THE INDUSTRIAL & COMMERCIAL BANK OF CHINA, SHENZHEN BRANCH v. NEW INTERNATIONAL (GROUPS) LTD.

HCA18944/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.18944 OF 1998

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J U D G M E N T

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1. This is an appeal by the defendant from the order of the Master made on 2 May 2000 entering summary judgment for the plaintiff on the claim. The judgment is for the sum of HK$7,332,827.64 together with interest and costs. At the conclusion of the submissions, I dismissed the appeal and gave oral reasons for so doing. I now reduce the reasons into writing.

Background

2. The plaintiff is a bank in the Mainland. The defendant is a company incorporated in Hong Kong. This action arises out of a Chinese Security Loan Agreement dated 17 July 1995 ("the Loan Agreement") signed between the plaintiff as lender, the defendant as borrower and one Shenzhen Wan Da Industrial Company Limited (深圳萬達實業有限公司) ("the Mortgagor") as mortgagor. Under the Loan Agreement, the plaintiff agreed to lend to the defendant a loan of HK$10 million secured by a property in Shenzhen ("the Shenzhen Property") owned by the Mortgagor. There is no dispute that the sum of HK$10 million had been deposited in the account of and thus received by the defendant.

3. It is also not in dispute that there has been default in repayments. Subsequently, two sums of HK$500,000 and HK$3 million were paid by the defendant under the Loan Agreement to the plaintiff on 31 March 1997 and 25 February 1998. By a letter of demand dated 28 July 1998, the plaintiff demanded from the defendant payment of the outstanding balance of HK$6.5 million together with interest. No further payment was made by the defendant.

4. On 28 May 1998, the Mortgagor was wound up by the Shenzhen Intermediate People's Court. The plaintiff filed a proof of debt in relation to the amount due under the Loan Agreement as secured by the Shenzhen Property. The Shenzhen Property was subsequently sold and a sum of RMB4,673,853.71 (equivalent to HK$4,395,611.50) was received by the plaintiff and applied towards satisfying the interest and part of the principal due under the Loan Agreement. This took place on 8 September 2000, after the summary judgment herein was granted.

The action

5. In the meantime on 6 November 1998, the plaintiff commenced the present action against the defendant claiming under the Loan Agreement for the payment of HK$7,332,827.64, being the principal outstanding and interest accrued as at 21 October 1998, and for further interest.

6. The defendant filed its defence on 22 December 1998. The grounds pleaded in the defence are twofold. Firstly, it is pleaded that the defendant, in entering into the Loan Agreement, only acted as the agent of the Mortgagor without any personal liability. Secondly, it is averred that on the true interpretation of the Loan Agreement, the plaintiff could only claim against the defendant after taking recovery action against the Mortgagor and when the amount recovered is insufficient to satisfy the indebtedness.

7. On 2 February 2000, the plaintiff applied for summary judgment. Affirmations were filed by both parties. The issues canvassed in those affirmations and before the Master were confined to the grounds pleaded in the defence and set out above.

8. On 2 May 2000 the Master entered summary judgment against the defendant as claimed.

The appeal

9. Notice of Appeal was filed shortly afterwards on 5 May 2000. The events that happened thereafter were less than expeditious. On 26 and 27 July 2000, the defendant filed two affirmations in support of the appeal. One of them, the affirmation of Wong Ping, concerns the agency defence. The other affirmation, which was from the defendant's solicitors, is to introduce a completely new defence, namely, under the PRC law, the defendant, being a Hong Kong company, has no requisite capacity to enter into a loan transaction with the plaintiff, a PRC bank. This had led to the adjournment of the appeal hearing and an affirmation in reply from the plaintiff, which was filed on 14 September 2000. No step was then taken to restore the appeal hearing until after the plaintiff served on the defendant on 12 April 2000 a statutory demand based on the judgment herein. The appeal was then restored and the defendant filed yet another affirmation leading a second expert opinion on PRC law dealing with yet another new issue of the governing law and the jurisdiction clause under the Loan Agreement. The plaintiff in the limited time available procured second expert report to deal with the new issue.

10. In my view, the defendant's conduct of the case and the appeal is wholly unsatisfactory and coming very close to an abuse of the court process. To say the least, any appeal from a summary judgment should be presented with due expedition and diligence. A delay of over a year is plainly unacceptable.

Grounds for the appeal

11. In support of the appeal, Mr Fung raises a number of issues which can be summarized as follows :

(1) Hong Kong Court has no jurisdiction to deal with disputes arising out of the Loan Agreement.

(2) The Loan Agreement is invalid and unenforceable for being in breach of clause 46 of Foreign Exchange Banking Business Management Regulation (銀行外?業務管理規定) ("the Foreign Exchange Regulation") and for charging excessive and compound interest.

(3) The defendant acted as agent for the Mortgagor in signing the Loan Agreement and has incurred no personal liability under it.

