Case Detail

CACV 94/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 94 OF 2010

(on appeal from HCMP 874/2009)

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IN THE MATTER of Order 88 of the Rules of the High Court, Cap 4

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BETWEEN
	BANK OF CHINA (HONG KONG) LIMITED	Plaintiff
and
	TWIN PROFIT LIMITED	1st Defendant
	WELLCO DEVELOPMENT LIMITED	2nd Defendant
	JACKPOT DEVELOPMENT LIMITED	3rd Defendant
	WAY AND FUNG PROPERTY DEVELOPMENT LIMITED	4th Defendant
	SUMMIT FORTUNE INVESTMENTS LIMITED	5th Defendant
	CROSSPROFIT DEVELOPMENT LIMITED	6th Defendant
	WAY AND FUNG INVESTMENT LIMITED	7th Defendant
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Before: Hon Yuen, Kwan JJA and Sakhrani J in Court

Date of hearing: 30 November 2011

Date of Judgment: 12 January 2012

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JUDGMENT

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Hon Yuen JA:

1. This is an application for leave to appeal to the Court of Final Appeal (“CFA”) against:

(1) the judgment of this court (Yuen JA, Stone J and Sakhrani J) dismissing the defendants’ appeal from the judgment of Fok J (now Fok JA) dismissing the defendants’ appeal from an order of Master de Souza who gave summary judgment to the plaintiff on an application made under O.28 r.4 Rules of the High Court (“RHC”);
(2) the judgment of this court giving the costs of the appeal to the plaintiff on an indemnity basis. This was a majority decision, Stone J having taken the view that costs should be awarded on a party and party basis only.

The first judgment has been called for convenience “the substantive judgment” and the second, “the scale of costs judgment”.

THE SUBSTANTIVE JUDGMENT

2. The defendants’ first argument was that the appeal falls within s22(1)(a) of the Hong Kong Court of Final Appeal Ordinance cap 484 (“HKCFAO”) which provides:

“(1) An appeal shall lie to the Court --
(a) as of right, from any final judgment of the Court of Appeal in any civil cause or matter, where the matter in dispute on the appeal amounts to or is of the value of $1000000 or more, or where the appeal involves, directly or indirectly, some claim or question to or respecting property or some civil right amounting to or of the value of $1000000 or more.”
(Emphasis added).

3. The defendants argued that this was a final judgment, and as the plaintiff was claiming a liquidated sum of $265,840,469.02 and the defendants were counterclaiming a liquidated sum of $136,000,000, s22(1)(a) was satisfied. The nature of the judgment is disputed by the plaintiff who argued that the judgment was interlocutory, at least for the purposes of an application for leave to appeal to the Court of Final Appeal.

The Yien Yieh Bank case

4. The defendants referred to Yien Yieh Commercial Bank Ltd v Hung Oi Wah CACV260/2009, unrep, where this court (Le Pichon and Cheung JJA and A Cheung J) gave leave to appeal to the Court of Final Appeal in an O.88 mortgage action on the basis that s22(1)(a) HKCFAO applied.

5. The plaintiff’s reply was that in the Yien Yieh Commercial Bank case, no argument had been advanced by the plaintiff/respondent that s22(1)(a) did not apply and the court did not consider the point. It would appear from para.2 of the Reasons for Judgment in that case that it was “common ground” that the defendant/applicant was entitled to appeal as of right. Since the point was not argued, the Yien Yieh Bank case is not binding on this court and we therefore have to consider whether the appeal falls within s22(1)(a).

The Shell case and the “application” test

6. The plaintiff argued that our judgment was not a final one for the purposes of s.22(1)(a). If one considered the matter on the basis of the common law “application” test adopted by the Court of Final Appeal in Shell Hong Kong Limited v Yeung Wai Man Kiu Yip Co Ltd (2003) 6 HKCFAR 222,the plaintiff’s application for summary judgment under O.28 r.4 was not one which, whichever way the decision went, would have determined the issues between the parties. If the plaintiff had failed at the application for summary judgment under O.28 r.4, the defendants would simply have lived to fight another day. No issues would have been finally determined against either party. I agree that if the matter were considered on the basis of the Shell case only, it is clear beyond argument that our judgment was an interlocutory judgment and not a final judgment.

Subsequent legislation

7. However, counsel for the defendants argued that legislation after the Shell case has changed matters. I shall first consider the relevant legislation and then consider its effect as interpreted by the Court of Final Appeal in a recent case (Champion Concord Limited and anor v Lau Koon Foo and anor FACV Nos 16 and 17 of 2010, 23 Nov 2011, unrep) to which counsel’s attention was drawn by the bench at the hearing of this application.

8. Section 14AA High Court Ordinance (“HCO”) which came into effect in April 2009, provides:

“(1) Except as provided by rules of court, no appeal lies to the Court of Appeal from an interlocutory judgment or order of the Court of First Instance in any civil cause or matter unless leave to appeal has been granted by the Court of First Instance or the Court of Appeal.
(2) Rules of court may specify a judgment or order of any prescribed description to which subsection (1) does not apply and accordingly an appeal lies as of right from the judgment or order”.
(Emphasis added).

9. The relevant rules of court are contained in O.59 r.21 RHC which provides:

“(1) Judgments or orders to which section 14AA(1) of the Ordinance (leave to appeal required for interlocutory appeals) does not apply and accordingly an appeal lies as of right from them are the following –
(a) a judgment or order determining in a summary way the substantive rights of a party to an action.
(2) Without affecting the generality of paragraph (1)(a), the following are judgments or orders determining in a summary way the substantive rights of a party –
(a) a summary judgment under Order 14 or Order 86; ...”
(Emphasis added).

10. In other words, since April 2009, leave is required for appeals from interlocutory judgments from the Court of First Instance (“CFI”) to the Court of Appeal (“CA”), but certain interlocutoryjudgments (as specified in O.59 r.21) are “exempted”, and for those, appeals lie to the CA as of right.

11. In the present case, the CFI awarded summary judgment under O.28 r.4. I accept the defendants’ argument that the judgment is analogous to a summary judgment under O.14 or O.86, and falls within O.59 r.21(1)(a). The defendants were thus “exempt” from the requirement to obtain leave to appeal to the CA.

12. Pausing there, it seems to me from the language of s.14AA(1) and O.59 r.21(1) (especially the references therein to “interlocutory judgment” and “interlocutory appeals” that I have emphasised earlier) that the legislature did not amend the law to do away altogether with the common law “application” test for the classification of “final” and “interlocutory” judgments. What it did was to provide for new procedure in the High Court – by requiring leave for appeals from interlocutory judgments of the CFI to the CA, and by specifying certain “leave-exempt” judgments.

