KEEN LLOYD ENERGY LTD v. SECRETARY FOR JUSTICE

HCA92/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 92 OF 2008

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J U D G M E N T

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1.    This is the plaintiff’s appeal against Master de Souza’s Order of 21 November 2008 striking out the Statement of Claim and dismissing the plaintiff’s action.  As such, the hearing before me is a hearing de novo.

2.    Many proceedings have been commenced and concluded in the substantial period of time that has passed since the matters giving rise to the present proceedings occurred in 1997 and 1998. 

3.    The plaintiff is one of the companies in the Keen Lloyd Group of Companies (“Keen Lloyd Group”) which included Keen Lloyd Motors Limited (“KLM”), now in liquidation, and Keen Lloyd Resources Limited (also in liquidation).  Mr Chin Kam Chiu (“Chin”) was the Chairman of the Group and acted on behalf of the Keen Lloyd Group at all material times.  These proceedings have been initiated on his direction.  The Keen Lloyd Group enjoyed general banking facilities with Sin Hua Bank Limited, Hong Kong Branch (“SHHK”) which was secured by pledges over property owned by various companies in the Keen Lloyd Group and other collateral.  The financial downturn starting from October 1997 affected many in Hong Kong including the Keen Lloyd Group.  By the end of 1998, the Keen Lloyd Group faced financial difficulty and, by November 1998, the Keen Lloyd Group owed substantial sums of money to SHHK, mostly in the form of overdue trust receipts.  From the year 2000, defaults occurred and SHHK began to take action to recover outstanding debts.  Eventually, some of the companies within the Keen Lloyd Group were wound up. 

4.    In March 2004, Chin and 4 officers of SHHK, namely, Chow Wai Choi (“Chow”), former Deputy General Manager of SHHK’s Credit Department, Hau Pui Yee, former Assistant General Manager of SHHK’s Bill Department, Ma Kin Fai, former Senior Manager of SHHK’s Castle Peak Road Sub-Branch and Madam Tsang Siu Lan, former In-house Bookkeeper of the Keen Lloyd Group, were convicted of conspiracy to defraud SHHK by dishonestly applying for and negotiating 25 Letters of Credit between 19 November 1998 and 16 April 1999 when there were no underlying commercial transactions behind them.  The conspiracy was hatched to raise funds to retire the overdue trust receipts and caused SHHK to lose its security over goods it had detained pursuant to its rights under the overdue trust receipts. 

5.    In April 1998, the Hong Kong Monetary Authority (“HKMA”) expressed concern over SHHK’s exposure to the Group.  At that time, the amount of credit extended was around $1.8 billion, representing about 25% of SHHK’s capital.  Under section 81(1) of the Banking Ordinance, an authorized institution incorporated in Hong Kong is subject to a statutory limit that its aggregate financial exposure to any one person or group of related persons should not exceed 25% of the local authorized institution’s capital base.  A local authorized institution that maintains financial exposure to a person, or a group of related persons, in excess of 25% of capital base would commit an offence under this section. The statutory requirement is not applicable to authorized institutions incorporated outside Hong Kong.  Foreign authorized institutions had to adhere to the banking laws and other requirements of their home jurisdiction.  However, the spirit of the legislation clearly applied to foreign authorized institutions operating in Hong Kong and they had to critically manage their credit risk and avoid excessive risk concentration with any particular borrower.  In discharge of its statutory duty, the HKMA has applied a 10% of the capital base as a prudent benchmark to measure excessive exposure to a single customer.  Authorized institutions are required to report their large exposures to the HKMA in the return of large exposures on a quarterly basis.  Local authorized institutions are required to report their 10 largest exposures and any exposures which exceed 10% of the authorized institution’s capital base, whereas a foreign authorized institution is required to report its 10 largest exposures (in its Hong Kong operations) only.  The 10% benchmark conformed with prudent international standards, as was accepted by the plaintiff in its averment in its Statement of Claim in HCA 1092 of 2006[1].

6.    It is necessary to mention that SHHK was also under the supervision of the Hong Kong-Macau Regional Office (“HKMRO”).  This Regional Office was a detached office of the Head Office of the Bank of China and responsible for managing, supervising and coordinating banks within the Bank of China Group in Hong Kong and Macau.  The HKMRO existed prior to the restructuring on 1 October 2001 of the Bank of China group of banks in Hong Kong.  The HKMRO was not an authorized institution and not under the supervision of the HKMA.  Guidelines were issued by HKMRO as intra-group communications.  

