his personal covenant to repay. See Simpson v. Forrester, (1972)46 A.L.J.R. 469; (1973)47 A.L.J. 544.

16. A mortgagee may sell to a coporation of which he is a member. In such a sale by the mortgagee if the connection is close and interest significant, a different set of rules arise for application : not only need the price secured be the best price reasonably obtainable in the prevailing circumstances but the mortgagee as vendor would he saddled with the burden of proving that it was indeed the best price obtained after all reasonable precautions having been taken. Tse Kwong Lam v. Wong Chit Sen, Supra. p.1335 Letter B & Letter G, p.1356 Letter H, p.1358 Letter H and p.1359 Letter H.

17. It does not seem to be seriously disputed that the sale of "Chartwell" in a commission for sale under our Admiralty Jurisdiction is not a sale by the plaintiff. The ordered sale to the plaintiff's admitted subsidiary cannot be a or a direct sale by the plaintiff in its capacity as mortgagee or at all. What was, in effect, sought to be argued is that the same principle in the Tse Kwong Lam case of a sale by a mortgagee to a company with which he is closely connected, would apply mutatis mutandis to any sale initiated or brought about by a mortgagee.

18. No sale of a vessel can be ordered unless it, the res is in the hands of the Court. A commission, for sale must first he sought and it should then be lodged with the Bailiff for execution. The Bailiff has the sole conduct of the sale. See p.287 of Roscoe on Admiralty Practice 5th edn. It was for the Bailiff alone to carry out that commission. See also The "Jarvis Brake", [1976]2 L1.L. Rep. 320 at p.321 L.H.S., per Brandon, J. In this case, the sale of "Chartwell" was by sealed public tenders, but if an auctioneer or broker had had to be appointed, he would have been appointed to sell the vessel by the Bailiff. See p.317 Jurisdiction and Practice of the English Court in Admiralty Practice and Appeal, William Bruce 3rd Edn.

19. Under 0.75, a set practice must be followed for the sale by the Bailiff of a ship arrested in rem pursuant to an order of the Admiralty Court. The arrested vessel cannot be said unless it has been caused to be appraised as it was in this case, by the Bailiff in executing his commission of sale. He cannot sell the ship below the appraised value without an order of the Court. See Form No 13 "Commission for Appraisement and Sale", p. B763 Cap.4 formerly p.A407. Moreover, it is the duty of the Bailiff to realise the highest price. The "Silia", [1981]2 L1.L.Rep. 534 p.535 R.H.S., per Sheen, J.

20. No one including the owners of an arrested vessel ordered to be sold in Admiralty proceedings in rem can interfere with the execution of the commission for appraisement and sale. An owner would be guilty of contempt if he were to make a parallel effort to sell the arrested ship independently of the Bailiff. At p.321, R.H.S., Brandon. J. in The "Jarvis Brake", Supra. Had this to say:

"Once a ship has been ordered to be sold by an officer of the Court, it is contempt for the owner to attempt to sell the ship himself."

"These matters must be left to the Court and that (the owner) is not to interfere any further."

21. If the plaintiff had endeavoured to take any step independently of the Bailiff to procure the best price reasonably obtainable, it would have beep guilty of interference with the execution of the Bailiff's commission, punishable by contempt. In my view, the plaintiff was virtually relieved from its implied duty as mortgagee to take reasonable care in securing the proper price in the ordered sale of "Chartwell" by the Admiralty Judge. In truth, it was clearly not a sale by the plaintiff as mortgagee but a sale by the Bailiff initiated by the plaintiff invoking the Admiralty jurisdiction Therefore the plaintiff had no such burden of proof to discharge as in Tse Kwong Lam.

22. However, an owner has a duty to keep the Bailiff well briefed of any useful information connected with the sale of a vessel under arrest. Hill, J. observed in The "Ruth Kayser", [1925] 23 Lloyd's List Law Reports 95:

"If an owner ..... got private information his duty was to bring it to the attention of the Marshal so that everyone might benefit by it."

23. By the same parity of reasoning, the plaintiff as mortgagee owed a similar duty.

24. It would still be open to the defendant to challenge the ordered sale, but the burden lies on him as an accuses. For instance, he might be able to show that the Bailiff had failed in his duty in executing the commission for appraisement and sale that the sale was at a gross undervalue for whatever cause, that the plaintiff was guilty of deceiving the Bailiff or the Admiralty Court, that the plaintiff had withheld material information or that other circumstances existed for the validity of the sale to be impugned. There is no evidence of any of these matters, and none was suggested.

25. The defendant sought to place some reliance on The "Calm C" [1975]1 Ll.L.Rep. 188. That is a case of a direct sale by a mortgagee who was to exercise due standard of care and prudence, no higher than "taking reasonable steps and precautions having regard to all the circumstances". It was not a sale by a mortgagee to an entity closely associated with himself. The decision cannot be relevant.

   The "Jocelyne", supra. is a case of a ship sold by a Belgian Bailiff in Antwerp. It was, inter alia, claimed that the price was artificially depressed on account of inadequate prior publicity in the press. The sale was also not one to a company of which the mortgagee was a member. At p.571 L.H.S, counsel argued that insofar as the of the Court had been invoked to sell the vessel in question, the implied obligation to take reasonable care was not excluded. Mr Yu, counsel for the defendant adopted a like approach that the sale by the Admiralty Bailiff here to the plaintiff's subsidiary could not and did not have the effect of excluding such an implied duty to take care or shift the burden of proof from the plaintiff as mortgagee. The "Jocelyne", was decided on estoppel. From that decision, one can also derive no assistance.

