XCHRX THE KWANGTUNG PROVINCIAL BANK v. KEEN LLOYD RESOURCES LTD.

HCMP4696/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO.4696 OF 2000

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REASONS FOR DECISION

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1. This is an appeal by the plaintiff from the Order given by the master on 13 March 2001 directing for these proceedings to be continued as if begun by Writ and for costs to be paid by the plaintiff. At the conclusion of the hearing on 3 July 2001, I allowed the appeal. My reasons appear below.

BACKGROUND

2. In these proceedings begun by originating summons, the plaintiff bank claims against the defendant for money due to the plaintiff under a Legal Charge dated 29 June 1994 ("the Charge") and for vacant possession of the property known as lower townhouse No.14 and car parking space nos.G14 and R13, La Hacienda, 29-33 Mount Kellett Road, Hong Kong ("the Property") secured by the Charge.

3. By a Notice of Appointment to hear originating summons, the plaintiff appeared for judgment against the defendant. After hearing arguments, the master ordered that these proceedings should be continued as if begun by Writ and gave consequential directions. The master also awarded the costs of the application to the defendant.

4. In this appeal, the plaintiff seeks to set aside the Order of the master and asks that judgment be entered on the originating summons. Further affirmations had been filed by both sides since the hearing before the master.

5. The events leading to the present proceedings can be briefly stated as follows.

6. Pursuant to a facility letter dated 31 March 1998 ("the Facility Letter"), the plaintiff granted to the defendant banking facilities in the form of trust receipts ("T/R") and letters of credit ("L/C") to the extent of HK$46.8 million. The T/R facilities had a tenor of 90 days. Clause I of the Facility Letter provides for the Revision Date of the banking facilities to be 30 June 1999. The Facility Letter further contains the following provisions :

"Clause V - AVAILABILITY: Subject to your acceptance of and full compliance with the terms set out in this letter and completion of all appropriate documentation to our satisfaction and the fulfilment of all conditions precedent (if any) as stated herein before, the foregoing banking facilities will be available for use until the date of review as specified above or such other time as we shall notify you in writing.

Clause VI - REPAYMENT:

(1) All banking facilities are repayable on demand.

...

XVI. OTHER CONDITIONS:

...

(7) The facilities granted hereunder are available subject to there being no material adverse change in the financial condition of the Borrower/hirer, the Guarantor(s), Chargor(s), Pledgor(s) and/or Mortgagor(s) as specified above and their normal credit factors remaining unchanged. The foregoing facilities are subject to periodic review and may be amended and/or cancelled at our sole discretion. All outstanding balance will then become immediately due and shall be repayable on demand ...."

7. Pursuant to Clause II of the Facility Letter, the Charge was executed. The banking facilities were also secured by a personal guarantee given by Mr Chun Kam Chiu, a director of the defendant ("Mr Chun"). Under Clause 1 of the Charge, the defendant covenanted to pay to the plaintiff on demand all sums of money owed to the plaintiff in respect of the banking facilities granted to it.

8. The arrangement between the plaintiff and the defendant over the banking facilities was this. Upon the defendant's application, the plaintiff would issue L/C and effect payment to the beneficiary upon presentation of the L/C and the supporting documentation. When the goods covered by the L/C arrived at the destination, the defendant would take delivery of the goods against signing T/R. The defendant then has 90 days in which to pay the T/R. Interest was payable during the 90 days and overdue interest would be charged thereafter.

9. Since 6 October 1998, the defendant has defaulted in making payments of principals and interests to the plaintiff as they fell due under eight sets of L/C. Two letters of demand dated 12 January 1999 and 28 August 2000 were issued by the plaintiff's solicitors to the defendant. Some payments totalling over US$3.3 million had been paid, but the bulk of the indebtedness remained outstanding. Hence, on 7 September 2000, the plaintiff issued the originating summons herein. On 12 September 2000, the plaintiff also issued HCA8971/2000 against Mr Chun claiming under the personal guarantee. On 14 September 2000, partial payment in the amount of US$27,098.24 was paid by the defendant. As at 5 October 2000, when the affirmation in support of the application for judgment was filed, the defendant was indebted to the plaintiff in the sum of HK$23,025,395.32 and US$3,043,159.07.

