BANK OF CHINA (HONG KONG) LTD v. CHINA INTERNATIONAL BUSINESS INVESTIGATION COMPANY LTD AND OTHERS

HCA 1905/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1905 OF 2000

BETWEEN

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J U D G M E N T

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A.  INTRODUCTION

1.  Kwantung Provincial Bank (the “Predecessor”), the predecessor of the Bank of China (Hong Kong) (“BOC”) that overtook the former’s business pursuant to the Bank of China (Hong Kong) Limited (Merger) Ordinance (Cap1167), issued the writ of this action on 23 February 2000 for an outstanding indebtedness under a banking facility granted to the 1^st defendant (a limited company) under a facility letter dated 19 January 1998 (“the Facility Letter”). Leave was granted to amend the name of the plaintiff as now appears in the title of this judgment.

2.  The three named individuals of the 2^nd defendants are sued as guarantors under three Deeds of Guarantee respectively dated 13 May 1996, 21 September 1996 and 28 January 1997 (collectively described as “Deeds of Guarantee”).

3.  The plaintiff obtained default judgment against the 1^st defendant and the 1^st named 2^nd defendants respectively on 13 March 2000 and 21 March 2000 each of which was for a total sum of $1,802,832.13 together with daily interest on the principal sum of $1,617,905.84 at the rate of $775.71 from 1 November 1999 to the respective dates of the judgments and thereafter at judgment rate until full payment and fixed costs.

4.  After the 2^nd and 3^rd named 2^nd defendants (“the Remaining Defendants”) filed their defence, the plaintiff applied for summary judgment, which application led to the entry of the interlocutory judgment against them on 10 July 2000.

5.  On 19 January 2001, Master Ho gave directions (“Directions Order”) for the assessment of damages.

6.  After the Directions Order, the matter became inactive for about 10 years, and the plaintiff only on 20 October 2011 served on the Remaining Defendants the required one month’s notice of intention to proceed to re-activate (so to speak) the proceeding.

7.  With the time extension having been granted by the court, the plaintiff eventually obtained an appointment for hearing the assessment of damages, which I heard, and now deliver the judgment.

B.  THE OBJECTIONS

8.  The Remaining Defendants raise three objections.  The solicitor for the plaintiff, Mr Cheung, has conveniently set them out in his written opening, and I would respectfully adopt and summarize them below:

(1) The outstanding indebtedness the plaintiff claimed is inaccurate and the plaintiff is required to prove it.

(2) There was a settlement agreement entered between the officers of the Predecessor and the Remaining Defendants.

(3) As a result of the plaintiff’s delay in bringing the matter to assessment, the plaintiff should not be allowed to claim any interest on the amount found to be due to the plaintiff during the period of delay.

9.  Since the delay is not in dispute, I think it would be more convenient to deal with the 1^st and 2^nd objections before discussing the 3^rd objection.

10.  The plaintiff’s witness is Mr Lee, the assets recovery manager of BOC and the witness for the Remaining Defendants is the 3^rd named 2^nd  defendants, Mr Lui.

C.  THE OUTSTANDING INDEBTEDNESS

C.1  THE PLAINTIFF’S EVIDENCE

11.  The principal sum of $1,617,905.84 claimed in the Statement of Claim, according to Mr Lee, should be $1,617,098.04, which reflects a more favourable way of applying the repayments in discharge of the overdraft (that had a higher interest) rather than of the outstanding loan amount. 

12.  The outstanding indebtedness in this action arose from a loan in the sum of $1,629,147.95 (“the Loan”) the Predecessor granted to the 1^st defendant under the Facility Letter[1] .  The prevailing contractual interest rate was 12.25% (i.e. 2% + prevailing prime rate) per annum.  According to Mr Lee, the Loan was granted to the 1^st defendant to enable it to discharge the latter’s outstanding loan balance under another instalment loan bearing the account number, 01958140010792.  Since the Loan was utilized to repay the said outstanding instalment loan, there was no money paid over to the 1^st defendant.