7.    Viewed against this background, it is easy to understand the concerns of the HKMA which were expressed by a confidential letter dated 16 April 1998 to Mr Wu Jun Sheng, the General Manager of SHHK (“Wu”).  The letter noted that the total credit facilities granted to the Keen Lloyd Group as at 28 February 1998 amounted to $1,827 million, which was about 25% of the capital base of the bank.  This represented an increase of 49% from the total facilities granted in January 1997.  It was also noted in the letter that in September 1997, SHHK had applied to the HKMRO to increase the Keen Lloyd Group’s total trust receipt (“T/R”)

limit from HK$700 million to HK$1,300 million.  Notwithstanding that the approval had not yet been given by the HKMRO, the bank still allowed the trust receipt balance of the Keen Lloyd Group to continue to increase to HK$1,017 million in February 1998.  Under the sub-heading “inadequate assessment of concentration risk”, it was noted that the Keen Lloyd Group had become the bank’s largest borrower with total exposure accounting for 25% of its capital base.  The letter then continued in these terms:

“As a matter of prudent lending principle, the bank should avoid undue exposure to any single customer and should be satisfied that only customers with undoubted financial standing would be allowed to borrow more than 10% of the bank’s capital base.”

The letter concluded with the request for a meeting and a statement that the letter was strictly confidential.

8.    As I understand the plaintiff’s case, no complaint is made in respect of this letter.

9.    Wu replied to HKMA by letter dated 18 May 1998 in which he offered the explanation that the facilities had been increased to meet the growing business demands of the Keen Lloyd Group and which the bank was monitoring very closely.  The letter made reference to the occurrence of the Hong Kong financial storm in October 1997 and continued in these terms:

“Considering the enormous effect of the financial storm, the application for increasing L/C and T/R limits of the Group was pending.  In order to accommodate its business need, we granted the Group a temporary T/R limit of 0.3 billions.  The advantage of granting a temporary limit was repayment on demand in nature.  In the meantime, the HKMRO knew the above arrangement.”

10.   I now refer to the letter which is the subject matter of complaint in these proceedings, namely, the confidential letter from HKMA to Wu dated 17 July 1998.  The letter commenced with a reference to a meeting on 8 July 1998 and continued in these terms:

“Exposure to the Keen Lloyd Group

As mentioned at the meeting, we are concerned about the bank’s significant exposure to the Keen Lloyd Group (the Group), which accounted for more than 20% of the bank’s capital base.  Our view is that such concentration of risk on a single borrower is not desirable as the bank’s financial position could be severely affected if the borrower was to encounter financial difficulties and the scope for working out a financial solution in such circumstances is usually very limited.  Despite your explanation that the business of the Group has been very profitable and substantial, we still consider the level of the bank’s exposure to the Group as unduly high in the light of its very high gearing ratio and heavy exposure to the property market.  As a matter of prudent lending principle, we believe that the bank should not allow its exposure to a single customer to exceed 10% of its capital base unless it is fully satisfied that the borrower has undoubted financial strength and the business concerned is well managed and diversified.

In view of the above, we would like the bank to take the following measures in respect of its exposure to the Group :

(a) to contain the exposure at the current level, and in due course to gradually reduce the exposure to a more appropriate level (say not more than 15% of the bank’s capital base);

(b) to take steps to strengthen the overall collateral position of the exposure (such as obtaining cash deposits as collateral); and

(c) to closely monitor the repayment of outstanding balance and promptly follow up on any overdue amounts.”

11.   After dealing with other matters, the letter concluded with a statement requesting a response to the matters mentioned therein within three weeks from the date of the letter. 

12.   After Chin and the co-conspirators were convicted of conspiracy to defraud on 24 March 2004, a string of proceedings have been issued by the plaintiff. 

The plaintiff’s 1^st claim : HCA 1299/2004 (“the 2004 Action”)

13.   This was brought on 1 June 2004 against Bank of China (“BOC”), formerly known as SHHK.  The Indorsement of Claim was for damages for fraudulent misrepresentation made “in or about December 1997 to the plaintiff, inter alia, that SHHK could and subsequently had increased the Keen Lloyd Group’s credit facilities with SHHK from HK$1.8 billion to HK$2.3 billion when SHHK could not and did not increase such facilities to the Group”.

14.   On 12 December 2005, the plaintiff applied to amend the Indorsement of Claim to allege that the misrepresentation was that SHHK could increase the general banking facilities from HK$1,656 million to HK$2,400 million, but SHHK failed to honour such representation.  The proposed amendment also sought damages for breaches of a contract in respect of credit facilities. 

15.   In the Statement of Claim, two separate misrepresentations were pleaded, namely, that the general banking facilities would be increased from HK$1.65 billion to HK$2.4 billion (the 1^st representation) and that the general facilities would be increased from HK$2.4 billion to HK$3.08 billion (the 2^nd representation).  The 2^nd representation was allegedly made early to late 1998.  This was a new claim as was another new claim for damages for breach of a contract that arose from the 2^nd representation. 