10. The defendant opposes the application for judgment on the originating summons on the basis that there is a serious issue of fact that ought to be tried. The issue of defence raised by the defendant is that sometime before 31 March 1998, there was a collateral oral agreement between Mr Chun and a Mr Joe H.M. Yuen ("Mr Yuen") of the plaintiff to the effect that the banking facilities extended to the defendant would be for a fixed term of five years ("the Oral Agreement").

11. The circumstances giving rise to the Oral Agreement are these. On 31 August 1997, the defendant entered into a provisional sale and purchase agreement ("the Provisional Agreement") with a Smartex Properties Limited ("Smartex") to buy the Property for $65 million. The formal sale and purchase agreement ("the Sale and Purchase Agreement") was signed on 19 September 1997. Completion was scheduled for 31 March 1998.

12. Smartex was a customer of the plaintiff and the Property was mortgaged to the bank. On 20 March 1998, the plaintiff appointed receivers to Smartex.

13. At the time of the signing of the Provisional Agreement, the Property was subject to a tenancy agreement, which was due to expire on 22 March 1998. The defendant's case is that as the Property was occupied, it was not available for inspection. Consequently, one day after signing the Provisional Agreement on 1 September 1997, the defendant and Smartex signed a Chinese Supplemental Agreement ("the Supplemental Agreement"), which provided that if the defendant discovered any problem with the Property or was dissatisfied with it 10 days before the date of completion, it may refuse to complete the transaction. In such eventuality, Smartex would be liable to return all deposits received with interest and the deposits would be regarded as a loan advanced to Smartex by the defendant.

14. The defendant says that Smartex had failed to comply with the defendant's requests to view and inspect the Property, as a result of which the defendant was entitled not to complete the purchase. Fearing that the defendant would exercise its right and refuse to complete, the plaintiff's officers held a meeting with Mr Chun. The defendant had no banking relation with the plaintiff before this. During the meeting, Mr Yuen on behalf of the plaintiff sought the assistance of the defendant and requested the defendant not to exercise its right to decline completion. Mr Yuen further offered to grant banking facilities for a fixed term of five years to the defendant. This offer was subsequently accepted by Mr Chun for the defendant resulting in the Oral Agreement. In reliance of the Oral Agreement, the defendant signed the Facility Letter and executed the Charge on 31 March 1998.

15. On 1 April 1998, the defendant also entered into an extension agreement with the receivers of Smartex whereby completion was postponed to 29 June 1998. Mr Chun also signed on this extension agreement to guarantee the performance by the defendant of the terms thereunder. Completion did take place on 29 June 2001.

16. The defendant does not dispute that it has defaulted in payments since October 1998. The defendant, however, says that the plaintiff had acted wrongfully and was in breach of the Oral Agreement when it terminated the banking facilities in late 1998 and early 1999. The defendant claims that it had written two letters of complaint on this to the plaintiff, but the plaintiff denied having received them. Further on 5 September 2000, the defendant commenced HCA8847/2000 against the plaintiff claiming specific performance of the Oral Agreement and damages for breach of it. In HCA8971/2000, Mr Chun also relied upon the Oral Agreement to defend the plaintiff's claim to enforce the guarantee.

17. The issue is whether there are triable issues associated with the defence of Oral Agreement that requires adjudication and render the regime of the originating summons unsuitable.

THE APPLICABLE PRINCIPLES

18. The present proceedings were brought pursuant to Order 88 of the Rules of the High Court, being proceedings for the enforcement of the terms under the Charge. In conformity with the usual practice, the action was commenced by originating summons and not by Writ : see Hong Kong Civil Procedure 2001 para.88/6/2. As such, the provisions of Order 28 are applicable.