13.  Relevantly, Mr Lee highlighted a number of terms contained in the Facility Letter.  They are:

(1) Clause II, which requires the provision of collateral securities that include a charge on Mr Lui’s property in Chi Fu, and the execution by the 2^nd defendants of the unconditional and irrevocable personal guarantees.

(2) Clause XII, which empowers the plaintiff to charge overdue interests on all overdue instalments or interest payments.

14.  Dated the same date as the Facility Letter is also a document signed by the 1^st defendant entitled the “Undertaking for Repayment of Loan”[2] (“the Undertaking”) by which the 1^st defendant undertook to repay to the plaintiff the Loan and interests as specified in the Undertaking.

15.  Additionally, the plaintiff also relied on the Deeds of Guarantee by which the 2^nd defendants guarantee repayment of the moneys due and owing to the plaintiff by the 1^st defendant to the extent of $10,300,000.

16.  The plaintiff places particular reliance on clause 5 contained in each of the Deeds of Guarantee to prove the outstanding indebtedness under the Loan.  Clause 5 provides:

“(a) Any admission or acknowledgement in writing by the Principal (the 1^st defendant) or by any person authorized by the Principal of the amount of indebtedness of the Principal to you (plaintiff) and any judgment recovered by you against the Principal in respect of such indebtedness shall be binding and conclusive on and against me/us (the 2^nd defendants) in all courts of law and elsewhere.

  (b) A certificate by an officer of you as to the money and liabilities for the time being due or owing to you from or by the Principal shall be binding on me/us and conclusive evidence in any legal proceedings against me/us in all courts of law and elsewhere.”

17.  The Predecessor issued such a certificate under clause 5(b) entitled “Certificate of indebtedness”[3] (“the Certificate”) certifying that the 1^st defendant, as of 31 October 1999, was indebted to the former a total sum of $1,802,832.13, which comprised of outstanding overdraft of $807.80, the outstanding principal sum of $1,617,098.04 under the Loan together with the accrued interests on the said sum in the amount of $184,926.29.

18.  An authorized signature of the 1^st defendant appears on the Certificate further suggests that the said sums as certified are accepted by the 1^st defendant.

19.  Mr Lee confirms that the plaintiff has not included a claim for the outstanding overdraft of $807.80 stated in the Certificate.  Thus, as at 9 October 2012, it is the plaintiff’s case that the Remaining Defendants should be liable to the plaintiff for the sum of $1,617,098.04 (as stated in the Certificate) together with accrued interests in the sum of $2,838,014.63 (which, according to the 2^nd Sch. to Mr Lee’s witness statement, was calculated at default rate of interest).

C.2  THE EVIDENCE OF THE REMAINING DEFENDANTS

20.  Whilst it is not in dispute that there is outstanding indebtedness under the Loan, the amount is disputed.

21.  Mr Lui, the director and manager of the 1^st defendant at the material time, who also signed the Facility Letter on behalf of the 1^st defendant, did not dispute the terms of the Loan as set out in the Facility Letter. He however took issue with the plaintiff’s failure in providing the Remaining Defendants with a detailed breakdown of the alleged outstanding amount under the Loan.

22.  Mr Lui confirmed that, apart from signing the Facility Letter, he also signed a number of facility letters on behalf of the 1^st defendant to obtain various banking facilities.  He contends that the outstanding principal sum under the Loan should only be in the region of around $600,000 to $700,000.  According to Mr Lui’s account, the 1st defendant initially owed to the Predecessor an amount of $13m.  After the sale of the 1^st defendant’s Wanchai office and his Chi Fu property, Mr Lui said that the proceeds of the sales respectively in the sums of around $ 9.5m and $1.6m were all used to partially repay the Loan.  Thus, after deducting the total sum of around $11m, there was only $600,000 to $700,000 outstanding under the Loan.

D.  THE SETTLEMENT AGREEMENT

23.  It is contended on behalf of the Remaining Defendants that there was a settlement agreement entered between the officers of the Predecessor and Mr Lui by which agreement it was alleged that the plaintiff had agreed to stay all legal proceedings against the 2^nd defendants on the condition that Mr Lui was to fulfill an agreed repayment scheme[4].

