BANK OF CREDIT AND COMMERCE HONG KONG LTD. (IN LIQUIDATION) v. ASIAN WINNER LTD.

HCCL7/1997

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMMERCIAL ACTION NO.7 OF 1997

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J U D G M E N T

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1. This is a dispute between the plaintiff bank, in liquidation, and the 2nd defendant, Mr Erez Levy, who acted as guarantor of the indebtedness to the bank of the 1st defendant, Asian Winner Limited ("Asian Winner"). It is also a dispute which has run a slightly unusual course. Summary judgment was entered against Asian Winner, the principal debtor, on 31 January 1996, and on 23 May 1996 default judgment was entered against the 2nd defendant. This latter judgment was set aside by Sears J on 13 January 1997, and that against Asian Winner by this court on 9 May 1997. Thereafter the case proceeded to trial, which originally was due to commence on 22 March 2000, but which then required adjournment due to the indisposition of counsel.

THE FACTS

2. The basic facts are in relatively short compass. The plaintiff bank, Bank of Credit and Commerce Hong Kong Limited ("BCC"), was placed into liquidation by the Order of Jones J on 2 March 1992, pursuant to a winding-up petition presented by the Financial Secretary. An order for the appointment of Mr Nicholas Etches and Mr Gabriel Tam ("Mr Tam") as Joint and Several Special Managers was made by Jones J on 5 March 1992, the right to bring these proceedings being confirmed by order of like date.

3. Prior to the liquidation, Asian Winner was a customer of BCC's Kwun Tong branch. BCC made banking facilities available pursuant to a written agreement between BCC and Asian Winner, dated 31 December 1996 and entitled "General Agreement for Commercial Business".

4. Asian Winner was, inter alia, a garment company. It was owned and run by Mr Gershon Levy, the brother of the 2nd defendant, Erez Levy. When Asian Winner entered into its "General Agreement for Commercial Business" with BCC, the bank wished to put some guarantors in place. Mr Gershon Levy was one, and Mr Erez Levy was the other, Mr Erez Levy signing a document entitled "Continuing Guarantee" addressed to BCC, dated 1 April 1987.

5. It is the obligations which arise under this latter document which provide the focus of this case. Mr Burns, who appears for the plaintiff liquidators, has informed the court that Asian Winner is now a defunct company, with no identifiable assets, and appears to be insolvent. In fact, Asian Winner did not defend this action, and was not represented at trial. Accordingly, the material defences with which this court is concerned are solely those put forward on behalf of the 2nd defendant herein, Mr Erez Levy.

THE PLAINTIFF'S CASE

6. This is straightforward in concept, if not in detail. The plaintiff invokes and seeks to enforce the terms of the 'Continuing Guarantee' signed by Mr Levy on 1 April 1987.

7. Mr Tam, a partner of KPMG Peak Marwick and one of the two Joint Special Managers of the plaintiff, whose witness statement stood as evidence-in-chief, gave detailed evidence as to the pre-liquidation relationship and state of affairs between Asian Winner and BCC, with special reference not only to the accrual of interest both ante and post-liquidation and as to the use of the FALCON computer system, but also with regard to the use of, and approach to, the monies deposited with the bank by Mr Gershon Levy and one Mr Ginati Eyal, both of whom had charged these deposits, pursuant to a document entitled "Security Over Deposits in respect of Third Party Obligations", in favour of the bank as security over the indebtedness of Asian Winner. The evidence is that Mr Gershon Levy was found to have deposited the overall sum of HK$8,474,634.33 with the bank as at 17 July 1991, and Mr Ginati Eyal the sum of HK$1,299,013.73 as at the same date. At various dates between 12 October 1995 and 14 March 1997 seven dividend payments, representing a total dividend of 100% in respect of the sums deposited, were made to Mr Levy, and likewise at various dates between 1 November 1993 and 14 March 1997 twelve dividend payments were made by the plaintiff in respect of the claim of Mr Eyal, representing a total dividend of 100% in respect of the sum adjudicated in his favour. In turn, both Mr Gershon Levy and Mr Eyal signed what was known as a 'Form 72' authorizing the Special Managers to appropriate the dividends thus declared in respect of the claims of Mr Levy and Mr Eyal in order to reduce the indebtedness of Asian Winner.

