TRXXAN INDUSTRIES LTD AND ANOTHER v. TEXXAN WAREHOUSE CO LTD

1990, No. A2410

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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JUDGMENT

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Hunter, JA :

1. I have before me two summonses both taken out by the plaintiffs. The first is an inter partes summons dated 17th April which asks first in effect for an order that a quantity of stock be delivered up into the safe keeping of a firm called "Henry Butcher" as bailees; second or alternatively that the ex parte injunction order granted by Bokhary J on 12th April 1990 be continued.  That order restrained the defendant until the disposal of the inter partes summons from "selling, charging, pledging or in any way dealing in or with the goods held in the name of the plaintiffs. The second summons invites the court to order, that the plaintiffs to be at liberty to sell these goods and upon the terms that upon such sale a sum of $5.569 million be paid into the court.

2. I therefore have the somewhat curious position that both parties are trying to sell the goods. The defendant would have sold them already but for the ex parte injunction. The plaintiffs now wish to sell them by a different method. The issue really is method of sale. The plaintiffs are concerned that these goods are realised at their full value, and the say that that would only happen if the goods were sold in a particular way, involving advertising of the goods outside Hong Kong and the staging of the sale over more than one day to try to avoid the deprivations of Hong Kong "rings" among the potential buyers. Up to that point I do not suppose that the defendant would have much objection. The real problem is the proceeds.  The defendant is desperately anxious to recover the monies that it says are owing to it and does not want the sale postponed.   The liquidator as the purchase price, as it were, of the postponement for his more complicated sales can put up no more than $1 million. So the parties may not appear to be very far apart, but one sees actually a substantial gap between them.  I therefore have to determine as a hard question of law, fact and discretion which of these two orders should be made.  That means that I have to determine first of all whether the sale which the defendant, was in the course of mounting before restrained by Bokhary J should take place or not.

3. With that preamble, I return to the background. Both the plaintiffs companies were carrying on a textile business which involved them in carrying very substantial stocks of material. These stocks they warehoused with the defendant. There were associations between the two companies. The plaintiffs got themselves into serious financial difficulty and went into liquidation, creditors' voluntary liquidation, both in April of this year, and the statement of the affairs shows a massive deficit. At that time the defendant asserted that there were considerable warehousing charges outstanding, a sum of $5.569 million, which was named in the plaintiff's second summons. That indebtedness goes back to 1988.  The apparent explanation is that when the plaintiffs' companies were trading successfully, the accounting processes were somewhat lax and substantial balances were built up.

4. The goods were kept at the start of this story in two godowns. One was on Tsing Yi Island, and the confusion as between the companies extended to that lease.  This was renewed as recently as January 1990 in the name of the first plaintiff, but it was asserted by the defendant that for sometime it had been paying the rental to the landlord, and that had happened to the landlord's knowledge.  This led to proceedings being brought by the landlord against both the 1st plaintiff and the defendant for arrears of rent and possession.  Mercifully those proceedings have been settled by a consent order, the most significant part of which is that the premises are being returned to the landlord vacant today. All the goods in them are being taken out and moved to the second godown. The really significant feature is that the threat of distress by the landlord on these goods has mercifully been removed.

5. The second godown is at Kwai Chung.  That is rented by the defendant.  The defendant says that it is very substantially in arrears of rent, figures of $5 and $6 million have been referred to in evidence.  There may be other risks to the possession of both the landlord and to the defendant to these premises, from what I have just been told in the course of the afternoon.  For the reasons I then gave, I cannot take those into consideration.  The position will probably be at the end of today that the whole of these goods will be in the Kwai Chung godown.

6. During this long course of dealing between the plaintiffs and the defendant company, the goods were stored under the terms of godown warrants issued by the defendant.  Those godown warrants record the terms and conditions of storage. One of these terms and conditions, condition 6 which deals with payment, says that the payment should be made monthly and more particularly goes on

This, it is said, gives the warehouseman an express contractual right to sell to recover unpaid storage charges.  It is common ground that in the absence of that express power a warehouseman has no implied power of sale.

