BANK OF CHINA (HONG KONG) LTD v. SENLAVEER (PACIFIC) CO LTD AND OTHERS

CACV 283/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 283 OF 2002

(ON APPEAL FROM HCMP NO. 4038 OF 1998)

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J U D G M E N T

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Hon Woo JA:

Background

1. This is an appeal against the judgment dated 2 May 2002 of Deputy Judge Saunders in the Court of First Instance.

2. This action was commenced by way of originating summons dated 14 August 1998. The original plaintiff was Kincheng Banking Corporation which subsequently amalgamated with the present plaintiff. I will simply call it "the bank". By the action, the bank claimed against six defendants in respect of debts owed by the 1st defendant incurred by it by using the banking facilities provided to it by the bank. The other defendants were either mortgagors of properties mortgaged to the bank as security for the grant of the banking facilities to the 1st defendant or guarantors of the 1st defendant's debts owed to the bank.

3. The trial before the judge only involved the bank and the 4th defendant, the bank having recovered part of its claim from the other defendants by way of money judgements and orders for possession of the properties mortgaged by the other defendants to it.

4. As far as the 4th defendant is concerned, she had mortgaged two properties to the bank by way of two legal charges ("the two legal charges"), namely, one dated 28 January 1994 in respect of Flat C, 20th Floor, Fu Yan Yuen, Chi Fu Fa Yuen, and the other dated 21 April 1994 in respect of Flat E, 25th Floor, Block 8, City Garden.

5. By his judgment of 2 May 2002, the judge made an order for possession of the two properties in favour of the bank, and ordered the bank to recover against the 4th defendant the sum of $33,737,481.50 (after credit being given to the sums recovered by the bank principally from the realisation of other properties and securities charged to it by the other defendants), with interest. The judge also ordered the 4th defendant to pay the costs of the proceedings on a full indemnity basis to the bank, to be taxed if not agreed. That basis of taxation of costs was founded on the contractual agreement between the bank and the 4th defendant.

6. The 4th defendant now seeks an order to set aside the judgment and a retrial, or alternatively, to vary the judgment so that it is for a lesser sum than that ordered by the judge. By a late amendment to the Notice of Appeal, for which I granted leave on 9 May 2003, Mr Albert Yau, for the 4th defendant, raises grounds of appeal in substitution for all the grounds set out in the original Notice of Appeal and other supplementary Notices of Appeal filed previously by the 4th defendant in person.

The grounds of appeal

7. Only three substantial grounds of appeal are raised by the Amended Notice of Appeal, the fourth ground only asking for a retrial and directions. The first two grounds of appeal are factually based on two letters dated respectively 28 January 1994 and 21 April 1994 ("facility letters"), both of which were before the judge at the trial. Both facility letters were addressed to the bank, and they were apparently prepared by solicitors appointed by the bank to prepare the legal charges to be executed by the 4th defendant. The facility letter dated 28 January 1994 addressed to the bank reads as follows:

"Dear Sirs,

Re:	Flat C on the 20th Floor of Fu Yan Yuen, Chi Fu Fa Yuen, Hong Kong
	Mortgagor : Cheung Hau Kwan
	Requesting Party : Senlaveer (Pacific) Company Limited

We, the undersigned hereby confirm that we will only utilize the General Banking Facilities granted to Senlaveer (Pacific) Company Limited under the Legal Charge of the above property only up to the extent of $2,400,000.00 notwithstanding the fact that the Legal Charge was created to secure General Banking Facilities to an unlimited extent.

Yours faithfully,

	Senlaveer (Pacific) Co. Ltd.
[signed] Cheung Hau Kwan	[signed] Cheung Ling Mun Shen Bin
Mortgagor	Requesting Party"

8. The facility letter dated 21 April 1994 reads as follows:

"To: Kincheng Banking Corporation, Hong Kong.

Re:	Mortgage of Flat E on the 25th Floor of Block 8 of City Garden, Nos. 231-233 Electric Road, Hong Kong to secure general banking facilities to an unlimited extent

We, the undersigned hereby confirm that we will only utilize the general banking facilities granted to us under the Mortgage of the above property only up to the extent of $8,000,000.00 notwithstanding the fact that the Mortgage was created to secure General Banking Facilities to an unlimited extent.