8. It was and is not in dispute that no demand has been made pursuant to that Continuing Guarantee which was signed by Mr Gershon Levy, Mr Tam confirming that written demands had been served upon both the 1st and 2nd defendants by letters dated 25 May 1992 and 23 November 1992 respectively. Mr Tam further gave evidence as to the accuracy of a printout of the indebtedness of the 1st defendant as it stood at 19 January 2000, and confirmed the accuracy of the updated sum due and owing as at 21 September 2000 (as particularized in the First Schedule to the Re-Re-Amended Statement of Claim) as being HK$6,391,462.78, with interest accruing on this sum at the rate of HK$1,959.52 per day. However, Mr Burns for the plaintiff conceded, for the purpose of this trial only, that the sum of $588,973.37 appearing in the First Schedule under the heading "Cost Recovery Charges", related to the costs of this litigation and should not be included in any judgment sum, so that the amount presently pleaded and claimed required consequent downward adjustment.

9. Mr Tam's evidence regarding the calculation of the 1st defendant's indebtedness as at the date of liquidation, 17 July 1991, in the sum of HK$8,596,660, was not challenged in cross-examination, and in this connection Mr Burns submitted that the relevant documents to which Mr Tam had referred, and upon which he had relied in calculating such indebtedness as at that date, were properly in evidence by virtue of the plaintiff's hearsay notice, and were proved by virtue of the Bankers' Books provisions in sections 20 and 20A of the Evidence Ordinance, Cap.8. In this context Mr Burns also relied upon Mr Tam's witness statement as constituting a "statement of account signed as correct by a duly authorized officer of BCCHK" pursuant to the terms of the Continuing Guarantee signed by Mr Levy, and in the alternative argued that Mr Tam's witness statement represented a statement of account furnished by BCC, the correctness of which is certified by one of BCCHK's managers within the meaning of clause 11 of the Guarantee, and was therefore binding and conclusive upon Mr Levy. The submissions did not appear controversial, although during the course of this trial (and no doubt for the avoidance of doubt) Mr Tam also signed a separate Certified Statement of Account pursuant to clause 11 of the Continuing Guarantee, the relevant part of which reads thus :

" Statement of Account

Indebtedness of Asian Winner Limited as at 17 July 1991 HK$8,596,660.00

Indebtedness of Asian Winner Limited as at 21 September 2000 HK$6,391,462.78

Furthermore, Interest continues to accrue on the amount outstanding at the rate of Hong Kong Dollar prime rate plus 1.5% per annum in respect of that part of the indebtedness between zero and HK$1.5 million plus Hong Kong Dollar prime rate plus 2.5% per annum in respect of that part of the indebtedness which exceeds HK$1.5 million but is less than HK$4 million plus Hong Kong Dollar prime rate plus 5% per annum in respect of that part of the indebtedness which exceeds HK$4 million."

10. I accept Mr Tam's evidence, both as to the mathematical accuracy of the figures as now certified, and in terms of his evidence as to what he has done, or caused to be done, in relation to this case since the date of his appointment. I turn now to the defences raised by the 2nd defendant which have been put forward to this claim.

THE DEFENCES RAISED

11. Essentially these are four in number :-

(1) the alleged oral agreement as to primary recourse to deposited funds and other guarantee;

(2) the existence of mutuality between the depositors, Gershon Levy and Ginati Eyal, and the plaintiff;

(3) the effective due date of the payment of liquidation dividends; and

(4) the calculation of post-liquidation interest.

I take these arguments in turn.

(1) The oral agreement

12. Mr Levy's case is that he agreed to execute the guarantee that he signed on condition that it would not be called upon nor enforced unless and until the bank first had been unable to recover the indebtedness of Asian Winner by enforcing the security given by Gershon Levy in the form of his cash deposit and guarantee.

13. The manner in which this argument is formulated in the pleading is found at paragraph 12 of the Amended Defence, and in the particulars supplied pursuant thereto. Paragraph 12 of the Defence asserts that the banking agreement entered into between the plaintiff and Asian Winner represented but part of that agreement, and that, inter alia, the following was agreed :-

"(i) The Plaintiff would only provide banking facilities if Mr. Gershon Levy the 1st Defendant's principal shareholder deposited with the Plaintiff as security a sum equivalent to the amount owed by the 1st Defendant or such sum as the Plaintiff required from time to time.