7. On 30th March the warehouseman gave notice of an intention to sell on the basis that this figure of unpaid warehouse charges of $5.569 million was unpaid.  Thereafter nothing was in fact paid or tendered, but on 12 April application was made ex parte on notice to Bokhary J. He then made the restraining order, to which I have already referred, which was to be effective until the disposal of the inter partes summons which was ordered to be taken out at the same time.

8. On the same day a writ was issued which makes basically two claims.   Having recited that the defendant is in possession of a large quantity of goods, the property of the plaintiffs, it says first that the defendant had threatened to sell and asserts that that act of sale would be an act of conversion.  Secondly, it asserts that the defendant is wrongfully detaining and still detains the goods.  The claim is for delivery and damages for conversion and damages for detention.  The answer which the defendant wish to assert to the claim in conversion is that this is a power of sale given to it by the express terms of the contract.  As to the claim for delivery up, I do not understand it, because in any event this warehouseman must enjoy a lien in respect of these goods and there has been no tender of any sort or any attempt to get rid of that lien. That order having been made, the inter partes summons in the terms I have already alluded to and the subsequent summons was taken out.

9. It seems to me now that I must deal first with the question as to whether it is right further to restrain the proposed sale of the defendant, or in other words to continue Bokhary J's order.  Only if the answer to that question is yes, do I reach the question as to whether or not the court can order a sale as proposed by the plaintiffs? I entirely accept that if the court were minded to order a sale under O29 r4, it could impose conditions upon the sale and regulate the sale in a way which it could not do the other way round.  That may at first blush appear attractive. I do not believe that is really the question before me. I have to answer the cold question first of all : what is the basis for the court restraining the sale which the defendant wishes to carry out?

10. Here there is no issue but that the basic facts asserted by the defendant are correct.  These goods have been warehoused with it in large quantities. Whether the sum due is $5 million or some less a sum is in dispute, because the liquidator for the two companies says that he has had insufficient time to investigate. But that some substantial sum is or must be due is plain. It has given notice which it is entitled to do under the terms of the godown warrant. Under those terms it is proposing to exercise the power of sale. On what basis can the court interfere with that apparent exercise of contractual rights?

11. The first objection is that having investigated the matter, the liquidator has discovered that a substantial number of the godown warrants have not been sealed by the company. The godown warrant says on its face .

"Important: This warrant is not valid unless sealed. And the above cargo can be delivered against this warrant or under a delivery order, the company is only responsible for undelivered packages".

This reference to sealing is repeated under the heading "remarks". The suggestion is that these unsealed godown warrants are therefore, invalid.  That invalidity extends to the defeat the power of sale in relation to the goods the warehousing of which is evidenced by that particular warrant.

12. Not so, says Mr Ching. One of the main purposes of the godown warrant is to operate as a document of title, to enable owners of the goods to transfer the ownership of those goods either permanently or temporarily to a bank as security for money, and to enable the holder of that warrant, if it is properly endorsed, to claim delivery of goods.  It is the validity of the warrant in that context, which is affected by lack of sealing.  This construction of the terms of conditions seems to me to be supported by what one finds in conditions 7 and 11.  Further, he submits, the invalidity of the warrant in no way negatives the terms and conditions of storage recorded on that warrant.   They are the terms and conditions which apply given that a warrant may be invalid for lack of sealing.  It matters not. There is still an effective bailment on the terms and conditions shown on that document. This is what the document show. This is evidenced by the total course of dealing between the parties. Therefore the fact that some of these warrants may or may not have been sealed is neither here nor there, and does not affect the validity of the power of sale.

13. I am bound to say, I think, that argument is convincing. I further have considerable doubts as to whether the prospect that some of these warrants may be invalid is of itself sufficient to justify the court in interfering by way of injunction. I am very far from sure that if there is an act of conversion, and if a full value is then obtained and goes to the warehouseman in satisfaction of his charges, any damage would be suffered by the company.  I do not put my decision upon the second point but upon the first. It seems to me that here you have terms and conditions of storage which operate independently as to whether the godown warrant as such is valid or invalid by reason of any sealing.