16.   BOC appealed against the Registrar’s grant of leave to amend the Indorsement of Claim and to file and serve the Statement of Claim and BOC also issued a Summons to strike out on the ground that no reasonable cause of action was disclosed.  On 12 April 2006, Deputy High Court Judge L. Chan allowed the appeal and struck out the Amended Writ of Summons and Statement of Claim on the basis that they were time-barred and that the “so-called representations, which were mere promises, do not disclose any reasonable cause of action”.  The deputy judge also struck out the plaintiff’s contractual claim holding that there was no pleading of the agreed consideration in support of the contract and also no basis to imply the implied terms pleaded in the Statement of Claim.  However, the deputy judge allowed the original Writ of Summons to be restored, leaving it to the plaintiff to clarify the particulars by way of amendment to the original Indorsement of Claim.

The plaintiff’s 2^nd claim

17.   On 22 May 2006, the plaintiff filed a new Statement of Claim in the 2004 Action pleading that SHHK could not lawfully or did not have the requisite approval to increase the facilities from HK$1.65 billion to HK$2.40 billion.  On 11 January 2008, Poon J struck out the Statement of Claim and dismissed the 2004 Action on the grounds of issue estoppel and because the claims were time-barred.  The learned judge also struck out the Statement of Claim in a new action, HCA 1092 of 2006, which had been commenced also on 22 May 2006.  

The plaintiff’s 3^rd claim : HCA 1092/ 2006 (“the 2006 Action”)

18.   In the 2006 Action, the plaintiff claimed damages for the 2^nd misrepresentation and breach of contract.  This contract was allegedly between the plaintiff on the one part and SHHK and the Sin Hua Bank, Shenzhen Branch (“SHSZ”) on the other part whereby, in consideration of their agreement to increase general banking facilities to the level of HK$3,100 million, the plaintiff agreed to maintain SHHK as the key banker of the Keen Lloyd Group and to provide additional securities. 

19.   As stated above, Poon J struck out the Statement of Claim and dismissed the 2006 Action on 11 January 2008 on the grounds of limitation and issue estoppel.  He held that the pleaded representations were virtually identical to their original forms and remained in substance the same misrepresentation as originally pleaded and that the same applied to the contract claim.

20.   On 6 November 2006, the Court of Appeal dismissed the plaintiff’s appeal against the decision of Poon J.  The following observations of Rogers VP are pertinent to the current application:

“17.   In my view, the first difficulty which the plaintiff must face is that whatever agreement or promise might have been made to provide general banking facilities it is quite clear that those facilities could have been withdrawn at any time.  The bank documentation in this case was no different from any other bank documentation and provided for the bank to be able to able to call in any loan or overdraft.  Hence any representation that the bank would allow general banking facilities was not a commitment which could, in any event, be said to have extended over any specified period of time.

18. That matter is a fundamental difficulty which exists in addition to the fact that the statements relied upon were promises and not statements of fact.  The approach of the judge that there was no actionable loss pleaded is, in my view, correct.  Indeed it is said that following investigations by the HKMA, SHHK had to take measures to reduce the general banking facilities granted to the group.  This highlights the point that general banking facilities are not something which would exist in perpetuity.  It is not suggested that the HKMA could by itself legislate or create a law by any other means, nor could it alter a contract between a bank and its client.  All it could do would be to give advice to a bank.  Technically, a bank was free to accept and act that advice or take other action as it deemed fit.

19. … The simple point must be that even if the representations had been made it must have been quite clear that they were not being honoured when the bank called in the various loans and overdrafts.  In those circumstances, as the Deputy Judge [L. Chan] held and the Judge [Poon J] agreed, it would be inevitable that the plaintiff had the necessary knowledge to bring any action well before the writ in the action was issued.”

21.   On 6 January 2009, the Court of Appeal dismissed the plaintiff’s application for leave to appeal to the Court of Final Appeal. 

The plaintiff’s 4^th claim : HCA 1949/2007 (“the 2007 Action”)

22.   In this action commenced in 2007 against HKMA, the plaintiff alleged that HKMA had made a misrepresentation to the plaintiff, via SHHK’s offices as its agents, suggesting that HKMA had the power to suspend the general banking facility agreements.  On 23 October 2007, HKMA applied for the Statement of Claim in the 2007 Action to be struck out and the action to be dismissed and on 16 January 2008, the plaintiff discontinued the action.

The plaintiff’s 5^th claim : HCA 92/2008 (“the present Action”)

23.   On the same day, 16 January 2008, the plaintiff commenced the present Action pleading two contracts, namely:

(1) an agreement made in around late 1997 (“the 1^st GBF Agreement”) by Chin on behalf of the plaintiff and Wu on behalf of SHHK to increase the level of the general banking facilities granted to the Keen Lloyd Group from HK$1,656 million to HK$2,400 million in return for, inter alia, additional securities or collaterals; and

(2) a further agreement made in 1998 (“the 2^nd GBF Agreement”) between the same parties to further increase the level of the general banking facilities granted to the Keen Lloyd Group from HK$2,400 million to HK$3,100 million by procuring SHSZ to provide additional general banking facilities in the amount of HK$700 million in return for, inter alia, additional securities or collateral including, in particular, the assets of a company known as Guangzhou Keen Lloyd Corporate Limited to be charged in favour of SHSZ. 

