BANK OF CHINA (HONG KONG) LTD v. TWIN PROFIT LTD AND OTHERS

HCMP 874/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 874 OF 2009

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BETWEEN

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J U D G M E N T

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Introduction

1.  The plaintiff, Bank of China (Hong Kong) Limited, commenced this mortgage action by originating summons dated 8 May 2009 seeking delivery of vacant possession of various mortgaged properties and payment of sums due together with interest and costs.

2.  By summons dated 9 September 2009, the defendants applied for an order that the proceedings be continued as if begun by writ and for directions for the further conduct of the proceedings.

3.  On 25 January 2010, Master de Souza acceded to the plaintiff’s application and summarily entered judgment for the plaintiff for the aggregate sum of HK$265,840,469.02 and interest and made orders against the 2^nd and 5^th defendants for delivery to the plaintiff of vacant possession of various charged properties.

4.  This is the defendants’ appeal against that order.

The applicable test

5.  The plaintiff’s application is made under RHC O. 28 r. 4(1), which, so far as material for present purposes, provides:-

“The Court by whom an originating summons is heard may, if the liability of the defendant to the plaintiff in respect of any claim made by the plaintiff is established, make such order in favour of the plaintiff as the nature of the case may require, …”

6.  On an application under RHC O. 28 r. 4(1), the action may be disposed of summarily where the court is satisfied that there are no triable issues: see Hong Kong Civil Procedure 2010 (Vol. 1) Note 28/4/1 (p. 607) and Bank of China (Hong Kong) Ltd v. Keen Lloyd Resources Ltd, unrep., CACV 1787/2001 at §19.

7.  The commentary in the White Book at Note 28/4/1 observes that O. 28 r. 4(1) approximates the rights of a plaintiff in an action begun by originating summons to those under Orders 13, 14 and 19 of an action begun by writ. Whilst there is no provision for default judgment, if the defendant files no evidence, or the plaintiff considers that the defendant’s evidence discloses no triable issue, he may seek a summary judgment under r. 4(1).

8.  Such an application by the plaintiff 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. Unlike O. 14 applications, the plaintiff must first justify its entitlement to summary judgment, but once this is demonstrated prima facie on the evidence, the burden falls on the defendant to show that he has a defence to the claim. In practice, therefore, there may be little difference between an application for summary judgment in originating summonses and an application for summary judgment under O. 14: see Wing Hang Bank Ltd v. Liu Kam Ying & ors [2002] 2 HKC 57 per Ma J (as he then was) at §§7 and 10.

The plaintiff’s claim

9.  The plaintiff’s claim is a simple one.

10.  The plaintiff and its predecessors, the Kincheng Banking Corporation HK Branch (“KBC HK Branch”) and Bank of China HK Branch (“BOC HK Branch”), extended various banking facilities to the defendants.

11.  The 1^st, 2^nd and 5^th defendants variously provided mortgages over a number of properties by way of security for those banking facilities. Those properties are respectively defined in the originating summons as the 1^st, 2^nd and 3^rd Charged Properties.

12.  The amounts outstanding from the 1^st to 7^th defendants as mortgagors and/or borrowers under the various banking facilities total HK$265,840,469.02 and this total is not disputed.

13.  Pursuant to the Bank of China (Hong Kong) Limited (Merger) Ordinance (Cap. 1167) (“the Merger Ordinance”), all the businesses and undertakings of, amongst others, KBC HK Branch and BOC HK Branch were transferred to and vested in the plaintiff with effect from 1 October 2001. As a result, the plaintiff succeeded to all the rights and interests of KBC HK Branch and BOC HK Branch as lenders vis-à-vis the various defendants, and is entitled to enforce such rights against them.

14.  The plaintiff’s originating summons seeks an order for delivery of vacant possession of the Charged Properties, recovery of the sums due under the mortgages together with interest and costs.

15.  I am satisfied that the plaintiff has shown prima facie on the evidence that it is entitled to summary judgment in this matter. It therefore falls to consider whether the defendants have shown they have a defence to the plaintiff’s claim.

