HUA CHIAO COMMERCIAL BANK LTD. v. YANG HSIANG YANG and Another

1992, No.MP3816

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

MISCELLANEOUS PROCEEDINGS

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J U D G M E N T

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1. This is an action under a legal charge dated 28th July 1992 ("the Legal Charge") executed by the 1st defendant Yang Hsiang Yang ("Yang") as mortgagor, the 2nd defendant Asia Trading Company ("Asia") as borrower in favour of Hua Chiao Commercial Bank Limited ("the Bank"), the plaintiff. It affects the property known as Flat B, Block A, 16th Floor, Yen Lok Building, Nos.4-12 Lin Shing Road, Chai Wan, Hong Kong. The Bank seeks vacant possession of the property and payment of all principal money and interest accruing thereon due to it under the Legal Charge.

2. The only live issue between the Bank and Mr Yang is whether any misrepresentation was made by the Bank to Mr Yang as to Mr Yang's liability under the Legal Charge at the time it was executed by him. It is the defendant's case that the manager of the North Point branch of the Bank had represented to him that his liability under the Legal Charge would be limited to $400,000 and further that it did not extend to any pre-existing indebtedness of Asia. It is not in dispute that if such a misrepresentation was in fact made, Mr Yang is entitled to have the Legal Charge set aside : T.S.B. Bank PLC v. Camfield [1995]1 W.L.R. 430.

3. Three witnesses gave evidence on behalf of the Bank. They were Ngaw Man Pok ("Mr Ngaw"), the manager of their North Point branch, Li Man Yin ("Mr Li") from the bills department of the Bank's head office and Iris Ho Yuen Ming ("Miss Ho") from Messrs Tsang, Chau & Shuen ("TCS"), the firm of solicitors who acted for all three parties to the Legal Charge. Mr Yang gave evidence on his own behalf.

Events preceding the execution of the Legal Charge

4. Asia, which was a sole proprietorship, was the trading name of one Tsoi Hau Lun ("Mr Tsoi"). It began a banking relationship with the Bank in January of 1992. It opened an account with the North Point branch of the Bank of which Mr Ngaw was manager. Asia's business was the import and export of shoes. Asia maintained various accounts with the Bank. There was a current account and a fixed deposit account with the North Point branch and a bills account with the head office. On 19th May 1992, Asia applied for general facilities regarding letters of credit and trust receipts. It applied for a credit line of $2 million for letters of credit and trust receipts of $1.4 million offering as security, fixed deposits in the amount of $900,000 that had already been pledged with the Bank. The balance of $500,000 was to be secured by a legal charge over a property owned not by Asia but by a third party. Asia's application was approved in principle, subject to fulfillment of the conditions. These matters are dealt with in greater detail below.

5. The loans department of the Bank's head office issued oral instructions to TCS regarding the Legal Charge on 19th May 1992, followed by written instructions on 23rd May, a copy of which was sent to Mr Ngaw. Upon receiving the Bank's instructions, Miss Ho who was handling the matter at TCS, carried out a land search and discovered that the property in question was subject to a legal charge in favour of Standard Chartered Bank as well as a sale and purchase agreement in favour of Ng Wing Sin ("Mr Ng"). She accordingly wrote to the Standard Chartered Bank on 20th May inquiring into the amount of principal and interest due and informed the Bank of the sale and purchase agreement by a letter dated 29th May, seeking the Bank's further instructions.

6. Mr Ngaw said that he spoke to Mr Tsoi after learning of the problem from the solicitors and understood from Mr Tsoi that Mr Tsoi would be repaying the $300,000 to the purchaser Mr Ng to enable the sale and purchase agreement to be cancelled. Mr Ngaw said he was not concerned with the execution of Legal Charge and had nothing to do with it thereafter. Mr Ngaw denies ever meeting Mr Yang prior to or at the time of the execution of the Legal Charge. The first time he met Mr Yang, he said, was in October 1992, several months after the execution of the Legal Charge.