24.   It is the plaintiff’s case that these Agreements were made orally. 

25.   Two causes of actions have been pleaded against HKMA in the present proceedings, namely, misfeasance in public office and wrongful interference with contract.   

26.   HKMA responded with a Summons issued on 19 March 2008 for orders that the Statement of Claim be struck out and the plaintiff’s action be dismissed on the grounds that it was frivolous and vexatious and/or an abuse of process.  Pursuant to directions of the Court, the following Affirmations have been served in support and/or in opposition to the said Summons, namely:

(1) the Affirmation of Mr Choi Yiu Kwan (“Choi”) made on 19 March 2008;

(2) the Affirmation of Chow made on 28 April 2008;

(3) the Affirmation of Chin made on 28 April 2008;

(4)     the 2^nd Affirmation of Choi made on 17 June 2008;

(5) the Affirmation of Leung Wing Sun made on 17 June 2008; and

(6) the 2^nd Affirmation of Chin made on 2 September 2008.

27.   As stated above, the matter came before Master de Souza who struck out the Statement of Claim and dismissed the action on 21 November 2008.  The matter came before me on appeal and I heard submissions from Mr Rimsky Yuen, SC on behalf of the plaintiff and Mr John Mok, SC on behalf of the defendant on 14 and 15 April 2009. 

28.   I received very helpful and detailed written submissions from both senior counsel prior to the hearing of the appeal.

Misfeasance in Public Office

29.   The leading authority on this tort is the House of Lords decision in Three Rivers District Council v Bank of England [2000] 3 All ER 1.  Mr Yuen, SC took me through the relevant passages in the judgments of Lord Steyn[2], Lord Hutton[3], Lord Hobhouse[4] and Lord Millett[5].  The present case was framed as falling within the second form of liability for misfeasance in public office, namely, untargeted malice.  As Lord Steyn explained[6]:

“The second form is where a public officer acts knowing that he has no power to do the act complained of and that the act will probably injure the plaintiff.  It involves bad faith inasmuch as the public officer does not have an honest belief that his act is lawful.

…

The basis for the action lies in the defendant taking a decision in the knowledge that it is an excess of the powers granted to him and that it is likely to cause damage to an individual or individuals.  It is not every act beyond the powers vesting in a public officer which will ground the tort.  The alternative form of liability requires an element of bad faith.”

30.   The tort requires actual knowledge or subjective recklessness on the part of the public officer.  As Lord Steyn explained[7]:

“The policy underlying it is sound: reckless indifference to consequences is as blameworthy as deliberately seeking such consequences.  It can therefore now be regarded as settled law that an act performed in reckless indifference as to the outcome is sufficient to ground the tort in its second form.”  

Objective recklessness is insufficient for the reason that “it could not be squared with a meaningful requirement of bad faith in the exercise of public powers which is the raison d’etre of the tort.  …  The plaintiff must prove that the public officer acted with a state of mind of reckless indifference to the illegality of his act.”[8].

31.   Lord Millett explained that the tort was an intentional tort and so could not be committed negligently or inadvertently and that its core concept was abuse of power.  This in turn involved other concepts, such as dishonesty, bad faith, or improper purpose:

“It is important to bear in mind that excess of power is not the same as abuse of power.  Nor is breach of duty the same as abuse of power.  The two must be kept distinct if the tort is to be kept separate from breach of statutory duty, which does not necessarily found a cause of action.  Even a deliberate excess of power is not necessarily an abuse of power. 

…

Proof that the official concerned knew that he had no power to act as he did and that his conduct would injure the plaintiff is only the first step in establishing the tort.

…

If, …, the plaintiff can establish that the official appreciated that he was acting in excess of the powers conferred upon him and that his conduct would cause injury to the plaintiff, the inference that he acted dishonestly or for an improper purpose will be exceedingly difficult and usually impossible to rebut.”[9]

32.   As this is a striking out application, I approach the matter on the basis that the facts pleaded in the Statement of Claim are provable at trial.  The question for me to answer is whether those facts, if proved, can support the pleaded cause of action of misfeasance in public office.

33.   It was pleaded in §6(1) of the Statement of Claim that by an agreement made by Chin on behalf of the plaintiff and Wu on behalf of SHHK in around late 1997, SHHK agreed to increase the level of the general banking facilities granted to the Keen Lloyd Group from HK$1,656 million to HK$2,400 million in return for, inter alia, additional securities or collaterals (“the 1997 GBF Agreement”).  It was further pleaded in §6(3) of the Statement of Claim that by another agreement made by Chin on behalf of the plaintiff and Wu on behalf of SHHK in 1998, SHHK agreed to further increase the level of the general banking facilities granted to the Keen Lloyd Group from HK$2,400 million to HK$3,100 million (by procuring SHSZ to provide the additional general banking facilities in the amount of HK$700 million) in return for, inter alia, additional securities or collaterals (“the 1998 GBF Agreement”).  It was further pleaded in §6(6) that the GBF Agreements were at all material times agreements made in good faith and for good consideration and thus were valid, binding and enforceable contracts.

