HSBC BANK (CHINA) CO LTD v. YIP KIM PO

HCA 2472/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2472 OF 2007

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J U D G M E N T

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1.  This is an application by the plaintiff for summary judgment against the defendant.  The plaintiff is the assignee of a debt due from one Hongli Nanfang Galvanized Sheet (Sanshui) Co., Ltd, (“the Company”).  The Company is domiciled in the Mainland. 

2.  The defendant is a guarantor of the debt.  His liability under the guarantee has likewise been assigned to the plaintiff.  The debt is further secured by a mortgage of a property in the Mainland.

3.  The plaintiff demanded repayment of the debt from the Company on 19 July 2006 and the Company was unable to pay.  The plaintiff then instituted proceedings in the Mainland against the Company on 20 July 2006.  Judgment was given to it on 7 June 2007 in the sum of RMB¥87,919,222.50, plus costs at RMB¥889,659.

4.  After some partial repayments, the sum due to the Plaintiff by way of principal as at 8 November 20907 was at RMB¥72,899,026.30, which was equivalent to US$9,817,918.45.

5.  When the plaintiff sued the Company on 20 July 2006, it also served a letter of demand on the defendant seeking repayment of the debt from him.  However, he has made no payment so far.

6.  Meanwhile, the plaintiff on 24 September 2007 applied to the Shenzhen Intermediate People’s Court for execution of the judgment against the Company.  The court granted an execution order on 18 October 2007.  The order froze all the assets and bank accounts of the Company.

7.  On 10 January 2008, a valuer appointed by the Intermediate People’s Court valued the frozen properties of the Company at RMB¥102,610,300, which was more than the amount due from the Company with interest.  In due course, the Intermediate People’s Court will arrange for the properties to be sold by auction.  All the above are not in dispute.

8.  Miss Tung, for the defendant, submits that the plaintiff is not entitled to enforce the guarantee against the defendant at this stage.  She relies on the doctrine of marshalling.  She said by this doctrine, the defendant can require the plaintiff to satisfy itself out of the mortgaged property as that is more than enough to pay off the debt with interest.

9.  The doctrine of marshalling has been explained by Cotton LJ in Webb v Smith, 30 Ch D 192 at 199-200:

“But the main point argued was as to the doctrine of marshalling.  I must consider what that doctrine is, and how far it extends: it comes to this, that if A. has a charge upon Whiteacre and Blackacre, and if B. also has a charge upon Blackacre only, A. must take payment of his charge out of Whiteacre, and must leave Blackacre, so that B., the other creditor, may follow it and obtain payment of his debt out of it: in other words, if two estates, Whiteacre and Blackacre, are mortgaged to one person, and subsequently one of them, Blackacre, is mortgaged to another person, unless Blackacre is insufficient to pay both charges, the first mortgagee will be compelled to take satisfaction out of Whiteacre, in order to leave to the second mortgagee Blackacre, upon which alone he can go.”

10.  Lord Hoffman has also explained this doctrine in In re Bank of Credit and Commerce International S. A. (No. 8) [1998] AC 214 at 230-231.

“This is a principle for doing equity between two or more creditors, each of whom are owed debts by the same debtor, but one of whom can enforce his claim against more than one security or fund and the other can resort to only one.  It gives the latter an equity to require that the first creditor satisfy himself (or be treated as having satisfied himself) so far as possible out of the security or fund to which the latter has no claim.”

11.  So far this doctrine does not appear to assist the defendant as it deals with the situation of two creditors who are owed debts by the same debtor.  However, Miss Tung says that as soon as the plaintiff has made demand on the defendant pursuant to the guarantee, the defendant can compel the plaintiff to have recourse to the mortgage of the Mainland property before suing him.  Miss Tung refers to paragraph 834, Volume 32 of Halsbury’s Laws of England, 4th Edition, 2005 Reissue where it says:

“A surety who has given his property as security for a debt may require the creditor to resort to the debtor’s other property comprised in security in order to exonerate the surety’s property or to marshal securities in the surety’s favour.”

