STATE BANK OF INDIA AND ANOTHER v. LISBELLAW LTD AND OTHERS

("Quota" can be charged)

1989, M.P. No. 792

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

MISCELLANEOUS PROCEEDINGS

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BETWEEN

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J U D G M E N T

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1. These proceedings raise several questions which fall to be answered for the proper resolution of the claims of a number of secured lenders who are in competition with each other over the borrower's interest in "quota" (that "Hong Kong peculiar" as it is called by the Court of Appeal at the outset of its judgment in Hong Kong & Shanghai Banking Corporation v. Star Trans International Limited [1988] 2 H.K.L.R. 549, at p. 550). This creature owes its existence to the Textiles Export Control System set up by the Trade Department of the Hong Kong Government to ensure compliance in Hong Kong with the international arrangement regarding trade in textiles, commonly known as the multi-fibre arrangement. (An official publication describing the system as at August 1987, from which I take what t follows, is in evidence.) A pre-requisite for companies to participate in the export of restrained textiles is that they must register with the Department. Companies applying for registration must be actively participating in the textiles trade. Any cessation of business must be reported to the Department immediately. Companies which have ceased business will have their registrations cancelled. Their "quota" holding (to which I shall refer in a moment) will revert back to the Department. They will not be allowed to dispose of it by transfer or other means. Applications from them for transfers will be automatically rejected.

2. The export of textiles products which are subject to restraint is controlled through "quota". Under this control arrangement, the restraint limit for a particular category in a particular restraint period is apportioned and distributed among qualified Hong Kong companies in the form of textiles export quotas. When a particular company applies for an export licence to cover textiles subject to restraint, the application must be made against the appropriate export quota held either by the exporter or by the manufacturer of the goods in question.

3. Quotas are allocated according to the basic principle of past performance, i.e. they go to those companies which have demonstrated their ability to export the particular products to the markets concerned. This means that quotas have to be earned and will be lost unless they are re-earned by export performance.

4. Quotas are transferable so as to facilitate optimum utilization of quotas by Hong Kong as a whole by providing flexibility to the trade; providing the opportunity for companies with no or insufficient quotas to obtain them, thereby creating a channel for newcomers; and encouraging the movement of quotas from the hands of those who are no longer able to use them to those who are.

5. Quotas (otherwise than from anticipated quotas) may be transferred on a permanent basis. All quota transfers must be registered with the Department.

6. Forfeiture or surrender of quota, or the withdrawal of the balance of quota remaining unlicensed at the time, are sanctions reserved by the Department in the event of malpractice. The Department accepts no liability whatsoever to the companies to whom it has awarded quotas in the event that the quota system is revised, amended or abolished altogether. The right to refuse any application to transfer quota without assigning any reason is also reserved.

7. These are the salient features of the system, so far as the present case is concerned. I find it unnecessary to delve further into the small print.

8. It is, however necessary, for present purposes, for me to attempt an analysis of the juridical nature of an interest in "quota". The field is not free from authority, in which various descriptions of the system are to be found.

9. Before attempting my own analysis of the juridical nature of "quota", on which I shall base my answers to the questions which arise here, I propose to review all those earlier cases in point to which my attention was called in the course of the argument.

10. The first case is Wong Man-shan v. The Queen [1980] H.K.L.R. 266, a criminal case in which the Court of Appeal rejected an argument that the textile quota scheme was illegal.

11. The next case is In re Golden WalI Shirts Factory Limited [1981). H. K. L. R. 144. This was a decision of the Full Bench on an application for a judicial review of an exercise of the Director of Trade's discretion under the textile quota scheme. The facts are immaterial, but the judgment of Rhind, J. contains (at pp.153-157) a detailed and helpful description of the system which I gratefully adopt and shall not repeat here. As to the nature of "quota" the judge expressed himself (at p. 156) as follows:-

"Clearly an allocation of quota is a valuable privilege for a trader........ moreover this privilege is given an enhanced value, as a quota, once allocated, is in certain circumstances transferable ........that allocation of quota has a value quantifiable in money terms can be discerned from the fact that a market is made in transfers ......... Whether an allocation of quota could ever be regarded as some species of property and, if so, what, does not call for any definitive answer for the purposes of the present case. Suffice it to say that such a quota, possessing as it does material value to the company to whom it has been allocated, can only be realistically viewed as in the nature of an asset of that company."

