HANG SENG BANK LTD v. PERFECTA DYEING, PRINTING & WEAVING WORKS LTD AND OTHERS

HCMP 1375/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 1375 OF 2008

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REASONS  FOR  JUDGMENT

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1.  I have given judgment in favour of the plaintiff on 4 February 2009.  I now give my reasons.  The plaintiff has issued an originating summons to enforce four mortgages and eight guarantees against the five Defendants.  The 1st defendant has entered into two mortgages with the plaintiff in respect of two properties in return for credit facilities to it.  The 2nd defendant has entered into another two mortgages with the plaintiff in respect of another two properties also in return for credit facilities for the 1st defendant.  Each of the 2nd, 3rd, 4th and 5th defendants has give a number of guarantees in favour of the plaintiff to secure credit facilities for the 1st defendant.  The cumulative maximum of the guarantees for each of the 2nd to 4th defendants is HK$250 million.  On 23 May 2008, the plaintiff demanded the defendants to repay all outstanding loans, credit facilities and interest owed by the 1st defendant.  The defendants have not made any repayment.  The plaintiff then instituted these proceedings for orders for possession of the mortgaged properties and payment of the outstanding sums with interests.

2.  The loans and facilities were advanced to the 1st defendant pursuant to a facility letter issued by the plaintiff and dated 4 February 2008.  One of the loans was also subject to the terms of an earlier facility letter dated 27 March 2006.  All five defendants have signed the two letters to signify their agreements with the terms therein.  These loans and facilities together with interests accrued to HK$231,624,585.46 as at 12 September 2009.  Further interests have been accruing since then.

3.  In making this claim, the plaintiff primarily relies on its overriding right to demand repayment from the 1st defendant.  The plaintiff said that this right could be exercised at any time at its sole discretion.  It is contained in the facility letter of 4 February 2008.  It reads:

“The Facilities are subject to review at any time and also subject to the Bank’s overriding right of withdrawal and repayment on demand, including the right to call for cash cover on demand for prospective and contingent liabilities.  Notwithstanding anything contained in this letter, the Bank shall not be bound to make any advance or grant any of the Facilities at all or beyond such sum as the Bank may in its sole discretion consider safe without prior notice to or consent from the Borrower.”

The facility letter dated 27 March 2006 contained similar terms.

4.  The plaintiff submitted that once the demand for payment was not met by the 1st defendant, an event of default immediately arose under the four mortgages.  The plaintiff is thus entitled to orders for possession of the four properties.  For the 1st mortgage, the event of default and the plaintiff’s power upon the happening of such event is contained in clauses 5 and 6.  They provide:

“EVENTS OF DEFAULT

5.01    It is hereby agreed and declared that if:-

(a)   the Borrower makes default in the payment of the Secured Indebtedness or any part thereof following demand duly made;

6.01    If any Event of Default shall have occurred then it shall be lawful for the Lender at any time thereafter without any consent on the part of the Borrower or of any person to:-

(a)   enter into and upon and take possession of the Property and for that purpose to take any legal proceedings and thenceforth to hold, possess and enjoy the Property and to receive the rents and profits thereof without any lawful interruption or disturbance by the Borrower or any other person.”

The other three mortgages have similar terms as these save that the two mortgages of the 2nd defendant also included default of the 2nd defendant for an event of default to arise.

5.  In the event of default by the 1st defendant to repay upon demand, the 2nd to 4th defendants would also become liable to pay under their guarantees.

6.  In addition to the overriding right to demand repayment, the plaintiff also relies on the commission of other alleged events of default by the 1st and 2nd defendants under the mortgages.  They are defined in clauses 5.01(c), (g) and (i) of the mortgages:

“(c)      there shall be any breach of or omission by the Borrower to observe any of the agreements, covenants or obligations under this Charge; or

…

(g)       (if applicable) the Borrower shall become bankrupt or otherwise become insolvent or make any arrangement or composition with the Borrower’s creditors; or

…

(i)                the Borrower shall without the consent in writing of the Lender stop payment to creditors generally … or (if applicable) shall be deemed, for the purposes of Section 178 of the Companies Ordinance or any statutory modification or re-enactment thereof for the time being in force, to be unable to pay its debts or disposes or threatens to dispose of the whole or a substantial part of its undertaking or assets; or

… 

then and in any such case the Borrower will notify the Lender forthwith in writing of the occurrence of such event and regardless of whether notice of such event has or has not been given by the Borrower to the Lender as required above, an Event of Default shall have occurred.”