Yours faithfully,

	[signed] Cheung Hau Kwan
	CHEUNG HAU KWAN
	'the Mortgagor'
	Senlaveer (Pacific) Company Limited
	[signed] Shen Bin Cheung Ling Mun
	SENLAVEER (PACIFIC) COMPANY LIMITED
	'the Borrower' "

9. The first two grounds of appeal are based on these two facility letters and the fact that the bank's claim against all the 4th defendant (and other defendants) exceeded the total of $10.4 million (ie, $2.4 million plus $8 million) mentioned in the two facility letters. Ground 1 is to the effect that the judge failed to have sufficient regard to the two facility letters in wrongly concluding that the two mortgages provided by the 4th defendant were created to secure general banking facilities to an unlimited extent. Ground 2 is to the effect that the judge failed to consider whether a case of material variation of the terms of the two mortgages to the detriment of the 4th defendant had been made out which discharged the mortgages altogether.

10. Ground 3 can be summarised as being based on a statement made in the 4th defendant's witness statement dated 23 November 2001, which is translated as follows:

"6. About one and a half years after my lending out the title deeds, on five occasions I had been to the Kincheng Bank at North Point to look for Choi Sui Kwan [Choi Suiqun] twice, to look for Wong Sau Ying, the person in charge, three times, with intention to get back my title deeds. My request was rejected by Wong Sau Ying, the person in charge, for the reason that because it was business secret, she could not deal with me direct."

11. Based on this fact, ground 3 states that the judge, through no fault of his own, did not consider whether in the circumstances of the case, the bank owed to the 4th defendant a duty under the law of tort or implied under contract to take such steps as may be reasonably necessary for the protection of the interest of the principal borrower, the 4th defendant as guarantor and itself as creditor when the 4th defendant gave notice to the bank that she was no longer willing to continue assuming liability under the guarantee/mortgage and wanted to recall the guarantee/mortgage. The ground further poses the question that if the answer to the above is in the affirmative, whether such duty on the part of the bank had been broken and the question, in the event of breach of such duty, as to what the appropriate relief, if any, should be.

Grounds not pleaded

12. While some evidence for raising the three grounds of appeal was apparently before the judge at the trial, the points taken by the three grounds were never pleaded.

13. Although the action was commenced by way of originating summons, pleadings between the bank and the 4th defendant were served pursuant to the order of Master Poon made on 9 September 1999. At the initial stage of the proceedings, the 4th defendant was apparently acting in person, because she had filed a document written apparently in her own hand in Chinese entitled "Application for Assistance" dated 26 August 1998, setting out some circumstances of how she came to execute the legal charges in respect of her two properties, but mainly talking about her family and matrimonial problems, and urging the court to allow her to retain the two properties for her own use. Before the Statement of Claim was filed and served, the 4th defendant became represented. There was an affirmation in English made by her on 2 June 1999, which was filed by a firm of solicitors. A Defence dated 8 November 1999 was filed on her behalf, repeating her matrimonial difficulties and raised the defence of undue influence by the 2nd defendant, Cheung Ling Mun, causing her to execute the two legal charges.

14. Apparently, however, approaching the trial, the 4th defendant was acting in person, because she caused to be filed her own witness statement and the witness statements of her witnesses which were typed in Chinese. Before the judge at the trial, the 4th defendant was unrepresented.

15. In his judgment, the judge identified the 4th defendant's defences as comprising undue inference and non est factum. After analysing the evidence very carefully, he found against both defences. The points now raised on appeal were apparently not relied on by the 4th defendant before him.

16. Mr Yau has directed our attention to the reference to the two facility letters in the opening submission of counsel for the bank before the judge. When these two facility letters were mentioned to the judge, the judge queried whether the liability of the 4th defendant was limited to $2.4 million plus $8 million as set out in the two facility letters. He repeatedly expressed the view that the two facility letters should have such an effect or else they would serve no useful purpose. Counsel explained that the effect of the facility letters were for the purpose of explaining to the 1st defendant (the principal borrower) and the 4th defendant (the mortgagor) the extent of the banking facilities that the bank had agreed to provide to them under each of the two legal charges. On the other hand, because of the provisions of the two legal charges, and in particular the covenant to pay all outstanding indebtedness in clause 2.01 thereof, the 4th defendant, as the mortgagor, had made a personal covenant to pay in full the indebtedness of the 1st defendant. In the end, the judge expressed the view that the two facility letters did not take the bank's case any further and they only served to complicate matters. Counsel then explained that the two facility letters were included in the documents presented to the judge in order to give the court a whole picture. There the matter rested. The two facility letters were not referred to in the oral testimonies of the parties' witnesses or in the judge's judgment.