(ii) Mr. Gershon Levy would not be able to draw on his deposit with the Plaintiff whilst the Plaintiff provided general banking facilities to the 1st Defendant.

(iii) The said deposit was to be applied to reduce or extinguish the indebtedness of the 1st Defendant, before any other security given for the purposes of obtaining banking facilities for the 1st Defendant, would be called upon or enforced by the Plaintiff.

(iv) The 2nd Defendant agreed to execute a guarantee ('the said guarantee') to secure the indebtedness of the 1st Defendant on the condition that the said guarantee would not be called upon or enforced unless and until the Plaintiff had been unable to recover the indebtedness of the 1st Defendant by enforcing the security given by Mr. Gershon Levy in the form of the deposit pleaded above and a continuing guarantee given by Mr. Gershon Levy on 16th December 1986."

Thereafter, further particulars furnished regarding this other part of the banking agreement read thus :-

"Part of the agreement entered into between the Plaintiff and the 1st Defendant was made in writing in a document entitled 'General Agreement for Commercial Business' dated 31 December 1987. The other part of the agreement entered into between the Plaintiff and the 1st Defendant was made orally, the terms of which are set out in paragraph 12 of the Defence. The oral part of the agreement was made at or about the end of 1986 and the beginning of 1987 during various visits to the Plaintiff's Kwun Tong Branch by Mr. Gershon Levy on behalf of the 1st Defendant. Mr. Gershon Levy had a number of meetings with bank officials at the Plaintiff's Kwun Tong Branch (including various Marketing Managers/Assistant Managers and the Branch Manager, Mr. Sherman Ha). Although Mr. Gershon Levy is unable to recall the name(s) of the official(s) who made the said oral part of the agreement on behalf of the Plaintiff, the 2nd Defendant would expect further information in this regard to become available upon discovery."

14. It is not suggested, in the particulars provided, that the 2nd defendant was present at the time the alleged oral agreement was made, and it is curious that this element of the case should be pleaded as part of a banking agreement entered into between the 1st defendant, Asian Winner, and the bank, given that the 2nd defendant, Mr Erez Levy, had a separate contractual relationship with the bank consequent upon his signing of the Guarantee. In this context Mr Gershon Levy did not attend and give evidence, nor was any statement from him submitted under the hearsay provisions. In his own evidence, Mr Erez Levy was pressed about the content of the particulars so pleaded, and plainly had but the haziest recollection of what meetings had taken place, when and with whom : "I can't really recall exactly what was said in every meeting; things were said in different meetings on different matters ...".

15. The thrust of Mr Levy's evidence was that he understood from his brother, Gershon Levy, that none of the guarantees would be called whilst the funds deposited with the bank by Gershon Levy and Ginati Eyal remained in excess of the funds borrowed. His witness statement, which was admitted as his evidence in chief, identified one meeting, at the beginning of 1987, held at the offices of Asian Winner and which was attended by his brother, a branch manager of the bank, one Mr Sherman Ha, together with another bank officer. It is said that at this meeting it was confirmed that the bank maintained substantial deposits by way of primary security and that he, Mr Erez Levy, was told by Mr Ha and his colleague that the funds so deposited would first be used to satisfy any bank demand for repayment of the borrowed funds prior to any call for payment under any of the guarantees, and that it was on this basis that he agreed to give a personal guarantee "in the belief that it would never be necessary for the bank to call upon me to make payment under my guarantee". In fact, in his evidence Mr Levy made the point that not only should the deposit monies first be used but that Mr Gershon Levy's guarantee would also be called in priority to his.

16. Mr Sherman Ha also gave evidence on behalf of the 2nd defendant. He could not recall any such discussion, he said, but he offered the view that he would have said, if he had been asked about this, that "the deposit monies would first be used to settle the indebtedness to the Bank, in accordance with normal banking practice", and that Mr Levy's guarantee was obtained by way of "extra comfort" for the bank, which in normal course would not call the guarantees whilst the deposits exceeded the debt, and would merely set off one against the other. However, upon the point directly in issue, Mr Ha was unable to take the matter further.

