XCHRX THE CHINA AND SOUTH SEA BANK LTD., HONG KONG BRANCH v. SUTHI TEJAVIBULYA

HCA2222/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2222 OF 2000

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J U D G M E N T

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1. On 26 April 2001 Mr Registrar Chan under O.14, r.1 of the Rules of High Court ordered that judgment be entered for the plaintiff against the 2nd defendant for part of the amount claimed giving the 2nd defendant unconditional leave to defend the balance.

2. This is the 2nd defendant's appeal against that order.

The History

3. The plaintiff is a bank incorporated in PRC carrying on business through a branch office in Hong Kong. Centresign Company Limited ("Centresign") and the 2nd defendant were at all material times customers of the plaintiff's Hong Kong branch office. Both customers were granted general banking facilities. Those afforded the 2nd defendant included a letter of credit facility up to a specified level which incorporated a trust receipt facility. Part of the accommodation to Centresign was secured by a legal charge in favour of the plaintiff over a house property it was the owner of, being House A9, Beaulieu Peninsula, Tuen Mun ("Beaulieu").

4. Both customers defaulted. The plaintiff gave notice that it proposed to exercise its power of sale in the legal charge and sell Beaulieu. By agreement of the plaintiff, Centresign and the 2nd defendant, it was agreed that the sale proceeds of Beaulieu would be credited in reduction of the 2nd defendant's indebtedness to the plaintiff, not that of Centresign.

5. In October 1999 Beaulieu was sold for $13 million. Following completion in December, the plaintiff credited the 2nd defendant's account with $12, 685,490.00, being the sale price less the sum of $314,510.00 stated to be the costs of the sale.

6. The parties being in dispute as to the balance of the 2nd defendant's indebtedness, the plaintiff issued a writ in March 2000.

The Plaintiff's Claim

7. Making the assumption for the moment that the credit to which I have referred is a proper calculation, not admitted as I shall come to, the balance principal due by the 2nd defendant to the plaintiff as at 16 August 2000 comprised two outstanding amounts, namely, HK$111,973.78 and US$874,520.20. The plaintiff claims these amounts. It further claims the following:-

(1) interest on the HKD principal at 6.7% over prime as at 16 August 2000, being HK$16,385.29;

(2) interest from 17 August 2000 at the same rate until payment;

(3) interest on the USD principal at 6.7% over prime as at 16 August 2000 being US$145,650.58;

(4) interest from 17 August 2000 at the same rate until payment;

(5) an insurance premium, custody fee and handling charge of HK$23,500.00;

(6) a solicitor's fee of $51,699.30.

The Defence

8. The 2nd defendant says:-

(1) Beaulieu was sold too cheaply, in breach of an implied obligation by the plaintiff to sell at market value; thus the credit referred to is not a proper calculation and the quantum of the balance indebtedness outstanding is not accepted;

(2) the default interest of 6.7% over prime is an excessive rate, is not a pre-estimate of damages and should be struck down as a penalty;

(3) the plaintiff has failed to give an account of or otherwise justify the expenditure of $314,510.00 which is thus challenged;

(4) the solicitors' costs of $51,699.30 are part of the overall costs of the action. To itemize them amounts to a double claim;

(5) it does not challenge the claim for $23,500.00.

The Registrar's Order

9. The above issues were argued before the Registrar. Following that he rejected the 2nd defendant's challenge to the propriety of the Beaulieu sale but was satisfied it had a defence to argue the claims for the costs of $51,699.30 and $314,510.00 and the default interest rate. He entered judgment for the sums of HK$135,473.78 and US$874,520.20 minus the sum of $314,510.00, and gave unconditional leave for the defence of the remainder. He reserved costs.

The Appeal

10. Counsel for the 2nd defendant, Mr Mok, argued that the judgment should not stand because the plaintiff owed a duty to the 2nd defendant to sell Beaulieu at a proper price and there is an arguable case it did not. He further submitted the Registrar was right to allow the issue of the default rate of interest to go to trial because the rate was extortionist and should not stand.

