WONG YIN v. UNION BANK OF HONG KONG LTD.

HCMP4728/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO.4728 OF 1998

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J U D G M E N T

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1. This is a consolidated action. The plaintiff and defendant by counterclaim is the Union Bank of Hong Kong Ltd, which has since changed its name to the Industrial and Commercial Bank of China (Asia) Ltd. I have already ordered in the course of the trial that all references to the Union Bank of Hong Kong Ltd in these proceedings be changed to the new name. For simplicity I will refer to it as "the Bank".

2. The Bank instituted a mortgage action against the defendant and plaintiff by counterclaim, Mr Wong Yin ("Mr Wong"), by originating summons dated 14 September 1998. It claimed payment of all sums of money due under a legal charge dated 11 November 1993 over Mr Wong's property at Flat No.31 and Parking Space No.161, Hong Kong Parkview ("Property") and delivery of vacant possession of that Property.

3. The supporting affirmation alleged that the Bank had made an instalment loan to Mr Wong pursuant to a facility letter dated 2 November 1993 and had made available to him an overdraft facility pursuant to a second facility letter dated 3 July 1996. These were secured by the legal charge. Mr Wong had defaulted on payment of the instalments in respect of the instalment loan since July 1997. The Bank had demanded full repayment but had not received it.

4. Mr Wong later instituted proceedings by writ against the Bank in May 1999. Mr Wong's pleaded case is that he took out the loan and the overdraft facility offered in the two facility letters and secured them by means of the legal charge. He requested to redeem the Property on 28 April and 9 October 1997 but the Bank, as he put it,

"wrongfully insisted that he also make full repayment of a loan,

(a) which was more than US$9.1 million at 28 April 1997 and about US$6.8 million at 9 October 1997 at the time;

(b) of which the plaintiff was, and is, only interested as a co-guarantor; and

(c) which was not, in the circumstances, breached."

5. In the premises, the Bank clogged his equity of redemption. Because of this he was unable to raise money by means of a transfer of the mortgage. He claims damages in equity for this.

6. The Bank's pleaded case is that it lent US$8,000,000 to the Jing Guang (Guangzhou) Estate Co. Ltd ("Jing Guang") on 24 December 1993. Mr Wong was a guarantor of the debt by a Joint and Several Personal Guarantee of the same date. At the proposed redemption dates, Jing Guang owed money to the Bank. The legal charge is an "all moneys" mortgage and by reason of this and covers Mr Wong's liability as guarantor as well as his own liabilities as mortgagor. The Bank was entitled to insist on repayment of all sums due by Mr Wong on his own account and as guarantor, for redemption of the legal charge.

7. On 15 March 2000, another guarantor, the Bank of China, Guangdong Branch, repaid the sums then owed by Jing Guang. Accordingly, the Bank counterclaims for the sums now due under the two facility letters.

8. There is no dispute that Mr Wong borrowed money and took an overdraft facility from the Bank pursuant to the two facility letters dated 2 November 1993 and 3 July 1996, and secured these facilities by means of the legal charge on his Property. There is no dispute that Jing Guang, of which Mr Wong was a director, borrowed US$8,000,000 from the Bank under a loan agreement dated 24 December 1993. The Bank required a guarantee of the debt from the Bank of China, Guangdong Branch and the joint and several personal guarantee of the Jing Guang directors, Mr Wong and Mr Wong Ping. This latter guarantee was executed on 24 December 1993.

9. The loan agreement provided for repayment of the loan in one lump sum on the second anniversary of the date of drawdown. It is not in dispute that that was 29 April 1994. Accordingly, repayment would fall due on 29 April 1996.

The Factual Dispute

10. The Bank contends that the loan agreement was breached by non-payment and that Mr Wong became liable under the guarantee. Mr Wong disputes that the Jing Guang loan agreement was breached, although the basis of this dispute is not clear from the pleadings. There is no averment, for instance, that payment had been made and no averment that the time for payment had been extended. Mr Wong also seems to dispute, or at least to put the Bank to proof that the loan was ultimately repaid on 15 March 2000 by the Bank of China, Guangdong Branch.

