RE: LAM YUK HA and EX PARTE: CHEKIANG FIRST BANK LTD.

HCB 62/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

IN BANKRUPTCY NO. 62 OF 2000

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J U D G M E N T

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1. These two Petitions for bankruptcy were ordered to be heard together. The Debtors, Mr Tse Sheung Yan and Madam Lam Yuk Ha, are husband and wife. They were the customers of the Petitioner, Chekiang First Bank Limited ("the Bank"). The Petitions were brought in respect of the unsecured part of a judgment debt obtained by the Bank against the Debtors in the sum of HK$5,146,618.59 in HCMP No. 3148 of 1999 dated 17 August 1999. In the Petition which was filed on 6 January 2000, the Bank gave the estimated value of the security, being a property known as Flat B on 30th Floor of Tower 2, The Waterside, No. 15 On Chun Street, Ma On Shan, Shatin, New Territories ("the Property") at HK$4,100,000.00. Shortly before the hearing of the Petitions, and on 20 June 2000, the Bank signed a Provisional Sale and Purchase Agreement in respect of the Property with a purchaser at the price of HK$2,950,000.00. According to the latest affidavit of continuing default filed on behalf of the Bank on 23 June 2000, the Debtors' indebtedness amounted to HK$2,395,157.89 plus further daily interest accruing thereon at the rate of 8.75% per annum.

2. The Debtors oppose the Petitions on two grounds. Firstly, they say that they had reached an agreement with the Bank in 1999 by which the Bank allowed the Debtors time to repay with concessions including waiving interest for 6 months in return for the Debtors' promise to deliver up vacant possession of the Property and to allow the Bank to sell it at not less than HK$4.6 million. The Debtors allege that as the Bank had reneged on the agreement in their meeting with the Bank on 23 September 1999, they refused to deliver up vacant possession to the Bank. Secondly, the Debtors allege that the Bank had sold the Property at an under value of at least 20% below the market price in June 2000.

3. The Bank denies that there was an agreement with the Debtors as alleged. They admitted that they had agreed to offer certain concessions to the Debtors in July 1999 on condition that the Debtors were to deliver up vacant possession of the Property on or before 17 August 1999, which was the hearing date of the originating summons in the mortgage action taken out by the Bank against the Debtors in HCMP No. 3148 of 1999. That offer had lapsed and the Debtors were not able to take advantage of the concessions because they did not vacate the Property by 17 August 1999. In any event, even if there was any agreement with the Debtors as alleged, the Bank contends that there is no consideration for such an agreement in that there was merely to be performance of an existing obligation. The Bank further denies that the sale of the Property in June at HK$2,950,000.00 was at an under value.

4. Mr Tse and Madam Lam gave evidence and were cross-examined. The Bank called 3 witnesses, Mr Brian Loh Him Toa, the manager of the Shaukeiwan branch; Mr Daniel Yip Kai Tung, a credit officer of the Loans and Credit Department; and Mr Chan Ying Dik, a senior credit officer of the same department. Of the documentary exhibits produced by the Bank from its internal records, the most important ones are the log sheet for customer call of the Shaukeiwan branch from April 1999 to March 2000; an internal memo dated 6 July 1999 from the Loans and Credit Department to Mr Loh of the Shaukeiwan branch; and the extracts of various progress reports for problem accounts compiled by Mr Yip. The Bank's witnesses were cross-examined by Mr Tse and Madam Lam.

Facts not in dispute

5. Mr Tse was and is at all material times a property agent. In April 1997, he and Madam Lam entered into an agreement to purchase the Property and obtained a mortgage loan from the Bank to finance the purchase. When completion took place in November 1997, property prices had fallen drastically. Mr Tse and Madam Lam had defaulted in payment of the mortgage instalments in or about February 1999. On 15 May 1999, the Bank's solicitors issued letters of demand to the Debtors for the sum of HK$4,880,417.42 and threatened legal action if payment was not made within 7 days. On 27 May 1999, the Bank issued the originating summons in the mortgage action for vacant possession of the Property and for money judgment. The Debtors returned the Acknowledgement of service stating that they did not intend to contest the mortgage action. They did not attend the hearing on 17 August 1999, and an order was made by which the Debtors were ordered to pay HK$4,982,802.75 with interest as stipulated and to deliver up vacant possession of the Property within 28 days of the service of the order. The order was not complied with by the Debtors. On 12 November 1999, a writ of possession and fi fa combined was issued and it was on 17 December 1999 that the Bank eventually obtained possession through the Court Bailiff. The Petitions for bankruptcy against the Debtors were filed in January 2000.

