XCHRX TRUE PEACE CO. LTD. v. ON KWOK AND OTHERS

HCMP3715/97

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 3715 OF 1997

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D E C I S I O N

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1. This is a mortgage action. The Plaintiff is a company which had advanced money to the 3rd Defendant by opening Letters of Credit in 1994-5. The 1st and 2nd Defendants are directors of the 3rd Defendant who had, by way of a Mortgage made in August 1994, mortgaged their property to secure all monies payable by the 3rd Defendant to the Plaintiff.

2. The Originating Summons was issued on 4 November 1997. On 12 November 1997, the 3rd Defendant issued a writ against the Plaintiff claiming damages for breach of an agreement allegedly made in July 1995. The Defendants sought a stay of the mortgage action pending the disposal of the writ action.

3. On 17 June 1998, the parties appeared before Master Lok who refused to stay the present proceedings and entered judgment against the Defendants for the sums of US$4,803,995.75 and HK$2,543,265.31. The deadline for lodging an appeal was 23 June 1998.

4. On 30 June 1998, the Defendants issued a summons for an extension of time to lodge an appeal. On 3 July 1998, the Registrar dismissed that summons. This is the Defendants' appeal from the Registrar's decision.

5. Mr. Leong SC, counsel for the Defendants, invited this court to deal with the matter as if this appeal were also an appeal from Master Lok's decision. Mr. S.H. Kwok, counsel for the Plaintiff, did not agree. Consequently, the appeal before this court is the appeal against the Registrar's refusal to give an extension of time, which appeal is of course in the nature of a hearing de novo.

Principles to be applied in considering leave to appeal out of time

6. The principles to be applied by the Court in considering whether leave should be granted to appeal out of time are summarized in Norwich & Peterborough Building Society v Steed [1991] 1 WLR 449 as follows :-

" ... Once the time for appealing has elapsed, the respondent who was successful in the court below is entitled to regard the judgment in his favour as being final. If he is to be deprived of this entitlement, it can only be on the basis of a discretionary balancing exercise, however blameless may be the delay on the part of the would-be appellant. The ... elements of this equation ... are ... namely (1) the length of the delay; (2) the reasons for the delay; (3) the chances of the appeal succeeding if an extension of time is granted; and (4) the degree of prejudice to the respondent if the application is granted."

Length of and reasons for delay

7. The length of delay here was 7 days. Although an appeal from a master's decision should be lodged within 5 days, I do not find a delay of 7 days to be so substantial as to be an important consideration in the balancing exercise in the present case.

8. As for the reasons for delay, the 2nd Defendant has, on behalf also of the other Defendants, deposed in her 3rd Affirmation that their former solicitor informed her on the day of Master Lok's order that they had lost the case and that he would write to explain the situation. She was not told of the time limit for appealing.

9. The solicitor did write ("SSS-14") but only on 26 June 1998, already past the time limit for appealing. The letter also did not inform the Defendants of the time limit for appealing.

10. The next day, the Defendants were provided with the sealed order. The day after that (Sunday 28 June 1998) the Defendants instructed new solicitors, who issued the summons before the Registrar on 30 June 1998.

11. The 2nd Defendant having deposed on affirmation to the fact that their solicitor did not inform them of the time limit for appealing, and there being no evidence to dispute that, I take the view that on this aspect, the balance should be in favour of the Defendants. There was no intention on the part of the Defendants to let the time limit elapse without lodging an appeal. This is shown by the fact that the new solicitors immediately issued a summons for time. If the Defendants have not been well-served by their former solicitors, the Plaintiff should not benefit from this by a side-wind in the absence of any prejudice to it.

No prejudice to Plaintiff

12. In the present case, there is no evidence that any prejudice would be caused to the Plaintiff if the appeal were to be lodged out of time.

13. It was at one time thought that the 3rd Defendant was subject to two petitions for winding-up. Mr. Leong SC informed the Court of his own knowledge that both petitions have been dismissed, and this point was not further pursued by the Plaintiff.

