THE HONG KONG AND SHANGHAI BANKING CORPORATION v. STAR TRANS INTERNATIONAL LTD

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J U D G M E N T

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Hunter, J.A. :

1. This is the judgment of the court.

2. Quota is a Hong Kong, peculiar. Apart from obvious and considerable market value, its precise characteristics are difficult to define. Any attempt to levy execution upon it is likely to encounter problems. This is particularly so when the execution is based upon an "original" order and when it brings the execution creditor into conflict with a prior debenture holder. That is this case.

3. In 1985 Charro Ltd (Charro) conducted a textile business. On 31st January 1985 It granted an all assets debenture to the Hong Kong and Shanghai Banking Corporation (the Bank) in return for banking facilities. This deed (inter alia) -

(1)    created "a first floating charge on all the undertaking and all the other property assets and rights of" Charro.

(2)    included within the category of "events of default" giving rise to an immediate obligation to pay, the appointment of a receiver over "any part of the undertaking" of Charro, and noncompliance with a judgment within seven days by Charro.

(3)    entitled the Bank upon the happening of an "event of default" to appoint a receiver "of all or any of the property and assets charged by this debenture".

4. On 16th February 1987 the appellants, Star Trans International Ltd (Star Trans) obtained judgment against Charro in action number A550 of 1987 for a sum exceeding US$1.1m. Based upon an undated publication by the Director of Trade setting out allocations in the quota year 1986 of quota in the US market, Star Tran, believed Charro to be possessed of a quota entitlement of 5,003 dozen of quota in category 636, i.e. man made fibre dresses. It was Charro's only apparent asset. On 23rd February 1987 Nazareth J on an ex-parte application in the action, granted to Star Trans an injunction restraining Charro from transferring charging or otherwise dealing with this quota until the return day of the summons to be issued that day seeking an appointment of receivers by way of equitable execution.

5. This summons came before O'Connor J on 2nd March 1987. Charro did not appear. The judge then made an order the material terms of which were as follows :-

"It is ordered that Messrs H K Poon and Dermot Agnew of the Deloitte, Haskins and Sells, certified public accountants .... be and are hereby appointed to receive the defendants property in 6,003 dozen of quota in category 636 in or towards partial satisfaction of the monies and interest due to the plaintiff under the judgment in this action dated the 16th day of February 1987.

AND it is further directed that :-

(1)    the receivers be at liberty to dispose of all or any such quota allocation at the best price available as they shall judge upon taking appropriate advice from two textile quota brokers;

(2)    the receivers shall be empowered and authorised to act jointly and severally;

(3)    the remuneration of the receivers be at their usual professional fees and charges;

(4)    the costs and disbursements of the receivers be payable out of the sum received by the receivers;

(5)    there be general liberty to apply".

    The next day, 3rd March, three things happened, the precise sequence of events being unknown:

(1)     Messrs Poon and Agnew on behalf of Charro made an oral agreement with China Giant Industries Ltd which was later reduced to writing. This document records .-

"in consideration of HK$600 per dozen on 6,003 dozens of quota category 636 or however much quota in that category shall remain vested in the name of Charro Ltd, the receipt whereof is hereby acknowledged, I Dermot Agnew ... (the order is here recited). Hereby assign and/or make available the property in 6,003 dozens of quota in category 636 or however much quota in that category shall remain vested in the name of Charro Ltd as at the dated hereof to China Giant Industries Ltd of room 708, New World Tower, 16-18 Queen's Road Central, Hong Kong (CGI) and it is hereby confirmed and agreed :-

(1)    that an authorised representative of the said CGI has read and understood and hereby agrees to the conditions of transfer and warning notes in the form "Application for Type B Transfer of Quota" (a copy of which is annexed hereto).

(2)    that the joint receivers will do everything that they are reasonably able to do, within the limitation of their powers and duties as joint receivers, to assist in the application to the Director of Trade by CGI for the transfer of said quota but shall not be held personally liable in the event that the Director of Trade shall refuse such application.