7. Miss Ho's recollection on this issue is a little different. She said that after informing the Bank of the encumbrances in late May, she heard no more about the Legal Charge until she received a telephone call from Mr Ngaw in early July. Miss Ho was notified by Mr Ngaw that the sale and purchase agreement would be cancelled and that she could proceed with the preparation of the Legal Charge in favour of the plaintiff. Miss Ho stated that she was also informed by Mr Tsoi that the cancellation agreement would be executed. She therefore contacted the solicitors for the vendor and purchaser in the sale and purchase transaction and confirmed with them that the cancellation agreement would be executed. Meanwhile, Miss Ho prepared the Legal Charge.

The execution of the Legal Charge

8. According to Miss Ho, Mr Yang and Mr Tsoi came to her office on 24th July. She was presented with a copy of the cancellation agreement. She said that the Legal Charge was not executed that day but some four days later on 28th July : the draft Legal Charge and the statement of accounts were only prepared after she was given the cancellation agreement; the documents had to be approved by the partner-in-charge; and it was the firm's policy that all prior encumbrances had to be vacated before the Legal Charge could be executed.

9. Miss Ho said that she arranged for Mr Tsoi and Mr Yang to execute the Legal Charge on 28th July. She said that after Mr Tsoi and Mr Yang arrived, she took them into a room and explained the legal document to them. She said that she did not go through the document page by page but explained the overall effect of the document and highlighted the important points to them. She said she explained to them that it was an all monies legal charge and that Asia, through Mr Yang, had obtained a "without limit banking facility" from the plaintiff; that Mr Yang had to mortgage his property to the plaintiff as security and that liability was joint and several. She said she also explained that the Legal Charge secured indebtedness and covered all monies that the plaintiff lent to Asia at any time. She denied that she ever suggested that liability should be limited to $400,000 or that liability would be limited to debts incurred after the date of the Legal Charge so as to exclude any pre-existing indebtedness.

10. Although Miss Ho had initially maintained that she had explained to Mr Yang that upon the property being mortgaged to the Bank, the Bank would grant facilities to Asia and that there would be no limit to such facilities, she later explained that the "without limit facility" meant that the facility was a matter for agreement between Mr Yang, Mr Tsoi and the Bank and this was the explanation she had given to the defendants.

11. There is a statement of account originally dated 24th July. Miss Ho said that she gave a copy of the document to Mr Yang on 28th July. She said it could not have happened on the 24th since there was a reference to the debit note number and the debit note itself was not prepared until 25th July. As regards the manuscript amendment of the date from 24th to 28th, Miss Ho's explanation was that it was after Mr Yang's departure that she took the file to the Accounting Department who made manuscript amendment.

12. I now turn to Mr Yang's evidence. His account of events is materially different from that given by both Mr Ngaw and Miss Ho. Mr Yang resides at the premises in question. For the past 10 years, he has been a go-down worker of an electric switches factory. He has never held a position in Asia and his contact with Mr Tsoi was through Mr Tsoi's father whom he knew well. Mr Yang and Mr Tsoi Senior were clansmen coming from the same native place in China.

13. Some time in May or June of 1992, Mr Yang was asked by Mr Tsoi's father to go to the latter's home. On the ground floor of the building where Mr Tsoi Senior lived, Mr Yang saw Mr Tsoi having tea with Mr Ngaw and a Miss Lam. This was the first time that Mr Yang had met Mr Ngaw. Nothing transpired at that meeting.

14. According to Mr Yang, during the first part of July, on or around the 10th, he went to the office of Asia to look for Mr Tsoi's Senior. Mr Tsoi was in a room in the office and caused a call to be transferred into the room where Mr Yang was. Mr Tsoi then said that Mr Ngaw wanted to speak to Mr Yang. Mr Yang declined to speak with Mr Ngaw as he had only met him once, but Mr Ngaw's call was put through the speaker phone and Mr Ngaw asked Mr Yang why he was unwilling to provide a guarantee to Asia. Mr Yang answered that there was no way that he could help.