14. As to the suggestion in Mr. Kwok's skeleton that the Plaintiff's commercial operation was being prejudiced because the Defendants' debts were taking up the Plaintiff's credit limit with its banker, there was no evidence to suggest that the Plaintiff would be unable to obtain other finance or the terms thereof, and this point was not pursued before me.

Chances of succeeding on appeal - the test

15. The main contest between the parties concerned the Defendants' chances of success on appeal.

16. The first difference between the parties pertained to the test or standard to be applied when the Court considers the Defendants' chances of succeeding on appeal. Mr. Kwok submitted that the Defendants had to show by credible evidence that there was a real prospect of success, basing his submission on Tong Yi Sang v Fung, Law & Ng [1993] 2 HKC 665.

17. With respect to Mr Kwok, I do not accept that submission. The high threshold applied in Tong (the Saudi Eagle test) was required because the out-of-time appeal in that case was to set aside a default judgment under O.13 r.9.

18. The present case was an application under O.28 r.4(1), where a plaintiff can obtain judgment only if he can show that the defendants' liability is established. An appeal from a master to a judge is by way of a re-hearing, so the Defendants would succeed on appeal from Master Lok if the Plaintiff is unable to show that the Defendants' liability is established. It is these chances of success that I have to consider at this stage.

Defendants' case

19. The Defendants have disputed liability on 4 grounds :

(1) the sums alleged by the Plaintiff to be due and owing are wrong;

(2) there is a set-off and/or counterclaim against the Plaintiff arising from the Plaintiff's breach of an agreement in July 1995 to open a Letter of Credit for the 3rd Defendant;

(3) the Plaintiff was an unregistered money-lender;

(4) the solicitors who had attended the 1st and 2nd Defendants when they signed the Mortgage had not explained to them that they were liable for the 3rd Defendant's debt beyond the value of the mortgaged property.

(1) Wrong sums

20. The Plaintiff claims that the 3rd Defendant is indebted to it in the sums of HK$2.5m odd and US$4.8m odd, comprised of principal and interest on loans relating to L/C No.720 and L/C No.5125, and interest only on a loan relating to L/C No. 6924.

21. The Defendants allege that the 3rd Defendant had in fact repaid the loans (whether principal or interest) relating to these Letters of Credit. A number of documents evidencing remittances have been exhibited, together with copies of the 3rd Defendant's internal accounts recording the payments as payments for these Letters of Credit.

22. The Plaintiff does not dispute that the 3rd Defendant had made these payments to it. But it says these payments are referable to another loan - under L/C No.5430.

23. In respect of this, the 3rd Defendant says that this L/C was opened under a joint venture agreement and since this joint venture had run into difficulties, the 3rd Defendant is not obliged to repay the loan (at least at this stage). Mr. Leong, SC counsel for the Defendants, drew attention to the fact that the Plaintiff does not allege that there was any agreement that the remittances made by the 3rd Defendant should be credited against L/C No.5430. So it is a question of whether these payments could have been credited by the Plaintiff properly against L/C No.5430.

24. I am satisfied that the answer is Yes. In the Plaintiff's books, these payments are credited to the loan under L/C 5430, and under cl.2.01(i) of the Mortgage, the Defendants have covenanted to repay all sums of money which may be outstanding and payable "according to the books of the Lender".

25. Further, this L/C 5430 was earlier in time to the three L/Cs in question, and no credit period was given. So in the absence of any agreement that repayment of the loan under this L/C could be postponed, the Plaintiff could properly credit payments by the 3rd Defendant against it. (Indeed the Plaintiff says that it had sent receipts to the 3rd Defendant indicating that was how the payments were credited, but the Defendants say that they had not received these receipts. In arriving at my decision on this aspect, however, I have ignored these receipts).