26. For the reasons I have given, in a commission for sale wholly in the hands of the Admiralty Court and its Bailiff, the plaintiff had no such duty to take care and the burden as laid down in Tse Kwong Lam case did not apply to the plaintiff.

27. The 1982 Valuation Report gave an estimate of US$3.45M as at the 2nd June 1982. It is note-worthy that even the Borrower itself acquired "Chartwell" for about US$1M less. Moreover, the appraised values from the two Hong Kong surveyors were more than US$1/2M apart at US$1.65M plus hunkers US$42,500 and US$1.05M respectively. The two biddings in the first sealed public tender were both below US$3,00.000. It was the plaintiff's belief that these tenders were made on scrap basis but that "Chartwell" was sound enough for further trading. Thereupon, the Bailiff obtained a further order from the Admiralty Judge for re-advertisement and sealed public tenders were again invited. Three came, one below Usss$300,000, another for US$450,00 and the bid from the plaintiff's subsidiary was some US$126,000more than the higher of these two at the equivalent of US$576,923. On the Bailiff's application to the Admiralty Judge, the vessel was sold to the plaintiff's subsidiary as the highest tenderer by an Order of the Court made on the 23rd May 1984.

28. Mr Lyne, solicitor having the conduct of the plaintiff's case, explained that it was a falling market, that the valuations were from surveyors rather than ship brokers who would be more familiar with the current market price of old ships and that the wide margin between appraised values and actual biddings was not unexpected. Mr Lyne outlined the incidents of likely prior equities affecting a ship in a private sale. He explained the difficulty in providing a banker's warranty of clearance of all outstanding debts. He emphasized the obligation of a purchaser in a private sale to meet the costs of completing the voyage to China for discharging the cargo, which would depress the price of "Chartwell". Mr Lyne reminded us of the advantage of vesting a perfect title in the purchaser by a Court sale, free from all suits and claims of every kind. A further crucial consideration was that the plaintiff could not risk "Chartwell" proceeding to China for fear that she might not return to jurisdiction.

29. The public tenders were not opened until the 18th May 1984. It would be difficult to imagine as one of the competitive tenderers, what advantage an entity closely associated with the plaintiff could possibly hope to gain in these circumstances. It must not be forgotten that the sale was conducted under the watchful eyes of the Bailiff whose duty was to realise the highest price.

30. I have referred to some of the explanations given by Mr Lyne, but as a matter of fact, there is really no evidence of any undervalue. In paragraph 66 of his affirmation filed on the 3rd May 1986 in the other High Court Action No. A1548 of 1986, Mr Johnson Lam also complained of the ordered sale as being at a gross undervalue. He categorically stated that he was in a course of obtaining a valuation report. That was in may 1986. In paragraph 9 of the defendant's affidavit filed herein on the 24th October 1988, the defendant volunteered the information that on legal advice he had appointed his own valuer for a report which would be received shortly. That was in October 1988. When this appeal came on for hearing on the 22nd March 1989, none of these reports had been disclosed.

31. The admiralty Judge could not have sanctioned the sale to Caribou if he had any doubt as to whether the Bailiff had properly discharged his duty to realise the highest price obtainable. The Bailiff would not have sold "Chartwellk" to Caribou if he had entertained any real hope that a higher price could be obtained. An explicit disclosure of the plaintiff's relationship with Caribou could not have made any difference. The figures known do not suggest any undervalue sale. The sale to Caribou was completed on the 1st June 1984, and on the 20th July 1984 "Chartwell" was resold to Terminal Navigation Co. Ltd. at US$710,000. There was a commission of US$24,850 to be paid. Naturally, there were other expenses for the purchase of "Chartwell" on the 1st June 1984 as well as for her resale on the 20th July 1984. The margin of gross profit was some US$ 140,000. "Chatrwell" was bid for by Caribou with the express intention of a resale. It was to be expected that Caribou would not have put in a tender without leaving a profit margin. It is not suggested that the ultimate net profit was anything other than within reasonable bounds. The Bailiff, in executing his commission of sale, has evidently to exercise at least the same standard of care as a mortgagee in the price. All this constitutes prima facie evidence that all reasonable precautions had been taken to obtain the best price obtainable for "Chartwell" in a sale pendente late with a touch of urgency. If the plaintiff had any onus to prove the same the circumstances surrounding the sale conducted by the Bailiff would be evidence enough to discharge that onus for the plaintiff.

32. Mr Yu for the defendant suggested that the plaintiff should at least have advertised in the world press and that local ship brokers should have been instructed to sell "Chartwell". I was not assisted on the extent of any expected gain to warrant the expense of a worldwide advertisement for a ship of comparatively insubstantial value. The sale of "Chartwell" had already been advertised twice locally. According to Mr. Lyne, the plaintiff had also instructed ship brokers in Hong Kong to publicise the sale of the vessel. Even if the plaintiff had assumed the conduct of the sale, there is nothing to substantiate the alleged shortfalls in these two areas. In addition to what must have been his seasoned experience, the Admiralty Bailiff had the added advantage of set practice and statutory guidelines in appraisement and sale. I can readily rest on the presumption of regularity.

33. If it is to be accepted that in the circumstances the Admiralty Judge's sanction of the sale and the exercise the Admiralty Bailiff's duty is unimpeachable, I cannot see how it can be consistently said that reasonable precautions had not all been taken to obtain the best price reasonably obtainable at the time.

34. For all the reasons I have given, this appeal must fail. If I were wrong, I would have no hesitation ordering a payment into Court by the defendant.

35. The appea1 therefore stands dismissed. The order of the master be accordingly affirmed Costs of this appeal be, subject to what Counsel have to say, costs to the plaintiff against the defendant.