11. Mr Wong says that the Bank, by demanding that he pay off the Jing Guang loan in order to redeem his Property, when there was no breach of the loan agreement and by extension no liability on him to pay the loan, clogged his equity of redemption of that Property. The Bank argues that the doctrine of a clog or fetter on the equity of redemption only operates if the mortgagee has stipulated in the mortgage for some objectionable collateral advantage, and that the Bank's conduct did not fall within the categories of objectionable collateral advantages. Certainly, neither counsel nor I have been able to find any case in which conduct of the mortgagee has amounted to a clog on the equity. However, it seems to me that the factual disputes must be resolved first before I pass on to the legal issues and the interpretation of the documents.

Evidence

12. The evidence comes from Mr Lee Ka Wing, PW1 for the Bank and from Mr Wong himself. Both of them adopted their statements and gave supplementary oral evidence. I do not propose to reproduce that evidence in full but I will refer to parts of it where necessary and, in particular, I will refer to the correspondence between the parties' solicitors, Messrs Deacon Graham and James ("DGJ") for the Bank and Messrs K.M. Lai & Lee ("KMLL") who acted both for Jing Guang and Mr Wong.

13. It is helpful to refer first to the correspondence. The Bank wrote to Jing Guang and the guarantors on the 10 October 1995 giving notice of overdue interest payments amounting to US $462,263.89 and demanding payment within 14 days. Then on 23 September 1996, DGJ wrote to Jing Guang and the guarantors, including Mr Wong, claiming that in breach of the provisions of the loan agreement, Jing Guang had failed to make payment of sums due of US$8,425,444.000 as at 23 September 1996, together with daily interest of US$3,101.04 thereafter.

14. On 18 March 1997, KMLL on behalf of Jing Guang wrote to DGJ stating that they understood that the loan agreement provided for repayment on 29 April 1997, and asking for the amount of principal and interest payable on that date. DGJ replied on 2 April 1997 that Jing Guang had in breach of the loan agreement failed to pay the sums due thereunder and certifying that the amount payable by Jing Guang at 29 April was US$9,116,838.08. KMLL on 16 April disagreed that their client was in breach of the agreement and asked for reasons for this opinion. DGJ on 18 April replied that all sums should have been repaid by 29 April 1996 and that :

"Notwithstanding that a supplemental agreement to extend the Repayment Date to 29th April 1997 has been executed by your client, such supplemental agreement has not taken effect due to the fact that the conditions precedent set out in Schedule 1 thereto have not been satisfied "

15. Also on 16 April 1997, KMLL wrote to DGJ on behalf of Mr Wong inquiring the amount of principal and interest for redemption of the Property on 29 April. DGJ replied on 25 April sending the title deeds and on 29 April with the figures which were HK$10,700,319.70 and US$9,116,863.08.

16. Nothing happened then until 21 June 1997 when DGJ wrote to inquire as to the position. KMLL replied on 23 July 1997 that they had no further instructions to redeem the Property and returned the title deeds.

17. In August and September 1997 there was some correspondence in Chinese between the Bank, KMLL and DGJ. KMLL wrote to the Bank to the effect that Jing Guang had unilaterally assigned its indebtedness to China Merchants Estates Co. Ltd; and DGJ wrote to KMLL to the effect that the Bank neither knew of nor consented to any novation of the loan.

18. Then on 27 September 1997, KMLL again wrote to DGJ for the title deeds of Mr Wong's Property and the redemption figures. DGJ again advised a HK dollar sum and a US dollar sum. KMLL asked for a breakdown of the figures and said that they were instructed that the US dollar sum did not relate to the legal charges. (There was a second legal charge executed in May 1995, but we are not concerned with that in this case.) There were, apparently, some telephone calls between the firms, and then on 4 November, DGJ notified KMLL that the Bank would like to reply to Mr Wong directly about the point of redemption and asking them to arrange for Mr Wong to contact the Bank.

