ECHELLES RIFFAUD S.A. v. THE SECRETARY FOR JUSTICE

HCA 1841/2011

[2024] HKCFI 3509

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1841 OF 2011

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D E C I S I O N

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Background

1.  By a judgment dated 1 August 2024 (“the Judgment”), this Court ordered, on a nisi basis, that pre-judgment interest on damages be awarded to the Government at the rate of P+1% per annum from 12 June 2012, the date of the counterclaim. The Plaintiff does not dispute the commencement date for computation of interest but asks that the rate be reduced to one of the following, both of which are substantially lower than P+1%:

(1)  Costs of borrowing: The proposed rate is 2.073% per annum (“Average Borrowing Rate”), being the average interest rate of comparable 10 to 15 year institutional bonds issued by the Government, and consequently the Government’s theoretical cost of borrowing. Alternatively, the rates should be 2.975% per annum (“IG Avg Borrowing Rate”) or 3.132% per annum (“the Sukuk Borrowing Rate”), being such theoretical costs based on other 10-year bonds issued by the Government.

(2)  Median or mean rate of investment return: this is the Plaintiff’s alternative position. The proposed rate is 3.7% per annum, alternatively 4.2%, which represents the Government’s median (alternatively, average) rate of investment return according to the Government’s own evidence (“the Investment Rate”).

2.  The Government does not insist on the contract rate of P+5% per annum. It supports the rate of P+1%.

Legal principles on the award of pre-judgment interest

3.  The legal principles are not really in dispute. The leading case is the Court of Appeal’s judgment in Lo Yuk Sui v Fubon Bank (Hong Kong) Ltd [2019] HKCA 1345, Lam VP (as he then was):

(a)  Pre-judgment interest is intended to reflect the rate at which the plaintiff would have had to borrow money to supply the place of that which was withheld (§41).

(b)  The award of interest is not based on the actual but theoretical cost of borrowing of the receiving party (§46).

(c)  The rate of interest is not to be assessed by reference to what the receiving party might have earned on the money. Rather, the interest rate is to represent a compromise between that and what a person might have had to pay by way of interest to borrow the sum. It is based on a notional borrowing, irrespective of whether the party had borrowed or could have borrowed a replacement loan on the actual facts of the case. For these reasons, one should not have regard to the special personal circumstances of the receiving party in the application of the approach (§47).

(d)  In determining the “theoretical cost”, the Court is to consider, at a “high level of generality”, the “general attribute” of the borrowing party, which refers to “general matters relevant for the purpose of commercial borrowing in the money market” (§§49, 52).

(e)  The interest of P+1% is the starting point in commercial cases. Interest would be awarded at such rate unless there is evidence to persuade the court that time has come to move away from such rate (§34).

4.  In Lo Yuk Sui (§53) the Court of Appeal awarded the lower interbank rates for pre-judgment interest as it was not disputed that the successful party, Fubon Bank, could borrow money in the money market at the interbank rates, which were generally more favourable than rates offered to other commercial lenders.

5.  The Court is not required to embark on an exercise to find out the cost of borrowing of the receiving party because the Court applies P+1% per annum as a “theoretical cost” without assessment of the financial circumstances of the receiving party. In Lo Yuk Sui, the Court of Appeal refused the paying party’s evidence on average borrowing cost of the comparable banks (§§33 and 52).

6.  In Waddington Ltd v Chan Chun Hoo Thomas, CACV 10/2014, 20 May 2016, evidence was placed before the judge that the interest rates on deposits and HIBOR had been dropping but the HSBC’s best lending rate as prime rate had remained at a high level of 5% per annum or above; and that the rates for loans had been fixed by reference to the lower HIBOR. The Court of Appeal rejected the approach based on the impression that the prime rate no longer reflected the real cost of borrowing. It held that such evidence could not displace the conventional rate of P+1%.

7.  The rate of P+1% per annum is conveniently called the commercial rate. It is adopted for the avoidance of arbitrary variations between similar cases and for the promotion of reasonable consistency: The Pertamina [1984] HKLR 219, at p223B.

8.  The rate of P+1% per annum is a presumption that can be displaced if its application would be substantially unfair to either party. The burden of displacing this presumption lies on the party seeking to displace it: The Hong Kong Electric Co Ltd v Commissioner of Rating and Valuation LDGA 224/2004, 12 April 2010, §24. In the light of the evidence before the Tribunal, Au J, President (as he then was), applied the actual rate of borrowing of the paying party instead of P+1% (§§25 and 26).

