BANK OF CHINA (HONG KONG) LTD v. EDDY TECHNOLOGY CO LTD AND OTHERS

CACV 184/2017

[2019] HKCA 339

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 184 OF 2017

(ON APPEAL FROM HCA 1019/2015)

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JUDGMENT

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Hon Lam VP (giving the Judgment of the Court):

1.  On 31 July 2017, Lok J dismissed an appeal against a summary judgment granted against the Defendants by Master Ho. The Defendants further appealed to this Court. After hearing counsel, we indicated that we would allowed the appeal to the limited extent as set out below. We also directed parties to provide with the correct figure upon recalculation by 12 March 2019.

2.  The background to the dispute has been fully set out in the judgment of 31 July 2017 at [2] to [21] and we would not repeat the same in this judgment.

3.  In a nutshell, the Plaintiff (as successor of Sin Hua Bank Limited) sued the Defendants in respect of three loans advanced to the 1^st Defendant for which the 2^nd and 3^rd Defendants were guarantors.  In addition to the loans, the 1^st Defendant had also utilised overdraft facilities and time loan facilities provided by the bank.  There were part repayments in 2004 when a property was sold and the proceed of $2.2 million was used to satisfy the overdraft facilities and the time loan.  The balance of the proceed in the sum of $256,061.69 was used to partly repay one of the three loans.

4.  On 14 January 2009, the Plaintiff demanded the Defendants to repay the outstanding balance under the three loans in the total sum of $4,151,435.12.  The Defendants sought indulgence from the Plaintiff.  On 11 June 2009, a compromise was reached and the Plaintiff granted conditional indulgence on terms as set out in a letter of that date [“the Letter”].  Since the main grounds of appeal relate to the effect of the Letter, we set out the same in full (in its original language):

“ 敬啟者：

關於：在原新華銀行貸款的還款計劃

A/C:031-381-4-001777-7

031-381-4-001778-0

031-381-4-001626-6

_______________________________________________________________

本行於2009年1月14日發信向 貴公司及擔保人追討截至2009年1月9日的欠款HKD4,151,435.12。經考慮 貴公司於2009年4月17日來函申請，本行同意給予 貴公司下列可撤銷及有條件之優惠，其條款如下：-

一. 在按照下述還款方式的情況下，同意：

(1) 豁免部份逾期利息，即欠款金額截算至2009年5月12日為HKD3,781,270.97（包括：本金HKD2,585,304.39;利息HKD 1,195,966.58）；

(2) 由2009年5月13日起，本行將按本行不時頒佈之港元最優惠利率計算有關欠款的進一步利息；

(3) 還款先還本金，後還利息。

二. 還款方式：

(1) 由2009年第2季起，每季還款HKD40,000.00，第1期還款須在2009年6月30日前償還；

(2) 由2010年第1季起，每季還款HKD80,000.00；

(3) 由2011年第1季起，每季還款HKD120,000.00；

(4) 由2012年第1季起，每季還款HKD160,000.00，直至有關欠款全數清還為止。

三. 如 貴公司未能根據上述條款（二）準時支付有關欠款，上述所有優惠將即時自動撤銷，屆時所有欠款即時到期，本行有權按照原逾期利率（即我行不時頒佈之港元最優惠利率加6厘）重新計算有關欠款利息。

最後，本行保留有關貸款契約及/或所有授信文件下的一切權利。

中國銀行（香港）有限公司

風險管理部

資產保存單位

”

5.  The Letter was countersigned by all the Defendants to confirm their agreement to the terms therein. 

6.  Repayments were made by the 1^st Defendant in accordance with the terms of Letter until the first quarter of 2014.  After repeated defaults (and the 1^st Defendant failed to make any repayment since last quarter of 2014), the Plaintiff decided to enforce the obligations under the three loans on their original terms.  On 30 April 2015, the Plaintiff demanded payment of the whole outstanding indebtedness in the total sum of $3,070,247.76.  The Defendants did not make any payment.  On 8 May 2015, the writ was issued.   

7.  The primary grounds of appeal related to the calculation of the outstanding amounts.  Mr Lo, representing the Defendants, submitted that on proper interpretation, default interest should only start to run from the date of non-payment of any instalment under the terms of the Letter.  The outstanding amounts as at the date of the Letter consisted of principals as well as interests.  Counsel further submitted that instalment payments should, as per paragraph 1(3) of the Letter, be appropriated to settle principal first before settling any interest.

8.  The judge addressed similar grounds at [33] to [41] of the judgment.  In particular, the judge said at [37] that these arguments failed to take account of the default clause at para 3 of the Letter.  The judge took the view that the effect of the default clause was that the Defendants could only be entitled to the benefit of the conditional indulgence so long as they had punctually paid the instalments in accordance with the terms of the Letter.  Once they had defaulted (as they did), the Plaintiff was entitled to revert to the original terms of the loans in enforcing the same. 

9.  Mr Lo did not even address this part of the reasoning of the judge in his written submissions. 

10.  Further, the state of the affairs before the signing of the Letter was that the Defendants were in default of the obligations to repay the loans and by reason of that the Plaintiff was, in accordance with the loan agreements, entitled to charge default interests. 