17. After reviewing the evidence I have concluded, albeit with some hesitation, that this line of defence cannot succeed. Apart from the fact that it is difficult to see why this agreement should form part of a banking agreement between two other contracting parties, no reference to the condition now asserted is found in the Deed of Guarantee, and indeed, as Mr Burns pointed out, it is inconsistent with the terms of that document, and that if it be accepted that the parties' agreement is wholly contained within this document (albeit there is here no 'entire agreement clause'), then the case as now put forward runs foul of the parol evidence rule. And whilst I have little doubt in the circumstances that something was said by a bank officer with reference to a general desire on the part of the bank to utilise other securities prior to calling upon Mr Erez Levy's guarantee, I decline to elevate such an exchange to the status of a contractual term within the guarantee itself, nor within the bank's agreement entered into between the plaintiff and the 1st defendant (which is what is pleaded). In this regard Mr Burns must be correct when he submitted that, even if all that Mr Levy said was accepted, at its highest it could amount to no more than a representation, and that there was no claim for misrepresentation or any defence of promissory estoppel, and that in any event what was allegedly said could only have amounted to an indication of what would be likely to happen as a matter of normal banking practice, a situation far removed from the present.

18. I am constrained to agree with these submissions. On the evidence before the court, I do not find the presence of an oral agreement binding upon the bank, the effect of which is to negative the broad terms of the 'Continuing Guarantee' entered into by Mr Erez Levy, or to prevent this guarantee being utilised as a cause of action against Mr Levy in the manner in which it is now sought to do. In my judgment, this defence must fail.

(2) Mutuality

19. This, perhaps, is the principal line of defence which is run in this case. The point is short. The 2nd defendant seeks to establish mutuality between Mr Gershon Levy and Mr Ginati Eyal on the one hand and the plaintiff on the other, thereby triggering automatic set-off between the indebtedness of Asian Winner and the deposits held by these gentlemen with the bank, such set-off - pursuant to section 35, Bankruptcy Ordinance, as applied to companies in liquidation by virtue of section 264, Companies Ordinance - to take effect as at the date of liquidation.

20. Mr Kerr sought to achieve this result because, he said, the plaintiff through its Special Managers had exercised its rights of security within the language of the Security Over Deposit Agreements in that the plaintiff had "retained, applied or realised" the monies due to Mr Gershon Levy and Mr Ginati Eyal, thereby creating a situation of mutuality. Mr Kerr asserted that the plaintiff had exercised such rights of security under the Agreements by means of "blocking" the deposits of Messrs Levy and Eyal.

21. The evidence of Mr Tam as to this element of the case is that upon the liquidation of the plaintiff it was evident that there were numerous third party deposits charged with securing the liability of principal debtors, and that both in this case, and generally, it was the policy of the Special Managers to "block" such third party deposits until settlement of the liability of the principal debtor, "blocking" in this sense meaning that the Special Managers did not pay out dividends accruing on the deposits or interest which became payable after the plaintiff went into surplus. Accordingly, provision was and is made within the plaintiff's liquidation accounts for such dividends or interest, such sums where necessary remaining in suspense accounts. Nevertheless, said Mr Tam, there had been no "appropriation" by the Special Managers of such dividends or interest. The application to Asian Winner's debt of the deposit dividends as declared in the liquidation was pursuant to the permission so granted in the Forms 72 which had been completed by the depositors. Nor had there been any "appropriation" of the interest which had subsequently become payable (which aspect had not been the subject of specific agreement by Messrs Gershon Levy and Ginati Eyal), such post-liquidation interest being retained, as were the deposits themselves, pursuant to the provision of the Security Over Deposit Agreements.

