RE THAI MERCANTILE DEVELOPMENT FINANCE LTD.

IN THE SUPREME COURT OF HONG KONG

COMPANIES WINDING-UP

NO. 202 OF 1986

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BETWEEN

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JUDGMENT

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1. I have before me a summons issued by the Official Receiver as liquidator of the First Bangkok City Finance Ltd. (F.B.C.F.) to determine whether an assignment or purported assignment by that company to Chase Manhattan (Asia) Ltd. (CMAL) executed on the 7th April 1986 is void on the grounds of non-registration being a charge on the book debts of the company under section 80(2)(e) of the Companies Ordinance. The Official Receiver also seeks directions as to whether a loan made to People Plaza Company Limited (P.P.C.) by FBCF in December 1985 is void against him and any creditor of FBCF and/or Thai Mercantile Development Finance Ltd. also on the grounds that it had not been registered under section 80. However, no argument has so far been directed to the second application. A cross-summons issued by C.M.A.L. seeks a declaration that a promissory note dated the 30th December 1985 in the possession of the Official Receiver that relates to the transaction is held on trust for C.M.A.L. and for an order that it be endorsed in favour of C.M.A.L. or its nominee and delivered up.

2. F.B.C.F. was incorporated in Hong Kong in 1979 and was registered as a deposit taking company under the Deposit-Taking Companies Ordinance in 1980. The company was wound up compulsorily on the 15th September 1986 on the grounds of insolvency upon a petition presented by the Financial Secretary. The Official Receiver was appointed to be the liquidator.

3. On the 19th December 1985 F.B.C.F. entered into a Loan Agreement with PPC, a company incorporated in Thailand whereby PPC borrowed the sum of SFr 10 million to assist in the finance of a shopping centre to be built in Thailand. The sum borrowed was drawn down by a single payment on the 31st December 1985. The loan was to be repaid over a period of 5 years and was guaranteed by the Thai Military Bank Ltd (Thai Bank) by way of an irrevocable stand-by letter of credit dated the 24th December 1985. Interest under the agreement was to be paid at the rate of 0.5% over the London Inter-Bank Offered Date (LIBOR). P.P.C. also executed a promissory note in favour of F.B.C.F. for repayment of the loan. Under the promissory note P.P.C. agreed to make repayment of the principal sum by six instalments, the first instalment to be made 30 months after the date of the drawing down and thereafter at six monthly intervals. These dates correspond with the dates of repayment set out in the Loan Agreement. A supplemental agreement was also entered into between the same parties on the same date, but nothing turns on this. On the 27th December 1985 the Loan  Agreement was varied by incorporating the following terms:

The reference to the Sixth Schedule in this agreement should read the Fifth Schedule.

4. Two separate promissory notes were executed on the 30th December 1985 whereby P.P.C. agreed to pay the principal sum of SFr 5 million on the 30th June 1986 with interest at 5.0625% on each sum. F.B.C.F. entered into an Assignment and Assumption Agreement (the assignment) on the 7th April 1986 with C.M.A.L. which company is incorporated in Hong Kong as an investment banking company, whereby one half of the loan made to P.P.C. by the Loan Agreement, viz. SFr 5 million was assigned to C.M.A.L. 4 of the assignment provides:

"(4)     The parties hereto have agreed to the sale, assignment and transfer by the Company to the Assignee, without recourse, of the Company's right, title and interest of and in part of the Loan amounting to SF 5,000,000.00 (hereinafter called "the Assigned Loan") free from incumbances and in the Note, the Loan Agreement and the proceeds of the Letter of Credit to the extent of Swiss Francs Five Million only with interest accrued thereon (if any) on the Effective Date (as defined below) and for the assumption by the Assignee of such obligations of the Company under the Loan Agreement as herein appearing,"

The effective date was the 8th April 1986.