15. About two weeks later, on 24th July, Mr Yang went to Asia again to look for Mr Tsoi Senior. As on the previous occasion, whilst Mr Yang was in Asia's office, Mr Tsoi transferred a call from Mr Ngaw who asked why Mr Yang would not help Asia. Mr Ngaw proceeded to say that if Mr Yang did not help Asia, Mr Tsoi would be out of business and Mr Tsoi Senior's livelihood would be in difficulty. Mr Yang said he didn't understand how he could help Mr Tsoi Senior. Mr Ngaw then proceeded to refer to Mr Yang's ownership of a property worth between $600,000 to $700,000. Although other banks would not accept a mortgage on such a property which is over 20 years old, as the parties concerned were all Fukienese, he was prepared to take a mortgage of the property, for an amount up to say $350,000 to $400,000. When Mr Yang asked Mr Ngaw if Asia owed the Bank money, Mr Ngaw replied that Asia's debt was complicated but that it did not exceed $100,000. He further said that as regards the monies already owing, that would not be Mr Yang's concern. If Mr Yang was prepared to act as guarantor, the Bank would open letters of credit for Asia and provide trust receipts in the sum of $400,000. As Mr Yang did not understand what trust receipts meant, he asked Mr Ngaw to explain. Mr Ngaw said that if, for example, goods to the value of $500,000 were to arrive, and the Bank had trust receipts of $400,000, the Bank would ask Asia for $100,000 and release the goods on the basis of the trust receipts of $400,000. He assured Mr Yang that there was no need to pay in cash for the $400,000 trust receipts. He explained that it was a kind of security for taking delivery of goods. At Mr Ngaw's request, Mr Yang went with Mr Tsoi to the Bank that same day to see Mr Ngaw.

16. At the meeting with Mr Ngaw, Mr Yang said that he was told by Mr Ngaw that the amount that Asia owed the Bank was definitely less than $100,000. He said that if Mr Yang guaranteed $400,000, the Bank would give trust receipts up to that amount to Asia. Mr Yang said that he then agreed to guarantee Asia's trading up to the amount of $400,000 of trust receipts. Mr Ngaw made a telephone call and after that he told Mr Yang and Mr Tsoi to go and see a Miss Ho at TCS that afternoon.

17. Mr Yang further said that the question of his liability was specifically discussed with Mr Ngaw. Mr Ngaw assured him that pre-existing debts of Asia were not Mr Yang's responsibility and that Mr Yang's liability under the Legal Charge would be limited to $400,000 to be provided by way of trust receipts.

18. That afternoon Mr Yang went with Mr Tsoi, Mr Tsoi Senior and Miss Lam to TCS. At the meeting with Miss Ho, he said that Miss Ho produced a document and said that it was about what he had been discussing with the Bank. Mr Yang said that he was not given any explanation of the document, whether page by page or in terms of its overall effect. They went into a room and Miss Ho indicated to him where he was to sign. He said he did ask her about the effect of the document and Miss Ho merely said that it was what he had already discussed with the Bank and it had nothing to do with what had gone on before between Asia and the Bank. Mr Yang said that when he signed the document he thought that the terms and conditions were as discussed with Mr Ngaw, namely, that his liability would be limited to $400,000 of trust receipts and that he would not be responsible for Asia's pre-existing debts.

19. Mr Yang said that after he had signed the Legal Charge, he was taken several floors down to another firm of solicitors, that of Augustine Tong & Co. The purpose was to cancel the sale and purchase agreement with Mr Ng. This was never intended to be a sale and purchase transaction but was simply a device used for guaranteeing a loan of $300,000 that had been made by Mr Ng to Mr Tsoi Senior whom Mr Yang was willing to accommodate. This loan was repaid by Mr Tsoi Senior. Mr Yang recalled money being counted out and handed to Mr Ng directly at Augustine Tong & Co.

20. As regards the amount owing to Standard Chartered, Mr Yang said that he gave Mr Tsoi Senior $160,000 in cash on 28th July to discharge that debt as Mr Yang had to go to work that day and could not go to the solicitors himself. He said that Mr Tsoi Senior called him later that evening and said that he had paid $153,000 odd as regards the outstanding Standard Chartered loan. But TCS's receipt show that it was in fact given a cashier's order drawn on Mr Tsoi Senior's account with the Chiyu Banking Corporation Limited for the amount owing to Standard Chartered.

Credibility

21. There is only one issue in this case. That issue is one of fact, namely, whether or not there was a meeting between Mr Yang and Mr Ngaw prior to the execution of the Legal Charge and, if so, whether Mr Ngaw made the misrepresentation regarding Mr Yang's liability as is alleged. Mr Ngaw denied meeting Mr Yang prior to October 1992. In these circumstances, I have to evaluate the evidence of Mr Ngaw and Mr Yang respectively in order to determine who is the more credible witness. In this regard, I accept the submission of counsel for Mr Yang that if there was a meeting at which the representation was made as alleged, nothing that Miss Ho said to Mr Yang when the Legal Charge was executed could have undone the effect of the representation. This is because the extent of facilities to be granted by the Bank and therefore liability under the Legal Charge as explained by Miss Ho to the defendants was to be decided upon between the Bank and the defendants.

