UTG INVESTMENT (FAR EAST) LTD. v. PETRA BANK and Another

IN THE COURT OF APPEAL

1994, No. 172
(Civil)

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J U D G M E N T

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Godfrey, J.A. :

1. This appeal, from an order dated 10 September 1994 of Mr. John Griffiths, C.M.G., Q.C., sitting as a Deputy Judge of the High Court, raises two questions.

2. The first question is as to whether there is any difference between the rights incident to an equity of redemption vested in a borrower when the property assigned to secure the borrowing consists of a thing in action rather than an interest in land.

3. The second question is as to whether having regard to the course taken by the trial judge in relation to a different issue, this court ought to order that a new trial be had between the parties as to that issue.

4. The facts which give rise to the first question may be briefly stated.

5. By an agreement dated 29 April 1985 ("the April 1985 agreement') Wardley Limited ("Wardley") became liable to pay to UTGI (Far East) Limited ("the borrower") moneys to be received by Wardley from time to time from certain Chinese parties indebted or to become indebted to the borrower.

6. Later in 1985, Petra Bank ("the lender") agreed to extend banking facilities to the borrower, secured by an agreement on the part of the borrower irrevocably to "allocate" to the lender moneys due from Wardley to the borrower under the April 1985 agreement. (This arrangement constituted an equitable assignment by way of mortgage of the moneys to come to Wardley's hands under the April 1985 agreement.)

7. In 1990 the lender went into liquidation. In 1991 the lender recovered a final payment from Wardley, sufficient to extinguish the indebtedness of the borrower to the lender under the arrangements made in 1985.

8. The borrower then called on Wardley to pay future payments to be received by Wardley from the Chinese parties to the borrower, but Wardley refused to do so without the authority of the lender; pointing out, correctly, that the authority given by the borrower to Wardley to "allocate" such payments to the lender had been expressed to be irrevocable. The borrower therefore called on the lender to authorise Wardley to pay the borrower. But the lender refused to do so.

9. The question before the judge was whether the lender was now bound to re-assign to the borrower its rights to receive the moneys in question, just as it would have been bound to re-assign the security to the borrower in the events which had happened if the security had been an interest in land.

10. The lender accepted that this would indeed have been the case if the security had been an interest in land. But, said the lender, this was not so when the security was a thing in action. In such a case, said the lender, a lender was entitled to keep the security for itself (or, if it was insolvent, for the benefit of the general body of its creditors). Of course, admitted the lender, for the lender to refuse to re-assign the security to the borrower would be a breach of contract. But, it said, for that breach of contract the borrower's only remedy would be to sue the lender for damages, the measure of damages being, presumably, the value of the thing in action. (While this remedy may well be an adequate remedy if the lender is solvent, it will not be an adequate remedy if the lender is insolvent, for then the borrower will rank merely as an ordinary unsecured creditor of the lender for the damages to which it is entitled.) Although, obviously, this remedy will be of little or perhaps no value, the borrower, said the lender, cannot complain of that. If it had no right to a re-assignment while the lender was solvent, it can have no better right simply because the lender had become insolvent.

11. The borrower's case below was this. First, said the borrower, a necessary incident of equity of redemption is the borrower's right to have the security re-assigned to the borrower when the indebtedness of the borrower to the lender is discharged. The nature of the security, whether an interest in land, or a thing in action, said the borrower, is irrelevant and immaterial. Secondly, said the borrower, the solvency or otherwise of the lender is equally irrelevant and immaterial, since the lender has only a security interest, not an absolute interest, in the security and it is that security interest only, not an absolute interest, which the liquidator is entitled to claim for the benefit of the general body of creditors. In the end, it became clear that the lender did not dispute the validity of this second proposition. So the only question for us to decide is whether there is some valid distinction to be drawn, as to the rights of the borrower in connection with his equity of redemption (1) when the security is an interest in land and (2) when the security is a thing in action. In my judgment, there is no warrant for any such distinction. It is not a distinction drawn in any authority cited to us, or in any authority known to me; and I cannot discern any justification whatever for such a distinction as a matter of principle. But what then, it may be asked, is the principle?

12. The law of mortgages is a creature of equity, replete with fictions introduced by equity, true to form, to mitigate the rigours of the common law. Even in the case of interests in land, this creates some nice problems. Lord Macnaughten once said:

"No one, I am sure, by the light of nature ever understood an English mortgage of real estate."