13. The effect of these provisions on other matters of procedure in the High Court has been discussed by the CFA in the recent case of Champion Concord.

The Champion Concord case

14. The particular facts of this case need not detain us. Essentially, a vendor refused to complete a purchase after letting the purchasers into possession under a lease. The purchasers sued in one action (HCCL1/2010) for specific performance, and the vendor sued in another action (HCCL5/2010) for declaratory relief that he was entitled to vacant possession and damages etc.

15. Both parties applied for summary judgment for specific performance under O.86 in their respective actions. These applications were heard in the CFI by Stone J. He gave judgment to the respondent in both actions

16. The appellants appealed against the judgment in both actions. The appeals (CACV232/2010 and CACV233/2010) were heard by a 2-judge court of appeal (Rogers VP and Le Pichon JA). At the commencement of the hearing of those appeals, the court asked the parties if they consented to the constitution of the court – which would be necessary if the appeals were final, but not if they were interlocutory. Section 34B(4) HCO provides:

“The Court shall, if it consists of 2 Justices of Appeal, be duly constituted for the purpose of -
(a) hearing or determining any appeal against an interlocutory order or interlocutory judgment; ...
(c) hearing or determining any appeal where all the parties have before the hearing filed a consent to the appeal being heard and determined by 2 Justices of Appeal”.
(Emphasis added).

Consent was given by the parties, undertakings were given to “file” the consent, and the appeals proceeded. The court of appeal upheld Stone J’s judgment in both appeals. Subsequently however, no consent was “filed” notwithstanding the undertakings given.

17. The appellants applied to the CA for leave to appeal to the CFA on the basis that the judgment was final. The CA gave leave as of right under s.22(1)(a) in both appeals. Brief reasons were given at the hearing on 3 December 2010. It was said that normally an O.86 judgment would be regarded as interlocutory, but because of the “special situation” of the case where both parties sought summary judgment, such that the “winner will take all”, the decision was a final one (see para 6). It would appear that the reasons were confined to the peculiar circumstances of that case.

18. When the appellants got to the CFA (in FACV 16/2010 and FACV17/2010), they argued that the judgments were final, and thus the 2-judge CA had no jurisdiction to hear the appeals as no consent had been filed prior to the hearing of the appeals. Not surprisingly that argument was rejected by the CFA. Whatever the nature of the judgments, the parties had expressly consented to the constitution of the 2-judge court.

19. However Ribeiro PJ (with whom the other judges agreed) took the opportunity to consider the effect of s.14AA HCO and O.59 r.21 on the nature of appeals in the CFI and CA in the context of s.34B(4) - which governs the constitution of the CA in interlocutory appeals, in contrast to final appeals. He held:

“31. Although the legislation [s.14AA HCO and O.59 r.21 RHC] does not in terms state that appeals from the Court of First Instance falling within Order 59 rr.21(1)(a) or (2)(a) are to be treated as final and not interlocutory, that is their effect. Those rules therefore address the same questions as that which has bedevilled section 34B(4), namely: Is the appeal in question an appeal from an interlocutory or final judgment or order of the Court of First Instance? While section 14AA and Order 59, r 21 ask that question to determine whether leave to appeal is required, the same question has to be asked in the section 34B(4) context to determine whether the Court of Appeal would be duly constituted if sitting with two Justices of Appeal, or whether such a bench requires the consent of the parties to be properly constituted.

32. There is, in my opinion, no reason in logic or policy to adopt different tests in approaching these two questions. Where by operation of the aforesaid rules, the appeal to the Court of Appeal does not require the [High] Court’s leave, that appeal should equally be treated as final and as requiring a bench of three unless there is the requisite consent of the parties to the appeal being dealt with by a panel of two members. I would however add that these remarks are not intended to apply to applications for leave to appeal to the Court of Final Appeal under section 22(1)(a) of the Court [of Final Appeal]’s statute since considerations going beyond the requirement of finality of the judgment arise in that context”.
(Emphasis added).

Discussion

20. As I understand those passages, which are binding on this court, what Ribeiro PJ was saying was that the effect of s.14AA HCO and O.59 r21 RHC was to deem “leave-exempt” interlocutory judgments as “final” judgments for the purposes of determining (1) whether leave is required for appeals from the CFI to the CA, as well as (2) the constitution of the CA bench hearing the appeal. These provisions, set out in the High Court Ordinance and its subsidiary legislation, govern procedure “within” the two levels of the High Court.

21. The question facing us is whether they also govern an application for leave to appeal to the CFA, where the relevant provision is s.22(1)(a) HKCFAO. I acknowledge the defendants’ argument that if the “application” test is retained for s.22(1)(a), an anomaly may be created, as the same judgment would be treated as “final” for an appeal from the CFI to the CA but would be regarded as “interlocutory” for an intended appeal from the CA to the CFA. As for the caveat in para. 32 of Ribeiro PJ’s judgment referring to applications for leave to appeal to the CFA, the defendants argued that that was only a reference to the additional “financial” requirements of s.22(1)(a).

22. Whilst acknowledging the anomaly, I am not persuaded that our judgment, from which the defendants are now seeking leave to appeal to the CFA, is a “final” one for which leave to appeal to the CFA should be given as of right.

(1) As discussed earlier, the HCO and the RHC did not amend the law to do away altogether with the common law “application” test and the distinction between final and interlocutory judgments. Section 14AA and O.59 r 21 themselves allude to “leave-exempt” judgments as “interlocutory” judgments.
(2) The effect of those provisions (as determined in Champion Concord) was to treat “leave-exempt” interlocutory judgments as “final” judgments for procedures governing appeals “within” the High Court only (ie from the CFI to the CA).
(3) Although an application for leave to appeal to the CFA is made first to the CA in proceedings in the High Court, the governing legislation for the grant of leave is the HKCFAO, not the HCO, and different considerations arise (see also para. 11 of Champion Concord).
(4) There is nothing in the HKCFAO that requires the word “final” in s.22(1)(a) to be given anything other than its natural meaning.
(5) In light of the CFA’s remarks concerning the anomaly of having an “as of right” ground of appeal to the highest court (see Champion Concord, para 6, and Wealth Duke Ltd and ors v Bank of China (Hong Kong) Ltd FACV2/2011, 23 Nov 2011, unrep, para 33), this court should err on the side of caution when considering whether to grant leave under s22(1)(a). The defendants have recourse in making a direct application to the CFA if so advised.

Any questions of great general or public importance?

