FWD LIFE INSURANCE CO (BERMUDA) LTD v. CHENG WING YIU DUMAS also known as CHENG WING YIU FREDDIE AND ANOTHER

HCMP 2365/2014
[2018] HKCFI 91

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 2365 OF 2014

____________

____________

_________________________________

REASONS FOR DECISION

_________________________________

Introduction

1.  This was an application by the plaintiff for, amongst others, the determination of the exact principal sum/judgment debt due to it under the judgment of DHCJ Saunders dated 8 July 2016 (“the Judgment”) and the appropriate interest to be awarded on such sum.

2.  During D1’s engagement as its insurance agent between 1 July 1984 to 12 February 2014:

(a) The plaintiff had advanced various loans and bonuses to D1 which were repayable after his departure from the plaintiff but which remained unpaid; 

(b) D1 owed premium under a group medical insurance plan provided by the plaintiff and some of his team members; and

(c) D1 failed to honour guarantees to repay advancements of bonuses by the plaintiff to various staff members that D1 recruited.

3.  Before Deputy Judge Saunders, most of the outstanding debts were agreed save for 2 substantive issues:

(a) Whether D1 was liable under a mortgage in the sum of HK$1,525,180 on 5 disputed guarantees?

(b) Whether D1 was entitled to a long service bonus (“LSB”) of HK$1,872,561.15 provided by the plaintiff?

4.  The Judgment held against D1 on issue (a) but for him on issue (b). D1 was also ordered to deliver vacant possession of the Property to the plaintiff and pay 80% of the plaintiff’s costs on indemnity basis.  The Judgment did not deal with the matter of interest as the court was assured by the parties that these were “matters of arithmetic which would be able to be calculated” (Judgment, §70)

5.  The parties could not agree on the exact amount of the judgment sum.  D1 has never paid or delivered up vacant possession.  The plaintiff took out this summons on 12 July 2017 at my directions before the order was sealed.

6.  The current position was that $2,017,804.73 of the principal sum was not disputed. The amounts of LSB which D1 was entitled to were HK$2,114,656.06 and HK$1,872,561.15 (total HK$3,987,217.21). 

7.  The remaining issue was how the LSB should be applied to set off 3 outstanding loans, known as the PFL01 Loan, the Dragon Fund (PB) and the Dragon Fund (SIB).  The parties have agreed that the date when the plaintiff exercised set off was 12 February 2014.

8.  Resolution of this issue would affect the amount payable by the defendants because of the different applicable interest rate.  In respect of the PFL01 Loan, the interest was 5% per annum before 13 February 2014 and 9.5% per annum thereafter.  In respect of the Dragon Funds, it was 3% per annum from 13 February 2014.  The amount payable by the defendants in respect of the 3 outstanding loans was HK$5,677,253.02 according to the plaintiff’s calculations, but HK$4,659,335.22 according to the defendants’.  The difference was about HK$1,000,000.

9.  The plaintiff contended that, on a proper construction of clauses 7 and 8 of the PFL01 Letter, it had the right (but was under no obligation) to set off the LSB against the PFL01 Loan.  The plaintiff, and the plaintiff alone, could decide the priority and sequence of set off. The plaintiff also contended that this view was reinforced by the LSB Plan governing D1’s LSB (“the LSB Rules”) which similarly gave a discretion to the plaintiff to apply the LSB to loans acknowledged by D1.

10.  The defendants disagreed.  They contended that set off was automatic.  The LSB should be used first to repay the PFL01 Loan and the remaining credit balance of his LSB could be applied to set off other outstanding sums.  They contended that (1) this was a matter of construction of the PFL01 Letter; (2) the LSB was a security for the PFL01 Loan; and (3) automatic set-off was not inconsistent with the LSB Rules.

Issues

11.  The issues were therefore:

(1) Whether set off was automatic, or the plaintiff only had a right but not an obligation to set off the LSB?

(2) Whether clause 9 of the PFL01 Letter created a security?

(3) Was automatic set-off inconsistent with the LSB Rules?

12.  Given the parties’ current stance, it was no longer necessary to deal with other arguments disclosed in the correspondence and the question of whether the plaintiff had previously “agreed” that the LSB shall be deducted from the PFL01 Loan. 

13.  I found for the defendants after the hearing and awarded costs to them on a nisi basis.  Here are my reasons.

General principles on construction

14.  This case turned on construction of various contractual clauses.  The undisputed principles on construction are as follows:

(1) Construction of a document is an attempt to discover what a reasonable person would have understood the parties to mean.  This involves having regard, not merely to the individual words they have used, but to the agreement as a whole, the factual and legal background against which it was concluded and the practical objects which it was intended to achieve: Jumbo King Ltd v Faithful Properties Ltd (1999) 2 HKCFAR 279 at 296D-E, per Lord Hoffmann NPJ.

(2) It is in most cases “not particularly helpful” to refer to the “ordinary and natural meaning” of words, and the “surer guide” is context: Fully Profit (Asia) Ltd v Secretary for Justice (2013) 16 HKCFAR 351 at §15, Ma CJ.

Issue (1): Whether the set off was automatic, or the plaintiff only had a right but not an obligation to set off the LSB?