5. As it will be necessary for me to consider the intention of the parties concerning the assignment, it will be convenient at this stage to set out those parts of the agreement that are relevant for this purpose. First under the heading "Assignment and Assumption",

                "ASSIGNMENT AND ASSUMPTION

3.     As and with effect from the Effective Date and subject to the receipt by the Company of the Purchase Price as provided in Clause 6 hereof, the Company, as beneficial owner, hereby sells, assigns and transfers to the Assignee, without recourse, representation or warranty, the Assigned Loan and the Company's rights and benefits under firstly the Note and secondly the Loan Agreement and thirdly the proceeds of the Letter of Credit, in each case, to the extent of Swiss Francs Five Million only (SF 5,000,000.00) on the Effective Date (including without limitation interest therefor accruing from and after the Effective Date). The rights and benefits hereby assigned are herein collectively called "the Assigned Rights".

Notices of the assignment were served by CMAL on PPC and the Thai Bank on the 26th June 1986.

Second under the heading Purchase Price : Payments : Interest :

                "PURCHASE PRICE : PAYMENTS : INTEREST

7.    In consideration of the sale, assignment and transfer by the Company provided for in Clause 3 hereof, the Assignee agrees to pay to the Company on the Effective Date an amount equal to the Purchase Price against the delivery by the Company of the Note duly endorsed by the Company in favour of the Assignee or its nominee but without liability on the part of the Company as such endorsee.

Third under the heading Buy Back:

                "BUY BACK

10.     The Assignment by the Company of the Assigned Loan and the Assigned Rights will be in respect of the entire period from the Effective Date up to and inclusive of 29th June 1986 and during this period the assignment shall be outright and absolute and without recourse. The Company hereby irrevocably and unconditionally undertakes with the Assignee that, on 30th June 1986, the Company will, or the Company will procure that its nominee will, buy back the Assigned Loan at the buy back price of SF 5,000,000.00 (Swiss Francs Five Million) and upon due completion of such buy back the Assignee shall re-endorse the Note in favour of the Company or its nominee and re-deliver the same to the Company or its nominee forthwith. On 30th June 1986, the Company will pay to the Assignee, or will procure the payment to the Assignee of, the sum of SF 5,000,000.00 (Swiss Francs Five Million) in discharge of its obligations contained in this Clause 10, and such payment shall be made to the account of the Assignee at The Chase Manhattan Bank (Suisse), Geneva, Switzerland, for the account of The Chase Manhattan Bank, N.A., Hong Kong branch, in favour of Chase Manhattan Asia Limited, Account No. 7060046013."

Finally under the heading Miscellaneous, Clause 14(b) provides:

                "MISCELLANEOUS

14(b).     The Company shall not be liable to the Assignee for the default of the Borrower or the Guarantor under the Loan Agreement, the Note and the Letter of Credit but the Company shall, at the cost and expense of the Assignee, calculated on a pro-rata basis, assist the Assignee in the enforcement of the Loan Agreement, the Note and the Letter of Credit so as to recover the sum of SF 5,000,000.00 together with interest thereon which the Assignee will be entitled to under this Agreement. The Company hereby agrees with the Assignee that it will not take action in respect of the enforcement of any of its rights under the Loan Agreement and the Letter of Credit without first consulting with the Assignee and obtaining the written instructions of the Assignee in respect of such enforcement. The Company agrees that during such time that this Assignment is effective, the Company shall at all times act strictly in accordance with such instructions from the Assignee. The Company further agrees with the Assignee that, prior to the Effective Date, it shall execute in favour of the Assignee a power of Attorney, in form and substance satisfactory in all respects to the Assignee, appointing the assignee its attorney-in-fact to take all actions on its behalf as the Assignee shall consider necessary or appropriate in respect of the enforcement of the Loan Agreement and the Letter of Credit."