(4) The judgment was entered for too much.

I shall deal with them in turn.

Jurisdiction

12. Clause 8 of the Loan Agreement reads as follows :

「1. 法律的選擇	本合同受中國法律的管轄，並據此釋義和解釋。
2. 管轄權	(1) 借款人及抵押人特此同意任何與本協定有關的訴訟或審理程序都可在中國深圳市的法院提起並執行，借款人不可撤銷地接受各該法院管轄。
	(2) 借款人及抵押人不可撤銷地放棄就本協定有關的任何訴訟或審理程序不受在中國深圳市法院的管轄，在判決前後不受扣押及執行的所有豁免權(不論是以主權或其他為根據) ，並同意在或有關任何上述訴訟或審理程序時不提起或不主張任何豁免權。
	(3) 借款人及抵押人在法律允許的最大限度內，不可撤銷地放棄對現在或以後在中國深圳市法院提起的，以任何方式與本合同有關的訴訟或審理程序指定的審判地點提出異議，對在上述法院提起的訴訟，不可撤銷地放棄以出庭不便為理由而提出的請求。」

13. Based on clause 8, the defendant's PRC law expert concluded that the parties had agreed that the Shenzhen Court shall have jurisdiction over any dispute arising out of the Loan Agreement. It is therefore a breach of the agreement between the parties as well as a breach of the PRC civil procedure law to commence the present action in Hong Kong.

14. Acting on the expert's opinion, Mr Fung advanced two propositions. Firstly, he argues that clause 8(2) confers exclusive jurisdiction on the Shenzhen Court such that Hong Kong Court has no jurisdiction over the present dispute. And since parties cannot by agreement confer jurisdiction on the court, it matters not that the defendant has already taken part in these proceedings. Secondly, he says that as the plaintiff has acted in breach of the exclusive jurisdiction agreement, the plaintiff is estopped from litigating in Hong Kong Court.

15. For my part, I have reservations whether clause 8 should be read as conferring exclusive jurisdiction on the Shenzhen Court. Certainly the defendant's expert did not say so in his opinion. Irrespective of whether the clause is an exclusive jurisdiction clause, the proposition that the Hong Kong Court has no jurisdiction over this matter is plainly flawed.

16. It is trite law that service of process is the foundation of the court's jurisdiction to entertain a claim in personam : Dicey & Morris on The Conflict of Laws (13th ed.), Vol.1, para.11-003, Hong Kong Civil Procedure 2002, Vol.1, paras.10/0/2, 11/0/2 and 11/0/3. It is so even if the parties had agreed on an exclusive jurisdiction. In such a case, the court retains a discretion to grant a stay of proceedings brought in breach of the jurisdiction clause. No issue of estoppel can arise. The case of T & K Electronics Ltd v. Tai Ping Insurance Co. Ltd [1998] 1 HKLRD 172 cited by Mr Fung does no more than reiterating this fundamental principle. It does not support the proposition that Hong Kong Court cannot have jurisdiction over cases involving an exclusive jurisdiction clause.

17. In the present case, the defendant is a company incorporated in Hong Kong and has its registered office in Hong Kong. The defendant had been properly served with the writ in Hong Kong. There can be no doubt that Hong Kong Court has jurisdiction over the parties in this dispute.

18. Mr Fung in his submission in reply indicated that the defendant will apply to stay these proceedings after the judgment is set aside. That, in my view, does not assist the defendant. Firstly, it is probably too late for the defendant to adopt that course. The defendant has chosen to file an acknowledgement of service and a defence. It had also filed evidence to contest the Order 14 application and had further appealed against the judgment. All these steps were taken without any reservation of the right to challenge the court's jurisdiction. It is more probable than not that the defendant had submitted to the jurisdiction of the Hong Kong Court : Buisiwe Ngcobo v. Thor Chemicals Holdings Ltd, (unreported), English Court of Appeal, 9 October 1995.

19. Secondly and more importantly, unless and until the court has ordered a stay of these proceedings, the Hong Kong Court shall continue to have jurisdiction over the case. The exclusive jurisdiction clause or the intention to seek a stay does not therefore constitute a plea of defence that goes to the merits of the claim. It cannot give rise to any triable issue as will defeat an application for summary judgment.

Validity of the Loan Agreement

20. Regulation 46 of the Foreign Exchange Regulation provides :

「銀行向境外金融機構或者向境內外資﹑中外合資金融機構存拆外匯資金，必須建立信用額度控制制度，對每家機構的具體授信額度必須報國家外匯管理局備案 ...」

21. In reliance of this regulation, the defendant's PRC Law expert took the view the Loan Agreement was invalid and unenforceable in that the plaintiff had not put forward material showing that it had made the requisite report to the authority.