24.  In the alleged settlement agreement between the parties, Mr Lui avers[5] that the plaintiff agreed that no interest would be charged.

25.  In this regard, a number of documents are produced.  They include a number of correspondence exchanged between Mr Lui and the Predecessor and its solicitors, Messrs Tony Kan & Co (“Tony Kan”).

26.  The parties, as evidenced by a letter dated 22 August 1998[6] by the 2^nd defendants to the Predecessor, began discussing about the terms of a repayment schedule for the repayment of the outstanding indebtedness under the Loan in around August 1998.

27.  This was subsequently followed by a letter [7]by Mr Lui on 9 April 1999 to the Predecessor.  According to the letter, Mr Lui referred to an agreement having been reached over the phone with the officers of the Predecessor that he had been allowed “to take up the liability of a guarantor to settle the balance loan (after the repayment made to you as a result of the sales of my property) of the (1^st defendant) without taking legal action against me”.   Mr Lui also sent with the letter 12 cheques, six of which were in the amount of $12,000 each and the remaining six, in the sum of $15,000 each. A request was also made for the written breakdown of the outstanding amount and interest rates.

28.  Mr Lui repeated the same request for a breakdown on 30 April[8] and 10 May 1999[9].

29.  On 18 May 1999, Tony Kan replied to Mr Lui, stating that as of 13 May 1999, the outstanding principal and its accrued interests were respectively in the sums of $1,617,905.84 and $53,476.99.  Mr Lui was further informed that any additional interests for the outstanding principal were to be calculated at the rate of $17.25% per annum.  In the letter, Tony Kan confirmed that the Predecessor would be agreeing to withhold legal action against Mr Lui in respect of his liability until the end of the year or further agreement on the condition that Mr Lui would pay a sum of $138,000 by 10 instalments.  The usual non-waiver of rights is also set out in the letter.

30.  After the said letter of 18 May 1999, I am unable to find any evidence of Mr Lui’s acceptance of the said condition or terms but can only find his repeated requests for a breakdown of the alleged indebtedness stated in Tony Kan’s said letter.  When asked about this, Mr Lui in fact confirmed in his oral testimony that he has never accepted the terms as set out in the 18 May letter.

31.  Subsequently, Tony Kan on 8 July 1999 sent to Mr Lui a table[10] showing the breakdown of the principal amount and the accrued interests under the Loan.  According to the table, there were two partial repayments – one was in the sum of $220,394.63 on 5 March 1999 and another in the sum of $12,000 on 3 May 1999.  It was further stated that, as of 13 May 1999, the outstanding principal was in the sum of $1,617,905.84 and $53,476.99 were the accrued interests.

32.  By Tony Kan’s letters respectively dated 5 October and 29 November 1999 to the 1^st defendant and the 2^nd defendants, the defendants were demanded to make payment in the total sum of $1,802,832.13.

E.  DISCUSSION AND FINDING: THE AMOUNT OUTSTANDING

E.1  OUTSTANDING INDEBTEDNESS

E.1a  The alleged repayments from the sale proceeds of the Wanchai and Chi Fu properties

33.  The documents adduced in the assessment clearly show that Mr Lui’s contention is plainly wrong and his evidence in this regard must be rejected.

34.  The land search documents on the Wanchai property establish that the sale actually took place well before the granting of the Loan pursuant to the Facility Letter.  Thus, the sale proceeds of the Wanchai office has nothing to do with the Loan.

35.  It is however true that the Chi Fu property was sold after the granting of the Loan.  Mr Lui however is unable to provide any documents to corroborate his assertion that an alleged sum of about $1.6m from the sale proceeds of the Chi Fu property had been utilized by the Predecessor for the partial repayment of the Loan.  On the other hand, the evidence shows quite a different picture.

36.  According to Mr Lee’s witness statement[11], the sale proceeds under the 2^nd Charge created on the Chi Fu property was in the amount of $219,510.75, which had been used for the partial repayment of the Loan and which repayment can be seen from the indebtedness reports both dated 9 October 2012 attached to Schs 1 and 2 to Mr Lee’s witness statement.