The defendants’ case

16.  The defendants’ case is set out in three affirmations made on their behalf by Mr Mok Wei Tak, a director of each of the defendants. As set out in his evidence, it is the defendants’ case, in broad summary, that:-

(1)  The 6^th and 7^th defendants, together with another related company called Carefree Development Ltd (“Carefree”), held, through their subsidiaries, a 60% interest in a building in Beijing called Central Plaza (“Beijing Central Plaza”).

(2)  Towards the end of 1997, representatives of the head office and Beijing branch office of Bank of China (“BOC”) visited Beijing Central Plaza and became interested in purchasing the building in order to set up the Beijing branch office of the bank.

(3)  BOC decided that Kincheng Investments & Developments (China) Ltd (“Kincheng China”) would purchase the shareholding in the subsidiaries of the 6^th and 7^th defendants in order indirectly to acquire the ownership of Beijing Central Plaza.

(4)  On 22 February 2000, Kincheng China entered into written agreements with the 6^th defendant, the 7^th defendant and Carefree to purchase the shares of the subsidiaries through which their 60% interest in Beijing Central Plaza was owned.

(5)  In addition to the stated consideration in the written agreements, it was orally agreed by BOC that Kincheng China would pay the 6^th defendant, the 7^th defendant and Carefree additional consideration in the net amount of HK$186 million as the agent or nominee of its principal, BOC.

(6)  On 23 March 2001, Kincheng China paid the sum of HK$50 million to the 6^th defendant, the 7^th defendant and Carefree but has not paid the balance of HK$136 million in breach of the agreement to do so.

(7)  It was the defendants’ intention to use the proceeds of the sale of their interest in Beijing Central Plaza to repay the defendants’ debts to the plaintiff.  As a result of BOC’s and/or Kincheng China’s failure to pay the balance of HK$136 million, the defendants have encountered financial difficulties and have not been able to repay the debts the subject of this action and have suffered other unliquidated loss and damage.

(8)  Representatives of the plaintiff’s predecessors participated in the course of negotiations between the parties in respect of the non-payment by Kincheng China.  The defendants rely on this participation as supporting a contention that the liability of BOC and/or Kincheng China to pay the additional HK$136 million falls within the definition of the businesses and undertakings transferred to and vested in the plaintiff by virtue of the Merger Ordinance.

17.  On the basis of the matters referred to above, the defendants contend that the 6^th and 7^th defendants have a valid set-off and counterclaim against the plaintiff for failure to pay the additional HK$136 million. The defendants also seek to set-off their claim, and to counterclaim, for unliquidated damages against their liability to the plaintiff. Since these defences and cross-claims are not suitable for summary dismissal, the defendants contend they should have leave to defend the proceedings and to serve a counterclaim.

What was transferred to the plaintiff under the Merger Ordinance?

18.  The crux of the defendants’ case is the assumption by the plaintiff of responsibility for the alleged oral agreement by BOC and/or Kincheng China to pay an additional HK$186 million to the 6^th defendant, the 7^th defendant and Carefree by way of consideration for the shares of their subsidiaries.

19.  This involves an examination of the terms of the Merger Ordinance to determine what precisely was merged into and transferred to the plaintiff.

20.  Under the Merger Ordinance, the merger was limited to the businesses and undertakings of:-

(1)  BOC HK Branch;

(2)  the Hong Kong branches of certain Mainland incorporated banks in the Bank of China Group (which included KBC HK Branch);

(3)  Hua Chiao Commercial Bank Limited (a bank in Hong Kong under the Bank of China Group); and

(4)  the Shenzhen branches of the Kwangtung Provincial Bank and Sin Hua Bank Limited (companies incorporated under PRC law).

21.  As to the above, see:-

(1)  the Preamble to the Merger Ordinance, esp. para. (i);

(2)  the definitions of “Bank of China”, “Bank of China Group”, “Bank of China Hong Kong Branch”, “the Hong Kong branches of the Mainland incorporated banks”, “Hua Chiao”, “Kwangtung”, “Kwangtung Shenzhen Branch”, “Kincheng”, “Mainland incorporated bank”, “merging bank”, “the merging branches”, “Sin Hua”, “Sin Hua Shenzhen Branch” and “undertaking of Hua Chiao” in s. 2(1); and

(3)  the provision in s. 5(1)(a) providing for the vesting of the merging branches in, and their transfer to, the plaintiff.