23. As for the defendants’ argument that leave should be given on the s.22(1)(b) ground, they have suggested that the following questions are ones of great general or public importance:

‘1. the true and proper construction, interpretation and application of an important statue – Bank of China (Hong Kong) Limited (Merger) Ordinance (Cap 1167) – affecting a substantial and important bank and persons who have prior to 1st October 2001 dealt with any of the ‘merging banks’;
2. ascertaining what assets and liabilities were or were not merged into the entity that is now the Plaintiff (previously known as Po Sang Bank);
3. ascertaining the scope and ambit and true and proper construction, interpretation and application of the statutory expression “business carried on in or from Hong Kong” when applied to the former Mainland PRC entities – Bank of China and Kincheng Bank;
4. whether the statutory expression includes Bank of China or Kincheng Bank conducting business through the use of nominees, corporate vehicles, wholly owned subsidiaries and/or disclosed agents that are controlled, managed and/or located or incorporated in or from Hong Kong;
5. whether the statutory expression includes Bank of China or Kincheng Bank, whether acting as principal, ‘trustee’ and/or agent, for business conducted through or represented by officers of Bank of China or Kincheng Bank positioned, stationed, located, employed and/or who work in or from Hong Kong and/or who manage or control or work for Bank of China or Kincheng Bank in or from Hong Kong;’

24. I do not consider that any of those questions raises points of great general or public importance. The statute is clear, and the judgments of this court and of Fok J were reached by the application of the statute to the facts of this case.

25. No submissions have been made by the defendants on the basis of the “or otherwise” limb of s.22(1)(b).

26. Accordingly, I take the view that leave should not be given to appeal to the CFA against the substantive judgment.

THE SCALE OF COSTS JUDGMENT

27. As for the scale of costs judgment, the majority of this court followed the decision of this court (Litton VP, Godfrey and Ching JJA) in Chekiang First Bank v Fong Siu Kin [1997] 2 HKC 302, which applied the decision of the English Court of Appeal in Gomba Holdings (UK) Ltd v Minories Finance Ltd [1993] Ch. 171 – essentially, that the court would, when exercising its discretion over costs, normally give effect to the scale of costs expressly agreed by the parties.

28. The defendants suggest that the following question of great general or public importance arises:

“1. the correct legal principles and proper approach to be applied to the question of costs and the exercise of discretion when awarding costs in circumstances where consumer contractual documents such as mortgages and guarantees contain ‘indemnity costs’ clauses or provisions, and whether the Court’s discretion is fettered or affected, and if so in what way or to what extent, and how (if any) the ‘indemnity costs’ clauses or provisions are to be given effect (if any) to or considered (if at all) in the balance of discretion.”

29. I do not see how the Chekiang case fetters the exercise of discretion. On the contrary, it held that there should be no fetter on the court’s exercise of discretion on costs - not even by anything in the contractual document, although in the normal course of events, the court would give effect to the parties’ express agreement. That cannot be a surprising proposition, and in any event in the present case, there was no evidence that these corporate defendants are consumers as that term is normally understood.

30. No submissions have been made by the defendants on the basis of the “or otherwise” limb of s.22(1)(b).

31. I therefore take the view that leave should not be given to appeal to the CFA against the scale of costs judgment either.

Order

32. The application should be dismissed with an order nisi that the defendants should pay the plaintiff’s costs of the application. With respect to Mr Coleman and Mr Jat, I do not think that attendance by senior counsel was necessary.

Hon. Kwan JA:

33. I agree with the judgment of Yuen JA.

Hon. Sakhrani J:

34. I agree with the judgment of Yuen JA.

(Maria Yuen)
Justice of Appeal

(Susan Kwan)
Justice of Appeal

(Arjan Sakhrani)
Judge of the Court of First Instance

Mr Russell Coleman, SC and Mr Jeremy Chan, instructed by Messrs Mayer Brown JSM, for the appellants/1^st to 7^th defendants

Mr Jat Sew Tong, SC and Mr Mike Lui, instructed by Messrs Li & Partners, for the respondent/ plaintiff

Please refer to FAMV4/2012 for the relevant appeal(s) to the Court of Final Appeal.

CACV 94/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 94 OF 2010

(on appeal from HCMP 874/2009)

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IN THE MATTER of Order 88 of the Rules of the High Court, Cap 4

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BETWEEN

	BANK OF CHINA (HONG KONG) LIMITED	Plaintiff
and
	TWIN PROFIT LIMITED	1^st Defendant
	WELLCO DEVELOPMENT LIMITED	2^nd Defendant
	JACKPOT DEVELOPMENT LIMITED	3^rd Defendant
	WAY AND FUNG PROPERTY DEVELOPMENT LIMITED	4^th Defendant
	SUMMIT FORTUNE INVESTMENTS LIMITED	5^th Defendant
	CROSSPROFIT DEVELOPMENT LIMITED	6^th Defendant
	WAY AND FUNG INVESTMENT LIMITED	7^th Defendant

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Before: Hon Yuen JA, Hon Stone and Sakhrani JJ in Court

Dates of written submission: 24 and 25 February 2011

Date of decision on scale of costs: 18 March 2011

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DECISION ON SCALE OF COSTS

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Hon Yuen JA:

1. On 10 February 2011 this court gave judgment dismissing the Defendants’ appeal with an order nisi for costs in favour of the Plaintiff. The parties were invited to make short written submissions within 14 days on the issue of the appropriate scale for taxation. Both the Plaintiff and Defendants have since provided written submissions together with the relevant authorities.

2. Having considered the submissions and authorities, I am of the view that the costs should be taxed on an indemnity basis. My reasons appear below.

3. First, the Defendants have in the mortgage documents expressly agreed to pay or reimburse the bank the costs and expenses incurred in connection with the enforcement of the securities on a full indemnity basis. This is not challenged by the Defendants.

4. Indeed, even if there had not been an express agreement, there would be an implied agreement arising from the particular relationship between mortgagee and mortgagor whereby the mortgagee has a right to costs, reasonably and properly incurred, of proceedings between himself and the mortgagor and its sureties for the enforcement of its security (Fisher and Lightwood’s Law of Mortgage para. 55.1)

5. In Gomba Holdings (UK) Ltd v Minories Finance Ltd [1993] Ch 171 Scott LJ held, after noting the court’s full discretion over litigation costs in proceedings between mortgagor and mortgagee (at 182A-B), that similar language in a mortgage giving the mortgagee full indemnity costs entitled the mortgagee “to be paid or to retain out of the mortgaged property all their actual costs, charges and expenses ... except in so far they are of an unreasonable amount or have been unreasonably incurred and with any doubts as to whether the costs have been reasonably incurred or are unreasonable in amount being resolved in favour of the [mortgagee]” (187 A-C). If however the mortgage deed went so far as to provide that even charges of an unreasonable amount or charges unreasonably incurred would have to be paid by the mortgagor, then the court may interfere on public policy grounds (188A).