The alleged agreement

6. There were differences in the evidence of Mr Tse and Madam Lam as to when the alleged agreement was reached with the Bank and the terms thereof.

7. According to Mr Tse, the agreement was made by Madam Lam with Mr Loh in August 1999 and the terms thereof related to him by Madam Lam were as follows:

(i) they were to deliver the keys of the Property to the Bank on or before 23 September 1999;

(ii) once (i) was complied with, the Bank would waive interest for 6 months;

(iii) further, they would not have to pay instalment payments of the mortgage loan for 6 months;

(iv) the Bank would sell the Property within 6 months at not less than HK$4.6 million; and

(v) after the Property was sold, and if there was an outstanding amount owed to the Bank, they were required to pay only the principal over a period of 7 years and they would not be obliged to pay any interest.

8. According to Madam Lam, she reached an agreement with Mr Loh on or about 10 July 1999 and she informed Mr Tse of the agreement afterwards. As for the terms, they included (ii), (iv) and (v) as set out above. However, according to Madam Lam, it was agreed that she and Mr Tse were to move out of the Property as soon as possible and it was not a term of the agreement that they should vacate the premises by a specific date. Madam Lam also stated that there was no term agreed as in (iii) above, the Bank had only agreed to waive interest for 6 months, there was no agreement to waive instalment payment of the mortgage loan.

9. As for the Bank, the evidence was that an agreement was reached with Madam Lam sometime in July 1999, after there was a meeting of the senior management of the Bank on 30 June 1999. The terms that the senior management had decided to offer to Madam Lam and which were accepted by her were as follows:

(i) the bank would waive interest in respect of the mortgage loan for 6 months;

(ii) in return, the Debtors were to surrender the Property to the Bank on or before 17 August 1999, which was the hearing date of the mortgage action; and

(iii) they would allow the Bank to sell the Property for at least HK$4,600,000.00.

10. Those were the only terms which the Bank had agreed to offer to Madam Lam at any time. She was, however, unable to take advantage of those concessions because the Property was not surrendered to the Bank on or before the hearing of the mortgage action.

11. The Bank's officer who was responsible for communicating the offer as decided by the senior management was Mr Ronnie Ng Pui Hung and it would appear from the log sheet that he did so on 8 July 1999. Mr Ng had filed an affirmation in these proceedings but he was not called to give evidence as he had left the Bank's employment on 5 June 2000 and is now in Canada. As he was not called as a witness, his affirmation could not be used by the Bank. Nevertheless, there is evidence from Mr Loh and Mr Yip who had spoken to Madam Lam in July and August 1999 and these witnesses have testified that they had spoken to Madam Lam about the agreement (the terms of which were communicated to her by Mr Ng earlier). I should also mention that although the log sheet was written by Mr Ng, who was the trainee marketing officer of the Shaukeiwan branch at that time, it was the practice for Mr Ng to report the telephone conversation he had with the customer to Mr Loh and Mr Loh would initial the log sheet after Mr Ng had written the account of the telephone conversation and Mr Loh had approved the entry. In the instances where Mr Loh had telephone discussions with a customer, he would inform Mr Ng of the contents and after a record was made by Mr Ng of it in the log sheet, Mr Loh would initial the entry to signify his approval.

The evidence of the Debtors

12. The gist of the evidence given by Mr Tse and Madam Lam may be given as follows. They were never told by anyone from the Bank that they had to move out of the Property on or before 17 August 1999, failing which they would not be offered the concessionary terms. Madam Lam had a number of telephone discussions with Mr Loh and other staff of the Bank in July and August 1999 and in all those discussions, she had only said that she would move out of the Property as soon as she was able to find alternative accommodation for her family. It was only on 12 September 1999 that she and Mr Tse had signed a tenancy agreement for another flat. She had notified Mr Loh about this the following day and told him she would move out of the Property on 19 September 1999 and asked him to arrange a time for the keys to be handed over to the Bank. She also requested Mr Loh to confirm the terms of the agreement in July 1999 and proposed that the terms should be set out in a document for her and Mr Tse to sign. On 21 September 1999, Mr Loh informed Madam Lam that he had made an arrangement for the Debtors to attend the headquarters of the Bank for the keys to be handed over and a surrender letter to be signed by the Debtors. When Madam Lam and Mr Tse attended the headquarters as arranged, the Bank's officers denied that the Bank had an agreement with them as per the terms offered in July 1999. The only concession made by the Bank on that day was to offer them waiver of interest for 3 months. Madam Lam and Mr Tse were angry that the Bank had broken its promise and they felt they were tricked into signing a letter of surrender, which they declined to do.