(a) Mr Ngaw

22. To properly evaluate Mr Ngaw's credibility, it is necessary to go into Asia's position with the Bank during the months of May to July 1992 in some detail. For it is against this backdrop that the Legal Charge came to be executed.

23. In all, five letters of credit were issued for Asia by the Bank. Mr Li Man Yee, the deputy manager of the bills department at the Bank's head office gave evidence. He was the supervisor of the inward bills department in 1992. As such, he was familiar with the procedure regarding transactions in that department. He said that it was the Bank's practice that letters of credit would invariably only be issued against 100% payment unless the client in question enjoyed facilities from the Bank. The applications by Asia for letters of credit were considered on a case by case basis. Each would normally be accompanied by a report from the branch if there were no facilities or the limit would be exceeded. If the branch manager supported the issuance of a letter of credit, the application might contain an endorsement "release first report later". Although it was a recommendation, all procedures still had to be gone through.

24. Asia placed fixed deposits with the Bank in 1992 as follows :

Date	Amount (HK$)
13/3	430,000
13/3	100,000
30/4	250,000
5/5	70,000
19/5	50,000

25. Set out below is a table summarising the position regarding the five letters of credit issued to Asia.

*This became 100% secured on 24th June through a transfer from Asia's current account.

Prior to the issuance of the first letter of credit, fixed deposits, sufficient to secure 100% of the amount of the letter of credit, had been placed with the Bank. Its issuance was therefore not a problem.

26. The second and third letters of credit were applied for within a few days of each other. In each case, as at the date of application, the percentage that was secured through fixed deposits placed with the Bank was in the region of 40%. The third letter of credit was in fact issued on 16th May, four days before the issuance of the second letter of credit. In each case, shortly prior to the issuance of the letter of credit, funds were transferred from Asia's current account to Asia's bills account held at the head office. Such transfers were made at the behest of the head office, in each case when Asia's current account was already substantially overdrawn. On 11th May, the sum of $116,000 was transferred from the current account. This amount coupled with a fixed deposit of $70,000 placed with the Bank on 5th May fully secured the third letter of credit. On 18th May, a sum of $285,600 was transferred from the current account. On the following day, a further sum of $70,000 was similarly transferred. These two amounts coupled with the fixed deposit of $250,000 placed on 30th April thus fully secured the second letter of credit. The amounts transferred were treated as marginal deposits in the bills account. From the perspective of the Bills Department therefore, the issuance of the first three letters of credit was on a fully secured basis.

27. On 19th May, Asia applied for facilities of $2 million for letters of credit and $1.4 million for trust receipts. It offered fixed deposits that it had placed with the Bank of $900,000, as well as a legal charge over a property owned not by Asia but by a third party to secure the balance of $500,000. This application was approved in principle on 21st May. On the same day, Asia applied for the issuance of two letters of credit, namely, the fourth and fifth letters of credit.

28. The fourth letter of credit which was for a much smaller amount was submitted to the head office on 20th May. Mr Ngaw accepted and agreed that his branch recommended the issuance of the fourth letter of credit based on Asia's application for general facilities as well as the fact that a $50,000 fixed deposit had been placed with the Bank. That of course represented only 20% of the amount of the letter of credit to be issued but it was coupled with the offer of a legal charge. On 21st May, acting on the branch's recommendation, the Bank issued the fourth letter of credit although it was not fully secured. The application for general facilities was accepted and approved in principle on 22nd May, subject only to compliance with the conditions, namely, the execution of the Legal Charge.

29. For reasons which are not apparent, the application for the fifth letter of credit made at the same time as the fourth letter of credit i.e. on 19th May, was not submitted to the head office until 29th May. Special clearance from the general manager was required before it could be issued because although it was not secured, by this time the application for general facilities had been approved in principle. Special clearance was duly obtained on 4th June and the fifth letter of credit was issued that day.