12. Zimmern, J. in the same case (at p.150) said this:-

"The quota certificates are valuable choses in action. They can be sold and transferred."

Barker, J. (at p.151) agreed with the judgment of Zimmern J.

13. In Texwood Limited v. Jackson & Wendy, 2nd March 1983 (unreported), Hunter, J. awarded the plaintiffs damages for breach of two contracts for the sale of quota. At pp. 2-5 of his judgment, he gave a full (and less than enthusiastic) description of the quota market (to which he referred, at p.2 as "very peculiar"). I will not repeat that description here.

14. In The Queen v. Lo, 12th March 1985 (unreported), the Court of Appeal held that a textile export quota was property capable of being stolen. It had been argued that "quota" did not fall within the description of "property" in section 5 (1) of the Theft Ordinance. "Property" is there defined as including "money and all other property, real and personal, including things in action and other intangible property". The Chief Justice (Roberts, C.J.) giving the judgment of the court said:-

"We have no doubt that a quota falls within the phrase 'things in action and other intangible property'."

He added :-

"If a transaction took place between the owner of quota and a purchaser of it and either party were to default, an action to enforce rights under that sale would properly lie. Because the holder of the quota must obtain permission to transfer it and it is subject to cancellation by the department does not mean he does not own it."

15. These observations are consonant with the decision of Hunter, J. in the Texwood case above.

16. In Attorney-General of Hong Kong v. Chan [1987]1 W.L.R. 1339, Lord Bridge, delivering the judgment of the Privy Council on the same question, namely, whether export quotas were capable of being stolen, himself briefly described the quota allocation system. He said (at pp.1341-1342) :-

"The export of goods from Hong Kong is controlled by regulations made under the Import and Export Ordinance. The Import and Export (General) Regulations prohibit the export of certain classes of goods, including textiles, without a licence. But where the overall quantity of a class of goods which Hong Kong may lawfully export to a particular destination, in this case textiles exported to the United Kingdom, is restricted, there is superimposed on the legislative control by licence an administrative system of quota allocations operated by the Department of Trade and Industry. Each exporter will be allocated a quota representing the maximum quantity of each category of textile goods for which he may expect to be granted an export licence in the year. Unless registered as the holder of an appropriate quota, an exporter will not obtain an export licence. Although quota allocations may vary from year to year, the quota allocation for an ensuing year in a particular category will depend primarily on performance in the previous year. Export quotas are registered with the Department of Trade and Industry but are transferable, subject to the department's approval, and there is a florishing market recognised by the department in which quota brokers operate and in which quotas are freely bought and sold. Transfers are of two kinds, temporary and permanent. If a quota holder cannot utilise his full quota for a particular category of goods in a particular year he may sell it to another on terms that this will not affect his quota allocation for the ensuing year; this is a temporary tranfer. But on a permanent transfer, the buyer acquires the benefit both of the quota for the current year and, to use the language of the official form issued by the Department of Trade and Industry to effect and record such a transfer 'any quota entitlement for a succeeding restraint period [resulting] from shipment performance against this quota'. In summary, to be registered as the holder of an appropriate quota is a pre-requisite to obtaining an export licence; it confers an expectation that, in the ordinary course, a corresponding licence will be granted, though not an enforceable legal right. In their Lordships' opinion the definition of "property" in the English Theft Act 1968 and the Hong Kong Theft Ordinance was intended to have the widest ambit. It would be strange indeed if something which is freely bought and sold and which may clearly be the subject of dishonest dealing which deprives the owner of the benefit it confers were not capable of being stolen. Their Lordships have no hesitation in concluding that export quotas in Hong Kong, although not 'things in action' are a form of 'other intangible property'."

17. Finally, in the Star Trans case (see above), the Court, after describing a valid quota allocation certificate as "very valuable" and stating that this explained why creditors could "be so anxious to realise this asset", added "the legal characteristics of this asset are more open to doubt". It cited Char's case (see above) and the Board's conclusion; and, in an important passage, it continued :-

"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's description, where 'quota allocation 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 Limited [see above] where at least the majority concluded that 'quota certificates are valuable chosen in action' (per Zimmern J. at 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 Lord Halsbury in Quinn v. Leathem .... and Lord Upjohn in Ogden Industries Pty. Ltd. v. Lucas ..... 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 be 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 seemingly treated in Re Golden Wall as binding upon applicants; coupled with the rejection of the statutory route available under sections 31 (q), (r) and (s) of the Import and Export Ordinance (Cap. 60).