6. The Gomba approach was followed by this court (Litton VP, Godfrey and Ching JJA) in Chekiang First Bank v Fong Siu Kin [1997] 2 HKC 302. The court again noted its unfettered jurisdiction as to costs, but held that “where parties have contractually provided for the basis upon which costs are to be quantified, the court would in the normal course of events give effect to that” (309 E-H).

7. A previous decision of this court is binding on us unless we are persuaded that it was “plainly wrong”. I am not persuaded that Chekiang First Bank was plainly wrong. Where parties have entered into a commercial transaction on a certain basis, the court should be slow to disturb the parties’ agreement, unless the circumstances are such as to cause the court in the exercise of its discretion to intervene. For instance, the court may well consider intervention in the situation referred to in Gomba where the mortgagor is required to pay charges of an unreasonable amount or charges unreasonably incurred, but it is not suggested by the Defendants that that would be the case here.

8. Accordingly I would order that the Defendants pay the Plaintiff’s costs on an indemnity basis in accordance with the mortgage documents.

Hon Stone J:

9. I have had the advantage of reading in draft the decision of Yuen JA, and the concurrence therewith of Sakhrani J.

10. I am in the unfortunate position of disagreeing with the majority.

11. On the issue of indemnity costs in a situation wherein one party had made contractual stipulation therefor, I respectfully repeat the views expressed in the Commercial Court’s ‘Decision on Costs’ dated 6 July 2010 in Standard Chartered Bank (Hong Kong) Ltd vSweetmart Garment Works Ltd & ors, unrep., HCA 1807 of 2005, and in the same case in the subsequent ‘Decision on Application for Leave to Appeal against Costs’ (wherein leave so to appeal was granted) as handed down on 11 August 2010.

12. It is clear from these decisions that when sitting at first instance I had declined to follow the English Court of Appeal in Gomba Holdings (UK) Ltd & ors v Minories Finance Ltd &ors (No 2), [1993] Ch 171, and further, that also I had taken the view – vide paragraph 26 of my Decision on Costs dated 6 July 2010 – that as a matter of strict precedent the Court of First Instance was not bound by direct Hong Kong appellate authority notwithstanding observations on the matter by their Lordships in the Hong Kong Court of Appeal in Chekiang First Bank v FongSiu Kin [1997] 2 HKC 302.

13. I perceive no need to reiterate in detail the contrary opinion expressed on the point in these earlier Costs’ Decisions.

14. Suffice to say that I remain of the view – vide paragraphs 30 ‑ 32 of the ‘Decision on Costs’ dated 6 July 2010 in Sweetmart, op cit. – to the effect that:

“…any attempt by commercial law draftsmen to trespass upon the court’s domain and to purport to create a contractually binding obligation as to costs, and to the level therefor, should not be accorded the judicial time of day. Litigation costs are the business of the court dealing with that litigation and of that court alone, and for my part I am of the view that whatever the contract wishes to assert or purport to provide on the issue of costs is nothing to the point.
Nor do I consider that this ineluctable principle is ameliorated by on the one hand acknowledging the wholly unfettered discretion of the courts in matters of costs, yet on the other giving effect to a so-called ‘contractual right’ to indemnity costs by visiting upon the unfortunate signatory to such oppressive clause the burden to demonstrate why this extreme level of costs should not be awarded against him.
As I have ventured respectfully to suggest, the very fact of the purported reversal of the burden of establishing that costs should not be awarded consequent upon such anomalously termed ‘contractual right’ (which in truth is no right at all) seems to me to fly in the face of the jealously-guarded judicial discretion with regard to all aspects of litigation costs…”

15. Clearly however, the majority decision in the present case represents an unequivocal Hong Kong Court of Appeal decision on the point, and equally clearly the view which I take on the matter has not prevailed.

16. I readily acknowledge the depth and consistency of contrary view by eminent senior appellate judges both in England and Hong Kong, and with the greatest respect I am driven to conclude that the views of the majority in this case, together with the earlier observations of the Hong Kong appellate court, and the views of the English Court of Appeal in Gomba Holdings, op cit., represent an approach with which I am wholly unable to agree.

17. I say this with all due diffidence, but in this matter I remain, if I may say so, unreconstructed.

18. I appreciate that in normal course when it comes to contractual provisions which often occupy the attention of the court – such as, for example, consideration of contractual foreign jurisdiction clauses, wherein the parties expressly have agreed the relevant forum for the resolution of their dispute – the court takes the view that the agreement on the issue is to hold (‘pacta sunt servanda’) unless the objecting party can satisfy the burden of demonstrating why this should not be the case.

19. For my part, however, I fail to appreciate why this principle should be applied to the wholly discrete issue of the costs of the litigation, which always has been within the exclusive purview of the court hearing the dispute, and why the efforts of a commercial draftsman – who naturally has been tasked to produce the most commercially advantageous agreement for his institution, and, by the same token, the most commercially disadvantageous agreement for the contractual counterparty (of which the situation in Sweetmart, op cit., is a classic example) ‑ should have any bearing whatever in terms of the award of costs, even in the relatively oblique terms of placing the burden upon the counterparty to justify departure from what has become the normal (and in my view pernicious) ‘indemnity costs clause’ within the particular agreement which then is sought to be enforced by the court.

20. In so far as this point relates to the exercise of judicial discretion as to the award of costs, it seems to me that this involves a matter of fundamental principle wherein the courts should assert their traditional primacy and have no truck with being ‘steered’ in an indemnity costs’ direction by commercial institutions who specialize in imposing ‘commercial boilerplate’ in terms wholly adverse to their clients (who in the vast majority of instances have no choice but to accept that which, as in Sweetmart, op cit., they are required to sign as part of the ‘price’, for example, of obtaining a mortgage).

21. It strikes me, with great respect, that in the fullness of time this particular issue is a matter deserving of the consideration of the Court of Final Appeal.

Hon Sakhrani J:

22. I agree with the Order proposed by the Hon Yuen JA for the reasons she has given. I have nothing to add.

Hon Yuen JA:

23. There will accordingly be an Order in terms of paragraph 8 above.

(Maria Yuen)
Justice of Appeal

(William Stone)
Judge of the Court of First Instance

(Arjan Sakhrani)
Judge of the Court of First Instance

Representation (written argument only):

Mr Mike Lui, instructed by Messrs Li & Partners, for the respondent/ plaintiff

Mr Jeremy SK Chan, instructed by Messrs Mayer Brown JSM, for the appellants/1^st to 7^th defendants

Please refer to FAMV4/2012 for the relevant appeal(s) to the Court of Final Appeal.

