TAE KIM CHANG AND ANOTHER v. THE OFFICIAL RECEIVER

1986, CWU No. 215

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H E A D N O T E

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    Appeal against rejection of proof of debt. Defence raised by the Official Receiver that the debt was unenforceable by virtue of the Bretton Woods Agreements. Burden of Proof lies upon the official Receiver.

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

COMPANIES WINDING-UP NO.215 OF 1986

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J U D G M E N T

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1. This is an appeal by the applicants against the rejection by the Official Receiver of their proof of debt in the liquidation of the Thai Mercantile Development Finance Limited (the company).

2. The appeal was heard in Chambers, but I am handing down the judgment in Court as the application concerns a matter of public importance involving the Bretton Woods Agreements.

3. The company which was a deposit taking company was compulsorily wound up on the 15th September 1986 and the Official Receiver was appointed to be the liguidator.

4. On the 13th November 1986, the applicants lodged proofs for SFr 2,144,853.40 and US$1,000,000 interest in respect of two fixed deposits for three months with the company that were made on the 15th April 1986 and 30th April 1986. After the proofs were lodged, there was an exchange of correspondence between the applicants and the Official Receiver that concerned various queries raised by the Official Receiver as to the origin of the monies and other matters. The deposits were originally in the name of Mr Suthi and Mr Prasert., residents of Thailand, but were transferred into the names of the applicants who are also Thai residents in April 1986 because they did not wish their names to be exposed to the public as depositors in the event that the company was wound up.

5. The original deposits appear to have been made in 1982 or 1983 and were then rolled over in different foreign currencies from time to time. There is no evidence from where the monies came nor the currency from which the deposits were made although I am asked to infer that the country was Thailand and the currency Thai baht. As no response was received from the applicants as to how the funds originated, the Official Receiver rejected the applicant's proof on the 26th July 1991. The rejection was made on the grounds that the transactions were exchange contracts, contrary to Thai law, and therefore, unenforceable.

6. The appeal against the Official Receiver's decision to reject a sum of US$40,000 by way of set off was abandoned by the applicants.

7. The issue that I have been asked to decide is whether the deposits are exchange contracts and therefore unenforceable under the Bretton Woods Agreements Order in Council 1946 made under the Bretton Woods Agreements Act 1945. The relevant provision that appears in the Schedule of the Order in Council is article VIII s.2(b) which provides

"Exchange contracts which involve the currency of any Member and which are contrary to the exchange control regulations of that member maintained or imposed consistently with this Agreement shall be unenforceable in the territories of any member."

8. It is not in dispute that Thailand is a member of the International Monetary Fund and that the Order in Council extends to Hong Kong.

9. It is the case for the Official Receiver that in the absence of a full explanation by the applicants to establish the source of the funds and the circumstances surrounding the transactions, the court should draw an adverse inference against the applicants that the funds were transferred contrary to Thai exchange control regulations so that the contracts are unenforceable. However, it has been emphasised by Mr Smith, counsel for the Official Receiver, that the Official Receiver would be willing to reconsider the application if the applicants can establish that permission was given by the Thai authorities for the export of the funds or that the applicants were exempt from exchange control regulations.

10. My attention was drawn by counsel to the following cases: Sharif v. Azad [1967] 1 QB 605, Batra v. Ebrahim [1982] 2 Lloyd's Rep 11, United City Merchants (Investments) Ltd. v. Roval Bank of Canada [1983] 1 AC 168 and Mansouri v. Singh .[1986] 1 WLR 1393 with regard to the effect of article VIII s.(2)(b) and the meaning of the words "exchange contracts". In U.C.M. v. Royal Bank of Canada, the House of Lords accepted that a narrow interpretation should be placed upon the term "exchange contracts". Lord Diplock in his speech at p.188 had this to say :-

"My Lords, I accept as correct the narrow interpretation that was placed upon the expression 'exchange contracts' in this provision of the Bretton Woods Agreement by the Court of Appeal in Wilson, Smithett & Cope Ltd. v. Terruzzi [1976] QB 683. It is confined to contracts to exchange the currency of one country for the currency of another; it does not include contracts entered into in connection with sales of goods which require the conversion by the buyer of one currency into another in order to enable him to pay the purchase price. As was said by Lord Denning M.R. in his judgment in the Terruzzi case at p.714, the court in considering the application of the provision should look at the substance of the contracts and not at the form. It should not enforce a contract that is a mere 'monetary transaction in disguise.'"

