XCHRX SKAI IMPORT-EXPORT LIMITED v. BANK OF CREDIT & COMMERCE HONG KONG LTD. (IN LIQUIDATION)

1993, No. A2190

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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J U D G M E N T

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1. The 1st Plaintiff(P1) is a director and shareholder of the 2nd Plaintiff (P2). P2 is an import-export company. Both Plaintiffs were customers of the Defendant which was ordered to be wound-up on 2nd March 1992. In order to secure credit facilities for P2, P1 charged his foreign currency deposits with the Defendant in favour of the Defendant. At the date of winding-up, those deposits were worth approximately HK$30m and credit facilities of some HK$22m had been extended to P2.

By this action, the Plaintiffs seek, inter alia, a declaration that the two sums be set off against each other. With the support of the Plaintiffs, the Defendant applied by summons under O. 14A for determination of the questions:

"1. Whether, on a proper construction of the two documents titled "Security over Deposit in respect of Third Party Obligations" dated 25th June 1990 and 6th July 1990 signed by the 1st Plaintiff addressed to the Defendant, the 1st Plaintiff was under an accrued liability to the Defendant to pay or satisfy the Defendant in respect of the 2nd Plaintiff's indebtedness upon the commencement of the winding-up of the Defendant;

2. If the question in paragraph 1 above be answered in the affirmative then an account be taken both of the amount owed to the 1st Plaintiff by the Defendant and the amount owed to the Defendant by the 2nd Plaintiff as at 17th July 1991 at that such sums be set off against each other."

2. Of that summons, I am now seised. In essence, I have to resolve the same question as I had before me in William Young Hong Yui and Others v. Bank of Credit And Commerce Hong Kong Limited (In Liquidation) 1993 No. MP 806 (unreported) in which I delivered judgment on 29th September 1993. The question is whether liquidation set-off is available to P1. Liquidation set-off is a statutory provision pursuant to section 264 of the Companies Ordinance Cap. 32 which imports into the winding-up of companies section 35 of the Bankruptcy Ordinance Cap. 6, the relevant part of which reads :-

"Where there have been mutual credits, mutual debts or other mutual dealings between a debtor against whom a receiving order is made under this Ordinance and any other person proving or claiming to prove a debt under the receiving order, an account shall be taken of what is due from the one party to the other in respect of such mutual dealings and the sum due from the one party shall be set off against any sum due from the other party and the balance of the account, and no more, shall be claimed or paid on either side respectively; but a person shall not be entitled under this section to claim the benefit of any set-off against the property of a debtor in any case where he had, at the time of giving credit to the debtor, notice of an act of bankruptcy committed by the debtor and available against him either side respectively ......"

3. I dealt at some length with the law in Young. For the most part, the law is not in dispute. For the purpose of this decision, it is sufficient to state :-

1. If there have been mutual dealings, set off is mandatory;

2. The relevant date for an account to be taken is the date of the winding-up order;

3. A liability contingent at the date of winding-up can and must be set off provided it has accrued or crystallised when set-off is sought.

4. Among other issues in Young, as here, was the effect of the charge on deposits given by the security over deposit documents. In Young it was not argued that the depositor/chargor incurred any personal liability. Such liability arose or might have arisen by virtue of a separate guarantee. What was argued by Mr. John Griffiths, Q.C., who appeared for the Defendant in Young as he does now was that :-

1. There was no mutuality as the deposits were made over for a specific purpose;

2. While the deposits remained the subject of the charge, the defendant owed no debt;

3. Set-off would destroy the equity of redemption;

4. Liquidation set-off has no application to a bona fide security.

5. I rejected those arguments which Mr. Griffiths was content to express reliance on again without further arguing them.

6. What has been argued, however, is whether P1 incurred any personal liability by virtue of the security over deposit documents. For P1, Mr. Geoffrey Ma, Q.C., relied upon M.S. Fashions Ltd. and Others v. Bank of Credit and Commerce International S.A. (In Liquidation) and Others [1993] 3W.L.R. 220, where at p.226, Hoffmann L.J., who heard the matter at first instance, said :-