CACV 94/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 94 OF 2010

(on appeal from HCMP 874/2009)

---------------------------------------

IN THE MATTER of Order 88 of the Rules of the High Court, Cap 4

---------------------------------------

BETWEEN
	BANK OF CHINA (HONG KONG) LIMITED	Plaintiff
and
	TWIN PROFIT LIMITED	1st Defendant
	WELLCO DEVELOPMENT LIMITED	2nd Defendant
	JACKPOT DEVELOPMENT LIMITED	3rd Defendant
	WAY AND FUNG PROPERTY DEVELOPMENT
	LIMITED	4th Defendant
	SUMMIT FORTUNE INVESTMENTS LIMITED	5th Defendant
	CROSSPROFIT DEVELOPMENT LIMITED	6th Defendant
	WAY AND FUNG INVESTMENT LIMITED	7th Defendant
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Before: Hon Yuen JA, Hon Stone and Sakhrani JJ in Court

Date of Hearing: 19 November 2010

Date of Judgment: 10 February 2011

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J U D G M E N T

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Hon Yuen JA:

1. I agree with the judgment of Stone J. Accordingly, this appeal is dismissed with an order nisi as to costs in favour of the plaintiff. As to the appropriate scale for taxation of such costs, the parties are invited to make short written submissions to the Court within 14 days of the date of this Judgment.

Hon Stone J:

This appeal

2. This is the defendants’ appeal against the judgment of Mr Justice Fok delivered on 30 March 2010.

3. By this judgment, the learned judge dismissed with costs on an indemnity basis the defendants’ appeal against the Order of Master de Souza made on 25 January 2010, by which the learned Master had acceded to the plaintiff’s application under Order 28, rule 4(1) RHC, and had entered summary judgment in favour of the plaintiff in the aggregate sum of HK$265,840,469.02, together with interest thereon, and made further orders against the 2^nd and 5^th defendants for delivery to the plaintiff of vacant possession of various charged properties.

The factual background

4. As the judge below observes, in what if I may say so is a clear and succinct judgment, the claim of the plaintiff is a simple one.

5. The plaintiff, Bank of China (Hong Kong) Ltd., and its predecessors, the Kincheng Banking Corporation HK Branch (‘KBC HK Branch’) and the Bank of China HK Branch (‘BOC HK Branch’), had extended various banking facilities to the defendants.

6. In particular, in exchange for such banking facilities, the 1^st, 2^nd and 5^th defendants variously had provided mortgages over a number of properties by way of security: in the Originating Summons dated 8 May 2009 commencing this action these properties respectively are defined as the ‘1^st, 2^nd and 3^rd Charged Properties’.

7. This dispute has its factual origin in a bank merger: pursuant to the Bank of China (Hong Kong) Limited (Merger) Ordinance, Cap 1167, (‘the Merger Ordinance’) all the businesses and undertakings of, inter alia, KBC HK Branch and BOC HK Branch were transferred to and vested in the plaintiff with effect from 1 October 2001. As a result, as the judge observed, the plaintiff statutorily succeeded to all the rights and interests of KBC HK Branch and BOC HK Branch qua lenders vis-à-vis the various defendants, and as such is entitled to enforce such security rights against them.

8. Thus, the plaintiff’s case is that it was, and remains, entitled to vacant possession and delivery of the Charged Properties, together with recovery of sums due under the mortgages, together with interest and costs.

9. 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.

10. In the judgment presently under appeal, Fok J meticulously has summarized the contentions that are made therein. For present purposes there is no necessity to repeat in detail this factual narrative.

11. Suffice it to say to that the gravamen of the defence to the summary judgment as was mounted (and in due course rejected both by Master de Souza and by the learned judge below) amounted to the contention that the financial difficulty of the defendants in being unable to pay to the plaintiff bank the debts the subject of the present action arose as a direct result of the failure of the Bank of China and Kincheng Investments & Developments (China) Ltd (‘Kincheng China’) to pay to the 6^th and 7^th defendants, together with an entity known as Carefree Development Ltd (‘Carefree’) a sum of HK$136 million, which represented the balance outstanding and payable by Kincheng China arising from the sale to Kincheng China of a 60% interest in a Beijing building, Beijing Central Plaza, which was owned, via subsidiary companies, by the 6^th and 7^th defendants and by Carefree.

12. In this regard, it is said that not only had there been a written sale and purchase agreement dated 22 February 2000 entered into between the 6^th and 7^th defendants and Carefree of the one part, and by Kincheng China of the other, but additionally that there had been an oral agreement with the Bank of China that Kincheng China (acting as agent or nominee of its principal, Bank of China) would pay the 6^th and 7^th defendants and Carefree additional consideration in the sum of HK$186 million, of which but HK$50 million thus far had been paid, thereby leaving outstanding and due and owing the aforesaid balance of HK$136 million.

13. It also is alleged that representatives of the plaintiff’s pre‑merger predecessors had participated in the negotiations in respect of this non‑payment of HK$136 million by Kincheng China, and thus, it is asserted, such participation supported the defendants’ contention that such outstanding liability of BOC and/or Kincheng China came within the statutory definition of the “businesses” and “undertakings” which, by virtue of the Merger Ordinance, had been transferred to and now currently vest in the plaintiff.

14. Thus, runs the argument in this appeal, the 6^th and 7^th defendants have a valid set-off and counterclaim against the plaintiff for such failure to pay the additional HK$136 million; in addition to such set‑off, the defendants seek, by counterclaim, to assert a right to (unparticularized) unliquidated damages, all of which, it is said, must be placed in the balance against the plaintiff’s existing claim.

15. At bottom, therefore – as the learned judge below expressly recognized – the key argument arising from this somewhat unusual factual matrix is precisely what was, or was not, transferred to the plaintiff under the Merger Ordinance?

16. If the liability to pay these monies indeed thus was transferred, then clearly this outstanding sum of HK$136 million must be taken into account; if it was not so transferred, then equally clearly this version of events does not assist in the defence of this claim as now mounted by the plaintiff.

17. In the event, Fok J analysed the terms of the Merger Ordinance in order to determine precisely what had been merged into and transferred to the plaintiff, and after a detailed review of the evidence as filed, ultimately the judge came to the view that the acquisition of the building in question, Beijing Central Plaza, could not be regarded as business being carried on by either BOC or Kincheng Banking Corporation in or from their branches in Hong Kong, and therefore did not constitute part of the businesses as thus statutorily merged into the plaintiff.