12.  The authority relied on in Halsbury is Westzinthus (1833) 5 B. & Ad. 817.  This case dealt with a situation where a surety has given his property as security to the creditor to secure the debt.  In this case, Westzinthus was the unpaid seller of some 23 casks of oil that he had sold Lapage & Co.  He delivered the bill of lading to Lapage & Co. upon acceptance.  However, Lapage & Co. did not pay and afterwards committed acts of bankruptcy.  Before committing any act of bankruptcy, Lapage & Co. had obtained advance from Hardman & Co. by providing its own goods to Hardman & Co. as security.  Lapage & Co. further endorsed the bill of lading for the 23 casks of oil to Hardman & Co. as security for further advance.  After Lapage & Co. had committed acts of bankruptcy, Westzinthus tried to stop the delivery of the 23 casks of oil in transit but the attempt was subject to Hardman’s rights because the bill of lading had been endorsed by Lapage & Co. to Hardman.

13.  Denman CJ said in a court of equity, the transfer of property and right of possession by the endorsement of the bill of lading to Hardman would be treated as a pledge or mortgage in favour of Hardman.  Westzinthus, by reason of the attempted stoppage, would be considered as having resumed his former interest in the goods subject to that pledge or mortgage.  Westzinthus had thus acquired a right over the goods in equity as against Lapage.  Since Westzinthus had an equitable right to the oil which was subject to Hardman’s lien thereon for Lapage’s debt, Westzinthus, by means of the oil, had become a surety to Hardman for Lapage’s debt and had a clear equity to oblige Hardman to have recourse to Lapage’s own goods that had been provided to Hardman as security before having recourse to Westzinthus’ oil. 

14.  In this case, there was still two lots of assets.  One lot were Lapage’s own properties and the other lot were the 23 casks of oil.  Westzinthus only had some rights over the oil and not the other properties of Lapage, while Hardman had rights over both.  In a way, Westzinthus was also a creditor for the unpaid oil.

15.  So far, this case also does not appear to assist the defendant.  However, Miss Tung further relies on a statement in paragraph 11-015 of the 5th Edition of Law of Guarantees by Andrews and Millett.  It reads:

“The doctrine (of marshalling) applies to guaranteed debts.  Once a demand is made of him by the creditor, the surety has the right to compel the creditor first to have recourse to a security held by that creditor before suing him.”

16.  This statement has wide repercussions but no authority has been cited in support of it.  It is contrary to the well-established principle that a creditor can choose to enforce whichever remedy that is open to him.  For this I will refer to the speech of Lord Templeman in China and South Sea Bank v. Tan Soon Gin [1990] 1 AC 536 at 545C to D, which is an appeal from Hong Kong to the Privy Council:

“The creditor had three sources of repayment.  The creditor could sue the debtor, sell the mortgage securities or sue the surety.  All these remedies could be exercised at any time or times simultaneously or contemporaneously or successively or not at all.”

This statement was repeated by Lord Hoffman in the Bank of Credit and Commerce case at page 222 D to E.

17.  I asked Miss Tung where do I find Blackacre in the present case.  She said that is the properties of the defendant although they have not been given to the plaintiff as security because the plaintiff, if successful in this action, can execute these properties.  If Miss Tung is right, then all creditors who have their advances secured by guarantees and other security will have difficulty in enforcing guarantees.  They will have to exhaust the other security before having recourse to the guarantees.

18.  Miss Tung can furnish no authority but a bare statement from Law of Guarantees.  The statement is contrary to what Lord Templeman has said in China and South Sea Bank. I reject her submissions. 

19.  Furthermore, the guarantee given by the defendant has a clause 3.02, which reads:

“This guarantee is in addition to, shall not be affected by and may be enforced despite the existence of any other guarantee or security held by the bank.”

On the strength of this clause, even the doctrine of marshalling would be ousted, if it should otherwise be applicable.

20.  For the above reasons, I find that the defendant has no defence to this action.  I order that he should pay the plaintiff the sum of US$9,817,918.45 with interest on US$9.8 million at the rate of 9.75% per annum (pursuant to the guarantee) from 9 November 2007 until today.

21.  I also order that he should pay the costs of this action to the plaintiff.  Pursuant to a clause in the guarantee, I also order the costs to be taxed on an indemnity basis.