7.  The plaintiff said that there were the following events of default:

“(a)      the 1st Defendant was in default of repaying the overdue outstanding balance on respective dates as follows:-

(1)     on 9th May 2008, a sum of HK$96,350.00 under the packing credit account; and

(2)     15th May 2008, a sum of HK$566,000.00 under the packing credit account.

(b)       On 20th May 2008, Dah Sing Bank Ltd. issued a writ against the 1st, 2nd and 3rd Defendants claiming for the sums of HK$10,921,461.22 and US$29,415.69.”

The grounds of defence

8.  The Defendants resist this claim.  They said that it was unconscionable for the plaintiff to have exercised the overriding right of demand.  They also denied any event of default.

9.  In fact, the 1st Defendant has on 11 July 2008 instituted an action in HCA 1021 of 2008 against the plaintiff.  The grounds in that action are repeated here as grounds of defence.  These grounds are a collateral agreement, misrepresentations and an implied term as discussed below.  These grounds are also repeated in an affirmation of the 3rd defendant which was put in on 2 February 2009. 

10.  The 3rd defendant referred to a breakfast meeting he had with various officers of the plaintiff on 7 January 2008.  He said that the plaintiff was eager to become the 1st defendant’s principal banker.  One Mr Benny Pang of the plaintiff emphasised that the plaintiff would provide a much more flexible approach towards granting facilities to the 1st defendant.  That would assist the 1st defendant to further its business.  The 3rd defendant further referred to another meeting in paragraph 5 of his affirmation.  He said:

“5.         Regarding the meeting on 17^th of January 2008 … I also specifically requested at the said meeting that the Plaintiff would grant the 1^st Defendant in term of total banking facilities i.e. around $270 million.  Benny Pang agreed for on behalf of the Plaintiff to the said proposal.  It was also agreed that the banking facilities would be available before the end of January 2008.  Because of the delay by the Plaintiff’s Credit Department in approving the said banking facilities Benny Pang then made it clear that in order to expedite the granting of such facilities the requested facilities would be limited to 230 to 240 million and as Vice President of the Plaintiff he had the power to grant the extra 30 million loan.  After the granting of banking facilities I chased after Benny Pang and his staff for the said loan of $30 million but the staffs of the Plaintiff just tried to delay the matter and the said loan was never advanced to the 1^st Defendant.”

11.  Based on these allegations, the 1st defendant pleaded in HCA 1021 a collateral agreement to the loan agreement between the plaintiff and the 1st defendant as follows:

“11.    In the same meeting, the representatives of the [Plaintiff], in order to convince the [Defendant] that the [Plaintiff] was a better principal banker to the [Defendant] than the Standard chartered Bank and other banks, and in consideration of the [Defendant’s] agreement to enter into the loan agreement as set forth and proposed by the [Plaintiff], had orally agreed, for and on behalf of the [Plaintiff], the followings (‘the collateral agreement’):

a)      the [Plaintiff] would be far more supportive and flexible than the Standard Chartered Bank and other banks when the [Defendant] was in time of difficulties and needs;

b)      the [Plaintiff] would advance to the [Defendant], on the securities agreed to be pledged under the loan, an additional term loan of HK$30 millions within 2 months from the closing of the loan.”

12.  The 1st defendant further pleaded that these terms of the alleged collateral agreement also amounted to representations by the plaintiff herein and they had become terms of the loan agreement.

13.  The 1st defendant also pleaded that there was an implied term of the loan agreement that the plaintiff would not unreasonably demand repayment by the 1st defendant of the indebtedness in particular the term loan.

