INTRALINE RESOURCES SDN BHD v. THE OWNERS OF THE SHIP OR VESSEL "HUA TIAN LONG"

HCAJ 59/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ADMIRALTY ACTION NO. 59 OF 2008

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Admiralty Action in rem against: the ship or vessel “HUA TIAN LONG” (People’s Republic of China Flag)

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D E C I S I O N

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I. INTRODUCTION

1.  In order to obtain the release of their Vessel, the Defendants have been ordered to provide bail of over $122 million.  The Defendants propose to post such bail by way of bonds issued by the Hong Kong branch of China Merchants Bank Co. Ltd. (CMB).

2.  The Plaintiffs say that the bail bonds are not an adequate surety and so the Court should reject them.  The Defendants, on the other hand, say that CMB is good and sufficient surety for the purpose of providing security.

3.  I have to decide whether the proposed CMB security is adequate for the purposes of posting the requisite bail.

II.  DISCUSSION

4.  In support of their contention the Plaintiffs advance a number of points.

5.  First, citing The “PIYA BHUM” [2004] 1 SLR 564 (Selvam JC) Mr. Charles Sussex SC (appearing for the Plaintiffs) suggests that a bail bond by a person without assets within the jurisdiction is worthless from a plaintiff’s point of view. 

6.  Mr. Sussex notes that, although the Hong Kong branch of CMB appears to have assets of US$2.4 billion, that “could be no more than the extent of its loan portfolio to Hong Kong entities”. It is unclear (Mr. Sussex says) whether the branch owns tangible movables or fixed assets against which execution could be levied in Hong Kong.  Not enough information is known (Mr. Sussex says) about the nature of CMB Hong Kong’s assets.

7.  Second, the Plaintiffs refer me to a Federal Reserve Bulletin dated Fourth Quarter 2007.  That states:-

“CMB, with total assets of approximately [US]$145.6 billion, is the sixth largest bank in China.  CMB is indirectly controlled by the Government of China through a number of wholly owned companies.  One of these companies, China Merchant Group, Limited, Shenzhen, People’s Republic of China, indirectly owns approximately 17.6 percent of CMB’s total outstanding shares. Two other government-owned companies, China Ocean Shipping (Group) Company and China Shipping (Group) Company, own 6.4 percent and 5.4 percent, respectively, of the shares of CMB. No other shareholder owns more than 5 percent of the shares of CMB.”

8.  Mr. Sussex says that the Plaintiffs are worried that CMB may not be independent of the Central Government or the Guangzhou Salvage Bureau of the Ministry of Communications which owns the Vessel.

9.  Third, the Plaintiffs observe that the bail required is a substantial sum.  They contend that the resolution of their claim before this Court will likely take “a number of years”.  It follows (they suggest) that any security must be good for the long term. 

10.  In this connection, the Plaintiffs note the following:-

(1)   Standard & Poor (S&P) give CMB an A3 rating for short-term obligations.  This means that in S&P’s view CMB:-

“has adequate capacity to meet its financial obligations. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitments.”

(2)   S&P give CMB a BBB- rating for long-term issue obligations.  This means that in S&P’s view long-term financial obligations by CMB:-

“exhibit adequate protection parameters.  However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation.”

The minus (-) shows “relative standing within the major rating categor[y]”.

(3)   The ratings for CMB contrast with the higher S&P ratings given to certain banks (such as HSBC and Hang Seng) which the Plaintiffs have recommended to the Defendants.

11.  Mr. Sussex submits that, in the adverse or changing economic climate which the world is now facing, S&P’s rating of CMB’s creditworthiness legitimately gives rise to concern about CMB’s ability to meet the bail bond (if called upon).

12.  Mr. Sussex further observes that little is known concerning the exposure of Mainland banks to the mortgage-backed securities and the American sub-prime market.  Presumably by this comment he means to imply that CMB may not be as financially sound as it might at first blush seem. 

13.  Fourth, the Plaintiffs observe that an earlier version of the bond for a lesser amount had not been signed in accordance with CMB’s internal requirements.  The signatories of the earlier bond did not have the requisite authority to sign.  A corrective second bond had to be put up in substitution for the earlier bond.  This was (the Plaintiffs say) a lapse in CMB’s corporate governance which cannot inspire any confidence in the reliability of its bonds.

14.  In my view, on balance the proposed bond by CMB is adequate security.

15.  First, I shall assume (without necessarily accepting) that Selvam JC was right in his conclusion in The “PIYA BHUM”.  I shall also assume that a substantial portion of the US$2.4 billion assets of CMB’s Hong Kong branch represents the latter’s lending portfolio as Mr. Sussex supposes. 

16.  Even then I do not see why the debts owed to the Bank would not constitute assets against which the Plaintiffs (if necessary) could seek enforcement on the basis of any judgment here in the Plaintiffs’ favour.

17.  For what it is worth, the Defendants have drawn my attention to an article in Business Week indicating that CMB will be acquiring a 53% stake in Hong Kong-based Wing Lung Bank.  If that is right, plainly CMB would through the acquisition obtain tangible movable or fixed assets in Hong Kong.

18.  Second, the concerns about possible intermeddling in CMB’s affairs by the Mainland Government or the Ministry of Communications seem to me speculative and unsubstantiated.

19.  Third, insofar as credit ratings are concerned, the Defendants point out that P&I Clubs from which this Court routinely accepts bail bonds have similar or lower ratings.

20.  Thus, for example, London Steamship Owners Mutual Insurance Association has a BBBpi rating (the “pi” subscript signifying that the rating given does “not reflect in depth meetings with an issuer’s management and are therefore based on less comprehensive information than ratings without a ‘pi’ subscript”); Steamship Mutual Underwriting Association a BBB+ rating; West of England Ship Owners’ Mutual Insurance Association a BBBpi rating; Swedish Club a BBB rating; and American Steamship Owners Mutual P & I Association a BB- rating.

21.  Accordingly, a BBB credit rating for long-term obligations, while obviously not as good as an A1 rating, should generally be adequate. 

22.  I am not persuaded by Mr. Sussex’ speculative suggestion that CMB may have a large exposure in the US mortgage-backed securities and sub-prime lending markets.  I note in relation to this that the Federal Reserve Bulletin referred to by the Plaintiffs also says this:-

“China has adopted risk-based capital standards tha are consistent with those established by the Basel Capital Accord (‘Accord’).  CMB’s capital is in excess of the minimum levels that would be required by the Accord and is considered equivalent to capital that would be required of US banking organization.  Managerial and other financial resources of CMB are consistent with approval [by the Federal Reserve Board of a CMB branch in New York], and CMB appears to have the experience and capacity to support the proposed branch....”

23.  There would in any event be an enormous disincentive for a Government to use its shareholding to intervene in the affairs of a major bank.  Such intervention would immediately lead to an irreparable and fatal collapse in the bank’s reputation and credibility with considerable financial losses to all, including the Government involved.

24.  Fourth, that any bail bond provided should be a valid document signed by properly authorised officers of CMB seems to me a genuine matter of concern. 

25.  But this concern can be catered for by a condition that any security provided be supported by an affidavit of an appropriate CMB officer confirming that the executed security complies with CMB’s internal rules and regulations.  Subject to such condition, I do not think that it can be said that the proposed security is inadequate.

III.  CONCLUSION

26.  The proposed CMB security is adequate.