37.  Further, there is also a letter dated 5 March 1999[12] from Messrs Ford Kwan & Company, the solicitors acting for Mr Lui in the sale of the Chi Fu property to the Predecessor. The content of this letter seems to confirm that an amount of $2,385,500 from the sale of the Chi Fu property was paid to the Predecessor for the discharge of two charges, including the Second Charge.  Whilst there is no evidence in respect of the amounts outstanding under the two legal charges, it does show that the net sale proceeds would have been required to discharge two charges. I am of the view that the calculations in respect of the outstanding principal and accrued interests set out in the indebtedness reports mentioned in the preceding paragraph are on balance to be accurate.  Accordingly, I find that only a sum of $219,510.75 from the sale proceeds was used for the partial repayment of the Loan.

38.  The tables of indebtedness in Schs 1 and 2 to Mr Lee’s witness statement, Mr Lee explained, show the outstanding amounts based on different interest calculations.  Sch 1 is calculated in accordance with the contractual rate of interest, which is the prevailing prime rate plus 2% while Sch 2, the default interest rate, which is the prime rate from time to time as quoted by the plaintiff plus 9%[13].

39.  Under the terms of the Facility Letter, the plaintiff is contractually entitled to charge default interests upon the 1^st defendant’s default of payment.  Mr Lui also does not dispute the plaintiff’s entitlement to charge default interests.  Accordingly, I find, the outstanding principal and interests under the Loan, as of 6 March 1999, after the sale of the Chi Fu property, was $1,629,570.84[14], not a sum of $600,000 to $700,000 as Mr Lui contended. The outstanding accrued interests will be dealt with later in paras 52 to 56 below.

E.1b  Conclusive Evidence Clause

40.  The plaintiff further relies on the Certificate to prove the outstanding indebtedness against the Remaining Defendants.

41.  According to the said clause 5(b), the plaintiff would be able to rely on the said provision to prove as conclusive and binding evidence that the Remaining Defendants owe to the former (as certified in the Certificate) the outstanding principal sum under the Loan (as of 31 October 1998) a sum of $1,617,098.04 and accrued interests on the said sum, $184,926.29.

42.  The conclusive evidence clause as contained in Clause 5 in fact consists of two parts.  Clause 5(a) relates to a judgment obtained against the borrower.  Since Mr Cheung confirmed at the assessment hearing that the plaintiff would not be relying on sub-clause (a) in relation to the default judgment against the 1^st defendant, but only on sub-clause (b), I only need to consider the effect of this sub-clause concerning the Certificate.

43.  As already set out in para 16 above, the plaintiff is contractually entitled to invoke Clause 5(b) by relying on the amount outstanding certified in the Certificate as conclusive evidence and the Remaining Defendants will be bound by it.

44.  Bache & Co (London) Ltd v Banque Vernes Et Commerciale De Paris S.A. [1973] 2 Lloyd’s Law Reports [1973] 437 and Chong Hing Bank Ltd (formerly known as Liu Chong Hing Bank Ltd) v Perfecta Dyeing, Printing & Weaving Works Ltd & Ors, HCA 956 of 2008 (unrep) are the authorities Mr Cheung cited in support of the court’s readiness in upholding a similar conclusive evidence clause.

45.  Without citing any authorities in support, Mr Chan, counsel for the Remaining Defendants, contends that by the operation of the Unconscionable Contracts Ordinance (Cap 458), the court should restrict the application of Clause 5.

46.  Under section 6(1) of Cap 458, the court, in deciding if a particular contract or a term of a contract is unconscionable, is required to take into consideration all the relevant matters such as the relative strengths of the bargaining positions of the parties etc. Quite apart from the fact that there is nothing before the court in support of Mr Chan’s challenge to Clause 5 on the ground of it being unconscionable, I find, having observed Mr Lui in court and considered his evidence, that Mr Lui is far from being a person without bargaining position. He strikes me to be a rather nuanced business man who has shown a considerable bargaining strength in the course of his settlement discussions with the Predecessor.  I do not consider the sub-clause unconscionable.