(3)    the transfer and vesting of the property in the quota in CCI was completed on the receipt by a Deloitte, Haskins and Sells on behalf of the joint receivers of the sum of HK$3, 601, 300".

(2) the said sum of HK$3, 601, 800 was credited by Messrs Poon and Agnew to a bank, account in the name of their said firm. On the following day they caused the said sum to be paid to the appellants.

(3) the Bank appointed receivers under the debenture dated 31st January 1985.

6. When inquiries were thereafter made of the Director of Trade, it transpired that in his view the only quota Charro had available for transfer was 1107 dozen in category 636. China Giant wanted this; the Bank's receivers objected. The Director took legal advice. On 28th April he wrote in these terms to both sides:-

"In the light of foregoing it is my intention to approve the application for transfer (of 1107 dozens quota in category 636 being the only quota available for transfer) : however I do not intend to initiate that approval until 11th May in case (the bank receivers) should wish to take any court proceedings to contest my planned course of action. In this connection Messrs Poon and Agnew are required to accept the quota allocation of Charro Ltd in category 636 (which has not yet accepted by the company and to complete the relevant transfer form in accordance with the provisions of the textile export control system".

No proceedings were then taken and the transfer was implemented on 11th May. We take it that the necessary price adjustment took place to reflect the new quantity.

7. On 3rd June 1987 the Bank commenced the present proceedings by Originating Summons seeking (inter alia) a declaration that the interests of the Rank in the quota as derived from its debenture ranked prior to the interests of Star Trans under the order of 2nd March. On 16th September Jones J granted to the Bank the declaration it sought. From that decision Star Trans appeals.

8. At the outset it is convenient to consider :-

    (1) the terms of the order of 2nd March.

    (2) the problem of quota.

        (1) The terms of the order of 2nd March.

9. No criticism is or can be made of the merits of this order. Star Trans were entitled to seek the remedy they did. But its form is very unfortunate. The appellants then solicitors seemed to have fallen into the trap of issuing a correct form of summons based upon form 82 of the forms annexed to the RSC, but failed to notice, or to draw the judge's attention to form R4, which contains the appropriate form of order. In many cases there is no material difference between the proper form of summons and order e.g. where the forms are based upon the Queen's Bench practice in London. But in those cases where the forms are based upon the Chancery practice, the differences are real. The form of summons describes the relief in shorthand form; that relief is spelled out in detail in the form of order.

10. A glance at the differences between the order here made, and the form prescribed in form 84 reveals their significance. Thus :-

(1)    the form contains : "this appointment shall be without prejudice to the rights of any prior incumbrancers upon the said property who may think proper to take possession of or receive the same by virtue of their respective securities, or if any prior incumbrancers is in possession then without prejudice to such possession" : whereas the order is silent.

(2)    the forms contains detailed directions to the receiver as to the lodging and approval of his accounts; the recovery of his costs; and then as to the Payment "into court to the credit of this action" of the balance in his hands thereafter. The instant order was again silent.

11. In these circumstances we have rather more sympathy with the receivers so appointed than had Jones J. Having granted the declaration appealed from, the judge summoned the receivers before him and was extremely critical of their conduct in seeking legal advice and in paying out money to the appellants "when the words of the order were prefectly clear". We cannot so describe this order, and in making it in the form it did the court in our view failed to give to its receivers the guidance they were entitled to receive and which an order in form 84 would have given. The express terms of the order made : the absence of the provision for passing accounts and for payment which may have been regarded as deliberate : and the understandable feeling of urgency in the priorities battle that developed were I think calculated to confuse the receivers.

12. We strongly suspect that the non-use of form 84 was accidental and not deliberate. But when an order is in fact made in special terms, we seriously doubt whether the court can rewrite it under the slip rule or imply into it the terms of form 84. Rather we think the actual order has to be judged against the requirements of the underlying law, not least the principle "that an execution creditor takes subject to all the equities" per Lord Halsbury in Re Standard Manufacturing Co(1) at p 641. The fact that the order was made in an action to which only the judgment debtor and creditor were parties, coupled with the terms of form 84 are however powerful pointers to the true practice, and to the limitations of an order of this nature.

