BANK OF COMMUNICATIONS CO LTD v. VICTORY SEASON LTD AND OTHERS

HCMP 292/2023

[2024] HKCFI 580

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 292OF 2023

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JUDGMENT

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I.  INTRODUCTION

1.  Victory Season (the Company), Chen Hong Tian (Mr Chen) and Mr Chen’s wife Chen Li Ni Yao (Ms Chen), respectively the 1^st, 5^th and 6^th Defendants, appeal against the Order of Master Lok dated 21 September 2023. In this Judgment, I shall refer to the Company and Mr and Ms Chen collectively as the “Appellants”. Master Lok’s Order was made pursuant to the Plaintiff Bank’s Originating Summons dated 22 February 2023.

2.  By paragraphs 1 to 3 of her Order, Master Lok entered money judgments against all the Defendants. By paragraph 4 of her Order, she directed that Mr and Ms Chen deliver vacant possession within 28 days of the property known as the 5^th Floor, Opus Hong Kong, 53 Stubbs Road, Hong Kong, along with Parking Spaces Nos 5 and 6 (collectively, the Property).

3.  By paragraph 5 of her Order, Master Lok stipulated:

“ Upon [the Defendants] paying to the Plaintiff the monies ordered to be paid and all other monies (if any) secured by the Mortgage and the Guarantees, the Plaintiff (subject and without prejudice to the due exercise of any power of sale for the time being vested in it) shall redeliver to [Mr and Ms Chen] possession of the Mortgaged Property and release to [the Defendants] the security constituted by the Mortgage and the Guarantees as [the Defendants] may agree or as this ... Court may direct.”

I understand from counsel this morning that the Property was sold by tender (without possession) in November 2023, fetching around HK$400 million.

4.  The Property was mortgaged to the Bank. The Bank granted loan facilities to the Company and the 2^nd Defendant (together, the Borrowers). The 3^rd and 4^th Defendants along with Mr and Ms Chen guaranteed the repayment of the loans. Mr and Ms Chen mortgaged the Property to the Bank as further security. At the date of the Originating Summons, the principal amount due to the Bank was HK$484,663,319.09, with interest in arrears of over HK$5.6 million. The Appellants do not dispute the amount of total indebtedness.

5.  By a Decision dated 30 October 2023, Master Lok stayed the execution of paragraph 4 of her Order granting vacant possession, pending the outcome of this appeal, but without prejudice to any other enforcement proceedings that the Bank might take.

6.  The Appellants raise two grounds of appeal. The Appellants first complain that the Bank insisted on a sale of the Property by tender. In so doing, the Appellants suggest that the Bank failed to obtain the best price reasonably obtainable for the Property. The Appellants allege that the Bank consequently failed to discharge the duty of reasonable care which the Bank owed as mortgagee to Mr and Ms Chen as mortgagors. Second, the Appellants say that the Bank actively engaged in discussions and negotiations with the Defendants on the debts owed by the Borrowers. They suggest that, as a result, the Bank is barred by promissory estoppel from enforcing the mortgage and guarantees against the Appellants without sufficient warning, notification, or consultation.

II.  BACKGROUND

7.  Mr Chen carries out business through the Cheung Kei Group (the Group) of companies. The Bank granted loan facilities to the Borrowers against the securities mentioned in the previous section.

8.  The Bank had concerns about the Group’s cashflow from about February 2022. In August 2022, the Bank found out that the aggregate net value of the investment products funded by the loan facilities granted to the Borrowers was less than their outstanding indebtedness. That was a breach of the terms of certain facilities. Between August and October 2022, the Bank requested the Group to rectify the breach by making partial payment or providing additional security. The Group offered to make a partial payment of HK$70 million by 12 instalments. However, in September 2022, while the parties were discussing such plan, Cheung Kei Centre Limited (CKCL) (a subsidiary of the 4^th Defendant) requested a reduction in the quarterly repayments due under the loan facilities. This highlighted the Group’s serious cashflow difficulties to the Bank.

9.  To alleviate the Group’s problems, the Bank offered to extend the maturity date of the loan facilities from 31 December 2022 to 25 April 2023 and to revise repayment details. The Bank sent a term sheet and a draft facility letter to the Group on 28 October and 10 November 2022 respectively. There was no feedback from the Group on the foregoing documents.

10.  On 29 November 2022, the Bank signed the draft facility letter and sent the same to the Group for execution. The Group, on the other hand, put forward a company known as Gesway Investment Limited as an additional corporate guarantor. The Bank agreed to this and sent two deeds of guarantee to the Group covering the loans to each of the Borrowers for Gesway's signature. But neither the facility letter nor the deeds of guarantee were ever returned in executed form to the Bank.

