FRENCHER LTD and Another v. THE BANK OF EAST ASIA LTD. and Others

HEADNOTE

'F' Ltd. mortgaged the 29th Floor in the Bank of America Tower to the Defendant Bank in August 1981 for $28m. 'B' Ltd guaranteed the mortgage.

'F' Ltd defaulted in 1983. The market value of the floor had fallen to $23m. 'B' Ltd. defaulted on the guarantee and were put into liquidation. The Directors of 'F' Ltd. purported to resign in March 1984. In December 1984, the Bank obtained a foreclosure order absolute of the floor, and served it on the registered office of 'F' Ltd. By 1987 the market value of the floor had risen to $40m & by 1988 $51m.

In 1988, 'F' Ltd. was wound up.

In 1989, the Official Receiver of 'F' Ltd. sought to reopen the order absolute and redeem the mortgage and assigned its rights to the Plaintiff - B.Y. Lam & Sons (Investment) Ltd., in 1990.

The Bank sued its solicitors for professional negligence, who in turn sued the Queen's Counsel who advised it.

Held

1. In the absence of fraud, there was no absolute entitlement to the foreclosure order being re-opened.

2. The maintenance by the Bank of a proof of debt in 'B' Ltd.'s liquidation did not entitle the Plaintiff to re-open the order.

3. The order was regularly made and served. As the directors had abandoned 'F' Ltd. they could not be said to have had no knowledge of the order.

4. In the exercise of the court's discretion, particularly the delay which had occurred, the order absolute would not be re-opened and the mortgage could not be redeemed (Campbell v. Holyland 7 Ch.D 166 applied).

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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(Consolidated by Order of Mr. Justice J. Chan
dated 30th July 1993)

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J U D G M E N T

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1. This is an unusual action. It has taken an inordinate length of time to get to Court. It has never been case-managed so that the issues could be distilled and substantial saving of time would have been achieved. At the very last moment, the morning of the hearing, allegations of a nature close to fraud against the Defendant (the Bank) and its advisers have been dropped.

2. The claim essentially is for a declaration that as at 9 March 1990 the 2nd Plaintiff was entitled to re-open a foreclosure order absolute made in November 1984 in favour of the Defendant bank, and is therefore entitled to a sum now worth approximately $32 million standing in a joint account by virtue of an agreement between the parties on 8 March 1990.

3. The Bank denies that the mortgage can be redeemed and has joined as a 3rd party the solicitors then acting for it, who have in turn joined the Queen's Counsel then advising it.

Factual background

4. Frencher Limited (the company) was a wholly owned subsidiary of Bylamson & Associates (Enterprises) Limited, (Byle) - a public company which owned the 29th floor and 3 car parking spaces of the Bank of America Tower. Other subsidiaries were Jofille which owned the 28th floor and 3 car parking spaces, and Balew which owned the 30th floor and 3 car parking spaces. The only asset of the company was the property and it was mortgaged for $28 million to the Defendant bank on 4 August 1981. Its value then was approximately $32 million. The other floors were similarly mortgaged. The mortgage was guaranteed by Rogerio & Stephen Lam, but in December 1981, this was replaced by a guarantee from Byle.

5. The directors of Frencher were Rogerio LAM, LI Sik Kwan and Miss LEE Wai King. LAM & LI who both gave evidence were also Directors of Byle. The volatile Hong Kong property market fell from 1982, and by March 1983 Frencher had defaulted in the payment of interest on the mortgage. The value of the property had fallen dramatically and Byle and its subsidiaries were in serious financial difficulties. The Bank invoked the guarantee but Byle defaulted on 16 February 1984 and the Company, on appeal to the Court of Appeal, was wound up.

6. The Bank obtained possession against Frencher in August 1983 and was able to let the 29th floor on 2 April 1984 to Wardley-Aclli Commodities Limited. The Directors of Frencher on 13 March 1984, in stereotyped letters, purportedly resigned, leaving Frencher with no directors or management.

7. On 20 August, the Bank lodged a proof of debt in Byle's liquidation relating to the sum owed on the guarantee and also in respect of the other subsidiaries amounting to some $94 million and attended a meeting of creditors called on 3 April. On 3 September the Bank sought foreclosure of Frencher's right to redeem the property if Frencher failed to pay the outstanding principal and interest.

8. On 2 October an order nisi was made and the Master certified that $34,998,128 was due for repayment on 12 November. No payment was made. An order absolute was made on 29 December. The 28th and 30th floors were similarly foreclosed.

9. There had been a conscious decision by the Official Referee not to wind up Frencher as it was worthless, but on 12 September 1988, such an order was made. The Bank continued to maintain its proof of debt in Byle's liquidation until on 21 June 1988 it was withdrawn.