See Samuel v. Jarrah Timber & Wood Paving Co. Corporation Ltd. (1904) AC 323 at p.326. F.W. Maitland added:

"That is the worst of our mortgage deed. Owing to the action of equity, it is one long suppressio veri and suggestso falsi."

See Maitland, Equity, 2nd edition (1936) at p 182.

13. The feature of a mortgage which has given rise to the most misunderstanding is the so-called "equity of redemption". In Salt v. the Marquess of Northampton [1892] AC 1, Lord Bramwell, at pp.18, 19, says this of the "equity of redemption":

"Of course, one knows in a general, if not in a critical way, what is an equity of redemption. It is a right not given by the terms of the agreement between the parties to it, but contrary to them, to have back securities given by a borrower to a lender, I suppose one may say by a debtor to a creditor, on payment of principal and interest at a day after that appointed for payment, when by the terms of the agreement between the parties the securities were to be the absolute property of the creditor. This is now a legal right in the debtor. Whether it would not have been better to have held people to their bargains, and taught them by experience not to make unwise ones, rather than relieve them when they had done so, may be doubtful. We should have been spared the double condition of things, legal rights and equitable rights, and a system of documents which do not mean what they say. But the piety or love of fees of those who administered equity has thought otherwise. And probably to undo this would be more costly and troublesome than to continue it." [emphasis added]

This passage exemplifies the typical reaction of a distinguished common lawyer faced with an abstruse concept of equity; but, be that as it may, on a proper analysis, it does not appear to me to be in any doubt that, although the form of mortgage in cases like the present may appear to be absolute, the substance is different. The borrower retains an equity (known as "the equity of redemption") in the security; the lender's interest is a security interest only, not an absolute interest. Once a mortgage, always a mortgage. Absent a foreclosure, the borrower is always, and invariably, entitled, on discharging his indebtedness to the lender, to re-assume 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 re-assign 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 re-assign the mortgage property to the borrower: see, for example, the form of order set out in Seton's Judgments and Orders, 7th edition (1912) Vol. III at pp.1854 and 1855.

14. In the present case, the borrower having (as is common ground) discharged its indebtedness to the lender, the position is simply that, despite the "irrevocable" authority held by Wardley to pay to the lender whatever is received from the Chinese parties by Wardley under the April 1985 agreement, the court of equity will now treat whatever is received by Wardley as held by Wardley in trust for the borrower. The mandate to pay the lender having been given by the borrower by way of security only, it does not, in equity (whatever the position may be in law) survive the discharge of the borrower's indebtedness to the lender.

15. In my judgment, therefore, the court need do no more to resolve the differences which have arisen in the present case than to declare (1) that, as from the date when the indebtedness of the borrower to the lender was extinguished, the right to receive all future payments from Wardley under the April 1985 agreement became re-vested in the borrower; (2) that the mandate given by the borrower to Wardley to pay the moneys in question to the lender ceased as from that date to have effect; and (3) that the borrower is now entitled to give a good receipt to Wardley for all moneys after that date come to the hands of Wardley under the April 1985 agreement.

16. The case went off below at a tangent, the argument being directed to the irrelevant question whether the remedy of specific performance lay in order to compel a re-assignment in favour of the lender of a thing in action mortgaged by a borrower to a lender. The question is irrelevant because it is not a question of contract with which we are concerned. The law of contract, or equity's auxiliary jurisdiction to grant specific performance of contracts to supplement the common law remedy of damages when that remedy is inadequate, has nothing to do with our case. We are concerned simply with the law of mortgage, fashioned by equity as part of its original, not its auxiliary jurisdiction. By way of specific relief (I prefer not to call it in this context "specific performance") the court of equity will always order a lender to re-assign to a borrower the security held by the lender once the borrower's indebtedness to the lender is discharged. For these reasons, which differ from those given by the judge, I would decide (as he did) the first question in this appeal in favour of the borrower.

17. As to the second question, I am satisfied that, as my Lord, Mortimer J.A. will shortly explain, some things did go wrong in the course of the proceedings below; but I am equally satisfied that no "substantial wrong or miscarriage of justice" was thereby occasioned: see RSC O.59 r.11(2) and (3), from which I deduce that it is only where this court is satisfied that a substantial wrong or miscarriage of justice has occurred that it will declare that a new trial ought to be had between the parties.

18. Accordingly, I do not think we should here order a new trial of the issue in relation to which one has been sought by the appellants. For these reasons, I would dismiss this appeal.

