INTERNATIONAL BANK OF ASIA LTD. v. KEWPAISAL WARRANUCH AND OTHERS

HCMP 1421/98

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

MISCELLANEOUS PROCEEDINGS

NO. 1421 OF 1998

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DECISION

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1. These two actions were heard together. The International Bank of Asia Ltd is the Plaintiff in both. There are common defendants:-

- Deluxe Diamonds (HK) Ltd is sued in both actions as the principal debtor;

- Mr Cheung Wai Sang and his wife Madam Kewpaisal Warranuch are sued in both actions as Guarantors of Deluxe Diamonds.

Madam Kewpaisal is also sued as Chargor of an apartment in MP 1421. In the other action MP 1422, High Gay is sued as Chargor of office space. In both Legal Charges, the properties were charged to secure the repayment by the Chargors and Deluxe Diamonds of banking facilities granted to that company.

2. These actions have not been consolidated, but they have been heard together as similar issues arise in both. Therefore I am handing down one Decision, but the Orders to be made are made separately in each action and should be drafted accordingly.

Proceedings

3. The action in each case commenced in April 1998 by way of Originating Summons issued under Order 88 RHC. The relief sought was:-

(1) payment of money due and payable by Deluxe Diamonds and the Chargor under the covenants in the Legal Charge;

(2) payment of money due and payable by the Guarantors; and

(3) delivery by the Chargor of vacant possession of the charged property; and

(4) costs.

4. In each case, the property was originally tenanted. In the case of MP 1421, the Plaintiff took possession of the apartment after the issue of the Originating Summons by informing the tenant to pay rents directly to it in future. In the case of MP 1422, the tenant vacated the office space after the issue of the Originating Summons and offered to return the keys to the Plaintiff and to High Gay. So it would appear that after the issue of the Originating Summons in each case, an order for possession became inapplicable.

5. The cases came before a master in December 1998, who ordered in each case that the Plaintiff recover from the Defendants certain sums with interest, and that the Plaintiff have liberty to execute the monetary judgment sum outstanding from time to time so far as it had not been paid under the monetary judgment given in the other case.

6. The Defendants raised the following points:-

(1) the actions should not have proceeded under O.88 and they should not have been heard by the master in chambers;

(2) the individual Defendants had only guaranteed the facilities available at the time the Guarantee was signed, so any subsequent change in the facilities constituted a material variation;

(3) the interest rate charged by the Plaintiff as from 16 January 1998 was unreasonable and higher than other banks;

(4) the Plaintiff had acted unreasonably in refusing to release the Legal Charge to enable the property to be sold to a proposed purchaser, and this constituted a clog on the equity of redemption.

(1) Appropriate to proceed under O.88 actions and properly heard by master

7. In my view, it was appropriate to proceed under O.88. This is the appropriate procedure where a plaintiff relies on a mortgage (or legal charge) to recover its money or to obtain possession of property (cf National Westminster Bank PLC v Kitch [1996] 1 WLR 1316, where it was held that it was not necessary to proceed under O.88 because the Plaintiff did not rely on the mortgage to recover a debt on a running account).

8. The Plaintiff here did rely on the Legal Charges, not only to recover money from the Chargors and Deluxe Diamonds, but also to obtain possession of the properties, although as events unfolded after the issue of the Originating Summonses, the applications for an order for possession were not proceeded with.

9. In any event, it is difficult to understand the Defendants' objection to the use of O.88. In the usual case, proceeding under O.88 gives more protection to the defendants, not less. Judgment in default of defence is not available, and third parties are given notice so that they can assert their rights if any.

10. The Defendants' arguments boiled down to the objection that the matter was heard in chambers by a master.

11. In this respect, it should be noted that a mortgage action may, under O.88, be commenced either by writ or by originating summons. If a mortgage action is commenced by originating summons (as in this case), it goes, in the first instance, for a first hearing before a master.

12. A first hearing of an originating summons (whether before a judge or a master) is conducted in chambers. In accordance with O.28 r.3 and 4, if the judge/master decides that the matter can be dealt with summarily, then an order disposing of the entire proceeding can be made. This is akin to an application for summary judgment under O.14, but with the difference that the burden is not cast upon the defendant, as in O.14.