22. It is settled law that before section 35 (which in itself provides an exception to the general insolvency rules) can come into operation, that which is required, in the words of Hoffman LJ (as he then was) in M.S. Fashions Ltd v. BCCI, [1993] Ch.425 at 432F is "mutual dealings before the winding-up order which have given rise to cross claims ...". It is also settled that there must be a right to make a pecuniary demand upon the party to such mutual dealings, and further that the right to appropriate property under one's control, or to be discharged from a liability does not amount to such a right : see In re Bank of Credit and Commerce International S.A. (No.8), [1998] AC 214 (HL) and Tam Wing Chuen & Another v. Bank of Credit & Commerce Hong Kong Limited (in liquidation), [1996] 2 HKLR 161 (PC). In fact, as Mr Burns pointed out, the specific document construed by the Privy Council in Tam Wing Chuen, op.cit., was identical to the Security Over Deposit Agreements signed by Mr Gershon Levy and Mr Eyal, the Privy Council in that case holding that under that document the depositor did not accept any responsibilities or liabilities beyond the making of the deposit. Moreover, it is common ground that no demand was ever made under Mr Gershon Levy's guarantee (it is now evident that Mr Ginati Eyal did not give one), and that absent such a demand, pursuant to what is a secondary obligation, no liability arises on the part of the guarantor : see William Young & Others v. Bank of Credit and Commerce Hong Kong Limited (in liquidation), Hong Kong Court of Appeal, judgment dated 6 May 1994 (unreported).

23. In my view, therefore, Mr Burns is correct in his contention that under the Security Over Deposit Agreements signed by Messrs Levy and Eyal, neither of the depositors owed anything to the bank, whilst the documents themselves imposed no liability upon either, so that there could be no question of section 35 having any application in these circumstances. Accordingly, Mr Burns further submitted, even if it could be said that in their various actions the Special Managers had "exercised" the plaintiff's rights under these Agreements, such would not be capable of creating mutuality for the purpose of a section 35 set-off.

24. I accept these submissions. The manner in which the dividends on the deposits and the post-liquidation interest had been treated by the Special Managers is clear on the evidence, and I have not understood Mr Tam's evidence when read as a whole to have imported that there was any appropriation of the dividends prior to the execution of the respective Forms 72, nor that the post-liquidation interest, whilst admittedly being withheld from Messrs Levy and Eyal, is being held other than in a suspense account. It seems clear, also, from Mr Tam's evidence that had it not been for the express authorisations conferred by the respective Forms 72, no appropriations to the debt would have been made, with the result that had the dividends remained 'blocked' the indebtedness of Asian Winner would have increased markedly (instead of being reduced), with a corresponding increase in the amount now sought in respect of Mr Erez Levy's guarantee. Moreover, whilst the accrual of post-liquidation interest in a suspense account clearly has been effected pursuant to the Security Over Deposits documentation, it is problematic whether strictly this can be said to amount to the "exercise" of the bank's security rights, any more than retention by the bank of the original deposits would have done; as Mr Burns submitted, it would be odd if by retaining the original deposits as security for the debt of Asian Winner, the bank thereby had "exercised" its right of security, and thus that mutuality had been created for the purposes of this liquidation. In any event, it seems tolerably clear that the bank's rights under the Security Over Deposit Agreements are rights which are exercisable unilaterally by the bank and, post-liquidation, by the liquidators and/or Special Managers, over the deposits the subject-matter of the Agreements, and that the existence of such rights does not involve any 'liability' on the part of the depositors, thereby precluding statutory mutuality.

25. Accordingly, notwithstanding Mr Kerr's persuasive arguments to the contrary, in my view the only 'appropriations' that have taken place pursuant to the Agreements have been made on the basis of the express authorisations conferred by the depositors within the Forms 72, and I decline to accept the contention that any action taken with regard either to dividends or interest has been sufficient to create mutuality for section 35 purposes.

26. It follows from the foregoing, therefore, that this argument is also rejected.

(3) Effective due date of liquidation dividends

27. The proposition put forward on behalf of Mr Levy under this head appears to be thus : that the dividends declared in the liquidation are deemed to have been paid as at the date of the liquidation, with the consequence that the debt of Asian Winner must be regarded as extinguished as at that date.