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. Mackman [1983] 2 A.C. 237 per Lord Diplock at p.275."

18. It was suggested before me that counsel, in telling the Court of Appeal that the relevant rules were not in evidence in Chan's case, had been in error, and that the assumption of the Court of Appeal (no doubt, from the published report of the case) that the Golden Wall case had not been cited in Chan's case, was also erroneous. But nothing in my judgment turns on these points and I do not consider them further.

19. The question before the Court of Appeal in the Star Trans case was whether a lender, the holder of a floating charge over the property of a company, took priority over an execution creditor. The asset over which the parties were in dispute was, as here, an interest in "quota". The Court of Appeal held (at p. 556) that the company's assets included its quota expectation "which it could sell or charge" and decided the case in favour of the lender.

20. The question to which most of the argument before me was directed, and which I shall now consider, is: What, in the fitful light of these authorities, and on general principle, is the juridical nature of an interest in "quota"?

I reach the following conclusions upon this question.

1. An interest in "quota" derives, in the first instance, from the grant of a privilege created in the realm of public law. The grantee of the privilege may invoke public law remedies if, in relation to his privilege, the Trade Department treats him unlawfully, improperly or irrationally.

2. An interest in "quota" is (unusually for a public law right) capable of assignment. A right to transfer a taxi licence from one taxi operator to another is a similar example of an assignable public law right. The right to assign an interest in "quota" is a right to assign it within a limited market, that is to say, a market consisting of other traders in the field. It is a right to assign of a qualified character, subject to restrictions (similar to those imposed on a transfer by the holder of a share in a private company, or the owner of a short leasehold interest).

3. Although questions between the assignee of an interest in "quota" and the Trade Department are matters which will lie in the realm of public law, questions between an assignor and assignee of an interest in "quota" are matters which will lie in the realm of private law.

4. An interest in "quota" is a thing of value, but not in the strict sense a thing (or chose) in action, in that the grantee (or the assignee) has as against the Trade Department only his public law remedy for the protection of his interest; he does hot have a remedy by action, which is a remedy in the realm of private law.

5. An interest In "quota", although not in the strict sense a thing (or chose) in action, is an intangible thing of value, in which a right of property can subsist. It can be sold and it can be charged. There is no juridical or other reason for denying an interest which possesses these characteristics the status of a right of property, that is to say, one over which there can exist, as the scholars of jurisprudence would put it, a right of dominium.

21. Of these conclusions, the one which is of most importance in the present case is that an interest in "quota" is capable of being charged. I arrive at this conclusion for two independent reasons.

22. First, I am constrained to do so by the decision of the Court of Appeal in the Star Trans case. The decision of the Court of Appeal in that case was predicated on its holding that the plaintiff by virtue of its floating charge had an interest in the "quota" of the borrower which the borrower could "sell or charge". The Court of Appeal could not have arrived at its decision in that case in favour of the plaintiff except on the footing that the borrower had an interest which was capable of being charged.

23. Secondly, I am in any event of the same opinion as the Court of Appeal. As it seems to me, once one concludes (as I have) that an interest in "quota" is an intangible thing of value having the characteristics of a right of property, it is capable of being charged, like any other right in the nature of property. I see no reason whatever for concluding that a thing of value can be assigned (as an interest in "quota" clearly can) but cannot be charged. All sorts of "rights", even speculative ones, are capable of assignment in equity (for a list of examples, see Snell's principles of Equity, 28th Edn. (1982) at pp. 84, 85); and all these things of value (even if they are not choses in action) can be charged, not merely assigned. A charge, like a mortgage (and for present purposes the distinction n is immaterial) is a disposition of property of a limited, rather than an absolute character. A right to charge is an incident of the right to alienate; the greater must include the less.

24. Having decided that an interest in "quota" can be the subject of a charge, I next consider the question whether it can be the subject of a fixed charge, or (as was argued before me) can only be the subject of a floating charge.

