CASHBOX CREDIT SERVICES LTD v. DBS BANK (HONG KONG) LTD

HCA 1977/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 1977 OF 2016

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D E C I S I O N

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The application

1.  This is the defendant’s (“D’s”) application to strike out §4(2) of the plaintiff’s (“P’s”) Reply as inconsistent to an admission made previously in the Statement of Claim pursuant to Order 18, r.10 RHC:

“10. Departure (O. 18, r. 10)

A party shall not in any pleading make any allegation of fact, or raise any new ground of claim, inconsistent with a previous pleading of his.”

2.  This application is contested and the parties are legally represented.[1]

The factual background

3.  The present application concerns separate loans advanced by P and D to the same third party borrowers (“Borrowers”) with security over a Property which the Borrowers co-own (“Property”).

4.  Prior to the aforementioned loans, the Property was subject to the following encumbrances:

(a)   A first legal charge over the Property for Wing Hang Bank (“Wing Hang Charge”).

(b)   A second mortgage in favour of United Asia Finance Limited (“UAF Mortgage”).

(c)   An irrevocable power of attorney for Credit Gain Finance Company Limited (“Credit Gain POA”).

5.  All of the above were registered at the Land Registry. There is no dispute that the Wing Hang Charge was registered before the UAF Mortgage and Credit Gain POA and therefore had priority over them.

6.  P and D’s loans were for the Borrowers to obtain refinancing and discharge the prior encumbrances.  To implement this, the Borrowers first obtained a loan of HK$ 2,100,000 from P (“Cashbox loan”) with a second legal charge over the Property on 20 January 2014.  (“Cashbox Legal Charge”).

7.  The Cashbox Legal Charge was registered on 19 February 2014.

8.  According to the Statement of Claim, the loan advanced under the Cashbox Legal Charge was to:

(a)   Discharge the loans under the UAF Mortgage and Credit Gain POA; and

(b)   Allow the Borrowers to satisfy the “pre-condition imposed by the Defendant on the Borrower to clear prior encumbrances” before general banking facilities would be granted by D to the Borrowers (emphasis added).

9.  Subsequently on 6 February 2014, D duly advanced HK$11.7 million to the Borrowers (“DBS Loan”) which was secured with a mortgage over the Property (“DBS Mortgage”).  The DBS Mortgage was registered on 4 March 2014.

10.  It is not disputed that, at the time when the DBS Mortgage was executed, the Wing Hang Charge, UAF Mortgage and Credit Gain POA and the Cashbox Legal Charge) were already executed over the Property.

11.  The respective loans from P and D were then used to discharge the Wing Hang Charge, UAF Mortgage and the Credit Gain POA.

12.  The Borrowers defaulted in repaying to P and D.  D enforced the DBS Mortgage against the Property and sold the Property to third parties for HK$10,281,800.00.  After deduction of expenses, a sum of HK$9,976,824.62 (“the Sale Proceeds”) was retained by D.

13.  By virtue of the receipt of the Sale Proceeds by D, P now claims that D is only entitled to the amount used to discharge the Wing Hang Charge.

14.  D argues that it would receive, amongst other things, an all monies first legal charge/mortgage over the Property.[2]

The disputed pleadings

15.  It will be important to set out the relevant disputed pleadings under discussion.

16.  Paragraph 5 of the Statement of Claim pleads:

“At the material time when the Cashbox Legal Charge was executed, the Plaintiff provided the Bridging Financing to the Borrowers for their purpose of:

(1) Discharging the indebtedness due under the UAF Mortgage and the Credit Gain POA as prior encumbrances; and

(2) Satisfying the pre-condition imposed by the Defendant on the Borrowers to clear prior encumbrances before general banking facilities would be granted by the Defendant to the Borrowers” [emphasis added]”

17.  Paragraph 3(2) of the Defence:

“The DBS offer was subject to, amongst others, the following conditions precedent:

(a) That the UAF Mortgage and Credit Gain POA would be discharged; and

(b) That the Defendant would receive, amongst other things, an all monies first legal charge/mortgage over the Property.”

18.  Paragraph 4(2) of the Reply pleads:

“Save as pleaded in Paragraph 5 of the Statement of Claim, the Plaintiff had no knowledge as to the existence and/or the terms of the alleged DBS Offer including the alleged conditions precedent as pleaded in Paragraph 3(2).”

Discussion

19.  The disputed issue is whether P can plead in the Reply that it had no knowledge that D would receive, amongst other things, an all monies first legal charge/mortgage over the Property, ie. §3(2)(b) of the Defence, there being no dispute over §3(2)(a) of the Defence.

20.  The question of this application turns on whether paragraph 4(2) of the Reply is inconsistent with or tantamount to withdrawing an admission as pleaded in paragraph 5 of the Statement of Claim.

21.  P argues that §4(2) of the Reply is clear that it should be read together with §5 of the Statement of Claim.  As such, it is not inconsistent with §5 of the Statement of Claim.  P is also entitled to ask the court to consider the facts as pleaded in other sub-paragraphs of paragraph 4 of the Reply.  It further argues “However, P’s qualification in §4(2) of the Reply should not, and cannot, be construed as a wholesale admission that P knew about the existence and terms of the DBS Offer as contained in the Facility Letters.”

22.  Pressed for explanation by this Court, P’s counsel explains that this Court must read paragraph 5 of the Statement of Claim carefully and understand the meaning of the so-called “prior encumbrances” within the context of this paragraph.  Paragraph 5(1) refers to UAF Mortgage and Credit Gain POA as prior encumbrances. Paragraph 5(2) refers to the pre-condition of clearing prior encumbrances, which must mean the same as pleaded in paragraph 5(1).  These prior encumbrances refer to UAF Mortgage and the Credit Gain POA only.  The Wing Hang Charge, which was in existence at the material time was not within P’s contemplation.  In fact, P’s Cashbox loan was only to discharge the UAF Mortgage and the Credit Gain POA.  It did not deal with the Wing Hang Charge.

23.  Therefore, when D pleaded that it would receive, amongst other things, an all monies first legal charge/mortgage over the Property, the Wing Hang Charge was not within P’s contemplation.

24.  P cannot agree that by its pleadings in paragraph 5 of the Statement of Claim, it can be held to have the admission as alleged by D.  Its Reply as it is now pleaded, will therefore not be inconsistent with paragraph 5 of its Statement of Claim.

25.  D argues that P pleaded in paragraph 4 of the Statement of Claim all the three encumbrances including the Wing Hang Charge.  They are the prior encumbrances, which should be adopted for the interpretation of paragraph 5.

26.  I am afraid that I cannot accept this interpretation because in paragraph 4, P did not define those three encumbrances as the prior encumbrances.  It cannot form the view that by clearing the UAF Mortgage and the Credit Gain POA, D would get an all monies first legal charge over the Property, simply because it would not be in a position to make that statement.  Its security did not cover the Wing Hang Charge.

27.  For the reasons above, I will not strike out paragraph 4(2) of the Reply.  D’s summons is therefore dismissed.

Costs and Order

28.  As to the costs of this application, the costs including costs reserved and the hearing today, should follow the event with certificate for counsel.  The costs are summarily assessed under O.62, r.9A RHC to be $105,000, to be paid by D to P within 14 days from the date hereof.

29.  I shall now made an order in terms as follows:

(a) D’s summons be dismissed;

(b) Costs of this application be as per paragraph 28 above.