XCHRX THE HONGKONG AND SHANGHAI BANKING CORPORATION LTD. v. DR PHILIP LING LEE KANG AND ANOTHER

HCA 18072/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 18072 OF 1999

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R U L I N G

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1. The Plaintiff, the Hong Kong and Shanghai Banking Corporation Limited, seeks summary judgment against the 2nd Defendant in respect of moneys advanced to it under banking facilities granted by three facility letters dated 18th November 1996, 2nd April 1997 and 31st March 1998, as well as moneys due in respect of an unauthorised overdraft. It also claims interest on those sums.

2. The 2nd Defendant was not represented at the hearing of the summons but it had filed an affidavit in opposition to the Plaintiff's summons. I have, therefore, considered the arguments raised in that affidavit.

3. There is no dispute as to the sums of money advanced under the terms of the Plaintiff's facility letters. Nor is it disputed that by a letter of demand dated 3rd November 1999, the Plaintiff demanded payment from the 2nd Defendant of its then alleged indebtedness.

4. The first and principal matter in issue between the parties is whether under the terms of the facility letters the Plaintiff was entitled to insist on repayment on demand or whether the sums advanced were term loans not repayable on demand.

5. The second matter relates to interest: whether the Plaintiff was in breach of contract by charging compound interest on the amounts outstanding in the 2nd Defendant's current account, which was debited with the interest payable by the 2nd Defendant under the facility letters at the end of each interest period. Alternatively, whether the charging of interest on interest on the Plaintiff's current account constituted a penalty.

6. The question relevant to these proceedings in respect of each of the issues is whether the 2nd Defendant has demonstrated that it has an arguable case - "an issue or question in dispute which ought to be tried" or some other reason why there should be a trial (see O.14 r.3).

7. The facilities were originally granted to the 2nd Defendant under the letter of 18th November 1996. It permitted the 2nd Defendant to draw up to US$19 million in three tranches.

8. Tranche A was a term loan of up to US$15 million to be repaid by 10 consecutive semi-annual payments commencing on the 31st March 1998, the interest rate to be charged at 2% per annum over 1, 2, 3 or 6 months SIBOR (i.e. Singapore Interbank Money Market Offer Rate) and payable at the end of each interest period to the debit of the borrowers account to be opened with the lender.

9. The purpose of this tranche was stated to be "to finance part of the investment cost in Anli International (Yan Bian) Lumber Co Ltd for the plywood project in Jilin, China."

10. Tranche B was a term loan of up to US$2 million to be repaid by 11 consecutive semi-annual payments commencing on 30th September 1997 at an interest rate to be charged at 2% per annum over 1, 2, 3 or 6 months SIBOR and payable at the end of each interest period to the debit of the borrower's account to be opened with the lender.

11. The purpose of this tranche was stated to be "to finance part of the investment cost in Anli International (Yan Bian) Lumber Co Ltd for the laminated board project in Jilin, China."

12. Tranche C was a revolving loan of up to US$2 million, interest on which to be charged at 1.75% per annum over 1, 2, 3 or 6 months SIBOR and payable at the end of each interest period to the debit of the borrowers account to be opened with the lender.

13. The purpose of this tranche was stated to be "to finance the borrower's working capital requirement".

14. It was expressly stated in the letter of 18th November 1996 that "these facilities are subject to review at any time and in any event by 31st October 1997 and also subject to our overriding right of withdrawal and repayment on demand."

15. The facilities were reviewed on 2nd April 1997. The 2nd Defendant was granted a facility of US$6,821,000 in respect of foreign exchange contracts. This amendment to the facilities is not particularly relevant to these proceedings. It was stated that these additional facilities were "subject to review at any time and in any event by 31st October 1997 and subject to our overriding right of withdrawal."

16. The review of the facilities which resulted in the facility letter of 31st March 1998 came about because towards the end of March 1998, the 2nd Defendant had requested the Plaintiff to defer payment of the first instalment of the Tranche A loan by 12 months and defer payment of the second instalment of the Tranche B loan by 6 months. The deferral and rescheduling of the term loans was approved by the Plaintiff subject to increasing the contractual interest rate by 0.25% per annum. These revised facilities were again said to be subject to review at any time and subject to the Plaintiff's customary overriding right of withdrawal and repayment on demand.