14.  The 1st defendant also pleaded that the plaintiff had on 20 May 2008 wrongfully refused to clear two cheques drawn by the 1st defendant on its current account when there was sufficient credit in the account.  As a result, the 1st defendant suffered loss and damage.

15.  Furthermore, the 1st defendant had found a tenant for one of the mortgaged properties, but the plaintiff refused consent for letting without any valid reason. 

16.  The 1st defendant further pleaded that the above conduct and the demand by the plaintiff for repayment by the 1st defendant constituted a breach of the collateral agreement and/or the implied term or made the representations false.

17.  Finally, the 3rd defendant also alleged that the Vice-Chairman and Chief Executive of the plaintiff had promised the 1st defendant that the plaintiff would be most supportive to the 1st defendant and would be the last bank to sue the 1st defendant.  This allegation was not pleaded in HCA 1021 and was not relied upon by the defendants at the hearing.  I think the defendants were sensible in not relying on it, because the 1st defendant had in fact sued the plaintiff on 11 July 2008 before the plaintiff had commenced these proceedings on 23 July 2008.

18.  The plaintiff submits that none of the grounds of defence herein or the claims made by the 1st defendant in HCA 1021 can stop the plaintiff from obtaining the relief it prayed for in these proceedings.

The collateral agreement

19.  There are two elements in the alleged collateral agreement, namely the plaintiff would be far more supportive and flexible to the 1st defendant than other banks and the plaintiff would advance to the defendant another HK$30 million within two months from the closing of the loan.

20.  Regarding the 1st element, the plaintiff has made a number of arguments including a suggestion that the allegation is unbelievable.  I agree with the plaintiff that this part of the alleged collateral agreement is too vague and uncertain to be enforceable.  Chitty on Contracts, 13th edition, para.2-139 reads:

“Requirement of certainty.  An agreement may lack contractual force because it is so vague or uncertain that no definite meaning can be given to it without adding further terms.  For example, in G. Scammell & Nephew Ltd v Ouston, the House of Lords held that an agreement to acquire goods ‘on hire-purchase’ was too vague to be enforced since there were many kinds of hire-purchase agreements in widely different terms, so that it was impossible to specify the terms on which the parties had agreed. …”

21.  It is indeed difficult to determine how the plaintiff should perform a term of “far more supportive and flexible than other banks” or to judge whether the term has been breached.  I do not think an exercise by the plaintiff of the rights expressly provided for in the main agreement, like the overriding right to demand payment, would amount to a breach of this term.  I therefore hold that this term, even if it were there, has no contractual force and cannot be enforced.

22.  Regarding the 2nd element of the collateral contract that the plaintiff would advance another HK$30 million within two months from the closing of the loan, it is just an allegation by the defendants without any documentary support.  If the bank should have so agreed, it would have been recorded in writing.

23.  Nevertheless, even if the plaintiff should have agreed to advance a further HK$30 million to the 1st defendant, the plaintiff was at liberty not to honour this promise by exercising its overriding right of withdrawal or its right not to advance the extra HK$30 millions under the terms of the facility letter quoted above.  Furthermore, the facility letter also stated that the facilities were made available on terms set out in the plaintiff’s Standard Terms and Conditions for Banking Facilities.  Condition 2.1 of which stated:

“The Bank reserves the right to terminate any offer of facilities set out in the Facility Letter by notice to the Borrower without giving any reason and the Borrower shall not be entitled to claim any damages or compensation for such termination from the Bank.”

Hence, the plaintiff can at any time withdraw any offer of facilities pursuant to this clause.

24.  For these reasons, I also hold that this 2nd part of the alleged collateral contract unenforceable, even if it were there.  It cannot stop the plaintiff from seeking the relief prayed herein.

The misrepresentations

25.  For the same reasons given for the two limbs of the collateral agreement, I also hold that the defendants cannot rely on the alleged misrepresentations which are based on the same factual allegations.