11. Mr Tze for the plaintiff countered that any duty of care that it owed in the sale of Beaulieu was to its mortgagor Centresign and not the 2nd defendant which was not a party to the charge. In any event, it did sell Beaulieu at a proper price as evidenced by contemporaneous valuations of Beaulieu. On the issue of default interest, he submitted that the rate charged was a usual and proper one and that the judgment entered should provide for that as well. He conceded that the matters of costs of sale and of the action should be reserved for trial.

The Issues

12. The plaintiff invites me to uphold the Registrar's entry of judgment but incorporating an enhanced amount for interest to date. The 2nd defendant asks that I allow its appeal, rescind the judgment and give it unconditional leave to defend.

13. There are two issues: the propriety of the Beaulieu sale and the level of default interest charged.

The Sale of Beaulieu

14. The plaintiff's case that it owed no particular duty to the 2nd defendant to sell Beaulieu at a proper price derives from the fact that it was Centresign, not the 2nd defendant, which was the mortgagor, to which alone the duty of care to be exercised by a mortgagee in the conduct of its sale of the property is owed. It relies on the Privy Council case of China and South Sea Bank Ltd v Tan [1989] 3 ALL ER 839.

15. In that case the surety of a secured loan claimed that he was owed a duty of care by the mortgagee which was in breach of that duty because it failed to exercise its power of sale to sell the security when it had value. As events transpired, the security became valueless and the mortgagee turned to the surety to recover the debt in full from him. The surety failed to establish he was owed a duty of care.

16. Lord Templeman said at page 842:-

"... The creditor had three sources of repayment. The creditor could sue the debtor, sell the mortgage securities or sue the surety. All these remedies could be exercised at any time or times simultaneously or contemporaneously or successively or not at all. If the creditor chose to sue the surety and not pursue any other remedy, the creditor on being paid in full was bound to assign the mortgage securities to the surety. If the creditor chose to exercise his power of sale over the mortgage security he must sell for the current market value but the creditor must decide in his own interest if and when he should sell. The creditor does not become a trustee of the mortgaged securities and the power of sale for the surety unless and until the creditor is paid in full and the surety, having paid the whole of the debt is entitled to a transfer of the mortgaged securities to procure recovery of the whole or part of the sum he has paid to the creditor."

17. Mr Tze argued that in these proceedings, the case of the plaintiff, coincidentally the same mortgagee bank, is even stronger; the 2nd defendant not being a party was one step further removed from the mortgage than was the surety who was a party.

18. It seems to me, however, that there might well be an argument that distinguishes Tan's case from this one. By agreement, however informal, the 2nd defendant stepped into the shoes of Centresign to the extent of being the sole beneficiary of the sale proceeds in reduction of its indebtedness to the plaintiff. It might be argued that impliedly the mortgagee's duty owed to the mortgagor did not, as the plaintiff would have it, disappear, but was transferred to the 2nd defendant as a term of the agreement. Moreover, Tan's case is authority for the proposition that a mortgagee with options available for recovery of the debt is entitled to pick and choose how and when he pursues the recovery. But having decided to sell the security he must do that at the then current value.

19. These are, I believe, triable issues.

20. Mr Tze submitted that even if there was a duty of care the plaintiff had discharged this. The sale price achieved, in a sale made in October 1999, was $13 million. He referred to an affidavit filed in evidence made by a Mr Cheuk Siu Chow, an officer of the plaintiff with conduct of the case. In answer to the 2nd defendant's allegation that Beaulieu was sold at below value, he said:-

"16. The Defence of the 2nd Defendant is not supported by any evidence. On the contrary, the Plaintiff has obtained evidence before the sale of the Property. It has been the Plaintiff's established practice pending sale to obtain a valuation report regarding the property to be sold as to ascertain its market value.