10. On 30 November the Bank sold the 30th floor and one car parking space of the 29th floor. On 13 July 1989, the Official Receiver as liquidator of Frencher issued a writ, seeking the re-opening of the foreclosure order absolute on one ground.

11. By virtue of an agreement dated 8 March 1990 between the Official Receiver of Frencher and the Bank, the 29th floor and 2 car parking spaces were sold for some $82 million - $50 million was paid to the Bank for the principal and interest then owing to it, and the balance held in a joint account pending the outcome of this litigation. The Official Receiver has assigned its rights to the 2nd Plaintiff, B Y Lam & Sons (Investment) Ltd, another of Mr LAM's companies, and the Bank sued its solicitors for professional negligence who in turn joined the Queen's Counsel who advised it.

12. The statement of claim was substantially amended claiming relief on additional grounds. The only other facts which have to be mentioned are:

1) The sum certified did not include a credit for two monthly payments of $160,188 from the Bank's tenant.

2) The sum certified did not include other debits which the Bank say were inadvertently excluded and the total should have been $35,008,567. (These debits were admitted as far as payment but not as the right to so deduct them according to the mortgage deed).

3) The approximate market value of the 29th floor was: 1981, $32 million; March 1984, $23-1/2 million; 1987, $40 million; 1988, $51 million and increasing; 1990, $83 million; and 1995, $140 million.

13. I have heard the Plaintiff's claim first and, dependent on the conclusion to which I come, will then determine the 3rd and 4th party proceedings.

LAW

14. There is no doubt that there is a discretion in the Court to set aside a foreclosure order absolute and in appropriate circumstances to permit the mortgagor to redeem. See Campbell v Holyland, 7 Ch. D. 166.

Jessel M.R. at P.169 said,

"The decree though final in terms was not final in fact, and the suit could not be considered as terminated".

At P.172,

"...but whether or not he shall be allowed so to redeem lies in the discretion of the court, and depends on the circumstances of each particular case".

15. Examples given by Jessel M.R. of considerations affecting the exercise of that discretion are:

(a)	"In the first place the mortgagor must come,as it is said promptly; that is within a reasonable time. He is not to let the mortgagee deal with the estate as his own....and then without any special reason come and say, "now I will redeem". (P.172)
(b)	"...where the estate is an estate in land in possession - where the mortgagee....deals with it and alters the property and so on - the mortgagor must come much more quickly than where it is an estate in reversion..." (P.172-3)
(c)	"...was the mortgagor entitled to redeem, but by some accident unable to redeem? Did he expect to get the money....and was he disappointed at the last moment?" (P.173)
(d)	"Then an element for consideration has always been the nature of the property as regards value." (P.173)
(e)	"The property....may possess not merely a positive money value, but a peculiar value....so that you cannot set an actual money value upon it". (P.172-3)
(f)	"I entirely agree with the various authorities
	which have been quoted, that reasonable promptness ought always to be shown". (P.175)

16. In certain circumstances, the discretion is bound to be exercised in favour of the mortgagor, for example, when the order is obtained by fraudulent means. (See Patch v Ward [1867] 3 Ch. App. 203)

17. The Plaintiff's case, by their amended statement of claim, was that there were three grounds which would cause the Court to be bound to set aside the order absolute.

a)	The affidavit of Mr Anstock, the legal adviser of the Bank, to obtain the order was misleading as it omitted to give credit for two months' rent received so that the sum certified by the Master was too high.
b)	The fact that two months' rent was received between the date of the Master's certificate and date fixed for redemption.
c)	Subsequent to the order absolute, the Bank continued to maintain its proof of debt until 21 June 1988 and it attended and voted at a creditors' meeting in Byle's liquidation on 23 March 1984.

18. The first ground is now no longer pursued, except that I am asked to give it weight in the exercise of my discretion.

19. As to the second, there is, as the citations from the authority show, in particular Campbell v Holyland, a clear distinction between extending the time for redemption before the order is made absolute and re-opening an order absolute.

20. Slight circumstances may cause the time for redemption to be extended. (See for example, Prees v Coke [1871] LR 6 Ch. App.645, Alden v Foster [1842] 5 Beav. 592 and the commentary in Halsbury Volume 32, paragraph 909.)

21. The receipt of rent re-opens the account and a new certificate and date for redemption will have to be obtained. These authorities do not assist the Plaintiff, the order has been made absolute and the account closed. However, as I said earlier, if the account was obtained by fraud, it would be re-opened.

22. As to the third ground, the proof of debt was against Byle because Byle was the guarantor of the mortgage, and if a judgment or satisfaction of the debt had been obtained against Byle, then it would have been entitled to an indemnity against the company. It is therefore submitted that it would have been subrogated to the Bank's rights under the mortgage and the company could only reimburse Byle by way of indemnity without thereby relieving the mortgaged property pro tanto.