22.  It therefore follows that, in the case of the Bank of China and the Kincheng Banking Corporation only their businesses carried on in or from their branches in Hong Kong were merged into the plaintiff under the Merger Ordinance.

23.  Furthermore, by virtue of the definition of the word “existing” in s. 2(1) of the Ordinance, it is only the property and liabilities of the Hong Kong branches of the Mainland incorporated banks existing, outstanding or in force immediately before the appointed time (i.e. 1 October 2001) that were to be transferred to and vest in the plaintiff.

24.  The above analysis of the operation and effect of the Merger Ordinance was not seriously challenged by the defendants.

25.  Instead, Mr Russell Coleman SC, counsel for the defendants, submitted that there was at least sufficient material before the court to conclude that the arrangements in respect of the acquisition of Beijing Central Plaza, including the agreement to pay the additional HK$136 million, were part of the business of the KBC HK Branch and/or the BOC HK Branch so that liability for failure to pay that sum was assumed by the plaintiff under the Merger Ordinance.

Were the arrangements relating to Beijing Central Plaza part of the business of KBC HK Branch and/or BOC HK Branch?

26.  In support of his submission that the arrangements relating to Beijing Central Plaza were part of the business of KBC HK Branch and/or BOC HK Branch, Mr Coleman SC relied on a number of documents.

27.  First, he relied on the minutes of a meeting dated 27 May 1999 (exhibited by Mr Mok as “MWT-2”) at which the purchase of Beijing Central Plaza was discussed. Those minutes identified the “Deputy General Manager of Hong Kong Kincheng Bank” as being present. It is also recorded that the Deputy Branch Manager of the Bank of China Beijing branch inquired whether, since the Beijing branch office was not permitted to set up companies in Hong Kong, “[c]ould Kincheng Bank acquire the shares on its behalf (and hold the shares on trust)”. These were references, he submitted, to the purchase of the building being part of the business being conducted on behalf of BOC by KBC HK Branch.

28.  Secondly, he referred to the share acquisition agreements entered into on 22 February 2000 by which Kincheng China agreed to acquire the shares of the subsidiaries of the 6^th defendant, the 7^th defendant and Carefree.

29.  Thirdly, he referred to a letter from Well Charm Investment Limited, one of the 6^th defendant’s subsidiaries through which it held an interest in Beijing Central Plaza, to Kincheng China dated 5 July 2001 (exhibited by Mr Mok as “MWT-7”), in which there is reference to a balance payment of HK$135,829,937 remaining outstanding as at that date and also reference to a total purchase price for Beijing Central Plaza of RMB720 million. The letter also appends a schedule showing how the total sum of HK$185,829,947 is arrived at and its reduction by the HK$50 million payment in March 2001.

30.  Fourthly, Mr Coleman SC referred to an internal memo dated 29 November 2000 entitled “Urgent report on Kincheng Bank’s acquisition of Beijing Central Plaza” (exhibited by Mr Mok as “MWT‑10”). This document was copied to “Kincheng Bank, Hong Kong Branch” and was issued by the “Bank of China Hong Kong and Macau Regional Office” (“BOC HK & Macau Regional Office”). Mr Coleman SC submitted that the first sentence of this memo made it clear that (1) it was the KBC HK Branch that was making the acquisition, and (2) the matter was being dealt with by the BOC HK & Macau Regional Office as part of its supervisory role in Hong Kong of BOC and therefore as part of the business of the BOC HK Branch.

31.  In connection with the involvement of the BOC HK & Macau Regional Office, Mr Coleman SC also referred to the evidence of Ms Chu Tan Fan, who previously worked in the Business Department of that office, that she had, prior to 1 October 2001, been involved in the preliminary assessment of Kincheng China’s acquisition of Beijing Central Plaza and was responsible for reporting its details and progress to the head office of BOC in Beijing.

32.  All of this showed, submitted Mr Coleman SC, that the acquisition of the Beijing Central Plaza was business being carried on by BOC and Kincheng Banking Corporation in or from their branches in Hong Kong and was therefore part of the businesses merged into the plaintiff by virtue of the Merger Ordinance.

33.  Despite the submissions made on behalf of the defendants by Mr Coleman SC, I have reached the conclusion that the defendants have not shown they have a defence to the plaintiff’s claim.