25. The distinction between a fixed charge and a floating charge lies in the degree of control over the subject of the charge allowed by the charge to the chargor. A charge over present ant future interests in "quota" is perfectly capable of being a fixed charge, so long as the chargee obtains control over the disposition of such interests by the chargor. If the only thing the chargor is permitted to do with the interest in "quota" is to utilise it in order to obtain export licences, so that he cannot turn to account his interest in that "quota" by selling or charging it to anyone else, he has, in my judgment, submitted to so restrictive a degree of control over his interest in quota as to dictate the conclusion that he has subjected it to a fixed charge, not a floating charge. The two modern cases in point are Siebe Gorman & Co. Ltd. v. Barclays Bank Ltd. [1979]2 L1. L. R. 142 and In re Brightlife Limited [1987] Ch. 200. In the first of these cases, a charge over book debts was held to be a fixed charge. In the second case, a similar charge was held to be a floating charge. Both cases show that the question is one of construction, turning on whether the chargor retains any right to convert the charged asset into money for his own account. If he does the charge is properly described as a floating charge. If he does not, it is a fixed charge.

26. I should add that a fixed charge over interest in "quota" will not require registration under section 80 of the Companies Ordinance, Cap. 32, for its protection. The simple reason is that section 80 applies only to charges of the type listed in subsection (2) of that section. There are nine categories, and a fixed charge over interest in "quota" does not fall within any of them.

27. Now that I have reached these general conclusions, I can, examine the facts of this particular case (although I will have to reserve any particular questions which may still arise for decision for further argument after the parties have considered this judgment and have considered whether the originating summons needs amendment to raise such questions).

28. On 3rd June 1980, Elangani Enterprises Ltd. ("Elangani") was incorporated as a company with limited liability under the provisions in that behalf contained in the Companies Ordinance. It took power, by its memorandum of association (as amended on 8th August 1980 by special resolution) to carry on all kinds of trust, commercial, mercantile and agency business, and in particular, in relation to the investment of money, the sale and dealing in of property both real and personal, and the collection and receipt of moneys : Clause 3(1). It took power to carryon the business of, and to act as manager of unit trusts : Clause 3(2). It took power to hold in trust as trustee of any person or organisation whether incorporated or not, and to manage, deal with and turn to account, any real and personal property of any kind, including in particular (amongst other things) business concerns and undertakings, claims, choses in action, licences, interests in real and personal property, and any claims against any such property or against any person, firm, company or other organisation : Clause 3(3). It took power (amongst other things) to import and export and otherwise deal in and turn to account goods and materials and merchandise generally in their prepared, manufactured semi-manufactured and raw state: Clause 3(9). It took power (amongst other things) to acquire, exploit, use and sell or otherwise deal in any real, personal or mixed property and any franchises, rights licences or privileges : Clause 3(14). It took power (amongst other things) to sell or otherwise deal with all or any part of its property, undertaking and assets (present and future) and any of its rights, interests and privileges : Clause 3(15). And it took power to borrow money in such manner as it should think fit, and in particular by the issue of debentures, mortgages and charges charged upon all or any of its property (both present and future) and undertaking : Clause 3(35).

29. By a deed of trust dated 31st March 1981 Elangani constituted itself trustee of the unit trust thereby established. Elangani declared that, whilst it was the trustee, it would carry on no business other than that of acting as trustee of the trust and such business or businesses as it might carry on as trustees of the trust and for the benefit of the trust : Clause 3. It took power to sell any or all of the assets included from time to time in the trust fund : Schedule B1. It took power to acquire any property of whatsoever nature and wheresoever situated and whether the same was of a wasting or speculative nature and whether income producing or not: Schedule B2(l). It took power to mortgage or charge or otherwise deal with any movable or immovable property : Schedule B3(3). It took power to carry on any business and use any assets included in the trust fund in carrying on such business, with power to charge against any assets included in the trust fund any debts or liabilities incurred in carrying on such business : Clause C1. It declared that any person dialing with it in connection with such business might contract with it without being required to enquire as to whether it had power so to do; and it declared that the title of any person to whom it transfered property in the course of such business should not affected by any notice he may have had that it held such property as trustee : Clause C1(13). It took additional powers to borrow on the security of the trust fund or any part thereof : Clause D1. It took power to acquire any movable or immovable property or any chose in action out of the income and capital of the trust fund so as to make the same an asset of the trust fund notwithstanding that the same might be non-income producing or a wasting asset : Clause D3(2). The unit holders have no interest in any of the trust assets; their only interest is to have the trust administered in accordance with the provisions of the trust deed : Schedule L1(2). The trust is called the "Murjani Industries Unit Trust": Claust A5 and Annexure. Its proper law is the law of the Republic of Nauru : Clause A6 and Annexure. I shall refer to the Murjani Industries Unit Trust as "MIUT".