19. There was no further correspondence until 15 January 1998 when DGJ wrote to Mr Wong, setting out the sums claimed under the facility letters and the guarantee of the Jing Guang loan, and demanding payment. KMLL replied on Mr Wong's behalf on 19 January, to the effect that Mr Wong had wished to re-mortgage the Property to the Hong Kong Bank in about April 1997; that the Bank had only agreed to release the Property if Mr Wong would repay the Jing Guang loan; that this was unreasonable because the Property was charged under the legal charges and not the Jing Guang agreement, that Mr Wong was not obliged to pay the Jing Guang debt and that the Property was security for the legal charges and not the Jing Guang loan agreement.

20. KMLL also advised in this letter that Mr Wong and his controlling companies had agreed to sell certain properties in the PRC and in Hong Kong, and that the proceeds of sale would be used to repay the "loan facility owing to your client under the Loan Agreement"; the "Loan Agreement" referred to being the Jing Guang loan.

21. DGJ took issue with KMLL's assertions in their letter of 17 February 1998 which set out their arguments that Mr Wong was liable as guarantor for the Jing Guang loan, and that the outstanding debt thereon was part of the outstanding indebtedness due under the legal charge which was an "all moneys" mortgage. This letter demanded full repayment and threatened legal action.

22. I turn to the evidence of Mr Lee, PW1, about the Jing Guang loan. In his statement, he referred to the overdue interest payments. In answer to questions put by myself at the end of his re-examination, he said that apart from overdue interest, the principal was to his knowledge not paid off by 29 April 1996. He had already said in his evidence-in-chief that the Bank of China, Guangdong Branch had paid off the outstanding indebtedness of Jing Guang on 15 March 2000. In fact, PW2, Mr Pang, produced a bank document which dealt with this.

23. I asked Mr Lee about non-payment because I was particularly concerned to find out whether there had in fact been a default on the part of Jing Guang which would make Mr Wong liable under the guarantee. Mr Wong's case on this was less than clear. Mr Lee was further cross-examined and it was put to him that the period had been extended. He said that there was a supplemental agreement extending it for one year; but because the terms stipulated therein could not be implemented, the supplemental agreement was not effective.

24. The supplemental agreement - which was disclosed and which had in fact been signed by Mr Wong and Mr Wong Ping - had to be approved by the Guangzhou Foreign Exchange Control Bureau ("the Bureau"). As this could not be done, the supplemental agreement could not be effective. To his knowledge no registration could be done and no endorsement could be obtained from the Bank of China, Guangdong Branch, which was a guarantor.

25. At this point, a hitherto undisclosed Chinese document was put to Mr Lee to suggest that such approval had been given. Mr Fung for the Bank did not object to this course of action. Mr Lee said that he had not seen this document before and he agreed that it stated that the Bureau had approved the supplemental agreement; but he added that according to the practice of the Bureau, whether it was renewal of loan or fresh loan, application had to be made to them. This letter was to tell the applicant that he could make such application. He went on to read out part of the letter which was translated as :

"Jing Guang, on signing the agreement with the outside, please come to my bureau and provide guarantee to make record and go through registration procedure according to provisions."

26. Mr Lee said that after the supplemental agreement had been signed, with all provisions satisfied, it would then be taken to the Foreign Exchange Bureau and registered there. Only then would there be effective registration. On this he was speaking from his own experience as to loan procedures.

27. Mr Wong in his evidence said that the overdue interest had been paid off, and that the Jing Guang loan agreement was extended for one year from 29 April 1996. In support of this, he sought to produce the undisclosed document which had been put to Mr Lee in cross-examination. He said that he had obtained it from the other guarantor, the Bank of China.

28. Not surprisingly, objection was taken to this course of action. Following argument, I ruled the document inadmissible for the reasons which I then gave.

29. Mr Cheung then asked and was given permission to take further instructions from his client even though Mr Wong was then in the course of giving evidence. Following this, Mr Cheung applied to amend his Statement of Claim to introduce circumstances of the supplemental agreement to prove that the Bank had agreed to extend the loan agreement. He said that Mr Wong had two letters in his possession, in Guangzhou, stating that the bank had agreed to the extension. After hearing argument, and for the reasons which I gave at the time, I refused this application.