28. Mr Kerr submitted that, absent proper application of this rule, an "artificial indebtedness" would be created which offended against the general principle that a company's assets are to be divided "in accordance with the indebtedness that existed as at the date of the winding-up". He also referred to this deemed date of payment as an "established rule", notwithstanding the received wisdom that the effective date of payment of a dividend is its actual date of payment (or, possibly, the date of its declaration). In this connection, Mr Kerr cited several cases, principal among these being In re Humber Ironworks and Shipbuilding Company, (1869) LR 4 Ch App 463 and In re Dynamics Corporation of America (in liquidation), [1976] 1 WLR 757, albeit this specific point is not addressed in the case law. In Humber Ironworks, op.cit., for example, it was decided that fairness to creditors meant that dividends ought to be paid on debts as they stood as at the date of the winding-up, absent any consideration of post-liquidation contractual interest, whilst in Dynamics, op.cit., the case was concerned with the date upon which the company's debts should be converted into sterling for the purposes of a distribution, it being held that the appropriate date therefor was the date of the winding-up.

29. Whilst I can appreciate the significance of the date of liquidation as the appropriate date to fix for the purpose of making claims in the liquidation, the idea that, as a matter of law, dividends are deemed to be paid as at that date appears to me to represent a quantum leap. As Mr Burns suggested, if this proposition were correct "it would lead to the startling result of achieving automatic set-off in circumstances where there is no mutuality", and that this proposition is simply wrong and contrary both to principle and commonsense. I agree, and reject this argument also.

(4) Post-liquidation interest

30. The point at issue here centres primarily upon the charging of compound interest. Mr Kerr's position is that the liquidator has no right to levy compound interest upon the indebtedness of Asian Winner, with the result that "a wholly unmeritorious claim" has been created against the 1st and 2nd defendants. Whilst banks are entitled by custom and usage to compound interest, he submitted, the liquidator is entitled merely to interest "on an equitable basis", albeit he has no right to interest in this case as he has had, said Mr Kerr, the use of the two depositors' monies for the entire period.

31. During the course of this argument Mr Kerr properly brought to the attention of the court an authority which stands against the proposition that a liquidator cannot charge compound interest. This is the case of Bank of Credit and Commerce v. Malik, [1996] BCC 15, a decision of Nicholas Stewart QC, sitting as a Deputy High Court judge, wherein the judge was seized with the specific issue of whether BCCI could continue to charge compound interest after the appointment of a provisional liquidator, the argument then being propounded being that upon the appointment of the provisional liquidator the relationship between the bank and the corporate borrower had come to an end, and that as a matter of law it was not possible for the bank to charge compound interest once that relationship had thus ended. This particular argument was firmly rejected, the judge observing (at pages 17-18) :-

"... It was submitted, however, that on the authorities it is not possible for the compounding of interest to survive the end of the banker/customer relationship which, as I have said, Mr Hossain contended had come to an end on 5 July 1991. I am not sure that it is helpful to approach such questions by seeking to identify something which can be labelled as the end of the banker/customer relationship. That seems to over-simplify a more complex position. The appointment of a provisional liquidator could be said in some sense to have brought about or corresponded with the ending of BCCI's life as a bank, but as between BCCI and Fitt, for example, not all features of the banker/customer relationship immediately came to an end. There was still money owing; there were still terms and conditions of the borrowing. There were still presumably, as Mr Crow observed, obligations of confidentiality. In any case, even if it can be said that the relationship of banker and customer came to an end on 5 July 1991, the authorities to which I was referred do not establish that compound interest could not thereafter be charged by BCCI.

I was referred to Deutsche Bank v Banque des Marchands du Moscou (1931) 4 Legal Decisions Affecting Bankers 293; Williamson v Williamson (1869) LR 7 Eq 542 and National Bank of Greece v Pinios Shipping [1990] 1 AC 637, a decision of the House of Lords in which those two earlier cases were both cited in the leading speech in the House of Lords by Lord Goff. It is clear from Lord Goff's speech that there is nothing in the decision in that case or in the two earlier cases that leads to a conclusion that a bank's contractual right to charge compound interest must end upon the appointment of a provisional liquidator or on the winding up of the bank (pp. 680A-G, 681D-684G).

For present purposes the effect of the speech of Lord Goff, with whom all the other four Lords hearing that appeal were in complete agreement, was that it is the terms of the contract which determine whether compound interest continues to be chargeable in any particular situation and not some supposed rule that it is not chargeable when the relationship of banker and customer comes to an end. It is true that at p. 684F, after expressing the opinion that the right to compound interest was not ended by a demand for payment of the outstanding balance on the customer's account, Lord Goff went on to say that such a demand would not of itself bring to an end the relationship of customer and banker; but I do not understand him to be saying that identification of the end of that relationship is the test by which it can or should be determined as a matter of law whether compound interest continues to be chargeable. It is quite clear that Lord Goff was expressing no enthusiasm at all for the concept of the ending of the banker/customer relationship as a supposed guide.