34.   Mr Mok, SC submitted that it was remarkable that these alleged GBF agreements to increase general banking facilities in such substantial sums of money were made orally, particularly when contrasted with the two written agreements for the grant of general banking facilities made on 21 September 1998, which have been exhibited, and which contained the usual term found in such agreements, namely, that the facilities were “subject to our overriding right to terminate the facilities from time to time in [the bank’s] absolute discretion upon notice”.  It was submitted that there were no agreed interest rate, no agreed repayment period, no agreed securities or collaterals, no agreed drawdown period, no agreed conditions precedent and no agreement on other essential terms and, relying on the authority of May and Butcher Limited v R [1934] 2 QB 17 and G. Scammell and Nephew Limited v Ouston [1941] AC 251, Mr Mok, SC submitted that there could be no enforceable or binding contract absent such essential terms.  He further submitted that the pleaded consideration was no consideration at all, as the provision of security or collateral had to be classified as a condition of the grant of the facility and not as consideration to support the promised grant facility.  In this connection, Mr Yuen, SC pointed out that SHHK would levy a service charge for the commitment to grant the facility but conceded that such service charges had not been pleaded as the consideration to support of the two GBF Agreements relied upon.

35.   Clearly, the plaintiff would face an uphill task to prove the alleged GBF Agreements at trial given the very formidable submissions made by Mr Mok, SC against the existence and/or validity of these alleged agreements.  However, the test I have to apply is to ask myself whether or not the plaintiff’s allegations of the existence of these two Agreements are obviously unsustainable.  Whilst acknowledging the strength of Mr Mok, SC’s submissions, I am not prepared to conclude that the allegations of the existence of these two Agreements are obviously unsustainable. 

36.   While the HKMA has denied knowledge of these alleged agreements, the plaintiff’s case, relying on the affirmations filed on its behalf, was that the HKMA was aware of the existence of the GBF Agreements.  Although Choi, the Deputy Chief Executive of the HKMA, who signed the letters from HKMA that I have quoted above, denied knowledge of the existence of these alleged agreements, I cannot determine this issue on the affidavit evidence and I have to proceed on the basis that the allegation that the HKMA knew of the existence of these alleged agreements is provable at trial. 

37.   I can now turn to consider the specific allegations made against HKMA of acting in excess of power in implementing the measures set out in its letter of 17 July 1998 (“the Measures”), namely:

(a)  to contain the exposure at the current level, and in due course to gradually reduce the exposure to a more appropriate level (say not more than 15% of the bank’s capital base);

(b) to take steps to strengthen the overall collateral position of the exposure (such as obtaining cash deposits as collateral); and

(c) to closely monitor the repayment of outstanding balance and promptly follow up on any overdue amounts.

38.   It was pleaded in §12 of the Statement of Claim that in demanding the implementation of the Measures, the HKMA directly or indirectly procured and/or caused SHHK to act in breach of its contractual obligations towards the companies within the Keen Lloyd Group, including the plaintiff, in that

(1) SHHK would have to refrain from increasing the general banking facilities in accordance with the GBF Agreements and also to reduce the level of general banking facilities below the current level, i.e. to gradually reduce the level to 15% and then 10% of SHHK’s capital base;

(2) SHHK  would have to demand more collateral than it would otherwise have demanded and/or agreed under the GBF Agreements.

39.   It was pleaded in §13(1) of the Statement of Claim that the HKMA did not have any power and/or authority to request or demand SHHK to implement the Measures; alternatively, by demanding SHHK to implement the Measures, the HKMA had acted in excess of the powers and/or authority conferred upon it under the Banking Ordinance.

40.   In §13(3) of the Statement of Claim, it was pleaded that in demanding SHHK to implement the Measures, HKMA knew that it did not have the power and/or authority to make such demands; alternatively, the HKMA acted with reckless indifference (in the subjective sense) as to the illegality of its acts.

41.   Under the particulars of illegality and/or excess of power pleaded in §14(3) of the Statement of Claim, it was averred that upon the true and proper construction of the Banking Ordinance, the HKMA did not have any power and/or authority to implement the Measures and, in particular:

(a)  to contain and/or reduce the exposure and thereby acted in breach of the GBF Agreements;

(b) to act in breach of SHHK’s contractual obligations owed under the GBF Agreements towards the companies within the Keen Lloyd Group, including the plaintiff.

42.   It was further pleaded in §14(4) of the Statement of Claim that by demanding SHHK to implement the Measures, SHHK would be acting in an irresponsible manner, not acting in a business-like manner and would be engaging in dishonourable or improper practices. 

43.   Under particulars of knowledge or recklessness, it was pleaded in §14(6) of the Statement of Claim that HKMA knew of the existence of the GBF Agreements and, under sub-paragraph (7) thereof, that at meetings held between HKMA and SHHK, HKMA was informed that a suspension or reduction of the GBF would cause SHHK to act in breach of the GBF Agreements.

