UP RIGHT CONSTRUCTION CO LTD v. PACIFIC FINANCE (HONG KONG) LTD

HCA787/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.787 OF 2002

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J U D G M E N T

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1. Pacific Finance (Hong Kong) Limited, the plaintiff by counterclaim (“the plaintiff”) is the mortgagee of 11 construction/excavation machinery/equipment (“the equipments”) mortgaged by Up Right Construction Company Limited, the 1^st defendant by counterclaim (“the 1^st defendant”).  The plaintiff sues the 1^st defendant for the balance due under the mortgage.  The 2^nd defendant by counterclaim (“the 2^nd defendant”) and the 3^rd defendant by counterclaim (“the 3^rd defendant”) are sued as guarantors by the plaintiff.  The 1^st defendant was the plaintiff in the original action and the plaintiff was the defendant in the original action.  The 1^st defendant was ordered to be wound up on 9 October 2002.  I am told by Mr Liu, who appeared for the plaintiff, that the liquidators of the 1^st defendant had decided not to pursue the original action or the 1^st defendant’s counterclaim to the plaintiff’s counterclaim.  The 2^nd defendant appeared in person.  His wife, the 3^rd defendant authorised the 2^nd defendant to represent her at the trial.

2. The claim involved the equipments, seven of which were repossessed by the plaintiff on 30 November 2001, three on 8 December 2001 and the last on 3 January 2002.  The cost of storage by the plaintiff was $300 per day at public godowns.  They were sold by tender (dated 9 January 2002) which closed at 4:00 p.m. on 16 January 2002.  There were five bidders.  Notice of the tender was given to 72 companies who were on the plaintiff’s list as being persons with potential interest in the tender.  Of these at least 14 of them were dealers in second-hand construction/excavation equipments.  I should mention that there was an earlier attempt to sell nine units of the equipments by tender.  That tender closed on 3 January 2002 but elicited no bid.  Sixty companies were invited to participate.  Among these at least 13 were second-hand dealers in construction/excavation machinery.

3. The issue in this case is whether the plaintiff was in breach of its duty to obtain the best price reasonable obtainable.  The law relating to the mortgagee’s rights and duties can be gathered from Fisher and Lightwood’s Law of Mortgage (11^th ed.), paragraph 20.22 at pages 564-6 :

“The power of sale is given to the mortgagee for his own benefit, to enable him the better to realise his debt.  Accordingly, his own interests come before those of the mortgagor.  The mortgagee is not a trustee of his own power of sale for the mortgagor and nor is he under a general duty of care to the mortgagor.  He can, therefore, act in his own interests in deciding whether or not to exercise his power of sale.  If the mortgagee does decide to exercise his power of sale, he can likewise act in his own interest in deciding when to exercise it, subject to his duty to obtain the best price reasonably obtainable.  He is entitled to sell even though a sale (or the time, or the terms, of the sale) may be disadvantageous to the mortgagor.

However, while the mortgagee may look to his own interests, he must nevertheless pay some regard to the interests of the mortgagor.  Thus, the mortgagee owes a general duty in equity to the mortgagor and to others with an interest in the equity of redemption (including subsequent incumbrancers) to act in good faith and to use his powers for proper purposes …”

The burden is on the defendants to show that the mortgagee had acted in breach of his duty to obtain the best price reasonably obtainable at the time.

4. It is common ground that in or about August 2001, the 1^st defendant began to default in payment of the monthly instalments due and payable under the Mortgage.  Letters of demand were written on the plaintiff’s behalf by their solicitor, Messrs Foo & Li (“Foo & Li”) on 5 November 2001.  Thereafter, the 1^st defendant indicated that it had no objection to surrendering the equipments to the plaintiff.  And as noted above they were returned.  However, prior to the voluntary surrender of the equipments the plaintiff arranged for a surveyor, namely Auto Adjusters Bureau (“AAB”) to inspect and appraise the current market value and forced sale value of each of the equipments.   