Lord Goff held that there was no basis in justice or logic for terminating the banker's right to compound interest simply because the bank had demanded payment of the outstanding balance. Similarly, I can see no justice or logic in terminating the right to compound interest simply because of the appointment of the provisional liquidator and the events surrounding or connected with that appointment. Why should that particular term of the contract drop away at that point? ..."

32. In principle I agree with these observations. What then, is the basis grounding the Special Managers' assertion that compound interest is chargeable at the rates now levied?

33. The contractual basis of the claim for the accrual of interest upon the indebtedness of Asian Winner in the post-liquidation period is to be found in the General Agreement for Commercial Business, dated 31 December 1996, Clause 31 of which reads :-

"31. That all moneys, payments, sums and amounts of money expressed herein to be payable by me (us) to you shall include any and all interest payable thereon. I (we) understand that no single rate can be fixed in respect of such interest, as the rate of interest in each case will vary according to the type of transaction involved, the credit risk involved and the general interest rates applicable at the time of such transaction. I (we) know your policy on interest rates, however, and hereby agree to leave the determination of the particular rate of interest applicable in each case in respect of the moneys, sums and amounts of money expressed herein to be payable by me (us) to you solely in your hands and to pay the interest thus determined by you as if such particular rate of interest had been expressly agreed between us beforehand."

34. Mr Burns submitted that this clause is drawn in very wide terms, and that it is the plaintiff's case that it is wide enough to permit both compound and default interest (representing a higher rate for unauthorised indebtedness) to be charged. He further submitted that the restrictive construction placed upon the clause by the 2nd defendant, so as to prohibit determination of compound interest, was both artificial and wrong, the phrase "rate of interest" being capable of importing both percentage rates and/or relevant base periods.

35. Mr Gabriel Tam gave detailed evidence of the bank's pre-liquidation practice concerning interest, with particular reference to the operation of Asian Winner's loan account, together with an explanation of the FALCON computer system, which was the system maintained by the plaintiff prior to liquidation which calculated interest due on any particular account. In summary, the prevailing pre-liquidation interest regime with regard to this particular overdraft account was Hong Kong dollar prime plus 1.5% regarding overdrawn sums between zero and HK$2.5 million, Hong Kong dollar prime plus 2.5% for sums in excess of HK$2.5 million but less than HK$4 million, and Hong Kong dollar prime plus 5% in respect of sums exceeding HK$4 million benchmark - applicable interest rate categories which I note were accepted by Mr Sherman Ha during cross-examination as the pre-liquidation interest rates which in fact were charged by the bank.

36. Further, the uncontradicted evidence is that following the liquidation of the bank, the Special Managers adopted the policy of continuing to accrue interest on all accounts at the rates and in the manner set out in any applicable facility letter or, in the absence thereof, in accordance with the established practice of the plaintiff prior to its liqidation. As indicated above, for the purpose of the Asian Winner Overdraft, the agreed overdraft limit was HK$4 million, within which were two tranches commanding varying rates, whilst above that limit the policy for unauthorised debt was Hong Kong dollar prime rate plus 5%.

37. I accept Mr Tam's evidence in this regard. I also find that the terms of Clause 31 of the GACB do not preclude the charging of compound interest, and I reject Mr Kerr's submission to the effect that "the act of compounding interest amounts to the liquidator doing business as a bank". I reject, also, the assertion that since the bank had had the use of the Gershon Levy and Eyal deposits that there was no entitlement to charge interest at all, or that the actions taken with regard to interest are otherwise inequitable and unfair. The pre-liquidation contractual position expressly provided for the charging of interest, and if this does not terminate as at the date of liquidation - which in my view it does not - the liquidators/Special Managers clearly remain under a duty to attempt to continue to collect it. It follows that I do not see any remit, as Mr Kerr alternatively suggested, to order that the liquidators charge simple as opposed to compound interest, nor do I believe that it is open to the court arbitrarily to reduce the interest charged to the rate of 1% above prime, given that the Special Managers are doing no more than was open to the bank to do prior to its liquidation.