Ground 1

17. As far as I understand, Mr Yau's submissions on ground 1 are on two bases. First, in view of the matrix of facts, the two legal charges should properly be construed as the bank having agreed to limit the 4th defendant's liability to the stated amounts of $2.4 million and $8 million. Secondly, on the strength of the case of Bank of China (Hong Kong) Ltd v Fung Chin Kan and Anr [2003] 1 HKLRD 181 Mr Yau argues that there was a collateral or composite agreement in the instant case that the liability of the 4th defendant under the two charges was limited to those sums.

18. It is without dispute that clause 2.01 of each of the two legal charges contained a personal covenant on the part of the 4th defendant to pay in full all the outstanding indebtedness of the 1st defendant, the principal borrower. Mr Yau directs our attention to the following matters as the factual matrix in construing the legal charges in such a way that the 4th defendant's liability must have been limited to $2.4 million and $8 million respectively, namely,

(1) The bank did not need the two facility letters to limit its lending, as there were other documents making such a limit or the bank could simply impose a limit from time to time. On that basis, therefore, by necessary implication, the two facility letters were intended by the bank or indicated the bank's agreement to limit the 4th defendant's liability to those two sums.

(2) Save that the two facility letters recorded the bank's agreement to limit the 4th defendant's liability under the two charges, there would have been no necessity for the bank to require the 4th defendant to sign them.

(3) When the two legal charges were executed by the 4th defendant, the 1st defendant, as the principal borrower, had already obtained facilities that exceeded the two stated sums. The only rational explanation of requiring the two facility letters to be signed by the 1st and 4th defendants, in accordance with proper commercial morality, was that the 1st defendant and the 4th defendant agreed to limit the two charges to those two stated sums, and the bank agreed that the 4th defendant's liability was limited to those two sums.

(4) The recital to the two legal charges was to the effect that the amount to be advanced by the bank under them could only be increased by mutual agreement. Therefore the liability of the 4th defendant, unless mutually agreed, could only be limited to the two stated sums.

19. I do not agree. The plain and ordinary meaning of the two facility letters is that the 1st defendant and the 4th defendant acknowledged to the bank that they would only use banking facilities to the extent of the stated sums. As the 4th defendant was not the principal borrower and it was the 1st defendant who proposed to borrow from the bank, it was mainly the 1st defendant who acknowledged to the bank that it fully understood that the extent of the banking facilities to be made available by the bank under the two legal charges was the stated sums. This plain meaning was supported by the fact that at the time of the execution of the two legal charges, the bank had already granted banking facilities to the 1st defendant and the aim of the creation of the two legal charges in favour of the bank was to enlarge the banking facilities to be made available to the 1st defendant by the bank, but only to the extent of the two stated sums. By signing the two facility letters, the 4th defendant also made the same acknowledgement to the bank, whereby she was supposed to know that the banking facilities to be made available to the 1st defendant was not to exceed those two sums. It does not, however, mean that there was any agreement that her liability under the two legal charges, and in particular, her personal covenant to pay in full the outstanding indebtedness of the 1st defendant owed to the bank was limited to those two sums. If Mr Yau's argument is correct, then whenever a legal charge containing a personal covenant to pay all outstanding indebtedness contains a term that the banking facilities or bank loans advanced under the legal charge are limited to a certain amount, the personal covenant would be devoid of any effect or would only be of limited effect. This must be incorrect. In other words, such a limit of the loans secured by a legal charge that is agreed by a bank to be made available pursuant to the security does not derogate from the effectiveness of the personal covenant contained in the legal charge to pay all the outstanding indebtedness.

20. Mr Yau relies very heavily on the Fung Chin Kan case. In that case, the Court of Final Appeal held that on the facts of that case, the mortgagors (husband and wife) had limited their risk exposure to $3.3 million upon their execution of the legal charge of their property, valued at $4 million, for the bank's provision of banking facilities to a company. The Court held that through the solicitors preparing the legal charge and other documentation relating thereto the bank knew that the mortgagors' risk exposure had been agreed to the limit of $3.3 million, and that agreement amounted to a collateral agreement or a composite agreement. The Court entered judgment for the bank in the sum of $3.3 million, on the basis that on the mortgagors' own case that they were liable to the bank for that sum.

21. However it is to be noted that in that case, the solicitors who prepared the legal charge had also prepared a draft undertaking by the principal borrower to indemnify the mortgagors of $3.5 million, which sum one of the mortgagors (the husband) had corrected to $3.3 million. The court held that the draft undertaking strongly corroborated the mortgagors' case that there was an agreed limit of $3.3 million as their risk exposure, and that the solicitors who later received instructions from the bank in preparing the legal charge must have known about it. It further held that the bank could only have given instructions to the solicitors after preliminary discussions with the directors of the principal borrower and, as a matter of necessary inference, the matter of the mortgagors' limit of liability must have then been agreed.