5. The then current market value according to AAB of the 11 units was $2,690,000.  However, the forced sale value was given as $1,195,000.  The reason for that was the low demand from the construction industry as a result of the financial crisis which hit Hong Kong in 1997.  Mr Ng Kuen Ho of AAB explained the term “forced sale value” in this way :

“… the estimated most probable price expressed in terms of currency which could typically be realized at a properly advertised and conducted auction sale, held under forced sale conditions and under present day economic trends, as of the effective date of the appraisal report.”

And that “current market value” means :

“… the estimated most probable price expressed in terms of currency to be realized for property in an exchange between a willing buyer and a willing seller, with equity to both, neither being any under any compulsion to buy or sell, and both parties fully aware of all relevant facts as of the effective date of the appraisal report.”

6. By a letter dated 3 January 2002, Foo & Li wrote to the 1^st defendant, attentioned to the 2^nd and 3^rd defendants in response to a letter from the 1^st defendant as follows :

“We are instructed that our client is in course of the selling the Goods in its capacity as mortgagee in possession, and the price will be the best price obtainable from the market.  Our client will not give any warranty as to whether or not the selling price of the Goods will not be less than $2,000,000.00”

7. According to the evidence of Mr Chan Chi Kwan, a collection assistant manager of the plaintiff, it was :

“… commonly used and accepted by the industry that sale by public or private tenders is an appropriate and cost-effective method for disposal of machines/vehicles.  As there was no longer a demand for construction machines due to the decline of the construction industry and the economic downturn, the Defendant anticipated that the selling prices of second-hand machines would decline in the foreseeable future.  Having taken into account the market condition at that time and in particular the state and condition of the Machinery, the Defendant considered that it would be appropriate to dispose of the Machinery by way of tender as soon as practicable.”

8. In addition to the direct invitations, both tenders were advertised in two Chinese newspapers, namely, Sing Pao and the Oriental Daily.  Each advertisement contained a brief description of the equipments.  It is to be noted that of the five bidders, three of them, namely, Aik Sing Trading Co., Man Tat Hong and Wing Chi Engineering Limited had not been invited to tender.   Presumably they came to know of the sale by tender through the advertisements.

9. The evidence of Mr Ng Kuen Hon of AAB, which I accept, is that Sing Pao was widely regarded as a newspaper in which one would expect advertisements for the sale of vehicles and machineries to appear and that the Oriental Daily was popular with people in the construction industry.

10. It seemed that the 2^nd defendant was willing to accept the current market valuation put on the machineries by AAB.  However, he did not accept that the forced sale value put on the machineries as correct. 

11. Mr Ng Kuen Hon had inspected the machineries on separate occasions and produced a total of 11 inspection reports together with photographs, all dated 6 November 2001; ten inspection reports together with photographs dated 15 December 2001; one inspection report together with photographs dated 17 December 2001 and one inspection report together with photographs dated 7 January 2001.  It is clear from his evidence that there was not a wide market for this kind of equipments in Hong Kong.  It is common ground that the construction industry in Hong Kong was going through a particularly difficult patch in 2001 and 2002.  Indeed, according to the 2^nd defendant, many companies in the same business as the 1^st defendant had failed during that period.  Indeed, so far as the 1^st defendant was concerned, it managed to survive into 2002 only by refinancing and selling off its assets including its equipments.  Eventually cash flow problems drove it into liquidation with liabilities in excess of $10,000,000.

12. Another witness called on behalf of the plaintiff was one Lau Pong Sing, the managing director of Ajax Pong Construction Equipment Ltd.  He gave evidence as an expert.  I am satisfied that with his experience of over 25 years in the buying, selling and leasing of, amongst other things, second-hand construction/excavation equipments, that he was sufficiently knowledgeable about the equipments.  According to him, the years 2000 to 2002 were particularly bad years for the construction industry.  His company was one of the companies which were invited to tender.  He and his staff inspected the equipments.  They did not put in a bid.  At the time, his company had about 1,700 units of different types of construction/excavation equipments on hand and, according to Mr Lau, they were : “faced with a tough market situation themselves”.  Mr Lau was an impressive witness and I have no difficulty in accepting his evidence that the equipments were difficult to sell.