34.  As to the involvement of Kincheng China, it is important to keep its status in mind. At the time it entered into the alleged oral agreement in respect of Beijing Central Plaza and the written agreements dated 22 February 2000, which was prior to 1 October 2001 when the arrangements under the Merger Ordinance took effect, it was a subsidiary of the Kincheng Banking Corporation, a company incorporated under national (i.e. PRC) law, and not of KBC HK Branch, which did not then have any separate legal personality.

35.  Furthermore, any liabilities of Kincheng China were not transferred to and merged in the plaintiff pursuant to the Merger Ordinance. The evidence in the second affirmation of the plaintiff’s manager, Mr Pang Chi Hung, unchallenged in this respect, is that the entire share capital of Kincheng China was transferred to a company known as Gold Fortune Management Corporation (“Gold Fortune”) on or about 28 September 2001. By reason of the definition of “existing” in s. 2(1) of the Merger Ordinance, Kincheng China and its liabilities would not fall within the “existing property and liabilities of the Hong Kong branches of the Mainland incorporated banks” including KBC HK Branch. The defendants are not able to show any material to suggest that Gold Fortune is another vehicle by which the Kincheng Banking Corporation conducted business in Hong Kong or that any liabilities of Kincheng China (assuming they were liabilities of BOC HK Branch or KBC HK Branch) were not divested by reason of the transfer of its share capital to Gold Fortune.

36.  The documents relied upon by Mr Coleman SC do not, in my opinion, give rise to a triable issue as to whether the involvement of Kincheng China in the Beijing Central Plaza deal was undertaken as part of the business of the KBC HK Branch or BOC HK Branch. This is all the more so when viewed in the light of the way the defendants’ case was first put and the reaction of the defendants to demands for repayment by the plaintiff.

37.  In the first place, none of the documents actually states that the Beijing Central Plaza deal was undertaken as part of the business of one or other of the Hong Kong branches in question and it is the defendants’ own evidence that it was the representatives of the head office and/or the Beijing branch office of BOC that decided to acquire the building for the purpose of accommodating the Beijing branch office of BOC.

38.  On the contrary, the “MWT-2” minutes record that the Deputy General Manager of “Hong Kong Kincheng Bank”, was asked if “Kincheng Bank”, which may or may not equate to KBC HK Branch, could acquire the shares in Beijing Central Plaza on behalf of the Beijing branch office of BOC and hold them on trust. At most, this points to BOC via its Beijing branch or head office undertaking the transaction but using an agent or nominee to act on its behalf. That agent or nominee was Kincheng China, as demonstrated by it becoming a party to the 22 February 2000 written agreements.

39.  Furthermore, since Kincheng China was a subsidiary of the Kincheng Banking Corporation and not of KBC HK Branch, this does not support a conclusion that the involvement of Kincheng China was part of the business of KBC HK Branch.

40.  Given that the acquisition was for the purposes of the business of the head office and Beijing branch office of BOC, the 22 February 2000 written agreements do not support a conclusion that the share acquisition was part of the business of KBC HK Branch. Indeed, as “MWT-2” records, the involvement of “Kincheng Bank” was proposed as trustee for the Beijing branch office of BOC.

41.  The letter “MWT-7” clearly indicates that the acquisition of Beijing Central Plaza was for the Beijing branch of BOC and there is no reference in “MWT-7” to KBC HK Branch or BOC HK Branch.

42.  The letter does refer to the 22 February 2000 written agreements and to an obligation on the part of Kincheng China to pay an outstanding balance of approximately HK$136 million after taking into account a payment of HK$50 million in March 2001. This figure is supported by a schedule appended to the letter which in fact appears to indicate that the HK$186 million liability arises as an obligation to discharge the shareholders’ loans of the 6^th defendant, the 7^th defendant and Carefree under the written agreements rather than a separate oral agreement.

43.  The letter suggests that Kincheng China’s delay in making payment resulted in the 7^th defendant and its subsidiaries having to pay overdraft interest to “Kincheng Bank”. But even if this reference to Kincheng Bank is assumed to be a reference to KBC HK Branch, it does not follow that Kincheng China’s obligation was part of its business.