22. In the present case, there was before the judge no evidence of the instructions given by the bank to the two firms of solicitors who respectively prepared the documentation relating to the two legal charges executed by the 4th defendant. But those representing the bank in this appeal have, without objection by Mr Yau, produced the bank's related instructions to the solicitors. Each set of instructions stated to the effect (a) that a legal mortgage should be prepared to secure general banking facilities to an unlimited extent and (b) that the mortgagor and principal borrower were requested to acknowledge in writing that the banking facilities available to them should be limited to $2.4 million and $8 million respectively. Mr Yau contends that these two requirements in the bank's instructions were contradictory, creating an ambiguity that should properly be construed as limiting the liability of the mortgagor. For the reasons stated in para 19 above, I do not agree. These two requirements were entirely different and for different purposes, and there is no ambiguity as Mr Yau submits.

23. Moreover, there were two Chinese documents entitled "guarantee" executed by the 1st defendant in favour of the 4th defendant. The first one dated 14 January 1994 was in respect of the Chi Fu Fa Yuen flat, whereas the "guarantee" in respect of the City Garden flat was dated 27 May 1994. The first "guarantee" provided that for the 4th defendant's agreeing to mortgage the related flat to the bank for assisting the 1st defendant's business development, the 1st defendant agreed to pay a monthly sum of $30,000 to the 4th defendant as reward for two years after the bank had agreed to grant the banking facilities and that in the third to fifth years thereafter, if the 4th defendant wished to, she could, by giving one-month advance notice to the 1st defendant, request the 1st defendant to assist in obtaining from the bank the discharge of the mortgage. The second "guarantee" was in similar terms, save that $100,000 instead of $30,000 was provided for as the monthly reward.

24. In respect of these two "guarantees" the judge said in his judgment:

"15. The payments were properly made to her pursuant to the two guarantees for about a year. The payments then became irregular and she has not kept proper track of them. She said that the payments stopped in late 1997. It was her evidence that she had received about $3 million by way of the guarantee payments.

16. It was Ms Cheung's [the 4th defendant's] case that both guarantees were received by her after the mortgage was signed. That is plainly the case in respect of the second mortgage for the guarantee, witnessed by a solicitor, is dated 27 May 1994, and the mortgage was signed on 21 April 1994.

17. The first mortgage was signed on 24 January 1994 and the first guarantee is dated 14 January 1994. It makes a promise to pay the reward of $30,000 a month 'after the bank has approved the LC and TR amount', a statement that plainly anticipates the bank's agreement, and one which would not be made had the bank already agreed to the arrangement. This was the first transaction that Ms Cheung had been involved in with Mr Cheung [the 2nd defendant, a director of the 1st defendant] and I am satisfied that she wanted assurance that her actions would be safe. She had every reason to wish to see the terms of the guarantee before the signing of the mortgage.

18. I find on the balance of probabilities that Ms Cheung received the first guarantee before she signed the first mortgage."

25. The execution of these two "guarantees" by the 1st defendant was apparently witnessed by a solicitor Anthony T K Leung. But Anthony Leung was not a solicitor instructed by the bank to arrange for the two legal charges to be executed by the 4th defendant. He was apparently a solicitor retained by the 1st defendant or the 2nd defendant for the purpose of preparing the "guarantees".

26. It, therefore, appears that apart from the two facility letters, there is no evidence to show that the bank was aware of any limit of exposure that the 4th defendant intended or wished to take by her creating the two legal charges. Nor is there any evidence to show that there was an agreement between the 1st defendant as the principal borrower and the 4th defendant as the mortgagor that there was a limit of the 4th defendant's risk exposure to the extent of the banking facilities granted by the bank to the 1st defendant on the basis of the legal charges, let alone the bank's knowledge of any such agreement.

27. Mr Yau argues that had the point been raised in the Defence, or had the judge made further inquiry either during the opening submission for the bank or at the trial generally, there could have been further discovery of documents or inquiry relating to the issue. However, this is a factual issue that should and could have been easily raised by the 4th defendant, if it was a fact. Throughout the trial, the defendant did not raise this issue, nor was the issue raised in the Defence that was prepared by her then solicitors. Indeed, this issue would have been contrary to or very much inconsistent with the terms of the two "guarantees" and the allegations of her absence of knowledge of the contents of the two legal charges executed by her that was raised in her Defence.