17. In the affirmation filed on its behalf, the 2nd Defendant seeks to argue that Tranches A and B being term loans granted to the 2nd Defendant for specific purposes were at all times not repayable on demand and that the Plaintiff was not entitled to terminate the facility on 3rd November 1999, the 2nd Defendant having incurred substantial expenditure and liabilities in reliance upon the Plaintiff's agreement to provide such term loans. Insofar as Tranche C is concerned, it was for the 2nd Defendant's working capital . Since working capital was an ongoing requirement and it was envisaged that the 2nd Defendant's timber projects would require working capital at least for the initial 3 - 5 years in normal circumstances, the purpose of Tranche C would be defeated if it was repayable on demand.

18. The argument essentially is that the clause allowing the Plaintiff to insist on repayment on demand was repugnant to the main purpose of the facilities granted.

19. Very fairly, Mr Wong for the Plaintiff referred me to the unreported decision of Goff J in Titford Property Company v Cannon Street Acceptances (22nd May 1975) in which the learned judge found that where the bank in that case had granted an overdraft facility for 12 months to assist the Plaintiff in buying land and building upon it, a clause providing that all moneys should be repayable on demand was repugnant to the whole facility. He said this:

"(The bank) could not, in my judgment, with one hand grant a facility for a term for a purpose which to its knowledge clearly involves the plaintiffs in incurring expenditure and liabilities, with a view to ultimate profit, and with the other take it away by an unqualified right to require repayment on demand at any time. In my judgment, therefore, I must modify clause 9, by reading it as subject to the provision as to the duration of this facility, or ignore it altogether."

20. Titford's case has been considered in a number of later cases, for instance, William & Glyn's Bank v Barnes [1981] Commercial Law Reports 205, Bradford Savings & Loan Ltd v Barclays Bank PLC (unreported, 30th March 1994), Lloyds Bank PLC v Lampert [1999] BCC 507, Bank of Ireland v AMCD (unreported, 19th March 2001), and has been distinguished.

21. Gibson J in William & Glyn's Bank v Barnes said this:

"If the judgment of Goff J.....is to be regarded as stating that in a contest for primacy between a term loan, and a clause for repayment on demand, the provision for the term loan must always prevail, then, with respect, I should not feel able to follow it. Such a conclusion would in my judgment be contrary to the basic principle of the common law of contract, restated by Lord Diplock in Photo Production Ltd v Securicor Transport Ltd to the effect that parties to a contract are free to determine for themselves what primary obligations they will accept, subject to certain well known categories of exception which are not relevant to this point. I take the true principle to be that stated by Lord Denning MR, in Neuchatel Asphalt Co v Barnett which Goff J, cited: 'It is a well settled rule of construction that if one party puts forward a printed form of words for signature by the other, and it is afterwards found that those words are inconsistent with the main object and intention of the transaction as disclosed by the words specially agreed, then the court will limit or reject the printed word so as to ensure that the main object of the transaction is achieved.' Further, in determining what the main object and intention of the transaction is, the court is not free to disregard the provision in the contract which it is sought by this doctrine to exclude: in this case, the provision for repayment on demand. The point of construction can perhaps be expressed by asking, with reference to the term in question, can the bank, in including the term in their document, reasonably have supposed that the borrower would treat it seriously? Alternatively, in the circumstances, and on the terms of the contract, must the borrower sensibly or reasonably have supposed that the bank meant the term to be effective? If those questions can be answered in the sense that the bank could not reasonably have supposed that the borrower would treat the clause seriously, and that the borrower could not sensibly be expected to have supposed that the bank did mean the term to be effective, then the law both permits and requires the court to disregard the term. The court is not forcing upon the bank a contract which it never made: the court is enforcing the real contract which the parties intended to operate between them."

22. I do not consider it arguable in this case that the provision giving the bank the right to payment on demand is repugnant to the other terms of the facility letters.