22. Plainly, Regulation 46 applies to dealings with financial institution (金融機構). The evidence before the court does not in any way demonstrate that the defendant is a financial institution. Neither the affirmation of Wong Yin, a director of the defendant, nor the company search records shows the defendant to be a financial institution. The basis for invoking Regulation 46 is simply absent.

23. Even if Regulation 46 is applicable, there is still no evidence that the plaintiff had not complied with it. The burden of proving this allegation is on the defendant and it is for the defendant to condescend to particulars and make good the point.

24. Furthermore, the defendant's expert had not referred to any PRC legislation or law as showing the consequences of a failure to comply with Regulation 46. He simply gave the opinion that the loan transaction was contrary to the national policy and was therefore unlawful and invalid and legally not binding. An opinion professed in such manner cannot be afforded any weight.

25. Another basis on which the defendant contends that the Loan Agreement is invalid turns on the interest charged under the Loan Agreement. The defendant's expert commented that the agreed rate of 13% p.a. is excessive, being higher than the rate specified by the People's Bank of China (中國人民銀行) for the relevant period, and that the plaintiff has charged compound interest on the loan.

26. There is first of all no evidence of what the interest rate specified by the People's Bank of China for the period of July 1995 when the Loan Agreement was made. The schedule of interest rates attached to the defendant's Second Expert Opinion is not a document issued by the People's Bank of China. On the contrary, it appears to be a schedule prepared by the plaintiff. That aside, there is again no material before the court as to the consequences, in terms of PRC law, of charging an interest rate higher than the specified rate. In the absence of evidence on foreign law, the court cannot assume that the Loan Agreement is therefore rendered void or invalid.

27. As to the comment that compound interest was charged, the basis for this is wholly unclear. Mr Fung accepts this much.

28. There is in short no merit in the submissions on the validity of the Loan Agreement.

Agency

29. The defendant had both in its defence and the affirmations of Wong Yiu and Wong Ping stated that the defendant was named as a borrower under the Loan Agreement upon the Mortgagor's request and at the instigation and with the approval of the plaintiff. The reason behind this, according to Wong Ping, the brother of Wong Yin and Huang Sheng, the owner of the Mortgagor, is that the plaintiff had already exceeded the quota for loans to be lent within the Mainland in foreign currency. The naming of the defendant as a borrower was to get round the quota restriction.

30. It is to be noted that there is no material to support this alleged reason or the alleged involvement of the plaintiff. The defendant only relies on two matters as shading light on the defence. The first is the fact that the security was provided by a third party. The second matter is that Huang Sheng was nominated as the representative of the defendant and the correspondences were all sent to the Mortgagor.

31. None of these matters, however, is sufficient to make good the contention that the defendant incurs no personal liability under the Loan Agreement. Even if the defendant did act as an agent for the Mortgagor, it does not necessarily follow that it assumes no liability under the Loan Agreement. The allegations put forward have not been properly particularized and amount to no more than bare allegations. The Loan Agreement does not bear out that the defendant signed as agent and assumed no personal liability. On the contrary, the plaintiff had adduced evidence that the defendant had made two repayments totalling HK$3.5 million. The defendant had not dealt with this at all in the affirmations filed.

32. In addition, given that the defendant signed the Loan Agreement without qualification, extrinsic evidence to the effect that the parties to the agreement intended that the defendant should not be personally liable is just inadmissible : Bowstead on Agency (17th ed.), para.9-039.

Sale proceeds of the Shenzhen Property

33. The plaintiff had filed evidence showing that it had in September 2000 recovered from the liquidator of the Mortgagor a sum of RMB4,673,853.71 (equivalent to HK$4,395,611.50), representing the net proceeds of sale of the Shenzhen Property after deducting some costs of liquidation and sale.

34. The defendant points out that there are discrepancies in the amount of the costs and expenses for liquidation as stated by the liquidator and those stated in a judgment dated 8 February 2001 by the Shenzhen Intermediate People's Court.

35. I accept there are apparent differences in the amounts of management fees and tax for the Shenzhen Property. That, however, is irrelevant. It is only relevant to whether the deductions applied by the liquidator to the sale proceeds are correct. It does not, and there is no evidence to, show that the plaintiff had received from the liquidator a sum larger than that said to have been recovered from the liquidator. At any rate, the recovery was made after the summary judgment. It is a post-judgment event that bears no weight on the propriety of the judgment entered. If there is an issue over the amount recovered by the plaintiff, the proper time for ventilating that is when the plaintiff seeks to enforce and execute the judgment.

Conclusion

36. By reason of the matters aforesaid, the appeal is devoid of merits. The appeal is accordingly dismissed with costs to the plaintiff, to be taxed if not agreed.

37. The defendant seeks a stay of execution pending appeal. None of the relevant considerations for granting a stay has been made out : Hong Kong Civil Procedure 2002 Vol.1 paras. 59/13/1, 59/13/11. The plaintiff being a successful party should not be further delayed in enjoying the fruit of the judgment. The stay sought is refused.