UNION BANK OF HONG KONG LTD v. CHAN KONG t/a THETA INDUSTRIES CO AND ANOTHER

1983, No. 11179

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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JUDGMENT

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1. The Plaintiff in this case is the Union Bank of Hong Kong Ltd. (the Bank). The 1st Defendant is Chan Kong (Mr. Chan) trading as Theta Industries Company. The lst Defendant became a customer of the Bank during the first half of 1982. To procure credit facilities with the Bank, it gave the Bank 2 letters of hypothecation in identical terms. One of these contained a guarantee executed by the 2nd Defendant, Tang Kwok Ying and Li Wai Sing trading as Kwong Hing Industrial Company.

2. Using its credit facilities, the 1st Defendant became indebted to the Bank in respect of overdue trust receipts to the tune of some $58,000 by March 1983. The Bank pressed it to pay up. The Bank's officers say Mr. Chan came and had a meeting with them on or about 30 March 1984, in the course of which he proposed to them that he deposit some bills with the Bank for purchase, so that the overdue trust receipts could be met from the proceeds. The Bank's officers, Mr. Lai and Mr. Leung, say this was agreed on the basis that the bills would have to be "alright".

3. Mr. Chan on the other hand says there was no such meeting, that on the contrary he telephoned Mr. Leung on or about 30 March, around 11 A.M. and told him he would be submitting a set of bills for US$24,760. He says he specifically asked if the Bank would purchase the whole amount as it had in the past. Mr. Leung, according to Mr. Chan, said the Bank would. Nevertheless as Mr. Leung was merely Loans and Credit Manager, Mr. Chan says he feared Mr. Leung's words might not stand. Therefore he asked him to speak to Mr. Lai who was the Bills Department Manager. Mr. Leung said he would do so and that there would be no problem. Nevertheless, says Mr. Chan, after 15 minutes he telephoned Mr. Lai, who he says, confirmed that the matter had been mentioned to him and that he agreed to buy the whole amount.

4. It is here that there is the only major conflict of evidence between the Plaintiff and the 1st Defendant and I shall return to this matter later.

5. On 7 April, about 3 p.m., Mr. Chan personally took to the Bank a bill for US$24,760 together with an application for negotiation and supporting documents. He asked to see Mr. Lai, but was told by the girl who accepted the documents that Mr. Lai was busy and it was alright to leave them with her.

6. It was the Bank's practice to check and verify bills the same day. If all was in order e.g. no documents missing, proper insurance effected, the unit price of relevant goods not unreasonable, no adverse record of the drawee and so on the Bank would purchase the bill subject to the customer's credit ceiling. The bill Mr. Chan left at the Bank related to 2,000 radios consigned to Roundlands Ltd. in England, at a unit price of US$12.38 per piece. The Bank after seeking advice considered this much too high. In consequence it decided to purchase only US$10,000 of the bill. This was on 8 April 1983. The Bank's officers say they then tried to contact Mr. Chan to tell him this, but failed. In accordance with their normal practice they  then without delay, dispatched the bill early on 9 April by DHL courier service to their correspondent bank, Barclays Bank International for collection. On the same day the Bank credited the Theta Industries account with the equivalent of US$10,000 and then applied almost all of this towards the overdue trust receipts, which they say they were entitled to do under the letters of hypothecation and the application to negotiate the Rcundlands bill.

7. On the morning of 9 April, Mr. Chan says he telephoned Mr. Lai to enquire about the bill, and was told the Bank was only prepared to purchase part of the bill for US$10,000. He protested to Mr. Lai who confirms this, and also to Mr. Leung, and he did this again on 11 April, all to no avail. He felt he had been lured by the Bank into letting it have the Roundlands bill and documents, and that the Bank had then proceeded to safeguard its own interests and disregard his.

8. On 14 April Barclays notified the Bank by telex that the drawee claimed that the goods were never ordered. On 18 and 20 April further telex messages were received from Barclays confirming that the bill remained unaccepted and unpaid, and that Roundlands Ltd. ceased trading on 15 April when at a general meeting it was decided that due to outstanding liabilities Roundlands could not continue its business.

9. The Bank arranged with Barclays Bank for the goods to be ware-housed and insured and for the documents to be returned to it. Mr. Chan was informed on 15 April and again on 19 April when his instructions were sought and repayment demanded. Mr. Chan did not repay the amount for which the bill was purchased, nor did he provide instructions. As he explained, he found himself in increasing difficulty.