The relevant clauses of the PFL01 Letter

15.  Clauses 7, 8, 9 and 14 of the PFL01 Letter were relevant:

“7) The Company [plaintiff] shall have the right to demand the Debtor’s [D1’s] immediate repayment of any outstanding balance of the Loan and Interest (“the Debt”).  Without prejudice to the Company’s right to demand the Debtor’s immediate repayment of the Debt, the Company may make any other repayment arrangement of the Debt without giving notice to the Debtor if the Debt is greater than the total vested benefits of the Debtor under the ING Life Agency Long Service Bonus Scheme.

8) The Debtor agrees to repay the Debt according to the terms herein and agree the Company to utilize any part of their respective vested benefits under the ING Life Agency Long Service Bonus Scheme and any credit balance in any of the accounts holding by the Debtor with the Company (including but not limited to the accounts relating to commission, allowance, bonus, funds, entitlement, earnings) (if any) to repay the Debt, or off set the Debt against any sum due from the Company to the Debtor without any notice or demand.

9) In consideration of the Loan granted by the Company to the Debtor, the Debtor hereby irrevocably agree to transfer and assign all the Debtor’s entitlement, present and future, due from the ING Life Agency Long Service Bonus Scheme (if any) to and in favour of ING Life Insurance Company (Bermuda) Limited unless and until the Debt has been fully repaid.

14)  For the avoidance of doubt, the above provisions shall apply to the Long Service Personal Loan [ie the PFL01 Loan] only and nothing in the provisions of the Long Service Personal Loan shall vary or modify any terms of the ING Life Agency Long Service Bonus Scheme, the IAA and the agreements previously entered between the Company and your goodself.  In the event of any conflict or inconsistency between the terms and conditions herein and the terms and conditions of any agreements previously entered between the Company and your goodself, the terms and conditions herein shall prevail.”

(all underline added)

16.  Mr Nip, counsel for the plaintiff, submitted that on a plain reading of clauses 8 and 9, D1 had conferred a right, not an obligation, on the plaintiff to set off his LSB against the PFL01 Loan.  The practical object was to protect the plaintiff from D1’s default in repayment of the Loan.  Any suggestion of an automatic set off regime under clause 8 did not sit well with clause 7 which provided that the plaintiff “may make any other repayment arrangement” of the Debt without giving notice to D1 if the Debt was greater than the LSB.

17.  I am unable to entirely agree, having read the relevant clauses in context.

18.  In my view, clause 8 gave the plaintiff a right but not obligation to set off the PFL01 Loan against “any part” of the LSB or any monies due from the plaintiff to D1.  In that sense, set-off of the LSB was not automatic.

19.  However, the plaintiff’s right was only to decide how much LSB to apply towards set off, but not how to apply it.  Clause 8 limited the use of the LSB to reduce the PFL01 Loan and that loan only.

20.  This view was reinforced by 2 clauses:

(a) Clause 9, because assignment of the LSB only arose under the PFL01 Letter and not any other agreement;

(b) Clause 14, which made clear that “the above provisions [ie the preceding 13 clauses] shall apply to the Long Service Personal Loan only”, ie the PFL01 Loan only.

21.  Under clause 7, the plaintiff had a right to make “any other repayment arrangement of the Debt” but only if the Debt was greater than the LSB.  This plainly required the plaintiff to take the LSB into account for repayment.  As a corollary, I agree with Mr Lam, counsel for the defendants, that the “other repayment arrangement” should be limited to the balance that exceeded the LSB.

22.  In the present case, the Debt ($4,000,0000) was greater than the LSB (HK$3,987,217.21) but the plaintiff had made no other repayment arrangement of “the Debt”.  Application of the LSB to reduce the Dragon Funds was not a repayment arrangement of “the Debt”.

23.  Mr Lam also relied on clause 5 of the PFL01 Letter which provided for monthly repayment by deduction from the Debtor’s monthly commission/bonus earnings in support of his argument of automatic set-off.

24.  With respect, I do not find clause 5 useful.  Whilst it was automatic set off, it was limited to set off of loan interest against income (not the LSB).

25.  My decision on issue (1) was enough to dispose of the application.

Issue (2): Whether clause 9 of the PFL01 Letter created a security?

26.  Clause 9 did not contain an outright assignment of D1’s LSB to the plaintiff, as the assignment would only take effect “unless and until the Debt has been fully repaid”.

27.  Mr Lam submitted that it was probably a mortgage of the LSB (present and future), which was effected either by a legal or equitable assignment of the debt with a proviso for redemption: Fisher and Lightwood’s Law of Mortgage, 14^th ed, 2014, §17.27.  A legal or equitable charge or mortgage of a debt owed by the mortgagee himself to the mortgagor is permissible under section 15A of the Law Amendment and Reform (Consolidation) Ordinance, Cap 23.

28.  In Durham Brothers v Robertson [1898] 1 QB 765, there was a clause similar to clause 9:

“Re Building Contract … - In consideration of money advanced from time to time we hereby charge the sum of £1080 … which will become due to us from [R] on the completion of the above buildings, as security for the advances, and we hereby assign our interest in the above-mentioned sum until the money with added interest be repaid to you.”