47.  The legal effect of Clause 5(b), in my opinion, is that the amount certified by the plaintiff in the Certificate will be conclusive unless there is evidence to the contrary or it is shown that the amount is manifestly in error.  The policy reason for enforcing such a clause and requiring a guarantor to honour the certificate is succinctly  set out  in the speech of the eminent late Lord Denning, M.R. in Bache & Co (London) Ltd at p 440I:

“… public policy is in favour of enforcing it. … this commercial practice (of inserting conclusive evidence clauses) is only acceptable because the bankers … who insert them are known to be honest and reliable men of business who are most unlikely to make a mistake. Their standing is so high that their word is to be trusted … As we have repeatedly held, such a certificate must be honoured …”

48.  Accordingly, I am satisfied that there is nothing unconscionable for the court to enforce Clause 5(b) by allowing the plaintiff to rely on the Certificate to prove the outstanding indebtedness against the Remaining Defendants.  Thus, the outstanding principal sum under the Loan as of 31 October 1999 (as certified in the Certificate) is found to be $1,617,098.04 and the accrued interests on the said sum in the amount of $184,926.29.

E.2  THE ALLEGED SETTLEMENT AGREEMENT

49.  Mr Lui’s evidence concerning the alleged settlement agreement is most confusing.  While I’d be inclined, on the correspondence exchanged between the parties, to find that there were discussions for the restructuring of the payment schedules under the Loan, I am unable to accept that there was a concluded agreement as alleged by Mr Lui that the plaintiff had agreed to stay the proceedings and not to charge interest.

50.  Tony Kan’s letter of 18 May 1999 at best is only a record of the terms the Predecessor was prepared to accept in relation to the restructuring of the repayments of the Loan.  Mr Lui has also clearly confirmed in his evidence at the hearing that the Remaining Defendants did not accept the terms set out in the letter.  The calculations that he had done fail to show how the alleged outstanding sum of around $600,000 and $700,000 can be added up. Thus, I am unable to accept that an agreement has been reached by the parties.  I believe that the reason why the plaintiff had only presented payment of one of the cheques in the sum of $12,000 (as shown in the table discussed in para 27 above) as part repayment of the Loan but did not present the remaining 11 cheques reinforces the lack of a concluded settlement agreement.

51.  In conclusion, I find Mr Lui’s allegation of having reached a settlement agreement is inherently improbable, and reject his evidence.

E.3  CONCLUSION

52.  The plaintiff’s evidence, due to the long lapse of time, is, in my finding, not entirely satisfactory.  Thus, I find there are some inconsistencies concerning some numbers.  For example, the partial repayment from the net sale proceeds of the Chi Fu property, according to the table showing the breakdown provided by Tony Kan’s letter on 8 July 1999, was stated to be $220,394.63, which is slightly different to the amount of $219,510.75 as shown in the tables of indebtedness in Schs 1 and 2 to Mr Lee’s witness statement.  Given such a small difference, I do not consider such a small inconsistency is so material that it would render the plaintiff’s evidence unreliable.

53.  All in all, for the reasons foregoing, I am satisfied that the outstanding principal sum of the Loan, as evidenced by the Certificate, is $1,617,098.04.

54.  As for the outstanding interests, the plaintiff has at all the material times applied default rate of interest in its calculation of interests.  Since there were defaults in the payment of the Loan, the plaintiff was contractually entitled to charge default interests.

55.  Mr Cheung however at the hearing has indicated that the plaintiff is prepared not to insist on its contractual right in charging default interests, and will be content with contractual interests, which are to be calculated at 2% above prime rate.  Hence, I would adopt the amounts set out in Sch 1 to Mr Lee’s witness statement as the outstanding indebtedness.

56.  Accordingly, I assess the principal sum, as of 9 October 2012, to be $1,572,817.33, and the accrued interests  $1,742,790.18.

57.  Having disposed of the 1^st and the 2^nd Objections, I should next deal with the question of delay, and whether the plaintiff’s claim for interests should be denied.