19. It is not in dispute that the court has a wide discretion under Order 28, rule 4. At the hearing of an originating summons, the court may dispose of the action summarily where it is satisfied that the defendant's liability is established : Kincheng Banking Corporation v. Centresign Company Limited HCMP7239/1999 (unreported). Alternatively, if it considers that there are genuine or substantial issues of fact, the court may direct for oral evidence to be taken or for the proceedings to continue as if begun by Writ and give directions for the further conduct of the matter : Hong Kong Civil Procedure 2001 para.28/8/2.

20. For the plaintiff, it is argued that the position is analogous to an Order 14 application and that it is for the defendant to satisfy the court that there are triable issues that can only be resolved at trial. The defendant on the other hand contends that the burden remains on the plaintiff irrespective of the contentions of the defendant, that unlike in an Order 14 application, the defendant has no burden to condescend to particulars. Neither should the court on the hearing of an originating summons test the credibility of the defence against the totality of the evidence before the court. Several authorities have been referred to by counsel in support of their contentions.

21. In my view, a plaintiff under an originating summons does not stand differently from that in proceedings commenced by other mode in that he carries the burden of making good his claim and proving to the requisite standard the matters upon which the claim is grounded. If on the affidavit evidence placed before the court, the plaintiff is able to discharge that burden, he is prima facie entitled to judgment on the hearing of the originating summons. This is reflected in Order 28, rule 4(1) which provides that the court may make an order in favour of the plaintiff when the liability of the defendant is established at the hearing of the originating summons.

22. Similarly, where the defendant puts up no challenge to the factual matters upon which the claim is based, then the court will grant judgment on the originating summons. Where, however, the basic facts supporting the claim are not disputed, but that the defendant contends that there are other matters which preclude the plaintiff from obtaining judgment, then it is for the defendant to make good that assertion by credible evidence.

23. This, as I see it, is the approach adopted by Cheung J (as he then was) in Kincheng Banking Corporation v. Centresign Company Limited. At page 2 of the judgment, it was pointed out that "the defendant did not dispute that the plaintiff is otherwise entitled to its claim. However, it stated that there are disputed and substantive questions of fact to be tried which are not suitable for resolution by an originating summons". Cheung J then went on to examine the defence raised by the defendant and concluded that it is not credible so that there are no triable issues. At page 5 of the judgment, it was said that "while there may seem to be a conflict of evidence between the case of the respective parties, the test is whether the matters raised by the defendant is credible or not".

24. The case of Kincheng Banking Corporation v. Centresign Company Limited is to be contrasted with that of Shum Wah Ming v. The Estate of Chen King Ngo, Deceased & Anor (unreported) Civ.App.No.21/1996. In the latter case, the plaintiff sought by way of originating summons declaratory relief in relation to the beneficial ownership of a property. The plaintiff's case is that the property was purchased with his money and was held by the deceased on trust for him. The 2nd defendant disputed that the purchase money was provided by the plaintiff. There was thus a dispute as to the underlying fact supporting the plaintiff's claim. The Court of Appeal was of the view that the plaintiff's case required to be tested in cross-examination and that the regime of an originating summons was inapt. It was against such a background that Cheung J observed (at page 6) that : "[t]he burden remains on the plaintiff irrespective of the contention of the 2nd defendant. Afterall, he asserted that, notwithstanding the Property was registered in the name of Madam Chen, he was in fact the true beneficial owner".

25. I do not read the case of Shum Wah Ming v. The Estate of Chen King Ngo, Deceased & Anor as laying down a principle that in originating summons procedure, the burden in all cases remains with the plaintiff irrespective of the contention of the defendant and that, in deciding whether there are triable issues of fact, the court cannot assess the credibility of the defence on the totality of the evidence. When Mayo JA said at page 12 of the judgment that the Order 14 principles are not the correct approach for these proceedings, he was referring to the case before the Court of Appeal, as is apparent from the paragraphs that ensued.