11.  As a result, the Bank instructed its solicitors to issue demand letters dated 20 December 2022 to the Defendants, seeking payment of the outstanding loan by 31 December 2022. The Bank stated in its demand letters that it would take appropriate action to protect its interest in the event of non-payment.

12.  Between December 2022 and January 2023, there were discussions between the Bank (represented by Mr Lam Siew Wah (Mr Lam) and Ms Fong Chong Chui (Ms Fong)) and the Group (represented by Mr Chen and his son Mr Vincent Chen). Mr Vincent Chen made various promises on repayment, but these were not fulfilled. The loan facilities accordingly expired on 31 December 2022 with payment overdue. In the discussions, Mr Lam repeatedly asked if the Group would consider surrendering the Property to repay the outstanding debt. He noted that the Bank might have to take legal action against the Defendants and the Property to enforce its rights.

13.  On 17 January 2023, the Bank issued another letter demanding payment of the then outstanding amount within 7 days. On 4 February 2023, Mr Lam again asked whether the Defendants were prepared to surrender the Property to the Bank. Mr Chen refused. Mr Lam warned that the Bank could not see improvement in the Group's cashflow situation and might have to enforce its rights by legal action against the Property.

14.  On 10 February 2023 the Bank appointed Receivers to commence enforcement against the Property. About two weeks later, the Bank took out the present Originating Summons.

15.  On 5 March 2023, Mr and Ms Chen signed a Surrender Memorandum undertaking to repay HK$135 million to the Bank by 8 April 2023, failing which they would deliver immediate vacant possession of the Property to the Receivers. The Surrender Memorandum declared that “nothing herein shall prejudice or affect the existence of any rights arising from the Legal Charges”. Mr and Ms Chen failed to make any repayment but refused to surrender the Property.

16.  By letter dated 18 April 2023, Mr Chen’s solicitors informed the Receivers that Mr Chen was working on a settlement plan to resolve the parties’ disputes. The solicitors requested that the Receivers refrain from taking legal action, pending receipt of the settlement proposal. The letter stated that it was:

“ [w]ithout prejudice to our client's rights to challenge the legality and validity of the power purportedly exercised by the Mortgagee under the Legal Charges and your purported appointment as the Joint and Several Receivers and Managers of the Property.”

17.  By letter dated 19 April 2023, Mr Chen’s solicitors informed the Receivers that Mr Chen “intends to sell the Property to a potential purchaser at market value” and “the consideration should be sufficient to cover all outstanding amount due and owing to the Mortgagee under the Legal Charges”. The Receivers were requested to “withhold taking any action for the time being pending the terms of the transaction to be finalised”. The “potential purchaser” was eventually revealed to be Mr Chen’s son, Mr Bill Chen.

18.  By letter dated 20 April 2023, Mr Chen’s solicitors told the Receivers that the sale price for the Property would be HK$620 million. Mr Bill Chen proposed to pay HK$50 million upon the signing of a provisional agreement, with the balance of HK$570 million being paid four months after the provisional agreement.

19.  In response, by letter dated 27 April 2023, the Receivers requested (among other matters) that a further payment of HK$12 million be made within 14 days from the signing of the provisional agreement, and the time for completion be reduced to 75 days. Further, given the substantial amount involved and the family relationship between Mr and Ms Chen (as sellers and mortgagors) and Mr Bill Chen (as buyer), the Receivers asked Mr and Ms Chen as mortgagors to provide (1) a written consent to the proposed transaction and a waiver of any possible claims against the Receivers and the Bank in relation to the same, and (2) a funds proof that Mr Bill Chen had the financial capacity to buy the Property.

20.  By letter dated 2 May 2023, Mr Chen’s solicitors offered to reduce the time for completion to 120 days. The solicitors wrote that they were taking instructions on a written consent and waiver of claim. There was no reply on the request for funds proof. The solicitors asked that the Receivers refrain from taking any action while negotiations remained pending.

21.  By letter dated 3 May 2023 to Mr Chen’s solicitors, the Receivers stated that they were prepared to agree to a sale to Mr Bill Chen on condition (among other matters) that (1) completion take place within 75 days and that (2) the mortgagors provide (a) the written consent and waiver of claim and (b) the funds proof. The Receivers wrote that the proposed terms were final and non-negotiable, and that the Defendants were required to confirm their agreement to the proposed terms by 5 pm on 8 May 2023. Absent agreement, the Receivers’ offer would automatically be withdrawn. The letter concluded:

“ For the avoidance of doubt, nothing herein shall be binding upon our clients unless and until all terms are agreed and the written agreement is signed by the parties and exchanged.

All our clients' rights powers and remedies are expressly reserved, and it is emphasized that neither the Mo1tgagee nor the Receivers will withhold any further or other action in the meantime. No admission, estoppel, acquiescence, or waiver whatsoever is to be inferred on the part of our clients.”