    (2)    Quota.

13. At the outset of his argument Mr Ismail for the appellants referred to a five year old unreported decision of mine in Texwood Ltd v Jackson and Hendy (HK) Trading Co [No 7219 of 1981), apparently because few attempts seem to have been made to describe the quota market in a civil context. The sense of surprise I then experienced upon reading the 1980 rules of the "modified textile export control system" has not been diminished with a reading in this case of the 1984 rules, apparently in force from January 1984 to July 1987, and the subsequent 1987 rules. The need for multi-fibre arrangements, and to accept restraints on Hong Kong exporters is a matter of misfortune for them, and for the territory. The apportionment and distribution of the privilege of exporting between those anxious to export is no doubt a delicate matter. But I remain puzzled as to why, by the application of open market principles to as finite and closed a market as could be imagined, we have adopted a system which permits those with export experience, expressed as quota benefit, to convert a very large proportion of it annually into immense sums of money, at the direct cost of those seeking experience, and at the overall expense of the territory to the cost of whose exports must be added this self-imposed charge. But however obscure the advantage to the territory, this is the commercial reality. A "valid quota allocation certificate", the prerequisite of a licence for the export of embargoed goods to a quota country under regulation 5 of the Import and Export (General) Regulations, is very valuable. The speed with which a buyer like China Giant was ready to pay the equivalent of HK$50 a dress for Charro's believed quota entitlement, speaks for itself. It also explains why creditors can be so anxious to "realise" such an "asset".

14. The legal characteristics of this asset are more open to doubt. The question recently came before the Privy Council in Attorney General of Hong Kong v Nai-Keung⁽²⁾ in the context of section 5(1) of the Theft Ordinance, and whether quota was something capable of being stolen. At p 1342, Lord Bridge concluded his description of the quota market in these words :-

15. This conclusion was quite sufficient for the determination of the only question before the Board. We were told by counsel that the full terms of the 1984 rules were not in evidence in that case, and were not before the Board. Lord Bridge description where "quota, allocations certificates" are not mentioned,would seem to confirm this. Further the Board was not referred to a decision of the Full Bench in Re Golden Wall Shirts Factory Ltd v the Director of Trade⁽³⁾ where at least the majority concluded that "quota certificates are valuable choses in action" per Zimmern J p 150 with whom Barker J agreed. We trust that it shows no disrespect to the Privy Council to apply the principles of precedent spoken to by the Earl of Halsbury in Quinn v Leathem⁽⁴⁾ and Lord Upjohn in Ogden Industries pty Ltd v Lucas⁽⁵⁾ and "confine" Lord Bridge's "observations to the general compass of the facts before him". We would therefore be minded to conclude that it remains open to argument under both the 1984 and the 1987, rules whether the view expressed by Zimmern J might not he shown to be correct upon a closer examination of the rules; of the reality of the discretion on transfer allegedly Preserved, which now finds no mention in the rules and is relegated to a footnote in the forms; and of the impact of the contractual overlay introduced, and seemingly treated in Fe Golden Wall⁽³⁾ as binding upon applicants; coupled with the rejection of: the statutory route available under section 31(9), (r) and (s) of the Import and Export Ordinance (Cap 60).

16. It is sufficient for the purposes of this appeal to treat a quota certificate as a form of intangible property which does no more than give to its holder a legitimate expectation, a public law concept enforceable only in public law, O'Reilly v Mackname⁽⁶⁾ per Lord Diplock p 7.75. In practical terms this means that on 2nd March 1987 :-

(1)    Charro had a legitimate expectation that the Director would permit it to deal in the 1,107 dozen quota apparently referred to in the Director's offer to it - in the rules entitled "quota allocation certificate" - not withstanding, the lack of formal acceptance : as in fact he did.

(2)    Charro had a legitimate expectation that the Director would "verify" a permanent transfer of this allocation to a purchaser : as again he did.