13. That was also the evidence of the 2^nd defendant.  The 2^nd defendant told me that he had been trying to sell the equipments since about four months prior to August 2001.  Up to the time possession of the equipments were surrendered to the plaintiff in November/December 2001, he had not been able to sell any of them.  I have no doubt that when he surrendered the equipments to the plaintiff he knew that the plaintiff would try to sell them as mortgagees.  He said as much, and the letter quoted at paragraph 6 said as much.  I am also satisfied that he realised that in a forced sale the prices were likely to be low.  The fact that the 1^st defendant had not been able to sell any of these equipments showed that the market condition was difficult.  He also told me that when the AAB valuations were obtained and faxed to the 3^rd defendant in a document which he produced as Exhibit D1, it showed that the current market value given was $2,690,000.  He said that he thought that if the equipments were to be sold at or near the supposed current market value then the mortgage would have been paid off completely.  That prompted him to write to the plaintiff in December 2002 saying that the equipments should be sold for not less than $2,000,000.  The response by the plaintiff was the letter quoted in paragraph 6.  But he admitted that he was aware, as it plainly appeared on Exhibit D1, of the low forced sale value that had been put on the equipments.  However, he thought that any sale by the plaintiff would not be at such low prices.

14. The 2^nd defendant called as an expert a Mr Tam Lun Sun who is the proprietor of a company called Sam Woo Engineering Co. (“Sam Woo”).  Sam Woo were involved in civil engineering construction work including rock excavation as well as the buying and selling of second-hand construction/excavation equipments.   

15. The defendants’ case that the plaintiff was in breach of duty as mortgagee included the following allegations :

(1)     similar equipments had been sold at substantially higher prices at auction overseas;

(2)     one equipment, the Hydraulic Crawler Drills CHA660 was resold shortly after the tender at substantially higher prices;

(3)     the description of the conditions of the equipments by AAB was wrong such that potential buyers might have been put off.

16. Amongst the equipments mortgaged to the plaintiff were six Hydraulic Excavator Caterpillar 325L.  They were purchased new by the defendants in 1995 at $1,050,000 each.  However, according to Mr Lau Pong Sing 325L was not a popular model in Hong Kong.  One of the reasons was its size — because of the width of this particular machine, it could only be moved under license between mid-night and 7:00 a.m. with two escort vehicles with yellow warning lights, one in front and one behind.  Moreover, this model was mass produced between 1992 and 1994 and then replaced by a new series in 1995.  He said there were few such machinery in Hong Kong because 325L was expensive to buy as well as to maintain.  Thus, perhaps not the easiest to sell in a bad market.   

17. I do not believe what was paid for the machines when new is very helpful.  The Inland Revenue permitted a straight-line depreciation over five years although according to Mr Lau instead of adopting a straight-line depreciation over five years, his company would depreciate a machine roughly 15% a year so that at the end of the five-year period there would be left a residual value of 20%.  But whether the machine would still be worth 20% or more or less would depend on how well maintained it was.  So far as Mr Lau’s company’s machines were concerned, each one of them would come with a file containing its maintenance record.  According to him, the defendant’s machines were not well maintained.  Needless to say there were no such files.

18. The defendants also relied on certain auction results in relation to one of the 325L, namely S/N : 9KL00225 sold by the plaintiff at $128,000 to Aik Sing Trading Company.  The same equipment was sold at an auction between 27 and 29 May 2002 in Dubai for US$50,000.00 by Ritchie Brothers Auctioneers. 

19. According to Mr Lau, Ritchie Brothers were the pre-eminent auctioneers in construction equipments.  All their auctions were “without reserve”.  So the consignor would have to take the risk of a very low price if there was only one bidder.  Moreover, in 2002, to transport the Hydraulic Excavator 325L from Hong Kong to Dubai would have costed US$12,026.62.  In addition the commission charged by Ritchie Brothers was 14% of the hammer price.  Also according to Mr Lau, the consigner would normally be advised by the auctioneers to improve the chances of a good sale by refurbishing or reprovisioning the equipment prior to the sale.  So it is possible that money had been spent on S/N:9KL00225 prior to the sale.