44.   Absent the existence and knowledge of the GBF Agreements on the part of HKMA, it cannot be suggested that HKMA acted unlawfully in the sense of acting without power, or in excess of power, in issuing its letter of 17 July 1998 setting out the Measures complained of.  HKMA was charged with the duty to promote the general stability and effective working of the banking system under section 7(1) of the Banking Ordinance.  Without limiting the generality of subsection 1, it has been provided in section 7(2) that the HKMA shall:

“(a)    be responsible for supervising compliance with the provisions of this Ordinance;

(b) take all reasonable steps to ensure that the principal places of business, local branches, local offices, overseas branches and overseas representative offices of all authorized institutions and local representative offices are operated in a responsible, honest and business-like manner;

…

(d) suppress or aid in suppressing illegal, dishonourable or improper practices in relation to the business practices of authorized institutions;

…

(g) take all reasonable steps to ensure that any banking business, any business of taking deposits, or any other business, carried on by an authorized institution is carried on –

(i)    with integrity, prudence and the appropriate degree of professional competence; and

(ii)   in a manner which is not detrimental, or likely to be detrimental, to the interests of depositors or potential depositors.”

45.   It is clear that HKMA had a duty as well as the power to supervise SHHK in the manner in which it was conducting its banking business in Hong Kong.  At the relevant time of the issue of the letter of 17 July 1998, the HKMA was naturally concerned that SHHK’s exposure to the Keen Lloyd Group was more than 20% and close to 25% of SHHK’s capital base and that such concentration of risk on a single borrower was undesirable.  At that particular time, Hong Kong had been adversely affected by the Asian financial crisis and it was therefore both reasonable and responsible for the HKMA in its letter of 17 July 1998 to suggest that, as a matter of prudent lending principle, SHHK should not allow an exposure to a single customer such as the Keen Lloyd Group to exceed 10% of its capital base unless it was fully satisfied that the borrower had undoubted financial strength and the business concerned was well managed and diversified.  It was also reasonable and responsible for HKMA to express to SHHK that “we would like the bank to take the following measures including the measure of containing the exposure at the current level, and in due course to gradually reduce the exposure to a more appropriate level (say not more than 15% of the bank’s capital base)”. 

46.   Does the alleged knowledge of the GBF Agreements turn this lawful and, indeed, reasonable exercise of power into an act which was unlawful in the sense of an act performedwithout power, or in excess of power?  Mr Yuen, SC conceded that this was a question of law to be answered against the factual background presented in the affirmations filed on behalf of the plaintiff. 

47.   A banking relationship is never static.  It is dynamic and ever changing and this is necessarily so because banks and their customers conduct dealings in markets which are ever changing. 

48.   Apart from a bare plea that by the 1997 GBF Agreement, SHHK agreed to increase the level of general banking facilities from HK$1,656 million to HK$2,400 million, there are no averments that this new level of facility was an irrevocable commitment on the part of the bank whether for a defined or indefinite period.  Further, notwithstanding the 1997 GBF Agreement, the total facility as at 28 February 1998 amounted to HK$1,827 million, not HK$2,400 million[10].  As SHHK had explained to HKMA by letter dated 16 May 1998:

“…

In September 1997, it was the first time for the Group to apply for an increase in the banking facilities based upon the revaluation surplus of its secured properties.  As a result, the Hong Kong-Macau Regional Office (HKMRO) requested our bank to prepare a more detailed credit evaluation report after we submitted the first credit proposal on time.  The report was not finished and submitted until the occurrence of the Hong Kong financial storm in October 1997.  Considering the enormous effect of the financial storm, the application for increasing L/C and T/R limits of the Group was pending.  In order to accommodate its business need, we granted the Group a temporary T/R limit of 0.3 billions.  The advantage of granting a temporary limit was repayment on demand in nature.  In the meantime, the HKMRO knew the above arrangement.”

49.   Mr Yuen, SC submitted that the absence of internal approval from HKMRO did not negate the contractual obligation on the part of SHHK to provide facilities up to HK$2,400 million. Be that as it may, there is no averment in the Statement of Claim and no assertion on the affidavit evidence filed on behalf of the plaintiff that the commitment to grant general banking facilities up to HK$2,400 million was irrevocable whether for a definite or indefinite period.  When asked whether the plaintiff could prove that the 1997 and 1998 GBF Agreements could not be terminated by notice, Mr Yuen, SC frankly conceded that the affidavit evidence had not gone into any detail in this regard.

50.   In the context of an action for knowingly procuring a breach of contract, Neill LJ observed in Middlebrook Mushrooms Ltd v T G Wu [1993] ICR 612 that “in many cases, a third party may be deemed to know of the almost certain existence of a contract and indeed of some of its likely terms”[11].