30. On 24th June, some three weeks later, the bills department required that a sum of $184,000 be transferred from Asia's current account to the bills account. Mr Ngaw allowed this to happen although the current account was overdrawn. This amount coupled with the deposit of $50,000 meant that the fourth letter of credit was by now fully secured. The transfer is of some significance. It was made from Asia's current account notwithstanding the continuing negative balance of that account. The only reasonable inference to be drawn is that there was continuing pressure from the head office for the letters of credit to be secured, no doubt because the condition, i.e. the execution of the Legal Charge, remained outstanding. And as was Mr Li's evidence, after an application had been approved in principle subject to compliance with conditions, the loans department would expect the branch concerned to deal with any problems arising. Therefore contrary to Mr Ngaw's assertion, the head office looked to him to resolve the problem of continuing non-compliance with the conditions caused by the outstanding Legal Charge.

31. In this connection, it is not disputed that the branch submitted a report to the head office to recommend the application for general facilities. The report stated that the branch wanted Asia's business and concluded by saying that the risk was not great. However, the opinion of the loans department which is noted in the report was somewhat different. The following is the loans department annotation to the report with which the deputy manager agreed :

"This account had record exceeding limit, temporarily overdrawn. Have to first of all understand transactions with associates in the same trade. Strict control over using of funds within limit."

It is also a fact established from the evidence and admitted by Mr Ngaw that he allowed the current account of Asia to be overdrawn in order to fully secure the letters of credit. He agreed that, in effect, he was using the Bank's money to pay the Bank. The evidence also shows that the various reports made to the head office in respect of the letters of credit were unduly optimistic and contained many half-truths. They were not accurate as to the number of times cheques from Asia's current account had been dishonoured and grossly inflated the amount of turnover. In fact, a substantial part of the so-called turnover represented the value of bounced cheques.

32. As noted above, Mr Ngaw's evidence that he had nothing further to do with the Legal Charge after the end of May 1992 was contradicted by the evidence of Miss Ho. The call to Miss Ho is of significance : although initial instructions emanated from the head office, Mr Ngaw's intervention showed a continuing interest in the execution of the Legal Charge because as manager of the relevant branch, he was expected to resolve the problems caused by the continuing non-execution of the Legal Charge.

(b) Mr Yang

33. That Mr Yang should have had a meeting with Mr Ngaw prior to the execution of the Legal Charge is not an occurrence that is either out of the ordinary or unexpected. In fact, given the circumstances of this case, it would have been surprising had a meeting not occurred. There is no evidence that Mr Yang was a beneficial owner of the business carried on by Asia. He did not run and had no official position in the business which was a sole proprietorship wholly owned by Mr Tsoi. Unlike the owner of the business, there was no ostensible reason for Mr Yang to become involved. But as I think is clear from the evidence, Mr Yang had a close relationship with Mr Tsoi Senior and the threat to Mr Tsoi Senior's livelihood, were Asia to founder, might well have been the reason for his agreeing to execute the Legal Charge. That Mr Yang should have inquired about the extent of his potential exposure under the Legal Charge is again nothing out of the ordinary.

34. The question is whether Mr Yang has shown himself not to be a credible witness, so that his evidence as to these occurrences ought to be rejected. Mr Yang's evidence on various issues has been contradicted by other evidence. These relate, inter alia, to the date the Legal Charge was executed, the date the cancellation agreement was executed, how payment of the $300,000 to Mr Ng was effected. Nonetheless, his evidence on these issues has not been inarguably shown to be false.