20. I do not believe that I can take the sale at the auction as an indication that the sale by the plaintiff in Hong Kong at $128,000 was in breach of their duty to the 1^st defendant as mortgagee.  What is important is that I believe sale by tender to be a reasonable mode of sale and that the tender had been properly advertised and conducted.  

21. Nor do I think it helpful to show that other 325Ls were sold at auctions in the United States, Canada or the Netherlands all for roughly US$50,000.  The defendants suggested that some of the other equipments should have been sold overseas and by auction.  As for the 325L according to Mr Lau that they were under Hong Kong specifications so it might not be possible to sell them to the United States or European markets because of non-compliance with the environmental protection requirements.  That it would cause approximately $150,000 to $180,000 to bring an unit up to compliance with the latest standard.  Mr Lau has prepared a table showing the costs of transporting the various equipments to Dubai and to the west coast of the United States of America which is exhibit P1 and it can be seen that e.g. in the case of 992C it would have cost something like $40,000 to ship it to Dubai to sell and US$65,486.65 to the west coast of the USA.  Also according to Mr Lau in the case of 992C environmental regulations in the USA meant that it could not be imported into the USA.  Anyway having regard to the other matters I have mentioned in paragraph 19 sale by auction to overseas was not a realistic option.

22. I turn to another equipment sold by the plaintiff to Man Tak Hong for $200,000.  It appeared that Mr Tam’s company, Sam Woo, bought that equipment, namely Hydraulic Crawler Drills model number CHA660 (“CHA660”) from Man Tak Hong on 19 January 2002 for $250,000. 

23. According to Mr Tam he was told by Mr Chu of Man Tak Hong that a finance company was selling the CHA660.  Given the year of manufacture, the model number and the price that Mr Chu wanted, he was interested.  He then went with Mr Chu to a godown and inspected the CHA660.  He found it in good appearance and working condition so he was willing to buy it for $250,000.  That was a few days prior to 19 January 2002.  He said a few days later, Mr Chu told him that deal could go through.  It is obvious from his evidence that the inspection took place before the closing of the tender which, as noted, closed at 4:00 p.m. on 16 January 2002.  It also appeared from his evidence that despite the evidence of the plaintiff, prospective buyers or tenderers could test and inspect the equipments prior to the close of tender.  The tender which Man Tat Hong put in was dated 16 January 2002.  Thus, from Mr Tam’s evidence, it appeared that after Mr Chu ascertained the interest of Mr Lau in buying the particular equipment for $250,000, Mr Chu put in a tender for $200,000 which happened to be the highest and successful bid.  There were two other bids for CHA660, one by Zhong Xin Motors (“Zhong Xin”) at $160,000 and another one by Hoi Fat Construction Mechanical Company (“Hoi Fat”) at $155,000.  Both Hoi Fat and Zhong Xin were amongst those invited to tender.  Hoi Fat was a dealer in second-hand equipments.  It is not clear whether Zhong Xin was also a dealer.

24. The 2^nd defendant’s main complaint was that Sam Woo managed to sell the CHA660 on 18 June 2002 for $750,000.  The 2^nd defendant also relied on the fact that Sam Woo was able to borrow $250,000 from Wing Hang Finance as evidence that the sale to Man Tat Hong was at an undervalue.  But, as I have said, the 1^st defendant had had ample opportunities to sell the equipment but without success.  What I am concerned with is whether or not the method of sale chosen by the plaintiff was reasonable and that the tender had been properly advertised and conducted.  The fact that Sam Woo was able to sell CHA660 in June for $750,000 is evidence from which one might infer that the sale by the plaintiff was not at the best price reasonably obtainable.  But it is not an inference which I must draw.  Having regard to the economic situation at the time I do not think that it has been established that selling by tender in Hong Kong or the way in which the sale by tender was advertised and conducted fell short of the duty of care which the law required of a mortgagee in this kind of situation.