11.  The indulgence granted under the Letter was to relieve the Defendants from the liability to pay interests at default rates on condition that they should make payments according to the terms of the Letter.

12.  The Letter clearly stated that the indulgence granted was conditional and revocable and para 3 clearly provided that any default in making the instalment payment would carry the consequences as held by the judge. 

13.  We respectfully agree with the judge.  Thus, these grounds of appeal have no merit. 

14.  Mr Lo also contended that even under the original terms of the loans, the Defendants could direct that payments should first be appropriated to reduce the principals.  However, we cannot discern such directions on examination of the provisions in the loan documents which counsel relied upon.  As submitted by Ms Lau on behalf of the Plaintiff, those provisions only give the Defendants the right to repay prior to the maturity of the loans.  They did not constitute directions to appropriate payments to reduce the principals before paying interests.

15.  As a matter of law, unless there were contractual provisions stipulating otherwise, the Defendants as debtor had the right to give directions on the appropriation of their payments between interests and principals, Chitty on Contracts, 33^rd Edn paragraphs 21-061 and 21-062.   

16.  In the absence of any effective directions from the Defendants, the Plaintiff was at liberty to appropriate the monies paid by the 1^st Defendant between interests and principals, see Deeley v Lloyds Bank [1912] AC 756 at 783; Chitty on Contracts, 33^rd Edn paragraoph 21-063.  Further, where there is no appropriation by either debtor or creditor, the law (unless a contrary intention appears) applies the payment to discharge any interest due before applying it to the earliest items of principal, Chitty on Contracts, 33^rd Edn paragraph 21-069.

17.  Mr Lo submitted that para 1(3) of the Letter should be regarded as effective directions from the Defendants on appropriation notwithstanding the subsequent defaults.  On the other hand, Ms Lau submitted that by virtue of the default clause and the revocation of the conditional indulgence upon the default, para 1(3) ceased to have effect in the calculation of outstanding amounts based on the original terms.

18.  There is no contractual provision in the loan documentations which barred the Defendants from the exercise of the right of appropriation in respect of payments made after the Letter.  Ms Lau quite properly accepted that Clause 13 of the Legal Charge could not affect such payments as they were not derived from any proceeds of sale under the Legal Charge.

19.  As we have seen, the right to appropriate is a right conferred by law as opposed to the terms of the Letter.  Unless the Defendants were bound by any contractual provisions, they could exercise that right at any time in respect of each payment without the need of any indulgence from the Plaintiff. 

20.  The default clause at para 3 of the Letter only provided for revocation of benefits or indulgence granted under the Letter upon default.  As a matter of construction, we are of the view that the default clause did not negate the appropriation made under para 1(3) in respect of payments made after the Letter.  There are two reasons for this view. 

21.  First, it cannot remove the right of appropriation of the Defendants conferred by the law.  Second, once the right had been exercised (in the form of para 1(3) of the Letter) coupled with the payment of the quarterly instalments pursuant to the Letter up to the third quarter of 2014, the Plaintiff was obliged to reduce the principals accordingly. 

22.  The indulgence or benefit referred to in para 3 should be construed as the benefits conferred under paras 1 (1) and (2) of the Letter, viz the waiving of part of the default interest calculated up to 9 January 2014 ($4,151,435.12 - $3,781,270.97 = $370,164.15) and the waiving of interest calculated on the default rates by the Plaintiff as from 13 May 2009.

23.  This construction is supported by the latter part of para 3 which provided for the recalculation of all interests on default rates as the consequence of defaults. 

24.  On this construction, the amounts due from the Defendants would have to be re-calculated.  After recalculation in accordance with the above analysis, the parties agreed that the correct figure should be $2,481,864.95.  As shown in the recalculation attached to a letter of 12 March 2019 signed respectively by solicitors for the parties, this sum represents accrued interest up to 8 March 2019 and all the principals have been repaid. 

25.  Mr Lo also relied on the allegations of breach of implied terms and misrepresentations in this appeal.  Those allegations had been addressed by the judge at [44] to [49].  Notwithstanding the efforts of Mr Lo, even in the context of an application for summary judgment, we cannot find any flaw in the judge’s reasoning in rejecting these allegations. 

26.  We agree with the judge the allegation that the Plaintiff ignored the Defendants’ requests for details to enable them to make repayments is absurd.  The allegations that the Plaintiff acted in breach of a representation to utilize the proceeds of sale to repay the three loans and the lack of information concerning the outstanding debts were inherently incredible, in light of the various offers from the Defendants over the years for the repayment of their indebtedness and their countersigning the Letter confirming their agreement to the contents, including the amounts of the outstanding loans. 

27.  In our judgment, the Defendants did not put forward any credible evidence to support any case for challenging the contents of the Letter which they had agreed and acted upon.  There is no arguable basis for holding that the Defendants’ agreement to the terms of the Letter was tainted by any misrepresentation or unconscionable conduct.  