22.  By letter dated 4 May 2023, Mr Chen’s solicitors replied (among other matters) that:

“ the Intended Purchaser will obtain a loan from a mortgage bank(s) and/or financial institutions, for payment of part of the consideration. In this respect, funds proof of the Intended Purchasers is not necessary.”

23.  By letter dated 5 May 2023 to Mr Chen’s solicitors, the Receivers reiterated their request for a funds proof, observing that “the fact that the intended purchaser intends to obtain a mortgage loan is neither [here] nor there” since Mr Bill Chen:

“ will have to pay a substantial part of the purchase price, probably over 50% thereof, and as such our clients will have to be satisfied that the intended purchaser does have the ability to complete the transaction.”

The Receivers stressed that the Defendants should confirm their acceptance of the Receivers’ offer by 5 pm on 8 May 2023. Otherwise, the proposed terms would be withdrawn.

24.  By letter dated 8 May 2023, Mr Chen’s solicitors enclosed a revised draft waiver and stated that:

“ our clients are requesting the Purchaser to produce document(s) showing the payment of the initial and further deposit, i.e. HK$62,000,000 as fund proof. We shall let you have the said document(s) upon receipt of the same from our clients.”

25.  By letter dated 9 May 2023, the Receivers informed the Defendants that the proposed amendments to the draft waiver were not acceptable. Further, as no agreement to the Receivers’ terms had been confirmed by the deadline of 5 pm on 8 May, the terms were automatically withdrawn. The Receivers would accordingly take steps to exercise their rights and powers.

III.  DISCUSSION

A.  Ground 1: Alleged failure to take reasonable care

26.  Mr Tommy Cheung (appearing for the Appellants) contends that the Bank failed to take all reasonable care in the following respects:

(1)  The Bank failed to follow up with Mr and Ms Chen on Mr Bill Chen’s offer to buy the Property, but simply decided instead to proceed with a sale of the Property by tender.

(2)  The Bank did not consider the comparative disadvantages and benefits accruing to Mr and Ms Chen from the sale of the Property to Mr Bill Chen on the one hand and sale of the Property by tender on the other. Under the former, the Property could potentially be sold for HK$620 million, which would be significantly higher than the price obtainable through a sale by tender.

(3)  The Bank failed to take reasonable precautions to obtain a proper price or the best price reasonably obtainable for the sale of the Property by tender.

(4)  Accordingly, any sale by tender should be set aside or, alternatively, Mr and Ms Chen are entitled to counterclaim against the Bank for loss and damage suffered because of the sale of the Property by tender at an undervalue.

27.  I am unable to accept the Appellants’ contentions.

28.  I agree that, as a matter of Hong Kong law, when exercising its power of sale, a mortgagee owes an equitable duty of good faith and a duty to take reasonable precautions to obtain the true market value of the mortgaged property. See, for instance, Cuckmere Brick Co Ltd v Mutual Finance Ltd [1971] 1 Ch 949, at 966B-F per Salmon LJ, among numerous authorities. But I do not see how in the present case the Bank has acted unreasonably or in bad faith. If anything, the evidence suggests that the Bank made every effort to accommodate the Defendants.

29.  The real issue is the Bank’s right to take vacant possession of the Property pursuant to Master Lok’s Order. Any claim that the Bank has not achieved the best price in selling the Property is a matter for some other forum in the future, for instance, if and when the Bank seeks enforcement against the Defendants for any outstanding balance of the loan monies.

30.  What the Appellants are really complaining about here (as Mr Cheung confirmed to me in submission) is that the Bank withdrew its offer to agree on a sale of the Property to Mr Bill Chen, because of the failure (among others) to provide a funds proof. That is said to have been unreasonable. I do not see why.

31.  The Bank was entitled to insist that Mr Bill Chen provide proof of his financial capacity to purchase the Property for a substantial consideration of HK$620 million. Absent such proof and faced instead with coyness from the Defendants about the provision of proof, the Bank was entitled to conclude that Mr Bill Chen’s offer to purchase at HK$620 million was not a credible proposal, but only empty talk. At that stage, the Bank cannot be faulted for taking the view that enough was enough, and there was no point in wasting further time on negotiations, which had been going on since mid-2022. The failure to provide a funds proof, despite repeated demands, was understandably a showstopper for the Bank.

32.  The Appellants suggest that the Bank failed to take account of the fact that Mr and Ms Chen currently reside in the Property. Had the Bank proceeded with Mr Bill Chen’s offer, Mr and Ms Chen (it is said) would be able to remain in the Property if sold to their son. In contrast, a sale by tender would have “a profound and irreversible impact” on the lives of Mr and Ms Chen, who would then have the challenging task of securing alternative accommodation which would be suitable for their needs, but not a strain on their financial resources.