25. Now, the defendants also relied on an offer which they say they had received from Hing Fu Engineering Co. (“Hing Fu”) to buy the CHA660 at $450,000.  The matter arose in this way.  There is a letter from the 1^st defendant dated 18 January 2002 referring to a conversation with the 3^rd defendant of the same day, which said that the plaintiff had informed the 3^rd defendant :

“… that they would sold [sic] all our machines under the above agreement no.080-113152 at HKD1,081,200.”

26. Now, by 18 January the tender had closed.  On 17 January Letters of Acceptance had been sent to the highest bidders in relation to each of the 11 equipments.  It was on 18 January that the defendants produced two undated documents, one a quotation from the 1^st defendant to Hing Fu quoting a price of $500,000 for the crawler drills and an undated reply from Hing Fu, which stated :

“I refer to your quotation for the Tamrock Crawler Drill, the best price that can be offered is HK$450,000.00.  Please consider the price.”

27. Obviously, this came too late.  By then the tender had closed and the highest bidder notified of the acceptance of their tender.  No evidence was called by the defendants from Hing Fu.  Anyway, looking at the documents which had been produced, I do not think one can say that this was a firm offer by Hing Fu to buy or that it was a good indication of the price reasonably achievable at a sale by tender.  Nor am I satisfied this was an indication of any breach of duty on the part of the plaintiff.

28. Some criticisms had been made by the defendants against the plaintiff in relation to the reports prepared by ABB.  I think on the evidence of both Mr Ng and Mr Lau, it is quite clear that the equipments were not well maintained.  And, more importantly, they were being sold at a difficult time for the construction industry.  But the plaintiff was acting within its rights to sell at the time.  I do not believe AAB’s reports were unfair or wrong or that they were responsible for the low price.

29. I have not dealt with other aspects of Mr Tam’s evidence.  I have to say that I have not found Mr Tam to be an impressive witness.  Much of his report contained information supplied by others to him without any personal input by him.  I would not rely on him as an expert.  In any event, I do not believe his evidence throws any doubt on the propriety of the tender.

30. Another compliant which was made by the 2^nd defendant was that he was not aware that the machines were being sold by tender.  This complaint was not made in his witness statement nor in the contemporary correspondence.  The plaintiff’s witnesses were not cross-examined by the 2^nd defendant in that regard either.  I am not prepared to proceed on the basis that the 2^nd defendant is right, namely, that he was not aware that the equipments were being sold by tender.  The 2^nd defendant’s suggestions seem to be that had he known about the tender, he might have got people to bid.

31. According to the 2^nd defendant, he had tried to sell the machines from April 2001 but was unable to sell the machines so that possession of them were given to the plaintiff in November/December 2001.  He said the understanding was that both the plaintiff and the defendants would try to sell the machines as best they could.  I do not believe that the defendants would not have kept themselves informed of any progress towards sale.  It is obvious from the defendant’s evidence that the market for this kind of machinery was bad and he accepted it, saying that many of his competitors in the same field of business were going bust at that time.  But the 2^nd defendant made the point that no matter how bad the market people would buy if the price was right.  To a certain extent that is right and that may explain why the machines were eventually all sold.  But that is a far cry from saying that the plaintiff acted in breach of its duty or that the price that was obtained in relation to the machine was not the best price obtainable from the market. 

32. The 2^nd and 3^rd defendants are sued as guarantors, they relied on the only defence that the equipments were sold by the plaintiff in breach of duty as mortgagee.  That not having been established, judgment must be entered against the 2^nd and 3^rd defendants jointly and severally in the sum of $1,317,470.66.  That is the shortfall after sale.  The 2^nd and 3^rd defendants’ counterclaim is dismissed.

33. The effective rate of interest payable under the mortgage was 13.6% p.a.  I would order interest on the sum of $1,317,470.66 from 22 January 2002 at the rate of 13.6% p.a. until judgment.  Thereafter interest shall be at the judgment rate.

34. I make an order nisi for costs in favour of the plaintiff.  This order shall be made absolute within 14 days of the date of this judgment unless written application from the 2^nd or 3^rd defendants for a different order is received prior to that date.