WING HANG BANK LTD v. KIT CHOY DEVELOPMENT LTD AND ANOTHER

CACV260/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL No. 260 OF 2004

(ON APPEAL FROM HCMP 5172/2002 and HCMP 220/2003)
(Consolidated)

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JUDGMENT

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Hon. Yuen JA:

1.  This is the Defendants’ appeal from the order of Barma J. given on 23 July 2004 dismissing the Defendants’ application for an order to strike out the proceedings instituted by the Plaintiff ("the Bank") against the 1^st Defendant ("the Company") for payment of monies due and for possession of properties subject to a Legal Charge and against the 2^nd Defendant ("Mr Choy")  for payment under Personal Guarantees signed by him for the monies due. 

2.  The facts have been set out in detail in paras. 2 - 25 of the judge’s judgment and I do not propose to repeat them here.  Having considered those facts, the judge applied the relevant principles (which he had set out at para. 33 of his judgment) and exercised his discretion against ordering a strike-out.        

Grounds of appeal

3.  The Notice of Appeal contained 3 grounds of appeal, which may be summarized below.

(1)	The judge erred in law in holding that the Plaintiff could bring its claims under Order 88 RHC.  The Defendants submit that having regard to National Westminster Bank v Kitch [1996] 1 WLR 1316, the Plaintiff had "no basis in law" for relying on O.88, and the Originating Summonses ought then to have been struck out ("the O.88 point").
(2)	The judge erred in holding that it was arguable whether the banking facilities/Bank Guarantees had been cancelled.  The Defendants submit that the Plaintiff had invited the Company  to cancel the Bank Guarantees and the Company had accepted those invitations.  These parties were thus bound by the cancellations, irrespective of the wishes of the beneficiaries of the Bank Guarantees ("the cancellation point").
(3)	The judge erred in failing to have regard to the cancellations and the warnings that the Defendants had given to the Bank not to pay under the Bank Guarantees because of the "fraudulent conduct" of the beneficiaries ("the fraud point").

4.  However at the hearing before us, Mr Choy indicated that he was not pursuing the cancellation point and the fraud point on appeal. I shall deal below with the submissions that Mr Choy made before us.

Submission - right to representation of company by director?

5.  I pause here to note that the court file had no record of leave having been given to Mr Choy to represent the Company pursuant to Order 12 r.1(2) and (2A) RHC, which r.9 applies to originating summonses.   

6.  When the absence of leave was pointed out to Mr Choy at the hearing before us, he submitted that there was case law to the effect that where a director of a company was also a personal defendant in proceedings, leave was not required for him to represent the company.  Mr Choy undertook to produce the authority within the next day.  On that basis, and in view of the fact that Mr Choy had been permitted by the judge to represent the Company at the hearing, we proceeded to hear Mr Choy’s submissions on behalf of the Company and himself. 

7.  The case that Mr Choy sent, A.L.I. Finance Ltd v Havelet Ltd [1992] 1 WLR 455, did not support the proposition advanced by Mr Choy that leave is not required for a director to represent a company if the director was also involved in the litigation as a party.  In fact, Scott J affirmed that O.12 r.1 RHC prohibits a limited company from taking a step in proceedings otherwise than through a solicitor (p.462D-E) and that a director has no right of audience just because he is a director of a limited company which is party to proceedings (p.463B).  However since the director was himself a party, Scott J held that he had sufficient locus standi on his own account to make an application to vary an order that was binding on the company (p.464C-D): 

"I do not see why, as a party to the action, he has not, by reason of his office as director of Finance and his interest in the shareholding of Finance, sufficient locus standi to make an application for the variation of the order that binds Finance.  He does so, not on behalf of Finance, in the sense that Finance will be the party making the application, but on his own account albeit for the purposes of Finance and authorised by Finance to do so" (emphasis added). 

8.  The case is therefore no authority for Mr Choy’s submission that he had a right to represent the Company before us just because he happens also to be a party in the proceedings in his personal capacity.  The Company must therefore be treated as having been absent at the hearing.  In any event, it can be assumed that, even if leave had been given, the same submissions would have been made on its behalf.  

Submission - O.88 cannot apply to action on simple debt?

9.  As I understand it, Mr Choy’s submission was first, that O.88 did not apply because the Plaintiff was suing under a simple contract debt and not under a specialty debt.  He referred to Barclays Bank Ltd v Beck [1952] 2 QB 47, quoted in National Westminster Bank plc v Kitch, which held that a debt created otherwise than under and by virtue of a deed is a simple contract debt even though there is a deed giving collateral security for the debt.

10.  I do not agree that O.88 did not apply.  Order 88 expressly "applies to any action (whether begun by writ or originating summons) by a mortgagee ... being an action ... in which there is a claim for any of the following reliefs, namely - (a) payment of moneys secured by the mortgage; ... (d) delivery of possession ... to the mortgagee by the mortgagor ... ".

11.  Nowhere in O.88 is there a stipulation restricting its application to actions for payment of moneys lent under or by virtue of a deed.  So long as there is a claim for payment of moneys which had been secured by a mortgage, or there is a claim for delivery of possession of the mortgaged property, O.88 would apply.  So, even if Mr Choy is correct that the Bank is suing on a simple contract debt, so long as that debt is secured by a charge, O.88 applies.