Undisputed Facts

9.  The facts are all taken from the Government’s own financial or other statements that are in the public domain.

10.  The period for computation of pre-judgment interest is 2012 to 2024 (“the Relevant Period”). During that time, the Government did not actually need to borrow. Its balance sheets consistently showed a credit balance of billions of dollars and there were no bank loans. The Government did issue bonds, though. According to the introduction section of Government Bonds website, the primary objective was:

“to promote the further and sustainable development of the local bond market. … The development of a mature local bond market will help promote the efficient allocation of funds, thereby promoting financial stability, strengthening Hong Kong’s status as an international financial centre and promoting economic development.

The [Government] maintains a “strong fiscal position and does not need to finance its expenditures by issuing government bonds.”

The money raised under the Bond Programme was used to make investments.

11.  Various kinds of bonds have been issued by the Government. According to the LegCo Paper No. CB(1)1078/20-21(01) in 2021 (“the LegCo Paper”):

(1)  Institutional bonds are for subscription by institutional investors, such as pension funds, banks and insurance companies; to “facilitate the market in determining the pricing of other types of bonds (such as corporate bonds)”.

(2)  Retail bonds (including iBonds and Silver Bonds which are 3-year bonds) are to meet the general public’s demand for stable investments of a high quality and to promote public understanding of bond investment. They are inflation-linked so as to “meet the general public’s demand for stable investment of a high quality and to promote public understanding of bond investment”.

(3)  An alternative institutional bond known as Islamic bonds or “Sukuk” is a more complicated structure and with a 5-10 year tenor. They are to “signal to the markets that Hong Kong’s legal, regulatory and taxation frameworks are well established to accommodate sukuk issuances, thereby giving further impetus to other potential sukuk issuers from the public or private sector, both local and international, to raise funds in Hong Kong.

(4)  Institutional Green Bonds and Retail Green Bonds denominated in various currencies including US dollars are to provide funding for sustainable projects of the Hong Kong Government.

12.  As stated in the LegCo Paper, in determining the size of the issuance and terms of institutional bonds and retail bonds, the Government took into account “the prevailing market environment, the supply and demand situations, interest rate and inflation, the potential impact on other issuers in Hong Kong, the sustainability of the Bond Fund, etc.”

13.  The institutional bonds issued by the Government in the Relevant Period with maturity periods of 10 and 15 years carried interests from 1.936% to 2.209% per annum. The average of those 2 rates, to reflect an institutional bond with a maturity period of 12.5 years, was 2.073% per annum.

14.  The Institutional Green Bonds with a maturity period of 10 years carried interest at 2.975%. For those bonds issued in US dollars, the rate was 2.938%. (Note: there were no 15 year bonds; and these Bonds were issued only from 2021 onwards.)

15.  The available rates for iBonds, Silver Bonds and Retail Green Bonds were respectively 2.94%, 3.13% and 2.95%.

16.  The 10-year Sukuk institutional bonds, first issued in 2017 and denominated in US dollars, were at a fixed rate of 3.132% per annum.

17.  The interests on government bonds were described in the Government’s own financial statements as “interest expenses” and the bonds issued were its “liabilities”. The Government’s own statements in its website on Government Bonds refer to eg LegCo passing resolutions (i) on 8 July 2009 and (ii) 15 November 2018 respectively, authorizing the Government to “borrow” up to a maximum principal amount outstanding at any time at HK$100 billion or its equivalent under the Government Bond Programme and Government Green Bond Programme respectively.

The Average Borrowing Rate/ IG Avg Borrowing Rate/ Sukuk Borrowing Rate

18.  There is no dispute that the starting point is P+1%. The prime rate for the Relevant Period was 5-5.875% per annum.

19.  The Plaintiff invites the Court to reduce the commercial rate to the institutional bond rate of 2.073%, or the IG Avg Borrowing Rate of 2.975% or the Sukuk Borrowing Rate of 3.132%. It submits that P+1% is not only manifestly higher than the Government’s theoretical cost of borrowing but also over-compensates the Government.

20.  In my view, the Plaintiff has read too much into the word “commercial” as if this rate is a commercial rate that would only apply to commercial entities. The authorities do not distinguish between judgment creditors who are cash rich corporations and parents who lend hard-earned savings to their children.