Mortimer, J.A.:

19. I agree that this appeal must be dismissed.

20. On the first ground of appeal I find myself in agreement with Godfrey J.A. both in his conclusions and his reasoning. Once UTGI had repaid its indebtedness to Petra Bank, from the nature of the transaction itself - a mortgage - Petra Bank's obligation was to reassign the chose in action. It was called upon to do so by UTGI and wrongfully refused. This obligation to reassign existed quite independently of the agreement to do so. Therefore, once the indebtedness had been discharged, Petra Bank no longer had any beneficial interest in the chose in action. That beneficial interest was completely with UTGI. I agree therefore on principle that the orders to give effect of this should be made as indicated by my Lord, even though those differ from the orders made by the judge.

21. I turn to the second ground of appeal. There was an issue at trial concerning how much UTGI owed Petra Bank. Of three sums, one is relevant to this appeal. This concerned a transaction involving UTC, UTGI, AAB and Petra Bank. This issue was whether - as contended by UTGI - $1.825m was owed by it to the Bank or whether - as contended by the Bank - the sum of $3m was owed.

22. Briefly, UTC was indebted to AAB and all parties wanted to avoid any action by AAB which could affect UTC and UTGI's China business. It was arranged that $3m of the money to be received from China would be assigned to the AAB. However, AAB wanted cash immediately rather than in the future. So, as found by the judge, Petra Bank, acting on behalf of UTGI, obtained a reassignment of the $3m debt by discounting it for $1.7812m - by way of a standby letter of credit. The cost to UTGI, including the Petra Bank commission, was the sum found to be owing by the judge.

23. In reaching his conclusion, the judge accepted the evidence of Dr Chalabi. This involved rejecting the evidence of Mr Hajjar. The judge's finding is in para.39 of his judgment:

"The critical issue is whether, as Dr Chalabi had asserted, Petra conducted the negotiations on behalf of UTGI, or whether the true legal nature of the transaction was that AAB was to reassign the $3m to Petra in exchange for their guaranteed $1.781m, and Petra then look to UTGI to pay UTC's liability in the full amount of $3m. Not only do I accept the evidence of Dr Chalabi that this was not the case, but moreover it seems to me very unlikely that Dr Chalabi would in this way have sought to make a profit of in favour of Petra of some 80% or US$1.219m at that time from UTG, a company he knew to be beneficially owned by the Chalabi family. On this issue also I feel unable to rely on the evidence of Mr Hajjar which, apart from my perception of him as a witness, also contained a number of improbabilities and inconsistencies."

24. Mr Warren Chan Q.C., for Petra, asks by way of an amended notice of appeal for a retrial on this issue.

25. He rightly points out that the decision depended largely upon the judge's acceptance of Dr Chalabi's evidence. In the course of the trial, the judge indicated to counsel that he would rule in his judgment on the admissibility of some of Petra's internal and contemporaneous documents relating to the transaction produced by Petra. The judge did not do so. Therefore, submits Mr Chan, he possibly left them out of account altogether. Whereas, if he had taken them into account, this could possibly have affected his acceptance of Dr Chalabi as an accurate witness, and therefore, could possibly have affected his findings on this issue in UTGI's favour.

26. At trial UTGI, the plaintiff called Dr Chalabi on this issue although at the relevant time he had been chairman of the Petra Bank, the 1st defendant. Consistent evidence was given by Jawal Chalabi who at the relevant time was an officer in UTGI. On the other hand, Petra called Mr Taj Hajjar who was with UTGI to refute the account.

27. When Dr Chalabi had given his evidence in chief and had been cross-examined by Mr Chan, he was re-examined on a calculation in a document, Schedule C. This was produced by counsel and had no evidential value of itself. It was intended to show the effect if UTGI's liability to Petra was $3m and not the lower sum. Dr Chalabi rejected the contents consistent with his earlier evidence.

28. After Dr Chalabi had given his evidence and had been released, he returned to the Middle East. Those instructing Mr Chan then produced to him the documents now known as Schedule E. These were internal contemporaneous documents from Petra Bank's accounts found by the liquidator. They show that the monies received from Wardley's under the assignment had been dealt with by Petra in these accounts in a way contrary to Dr Chalabi's evidence in re-examination on Schedule C.

29. Mr Chan submitted that he was in a difficulty because the issues were not sufficiently clear in the pleadings, and because he was appearing for a liquidator who only came to know about the Bank documents after the liquidation. By inference it was therefore difficult for those instructing him to fully instruct him. He relies upon this to explain why he did not take the point up at the time by applying immediately after the re-examination to further cross-examine Dr Chalabi before he was released.