(3)    Such legitimate expectation was readily saleable by Charro and by its receivers in its name.

17. We now turn to the two substantial question in this case namely what is the effect upon this legitimate expectation of :-

    1. the bank's floating charge.

    2. the order of 2nd March.

    1. the bank's floating charge

18. The main characteristics of a floating charge have been described in the authorities in words upon which we will not attempt to improve.

"A floating security is an equitable charge on the assets for the time being of a going concern. It attaches to the subject charged in the varying condition in which it happens to be from time to time. It is of the essence of such a charge that it remains dormant until the undertaking charged ceases to be a going concern, or until the person in whose favour the charge is created intervenes"

per Lord Macnaghten in Government Stocks Investment Co v Manila Railway Co⁽⁷⁾.

"A floating charge ... is ambulatory and shifting in its nature, hovering over and so to speak floating with the property which it is intended to affect until some event occurs or some act is done which causes it to settle and fasten on the subject of the charge within its reach and grasp"

per Lord Macnaghten in Illingworth v Houldsworth⁽8).

"It is an existing charge, and is rightly termed so, but care must be taken to remember that it on has not settled down and fastened on the property which is the subject of the charge" .... (pending crystallisation)" the right of the company to carry on its business as it wills pending the enforcement of the security, must mean that it may carry it on in accordance with law, including a liability to the processes of the law if it does not pay its debts"

per Fletcher Moulton LJ in Evans v Rival Granite Quarries, Limited⁽⁹⁾.

"The true view is that (the execution creditor) takes subject to such equitable rights as an equitable charge of this kind confers.  ...A floating security is not a future security; it is a present security which presently affects all the assets of the company expressed to be included in it ... A floating security is not a specific mortgage of the assets plus a licence to the mortgagor to dispose of them in the course of his business, but is a floating mortgage applying to every item comprised in security, but not specifically affecting any item until some event occurs or some act on the part of the mortgagee is done which causes it to crystallise into a fixed security"

per Buckley LJ in Evans v Rival Granite⁽⁹⁾ p 999.

"One consequence of the receivers' appointment by the debenture holder was that the incomplete assignment constituted by the (debenture) deed became converted into a complete equitable assignment to them of the assets charged and of the company's rights"

per Edmund Davies LJ in George Barker Ltd v Eynon⁽¹⁰⁾

19. The application of these principles shows that on 2nd March, and prior to the crystallisation on 3rd March,Charro was free to deal with its assets in the ordinary course of business. Such assets included its quota expectation which-it could sell or charge. But only certain incomplete pre-crystallisation dealings affect a floating chargee and its receivers. The subjection of a trading debt to rights of set off or lien may : Rother Iron Works Ltd v CanterburyPrecision Engineers Ltd⁽¹¹⁾, and George Barker Ltd v Eynon⁽¹⁰⁾. Further "a floating charge would be postponed to a later fixed charge, legal or equitable"; Gower's Principles of Modern Company Law 4th edition 474, Palmer's Company Law 23rd edition paragraph 44-07, Wheatley v Silkstone⁽¹²⁾. The question therefore becomes whether the order of 2nd March falls within this special class of dealings either because it operated as a charge, or in any other way insulated this quota entitlement from "the reach and grasp" of the receivers.

2.    The order of 2nd March 1987.

20. The authorities upon equitable execution seem to establish the following propositions :-

(1)    "Equitable execution is not like legal execution; it is equitable relief which the court gives because execution at law cannot be had. It is not execution, but a substitute for execution"

per Bowen LJ in Re Shephard⁽¹³⁾.

(2)    "The appointment of a receiver does not create a charge, but it operates as an injunction to restain the defendant from himself receiving the proceeds of sale"

per Lindley LJ in Tyrrel v Painton⁽¹⁴⁾. See also Re A Debtor⁽¹⁵⁾.