6. Mr. E.M. Harris was the director of C.M.A.L. who was responsible for the assignment of the loan. In an affidavit sworn on the 17th June 1987, he describes the transaction as a loan asset sale which is a relatively new financial transaction that originated in 1984 or 1985. It involves the sale of a loan or part of a loan by one person to another. The principal amount of the loan is the asset sold which produces a yield in the form of the interest payable by the borrower. The consideration for the sale is the principal of the loan with an interest spread which is less than that paid by the borrower so that both the purchaser and seller of the loan make a profit. It is contended that the sale was intended to be an outright one even if the sale was not for the full term of the loan. However, sales are normally made for the whole remaining period of a loan so that the original lender will in respect of the amount sold, cease to be concerned with the original loan. Nevertheless, in the instant case the loan was sold only for the duration of an interest period so that C.M.A.L. bought an income for this time whilst the original lender was able to remove the loan asset from its books for this period. It appears that F.B.C.F. wanted to remove the asset from its books in order to avoid a contravention of the accounting requirements under the Deposit-Taking Companies Ordinance for they had almost reached their lending limit to P.P.C. Following the agreement between F.B.C.F. and C.M.A.L. C.M.A.L. entered into a Participation Agreement on the same date with an Italian Bank Institute Bancario San Paolo di Torino (San Paolo) which provided for San Paolo to take a 100% participation in C.M.A.L.'s assigned portion of the loan to the 29th June 1986. The amendment to the loan agreement on the 27th December 1985 to which I have already referred was made according to Mr. Harris, in order to convert the agreement into a revolving credit facility, so that after each six month period, the loan would be rolled over and renewed for a further six months. This arrangement would result in a repayment of the full amount of the loan at the end of each period of six months followed by an immediate redrawing of the same amount by the borrower. Each redrawing was to be secured by a new promissory note except for the first period, which was secured by the two promissory notes, one of which related to the loan asset sale to C.M.A.L.

7. A considerable part of the argument at the hearing was directed as to whether an assignment of part of a debt constitutes a right to pass the legal right to that portion of the debt within section 9 of the law Amendment and Reform (Consolidation) Ordinance, Cap. 23 which was the equivalent of section 25(6) of the Judicature Act 1873 and is now section 136 of the Law of Property Act 1925. Section 9 of the Law Amendment and Reform (Consolidation) Ordinance provides:

"9.    Any absolute assignment, by writing under the hand of the assignor (not purporting to be by way of charge only), of any debt or other legal chose in action, of which express notice in writing has been given to the debtor, trustee or other person from whom the assignor would have been entitled to receive or claim such debt or chose in action, shall be and be deemed to have been effectual in law (subject to all equities which would have been entitled to priority over the right of the assignee if this section and sections 2, 3, 4, 10 and 11 had not been enacted) to pass and transfer the legal right to such debt or chose in action from the date of such notice, and all legal and other remedies for the same, and the power to give a good discharge for the same, without the concurrence of the assignor: ............"

8. Mr. Smith, counsel for the Official Receiver, took me through a line of authorities commencing with Brice v. Bannister⁽¹⁾ which held that an instrument in writing constituted a valid assignment of part of the monies due or to become due from the defendant and that the plaintiff was entitled to recover that amount from the defendant notwithstanding subsequent payments that had been made to the assignee. The decision in that case was referred to by Chitty, L.J., in Durham Brothers v. Robertson⁽²⁾ where he had this to say at 774:

"The decision of Lord Coleridge C.J. in Brice v. Bannister, that the case fell within the 25th section, appears to me to be open to question. The assignment purported to be by way of charge only. It was a direction to pay the £100 out of money due or to become due. No doubt it purported to be a charge of an unredeemable sum of £100; but still it was a charge. The section speaks of an absolute assignment of any debt or other chose in action. It does not say "or any part of a debt or chose in action". It appears to me as at present advised to be questionable whether an assignment of part of an entire debt is within the enactment. If it be, it would seem to leave it in the power of the original creditor to split up the single legal cause of action for the debt into as many separate legal causes of action as he might think fit. However, it is not necessary to decide the point in the present case, and I leave it open for future consideration."