35. First, the defendants did meet with Miss Ho on 24th July and the facts are not such as to have excluded any possibility of the Legal Charge having been executed by the defendants on that occasion. Although when dealing with the events of 24th July, Miss Ho suggested that the Legal Charge had not yet been drafted, earlier in her evidence, she had said that she began preparing the Legal Charge, which was in standard form, after receiving the calls from Mr Ngaw and Mr Tsoi in the early part of July. It is entirely possible that the draft was ready by 24th July. Another reason she advanced was that in accordance with the firm's procedures she would not have allowed the Legal Charge to have been executed because of the Standard Chartered encumbrance. But that encumbrance was evidently not discharged until after the Legal Charge had been executed. Her letter to Standard Chartered was dated 28th July and the Release/Discharge was not returned to TCS until 11th August. In view of these matters, I do not consider that the evidence is such that I must rule out any possibility of the Legal Charge having been executed by the defendants on 24th July. Second, although on the face of the documents, the cancellation agreement appears to have been executed on 20th July and there is a cashier's order in the sum of $300,000 debited to Mr Tsoi Senior's account on that day, there is no evidence for example from an independent third party who was present when the cancellation agreement was executed that it was indeed executed on 20th July. Mr Yang's memory may have been at fault but it does not follow that he must have been lying. Third, as to the repayment of monies to Mr Ng, given that it is accepted that the cancellation of the sale and purchase agreement was in reality the repayment of a loan by Mr Tsoi Senior, that the loan should have attracted interest is unexceptional and the possibility of monies in addition to the $300,000 being repaid to Mr Ng cannot be dismissed out of hand.

36. On behalf of the Bank, it was submitted that the date of the cancellation agreement was crucial since once the loan was repaid and the agreement cancelled, the meeting with Mr Ngaw as alleged by Mr Yang could not have taken place because Mr Yang would already have agreed to execute the Legal Charge. That analysis overlooks the fact that the existence of the sale and purchase agreement was an impediment to the creation of the Legal Charge. Its removal was a pre-requisite to the creation of the Legal Charge. I do not therefore agree that if I were to find that the cancellation agreement was executed on 20th July, it would necessarily follow that the meeting as alleged by Mr Yang could not have occurred.

37. It was further submitted that Mr Yang had in fact been lending money to Asia since January 1992 for its business; that repayment of the $300,000 was not forthcoming, a fact which the court should infer from the supplementary agreement extending the date of completion from 7th May to 7th September 1992; that by agreeing to charge the property to the Bank, Mr Yang was not subjecting himself to greater liability because the sale and purchase agreement would be cancelled and the monies owing to Standard Chartered repaid with the risk of having to sell to Mr Ng removed.

38. As regards the monies repaid to Standard Chartered, there is no evidence to show that these came from the Tsois. The cashier's order is not inconsistent with Mr Yang's account which is that he had given cash to Mr Tsoi Senior. As to the submission itself, it appears to me that there is a world of difference between having one's exposure capped at $300,000 and unlimited liability where the property charged is worth significantly more than $300,000. I do not therefore accept the submission that Mr Yang would not be worse off by executing the Legal Charge.

Conclusion

39. Given the state of Asia's account with the Bank during the months of May to July 1992, the circumstances surrounding the issuance of the letters of credit particularly the last four letters of credit and the relationship between the head and branch offices regarding the issuance of letters of credit, I do not accept that Mr Ngaw was not concerned about and had nothing more to do with the Legal Charge after the application for credit was approved in principle and instructions had been given to TCS. It is reasonable to infer from the requests from the head office for transfers to cover the unsecured portions of letters of credit that had been issued and the ready compliance with such requests by Mr Ngaw even when Asia's current account did not warrant such transfers, that Mr Ngaw was under considerable pressure and that it was the responsibility of the branch to ensure compliance with the conditions. As Mr Ngaw had to admit, he was using the Bank's money to pay the Bank when he allowed the transfers to be made.

40. In these circumstances, it is inconceivable that Mr Ngaw was unconcerned and took no steps to procure the execution of the Legal Charge. To the contrary, he had every reason to be involved and he was involved. After all, Asia was his client whose credit applications he had enthusiastically supported to the extent of misrepresenting the state of Asia's current account to the head office. His re-activation of instructions to Miss Ho to draw up the Legal Charge during the early part of July bears out his continuing interest and involvement.

41. Moreover, if Miss Ho did provide the explanation she said she did as to what a "without limit facility" meant, namely that the limit is a matter of agreement between the Bank and the defendants, it is inconceivable that Mr Yang would not have sought further clarification had there been no prior discussion between him and Mr Ngaw in this regard.

42. As Mr Yang and Mr Ngaw cannot both be telling the truth on the only issue in this case, whilst Mr Yang's evidence has not been altogether satisfactory, on balance, I accept his evidence that he had a meeting with Mr Ngaw prior to the execution of the Legal Charge at which a representation as to the extent of his liability was made. Accordingly, the Bank's claim is dismissed with costs to Mr Yang. The Legal Charge is to be set aside and I so order.