51.   The usual term that one can expect to find in an agreement to offer general banking facilities is the bank’s overriding right of repayment on demand.  Such a clause was in fact present in the written agreements made on 21 September 1998 between Keen Lloyd (Holdings) Limited and Keen Lloyd Motors Limited and SHSZ.  Clause 13A of these written agreements stipulated:

“13A.  Repayment

Notwithstanding anything herein contained to the contrary, all amount due and payable by you hereunder (including interest and default interest accrued thereon) shall be subject to our overriding right of repayment on demand and if no demand is made, all Drawdowns together with interest accrued thereon shall be fully repaid on the last day of the 90 days’ period from the date of the relevant Drawdown, provided always that if any Drawdown shall otherwise be due after the final repayment date, they shall instead become due on the final repayment date.”

52.   Mr Yuen, SC submitted that the question whether terms such as Clause 13A quoted above were incorporated into the oral GBF Agreements was a fact sensitive matter which had to be determined at trial.  However, in my view, that submission has the effect of putting the cart before the horse. Without determining whether or not the plaintiff’s claims based on the 1997 and 1998 GBF Agreements were barred by reason of issue estoppel[12], I conclude that the plaintiff has provided no basis to suggest that it can overcome the conclusions of Rogers VP as quoted in §20 above, if this matter were to go to trial. 

53.   Accordingly, there is no basis upon which the plaintiff could assert that HKMA acted unlawfully by implementing the Measures and requesting SHHK to “contain the exposure at the current level, and in due course to gradually reduce the exposure to a more appropriate level (say not more than 15% of the SHHK’s capital base)”.  Given the banks’ usual overriding right of repayment on demand, implementation of this measure or the other measures set out in the same letter would not necessarily result in breach of the 1997 and 1998 GBF Agreements. 

54.   It goes without saying that there was no basis for asserting that Choi or any other relevant officer of the HKMA knew that the Measures were unlawful or were recklessly indifferent to whether or not the Measures were unlawful. 

55.   An additional reason to support the above conclusion in respect of the 1998 GBF Agreement was that the HKMA had no power to supervise SHSZ, which was an overseas branch of a foreign authorized institution.  The Measures being directed to SHHK could not impact on any general banking facility granted or to be granted by SHSZ.

56.   I do not have to express a view on whether or not HKMA would be acting unlawfully if it had required a bank to reduce its exposure to a single customer knowing that such requirement would inevitably cause the bank to breach its obligations to that customer.  The answer to that question must depend on the facts of the particular case.  It is likely to be a question of degree: if there was a substantial departure from prudent banking practice, I would have thought that HKMA’s positive duty to protect the depositors of the bank concerned, in particular, and of the banking system, in general, would override private contractual considerations between the bank concerned and the customer concerned. 

57.   As I have found that the HKMA did not act without power or in excess of power in the implementation of the Measures set out in the HKMA’s letter of 17 July 1998, and that the plaintiff’s case for misfeasance in public office is obviously unsustainable, I need not consider the effect of section 127 of the Banking Ordinance to the plaintiff’s claim.

Wrongful interference with Contract

58.   This claim must also fail, as very properly conceded by Mr Yuen, SC who accepted that if the Measures were lawfully implemented under section 7(2) of the Banking Ordinance, that provision would provide reasonable justification or excuse which is a defence to the tort of knowingly to procure or induce a third party to break its contract to the damage of the other contracting party[13].

59.   If it had been necessary for me to do so, I would have held that the plaintiff has failed to demonstrate a sustainable case that the HKMA had procured a breach of the 1997 and 1998 GBF Agreements.  The present case falls within that category of case illustrated by the decision in Cutsforth v Mansfield Inns Ltd [1986] 1 WLR 558 and not that category of case illustrated by the decision in Emerald Construction Co. Ltd v Lowthian [1966] 1 WLR 691.

60.   In the latter case, the contract in question, namely a “labour only” subcontract, was terminable on short notice. Lord Denning MR stated:

“The object of the defendant officers was plain.  It was to get Higgs & Hill Ltd. to terminate this ‘labour only’ subcontract; and the evidence suggests that they did not care how it was terminated, so long as it was terminated.  The two letters of ultimatum contain an unequivocal demand.  They did not inquire what were the terms of the contract.  They did not request that it be terminated by lawful notice.  They made the straight demand that it be terminated within the time limit – or else there would be a strike.  When Higgs & Hill Ltd. refused the demand, the defendants called a strike and did their best to get the contract terminated by that means.  Even when they or their advisers got to know of the terms of the contract, they still continued the strike.  All goes to show that they were determined to bring this contractual relationship to an end if they could, regardless of whether it was done in breach or not.”[14]

In the former case, Sir Neil Lawson stated:

“In my judgment the evidence does not disclose an arguable case that the defendants have procured or attempted to procure breaches of contracts between the plaintiffs and the defendants’ lessees and tenants with whom the plaintiffs have agreements.  Those contracts are in fact terminable on two weeks’ notice, and although it is fair to say that the defendants proceeded in this way, that is to say they have warned the tenants that if they retain the plaintiffs’ machines on their premises they will be in breach of the covenant in the terms to which I have referred, they also at the same time intend to indicate to the tenants that it is up to the tenants to decide whether or not to terminate their agreements by proper notice with the plaintiffs.  Therefore it seems to me that the plaintiffs are not entitled to hold that part of the injunction [restraining the defendants from procuring or attempting to procure breaches by lessees of contracts made between the plaintiffs and the said lessees].”[15]

Limitations

61.   Although not necessary for me to do so in order to dispose of this matter, I also find against the plaintiff on the issue of limitation.