"Thus a common feature of all three cases appears to be that the director signed a document saying that his liability to pay the company's debts was to be as that of a principal debtor. Mr. Thomas, who appeared for B.C.C.I. questioned whether this was entirely true. In the M.S. Fashions case he said that including Mr. Sarwar and his brother in the definition of the "principal debtor" was strange, and possibly a mistake. But the bank seems to have wanted to pile up as many cumulative rights as possible against the directors, and I cannot say that as a matter of construction it would make no sense to give effect to the definition. There is no claim for rectification, and I doubt whether it would be possible to show the necessary contrary intent on the part of both parties. Mr. Thomas also said that the reference to liability being as that of principal debtor in the M.S. Fashions and Impexbond cases letters of charge was odd, because the letters did not expressly create any liability. They merely constituted a charge over the deposit in favour of B.C.C.I. On the other hand, I think it is a tenable view that such charges over deposits can be analysed as the creation of a liability on the part of the chargor for the company's debt, not exceeding the amount of the deposit, which can be set off against B.C.C.I.'s liability to repay the deposit. It seems to me that the reference to the liability of the depositor as being that of a principal debtor should, as a matter of construction, be taken as having this effect. Whether or not this is the only way in which it can take effect (see In re Charge Card Services Ltd. [1987] Ch. 150, 175) I think that the principal debtor clause enables it to do so."

7. I agree with Mr. Griffiths that that passage does not help P1. The charge documents there expressly referred to liability as that of principal debtor. Clearly, Hoffmann L.J. construed them in that light; equally clearly, he left open whether creation of liability could arise in some other way.

8. Mr. Ma scrutinised the wording of the documents in the instant case. The relevant parts are :-

"1.01 In consideration of your granting or continuing to make available credit facilities or other financial accommodation, at the request of the undersigned, MR. TAM WING CHUEN of HKIC#E607027(6) ("the Depositor"), for so long as you may think fit to SKAI IMPORT-EXPORT LIMITED of Rm. 2003A Nan Fung Centre, 264-298 Castle Peak Road, Tsuen Wan, N.T. ("the customer"), the Depositor has deposited with you the sum of AUD FIVE HUNDRED NINETEEN THOUSAND SIX HUNDRED TWENTY FIVE & CENTS SIXTY ONE ONLY AND CAD TWO MILLION THREE HUNDRED THIRTY ONE THOUSAND ONE HUNDRED FIFTY EIGHT & CENTS SEVENTY SIX ONLY ("the Deposit" ....) free from any lien, charge or encumbrance of any kind, and, as beneficial owner, hereby charges to you, by way of first fixed charge, all the right, title and interest of the Depositor whatsoever, present and future, in and to the Deposit .... as a continuing security for the punctual payment to you on the respective due dates of all moneys which are now or may at any time hereafter be or become from time to time due or owing to you by the Customer anywhere, ...

3.01 If the Customer has failed to pay any moneys hereby secured when due or if the Depositor is in default under any of the terms hereof or if the Customer or the Depositor is unable or admits inability to pay debts as they become due or in the event of any proceedings in or analogous to the bankruptcy, insolvency, winding-up or liquidation or composition of the Customer or of the Depositor or if legal process is levied or enforced against any assets of the Customer or the Depositor, you may, without demand, notice, legal process or any other action with respect to the Depositor, retain, apply or realise the Deposit or any part thereof, for your own benefit, at any time and in any way which you may deem expedient, free from and discharged from all trusts, claims right of redemption and equities of the Depositor in or towards payment and settlement of the moneys and liabilities referred to in Clause 1.01.