23. Mr Bell cites Lloyd's & Scottish Trust Ltd v Britten [1982] 44 P & CR 249, in support of that submission.

24. The factual position is that Byle has never paid under the guarantee. It had no money. In my judgment, unless and until a guarantor pays under the guarantee, a claim for payment can give rise to no legal consequences affecting the relationship between the mortgagee and the mortgagor or the mortgaged property. See for example China & South Sea Bank Ltd v TAN Soon Gin [1990] 1 AC 536.

25. Although a large number of authorities have been cited and considerable time spent on submissions that the maintenance of a proof of debt, albeit unsatisfied, against the guarantors can permit the company to assert legally that the guarantee has been satisfied and it then would be liable hypothetically to an indemnity, the short answer in my judgment is the guarantor has not satisfied the guarantee and paid the Bank its $28 million plus interest.

26. Even if I am wrong, however, and I must assume the hypothesis that the guarantee is satisfied and therefore the company must indemnify Byle, does the maintenance of a proof of debt permit as of course the re-opening of a foreclosure order absolute?

27. A number of authorities have been cited and certain general propositions emerge.

1)	A mortgagee is entitled to pursue all remedies he has to satisfy the debt owed to him.
2)	He is entitled to sue the mortgagor on his personal covenant and if not fully paid, thereafter to obtain a foreclosure order for the unpaid balance.
3)	If the mortgagee forecloses and sues the mortgagor to judgment and the mortgagee pays, he is effectively redeeming, and so he must be entitled to set aside the order absolute. (See for example Mexborough U.D.C. v Harrison [1964] 1 WLR 733)
4)	Although a mortgagee can pursue all remedies, they must not be inconsistent so that he is overpaid. (See Gordon Grant v Boos [1926] AC 781 at P.785)

28. I cannot find anywhere any legal proposition that the mere maintenance of a proof of debt, even were it against the company, which it was not, gives rise to a right to re-open which the Court must grant. It follows therefore that I do not agree with Mr Bell's submissions that in the happening of the two events I have set out above, I must re-open this order absolute.

29. This action therefore must be considered in the light of my general discretion. Campbell v Holyland sets out a number of general principles which a Court can adopt in the balancing exercise of a Court's discretion.

30. It must be remembered that that case and a large bulk of the authorities cited to me were concerned with the latter 30 years or so of the 19th century in England. At that time, the Courts of Chancery were concerned in protecting the rights of owners, mainly of small property, who would lose it: sometimes when payment was late, or accident or inadvertence prevented the sum being available on the due date, or where the property had some special value, or when the sum foreclosed was small in relation to the value of the property. Courts of Equity, therefore, permitted the owner to come back and re-open an order which, on its particular facts, might have appeared unjust.

31. The situation in Hong Kong in the 1990s is dramatically different. Further, I have been dealing with rather different personalities than were found in England in the latter part of the 19th century.

32. Mr LAM is, I find, an experienced, skilful property investor or speculator. He is well versed in the ups and downs of the Hong Kong markets. He was Chairman of Byle now in liquidation. He runs a number of companies. Mr LI, who also gave evidence, I find was always acting under his instructions.

33. The first matter I must examine is the delay. Since Campbell v Holyland and reaffirmed in Hang Seng Bank Ltd v Mee Chong Investment Co. Ltd [1970] HKLR 94, the mortgagor must act promptly.

34. What happened in 1984 when values had plummeted was that the three directors of Frencher deliberately abandoned the company. There was no one to run it, but to the public, the company register still showed the directors and the registered office. It was said in argument that the company became a rudderless ship. It was far worse. It was a drifting worthless hulk, liable to sink at any time.

35. The orders nisi and absolute were lawfully obtained and lawfully served. The registered office was Room 3704, Bank of America Tower, where at the material times both Mr LAM and Mr LI were. Mr LI said he read some of the Frencher's correspondence and sent the rest onto the Official Receiver. He and Mr LAM denied they knew anything about the Frencher proceedings. Although this case does not turn on credibility, I confess I have considerable doubt about this alleged ignorance. It may be, to be charitable to them, that they did not care. They were both worried, in my judgment, about some personal liability which might arise if they stayed in Frencher, which might explain their sudden flight from responsibility in Frencher's affairs.

36. Much discussion has taken place over when and what they knew. It is conceded that by 1987, the time when the market was going up, they renewed interest in the 29th floor and were told that it was foreclosed. The position, however, in my judgment, is simple. The orders were regular. They were properly served in accordance with the rules on the registered office. They were actually served by a sealed copy - probably not in an envelope, although I make no specific finding on that - of the order nisi and the Master's certificate. Frencher, therefore, in law had actual knowledge of the order.