(3) The appointment "also prevents any subsequent judgment creditor from gaining priority over the creditor obtaining the order, if at the date when obtained, the property of the judgment debtor cannot be taken in execution or made available by any other legal process"

per Swinfen Eady J in Re Marquis of Anglesey⁽¹⁶⁾. In that case subsequent stop and charging orders were postponed because the holders could not take more than the judgment debtors could honestly have given. See also Ideal Betting Company Ltd v Holland⁽¹⁷⁾

(4) The test of capacity to assign was formulated and applied as between a judgment creditor who had obtained a garnishee order nisi and the trustee in a Scottish bankruptcy in Galbraith v Grimshaw⁽¹⁸⁾by Lord Loreburn LC as follows :-

"the question will be whether the bankrupt could have assigned to the trustee, at the date when the trustee's title: accrued, the debt or assets in question". (emphasis added)

This same test was applied by Bailhache J in Singer & Co v Fry⁽¹⁹⁾ as between a judgment creditor who had appointed a receiver by way of equitable execution, and a trustee under a later Scottish bankruptcy. It must be emphasised that in neither of these cases did the trustee in bankruptcy have the benefit of the equivalent of what are now sections 42 and 45 of the Bankruptcy Ordinance.

21. These principles are not in issue. In addition there is a considerable body of authority, upon which Mr Poon for the Bank relies, to the effect that the appointment of a receiver by way of equitable execution does not operate to create any charge or lien, or grant any interest in the subject matter to the execution creditor, or to give possession to the execution creditor : see Re Dickinson⁽²⁰⁾ per Lord Esher MR p 190 and Fry LJ p 193 : Re Potts⁽²¹⁾ per Lord Esher p 659, Lindley LJ p 660, Bowen LJ p 662 : followed by Stirling J in Croshaw v Lyndhurst Ship Co⁽²²⁾ (the order in these two cases is not readily distinguishable from the terms of form 84): Re Pearce⁽²³⁾ per Swinfen Eady LJ p 363 and Eve J p 365. The effect of this line of authority was summarised by Upjohn J in Stevens v Hutchinson⁽²⁴⁾ in these words:

"The effect, then, of the appointment of the receiver is that it does not create charge on the property, but it operates as injunction against the judgment debtor receiving the income ... Such an appointment confers upon the judgment creditor purely personal rights against the, judgment debtor and gives the former no right over the property as such".

22. In the face of this weight of authority Mr Ismail makes two submissions. First and foremost he invites the court to conclude that this order operated to create an equitable charge, as an equitable assignment by Charro of its interest or expectation in quota. He founds upon the decision in Levasseur v Mason & Barry⁽²⁵⁾ : adopts the comment in Picarda's Law Relating to Receivers and Managers 1984 at p 121, and Pennington's Company Law 5th edition p 488 that in effect the court in Levasseur ⁽²⁵⁾ afforded to the order the quality of a charge : adopts the same authors' comments that Levasseur ⁽²⁵⁾ is in conflict with Croshaw v Lyndhurst⁽²²⁾ and invites us to follow and prefer Levasseur⁽²⁵⁾ :and seeks to distinguish Re Potts⁽²¹⁾ on the basis that no charge was there created because the persons who controlled the fund, the executors, were not before the court or affected by the order, whereas this "asset" was in the control and disposition of Charro.

23. We are prepared to go someway with this argument. Some of the observations of the court inn Levasseur⁽²⁵⁾, particularly those of Lord Esher at P 80 where he speaks of a "positive order" do give support to these authors' suggestions. We would also agree that the actual decision in Re Potts⁽²¹⁾ is distinguishable upon the basis suggested. Rut upon this reading of Levasseur⁽²⁵⁾ the conflict to our minds would go much wider than with Croshaw v Lyndhurst⁽²²⁾. It would embrace Re Pearce⁽²³⁾, and the whole philosophy of these decisions as summarised by Upjohn J. In particular it would make it very difficult to reconcile what Lord Esher said in Lavasseur⁽²⁵⁾ with what he said in Re Dickinson⁽²⁰⁾ and in Re Potts⁽²¹⁾. Further it is to our minds almost impossible on this reading to reconcile the judgments of Fry LJ in Re Dickinson⁽²⁰⁾ and Levasseur⁽²⁵⁾, and his acceptance in the latter case of the argument of Sir Horace Davey that until an order for payment was made the receiver held the property "in medio", p 82, a factor held decisive against the existence of a charge in both Re Dickinson⁽²⁰⁾ and in Re Pearce⁽²³⁾.