28. Mr Yau, based on the first two grounds of appeal, asks us to order a new trial so that, it is intimated, the 4th defendant would be able to, on the basis of the two facility letters, go into a train of inquiry, so as to prove that the bank knew of the limit of exposure that the 4th defendant was willing to take in her execution of the two legal charges. However, the missing link, which makes the present case very different from the Fung Chin Kan case, is that even now before us, the 4th defendant does not say that there was an agreement between her and the 1st defendant or the 2nd defendant that her liability resulting from the execution of the two legal charges was to be limited to $2.4 million and $8 million respectively. Such an agreement, if true, can be raised by the 4th defendant without any need of any further inquiry. In these circumstances, I do not consider that there was any substantial wrong or miscarriage at the trial for this Court to exercise its power to order a new trial, pursuant to section 15 of the High Court Ordinance and Order 59 rule 11 of the Rules of the High Court.

Ground 2

29. Ground 2 is also based on the two facility letters with a limit of banking facilities to be granted under the two legal charges. However, it was never alleged in the Defence that the bank had lent more money than the respective limits of $2.4 million and $8 million under the two legal charges.

30. Moreover, Mr Ng, for the bank, has in his skeleton arguments drawn our attention to the evidence of Mr Yuen Chi-hung before the judge. Mr Yuen, a bank officer, told the judge that the 1st defendant's indebtedness did not "exceed the facilities limited granted to the 1st defendant". The evidence was not challenged by the 4th Defendant. The judge accepted this evidence and said in his judgment:

"19. There is no evidence as to precisely when Senlaveer and Mr Cheung defaulted with the bank. But in June 1998 formal demand was made by the bank. The total amount of the facility had not been exceeded but the repayment terms were not being met."

31. Ground 2 asserts that there was a material variation of the agreement limiting the 4th defendant's liability to the detriment of the 4th defendant which discharged the two legal charges altogether. Factually, as I have held that there was no agreement between the bank and the 4th defendant by way of construction and no agreement between the 1st defendant and the 4th defendant by way of fact to limit her liability, there is no substance in this ground.

Ground 3

32. The factual basis of the third ground of appeal is that the 4th defendant had on a number of occasions in about 1996 approached the bank to ask for the return of the title deeds. Mr Yau argues that this amounted to the 4th defendant giving notice of her intention to terminate the two legal charges and her covenant to repay the indebtedness of the 1st defendant to the bank. Mr Yau complains that the judge made no mention or finding in relation to the 4th defendant's testimony about her approaches to the bank's staff Mr Choi Sui Kwan (or Choi Suiqun) and Madam Wong Sau Ying to ask them for the return of the title deeds of her two properties. The 4th defendant had also cross-examined Mr Choi when he denied her approaches to him. Mr Yau complains that judge did not resolve this dispute of fact between the parties.

33. It is to be noted that this third ground of appeal is raised in, if I may say so, a strange manner. It states that the judge, through no fault of his own, failed to consider whether in the circumstances of the evidence, that the bank owed the 4th defendant any duty under tort or contract to take such steps as might reasonably be necessary for the protection of the interest of the 1st defendant as the principal borrower, the 4th defendant as the guarantor (by way of her personal covenant to pay) and itself as creditor when the 4th defendant gave notice to it that she wanted to recall the guarantee/mortgage. This is not saying that the judge erred in any respect in his judgment. Nor was the point ever pleaded. The judge was therefore not incumbent to consider it.

34. Mr Yau has not been able to cite any authority to support his contention that in the circumstances of this case, the bank owed a duty to assist the 4th defendant in obtaining a discharge of the two legal charges.

35. Moreover, the "guarantees" executed by the 1st defendant in favour of the 4th defendant contained a term to the effect that after the expiration of two years from the execution of the legal charges, based on which the bank granted banking facilities to the 1st defendant, she was entitled to seek the assistance of the 1st defendant to require the bank to discharge the legal charges, if she wished to do so.

36. In testimony, the 4th defendant did mention to the judge that sometime after mid-1995, she had asked the 2nd defendant to return the title deeds of her properties, through personal approaches and by letters. But the 2nd defendant did not give her any positive reply. In a situation like that in the present case, I cannot see any legal duty on the part of the bank, as the lender, towards the 4th defendant as the guarantor or mortgagor, to assist her to obtain a discharge of the guarantee or the mortgage, without the full repayment of the loan lent pursuant to the mortgage/guarantee and interest. The mortgage/guarantee was provided to secure the repayment of the loan and interests, without the full repayment of which, there can be no duty imposed by law on the lender to have the mortgage/guarantee discharged or to take any steps relating thereto. I consider that this ground of appeal has no merit and must fail.

Conclusion

37. For the above reasons, I would dismiss the appeal with costs.

Hon Cheung JA:

I agree.

Hon Chung J:

I agree.