26. In the present case, the defendant does not dispute that he had executed the Charge, that banking facilities had been granted by the plaintiff and that it had defaulted in paying the principals and interest as and when they fell due. There is also no dispute that letters of demand had been issued by the plaintiff and had not been complied with. Prima facie the plaintiff is entitled to recover from the defendant the money owed and also possession of the Property.

27. Notwithstanding that, the defendant contends that the plaintiff is not entitled to judgment by reason of the Oral Agreement and the events leading to it. That being the case, in considering whether the defence of Oral Agreement gives rise to triable issues which require adjudication, the court is entitled to see whether the defence is a credible one by reference to the other available evidence, including contemporaneous documentary evidence, and commercial reality and common sense.

28. It is with these principles in mind that I turn to see whether there are triable issues of fact that should be resolved at trial.

THE DEFENCE

29. The central thesis of the defence is that there was an oral promise and agreement made by Mr Yuen to the effect that the banking facilities were for a fixed term of five years. Mr Tang SC for the plaintiff submits that this defence is incredible. I agree.

30. The starting point is to look at the underlying circumstances, which the defendant says, led to the making of the Oral Agreement. In this regard, the court not only has the affidavit evidence of Mr Chun, but there are also the pleadings filed in HCA8847/2000 and HCA8971/2000. The defendant's case as pleaded in the Statement of Claim filed in HCA8847/2000 can be summarized as follows :

(1) It was an implied term of the Supplemental Agreement that Smartex would use its best endeavours to afford the defendant the opportunity to inspect the Property upon the defendant's request.

(2) In breach of the Supplemental Agreement, Smartex failed to make arrangement for the defendant to view the Property before the completion date despite the defendant's requests.

(3) The defendant was therefore entitled to exercise its right under the Supplemental Agreement not to complete the purchase of the Property.

(4) In view of the drastic decline in the property market in Hong Kong at the time, the plaintiff requested the defendant to forego its right not to complete the purchase and offered in return a five-year fixed term facility.

(5) As a result, the parties reached the Oral Agreement whereby :

(a) The defendant would complete the purchase in consideration of the provision of banking facilities by the plaintiff in the sum of HK$4.68 million for a definite term of five years.

(b) The Property would be assigned to the defendant free from all encumbrances including the mortgage of Smartex.

(6) Pursuant to the Oral Agreement, the defendant completed the purchase, banking facilities were granted to the defendant and the Charge was also created.

The case pleaded in Defence and Counterclaim filed by Mr Chun in HCA8971/2000 is in identical terms.

(1) Entitlement not to complete the purchase

31. It can be seen immediately that the triggering event is the alleged breach of the Supplemental Agreement by Smartex. But was Smartex in breach of the Supplemental Agreement? The contemporaneous documents show that on 19 February 1998, the solicitors acting for the defendant in the purchase of the Property, Tony Kan & Co. wrote to the solicitors for Smartex requesting to fix a date for inspection of the Property pursuant to Clause 24(i) of the Sale and Purchase Agreement. There were further exchanges of correspondence. Eventually on 12 March 1998, Tony Kan & Co. wrote to Smartex's solicitors to confirm that inspection would take place on 14 March 1998. There was no further correspondence exchanged on the matter.

32. Two points are clear from these contemporaneous documents. Firstly, the request for inspection was not made pursuant to the Supplemental Agreement, which is silent as to any right of inspection, but was pursuant to Clause 24(i) of the Sale and Purchase Agreement. The right of inspection under Clause 24(i) was limited to inspections by surveyors or bank staff for the purpose of carrying out valuation inspection. Secondly, it would appear that the defendant had been granted access to the Property for carrying out the inspection. The defendant admitted this when Mr Chun said in his 2nd affirmation that "[i]t is a fact that the defendant was not allowed to inspect the Property until about 14 March 1998". This is contrary to his 1st affirmation which says that "[w]hen the defendant exercised its right to request for viewing [sic] the Property as agreed in the Supplemental Agreement, Smartex failed to entertain the said request and as a result the defendant was entitled to exercise its right to not complete the sale and purchase of the Property ...".