(i) In accordance with its usual practice, the Plaintiff did, before the sale of the Property, instruct a property consultant, Chesterton Petty Limited, to prepare a valuation report of the Property. The said report dated 23 December 1999, prepared upon the Plaintiff's instruction, indicates that as at 16 October 1999, the open market value of the Property was HK$13,000,000.00, which is identical to the sale price of the Property by the Plaintiff. There is now shown and produced to me marked 'CSC-3' a copy of the said valuation report.

(ii) By another valuation report dated 8th January 2000 prepared by Centaline Surveyors Limited for the Plaintiff regarding the Property, it indicates that the open market value of the Property as at 22nd October 1999 was only HK$11,000,000.00. This value is even lesser than the sale price by the Plaintiff, namely HK$13,000,000.00; in other words, the Plaintiff managed to have sold the Property at a price even higher than the market value. There is now shown and produced to me marked 'CSC-4' a copy of the said valuation report."

21. Curiously, the Chesterton Petty report exhibited was not prepared before the sale, for it is dated December 1999, some two months later. Perhaps the sale price had a bearing on the valuation rather than the other way round. Be that as it may, the 2nd defendant in an affidavit prepared by its company secretary produced a third valuation dated September 2000 but dealing with values as at the previous October. The figure quoted is $19.9 million. Who is right? In my view, the disparity is such that, without the advantage of testing the veracity of the reports by cross-examination of their authors, it cannot be said that the plaintiff did sell at a proper price.

22. This is another triable issue.

The Default Interest

23. The plaintiff's facility letter which set out the conditions of loan quoted the rate of interest for up to 90 days' credit at prime plus 0.5% and for credit in excess of 90 days at prime plus 1.5%. There is no recorded specified rate if there is default. Instead there is the following:-

"All sums due but unpaid will bear overdue interest at such higher interest rate in accordance with our usual practice until payment in full ..."

24. It is the plaintiff's case that its usual practice is to charge a default rate of interest up to 6.7% above prime. It produced a document headed:- "The China and South Sea Bank Limited, Hong Kong Branch. Terms and Conditions for Bills Transactions and Trade Finance (1994)." In this document the maximum default rate of 6.7% above prime is spelt out. It says that at some stage, as part of its usual practice, it would have sent a copy of these terms and conditions to the 2nd defendant as a customer engaged in this form of borrowing.

25. It is the defence case that there is no evidence as to when this might have been and, in particular, nothing to suggest it was intended to form part of the terms and conditions of the banking facilities the plaintiff contracted to provide the 2nd defendant. And it points to evidence it has produced that the rate is excessive compared with default rates charged by other banks in Hong Kong.

26. In Lordsvale Finance PLC v Bank of Zambia [1996] 3 WLR 688, it was held that there was no reason that a contractual provision to increase the rate of interest on default should be struck down as a penalty if the interest could in the circumstances be explained as commercially justifiable; in that case it was held that a 1% surcharge was justifiable, recognizing the increased credit risk represented by a borrower in default.

27. Colman J said at p. 702:-

"I say nothing about exceptionally large increases. In such cases it may be possible to deduce that the dominant function is in terrorem the borrower. But nobody could seriously suggest that a 1% rate increase could be such."

28. In this case the plaintiff has two hurdles to surmount. The first is to establish that there was a contractual entitlement to charge up to 6.7% above prime and then, if there was, whether that hike of 5.2% (or 6.2%) is commercially justifiable.

29. In my view these also are triable issues.

The Consequences

30. For reasons given I agree with the Registrar's decision that there is a defence on the issue of the default interest rate but, with respect, depart from his finding that there is no defence in respect of that part of the claim in which he entered judgment.

31. Accordingly, I allow the appeal and rescind the order of 26 April 2001. The 2nd defendant is given unconditional leave to defend the claim.

32. Costs, nisi at first instance, both here and below, are to be in the cause.