I do not think it is necessary to repeat my reasons for these rulings here; they are in the record in case they are needed.

Evaluation

30. I have heard the evidence of Mr Lee that the Jing Guang debt was not paid by 29 April 1996, and that it was paid by the other guarantor on 15 March 2000. There is really nothing to contradict this evidence and there is no reason to disbelieve it.

31. Mr Cheung for Mr Wong referred to a statement by Mr Lee in his affirmation dated 25 February 1999 as indicating that the Bank initially accepted that there had been no breach. Of course, it is true that KMLL's letter of 28 April 1997, to which this part of the affirmation referred, did not say in terms "Jing Guang is in breach of its loan agreement". It did not have to. It set out Mr Wong's indebtedness which included his indebtedness as guarantor. Notice of that had been given as far back as September 1996. I do not see that this in any way detracts from the value of Mr Lee's evidence.

32. As to the alleged extension of time, it is clear that this never happened. If it had happened, KMLL, then acting for Jing Guang, would surely have asserted it in answer to the letter from DGJ on 2 April 1997 alleging breach of the loan agreement by non-payment, because until 29 April 1997 payment would not have been due. A fortiori they would have asserted it in answer to the letter of 18 April from DGJ alleging that the supplemental agreement had not taken effect. In fact there is simply no mention of any extension of time in the correspondence.

Finding of Fact

33. I am satisfied that Jing Guang was required to repay the loan to the Bank on 29 April 1996, and did not. It was then in breach of the loan agreement by reason of non-payment.

Mr Wong's Liability

34. I turn to the questions of Mr Wong's liability as guarantor, and whether the legal charge secured that liability as well as his own personal liabilities to the bank.

35. It is clear that once Jing Guang defaulted, the guarantors became liable under the guarantee. The terms of the Joint and Several Personal Guarantee are perfectly clear and I need not reproduce them here.

36. There does not seem to be any real dispute about the interpretation of the legal charge. Paragraph 2 of the Recital shows that the premises are intended to be charged as security for "the due payment of all moneys payable or which may become payable at any time hereafter or from time to time become payable by the Mortgagor to the Bank on any account whatsoever whether under or pursuant to any of the covenants terms and conditions hereinafter contained or otherwise howsoever."

37. On the face of it, the legal charge is security for all present and future indebtedness of Mr Wong to the Bank. It does not seem to be Mr Wong's position that it did not cover his liability as guarantor of Jing Guang but rather that the liability never came into being. At the same time, Mr Cheung has referred to the fact that the Jing Guang debt was very much greater than Mr Wong's own debts to the Bank. In his statement, Mr Wong refers to the "unreasonableness" of the Bank's action, and KMLL in correspondence also refers to the Bank's "unreasonable demand and condition".

38. Mr Fung for the Bank has referred me to various cases on the ambit of the "all moneys" clause in a mortgage. It is clear that the "all moneys" clause should be construed according to the actual words used, and that notions of fairness, justice or reasonableness which might arise under statute such as the Unconscionable Contracts Ordinance or in equity where unconscionability is suggested. See in particular the Australian case of Re Bankrupt Estate of Murphy: Donnelly v Commonwealth Bank of Australia Ltd (1996) 140 ALR 46.

39. I note in particular that by Clause 1 of the legal charge, the Mortgagor covenants to pay on demand :

"... all sums of money which at the date of such demand may be outstanding and according to the books of the Bank payable by the Mortgagor to the Bank in respect of any account whatsoever between the Mortgagor and the Bank..."

By Clause 2(b) the Mortgagor covenants to :

"Pay to the Bank the amount of all advances and all moneys which may from time to time become due to the Bank on all contracts and engagements including the payment of all bills of exchange drafts and promissory notes the due and punctual performance or payment of which may from time to time be guaranteed by the mortgagor to the Bank..."