30. I am the last person to belittle the considerable burden which is placed on counsel and also those instructing him in a case such as this. It is almost impossible for counsel to be fully instructed and informed about every detail in every available document.

31. But what was the situation here? As I see it, the relevant issues were pleaded. They were broadly pleaded but they were certainly pleaded. The solicitors on both sides rightly sought to clarify those issues before trial in correspondence. Often this is the only way in which such issues can be satisfactorily reduced and clarified before trial in complicated commercial cases. Most of the Schedule E documents had been disclosed as relevant to the issues pleaded before trial. I am bound to conclude, therefore, that Mr Chan's side were aware of them and they were available. More importantly there was an accurate summary of the effect of those Schedule E documents in a document already in the trial bundles. This document was entitled "Usages of Funds Received". It purported to show how the relevant funds received from Wardleys were dealt with in the Petra Bank accounts. It was signed by two officers of the Bank. The document was always available for use in cross-examination or further cross-examination. That material, therefore, was available to Mr Chan during his cross-examination of Dr Chalabi and when he was re-examined on Schedule C.

32. It was in those circumstances that Dr Chalabi was released and went back to the Middle East. Mr Chan did not later apply for Dr Chalabi to be brought back for further cross-examination. The reasons for this may be perfectly good but it was not done. In the absence of further cross-examination of Dr Chalabi, it is very difficult to determine what effect, if any, those documents would have had upon his credibility. The truth of the contents of the documents was not conceded but of course their authenticity was.

33. In these difficult circumstances, both the judge and counsel did their best to deal fairly with the problem that had arisen. The result was far from satisfactory but it was a solution accepted by the parties. Mr Chan was to introduce the documents de bene esse. Copies were then to be sent to Dr Chalabi whose comments were to be placed before by the judge by way of a hearsay notice. The judge indicated his intention to rule on their admissibility in his judgment.

34. A witness produced the documents. He was not the maker. A hearsay notice of Dr Chalabi's reaction to the documents was put before the judge. But when he eventually gave judgment he failed to rule on admissibility.

35. Mr Chan submits that if the judge in fact thought the documents were admissible, this could have changed the very favourable view he took of Dr Chalabi's credibility. However, in the absence of cross-examination of that witness upon either "the usages of the funds received" or the Schedule E documents, for my part, I cannot accept that submission. The judge cannot have overlooked the documents. He had before him counsel's written admissions on the documents and Dr Chalabi's comments - although the latter took the matter no further. I note also that the judge specifically considered some of the contemporaneous documents when considering the next issue - see para.41 of his judgment.

36. If those documents could have had the impact contended for, the judge would no doubt have dealt with them. I am not saying that he should not have made the ruling, having said that he would do so. He certainly should have made the ruling. However, I do say that the absence of the ruling can have only had minimal impact on his conclusions in the particular circumstances having regard to the way in which this matter was dealt with at trial. The failure to make a ruling may well be a misdirection but in my judgment there has been no "substantial wrong or miscarriage of justice"; see O.59 r.11. I would rule firmly against any order for a new trial of this issue.

37. For these reasons, I would dismiss the appeal.

Mayo, J.:

38. I entirely agree with the conclusions reached by my Lords Mortimer & Godfrey. I would however wish to express some views on my own.

39. The 1st part of this appeal deals with a question of law which comes within a narrow compass.

40. Initially Mr. Warren Chan Q.C. submitted that the point was whether the court could grant a decree of specific performance requiring Petra to reassign the mortgage of a chose in action when payment of all moneys due to the Defendant secured by the mortgage had been repaid. He argued that on account of the fact that an adequate alternative remedy was available this course was not open to the court.

41. I do not think that this is a correct formulation of the issue which arises on this appeal. It is UTGI's contention that they are the beneficial owners of the moneys held by the 2nd Defendant. Their claim is based on alternative arguments. The 1st is that they either have an implied equity of redemption or they have an equitable right to the reassignment of the mortgage and are entitled to receive the payments from the Chinese Authorities in respect of the Power Pack Agreements once their liabilities to Petra have been duly discharged.

42. The 2nd claim is based upon the contractual promise which they say was made by Petra to UTGI to cancel the original notices of allocation which in effect constituted the mortgage and instruct the 2nd Defendant to hold the said Power Pack Payments for UTGI once all debts secured by the original Assignment had been paid.