10. The Bank procured a valuation of the goods through Barclays, which turned out to be only £1.25 per radio, and then instructed Barclays to arrange for the goods to be auctioned. A sum of £2,609.26p was realized and credited to the Theta account.

11. Apart from a cheque for $5,000 which Mr. Chan paid into the Theta account during May 1983 and which the Bank applied towards repayment of the US$10,000 advanced on the bill, Mr. Chan does not dispute that he has not paid the balance demanded by the Bank. In June 1983, being somewhat beleagured, he made proposals for payment which in the event were not accepted by the Bank.

12. And so we now come to the claims in this case. The Bank claims the sum of US$5,584.24 being the balance of the US$10,000 credited to the 1st Defendant's account in respect of the bill, HK$8,392.41 outstanding on its current account, together with interest at the rate of 13.625% on the US dollar sum outstanding and 18.75% on the Hong Kong dollar sum, and costs.

13. The 1st Defendant counterclaims US$24,760 being the amount of the Roundlands bill, and also general  damages, interest and royalty.

14. It is helpful to begin with the 1st Defendant's claim that  there was an oral agreement made on or about 30 March that the Bank would purchase the whole of the bill or bills he sent in. Mr. Lai and Mr. Leung spoke of a meeting with Mr. Chan and were firm in their testimony  that the undertanding was that the bills would be purchased only if they were alright. The Bank's procedures required bills to be checked and verified, and there had to be regard to the customer's record. t that stage Mr. Lai and Mr. Leung had not seen the documents, which had not been prepared. Moreover all this was in the context of overdue trust receipts totalling some $58,000 which Mr. Chan was being pressed to pay.

15. Mr. Chan on the other hand says that not only did Mr. Lai and Mr. Leung agree to purchase the whole amount but that the former assured him there would be no problem. Mr. Chan had no convincing explanation as to why he should have gone to such lengths to obtain assurances that the whole amount would be purchased; assurances that one would have thought unnecessary if, as he said, the Bank had negotiated 2 or 3 Poundlands bills previously, without difficulty and for their total amounts.

16. Mr. Chan was not represented and  he conducted his case, particularly his searching and tenacious cross-examination of the Plaintiff's witnesses, with considerable ability. But he did not make a convincing witness. Under cross-examination he claimed that if the bill had been returned to him he could have negotiated it in total through other   banks with whom he had credit facilities, having provided them with letters of hypothecation. Pressed for the names of these he was evasive and with great difficulty and after a prolonged silence he came up with one single name. He claimed that the Bank had lured him into letting it have the Poundlands bill; that having got it the Bank concerned itself only with recovering the outstanding amount due to it; that it purchased the bill for more or less the amount due to it; that it did not genuinely try and inform him of this before dispatching the documents to Barclays Bank, and that it did not handle the disposal of his goods efficiently nor return them to him. He clearly feels deeply aggrieved. And, perhaps not without some reason, for the Bank's failure to find him on 8 April is in marked contrast to its ability to locate him on other occasions. And very likely, as he complained in Court, the Bank's subsequent efforts to recover its advances did embarrass him and damage his business opportunities. But as regards his claim that there was an oral agreement or assurance that the bill would be purchased in total, I am unable to accept his evidence. Indeed the probabilities point to the contrary. But as I shall explain, I do not consider the issue of whether such an oral agreement was made, to be of particular importance.

17. Mr. Chan also suggested that the application (Exhibit P12) which accompanied the bill, required it to be purchased in total or returned. In this context more than one of the Bank's officers referred to part purchase of the bill, and it is necessary to determine what happened upon receipt of the 1st Defendant's application. The material part of the application for present purposes is as follows:

"We append the following documents for negotiation ...... In consideration of an advance or advances or other financial accommodation given or to be given or renewed to or at the request of the undersigned by UNION BANK OF HONG KONG LTD. the undersigned does hereby sell, assign and transfer to UNION BANK OF HONG KONG LTD. all right, title and interest in and to the above described draft and/or documents and/or merchandise covered hereby and/or proceeds of sale thereof."