The issue was raised in Jones v. Humphreys⁽³⁾ and in Hughes v. Pumphouse Hotel Company ⁽⁴⁾, but again it was not necessary to decide the point although in the latter case, Mathew L.J. did not think that it came within section 25(6) of the Judicature Act 1873. However, in Skipper & Tucker v. Holloway and Howard⁽⁵⁾, Darling J. held that an assignment of part of a debt did come within the section, but Bray J. in Forster v. Baker⁽⁶⁾ refused to follow this decision and expressly held that it did not. His decision was followed in an Irish case Conlan v. Carlow County council⁽⁷⁾. Other cases in which it was held that the assignment of part of a debt did not come within the section are In Re Steel Wing⁽⁸⁾, Williams v. Atlantic Assurance Company Limited⁽⁹⁾ which overruled Skipper and Tucker v. Holloway⁽⁵⁾ and Walter & Sullivan Limited v. J. Murphie and Sons Limited⁽¹⁰⁾.

9. Although the preponderance of the authorities have expressed the view that an assignment of part of a debt is not an absolute assignment within he meaning of the section, I have been invited by Mr. Smith not to follow those authorities. On the other hand, Mr. Chadwick who appeared for C.M.A.L. submitted that it was only necessary to determine if the parties expected the assignment to take effect in equity without deciding the point and referred to clause 14(b) of the assignment whereby F.B.C.F. was required to assist C.M.A.L. in the enforcement of the loan which would have been unnecessary if a legal assignment had been effected. However, having regard to my decision upon this summons, it is unnecessary for me to express a firm opinion although I am inclined to follow the majority. In particular, the section does not include the words "or any part of a debt" see the decision of Chitty L.J. in Durham Brothers v. Roberson⁽²⁾ (Supra).

10. The issue that I have to determine is whether upon a construction of the assignment, it constituted an outright sale that does not require registration under section 80 of the Companies Ordinance or whether a charge was created by the company on its book debts so as to fall within the definition of the section. It is not in dispute that if a charge was created it is void against the Official Receiver as liquidator by reason of non-registration. Section 80 so far as it is relevant provides:-

"80.    (1) Subject to the provisions of this Part of this Ordinance, every charge created after the fixed date by a company and being a charge to which this section applies shall, so far as any security on the company's property or undertaking is conferred thereby, be void against the liquidator and any creditor of the company, unless the prescribed particulars of the charge, together with the instrument, if any, by which the charge is created or evidenced, are delivered to or received by the Registrar for registration in manner required by this Ordinance within 5 weeks after the date of its creation, but without prejudice to any contract or obligation for repayment of the money thereby secured, and when a charge becomes void under this section the money secured thereby shall immediately become payable.

11. Mr. Chadwick in the course of his submission referred to Section 80(5) which reads:-

"80.    (5) Where a negotiable instrument has beer given to secure the payment of any book debts of a company the deposit of the instrument for the purpose of securing an advance to the company shall not for the purposes of this section be treated as a charge on those book debts.''

Mr. Chadwick submitted that the true agreement entered into between F.B.C.F. and C.M.A.L. was for the sale and re-purchase of a promissory note so that repayment was to be made under the promissory note. Accordingly the rights under the Loan Agreement were suspended during the currency of the promissory note. He said that the promissory note and the Loan Agreement were two different transactions which had an independent existence of their own. From the date of the issue of the new promissory note on the 30th December 1985, the right to payment was governed by the promissory note and not by the Loan Agreement except when the agreement was amended to reflect the note. He therefore, asserted that the true position on the 7th April 1986 was that the obligations of the borrower were to be determined by the promissory note. In other words, the issue is, who was entitled to the promissory note, rather than who was entitled to the rights under the loan agreement. He therefore maintained that C.M.A.L. 's claim is under the promissory note and not under the assignment. In support of his submission, Mr. Chadwick advanced the following matters:-