26. Indeed it is most likely that the 3rd Defendant itself intended the payments to be credited against L/C 5430 and not the 3 Letters of Credit in suit. When the remittances were made, the credit period for each of the 3 Letters of Credit in question had not expired: i.e. payment was not yet due. As a matter of business sense, it is most unlikely that a commercial concern would pay debts which were not yet due; and there is no evidence from the Defendants to explain why the 3rd Defendant would do that.

27. Most important, however, in favour of the Plaintiff was the fact that in a letter to the Plaintiff dated 2 November 1995 signed by the 2nd Defendant on behalf of the 3rd Defendant ("NYK-5a"), the 3rd Defendant acknowledged its indebtedness in the sum of US$4.6m odd for L/C Nos.720 and 5125 and proposed payment by instalments. This was at a time when, according to the 2nd Defendant's evidence now (paragraph 6(1)(b) of Shu's 4th Affirmation), the 3rd Defendant "had already fully settled all payments due under the letters of credit No. 720 and 5125 and that the monies expected to come in on letter of credit No.5430 would not be paid due to circumstances beyond the parties' control".

28. The Defendants have tried to explain this by saying that that letter was written at the request of the Plaintiff's then General Manager (Lo Po Hak) to show to his superiors and the Plaintiff's banker, as he (Lo) was being hard pressed by them to show that payment by the 3rd Defendant would be forthcoming.

29. I find the Defendants' allegation inexplicable and incredible. If the Plaintiff and its bankers were worried about the 3rd Defendant's indebtedness, why would the Manager reassure them with a letter that says that the loans under L/C Nos. 720 and 5125 were outstanding when (according to the Defendants) these had been fully settled? It is incredible that a commercial concern would acknowledge indebtedness of these greater amounts when (on the Defendants' case) it had already repaid them, rather than acknowledge indebtedness of the smaller amount under L/C No.5430 (US$2.5m odd).

30. Mr Leong SC drew attention to the fact that Lo has not come forward to deny the Defendants' allegation. I note however that Lo has left the employ of the Plaintiff, and Shu's 4th Affirmation containing that allegation was filed only the day before the hearing.

31. On top of that, there is the note of a meeting in July 1996 signed by the 2nd Defendant on behalf of the 3rd Defendant. This again acknowledges that the 3rd Defendant owed the Plaintiff a total sum of US$4.7m odd but subject to a discrepancy of about US$150,000. It is correct that there was a provision that the 3rd Defendant had to confirm the total amount of loan at US$4.7m odd, but this has to be read in the context of the abovementioned specific discrepancy of US$150,000.

32. I find therefore that these documents were indeed (as they were ex facie) the 3rd Defendant's acknowledgment of indebtedness to the Plaintiff, and the Plaintiff has established the Defendants' liability with no triable issue having been raised by the Defendants.

(2) Equitable set-off

33. The Defendants' second defence was that the 3rd Defendant had an equitable set-off against the Plaintiff arising from the Plaintiff's breach of an agreement in July 1995 to open a Letter of Credit for the 3rd Defendant ("the July 1995 Agreement").

34. Under this agreement, the Plaintiff was to have opened letters of credit on the 3rd Defendant's behalf for 2 lots of goods. In the event, as was common ground, the Plaintiff did not do so. The 3rd Defendant alleges that as a result of the breach of the July 1995 Agreement by the Plaintiff, the 3rd Defendant has suffered substantial loss. A writ had been issued by the 3rd Defendant against the Plaintiff on 12 November 1997 claiming a total sum of US$6.5m odd. This action is now at summons for directions stage.

35. The Plaintiff has not admitted the authenticity of the July 1995 Agreement. At this stage of course in these proceedings, this court cannot decide whether "SSS-1" was or was not a true copy, and I shall assume that it was. This is especially so when there has also been exhibited ("SSS-13") a letter dated 18 June 1998 purportedly signed by Lo in which he confirmed that the Plaintiff and the 3rd Defendant had signed that agreement but that the Plaintiff had decided, after consultation with its holding company, not to open the Letter of Credit, with the result that the agreement was not performed.