33.  I am prepared to accept that moving house, especially when one is compelled to do so, can be difficult. But the fact remains that the Bank was prepared to consider the sale of the Property to Mr Bill Chen. What the Bank reasonably asked for was proof that Mr Bill Chen had access to the necessary funds or the financial capability to carry out the proposed transaction. All that was proffered in return was a bland statement that Mr Bill Chen intended to obtain a mortgage loan. Later, it was said that Mr Bill Chen was being asked “to produce document(s) showing the payment of the initial and further deposit, i.e. HK$62,000,000 as fund proof”. But such documents would not have established that Mr Bill Chen had the capacity to go through with the purchase of the Property for HK$620 million. In the absence of proof that Mr Bill Chen could undertake the proposed purchase, it is difficult to see why the inevitable hardship involved in Mr and Ms Chen’s moving house, should constrain the Bank from exercising its right to possession as mortgagee.

34.  In my view, the first ground of appeal is unarguable and raises no triable issue.

B.  Ground 2: Alleged promissory estoppel

35.  Promissory estoppel arises when:

(1)  a person A represents to another person B that A will not insist on enforcing A’s strict legal rights against B, and

(2)  B acts in reliance on that representation in a manner that would render it unconscionable for A to go back on A’s representation, without at least giving B reasonable notice that A will no longer abide by A’s earlier representation.

What is reasonable notice is fact-sensitive and will depend on the circumstances of each case. See for instance, Luo Xing Juan v Estate of Hui (2009) 12 HKCFAR 1, at [55]-[57], among numerous authorities.

36.  Mr Cheung submits that promissory estoppel arises as follows:

(1)  Multiple proposals, requests, and communications were exchanged between the parties to resolve the Defendants’ debt issues in negotiations. In that process, the Bank represented to the Defendants that it would cooperate with them and refrain from enforcing its charges without sufficient advance notification. This would be on the condition that the Defendants continued to work with the Bank to pursue a mutually acceptable solution to their debts. There was consequently an implicit promise or representation that the Bank would not enforce its strict legal rights as mortgagee while negotiations were ongoing.

(2)  The Defendants believed that the Bank would not enforce its strict legal rights under the Bank’s various securities. In reliance on the Bank’s promises, the Defendants engaged in conference calls and meetings; prepared detailed written replies and materials; and presented debt proposals to the Bank. The Defendants thus expended significant time, cost, expense, and other resources to review debt proposals, consult with financial advisors, and seek legal advice.

(3)  In breach of its promise, the Bank unexpectedly and unilaterally withdrew its proposed terms for the sale of the Property, without warning or consultation, alleging lapse of the 8 May 2023 deadline. This action contradicted the Bank’s representations that it would cooperate with the Defendants and not enforce its securities if the Defendants actively attempted to resolve their debt obligations. That was unconscionable conduct by the Bank.

(4)  As a result, the Bank’s right to enforce the mortgage and other securities should be considered as suspended on the basis that it would be inequitable for the Bank to go back on its promise without providing the Defendants with reasonable notice.

37.  In my view, the Appellants’ reliance on promissory estoppel is untenable.

38.  There is simply no evidence that the Bank made the alleged promise or representation. To the contrary, at every step of the way, the Bank made it clear that its willingness to negotiate was without prejudice to its legal rights and their enforcement.

39.  The Appellants are unable to point to a statement by any Bank representative to the effect that the Bank would refrain from taking enforcement action, provided the Defendants continued to negotiate. It is hard to see how merely conducting negotiations, while reserving one’s rights of enforcement if the negotiations go nowhere or do not progress, can give rise to a situation of promissory estoppel.

40.  Mr Damian Wong (appearing for the Bank) has also drawn my attention to the Surrender Memorandum signed by Mr and Ms Chen. That document expressly acknowledged that "[the Bank] have the right to exercise all the Mortgagee's rights arising from the Legal Charges, including the absolute right to determine the arrangements to sell the Charged Properties" and "[n]othing herein contained shall prejudice or affect any of the Mortgagee's rights and remedies set forth in the Legal Charges”. Mr Wong also refers to the repeated instances in correspondence when Mr Chen’s solicitors asked the Receivers to refrain from taking legal action, pending the making of a proposal or the doing of some act by the Defendants. These matters contradict the suggestion that the Defendants were proceeding on an understanding that, so long as the Defendants continued to negotiate, the Bank would not resort to legal action.

41.  The second ground of appeal raises no triable issues and fails.

IV.  CONCLUSION

42.  Subject to any variation of the period within which the Bank is to obtain vacant possession of the Property (on which I will hear counsel in a moment), the appeal is dismissed. I now invite counsel to address me on consequential matters and costs.