44.  The copying of the internal memo, “MWT-10”, to KBC HK Branch is explicable, in my view, by the fact that by this stage, the defendants, who were indebted to both BOC HK Branch and KBC HK Branch at the time, were seeking to excuse their non-payment by reference to Kincheng China’s delay in payment in respect of Beijing Central Plaza. The mere fact of copying the document to a particular branch does not elevate the obligation of Kincheng China into the business of that branch, in this case KBC HK Branch.

45.  As regards the defendants’ reliance, by reference to “MWT‑10” on the participation of officers of the BOC HK & Macau Regional Office in negotiations concerning the Beijing Central Plaza deal, the plaintiff filed evidence of Ms Chu Tan Fan, the Head of Corporate Assets Recovery in the Risk Management Department of the plaintiff, to explain that the BOC HK & Macau Regional Office was an office set up in Hong Kong by BOC and was a separate entity from BOC HK Branch and KBC HK Branch. This evidence was not contradicted by any evidence from the defendants.

46.  The defendants suggested that Ms Chu’s current employment by the plaintiff must have come about by virtue of the operation of s. 8(a) and s. 11 of the Merger Ordinance, so that her work prior to the merger must be considered to be part of the business of BOC HK Branch or KBC HK Branch. However, I do not think this conclusion is justified on her evidence which was that she was transferred from the BOC HK & Macau Regional Office to the Special Assets Management Department of the plaintiff after the merger. It follows that there is no reason to conclude that the matters dealt with by Ms Chu in her former capacity constituted business carried on by BOC HK Branch and KBC HK Branch.

47.  The conclusion I have reached as regards the documents relied upon by Mr Coleman SC is reinforced, in my opinion, by reference to the correspondence in 2008 when the plaintiff was chasing the defendants for repayment of the outstanding banking facilities and to the defendants’ reaction to this.

48.  In a letter dated 16 June 2008 from the 7^th defendant to the plaintiff, the 7^th defendant expressly referred to the indebtedness due and owing by each of the defendants to the plaintiff. Whilst the letter refers to the defendants’ intention to use the funds received from the disposal of Beijing Central Plaza to repay the various loans, it also records that the defendants had, in the meantime, “disposed several properties used as collateral to reduce the amount owing to you” and proposed a number of things including the disposal of the properties defined in this action as the 1^st Charged Property and serious consideration to a disposal of the properties defined in this action as the 2^nd Charged Property.

49.  If the defendants regarded the failure of Kincheng China to pay the additional HK$136 million as a breach of contract for which the plaintiff was responsible and which gave rise to a set-off and counterclaim, it strains credulity that the defendants would have already disposed of other properties to repay their indebtedness in part and would be proposing to dispose of further charged properties for that purpose.

50.  The letter of 16 June 2008 concluded with a request to review the interest payable but did not in any way dispute liability for the indebtedness. The letter also included a reference to selling Beijing Central Plaza as one of the proposals for repayment. If the defendants believed there was a liability on the part of the plaintiff in respect of any default by Kincheng China in respect of the acquisition of Beijing Central Plaza, it flies in the face of reality for this not to have been mentioned in this letter.

51.  Even after the commencement of these proceedings, the defendants proposed the sale of the 1^st Charged Property in a letter dated 14 May 2009, which again contained a reference to various loans owed by the group of defendants to the plaintiff.

52.  It was only after the issue of the originating summons in this action that the defendants’ solicitors wrote, on 21 May 2009, to suggest there were “substantive factual disputes amounting to a defence of set-off, if not a counterclaim as well”, although details of the nature of the set-off or counterclaim alleged were not set out in the letter.

53.  Yet, notwithstanding this suggested set-off and counterclaim, the defendants’ solicitors wrote further letters on behalf of the defendants consenting to the sale of the 1^st Charged Property.

54.  In conclusion, the defendants have not, in my opinion, raised any triable issue that any liability on the part of Kincheng China for failure to pay any additional sum in respect of the acquisition of Beijing Central Plaza gives rise to any set-off or counterclaim against the plaintiff’s claims in this action. It follows that there is no defence to the action.

Disposition and costs

55.  For the reasons set out above, I dismiss the appeal against the master’s order.

56.  The parties agreed that, in the event I were to dismiss the appeal, the defendants should pay the costs of this appeal to the plaintiff on a full indemnity basis to be taxed if not agreed, with a certificate for two counsel, and I so order.