The Bank's evidence

13. It is the Bank's evidence that its officers had quite a number of telephone discussions with Madam Lam during the period of April to September 1999. After the Bank's solicitors had issued the letters of demand in May 1999, Madam Lam had proposed to the Bank that the Debtors would surrender the keys to the Bank in August and requested the Bank to stop legal action. Later in June 1999, she proposed to the Bank that she would only surrender possession if the Bank would agree to waive interest. As a result, there was a meeting of the senior management on 30 June 1999 to discuss the terms that the Bank would be prepared to offer to the Debtors. Throughout July and August 1999, after the terms were communicated to Madam Lam and accepted by her, there were a number of telephone discussions with Madam Lam in which she gave various promises to move out of the Property in early August and before the hearing date of 17 August. It was in mid August 1999 that she informed the Bank that she required further time to look for another apartment. Notwithstanding the deadline for delivering possession in August had passed, the Bank was still prepared to negotiate with her to see if she would deliver up possession voluntarily. And even after the meeting on 23 September 1999 when the Debtors refused to surrender possession, the Bank had still contacted the Debtors to see if they would voluntarily vacate the premises and accept the new offer of an interest-free period of 3 months.

Analysis of the evidence

14. Mr Tse and Madam Lam are shrewd and astute. From the evidence they gave, the way they conducted their cross-examination of the Bank's witnesses and the separate submissions they had made to this court, I have formed the impression that they are well aware of their rights, even though they profess that they are not well versed in English and do not understand the legal terms in the documents they received from the Bank's solicitors. Even though they had little bargaining power, Madam Lam had apparently adopted a tough stance in her negotiations with the Bank as borne out by the log sheet. With these considerations in mind, I would be slow to find that they were deceived or taken advantage of by the Bank as alleged.

15. On a closer analysis of their evidence, I have come to the view that I cannot accept the version put forward by the Debtors and my reasons are as follows.

16. Firstly, there is discrepancy between Mr Tse's evidence and Madam Lam's evidence on the terms of the alleged agreement as pointed out in the earlier part of this judgment. I regard this as important, particularly the difference between them as to whether they were required to deliver up the keys by a specific date. As submitted by the Bank's counsel, Mr James Thomson, the date of 23 September mentioned by Mr Tse as the date for handing over the keys simply had no significance in August 1999, when Mr Tse was allegedly told by Madam Lam of the agreement she had reached with Mr Loh.

17. Secondly, there is another serious conflict between Mr Tse and Madam Lam in their testimony. According to Mr Tse, Madam Lam had discussed with him the terms she was to put to the Bank in the negotiations, including the term that they were to have 7 years to repay the debt, and that the Bank should waive interest throughout the 7-year period. Madam Lam however denied that she had ever discussed with Mr Tse as to what terms should be proposed to the Bank and that she had only told Mr Tse of the terms after she had reached an agreement with the Bank. Moreover, the terms offered by the Bank were not suggested by her but were suggested by the Bank. Again, I regard this conflict of evidence between Mr Tse and Madam Lam as significant and damaging to their credibility.

18. Thirdly, I think Madam Lam's account that she was not required by the Bank to deliver up possession by the hearing date of the mortgage action as improbable and I reject her evidence on this. It is unlikely that the Bank would not have given her a deadline to deliver up vacant possession bearing in mind that the Bank had issued an originating summons which was to be heard on 17 August 1999. If she had told the Bank that she would merely move out as soon as possible without committing herself in any way to giving up possession by a specific time, it would be unlikely that the Bank would be content with this and most certainly the Bank would not have agreed to offer waiver of interest for 6 months (which amounted to a substantial benefit because daily interest was over HK$1,000.00). Further, Madam Lam's version is not borne out by what she was recorded to have said in the various entries in the log sheet in July and August 1999. According to the record, she had informed the Bank at various times that she would move out in early August and before the hearing date on 17 August. She could only have made that kind of promise if she knew that she had to move out before the hearing date.