13. If the judge/master decides that the matter could not or should not be dealt with summarily, he gives directions and orders a full hearing, which would be before a judge in open court (except for cases where it would be inappropriate to have the matter heard in public, e.g. applications for appointing receivers of mental patients).

14. No prejudice is suffered by a defendant in a mortgage action commenced by originating summons just because the matter is first heard by a master in chambers.

15. If it is shown at the first hearing that there are material factual issues which need to be resolved, the judge/master would order that the proceeding continue as if begun by writ, and give directions for the filing of pleadings. Alternatively, even if the affirmations show that there are factual issues, but they are insubstantial or are restricted in scope, the judge/master may order that there be cross-examination at the full hearing on those issues only.

16. As to the further point made by counsel for the Defendants on the availability of procedure for a counterclaim, it is clearly stipulated in O.28 r.7 that a counterclaim may be lodged.

17. In conclusion, therefore, I do not see what is the objection that the Defendants have to the matter proceeding under O.88 and being heard by a master.

(2) No variation

18. There was no substance in this point, which was not really developed on appeal. The Guarantee clearly contemplated and expressly provided for variations in the credit or facilities to be afforded Deluxe Diamonds after the execution of the Guarantee (e.g. clauses 1, 2 and 7).

19. Further it was clear that Mr Cheung at least was fully aware from the terms of the facilities letters that he and his wife were liable under their personal guarantees for an "unlimited amount".

20. Therefore, I see nothing in this argument.

(3) High rate of interest not a breach of obligations

21. The Defendants complain that the Plaintiff charged a substantially higher rate of interest than other banks as from mid-January 1998. However, the Defendants were unable to say whether this amounted to a breach by the Plaintiff of any of its obligations to the Defendants, and if so, which obligations and how they were breached. The complaint seemed to be a general complaint of "unreasonableness".

22. Mr Khaw, counsel for the Plaintiff, pointed to a number of contractual provisions giving the Plaintiff discretion to determine the rate of interest. The Defendants have however not produced any materials which might lead the court to find, in the exercise of its equitable jurisdiction, that the interest rate was irrecoverable for being penal in nature.

23. Accordingly, I can see no substance in this argument either.

(4) Not acting unreasonably in not releasing charge, and not a clog on the equity of redemption

24. The Legal Charges here were "all-monies" mortgages, in that they provided security for the entire debt owing to the Plaintiff. Therefore, the Plaintiff was not obliged to release the charges unless it (the Plaintiff) was paid in full.

25. The Defendants have adduced evidence that they had proposed to sell the premises at a reasonable price supported by a valuation report, but that the Plaintiff had refused to release the charge on the premises. The Defendants argue that this was unreasonable on the part of the Plaintiff and it was submitted that this conduct constituted a clog on the equity of redemption.

26. In my view, this was not a clog on the equity of redemption. There was no bar to the mortgagor's right to redeem. When a mortgagor or chargor agrees to execute an all-monies mortgage or charge, he does not lose or clog his right to redeem - it is just that he agrees that the property may be redeemed by repaying the entire principal and interest under the loan.

27. As for the Plaintiff refusing to release the charge for the Defendants' proposed sale of the premises upon part-payment of the loan only, I am afraid I do not see how the Plaintiff can be held liable. It has often been said that a mortgagee is not a trustee for the mortgagor- on the contrary, the interests of the mortgagee and mortgagor are often adverse to each other's.

28. It is well-established law that a mortgagee holds his interest in the property for his own benefit and to protect his own interests. He may choose to hold onto the property and to let it out for rental, or to sell it; and if he does choose to sell, he may choose the time which suits him best. It is only when he does choose to sell it that he must exercise his power of sale bona fide and with reasonable care, but even then, he is under no obligation to delay the sale in order to get a better price. In my view, it must follow logically from the above that the Plaintiff was under no obligation to release the charge before full repayment, and it was at liberty to pursue its own agenda regarding its interest in the premises.

29. Accordingly, I see nothing in this argument. The existence of a surety does not add anything to the consideration (China and South Sea Bank Ltd v Tan 1989] 3 All ER 839).

Orders

30. In the circumstances, I would dismiss these appeals with an order nisi in each case that the costs should be paid by the Defendants to the Plaintiff.