Upon receipt of the application and processing it in the manner I have already explained, the Bank issued a notice to the 1st Defendant dated 8 April 1984 (Exhibit P13). This notified the 1st Defendant that the "proceeds of bills purchased with recourse to you" was HK$ 66,366.53 i. e. the equivalent of US$ 10,000 less certain deductions, leaving a balance of US$ 14,760; also that its current account had been credited. The current account computerised statement produced by the Bank (Exhibit P9) confirmed that $66,366.53 had indeed been so credited.

18. By virtue of the provisions of the application quoted above, all right, title and interest in the bill vested in the Bank. In my view therefor, and notwithstanding the references to part purchase, the bill in its entirety was purchased by the Bank. The bill was a deferred payment bill, and I find some support for my view in Lord Ellenborough's dictum in Giles v. Perkins (1807) 9 East 12 cited in the 24th Edition of Byles on Bills of Exchange at pages 403 and 404:

"Every man who pays bills not then due into the hands of his banker, places them there, as in the hands of his agent, to obtain payment of them when due. If the banker discounts the bill or advances money upon the credit of it, that alters the case; he then acquires the entire property in it, or has a lien on it, pro tanto, for his advance."

19. It is because I find that the bill was purchased in its entirety that I do not regard the conflict about the existence of an oral agreement as being of much importance. Of course only US$ 10,000 was initially credited, but I accept the evidence given on the Bank's behalf that the balance was to be credited on payment by the drawee. I have not been able to find anything in the application nor have I been referred to or discovered any authority requiring the Bank to pay the total amount for which the bill was drawn before sending it on for collection. I consider therefore that that under the application the Bank was entitled to credit the 1st Defendant with US$ 10,000, to send the bill for collection and to defer payment of any balance in the meantime.

20. If I am wrong then in not accepting the application upon the terms applicable to it, the Bank rejected the application. Ordinarily the Bank would have then had to return to the 1st Defendant its documents. But at that stage, if not from the moment of receipt of the documents, the Plaintiff's rights under the letters of hypothecation would apply. For these it is necessary to refer to the text of those letters. The material portion of that is as follows:

"         IN CONSIDERATION of Union Bank of Hong Kong Ltd. (hereinafter referred to as the Bank'') granting to me/us such accommodation as from time to time the Bank in its discretion may think fit, or at my/our request granting accommodation to others, whether by lending me/us money or by allowing to overdraw my/our account or by discounting for my/ out account Bills of Exchange ...... by purchasing Bills of Exchange for my/our account or incurring liabilities on my/our account ........ by all or any of those means or in any other manner whatsoever and in addition to any other security which I/we have given or may from time to time give to the Bank, I/we (jointly and severally) hereby pledge to the Bank all goods, .... margin and deposits, ..... bills of lading, bills of exchange, or other evidences of value, and all other property or securities of any nature whatsoever of mine/ours, or in which I/we have any interest, now or at any time hereafter deposited with the Bank by me/us or which may be or become deposited with them by any other method wherever they may be situated, whether for the express purpose of being used by the Bank as collateral security, or for safe custody or for any other or different purpose, as well as any moneys which I/we may have deposited or which I/ we may from time to time hereafter deposit with the Bank in deposit account or otherwise, (all and any of the foregoing things so pledged being hereinafter referred to as "the Securities") as security for the payment on demand (or when otherwise due) to the Bank of all amounts now or hereafter due or owing to the Bank from me/us either as principal, guarantor, surety or endorser, including all interest charges, costs and fees for legal service paid by the Bank ....... AND I/WE the undersigned, hereby constitute and appoint as my/our Attorney for the purposes hereinafter mentioned, with full power of substitution or revocation, the Manager or Agent for the time being of the Bank in Hong Kong and specially authorize and empower him in my/our name or otherwise to fill up and complete any document whatsoever and to insert the name of the Bank or its nominee therein as transferee of any of the Securities and register the same in the books of the company or office to which the same relates and obtain fresh scrip for any of the Securities in the name of the Bank or of its nominee without any reference to or consent of me/us; and also at any time or times to sell or otherwise dispose of the Securities, or any part thereof, .... at the option of the Bank, without either demand, advertisement or notice of any kind, all of which are hereby expressly waived. AND I/WE hereby agree, at the request of such Manager or Agent of the Bank, to sign, or, as the case may be, to sign, seal, execute and deliver any transfer or other document that may be necessary or reguired by the Bank for the purpose of completing the title of the 3ank to any of the Securities . . . . . . . . AND I/WE further authorize the Bank to reimburse itself out of the proceeds of any sale all costs, charges, legal fees and expenses incurred by it in transferring and selling all or any of the Securities or in perfecting the title thereto. AND I/WE further agree that the Bank shall have a lien on all the Securities or on the proceeds thereof as security for or in part payment of any other debt due or liability then incurred or likely to be incurred by me/us to the Bank."