19. Fourthly, Madam Lam's allegation that Mr Loh had agreed to give her 7 years to repay the indebtedness and that interest would be waived throughout this period does not seem to me to accord with the reality and commercial sense. It seems clear on the evidence that Mr Loh had no such authority to make that kind of promise. Certainly, the decision as to what terms to offer to a customer of a problem account was to be taken by a committee of the senior management, hence the meeting on 30 June 1999. I do not see why Mr Loh should offer to Madam Lam a term which, as Mr Loh knew or must have known, was clearly beyond his authority. It was Mr Loh's evidence that although the matter of giving the Debtors 7 years to repay was mentioned by Madam Lam to him, he had told her that the matter could only be discussed after the Property had been sold and the relevant factors had been submitted to the senior management. The relevant factors would include the debtor's ability to repay, his income and the amount outstanding after the security had been realised. It was Mr Chan's evidence that giving the Debtors 7 years to repay was simply not discussed at the meeting of the senior management which he attended in June 1999. I accept the Bank's evidence on this.

20. Fifthly, on 16 August 1999, the day before the hearing of the mortgage action, the Bank's solicitors had written a letter to Madam Lam and it was left at the Property. The letter stated that notwithstanding negotiations between Madam Lam and the Bank regarding the surrender of the Property, no binding agreement had been reached and the Property had not been surrendered by the date of the letter. The Bank had therefore instructed solicitors to obtain an order for possession and money judgment at the hearing the next day. Madam Lam did not deny that she had knowledge of this letter. If she did have an agreement with the Bank as alleged and that she was not required to deliver up vacant possession before the hearing date, I find it odd that she had not protested at that time that the Bank had reneged on the alleged agreement.

21. Sixthly, Madam Lam said in her evidence that when she spoke to Mr Loh in September 1999, she asked him whether the Bank would "still" give her the advantages as promised if she was to deliver up the keys on 23 September. I think this is a telling statement, as it showed that Madam Lam was keenly aware that the terms offered in July 1999 would not or might not be available to her in September because she had not delivered up vacant possession as required before the hearing date of the originating summons.

22. For the above reasons, I reject the Debtors' evidence on the alleged agreement. I accept the evidence given by the Bank's witnesses, which is supported by contemporaneous records, regarding the terms that the Bank had offered to Madam Lam in July 1999 and that the terms were not open to her to accept in September because the Debtors had failed to comply with the condition of delivering up possession by 17 August 1999.

Was there consideration for the alleged agreement

23. That being the finding I have reached on the alleged agreement, it is not strictly necessary for me to deal with the fall-back argument of the Bank, which is that even if there was an agreement to the effect as alleged by the Debtors, there was no consideration for that agreement because it amounted to a performance of an existing obligation. If I had to rule on this, I would have decided the point in favour of the Bank in that I would prefer to follow the decision of the English Court of Appeal in Re Selectmove Ltd [1995] 1 WLR 474. I would have declined to follow an earlier case of the English Court of Appeal in Williams v. Roffey Bros & Nicholls (Contractors) Ltd [1991] 1 QB 1.

The alleged sale at an under value

24. The Debtors allege that the sale of the Property at HK$2,950,000.00 on 20 June 2000 was at an under value in that it was at least 20% less than the market price. Mr Tse relied on transactions recorded to have been made in respect of a number of apartments in The Waterside between June 1999 and June 2000, which he had obtained from the website of his employer.

25. The Bank has adduced evidence to show how it had marketed the Property since recovering possession in December 1999, that the Property was initially advertised at HK$4,200,000.00 in January 2000, then it was lowered to HK$3,500,000.00 in May 2000 and eventually at HK$3,000,000.00 in June 2000. No offers were received by the Bank from the advertisements. Eventually, the Property was sold at the price as stated through a property agency which was a wholly owned subsidiary of the Bank. The Bank had also produced the reports it had obtained from two surveyors in March 2000 giving the market value and the forced sale value of the Property and the latest report it had obtained from a valuer on 21 June 2000. In the latest report, the market value was estimated at HK$3,000,000.00 and the forced sale value at HK$2,400,000.00.

26. On the available evidence, I am unable to say that the Debtors have made out a prima facie case that they would have a claim against the Bank for breach of duty as mortgagee in exercising the power of sale. This is perhaps unnecessary for my decision, because even if the Debtors do have a viable claim against the Bank, the value of their claim (being 20% less than the market value in the region of HK$760,000.00) is well short of the unsecured part of the debt owed to the Bank, being the judgment debt of about HK$5.4 million less the proceeds of sale of HK$2,950,000.00.

27. It may be a matter for the Official Receiver to consider after taking over the Debtors' affairs whether a claim should be made against the Bank for the alleged sale at an under value. However, that is not a reason against making a bankruptcy order in the circumstances of this case.

Order

28. I would therefore make a bankruptcy order on each of the Petitions presented against Mr Tse and Madam Lam. There would be an order nisi that the Petitioner is to have the costs of the Petition in the two sets of proceedings.