26.  I will deal with the implied term together with the plaintiff’s overriding right of demand below.

The events of default 

27.  The 3rd defendant in his affirmation maintained that there was no event of default.  He said those two occasions of default were caused by the failure of the letter of credit issuing banks to make payment on the maturity of the letter of credit.  He said previously when there was such default, the plaintiff would inform the 1st defendant about it at the end of the month by the issue of a “Bills Statement”.  The 1st defendant, after receiving notice of default through the “Bills Statement”, would contact the plaintiff to discuss the method of payment.  The default would either be made good by debiting the 1st defendant’s current account or by set-off against funds from other letters of credit issued to the 1st defendant.  However, for the two instances relied on by the plaintiff, there was no notice of “default” given by the plaintiff.  The 1st defendant thus denies that they were events of default.

28.  Such allegation may sound tenuous as I doubt if the 1st defendant would have been contented with notice of non-payment of letter of credit to be given to it only at the end of the month.  For non-payment of letter of credit, normally there would be prior notice of it by way of non-acceptance of documents on the ground of discrepancy or otherwise.  A collecting bank would in the normal course of events immediately advise their client upon receipt of such notice.  The client would therefore know that payment for the letter of credit may not be forthcoming. 

29.  However, the allegation by the 3rd defendant was only put in on the day before the hearing and the plaintiff was not given any opportunity to respond to it unless the hearing was adjourned.  In the end, the hearing was not adjourned and the plaintiff had to live with this allegation.  I therefore reluctantly hold that the existence of events of default is a triable issue.

30.  There is in fact a third alleged event of default by reason of a writ issued by another bank against the 1st, 2nd and 3rd defendants on 20 May 2008.  That writ was withdrawn on 23 May 2008 and I doubt if that would constitute an event of default.  I would therefore not give judgment to the plaintiff on the ground of events of default.

The dishonoured cheques 

31.  The two dishonoured cheques are related to the alleged events of default.  The 3rd defendant said in his affirmation that there was sufficient credit in the current account to meet the cheques.  He alleged that the plaintiff had, without notice to the 1st defendant, wrongly utilized the credit to set-off parts of the two defaults above-mentioned as caused by letters of credit.  The 1st defendant wants to hold the plaintiff liable for the consequence of non-payment.  The cheques were for HK$10,912 and HK$52,410.  There is no evidence of their purpose or what loss did the 1st defendant suffer as a result of their non-payment.  I would therefore not allow this claim to be an obstacle to the plaintiff’s application.  The 1st defendant may continue with this claim in HCA 1012.

Refusal of consent for letting

32.  Regarding the withholding of consent by the plaintiff for the proposed letting of a mortgage property, that happened in July 2008 and was long after the plaintiff’s demand for repayment and for possession of the properties.  If the plaintiff was entitled to make the demand for possession, nothing can be said about its withholding consent as it was entitled not to have the property tenanted which could adversely affect the subsequent disposal by it.

Overriding right to demand and the alleged implied term

33.  I now deal with the most important point, namely the plaintiff’s overriding right to demand repayment and also the defendant’s alleged implied term.  The plaintiff relies on the decision of Hong Kong and Shanghai Banking Corporation Ltd v Ling Lee Kang & Anor [2001] 3 HKLRD 255 where Deputy High Court Judge Longley considered a similar clause in a facility letter issued by the plaintiff in that case.  After reviewing several decisions, the learned Judge took the view that it was unarguable that the provision for overriding right to demand payment was repugnant to the other terms of the facility letter.  He also said that there was no inconsistency between a term loan, which both parties anticipate would last the duration of the term, and the lender retaining a right to call for repayment at any time on demand.  He also cited the judgment of Kempster J in Lloyds Bank International Ltd v Dericourt Investments Ltd [1983] HKLR 409 at 413I to 414A:

“Looking at the document from the point of view of a potential borrower possessed of normal business acumen and expertise and no more it is, in my view, to be construed as an offer of a term loan, or of the continued loan for a term of monies already advanced, subject to conditions one of which reserves to the plaintiffs the right at all times and at their sole discretion to call it in.  The intending borrowers would be aware that it was the lenders’ present intention, without guarantee as to the future, that the loan should run for some 7 years.  Making a commercial judgment they expressly accepted loans on these terms with all the attendant risks.”