Lord Diplock also approved Lord Denning's statement in Batra v. Ebrahim with regard to the effect that should be given to the word "unenforceable" when he said at p.189 in the same case :-

"If in the course of the hearing of an action the court becomes aware that the contract on which a party is suing is one that this country has accepted an international obligation to treat as unenforceable, the court must take the point itself, even though the defendant has not pleaded it, and must refuse to lend its aid to enforce the contract. But this does not have the effect of making an exchange contract that is contrary to the exchange control regulations of a member state other than the United Kingdom into a contract that is 'illegal' under English law or render acts undertaken in this country in performance of such a contract unlawful. Like a contract of guarantee of which there is no note or memorandum in writing it is unenforceable by the courts and nothing more."

11. It is also clear from the authorities that the court should look at the substance of the contract and should not enforce a mere monetary transaction in disguise. On this point, Lord Diplock at p.190 said :-

"... the task on which the court is engaged is to penetrate any disguise presented by the actual words the parties have used, to identify any monetary transaction (in the narrow sense of that expression as used in the Terruzzi case [1976] QB 683) which those words were intended to conceal and to refuse to enforce the contract to the extent that to do so would give effect to the monetary transaction."

12. From the authorities, an exchange contract is to be interpreted narrowly and is restricted to contracts to exchange the currency of one country for the currency of another. A contract for the sale of goods or a commercial . transaction will be excluded. If it appears from the evidence that the contract is an exchange contract and that the exchange control regulations of a member state have been broken, the court is bound to take the point into consideration even if it has not been raised by the parties. The court is also required to decide that the contract is what it appears to be and to ensure that it does not enforce an exchange contract in disguise.

13. Miss Woolley, the solicitor for the Official Receiver, has filed an affidavit exhibiting a copy of a letter from Mr Pornlert Sinthuvalee, a lawyer with Deacons and Graham & James of Bangkok, Thailand which deals with Thai law on exchange control legislation. However, in the absence of any evidence as to the source of the funding of the deposits, no opinion was expressed as to whether any exchange control law of Thailand had been breached.

14. Mr Tang, counsel for the applicants, submitted that the certificates of deposit are in any event not exchange contracts but contracts of deposit. On the other hand, if contrary to his submission the certificates of deposit are exchange contracts, Mr. Tang contends that it has not been established that they were contrary to the exchange control law of Thailand. He asserted that the burden of proof is upon the Official Receiver to establish the defense of the Bretton Woods point and that because the applicants have remained silent, does not justify an adverse inference being drawn against them. Mr. Tang submitted : "is the transaction what it appears to be?" or "is it an exchange contract in disguise?". Mr Tang maintained that the Official Receiver is not entitled to know the source of the funds but is only entitled to evidence that the deposits were truly made. As it is accepted that the deposits are genuine, then that is all the Official Receiver is entitled to know.

15. Mr Smith submitted by reason of the applicants' silence an adverse inference should be drawn. In other words, although there is no evidence before the court that either the certificates of deposit were exchange contracts or that if they were, that there has been a breach of the law of Thailand, the burden is upon the applicants to show that the contracts are enforceable. Whilst I accept that the court is bound to enforce the Bretton Woods Agreements if the certificates of deposit are exchange contracts and there has been a breach of the exchange control regulations of a member state; the court cannot act unless there is evidence to support these contentions. As I have said the official Receiver accepts the validity of the debts and does not advance any argument that the deposits are illegal but merely contends that as they are exchange contracts and are contrary to the exchange control regulations of Thailand, they are unenforceable. I accept that the original certificates of deposit may be exchange contracts and may be in breach of the exchange control regulations of Thailand, but in the absence of any evidence, it amounts to pure speculation. Further, I do not consider that any onus is cast upon the applicants to prove in effect what is a negative. As the defence was raised by the Official Receiver, the burden lies upon him to discharge the onus of proof. That burden without evidence to support the argument submitted has not been discharged.

16. Accordingly, the defence to the applicants' claim based upon the Bretton Woods point is rejected. The appeal will therefore be allowed and the applicants are entitled to be admitted as creditors of the company for the amounts claimed less the sum of US$40,000 by way of set off. There will also be an order nisi for costs to the applicants to be paid out of the assets of the company.