30. On 23rd December 1981, Elangani changed its name to Murjani Industries (Hong Kong) Limited. It is a defendant in these proceedings but it is now in liquidation and was not represented during the argument before me. I shall refer to it as 'MIHKL".

In these circumstances, MIHKL has entered into instruments of charge in favour of the secured lenders to whom I have referred. These instruments may be tabulated as follows:-

31. Each of these instruments is expressed to be entered into by MIHKL in its capacity as trustee for and on behalf of MIUT. In the case of Item No. 4, the debenture dated 18th May 1987 in favour of SBI, MIHKL is expressed to give it also as a company on its own behalf. The same is true in the case of Item No. 5, the debenture dated 28th March 1988 in favour of UCO, and in the case of Item No. 6, the debenture dated 12th May 1988 in favour of CA.

32. The legal position, so far as the present case is concerned, is that in so far as the interests in quota belong to MIHKL for its own use and benefit, it had power to charge those interests, in favour of a lender, under its memorandum of association, in its capacity as absolute owner of those interests. Insofar as the interests in quota were held by MIHKL as part of the property held by MIHKL on the trusts of the deed of trust constituting MIUT, MIHKL had power to charge those interests under the provisions of that deed. It is unnecessary for present purposes to enquire further into the relationship between MIHKL and MIUT, as to which there is in any case really no evidence before me. I would only add this. Under the deed of trust constituting MIUT, it is expressly provided that the unit holders are to have no interest in any specific assets forming part of the trust fund, and that their only rights are to have the trusts of the trust deed administered in accordance with its provisions (see above). In such a case (where equity protects a beneficiary, not by giving him an equitable interest, but by ensuring the due execution of the trusts by the trustee) it seems to me that the whole ownership of the trust assets must be held to be vested in the trustee, by analogy with the similar rule established in the case of personal representatives in relation to the unadministered estate of a deceased person : see Commissioner of Stamp Duties (Queensland) v. Livingston [1965] A.C. 694. I would, on this basis, hold that MIHKL is entitled to the whole legal and benefical ownership of the interests in "quota" which it has charged and was entitled to charge as trustee for and on behalf of MIUT.

33. Items No. 1, 3 and 7 in the list of instruments of charge which I have tabulated above are, I hold, on their true construction fixed charges. Item No. 2 is a debenture dated 3rd April 1985 in favour of BCCHKL. By this debenture, MIHKL charged to BCCHKL, and so that the charges thereby created should be by way of continuing security and by way of first floating charge, all book and other debts, receivables, inventories, cash, all other current assets and securities for money then and from time to time due or owing to or purchased or otherwise acquired by MIHKL and the undertaking and all property assets and rights of MIHKL, whatsoever and wheresoever, both present and future. The debenture provided that BCCHKL might at any time, by a notice in writing to MIHKL, convert the floating charge into a specific charge as regard any assets of MIHKL specified in the notice which BCCHKL might consider to be in danger of being seized or sold under any form of distress, execution or other process, levied or threatened, and might appoint a receiver in respect thereof. It was agreed between BCCHKL and MIHKL that, notwithstanding the terms of the debenture, MIHKL should have the right to provide security to third party creditors on terms substantially similar to those contained in the debenture and the rights of such third parties pursuant to such security interests should rank pari passu in all respects with the rights of BCCHKL under the debenture.

34. As appears from the same list, three further debentures were created by MIHKL after the date of the debenture in favour of BCCHKL to which I have referred. They are (1) the debenture of 18th May 1987 in favour of SBI (Item No. 4); the debenture dated 28th March 1988 in favour of UCO (Item No. 5); and the debenture dated 12th May 1988 in favour of CA (Item No. 6). There are a number of differences between these debentures to which my attention was drawn in the course of the argument but I do not propose to rehearse them. In my judgment, all these debentures were granted in substantially similar terms. As between themselves, I hold that they rank pari passu.

35. That disposes of all the questions raised in this case which have been the subject of debate before me. I propose now to adjourn the originating summons, so that the parties may have an opportunity of considering this judgment. It may be that, on the basis of the views I have expressed, the parties will be able to come to terms upon the issues which have divided them. If not, and there are further issues which have to be decided, then the originating summons will require amendment and (probably) the filing of further evidence. I shall not, therefore, make any form of order in these proceedings at this stage. I shall merely adjourn the originating summons, with liberty to the plaintiffs, and any defendant, to restore the originating summons (if so advised) for further consideration, whether as to some substantive question, or as to costs.