First, the agreement was between two financial institutions trading in financial assets. Second, the transaction was deliberately expressed as a sale and repurchase. Third, there were good commercial reasons whereby the company was to take the asset out of the balance sheet and sensible reasons for C.M.A.L. and San Paolo to purchase the loan. He said that there was a good commercial reason for interest under clause 9, the return being by reference to Libor on the maturity date which he described as compensation for the use of the loan, the interest being the same sort of interest that would have been obtained on a loan. Fourth, the issue of interest swap which arises where either the seller or the purchaser obtains a windfall profit as a result of a differential interest rate which is avoided by an agreement that places the buyer of the loan in the same position as having purchased the same interest possessed by the seller. The practice amounts to an accounting exercise, but it has no significance in so far as the decision that I have to make. Fifth, there was no reason to disguise what was the truth. Sixth, if the transaction was a loan, one would expect that the parties would provide interest on the loan which would run until the date of actual repayment, but here there was no provision for interest to continue until after the 30th June. If F.B.C.F. did not pay C.M.A.L. SFr five million on the 30th June, C.M.A.L. would be without contractual provisions to entitle them to contractual interest for money lent. A loan agreement would have interest provided for until repayment even if repayment was on a particular date. Seventh, the security for the alleged loan does not cover the debt. If it was intended as a loan, one would expect the charge to secure both principal and interest.

With regard to clause 10 of the Agreement, the "Buy Back", he argued that if it was a proviso for redemption, the so-called borrower could redeem the payment of SFr 5 million, and could get back the security on payment of the principal only notwithstanding that interest would be outstanding. This would be inconsistent with a loan made by a bank.

12. With regard to the submission that the rights under the original agreement were suspended during the operation of the promissory note, my attention was drawn to In Re Melton Finance Limited ⁽¹¹⁾, where the facts in the headnote were:-

"    A firm of stockbrokers lent £15,000 to a company. In order to secure repayment the company gave to the stockbrokers subcharges on properties and deposited deeds and documents with them "to the intent that the same may be equitably charged with the repayment" of the £15,000. The charges created were not registered under section 95(1) of the Companies Act, 1948. The company went into liquidation.

    On a summons by the liquidator claiming, inter alia, that the deposits of the deeds and documents were void as against him for want of registration under section 95 of the Act of 1948 and their delivery up by the stockbrokers, it was contended tended for the latter that they had a valid common law lien on the documents. On appeal by the stockbrokers from Pennycuick, J., who upheld the liquidator's claim:-

    Held, dismissing the appeal, that the deposit of the deeds and documents was merely ancillary to the equitable charge created and that the contractual right to their retention was lost when the charge was avoided for non-registration under section 95(1) of the Companies Act, 1948."

13. In determining the issue in this matter, it is necessary to look at the reality of the transaction and to consider the relationship of the parties see In Re Kent and Sussex Sawmills, Limited⁽¹²⁾ and In Re George Inglefield Ltd.⁽¹³⁾ where Lord Hanworth, M.R. at p. 17 had this to say:-

"    It is old law, and plain law, that in transactions of this sort the Court must consider whether or not the documents really mask the true transaction. If they do merely nark the transaction, the Court must have regard to the true position, in substance and in fact, and for this purpose tear away the mask or cloak that has been put upon the real transaction."

In the same case at p. 27, Romer L.J. explained the difference between a charge and a sale in the following terms:-

"    In a transaction of sale the vendor is not entitled to get back the subject-matter of the sale by returning to the purchaser the money that has passed between them. In the case of a mortgage or charge, the mortgagor is entitled, until he has been foreclosed, to get back the subject-matter of the mortgage or charge by returning to the mortgagee the money that has passed between them. The second essential difference is that if the mortgagee realizes the subject-matter of the mortgage for a sum more than sufficient to repay him, with interest and the costs, the money that has passed between him and the mortgagor he has to account to the mortgagor for the surplus. If the purchaser sells the subject-matter of the purchase, and realizes a profit, of course he has not got to account to the vendor for the profit. Thirdly if the mortgagee realizes the mortgage property for a sum that is insufficient to repay him the money that he has paid to the mortgagor, together with interest and costs, then the mortgagee is entitled to recover from the mortgagor the balance of the money, either because there is a covenant by the mortgagor to repay the money advanced by the mortgagee, or because of the existence of the simple contract debt which is created by the mere fact of the advance having been made. If the purchaser were to resell the purchased property at a price which was insufficient to recoup him the money that he paid to the vendor, of course he would not be entitled to recover the balance from the vendor."