18. In this connection the judge particularly noted the use of the word “existing” within section 2(1) of the Merger Ordinance, and concluded that it could not be said that the financial arrangements relating to the purchase of Beijing Central Plaza properly could be regarded as forming part of the business of KBC HK Branch and/or BOC HK Branch.

19. The crux of this appeal, therefore, was whether the learned judge was correct in so concluding upon the evidence before him, and accordingly thus was correct in upholding the summary grant to the plaintiff of the relief as sought in its originating summons, and as initially granted by Master de Souza?

The argument

20. As was the position below, the plaintiff was represented by Mr Jat Sew-Tong SC, together with Mr Mike Lui, and the defendants by Mr Russell Coleman SC, together with Mr Jeremy SK Chan.

21. In opening this appeal on behalf of the defendants, Mr Coleman’s argument was that the appeal ought to be allowed if there was a triable case on the proposed defence and counterclaim.

22. He noted that procedurally after the plaintiff bank had issued its originating summons dated 8 May 2009, the defendants themselves had taken out a summons the following day pursuant to the provisions of Order 28, rule 8 RHC, seeking orders therein that these proceedings should continue as if begun by writ, and requesting relevant directions as to both the plaintiff’s claim and the defendants’ intended counterclaim. His main point was that the precise relationships between these parties could properly be explored only in interlocutory steps towards, and thereafter at, a formal trial, and that the defendants’ assertions as to the counterclaim should not have been summarily dismissed – as now represented the current position consequent upon the hearing before the Master and the Judge below.

23. Mr Coleman submitted that pre-October 2001 ‘Bank of China’ and ‘Kincheng Bank’ were two entirely different corporate entities, both of which were PRC, and not Hong Kong, companies. Thus, prior to the Merger Ordinance, the so-called ‘Hong Kong’ and ‘PRC’ branches of BOC represented no more than different businesses conducted in Hong Kong and China respectively by the same PRC legal entity; accordingly, his argument went, in law there was no such thing as ‘Bank of China Hong Kong Branch’, and that in so far as the statutory definition within the Ordinance referred to “the business carried on by Bank of China in or from its branch in Hong Kong”, this was merely to recognize what that PRC company was doing in or from Hong Kong.

24. In this context leading counsel made reference to certain Bank of China documentation, and argued similarly in relation to the “notional” ‘HK’ and ‘PRC’ branches of Kincheng Banking Corporation, which remained no more than businesses respectively conducted in Hong Kong and the PRC by the same PRC-incorporated legal entity.

25. Thus, he said, when the Merger Ordinance had provided that Bank of China Hong Kong was to take over all the business carried on by Kincheng Banking Corporation “in or from its branch in Hong Kong”, it was certainly triable and/or arguable – which in the present context was the only benchmark that he had to meet in order to succeed in this appeal ‑ that this expressly included the business conducted by KBC through its wholly‑owned subsidiary Kincheng China.

26. If this be correct, Mr Coleman submitted, an analysis of the various mortgages and loans in question, taken together with the sworn evidence of the factual background put in by the defendants – which in this case was contained in the three affirmations of Mr Mok Wei Tak, who personally had been involved in the Beijing City Plaza project since its inception and had attended almost all the relevant meetings – served to demonstrate that it was BOC which had decided to use Kincheng China in order to purchase the shares of Beijing Central Plaza’s holding companies, and thus by this means to acquire the building.

27. In this context, counsel referred in some detail to minutes of meetings held in order to discuss the then-proposed transaction, which recorded involvement by Bank of China and ‘Hong Kong Kincheng Bank’, and noted in particular that a Minute of a 27 May 1999 meeting, which had discussed the mode of acquisition of shares, apparently had concluded that it was KBC’s wholly-owned subsidiary Kincheng China that had become involved as BOC’s agent or nominee, and that KBC’s use of Kincheng China, which was a Hong Kong company managed and controlled from KBC’s Hong Kong Branch, served to underline the point that what was occurring was “business activity in or from Hong Kong”.

28. Mr Coleman pointed out that it was then agreed that Kincheng China would pay the original shareholders of the Beijing Central Plaza Building (namely, Carefree, and the 6^th and 7^th defendants) the sum of RMB720 million ‑ which less loans and advances came to HK$186 million ‑ as BOC’s agent or nominee, and indeed on 23 March 2001 BOC through Kincheng China had paid the sum of HK$50 million, thereby leaving unpaid the balance of HK$136 million, notwithstanding that the indirect subsidiary holding companies already have been transferred to Kincheng China for and on behalf of BOC, their directors have resigned, and thus these erstwhile holding companies are now held by BOC.

29. A further illuminating element in the ‘change of ownership equation’, Mr Coleman argued, was an internal Memorandum dated 29 November 2000, wherein the Hong Kong-Macau Regional Office Bank of China wrote to BOC Head Office, copying in the KBC Hong Kong Branch, which on its face made it clear that it was the KBC Hong Kong Branch (and not merely its wholly-owned subsidiary Kincheng China) which was involved in the purchase of Beijing Central Plaza by BOC as its agent/nominee, so that all KBC actions were subject to and pursuant to authorizations from BOC.

30. There is a good deal of correlative detail on which leading counsel also relied, which for present purposes is unnecessary to recount, but all of which, said Mr Coleman, served to support his thesis, which was that the obvious involvement of the notional ‘Hong Kong Branches’ of the pre‑October 2001 Bank of China and Kincheng Bank, and their respective officers and staff, supported the arguable proposition that this purchase properly could be characterized as “business carried on in or from Hong Kong”, and therefore whether BOCHK is liable, by the merger having now assumed the relevant liabilities of BOC and KBC.

31. If this hypothesis be correct, he said, arising from the non‑payment of the balance of HK$136 million, the 6^th and 7^th defendants have valid counterclaims against both BOC qua principal and KBC qua agent; both BOC and KBC, the parent of Kincheng China, have now merged into the plaintiff, BOCHK, (formerly known as Po Sang Bank), and in the circumstances such counterclaims are not suitable for summary dismissal, and leave ought to be granted to the 6^th and 7^th defendants to file and serve counterclaims, counterclaims which also would include the additional loss and damage alluded to in the affirmations of Mr Mok, which, if established, also should be the subject of set-off against the plaintiff’s claim.

32. In fact, Mr Coleman concluded, the existing payment of HK$50 million was consistent with the defendants’ case as now revealed on the papers, and thus the defendants are able to demonstrate a real reason why this action should be permitted to continue as if by writ with all the appropriate interlocutory steps, including discovery, which would lead to a full trial with viva voce testimony.