33. In the 2nd affirmation of Mr Chun, the defendant raised another matter as giving rise to its entitlement not to complete the purchase. He said that if the defendant was not satisfied with the Property in any way and if the defendant discovered any problem with the Property 10 days before completion, the defendant could terminate the transaction. He further said it was always the parties' intention that so long as the defendant was not satisfied with the Property in any respect, it could refuse to complete. However, Mr Chun did not state in his two affirmations whether the defendant indeed found any problem with the Property or was dissatisfied with it and, if so, in what way. In the requisitions raised by Tony Kan & Co., reference was made to a drainage problem on the Property, but this complaint was not repeated in the affirmations and not relied upon in the pleadings in the other related actions as a ground for not exercising the right under the Supplemental Agreement.

34. It is also important to note from the solicitors' correspondence that the several requisitions raised by Tony Kan & Co. were no longer pursued after 23 March 1998. Instead, on 25 March 2000, Tony Kan & Co. requested to extend the completion date for four months.

35. The defendant's assertion that it had an entitlement or right under the Supplemental Agreement not to complete the purchase, when viewed against the uncontroverted documents, is plainly incredible.

(2) The Oral Agreement

36. The defendant's case is that the plaintiff, fearing that it would exercise its right under the Supplemental Agreement and refuse to complete the purchase, approached Mr Chun through Tony Kan & Co. for a discussion on the matter. As a result, there was a meeting between the plaintiff's officers and Mr Chun in which Mr Yuen requested the defendant to complete and also offered the five year facilities. The Oral Agreement was reached when Mr Chun accepted the request and offer several days later.

37. The plaintiff accepts that there was a meeting between the parties on 27 March 1998 attended also by the parties' solicitors ("the Meeting"). Mr Yuen in his affirmation said that he and his colleagues had requested the defendant to complete the transaction in accordance with the Sale and Purchase Agreement while the defendant requested to extend the time for completion. He however denied requesting the defendant to forego its right not to complete. Neither had they offered banking facilities of a five year term in exchange for the defendant's foregoing its right. The plaintiff's solicitor who attended the Meeting confirmed these matters in his affirmation filed herein.

38. It is of course not for me to resolve the disputes simply by comparing the affirmations. Nevertheless, when taking into account the solicitors' correspondence exchanged after the Meeting on the same day, it is clear that the defendant's assertion is incredible. In a W/P letter dated 27 March 1998, Tony Kan & Co. referred to the Meeting and stated :

"We summarise our proposals as follows :-

1. Our client will complete the purchase of the above property in accordance with the terms and conditions of the Agreement for Sale and Purchase dated 19th September 1997 made between Smartex Properties Limited as vendor and our client as purchaser provided that :-

a. the completion dated be postponed to on or before 29th June 1998; and

b. the Kwangtung Provincial bank agrees to make available banking facilities in form of letter of credit and trust receipt to the extent of HK$46,800,000.00 on security of a Legal Charge over the above property.

2. Should you require assurance of completion of the above property by our client on the postponed completion date, Mr Chun Kam Chiu, director of our client, is willing to give his personal guarantee."

39. This was followed by the plaintiff's solicitors letter of the same date which stated that "your proposals are in principle accepted" by the plaintiff, but subject to the approval of the receivers of Smartex. The letter concluded by saying that "the validity of this conditional acceptance, unless further extend, is valid until 31st March 1998".

40. These exchanges show that the proposals were put forward by the defendant through Tony Kan & Co. There is no mention of any right on the defendant's part to refuse completion. Neither is there any suggestion of the defendant agreeing or offering to forego such right. More importantly, there is no reference at all to a fixed term for the banking facilities to be granted, let alone a term of five years.