The English Court of Appeal considered that the document was divided into two parts: (1) a charge upon the £1080 for the advances, and (2) an assignment of the debts by way of security.

29.  Mr Lam submitted that the security was enforceable only for the purpose of securing the satisfaction of the Debt for which the security was created and no other.  Applying the security for a collateral purpose would frustrate the equity of redemption.  See Cukurova Finance International Ltd v Alfa Telecom Turkey Ltd (No 3)[2016] AC 923 at §73.

30.  Mr Nip disagreed.  He submitted that, to constitute security interest, the right must be given for the purpose of securing an obligation and the asset must be given in security only, not by way of outright transfer: Goode and Gullifer on Legal Problems of Credit and Security, 6^th ed, §1-17.  Clause 9 described the agreement to transfer and assign as being “in consideration of the Loan” but did not use words like “as security” as in Durham, or in clause 3.01 of the Second Mortgage executed by the defendants.  In contrast to the legal charge governing the parties, there was no provision for redemption in the PFL01 Letter.

31.  Mr Nip described clause 9 as a conditional assignment, subject to a condition subsequent, ie if D1 had repaid the loan, then the assignment would fall away. In the meantime, the title in the LSB went to the plaintiff, who would have discretion to use it until the Debt was repaid.

32.  In my view, it was the substance of clause 9 rather than the label that mattered.  D1 had assigned his LSB (past or future) to the plaintiff.  Even Mr Nip described the practical object of clauses 8 and 9 was to protect the plaintiff from the default of repayment of the loan by D1 (§34 of his written submission).

33.  I agree with Mr Lam that the LSB was a form of security which would be reverted to D1 upon full repayment of the debt.  The lack of express words like “as security” or proviso for redemption would not prevent the security from arising.

34.  Accordingly, applying the LSB first to set off loans other than the PFL01 Loan was not permissible.  Nor could the plaintiff rely on the LSB Rules (extraneous to the PFL01 Letter) to fetter the equity of redemption.

35.  I hasten to add that I saw no attempt by the plaintiff to apply the LSB for a collateral or ulterior purpose.  The fact that counsel fearlessly put forward a construction that would enable the plaintiff to claim more interest on the outstanding loans could not be described as being for any collateral or ulterior purpose.

36.  Mr Nip further submitted that even if clause 9 created a security, the plaintiff as a creditor was not bound to enforce the security but could choose to enforce any remedy open to him: Chitty on Contracts Vol II (32^nd Ed), §39-277; Chan Shu Chun v Right Margin Ltd [2015] 3 HKLRD 409 at §45 per Recorder Linda Chan SC.

37.  Subject to my conclusions under issue (1), I agree.  The plaintiff could have used eg D1’s commission or housing allowance instead of the LSB to set off the PFL01 Loan.  What the plaintiff could not do was to use the LSB to set off other loans.

Issue (3): Was automatic set-off inconsistent with the LSB Rules?

38.  The relevant LSB Rules provided as follows:

(a) Rule 3 applicable to the Long Service Bonus Scheme provided that the plaintiff “may deduct from the benefits payable to a member the amount of… debt acknowledged in writing by the member as owing to [the plaintiff]”.

(b) Rule 7 of the Special Rules for Long Service Bonus Plan – Agency Head provided that the plaintiff “reserves absolute discretionary right to deduct a portion from LSB payments for making repayment or provisions of debts, agent’s advance (for agents under his supervision) and any other contingent liability made by an agency head”.

39.  Mr Nip submitted that none of those Rules were consistent with an automatic set off scheme whereby the LSB would first be set off against the PFL01 Loan.

40.  With respect, the LSB Rules came into existence in 2010 whereas those for the Long Service Bonus Plan – Agency Head were made in 2001.  The PFL01 Letter came into existence even later on 12 April 2012.

41.  The PFL01 Letter made specific provisions for the PFL01 Loan and the LSB, but that did not make the PFL01 Letter inconsistent with Rules 3 and 7 of the LSB Rules.  After the LSB was set off against the PFL01 Loan, any balance could still be applied to set off other loans pursuant to the LSB Rules. 

42.  If there was inconsistency, clause 14 of the PFL01 Letter made clear that the terms and conditions in the PFL01 Letter shall prevail.

Conclusion

43.  Whilst set off was not automatic, as a matter of construction of the PFL01 Letter, the plaintiff could only set off the LSB against the PFL01 Loan. The balance of the LSB could be applied to set off other loans under the LSB Rules.  I accept D1’s computation of the judgment debt.  Judgment rate of interest shall be calculated as from 12 January 2018 on the outstanding principal until full payment.

44.  There shall be 14 days from the date of handing down of this decision for the defendants to pay, failing which they shall deliver up vacant possession of the property.

45.  I make an order in terms of the draft order prepared by D1 with my clerical amendments.

46.  The defendants have won at the hearing.  There had been 2 other issues at the time of issue of this summons but the plaintiff conceded them before the hearing.  On a nisi basis, I have therefore ordered the plaintiff to pay the defendants’ costs.

47.  I am most grateful to counsel for their able assistance.