62.   The plaintiff relies upon the fact that it did not become aware of HKMA’s first letter of 16 April 1998 until February 2004 and that it did not become aware of SHHK’s letter of 18 May 1998 and HKMA’s letter of 17 July 1998 until some time in late October 2007.  The plaintiff accordingly relies on section 26 of the Limitation Ordinance which provides that where, inter alia, any fact relevant to the plaintiff’s right of action has been deliberately concealed from him by the defendant, the period of limitation shall not begin to run until the plaintiff has discovered the concealment or “with reasonable diligence” has discovered it.  However, Chin has stated in §24 of his Affirmation of 28 April 2008 as follows:

“Later, when I was informed by the officers of SHHK in 1998 that they had to implement the Measures (defined and referred to below) against the Keen Lloyd Group as demanded by HKMA, I was under the misapprehension that I could not challenge the same and hence did not have any real alternative but to see how I could manage to maintain the operation of the Keen Lloyd Group although eventually it turned out that the impact brought about by the implementation of the Measures was disastrous.”

63.   In §26 of the same Affirmation, Chin set out the Measures contained in HKMA’s letter of 17 July 1998 verbatim. 

64.   Leaving aside the question whether or not confidential matters can be the subject of “deliberate concealment” within the meaning of section 26 of the Limitation Ordinance, the plaintiff was informed by officers of SHHK of the Measures in 1998.  The fact that it did not become aware of HKMA’s first letter of 16 April 1998 until February 2004 and the other two letters until late October 2007 did not prevent the plaintiff from formulating its claims for misfeasance in public office and for procuring a breach of contract.  In this connection, I quote from McGee, Limitation Periods, 5^th Ed.:

“Relevant to the plaintiff’s right of action

In Johnson v Chief Constable of Surrey (The Times, November 23, 1992, CA) it was held that the phrase ‘fact relevant to the plaintiff’s right of action’ meant a fact without which the cause of action would be incomplete.  It is not relevant that the defendant has concealed a fact which, if known, would merely strengthen an existing case.  This is sometimes referred to as the ‘statement of claim test’.  In other words, one has to ask whether the claimant already knows (actually or constructively) facts which, by themselves, would enable him to produce an adequate statement of case.  If so, then time runs against him, even if there are other facts which would help his case and of which he is unaware.”[16]

65.   The plaintiff’s case relies upon the 1997 and 1998 GBF Agreements which, according to the plaintiff, were made known to HKMA.  For this reason, the plaintiff contends that the Measures implemented by HKMA were unlawful and/or procured a breach of those Agreements.  The plaintiff was aware of those Measures in 1998.  The fact that the plaintiff did not become aware of the correspondence leading up to and containing those Measures until much later did not prevent the plaintiff from formulating a case within the 6-year period permitted under the Limitation Ordinance. Chin’s real complaint in §24 of his Affirmation of 28 April 2008 was that he was ignorant of the law.  However, ignorance of the law does not result in an extension of the limitation period.

Conclusion

66.   For these reasons, and notwithstanding the valiant efforts on the part of Mr Yuen, SC on behalf of the plaintiff, I find against the plaintiff. I conclude that the plaintiff’s Statement of Claim should be struck out and the plaintiff’s action dismissed on the grounds that it is frivolous and vexatious and an abuse of the process of the Court.  I therefore dismiss the plaintiff’s appeal.

67.   I make a costs order nisi that the costs of the appeal to be paid by the plaintiff to the defendant.

[1] See §11(1) thereof in which Article 39(4) of the Chinese Banking Law is cited as prohibiting lending in excess of 10% of capital base and see §18 below.

[2]    At pp.6-13.

[3]    At pp.34-42.

[4]    At pp.42-45.

[5]    At pp.48-50.

[6]    At p.8f and at p.9c.

[7]    At p.9f-g.

[8]    Per Lord Steyn at p.10a-b.

[9] At pp.48h-49j.

[10] As can be seen from the letter from HKMA dated 16 April 1998.

[11]    At p.621.

[12] It must be noted that HKMA was not a party to the earlier actions.

[13]    See Clerk & Lindsell on Torts, 19^th Ed. at §25-15.

[14]    At p.701.

[15]    At p.563.

[16]    At §20.012.