On the plain meaning of the letters, then, it seems to me that the Bank was entitled to retain the bill and the accompanying documents as security for the amount owing to it and  to realize such security.

21. Counsel for the Plaintiff nevertheless submitted that the Bank was also entitled to do so on the basis of an equitable charge it had on the bill; he referred me to certain authorities. I need only advert to the following. First of all in Gutteridge & Megrah's Law of Bankers' Commercial Credits 6th Ed. at pages 186 & 187 it is said that:

"         The use of the term "hypothecation" is somewhat of an anomaly, as the law of England does not admit, as a general rule, of anything corresponding to the hypothec of Roman Law .... It is not a term of art and, therefore, it is difficult to define its legal characteristics with precision when applied to property other than maritime property.

         Strictly, in the present context the term "letter of hypothecation" is to be applied to the case where the banker is to be given a charge over goods without possession of them or of documents of title and even before they are in existence".

He referred me also to the following passage which appears in the judgment of Buckley L.J. in Swiss Bank Corporation v Lloyds Bank Ltd. and others [1980]2 All E. R. 419 at 426:

"It follows that whether a particular transaction gives rise to an equitable charge of this nature must depend on the intention of the parties ascertained from what they have done in the then existing circumstances. The intention must be expressed or it may be inferred .... But notwithstanding that the matter depends on the intention of the parties, if on the true construction of the relevant documents in the light of any admissible evidence as to the surrounding circumstances the parties have entered into a transaction the legal effect of which is to give rise to an equitable charge in favour of one of them over the property of the other, the fact that they may not have realised this consequence will not mean that there is no charge."

Finally, in Kent v Sussex Sawmills Ltd. [1946] 2 All E. R. 638, where overdraft facilities were provided to a company on condition that it authorized certain moneys due to it to be paid direct to its account with the accommodating bank, it was held that on its true construction, the letter of authority constituted an equitable assignment by way of security and constituted a charge.

22. I must confess that I do not find these authorities of great assistance, though they do support the view that regard must be had to the intention expressed in determining whether a particular transaction gives rise to an equitable charge. If the terms of the application quoted earlier vested in the Bank , all right, title and interest in the bill, there would, of course, be no question of the Bank having an equitable charge over its own property. But if the application did not have that effect, the letters of hypothecation would in my view, as already indicated, create an equitable charge.

23. I am satisfied, therefore, that the Bank was entitled to deal with the bill in the way it did in pursuance of the express terms of the application and letters of hypothecation. I therefore reject the 1st Defendant's contention that the Bank had no right to deal with the Roundlands bill in the way it did.

24. I also hold that, under the express terms of the letters of hypothecation already quoted, the Bank was entitled to apply the US$10,000 credited to the 1st Defendant towards the outstanding trust receipts.

25. The 1st Defendant, to whom I allowed considerable latitude in presenting his case, also alleged as grounds of his counterclaim, that the Bank should have returned the goods to him and that their disposal was not handled with due care, thereby occasioning him loss. To dispose of these claims it is only necessary to refer to the following additional paragraphs of the 1st Defendant's application to negotiate the Bill:

"         In the event of any advance by UNION BANK OF HONG KONG LTD. the undersigned hereby guarantees to UNION BANK OF HONG KONG LTD. that the above described item will be promptly honoured according to the terms there-of failing which the undersigned will make immediate payment to UNION BANK OF HONG KONG LTD. for the amount of the draft or invoice plus interest and all charges and expenses incurred and UNION BANK OF HONG KONG LTD. is hereby authorized to charge back and recover from the undersigned accordingly.