OTHER MATTERS

38. In the course of his wide-ranging address, Mr Kerr invoked what he termed 'the court's equitable powers in liquidation', his thesis being that since it has transpired that the plaintiff in fact was solvent, the consequence of the delay in the liquidation has meant "that a fully secured claim has been transformed into a debt", thereby creating injustice to his client. In this connection he cited, inter alia, Lawton LJ in Re Multi Guarantee Co. Ltd, (1987) BCLC 257 at 270 :-

" I turn now, very briefly, to the second argument of counsel for Vallances (Mr Crystal QC) namely that, although there may not have been an effective trust of the sum of nearly ￡1/4m, nevertheless, having regard to all the circumstances, the liquidator should not demand that it should form part of the property of the company. He carried out considerable research to establish that proposition and he invited our attention to some of the cases which he had found when carrying out that research. Various words have been used in the cases to indicate the kind of conduct to which the principle of Ex p James, Re Condon (1874) LR 9 Ch App 609 may apply, such as 'a point of moral justice', 'dishonest', 'dishonourable', 'unworthy', 'unfair' and 'shabby'. Those words are not words of art at all. They are words of ordinary English usage and the concept behind them is, as I understand the cases, that an officer of the court, such as a trustee in bankruptcy or a liquidator, should not behave in a way which a reasonable member of the public, knowing all the facts, would regard as either dishonest, unfair or dishonourable.

The full extent of the doctrine in Ex p James as it has developed has not been discussed in this court because we did not call on counsel on behalf of the liquidator (Mr Chadwick QC) to comment on it. The reason we did not call on him was that, on the facts of this case, it seems to me and, I infer, to my brethren too, that no reasonable man could have considered that the liquidator, in the circumstances of this case, did behave in any of the ways which have been referred to in the decided cases." (emphasis added)

39. Mr Kerr submitted that most members of the public would view the action taken against Mr Levy "as at the very least 'unfair'", and if this submission were to be accepted, the court had jurisdiction to order the Special Managers not to proceed with a course of conduct thus regarded; in this case, said Mr Kerr, "the interests of justice would be served by ordering the plaintiff not to pursue its claim against the 2nd defendant".

40. I have no doubt that from Mr Erez Levy's viewpoint the "interests of justice" would be so served, but from a wider perspective, I do not consider that this submission can succeed in this case. It is of course difficult not to regard the sequence of events as they have unfolded without feeling a real degree of sympathy for Mr Levy's position. Had the plaintiff not gone into liquidation, the overwhelming probabilities are that matters would have occurred very differently, and certainly it is unlikely that Mr Erez Levy would have been first in the firing line when and if the bank had sought to recoup the indebtedness of Asian Winner. No doubt the relevant deposits would have been the first option, followed perhaps by an initial call upon the guarantee of Mr Gershon Levy. But events did not thus transpire, and it is no part of the court's function, whatever sympathy the present situation may engender, to target as 'shabby' or 'unfair' or 'dishonourable' actions of liquidators who have sought, within the law, to do no more than to exercise their functions in the interests of the general body of creditors as a whole; had they acted otherwise, no doubt criticism equally would have been forthcoming from those whose interests were not being protected as fully as the law permitted. So that, whilst the court may not view the end result with any great enthusiasm, ultimately this last line of argument amounts to no more than special pleading, which, on the facts of the present case, in my judgment fails also.

ORDER

41. It follows from the foregoing that the plaintiff is entitled to judgment against the 1st and 2nd defendants in the sum certified and claimed, that is HK$6,391,462.78, less the sum specifically conceded for the purposes of this trial, namely, HK$588,973.37, which results in a judgment sum of $5,802,489.41.

42. I make an order nisi that interest on the said sum is to run at the pleaded rate of $1,959.52 per day from 21 September 2000 until the date of judgment herein, and thereafter upon the said principal sum at the judgment rate from time to time prevailing until payment.

43. I further make an order nisi that the costs of this action are to be paid by the defendants to the plaintiff, to be taxed if not agreed.