43. UTGI do not seek a decree of specific performance. They would be quite satisfied with a Declaration couched in a form which would declare that they were entitled to the moneys held by the 2nd Defendant and an order that the moneys be paid to them.

44. The issue which has to be resolved is whether the mortgagor of a chose in action is entitled to reassignment of the mortgage after the moneys secured thereunder have been repaid when the mortgagee has become insolvent.

45. During the course of his submission Mr. Warren Chan conceded that the insolvency of the mortgagee didn't have a direct bearing on the resolution of this issue.

46. Mr. Chan contended that it was necessary to have regard to the subject matter of the mortgage. He accepted that if it was a mortgage of land it was clear that once the moneys secured by the mortgage had been repaid the mortgagor was entitled to a reassignment of the land as he had an equity of redemption.

47. He argued however that where the subject matter of the mortgage was a chose in action such as a right to receive payments as in the present case the position was different. What then had to be established was whether the subject matter of the mortgage could be specifically identified.

48. It was on this basis that he mounted his main attack on the judgment of the learned deputy judge.

49. He argued that when the Chinese Authorities had made payments to the 2nd Defendant there had been no segregation of the moneys and on the authority ofSpace Investments Ltd v. CBC 1986 1 WLR 1072 the moneys were fungible and simply comprised moneys generally held by the Bank.

50. This was an entirely different situation to the analysis which had been undertaken by Deputy Judge Griffiths in paragraphs 32 to 35 of his judgment when he had held that UTGI were entitled to a reassignment of the mortgage.

51. In coming to the conclusion he did Deputy Judge Griffiths had placed reliance upon 5 cases. These were Exparte Holthausen 1874 LR 9 Ch. Appeals 722. Re Bastable 1901 2KB 518. Freevale Ltd v. Metrostore Ltd 1984 Ch 199. The Diesels & Components Ltd 1985 9 ACLR 825 & Swiss Bank Corporation v. Lloyds Bank Ltd. 1979 Ch. 548. All of these cases had involved land and Mr. Chan submitted that they had at best marginal relevance to the issue arising in the present case.

52. I do not think that this is right. Mr. Chan's argument is dependent upon his establishing that what had been mortgaged was moneys which had been paid to Petra. This was not the case. What was mortgaged was a right to receive moneys paid by the Chinese Authorities which were payable to UTGI and which had been paid to the 2nd Defendant.

53. I am satisfied that the trial Judge was right in coming to the conclusion he did that UTGI were entitled to a reassignment of the mortgage once the debt secured by it had been repaid.

54. The 2nd part of the Appeal concerned the evidence given by Dr. Chalabi. Mr. Warren Chan sought an order in respect of the Allied Arab Bank undertaking that the Deputy Judge's order be set aside and that there be a retrial.

55. Before we would be in a position to make such an order we would need to be satisfied that there had been some substantial wrong or miscarriage of justice.

56. Mr. Warren Chan's complaint was that the failure of the Deputy Judge to make an immediate ruling on the admissibility of the documents comprised in Schedule E had effectively deprived him of an opportunity of challenging some of the evidence of Dr. Chalabi thus to an extent preventing him from calling in question his credibility.

57. The judge had said that he would consider the documents de bene esse and make a ruling on admissibility in his judgment. He had failed to do so. This had led to a suspicion that since a period of 6 months had elapsed from the conclusion of the trial to the delivery of judgment the Judge may have over looked the fact that it was necessary for him to make such a ruling.

58. While this situation was undoubtedly highly unsatisfactory I do not think that any substantial miscarriage of justice has occurred.

59. Mr. Warren Chan accepts that he did not draw the attention of the judge to the difficulties he would encounter if the ruling was deferred in the manner which had been proposed by the judge. Also he had made no objection to the course of action suggested that affidavit evidence should be adduced to obtain Dr. Chalabi's reaction to the evidence contained in the documents.

60. Nor had he made any application for Dr. Chalabi to be recalled as a witness.

61. Even more important than this Mr. Adrian Huggins Q.C. drew our attention to correspondence which had been exchanged between the respective instructing solicitors from which it was apparent that the subject matter of the documents had been considered by the parties well before the commencement of the trial. Accordingly it could not fairly be said that Petra Bank had been taken unawares by the matters which had been raised.

62. In addition to this it seems unlikely that Dr. Chalabi would have been seriously embarrassed by the contents of the documents. Taking all these matters into account this would not appear to be a case meriting the order being sought by Mr. Chan.

Mortimer, J.A.:

63. In those circumstances, the appeal is dismissed.