         It is hereby understood and agreed that in case the undersigned should fail to reimburse UNION BANK OF HONG KONG LTD. immediately according to the preceding paragraph hereof UNION BANK OF HONG KONG LTD. and/or its correspondent or agent is hereby authorized and empowered with full authority to sell any part or all of the merchandise covered by the above described item at any place and at any price and upon such terms and conditions as UNION BANK OF HONG KONG LTD. or its correspondent or agent may deem advisable and to apply the proceeds of such sale or sales as far as needed towards the payment of any or all indebtedness or liabilities of the undersigned to UNION BANK OF HONG KONG LTD. rendering the overplus, if any, to the undersigned, who shall remain liable to UNION BANK OF HONG KONG LTD. for any deficiency remaining unpaid after such application, with interest. The undersigned also empowers UNION BANK OF HONG KONG LTD. and/or its correspondent or agent with the right to transfer the merchandise covered by the above described item to any other place, at the discretion of UNION BANK OF HONG KONG LTD. and/or its correspondent or agent, for sale or otherwise, and all expenses of reconditioning, repacking, transferring shipping, customs charges and all other expenses and charges incidental thereto are for account of the undersigned.

        The undersigned agrees that the UNION BANK OF HONG KONG LTD. in undertaking the collection of this item assumes no responsibility beyond the exercise of due care and that UNION BANK OF HONG KONG LTD. will not be liable for the default or negligence of its correspondent or agent nor for losses in transit. The undersigned further agree that UNION BANK OF HONG KONG LTD., its correspondent or agent may send this item directly, or indirectly to any bank, including the drawee. If a bank accept a draft or credit in lieu of cash and that any payment or credit made to or for account of the undersigned for the proceeds of this item shall be subject to final payment in cash or solvent credits; also that UNION BANK OF HONG KONG LTD. may charge back and recover from the undersigned the proceeds of this item of any part thereof at any time if final payment in cash or solvent credits is not received and whether or not the item itself or the merchandise covered thereby may be returned.

        The undersigned does also undertake and agree to pay to UNION BANK OF HONG KONG LTD. and hereby authorizes UNION BANK OF HONG KONG LTD. to reimburse itself from the undersigned for all commission collection charges and interest as well as all expenses incurred in the handling of this item if such charges and expenses are not paid by the drawee."

26. In using the services of a reputable bank like Barclays Bank International, the Plaintiff acted prudently and with due care. It does not in my view have to resort to the available savings clauses incorporated in the application and letters of hypothecation.

27. I therefore reject the counterclaim of the lst Defendant. Of course, had he established breach of an oral  greement on the part of the Bank, he would not necessarily have been entitled to the US$ 24,760 he claimed as the price of the bill, US$10,000 of which, in my judgment, he received anyway. He himself admitted that if he had received such an amount he would have had  to repay it upon the bill inevitably being dishonoured upon Roundlands Ltd. ceasing to trade. The only benefit he lost, in his own words, was the use of the money for a short time. He made no attempt to establish any loss or damage or loss of royalties.

28. Proceeding then to the Plaintiff's claim, in respect of the bill, it is based upon the 1st Defendant's application and the letters of hypothecation, and as I understand it, not upon any statutory right of recourse. The terms of the application and the letters of hypothecation clearly entitle the Plaintiff to recover the outstanding amount advanced on the bill. The Plaintiff is likewise entitled to recover the advances reflected in the 1st Defendant's current account. So far as the calculation of the actual amounts in US dollars of overdue trust receipts and of the overdraft on the current account is concerned, the 1st Defendant did not dispute the Plaintiff's accounts nor the amounts in the amended statement of claim, and I am satisfied that they are due to the Plaintiff.

29. I accept that the moneys due to the Plaintiff from the 1st Defendant were required to bear interest at the Plaintiff's prevailing rates. However, the Plaintiff's first witness, Mr. Yu Kwok Wing, an accounts officer of the Bank testified that the average rate of interest on Hong Kong dollar overdrafts since November 1983 is 14 to 15%, which is somewhat less than the rate of 18.75% claimed by the Plaintiff.

30. The 2nd Defendant appearing in the person of Li Wai Sing, Tang Kwok Ying being out of the Colony, did not take any active part in the proceedings. By its defence, it disclaimed knowledge of the foregoing matters in issue and merely submitted that if the 1st Defendant was not liable to the Plaintiff, then neither would it as guarantor be liable. I find that under the express terms of the guarantee it executed the 2nd Defendant is liable to the Plaintiff in respect of the debts and liabilities of the 1st Defendant.

31. For the foregoing reasons there will be judgment for the Plaintiff for-

32. The 1st Defendant's counterclaim is dismissed  with costs.