34.  I agree with the views of both judges.  There is also no default clause in the plaintiff’s facility letters.  I hold that the plaintiff was entitled to exercise its overriding right to demand repayment of all debts and facilities from the 1st defendant at its sole discretion at any time.

35.  Regarding the implied term alleged by the defendants that the plaintiff would not unreasonably demand repayment by the 1st defendant in particular the term loan, such term seeks to contradict the express term of overriding right.  It is not permissible for an implied term to contradict an express term.  This term cannot be implied.

Unconscionableconduct

36.  Having come to the view above, I now deal with the defendant’s argument that it was unconscionable for the plaintiff to have made the demand.  The defendants seem to be saying that at the time when the plaintiff made the demand, the plaintiff had security of a total value of HK$310 million whilst the total debt was only HK$230 million.  The defendants also suggested that the plaintiff was unhappy about the 1st defendant’s refusal to execute a charge on deposit in respect of a HK$19.7 million time deposit maintained with the plaintiff.  The charge was supposed to secure to the plaintiff’s Guangzhou Branch the repayment of HK$20,000,000 from the 4th defendant.  The defendants seem to suggest that the demand for repayment by the 1st defendant somehow was related to this incident.

37.  For what amounts to unconscionable conduct, I refer to para. 7-132 of Chitty on Contracts, 13th edition:

“7-132          Unconscionable conduct.  A contract will not be set aside merely because the aggrieved party did not have independent advice and the consideration was inadequate.  It must also be shown that the other party engaged in unconscionable conduct or an unconscientious use of power.  He must have behaved:

                     ‘… in a morally reprehensible manner … which affects his conscience … The classic example of an unconscionable bargain is where advantage has been taken of a young, inexperienced or ignorant person to introduce a term which no sensible, well-advised … person would have accepted.’

                 If there has been no equitable fraud, victimisation, taking advantage, overreaching or other unconscionable conduct, relief will not be granted. …

                 In Boustany v Piggott Lord Templeman, delivering the judgment of the Privy Council, agreed in general terms with the submissions of counsel for the appellant:

(1)   there must be unconscionability in the sense that objectionable terms have been imposed on the weaker party in a reprehensible manner;

(2)   ‘unconscionability’ refers not only to the unreasonable terms but to the behaviour of the stronger party, which must be morally culpable or reprehensible;

(3)   unequal bargaining power or objectively unreasonable terms are no basis for interference in equity in the absence of unconscionable or extortionate abuse where, exceptionally and as a matter of common fairness, ‘it is unfair that the strong should be allowed to push the weak to the wall’;

(4)   a contract will not be set aside as unconscionable in the absence of actual or constructive fraud or other unconscionable conduct; and

(5)   the weaker party must show unconscionable conduct, in that the stronger party took unconscientious advantage of the weaker party’s disabling condition or circumstances.”

38.  It is clear that not every conduct that may exert pressure on the other party will be regarded as unconscionable conduct.  The conduct must be morally reprehensible.  The allegations of the defendants, even if proved, do not amount to unconscionable conduct on the part of the plaintiff.

Can mortgage action include guarantee claims

39.  Finally, there is the argument by the 3rd, 4th and 5th defendants that this application is brought under O.88 and the guarantee claims against them should not be included herein.  I do not see any merit in this argument.  This application is brought by an originating summons and it can of course include guarantee claims.  I agree with counsel for the plaintiff that the fact that O.88 is engaged simply means that more protection is afforded to the mortgagor defendants.  It does not exclude other claims that can be brought by originating summons.

40.  Since none of the defendants’ arguments can hinder the plaintiff’s application, the plaintiff is entitled to judgment as prayed together with costs.  Regarding the scale of costs, the facility letters provided for indemnity costs and I so order.