21.  In addition, the reference to the Government not being a profit-making entity was made in the context of the Court’s refusal to grant the contractual interest rate of P+5% (§507 of the Judgment).

22.  The present case was a commercial dispute based on contracts. The Government, though not itself a commercial entity, was prima facie entitled to the benefit of Lo Yuk Sui like any ordinary judgment creditor. In fact, the Plaintiff was granted pre-judgment interest at P+1% on damages for damages awarded. There was no reason to treat the Government differently.

23.  However, applying a “high level of generality” and by analogy to Fubon Bank in Lo Yuk Sui, §49, §53, the attribute of the present judgment creditor that the Court can take into account is that it is a government. While private entities usually borrow from banks, it is not uncommon for a government to issue bonds to raise loans.

24.  The Plaintiff suggests that the theoretical cost of borrowing by a government is best determined by reference to the interest rates of bonds that it issued.

25.  However, the issuance of bonds by the Government was expressly stated as not due to the need to borrow but to implement the policy of developing the bond market in Hong Kong. The Plaintiff submits that the Government’s subjective purpose for issuing bonds is irrelevant. The rates paid out by the Government were in essence interest paid by the Government to borrow from the public. The financial statements represented those rates as “interest expenses” for “interest on bonds and notes issued”.

26.  I am unable to agree. The Government’s statements referred to in §10 above would not have led a reasonable reader to think that the Government was/is genuinely borrowing.

27.  Even if I am wrong, the approach of researching the rates for different kinds of bonds in past years and inviting the Court to adopt one of them for pre-judgment interest is undesirable for the following reasons:

(1)  The different rates for different bonds now put before the Court is similar to the situation in Lo Yuk Sui (§33 and 52) where the Court was asked to adopt average borrowing costs of comparable banks as the theoretical borrowing costs. It was rejected.

(2)  Which bond rate should the Court adopt (necessarily with hindsight) as the appropriate pre-judgment rate when the claim was for unliquidated damages and the duration of the litigation was not foreseeable in 2012? Why should the Court prefer institutional bonds (for professional/institutional subscribers only) to bonds for the general public subscribers? This situation is different from The Hong Kong Electric v Commissioner of Rating and Valuation where there were actual rates of borrowing per year placed before the Court.

(3)  Most of the bond rates provided by the Plaintiff were for bonds denominated in Hong Kong dollars. The Institutional Green Bonds issued in US dollars should be the best comparable because the bulk of the judgment sum is US$9.96 million. (There is another judgment sum of €67,500.) However, these bonds were not issued until 2021.

(4)  The Plaintiff’s approach brings uncertainty to pre-judgment interest in every case where the Government is a receiving party. It departs from the reasonably consistent approach advocated in The Pertamina. In future, a litigant who loses his case against the Government may invite the Court to choose the pre-judgment interest rate from amongst Government bond rates as if it were an exercise of assessment of damages. It departs from the broad brush and pragmatic approach laid down by the Court of Appeal in Lo Yuk Sui, §49. It also puts the Government in a less advantaged position on pre-judgment interest compared to any other successful litigant.

28.  For the reasons given, I decline using any of the bond rates as pre-judgment interest.

Investment Rate

29.  The Government’s own rate of investment return in the Relevant Period was 2.8% to 5.6% per annum. This is disputed by the Plaintiff, who says that it should be 3.7 to 4.2% only. The dispute need not be resolved because both parties (correctly) do not consider the Investment Rate to be appropriate: Lo Yuk Sui, §47.

30.  I just deal with the parties’ fall back submission briefly. The Government submits that the judgment sum would have been transferred into the Government’s General Revenue Account and could then have been used to fund the Government’s day-to-day expenditure and the balance, if any, could have constituted the Government’s fiscal reserves and been used to generate investment income. The Investment Rates of the Government in the Relevant Period were slightly below P+1%. With respect, the submission is not supported by evidence as to what the “expenditure” and “balance” were.

31.  Equally the Plaintiff’s submission that the rate of investment return would not remain the same regardless of the amount of principal, and would likely be lower if a smaller sum was invested, was a general statement not supported by evidence.

32.  I therefore decline to use the Investment Rate as the pre-judgment interest rate.

Conclusion

33.  For the reasons given, I decline to vary the pre-judgment interest rate. The Summons is dismissed.

34.  On a nisi basis, costs should follow the event and be to the Government, summarily assessed and allowed in the sum of $96,660.

35.  I thank counsel for their assistance.