F.  THE DELAY

58.  It is Mr Lui’s contention that the plaintiff’s delay in pursuing the matter has caused him prejudice, and he asks this court to exercise its discretion to disallow the plaintiff’s interest on the outstanding principal sum during the period of delay.

59.  Mr Lee is not able to explain why the plaintiff has been delaying the proceeding for 10 years.

60.  Given the complete lack of explanation for the long delay, I think I am entitled to find that the delay is inordinate and unreasonable.

61.  Mr Chan contends that owing to the inordinate delay, I should exercise my discretion to deprive the plaintiff‘s interest for the whole period of delay.

62.  Mr Cheung, while does not dispute that the delay is inordinate, however submits that the court has no power to deny awarding to a party contractual interests.  To make good his arguments, Mr Cheung refers to a passage in the Hong Kong Civil Procedure 2013 at 6/L/9, which provides:

“If a plaintiff is entitled to interest by statute or statutory instrument (such as O13 r1) or by contract, the plaintiff is entitled to interest as of right, unless in a contract case he fails foul of the provisions of the Money Lenders Ordinance (Cap.163) as to exorbitant interest in consumer contracts (ss 24-25).”

63.  Mr Cheung further submits that the discretion that is discussed in para 6/L/22 of the Hong Kong Civil Procedure 2013[15] refers to the discretion under s 48 of the High Court Ordinance.

64.  Under s 48 of the High Court Ordinance, the court has a general power to award interest on a debt or damages and it has discretion in respect of the rate of interest and the period for which interest is awarded.

65.  In this case, one of the reliefs the plaintiff claims is a claim for contractual interests under the Facility Letter.  Thus, the interests being claimed form part of the debt, and I, therefore, respectfully agree with Mr Cheung that the discretion in s 48 does not apply to the relief for accrued interests.

66.  There is however nothing in my view to tie the court’s hands in depriving a plaintiff’s relief for contractual interest should it find the plaintiff’s conduct is such that it is just and equitable to deny such a relief.  A long period of delay would be one of those circumstances.  The plaintiff in this case has undoubtedly failed to pursue the matter with reasonable diligence.  According to the calculations in the table in Such 2, the amount of interests accrued is $2,838,014.63, which is much more than the amount of the outstanding principal of $1,617,098.04. It would be, in my view, grossly unjust to allow the plaintiff to unfairly benefit from its own default.

67.  Had the plaintiff pursued the relief with reasonable diligence, it would have likely, in my view, been able to obtain final judgment with a period not exceeding 2 years from the date of the Directions Order, which is probably be around the 4^th quarter of year 2002.  For the sake of easy calculations, I would conveniently choose a date that falls within this period from Sch 1 to Mr Lee’s witness statement, and am satisfied that the notional  date of judgment is likely to be 7 November 2002 had the matter been proceeded with reasonable diligence. The delay in my finding justifies the deprivation of the contractual interests from the notional date of judgment.    I would therefore enter judgment for the principal amount of $1,572,817.33 with the amount of the accrued interests to be calculated at the prevailing prime rate plus 2%, which, as shown in Sch 1, is $537,182.58.

68.  As far as interest on the judgment sum is concerned, I am of the view that I should likewise further exercise my discretion under s 48 in denying the plaintiff statutory interest during the period of delay.  Thus, I direct that there shall be interest at judgment rate on the principal sum from the date of the issuance of the writ until the notional earlier date of judgment of 7 November 2002, and there should be further interest at judgment rate from the date of judgment until full payment.

G.  CONCLUSION

69.  In conclusion, I would enter final judgment against the 2^nd named and 3^rd named 2^nd defendants for the total sum of $2,109,999.91.  There shall be interest at judgment rate on the principal sum of $1,572,817.33 from the date of the issuance of the writ until 7 November 2002, and further interest from the date of judgment until full payment.

70.  As for the costs of the assessment, I make a costs order nisi in favour of the plaintiff that the Remaining Defendants shall pay the costs of the assessment, including costs previously reserved, to be taxed if not agreed.  Any application to vary the said costs order nisi should be made within 14 days from the date of the handing down of this judgment.