14. Secondly, it is said that there is a dispute as to the amount. Mr Whitehead for the liquidator relies upon the well-known decision in Albermarle Supply Co Ltd v Hind & Co [1928] KB p 307 in dealing with an owner's position when faced with a warehouseman's or repairer's lien.  The material passage in the judgment of Scrutton LJ starts at p 318. It seems to me that case gives him no comfort here for a number of reasons.  This is not a case of enforcement of lien as such or of any question of tender.  There has been no tender of any sort. This is a case of a warehouseman seeking for rely upon an express provision in his contract which says that provision operates if the charges are unpaid for three months. As I see it, the only way that the owner can stop the exercise of that right is to put up the sum which the warehouseman is claiming as the charge, and dispute the payment later on. He cannot postpone the sale or object to it on the basis that he has not had a chance of checking the amount.

15. Secondly, it seems to me here that the liquidator can be in no better position than the owners, the two companies, that entered into these warehousing contracts. It may be much more difficult for him, as liquidator and having regard to his duties as liquidator, to ascertain the  facts to his satisfaction. It seems to me the companies were provided with ample information by this defendant simply upon the documentation that I have seen. They can have been in no doubt whatever as to the nature of the charges being claimed.

16. Thirdly, as I have said, we have no tender or demand.  This is a simple claim in detention without any such allegation. So I do not see that there is anything in a disputed amount to justify interference with the sale.

17. The third point which is taken is that the sale has been threatened at an undervalue. This comes back to the differences between the sale apparently proposed by the defendant from that which the plaintiffs would like to see. The two main differences are: one, that the plaintiffs want the goods to be advertised internationally and not simply at Hong Kong.   Secondly, the plaintiffs want the sale not only to be by lots but to be staggered over more than one day to avoid, as I said, the insidious influence of Hong Kong "rings" having regard to the very large quantity of goods, and the great danger that the true price may be distorted simply by the quantities.

18. The plaintiffs' problem about that seems to be this.  The defendant is not asserting any intention to sell at an under value.  He is simply trying to sell by public auction which is what the contract entitles him to do, and to sell by public auction in Hong Kong. The defendant knows perfectly well, and will be so advised, that he owes the duty which the law imposes upon the mortgagees which is enshrined in the case of Cuckmere Brick v Mutual Finance (1971) 1 Ch 494. The duty is to take reasonable steps to get the true market value. That duty extends to setting up a properly planned and structured sale. Further than that this court cannot go in tying the method of sale chosen either by a mortgagee or a warehouseman with a power of sale in circumstances like this.

19. So I ask myself are there good grounds for restraining this proposed sale by the defendant? If you like to put in Ethicon terms: is there a serious question to be tried? It seems to me that the answer no. There is no arguable basis that I can see for interfering with the exercise by this warehouseman of his contractual right. I think if I were to reach the balance of convenience, which having regard to that finding, I do not, I cannot likewise see any reason for increasing the risk of distraint by the landlord on the Kwai Chung godown having regard to the very large sums of money which are owing by way of rent. I note the strictures Mr whitehead directed to the lack of clear evidence as to lack of means, and there is some force in that. But when you are told that there is a claim for $5.5 million of warehouse charges and a similar sum owing by way of rental, it is not, I think, difficult to associate the two.

20. It seems to me in those circumstances that the answer to the first question as to whether or not Bokhary J's order should be renewed today, because it lapses now unless I renew it, is that it should not. This court should not be doing anything more to restrain that sale. In those circumstances the question raised by the other aspects of the plaintiff's summonses do not arise and I need say nothing about them. So as far as both summonses are concerned, I think the short answer is no order on either.

21. I am now asked by the plaintiffs to grant an interim order by way of injunction pending an appeal, with appropriate conditions about putting in the notice in proper time and pursuing the appea with expedition. I thus find myself in a slightly unusual situation. I accept that there is an unqualified right of appeal from an interlocutory decision notwithstanding the problems of appeals from the exercise of a judge's discretion. I am aware that I should be doing nothing to render that appeal nugatory. But I am bound to say that I have had really no shadow of doubt as to what my order should be and indeed had to be today. In those circumstances I think it would be somewhat hypocritical having given the judgement the way I have, now to grant any interim order. I think that I must leave the plaintiffs when they have put in their notice of appeal, to try for better luck before one of my colleagues.