33. With great respect to Fok J, counsel said, the learned judge’s detailed consideration of the position within his careful analysis represented the type of exercise which properly only could be conducted at trial, and the fact that the learned judge had dismissed the arguments arising from the content of the currently-available documents ‑ for example, using phrases such as “may or may not”, “explicable by”, “does not support a conclusion”, “it does not follow”, “there is no reason to conclude” – ironically served to underscore the very existence of triable issues in this case.

34. On the other side of the table, Mr Jat SC for the plaintiff ridiculed this argument: this appeal, he said, was “entirely devoid of merit”, and stated categorically that the plaintiff never was party to the Beijing property transaction now relied upon so centrally by the 6^th and 7th defendants, that an analysis of the defendants’ conduct to-date “plainly contradicts” the position now belatedly asserted, and that in any case the purported disputes involving the sum of HK$136 million could not possibly give rise to any arguable defence on the part of the 1^st to 5^th defendants.

35. Mr Jat observed that the plaintiff and its predecessors ‑ BOC HK Branch and KBC HK Branch – had extended banking facilities to the defendants, and that the 1^st, 2^nd and 5^th defendants had provided mortgages over the Charged Properties as security therefor. He further noted that when these proceedings were commenced, the undisputed outstanding debt had stood at HK$295 million, and after the start of this case the 1^st defendant had sold the 1^st Charged Property on 30 September 2009, and that the net proceeds were applied to discharge part of the outstanding debt. So there could be no doubt whatever, he submitted, that notwithstanding the now-alleged ‘set-off and counterclaim’, the defendants all along clearly had accepted liability for a debt owed to the plaintiff.

36. Mr Jat accepted that pursuant to the Merger Ordinance, all business and undertakings of BOC HK Branch and KBC HK Branch had been transferred to and had vested in the plaintiff with effect from 1 October 2001, and thus it followed that the plaintiff had succeeded to the rights and interests of both these entities qua lenders to the defendants, and there could be no doubt but that it was entitled to enforce such rights against them.

37. He emphasized, however, that so far as BOC – a state-owned enterprise established under PRC law – and Kincheng Banking Corporation was concerned, it was only their businesses carried on in or from their branches in Hong Kong which had been merged into the plaintiff, and that in terms of the scope of the merger, it was crucial to bear in mind that only property and liabilities of BOC HK Branch and KBC HK Branch “existing, outstanding or in force immediately before” 1^st October 2001 would be merged and succeeded to by the plaintiff.

38. So far as the case now being put forward on behalf of the defendants was concerned, given that there was no dispute that prima facie the plaintiff was entitled to judgment, the burden thus fell on the defendants to demonstrate an arguable case, and in this regard, said Mr Jat, the allegations made were first, incredible/highly implausible, and second and in any event, did not give rise to any defence.

39. In credibility terms, leading counsel submitted, this novel ‘set‑off stance’ wholly was contradicted by a review of the defendants’ own course of conduct since the purchase of Beijing Central Plaza, and thus rightly could be characterized as nothing but an “afterthought”; if, for example, the defendants all along had believed that the plaintiff was not entitled to enforce payment of apparently undisputed debts on the ground that, pursuant to the merger, the plaintiff could be impleaded in the acquisition of this Beijing building – in which connection there was no evidence whatever that the plaintiff ever had taken over any part of the liability of those corporate entities which had been involved in the Central Plaza transaction, or that the plaintiff or its predecessors had been responsible for the alleged non-payment of the outstanding sum ‑ then it reasonably would have been anticipated that such allegation would have been subject to some form of documentation.

40. However, the fact was that in the relevant contemporaneous correspondence (such as, for example, the 7^th defendant’s letter to the plaintiff dated 16 June 2008) there was no mention of any allegation that the plaintiff was not entitled to claim repayment from the defendants because of the non-payment of the HK$136 million by Kincheng China, and indeed even as late as December 2008 – see the 7^th defendants letter to the plaintiff on 2 December 2008 – the defendants still were relying on the unsettled dispute over Beijing Central Plaza in order simply to request an extension of time to repay the debt, and that there had been no question raised as to the primary liability to repay; in fact, correspondence between the parties after the commencement of proceedings in relation to the sale of the 1^st Charged Property contained a clear acknowledgment by the defendants of such liability.

41. In the course of his submission Mr Jat further argued that the mere fact of the plaintiff’s knowledge, through its officers, of the Beijing Central Plaza transaction or its aftermath could not give rise to any legal liability on the part of the plaintiff, and in so far as it now was said that the undisputed evidence was that this transaction could legitimately be regarded as “business” of the KBC HK Branch or BOC HK Branch, the undisputed evidence was that Kincheng China was a separate legal entity from, and had not merged with, the plaintiff.

42. His main point in this regard was that in submissions the defendants singularly had failed to address the fact that, under the Merger Ordinance, it was abundantly clear that the plaintiff had succeeded only to the property and liabilities of the BOC HK Branch and KBC HK Branch which liabilities were “existing, outstanding or in force immediately before” the crucial merger date, which was 1 October 2001.

43. Mr Jat also stressed that, whatever else could be said about this case, there could be no doubt but that the Beijing Central Plaza transaction solely concerned the 6^th and 7^th defendants, and not the 1^st ‑ 5^th defendants, a proposition to which there could be no answer.

44. Accordingly, counsel asked this court to affirm the judgment of Fok J below; alternatively to order that the plaintiff be entitled to enter judgment against the 1^st -5^th defendants, and thus to be in a position to enforce the security held over the 2^nd and 3^rd Charged Properties (the 1^st Charged Property having already been sold).

Decision

45. The essence of the case put up in the affirmations of Mr Mok Wei Tak, a director of each of the defendants, is that it was the defendants’ intention to use the proceeds of sale of their interest in Beijing Central Plaza to repay the defendants’ undisputed debts to the plaintiff, and that consequent upon the failure of BOC and/or Kincheng China to pay the outstanding balance of HK$136 million the defendants find themselves in financial difficulties which otherwise would not have been encountered.

46. There is no doubt about this plea: the only issue now arising is whether the Merger Ordinance had had the effect of bringing into the relevant ‘accounting net’ liability for such sum on the part of the plaintiff, which pursuant to the merger is said to have inherited such liability; the defendants’ contention in this regard is that representatives of the plaintiff’s predecessors participated in the negotiations between the parties consequent upon non-payment of this balance by Kincheng China, and that this falls within the definition of “the businesses and undertakings” transferred to and vested in the plaintiff.