24. It is we think noteworthy that none of the judges in Levasseur⁽²⁵⁾ mentioned the word "charge"; plainly saw no conflict between their decision in that case and their other decisions; and no such conflict has been suggested in any subsequent case. The reason for this we think is that there is another and more preferable explanation of the decision in Levasseur⁽²⁵⁾ which enables it to be accommodated within the lines of authority above mentioned, and the law as reflected in form 84. This is that the case is another example of the "capacity to assign" test applied in Re Anglesey⁽¹⁶⁾, Galbraith v Grimshaw ⁽¹⁸⁾ and Singer & Co v Fry⁽¹⁹⁾ This principle alone would suffice to explain why given a right to execute and the appointment of an equitable receiver, the judgment debtor "could" not "have assigned" to the subsequent French liquidator, who was postponed. It would also explain why, per Fry LJ, the fact that in the absence of any order for payment the receiver held the property "in medio" was not decisive. The court could look to entitlement and it was immaterial that at the date of liquidation there was "simply an uncompleted process to obtain payment of money" in the words of Lindley LJ in Re Potts⁽²¹⁾ p 661. In our judgment therefore this argument fails and this order created no charge.

25. Alternatively Mr Ismail relies upon the authorities noted under (3) and (4) above. He argues that the bank is in the same position as the later incumbrancers in those cases, because the order rendered Charro incapable of making an effective assignment. We agree that Charro were incapable but the Bank's right to bring about crystallisation of this debenture in no way depended upon any contemporary capacity in Charro. The right to appoint receivers did not arise "by reason of a charge then and there created, but by reason of a change in the operation of a charge which had existed long before" per Fletcher Moulton LJ in Evans v Rival Granite⁽⁹⁾ p 996. The point was precisely put by Buckley LJ in Cretanor Maritime Co vIrish Marine Ltd⁽²⁶⁾ as follows

"In that case (Galbraith v Grimshaw) the title of the trustee in bankruptcy arose for the first time at the date of the sequestration. Not so the rights of the debenture holder in the present case, for the debenture holder's rights stem not from the appointment of the receiver but from the creation of the debenture".

This argument likewise fails.

26. It follows in our judgment that the bank here enjoys priority over the judgment creditors and that Jones J was right to grant the declaration he did. The appeal is dismissed.

27. We cannot pass from this case without expressing our gratitude to counsel on both sides for the great care they both took in the presentation of their arguments.

28. In handing down this judgment We make an order nisi that the appellants pay the respondents' costs of the appeal.

(1) [1891] 1 Ch. 627, 641

(2) [1987] 1 WLR 1339

(3) [1981] HKLR 144

(4) [1901] AC 495, 406

(5) [1970] AC 113, 127

(6) [1983] 2 AC 237

(7) [1897] AC 81, 86

(8) [1904] AC 355, 358

(9) [1910] 2 kb 979, 994, 995

⁽¹⁰⁾ [1974] 1 WLR 462, 447

(11) [1973] 2 WLR 281

(12) [1885] 29 ChD 715

(13) [1889] 43 ChD 131, 137

(14) [1985] 1 QB 202, 206

(15) [1909] 1 KB 430, 437

(16) [1903] 2 ChD 727, 731

(17) [1907] 1 ChD 157

(18) [1910] AC 508

(19) [1915] 84 LJKB 2025

(20) [1888] 22 QBD 187

(21) [1893] 1 QB 648

(22) [1897] 2 ChD 154

(23) [1919] 1 KB 354

(24) [1953] 1 ChD 299, 305

(25) [1891] 2 QB 73

(26) [1978] 1 WLR 966, 977