14. The agreement entered into between the parties expressly states that there was an absolute assignment of SFr 5 million and that it was by way of an outright sale. By clause 3 of the assignment the note, the loan agreement and proceeds of the letter of credit were assigned and were called the assigned rights. Nevertheless, on the principles set out in Re George Inglefield⁽¹³⁾, although it may be described in this form that does not predetermine the issue for it is necessary to look at the substance of the transaction. The original loan agreement between P.P.C. and F.B.C.F. provided for repayment of the loan with interest over a period of five years with the first payment to be made in June 1988. The provision for repayment was also contained in the promissory note but this note was replaced by a different promissory note in the terms set out in the agreement of the 27th December 1985 to which I have referred. However, the actual times for repayment were not changed although the interest payable was different.

15. The assignment was made between two financial institutions, one of which was a deposit taking company on the brink of collapse and a well-known American Bank. The sum involved was SFr 5 million, the security given was the promissory note and the assigned rights possessed by F.B.C.F. under the loan agreement. There was no evidence to show that the transaction was in any way improper. The only payment of interest was to be made by F.B.C.F. to C.M.A.L. for the period from the date of the agreement to the 30th June 1986. In fact, interest for this period was paid by the Thai Bank as guarantor under the loan agreement, but no other payments have been made. It was submitted by Mr. Chadwick that the assignment expired by effluxion of time at mid-night on the 29th June 1986 before the "Buy Back" provision became operative. Accordingly, the only security held by C.M.A.L. at that time in his submission would be the promissory note. If Mr. Chadwick is right, during the period of the assignment, C.M.A.L. was not entitled to any repayment while it held the promissory note. Further the rights under the assignment remained with C.M.A.L. until it had been paid the SFr 5 million by F.B.C.F.

16. In my judgment, the assignment contained an agreement whereby C.M.A.L. would pay SFr 5 million to F.B.C.F. whereupon F.B.C.F. would endorse the promissory note to C.M.A.L. On the date of maturity, the 30th June 1986, F.B.C.F. or its nominee was required to pay the SFr 5 million in accordance with the "Buy Back" provision. In addition F.B.C.F. was required to pay interest to C.M.A.L. during the period of the assignment and the "Buy Back" while P.P.C. was required to pay interest under the loan agreement although the rate of interest was not necessarily the same. In the circumstances, despite the terms expressed in the assignment, I am quite satisfied that the provision for payment of interest by F.B.C.F. and the terms of the "Buy Back" amounted to a loan for which security had been given by way of charge. There was no commercial sense in buying the benefit of the debt for the short period in question during which time no payments were to be made on account of the debt in the absence of default. Further, during the time C.M.A.L. had possession of the promissory note, the rights against P.P.C. did not revert to F.B.C.F.  With regard to the application of section 80(5) I accept Mr. Smith's submission that the sub-section is intended to refer to payments by a customer of book debts for goods delivered and where a company borrows on the security of a negotiable instrument. I am therefore satisfied that section 80(5) is not applicable to the facts of this case.

17. In my opinion, the assignment was by way of charge to secure repayment of SFr 5 million and is therefore, void against the Official Receiver for non-registration. I am also satisfied that the promissory note was ancillary to the charge on the principles set out in Re Molton Finance Ltd.⁽¹¹⁾ . I do not therefore accept that the rights under the Loan Agreement were suspended during the currency of the promissory note. As a result C.M.A.L. is not entitled to obtain re-delivery of the promissory note from the Official Receiver.

18. There will be an order in terms in favour of the Official Receiver on the first port of the summons whilst the application on behalf of C.M.A.L. is dismissed.

(1)    [1878] 3 Q.B. 569

(2)    [1898] 1 Q.B. 765

(3)    (1902) 1 K.B. 10

(4)    [1902] 2 K.B. 190

(5)    [1910] 2 K.B. 630

(6)    [1910] 2 K.B. 636

(7)    [1912] 2 I.R. 535

(8)    [1921] 1 Ch. 349

(9)    [1933] 1 K.B. 81

(10)  [1955] 2 Q.B. 584

(11)    [1968] 1 Ch. 325

(12)    [1947] 1 Ch. 177

(13)    [1933] 1 Ch. 1