By Clause 2(e) the Mortgagor covenants to :

"Make good, pay and discharge any liability whatsoever of the Mortgagor to the Bank which liability may be incurred or arise in any manner howsoever whether the actual conditions under which liability may be incurred or arise have or have not been specifically mentioned and provided for by the foregoing covenants contained in the se presents and whether such liability shall be a liability incurred or arising under circumstances or conditions incidental to any form of contractual relationship between the Mortgagor and the Bank which comes properly and strictly within the meaning of the term "Banking Facilities" or whether such liability shall be a liability incurred or arising under circumstances or conditions incidental to any other form of contractual or other relationship whatsoever..."

40. By Clause 4, the Mortgagor charges the Property to the Bank as security "for the due fulfilment by the Mortgagor of the covenants terms and conditions herein contained."

41. It seems quite clear to me that actual words of the various clauses taken together provide that the Property is charged as security for all future liabilities by Mr Wong to the Bank. This would include his liability as guarantor of Jing Guang, of which he was a director and shareholder, to the Bank. This sort of situation where a director guarantees his company's debt is common. It could hardly be said to something which would be outwith the contemplation of the parties as a possible future liability and it could hardly be said to be unreasonable.

42. I am satisfied that the legal charge did cover Mr Wong's liability as guarantor.

The Result

43. This being so, the Bank was not in any way at fault in demanding that he pay off his own debts and those of Jing Guang in order to redeem the legal charge.

44. It is not necessary for me to consider further the question of clog or fetter on the equity of redemption. It seems to me, however, that if the Bank had wrongly demanded that Mr Wong pay off a debt which had not come into being, or which was in any event not covered by the legal charge this would not have amounted to a clog on the equity. All the case law, as I have indicated, points to this doctrine being invoked where there is a collateral term in the mortgage itself. Conduct does not come into it. It seems to me that Mr Wong's proceedings were misconceived.

45. I would have thought that if the Bank had wrongly demanded that Mr Wong pay off a debt which had not come into being, or which was in any event not covered by the legal charge, his proper course would have been to tender repayment of the sums due under the instalment loan and the overdraft facility. His entitlement would then have been as set out by Godfrey JA in UTG Investment (Far East) Ltd v Petra Bank & Anor., [1995] 2 HKC 157 at 161:

"Absent a foreclosure, the borrower is always, and invariably, entitled, on discharging his indebtedness to the lender, to reassume the full benefit of the property which he has mortgaged to the lender to secure the indebtedness. If the security is an interest in land, and the lender refuses to re-convey or reassign the property to the borrower, the borrower is entitled (1) to a declaration that, the borrower having paid what was due to the lender, the lender now holds the mortgaged property in trust for the borrower absolutely; and (2) to an order on the lender to re-convey or reassign the mortgage property to the borrower: see, for example, the form of order set out in Seton's Judgments and Orders (7th Ed, 1912) Vol III at pp 1854 and 1855."

46. Proceedings for damages based on conduct as a clog on the equity were misconceived and would in any event have been misconceived even in the situation I have just considered.

47. Mr Wong's proceedings against the Bank fail. The Bank is entitled to and will have judgment for the sums due under the two facility letters. The Bank has calculated the figures up to 12 October 2000. I indicated at the close of the trial that in the event of my giving judgment in favour of the Bank I would adopt those figures unless Mr Wong's solicitors advised me, through my clerk, that there was any mistake in them; in which case I would revert to the figures set out in the prayers of the counterclaim. I have had no such advice and so will adopt the Bank's latest figures.

48. Counsel addressed me on costs. The Bank seeks costs to be taxed on a solicitor and own client basis because this is provided for in the legal charge. However, the Rules of the High Court do not now provide for this basis of taxation; see Order 62 Rule 28.

49. Judgment for the plaintiff and defendant by counterclaim, now the Industrial and Commercial Bank of China (Asia) Ltd for:

(1) Payment of $10,364,062.76 with further daily interest of HK$2,933.99 at a rate of 2.75% over HK$ Prime (i.e. 12.15% currently accruing from 12 October 2000 up to the date of payment;

(2) Payment of $6,998,987.78 with further daily interest of HK$3,986.11 at a rate of 11.25% over HK$ Prime or one-month HIBOR accruing from 12 October 2000 up to the date of payment;

(3) Costs nisi to be taxed if not agreed.