37. It is absurd to suggest that if, for example, a director looks out of the window and sees a process-server walking up the path and he then runs away for several years, he can be heard to say that he knows naught of a Court order.

38. In my judgment, these directors, who of course were acting in contravention of the Company Ordinance and who may have rendered themselves personally liable to the liquidators for their abandonment of the company and their inaction in seeking to set aside the order, cannot now assert that they knew nothing of the Court orders.

39. The liquidator was also aware of the foreclosure. I accept Mr Budge's evidence that he spoke to Mr Wardell about the order and an attendance note he produced on 13 March 1985 also refers to that.

40. If the directors were personally unaware of the orders, and as I have said earlier I have considerable doubt as to this state of mind, it was their own fault, and they cannot derive any benefit from what they did. Even from 1987 there was delay. Mr LAM said he waited until he could see the actual order although his solicitor told him a foreclosure order had been made. I watched Mr LAM very closely giving evidence, and on this occasion, I do not believe he was telling the truth. The market was beginning to go up and he was waiting for an opportune moment.

41. In my judgment there has been substantial delay here. Briggs J, as he then was, in the Hang Seng Bank case thought 9 months too long. Here there has been a delay over 5 years. Added to this, there are the following matters which arise for the exercise of my discretion:

a) There is no special value in this property.

b) The relative value of the property and the mortgage debt as at December 1984, the date of the order absolute (see on this Patch v Ward & the Hang Seng Bank case at page 102), there was a debt of some $34 million and a value of $23-1/2 million or so.

c)	The company never was in a position to pay anything as at December 1984.
d)	There was a deliberate decision not to pay anything.
e)	The absence of the credit for two months' rent is trivial. I have not analysed all the mathematics put forward by Mr Ribeiro and set out in the document of the Bank's debits on the mortgage account, but some matters, it appears to me which would be permitted under the mortgage, were excluded. Even if the full $320-odd thousand is taken, this is less than 1% of the debt due and the company could pay absolutely nothing.
f)	The Bank, when foreclosing on an asset worth less than the debt, took a considerable risk. No interest was paid for several years. It rented the property and it was liable under various covenants contained in the letting arrangements. I accept the evidence of Mr Anstock that it found this mortgagor, as he called it, a problem. I am sure it was a substantial problem.
g)	The proof of debt was withdrawn in 1988 prior to the issue of the writ.
h)	Normally, a right to re-open an order absolute is for the benefit of the dispossessed mortgagor. This is not the case here. By virtue of the agreement of 1990, Mr LAM has paid $1 million to the liquidator of Frencher. He has invested, or some would say gambled, $1 million to recoup for himself and his family some $32 million. Admittedly, the liquidator also another $9 million if Mr LAM is successful, but essentially this action is for the benefit of Mr LAM and his family. It is said that he was a creditor of Byle, which no doubt he was.

Conclusion

42. I can find nothing meritorious in this claim. The company either through the liquidator of Byle or the ex-directors did nothing until 1989. Everybody sat back and did nothing. When the market recovered, Mr LAM's commercial interest was aroused and he persuaded the Official Receiver to assign this action to him and he now wishes to reap the benefit of his and his company's inactivity. I confess I find, on analysis, this claim the antithesis of the type of claim Courts of Chancery were striving to protect by permitting an order absolute to be re-opened. There is no merit in the claim. It is commercial opportunism.

43. Mr Bell complains that the Bank has been paid its debt and interest and now will receive a windfall of $32 million. This is by the way. The Bank took the risk of taking over this property. It had a substantial book loss at the time. It has had to suffer the vicissitudes of the property market and the problems caused both by Frencher and Byle going into liquidation. It now finds itself a Defendant in this unmeritorious action with claims of improper behaviour and it has had to join its own lawyers.

44. The profit to the Bank, in my judgment, has been fairly and properly obtained. I do not find Mr Bell's complaint in any way assists the Plaintiff. I have examined all the principles of discretion set out in Campbell v Holyland. I have had regard to the realities of the circumstances surrounding the collapse of Byle & Frencher, the actions, or I should say inactions of the directors, in particular Mr LAM, and the nature of this action. I can find nothing which is to be put in the balance in favour of re-opening this order absolute made now nearly 11 years ago. The balance comes down all one way. In the exercise of my discretion I dismiss this action. In view of my decision, it has not been necessary to decide the 3rd and 4th party proceedings.

45. I heard Mr Budge give evidence. The solicitors, albeit making a mistake in the computation of the account, appear to me to have acted perfectly reasonably and properly throughout. However, it is not necessary to come to any reasoned conclusion on this matter.