12.  In any event, the purpose of O.88 is to afford additional protection to mortgagors (Hong Kong Civil Procedure 2004, p.1140, §88/0/2).  For example, information of a particular type is required to be included in the mortgagee plaintiff’s affirmation in support of the proceedings (rule 5) and there are specific procedural rules that the plaintiff would have to comply with before it can apply for judgment in default (rules 4 ands 6).

13.  National Westminster Bank v Kitch was a case where money judgment was entered in default without the plaintiff bank having complied with the requirements of O.88.  The defendant argued that the default judgment should be set aside because he was entitled to the protection of the O.88 procedural rules, as the money debt had been secured by a mortgage. 

14.  The Court of Appeal held that the plaintiff in that case was simply suing on a debt.  The only relief it sought was repayment of overdrafts plus interest.  The writ made no mention of any mortgage (p.1318H).  Therefore there was no reason for classifying the case as a mortgage action, and so the defendant was not entitled to the protection of O.88 and the plaintiff was entitled to enter default judgment in the way it did.

Submission - Legal Charge discharged?

15.  Mr Choy submitted that the Bank here could not be seeking payment of monies secured by, and possession of properties charged under, a charge because the Legal Charge had been discharged in October 1998.  However, there is both affirmation and contemporaneous documentary evidence that the Company had requested the Bank to issue guarantees as security for costs, and the Bank had agreed to do so on the security of the Legal Charge (see the affirmation of Chan Han Wo filed 13/2/2004, para. 5, and the Bank’s Facility Letter dated 22/12/1998 which had been confirmed and accepted by the Company).  It is at least arguable that the language of the Legal Charge is wide enough to secure monies owed by the Company to the Bank for payment under the Bank Guarantees.

Submission - no evidence of simple debt because no facility letter?

16.  Further Mr Choy submitted that as this was a case of a simple contract debt, evidence of the debt in the form of a facility letter had to be produced.  Although there was a signed facility letter dated 22 December 1998, the facilities had been "cancelled" as indicated e.g. in the letter dated 12 May 2000. 

17.  As far as this submission of  "cancellation" is concerned, one must start with the Company’s letters requesting the Bank to issue guarantees in the form of a draft annexed thereto.  The Guarantees so requested were determinable, not upon expiry of a fixed period of time in terms of years or months, but only on the happening of certain events. 

18.  It is in this context that one must consider how it was that the Bank sent letters to the Company asking for instructions whether to "extend or cancel" the guarantees for a fixed period of time (whether a year or several months). 

19.  There is affirmation evidence from the Bank that it periodically charged its customers a commission for the provision of a guarantee, and that that was the reason for the letters.  If the customer were to indicate that he no longer wished the Bank to continue providing the guarantee, the Bank would then seek the approval of the beneficiary.  If that was given, the Bank would then cancel or revoke the Guarantee, and no commission would thereafter be charged to the customer. 

20.  According to the affirmation of the Bank’s Assistant Manager, the  purpose of the letters was explained to the Defendants who understood or ought to have understood the arrangement (see the affirmation of Ma Yu Ling filed 13/2/2004, para. 4).  As it happened, the beneficiaries here did not give their approval and so the Bank Guarantees were not cancelled or revoked.  

21.  Moreover, the "cancellation" letters themselves contained an undertaking by the Company "to reimburse to you [the Bank] on demand for any liability that may arise under the terms contained in the Letter of Guarantee".  Accordingly, it is also at least arguable that even if it is assumed that (as between the Bank and the Company) the guarantees had been "cancelled" notwithstanding the beneficiaries’ lack of approval, the Bank would in any event be entitled to reimbursement from the Company of the sums it had paid to the beneficiaries.  It cannot be said therefore that there was no evidence of debt. 

Submission - no evidence required under O.88 r.5(3)?

22.  Mr Choy’s further submission (which did not appear in his Notice of Appeal) was that there was no evidence to support proceedings under O.88.  The evidence required under O.88 r.5(3) included at sub-para. (b) the amount of periodic payments required to be made by a mortgagor.  Since there was no evidence of any periodic payments being required to be paid by the Company, Mr Choy submitted that therefore O.88 did not apply and hence the proceedings should have been struck out.

23.  It is obvious that though instalment loans are a common form of banking facility for which property is offered as security, they are not the only form.  Mortgages are often used to secure, say overdrafts.  If Mr Choy’s proposition is correct, it would mean that just because the facility takes another form, the protection afforded by O.88 to mortgagors would be lost.  I would be hesitant to accept such a proposition unless there is clear wording to that effect.  There is no such wording in the order. 

24.  Order 88 applies to mortgage actions without restricting the form of banking facility under which property had been secured.  If the form of facility did not involve periodic payments, then, as was done in this case, the mortgagee should indicate in its r.5 affirmation that none had been required from the mortgagor.   In this case it is clear from the affirmations of Sheh Ching Man filed on behalf of the Bank that the requirements of O.88 r.5(3) were being followed closely.  As there were no periodic payments in the Banking Guarantee facilities, "N/A" (not applicable) was indicated in para. 13 of Mr Sheh’s affirmation.  Mr Choy’s submission on this point is therefore also incorrect. 

Order

25.  By reason of the above, I do not consider that the judge was wrong in the exercise of his discretion not to strike out the proceedings and I would dismiss the appeal and give an order nisi that the Defendants pay the Plaintiff’s costs.

Hon. Tang JA:

26.  I agree.