36. Mr. Kwok, counsel for the Plaintiff, however submitted that :

(i) there was no equitable set-off because there was no evidence of a pre-existing "larger agreement" as alleged by the Defendants of which the July 1995 Agreement was part, and in any event there was nothing to show that the July 1995 Agreement and the present indebtedness were so closely connected that an equitable set-off applies; and

(ii) as against the 1st and 2nd Defendants, even if there was an equitable set-off, it is not a defence to the Plaintiff's right to possession as legal chargee (National Westminster Bank v Skelton [1993] 1 All ER 242).

37. I accept Mr Kwok's submissions. There was no evidence of the "larger agreement" alleged by the Defendants. But quite apart from that, the essential feature of a valid equitable set-off is that the equity must go to the very root of the plaintiff's claim (British Anzani v International Marine Ltd [1980] 1 QB 137, 145).

38. I do not find that any breach by the Plaintiff of the July 1995 Agreement went to the root of its present claim on the 3 Letters of Credit pertaining to other performed agreements.

39. I accept that the 3rd Defendant consistently asked the Plaintiff to open Letters of Credit to finance its purchase of goods. But that in itself is not enough. There is no evidence that as a direct result of the Plaintiff's alleged breach of the July 1995 Agreement, the 3rd Defendant has been rendered unable to repay the loans under the 3 Letters of Credit in suit.

40. That there was no "close connection" between the July Agreement and these 3 Letters of Credit in suit is also shown by the fact that there was no mention of the July 1995 Agreement (or the consequences of its alleged breach) in the November 1995 and July 1996 acknowledgments of indebtedness by the 3rd Defendant. If the July 1995 Agreement and the 3 Letters of Credit in suit had been closely connected, one would have expected the 3rd Defendant's claims to have loomed large in the note in July 1996, even if not in the earlier November 1995 letter. There was however silence. I find therefore that there was no such "close connection" as would entitle the Defendants to claim an equitable set-off.

41. As for Mr Kwok's second argument, it seems that National Westminster Bank v Skelton is on point and applies to the present case. In that case, the Court of Appeal held that even in the case of an equitable set-off, the principle set out in the Mobil Oil lines of cases applied, and it mattered not that the mortgagor's claim may in the event prove to exceed the amount of the mortgage debt (p.249).

(3) Moneylenders Ordinance

42. The Defendants' third argument was very brief. Mr. Leong argued, on behalf of the 1st and 2nd Defendants only, that the Plaintiff was an unregistered moneylender. He conceded that this argument could not be put forward on behalf of the 3rd Defendant because the loan to the 3rd Defendant is exempted under Part 2 of the 1st Schedule of the Moneylenders Ordinance cap.163.

43. I do not think it is triable that the 1st and 2nd Defendants, business people who were the controlling shareholders and directors of the 3rd Defendant, would be able to mount a defence under the Ordinance, and Mr Leong did not seek to develop any arguments in this respect.

(4) Mortgage not explained

44. Finally, it was argued for the 1st and 2nd Defendants that the mortgage was not fully explained to them by solicitors before they signed it. The 2nd Defendant said that the solicitor in question only told them that they were liable to lose the property, but did not say that they would also be liable for the 3rd Defendant's entire indebtedness.

45. However, even if there was an omission on the part of the solicitor to explain that to the 1st and 2nd Defendants, the solicitor acted for both the Plaintiff and the Defendants in the preparation and execution of the mortgage, and in explaining the mortgage, would have been acting in the capacity of solicitor for the Defendants. Accordingly, even if there had been an omission by the solicitor, that would have been an omission by the 1st and 2nd Defendants' own agents. The Defendants cannot escape liability to the Plaintiff, although they may have recourse against the solicitor separately.

Conclusion

46. In conclusion, therefore, I find that the Plaintiff has established the liability of the Defendants, and there is no triable issue such as to afford the Defendants a chance of succeeding on appeal if an extension of time is granted. I would therefore dismiss the appeal against the Registrar's decision with costs to the Plaintiff.