28.  The principal amounts of the three loans were $1.8 million, $1 million and $770,000 respectively.  If there were any truth in the Defendants’ allegation that it had been agreed that the $2.2 million proceeds of sale in 2004 should only be used to repay these loans, it could not have escaped the Defendants’ notice that after the deposits of the proceeds the outstanding amounts under these three loans could not have remained at such substantial figures as set out in the correspondence.  In a letter of 23 September 2005 from the then solicitors for the bank to the 1^st Defendant, the outstanding amounts of the three loans were stated to be $1,334,644.77, $632,270.27 and $618,389.35 respectively.  Though the Defendants expressed surprise in the letter of 10 November 2005, they did not raise any query regarding the amounts of outstanding principals.  Their complaint related to the lack of arrangement for payment by instalments and the quantum of the interests.

29.  In the proposal for instalment payments of the three loans by the Defendants in the letter of 24 January 2006, they proposed repayment by 84 instalments with the first 24 instalments at $30,000 and the subsequent 60 instalments at $70,000.  The total payment under this proposal was $4.92 million.  This could hardly be consistent with a belief that the three loans had been substantially reduced by the $2.2 million sale proceeds in 2004.

30.  Further, in respect of the other debts due from the 1^st Defendant to the bank, the sale proceeds were utilized to repay the same in 2004 in substantial amounts: $1,404,836.13 (under a fourth loan) and $539,102.18 by way of overdraft.  It is unbelievable that the Defendants did not notice that indebtedness of such magnitude had been repaid in 2004. 

31.  Against such background, the confirmation of the outstanding principals by the Defendants’ countersigning the Letter is most telling in demonstrating the lack of veracity in the allegations of misrepresentation and unconscionability.    

32.  The evidence clearly shows that the Defendants had been in default in the repayment of the three loans since 2002.  The letters from the Defendants to the bank since 2006 had been asking for indulgence.  In particular, in the letter of 25 September 2006, the Defendants asked the bank to waive the interests for the principal amount of $3.4 to $3.5 million. 

33.  In the letter of 17 April 2009, the Defendants asked the bank to reduced their burden by recalculating interests at prime rates (viz not using default rates) by reference to the total outstanding principal sum under these three loans at $2,585,304.39.

34.  The primary obligations under the Letter reflected the bank’s adoption in part of the request of 17 April 2009 though it was put on the basis of a conditional and revocable waiver subject to the default clause at paragraph 3.

35.  Viewed in that light, it can hardly be suggested that there was anything harsh or unconscionable in the Letter.  

36.  The allegation that these letters were written by the Defendants at the suggestion of the bank officer without any regard to their own interests is wholly unbelievable and practically moonshine. 

37.  There is thus no basis for the Defendants’ defence based on breach of implied term, misrepresentation and unconscionability.

38.  Mr Lo also contended that the retrospective charging of default interest constituted a penalty.  However, the underlying premise of the submission is that the Plaintiff charged retrospective default interest.  With respect, there is no factual foundation for this submission. The default interest was charged in respect of the default in paying the loans since 2002.  The Plaintiff only gave a conditional suspension of the same under the Letter.  When the Defendants failed to meet the condition under the Letter, there is nothing penal for the Plaintiff to revert back to its full rights as it had been expressly provided for under the default clause.  The situation is akin the case of Cine Bes Filmcilik ve Yapimcilik AS v United International Pictures [2003] EWCA Civ 1669, approved in Cavendish Square Holding BV v Makdessi [2016] AC 1172 at [149] to [152].  The charging of default interest was, as held in Lordsdale Finance plc v Bank of Zambia [1996] QB 752 a reflection that money is more expensive for a less good credit risk than for a good credit risk.  The Defendants had no evidence to show that the default rates are extravagant, exorbitant or unconscionable. 

39.  For these reasons, we only regard the appropriation point as discussed at [17] to [24] to be of merit. 

40.  In the circumstances, we allow the appeal to the limited extent of substituting $2,481,864.95 as the judgment sum under paragraph (a) in place of $3,070,247.76.  We also set aside the interest provisions under paragraphs (b) to (d) in the order of Master Ho of 6 July 2016.  We will not give any pre-judgment interest on these accrued interests but the substituted judgment sum will carry interest at judgment rate from the date of our judgment.   

41.  In respect of costs, as the Defendants only succeeded on the appropriation point which had not been adequately argued at the court below, we would only give them 50% of the costs of this appeal (excluding the costs of the application for admission of fresh evidence which had been determined in the judgment of 14 September 2018). 

42.  In respect of costs below, subject to what we said below, the Plaintiff should have the costs of the action. 

43.  For the Order 14 application, the Plaintiff was entitled to take out the application (as we only amended the judgment sum and rejected the other lines of defence raised by the Defendants).  Hence, the Plaintiff should also have the costs of the Order 14 application and the hearing before the master. 

44.  For the costs of the appeal to the judge, on the one hand it can be said that as judgment had been entered for the wrong sum the Defendants had to appeal.  On the other hand, as we have observed, the appropriation point had not been properly argued before the judge.  Had that been done the point could have been resolved by the judge and there would not be any need to come to this Court.  In such circumstances, we think a fair order is each party shall bear his own costs for that appeal.