41. On this question of the duration of the banking facilities, it is of importance to note that the Facility Letter contains a revision date, which is one year from the date the facilities were available. Clauses V, VI(1) and XVI(7) of the Facility Letter also provide that the availability of the facilities are subject to review and to there being no material change in the financial condition of the defendant, and that the facilities are repayable on demand and may be amended or cancelled at the plaintiff's sole discretion. Similarly, under clause 1 of the Charge, there is an overriding right to demand repayment at any time. All these are contrary to the existence of an agreement for a five-year fixed term facility.

42. Mr Chun explained in his 1st affirmation that he was told by Mr Yuen that because "it would not conform to the practice and/or regulations of the bank", the five-year term was not stated in the Facility Letter. The explanation is contrary to good sense. If the five-year term is against the plaintiff's practice and regulations and is therefore not reflected in writing or in any contractual document, then it must be plain to Mr Chun that there is no assurance that the oral promise will be honoured by or can be enforced against the plaintiff. Further, if the five-year term has to be concealed from the bank, then it will be strange that it was openly mentioned or offered at a meeting presided by the plaintiff's solicitors.

43. Moreover, from a practical point of view, the Oral Agreement has no commercial sense. Throughout, the defendant has not, whether in the affirmations filed herein or pleadings in the other actions, set out what is entailed by a five-year term facility. It is unclear whether it means the defendant is not obliged to make any repayment before the five years expire. It is also unclear whether it means that the term of the T/R having a tenor of 90 days is to be observed. Mr Tong SC for the defendant submits that by a five-year fixed term, it means the facilities cannot be terminated at will or without the consent of the defendant. Neither can the facilities be terminated for cause. In effect, the defendant's case as put by Mr Tong SC is that even though the defendant fails to pay the principals and/or interest under the T/R, the plaintiff cannot terminate the facilities without the defendant's consent. The same will apply even if the facilities of $4.68 million are used up and there is no repayment. The plaintiff can only apply the overdue interest rate but cannot take any step to terminate the facilities or demand repayment. Such an arrangement defies common sense, and makes no commercial sense.

44. Another telling feature is the letter written by the defendant to the plaintiff on 8 August 2000 communicating its intention to surrender the Property on 15 September 2000. This is inconsistent with the existence of the Oral Agreement. Mr Chun explained in his affirmation that the letter was sent out before the defendant had obtained legal advice and was an attempt to maintain the existing relationship with the plaintiff. This explanation is, however, incompatible with the defendant's case that it had as early as 29 December 1998 and 15 January 1999 sent two letters of complaint to the plaintiff complaining against the termination of the facilities.

45. Having regard to all the circumstances, I am of the view that there is no bona fide dispute of fact. The defence of Oral Agreement arising out of the breach of the alleged Supplemental Agreement, when viewed against the contemporaneous documents, commercial reality and the realities of life, is just incapable of belief.

46. Mr Tang SC also submits that the Oral Agreement, even if it exists, is vague and uncertain and cannot be enforced. In view of my conclusion on the credibility of the defence, I need only say that I agree with the argument. Indeed the vagueness and singularly lacking of particulars of the Oral Agreement, as stated in the affirmations or as pleaded in the other actions, is demonstrative of the inherent improbability and incredibility of the defence.

47. Given that the liability of the defendant is established and that there are no genuine dispute of fact, the plaintiff is entitled to judgment on the originating summons. Accordingly, the Order of the master should be set aside.

THE COSTS ORDER

48. I agree with Mr Tang SC that even if there are triable issues such that the action should be converted into a Writ action, the plaintiff should not be visited with a costs order. The appropriate costs order would have been for the costs to be in the cause.

CONCLUSION

49. Having regard to the above matters, I allow the appeal and set aside the Order of the master.

50. The orders that I make are as follows:

(1) The appeal is allowed.

(2) The Order of the master is set aside.

(3) Judgment be entered for the plaintiff against the defendant for:

(a) all money and interest due under the Charge,

(b) delivery up of possession of the Property, and

(c) the costs of the action on indemnity basis pursuant to Clause I(x) of the Charge.

(4) The costs of the hearing before the master and of this appeal will be to the plaintiff to be taxed if not agreed. There will be a certificate for 2 counsel.