23. The situation in Titford's case was quite different. Not only was the bank in that case, as part of the arrangement, to acquire a 20% shareholding in the borrower's company, but in the facility letter in that case there was no indication on its face whether the "term loan" provision or the "repayment on demand" provision was to prevail. In the case before me today, the right to insist on payment on demand is said in the facility letters to be an "overriding" right.

24. In Bradford Savings & Loan Ltd v Barclays Bank PLC where the words "repayable on demand" were also described as a "overriding condition" in the facility letter Mr H Kershaw QC sitting as a Deputy Judge of the Queen's Bench Division said:

"In my judgment if those words mean what they appear to mean, it would be impossible to imply anything to the contrary."

25. There is no inconsistency, in my view, between a term loan which both parties anticipate will last the duration of the term and the lender retaining a right to call for repayment at any time on demand. This is particularly so when the term is, as in this case, for a number of years and circumstances may change.

26. To answer the questions posed by Gibson J in William & Glyn's Bank v Barnes, the bank would reasonably have expected the 2nd Defendant to take the term as to "repayment on demand" seriously and the 2nd Defendant would have supposed the Plaintiff intended that term to be effective.

27. In the case of Lloyds Bank International v Dericourt Investments Ltd [1983] 2 HKC 691, Kempster J said this of the commercial rationale of the document in that case:

"Looking at the document from the point or view of a potential borrower possessed of normal business acumen and expertise and no more, it is, in my view, to be construed as an offer of a term loan, or of the continued loan for a term of moneys already advanced, subject to conditions one of which reserves to the plaintiffs the right at all times and at their sole discretion to call it in. The intending borrowers would be aware that it was the lenders' present intention, without guarantee as to the future, that the loan should run for some seven years. Making a commercial judgment, they expressly accepted loans on these terms with all the attendant risks."

28. In my view the same rationale applies to the terms of the facility letters in this case.

29. The second point raised by the 2nd Defendant amounts to an attack on the figure of US$2,781,352.36 claimed by the Plaintiff as the unauthorised overdraft.

30. Under the terms of the facility letters, the interest at the agreed rate was to become "payable at the end of each interest period to the debit of the borrowers account".

31. The 2nd Defendant appears to take no issue as to the amount of interest debited to its account but disputes the Plaintiff's right to charge interest on that interest.

32. The express provision in the Facilities Letters that the interest due on the loans was "to the debit" of the Current Account made it plain that such interest was to be treated as another advance by the Plaintiff, which itself attracts interest. This was the offer made, which the 2nd Defendant had unreservedly accepted. In Inland Revenue Commissioner v Holder [1931] 2 KB 81, at p.95, per Hansworth MR said:

"It was held by the Court of Session in Scotland in 1863, in Reddie v Williamson, that the effect of the method adopted by the bank in the present case namely, the accumulation of interest at each stop converted the interest so accumulated into an advance by the bank. Lord Cowan held: "The true view is, that the periodical interest at the end of each year is a debt to be then paid, and which must be held to have been paid when placed to the debit of the account as an additional advance by the bank for the convenience of the obligants."

33. In National Bank of Greece SA v Pinios Shipping Co No. 1, The Maira [1990] 1 AC 637, the House of Lords held that where a bank lends money, it is a term implied by the usage of bankers that the bank is entitled to capitalise or compound interest.

34. The 2nd Defendant has not raised an arguable defence on this point or on the point that the interest so charged by the Plaintiff constitutes a penalty.

35. One final and very minor point was raised in the affidavit of Brian Pok Kat Leow filed on behalf of the 2nd Defendant and that relates to the Plaintiff's calculations of the interest. That point was convincingly answered in the 2nd affidavit of Bede Joseph Pohlen filed on behalf of the Plaintiff, who gives a more detailed breakdown of how the amounts were calculated.

36. I accordingly give judgment in this action for the Plaintiff against the 2nd Defendant for the amounts claimed in the statement of claim. Interest at the rates referred to in paragraphs (v), (vi) and (vii) in the prayer are to run until today and thereafter at judgment rate until payment.

37. The Plaintiff's costs of the action to be taxed and paid by the 2nd Defendant.