7. This instrument shall be a continuing security and shall cover and secure the ultimate balance from time to time owing to you by the Customer on each separate account or in any manner whatsoever notwithstanding the death, bankruptcy, liquidation, winding-up, incapacity, or any change in the constitution or partners of the Depositor or the Customer or your receipt of notice of any such occurrence or any settlement of account or other matter whatsoever.

9.01 Should any purported obligation or liability of the Customer which, if valid or enforceable, would be secured hereby be or become wholly or in part invalid or unenforceable against the Customer on any ground whatsoever, including any defect in or insufficiency or want of powers of the Customer, or irregular or improper purported exercise thereof, or breach or want of authority by any person purporting to act on behalf of the Customer, or any legal limitation, disability, mental or other incapacity, or any other fact or circumstance, whether or not known to you, or if, for any other reason whatsoever, the Customer is not or ceases to be legally liable to discharge any obligation or liability undertaken or purported to be undertaken on the Customer's behalf, this security shall nevertheless extend to that obligation or liability or purported obligation or liability as if the same were wholly valid and enforceable. You are not to be concerned to see or enquire into the powers of the Customer or its officers (if the Customer is a limited company), employees or agents purporting to act on behalf of the Customer.

9.02 The Depositor shall not be exonerated, nor shall this security be in any way discharged or diminished or in any way affected by the existence of any defence, set-off or counterclaim which the Customer may have or by you, from time to time, without the assent or knowledge of the Depositor, granting to the Customer or to any other person, any time, indulgence or concession, or renewing any bills, promissory notes or other negotiable or non-negotiable instruments or securities, varying, realising, releasing or abstaining from perfecting or enforcing any guarantees, indemnities, assurances, pledges, liens, bills, notes, mortgages, charges, debentures, securities, or any other rights, powers or remedies, or renewing, waiving, varying, terminating or increasing any credit or facilities to, or the terms or conditions in respect of any transaction with the Customer in any manner whatsoever, or agreeing with the Customer as to the application of any loans or advances made or to be made to or for the account of the Customer or the making of any other agreement with the Customer or compounding with, discharging, releasing or varying the liability of the Customer or any other person, or concurring in accepting or varying any compromise, arrangement or settlement, or omitting to claim or enforce payment, or by anything done or omitted or any other circumstances which, but for this provision, might operate to exonerate the Depositor, or any other person.

9.03 You may enforce this security notwithstanding that you may have any outstanding right, power or remedy against the Customer or any other person and without proceeding or enforcing any claim against the Customer or any other person."

9. Having regard to the wording, particularly of clause 9.01, 02, 03, I am satisfied that the effect of the document is to render P1 a principal debtor to the extent of his deposits. If the intention had been simply to give the Defendant a right of recourse to those deposits if P2 failed to discharge its liabilities, it is difficult to understand why the document continued much beyond clause 3.01. The further clauses seem to me designed to ensure that the Defendant could have such recourse regardless of any other remedies and even if the debt proved unenforceable against P2. In my view, that unequivocally casts P1 in the role of principal debtor.

10. It is not in dispute that, upon the liquidation, P2 was liable to the Defendant. By virtue of his obligation as principal debtor, P1 also had a liability. The question that then arises, as in Young, is whether it was an accrued or contingent liability. In my view, the liability was contingent because the thrust of the document is permissive. The Defendant can, if it chooses, exercise its rights and appropriate the deposits. It has not done so. By letter dated 24th August 1992, one of the special managers advised P1 that some HK$30m was owing to him by the Defendant. Plainly, the Defendant regarded the charge as at an end and the usual debtor/creditor relationship as existing. I do not accept, as Mr. Ma argued, that the deposits were automatically applied for the benefit of the Defendant.

11. There is, therefore, as in Young where the Defendant declined to make the required demand for payment, no accrued or crystallised liability on the part of P1. Accordingly, liquidation set-off by virtue of section 35 of the Bankruptcy Ordinance does not arise. The answer to question 1 posed in the summons is No.

12. I make an order nisi that the Defendant has the costs of this application with a certificate for two counsel.