47. The learned judge below thought not. I confess that at first blush I had formed the preliminary view that, setting aside a sum of in or about HK$238 million which on any basis could be demonstrated otherwise indisputably to have been accruing to the plaintiff, that the judge below may have accorded insufficient weight to certain documents prayed in aid by the defendants as demonstrating that this plaintiff statutorily had assumed responsibility for the balance remaining of the total debt of the defendants, which on the schedule of figures with which this court has been supplied amounted to some HK$282,181,187.29, including interest, as at 19 November 2010, the latter being the latest calculation date adopted in this schedule.

48. On this line of reasoning, therefore, my initial reaction was that the appeal would have to succeed in part, and the order of the learned judge below be varied to give leave to the 6^th and 7^th defendants to defend as to the monetary differential.

49 However, on reflection closer scrutiny of the relevant documentation has served to convince me otherwise, and to form the view that the learned judge was correct in dismissing the appeal from the order of Master de Souza, and in holding that no triable issue had been raised that any liability on the part of Kincheng China for failure to pay the sum of HK$136 million arising out of the acquisition of Beijing Central Plaza gives rise to any alleged set-off or counterclaim against the plaintiff’s claims in this action.

50. Try as I might, ultimately I am unable to accept that the documents variously relied on in Mr Coleman’s highly persuasive submission constitute any more than isolated straws in the evidential wind, and that even when taken cumulatively do not suffice to discharge the accepted burden upon the defendants to demonstrate a triable issue.

51. For example, the minutes of a meeting dated 27 May 1999 [Exhibit ‘MW-2’] wherein the purchase of Beijing Central Plaza was the subject of discussion, and wherein is recorded the participation of the ‘Deputy General Manager of Hong Kong Kincheng Bank’ in the discussion do not strike me as constituting references to the purchase of this building on behalf of BOC by KBC HK Branch; in fact, as this document specifically records, the involvement of ‘Kincheng Bank’ was proposed simply as a trustee for the Beijing branch office of BOC.

52. Similarly, I do not ascribe much weight to the share acquisition agreements entered into on 22 February 2000 by which Kincheng China agreed to acquire the shares of the relevant subsidiaries of the 6^th and 7^th defendants, and of Carefree, and the proposition that these agreements sensibly can be read as supporting a conclusion that the share acquisition was part of the business of KBC HK Branch, not least since it was and is abundantly clear that the whole point of buying this building in the first place was to act as Head Office and Beijing Branch Office of BOC.

53. Nor do I consider that a document upon which particular reliance was placed before this court by Mr Coleman, namely an internal memo dated 29 November 2000 entitled “Urgent report on Kincheng Bank’s acquisition of Beijing Central Plaza” [Exhibit ‘MW-2’] issued by the ‘Bank of China Hong Kong and Macau Regional Office’, and which appears to have been copied to ‘Kincheng Bank, Hong Kong Branch’, strike me as being of great assistance to the defendants’ argument, given that this document expressly records that the involvement of ‘Kincheng Bank’ was being proposed to act as trustee for the Beijing branch office of BOC; as the learned judge below drily noted, the mere fact of copying an internal memo to a particular branch “does not elevate the obligation of Kincheng China into the business of that branch”, which in this instance was the KBC HK Branch.

54. There were a number of other documents relied upon in Mr Coleman’s persuasive address, but at the end of the day it must be borne in mind that the failure to pay the sum of HK$136 million solely was that of Kincheng China, which it is common ground was a subsidiary of Kincheng Banking Corporation and not of KBC HK Branch, and, as the learned judge below also has noted in his meticulous factual treatment, Kincheng China (and its liabilities) would not fall within the language of the Merger Ordinance, and in particular the definition of “existing” within section 2(1) thereof, which in turn refers to the “existing property and liabilities of the Hong Kong branches of the Mainland incorporated banks”, which included KBC HK Branch.

55. The hard fact remains that none of the documents proffered in support of the defendants’ case states the Beijing Central Plaza purchase was undertaken as part of the business of one or other of the Hong Kong branches in question, and as Fok J has emphasized, it is the defendants’ own evidence that it was the representatives of BOC Head Office and/or the Beijing branch office of BOC that were responsible for the decision to acquire this building.

56. The view that ultimately I now have formed to the effect that the outstanding liability of Kincheng China cannot thus be ‘forced’ within the language of the Merger Ordinance, and thereby afford the defendants ‑ or at least the 6^th and 7^th defendants ‑ some relief by way of set-off and counterclaim, is in my view reinforced by the available contemporaneous correspondence, wherein it is striking that no reference whatever is made to such alleged right of set-off when the defendants were faced with demands by the plaintiff for payment of outstanding banking facilities.

57. For example, in his judgment Fok J specifically notes that in the letter dated 16 June 2008 from the 7^th defendant to the plaintiff, the 7^th defendant makes express reference to the indebtedness due and owing by each of the defendants to the plaintiff, and that whilst the letter indeed refers to the intention on the part of the defendants to use funds received from the disposal of their interest in Central Plaza in order to repay the various outstanding loan amounts, this letter also records the disposal by the defendants of “several properties used as collateral to reduce the amount owing to you”, proposing at the same time to dispose of the property known as the ‘1^st Charged Property’, and citing consideration of disposing the ‘2^nd Charged Property’.

58. As the judge below pithily expressed the point in his judgment (at paragraphs 49-50):

“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.
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.”

59. I agree. Whilst, as earlier observed, it appeared at one stage of the argument appropriate to consider varying the order below and to permit the 6^th and 7^th defendants to go to trial on the case as now developed by their leading counsel, at the end of the day contemporary reality speaks volumes, and as the judge also has noted, it was only after issue of the originating process in this case that on 21 May 2009 the defendants’ solicitors went on record, presumably on instructions, to suggest that there were “substantive factual disputes amounting to a defence of set-off, if not a counterclaim as well”, albeit details of such were not condescended to in that letter.

60. However, details having now been provided in the form of counsels’ submission, the defendants’ case strikes me at bottom as little more than an ingenious and belated attempt to delay the inevitable conclusion: in hard terms, to buy some more time.

61. Tempting though this may have seemed, at least in the case of the 6^th and 7^th defendants, ultimately I am persuaded that this would be incorrect in principle, and that in substance there is nothing on the available evidence which would justify the conclusion that the defendants are able successfully to discharge the burden of demonstrating that the alleged liability on the part of Kincheng China to pay the additional sum of HK$136 million in respect of the acquisition of Beijing Central Plaza should accrue to the plaintiff pursuant to the operation of the Merger Ordinance, and thus, contrary to the view of the Master and Fok J, that this case is unsuitable to summary judgment in the terms as now entered.

62. In the circumstances, therefore, for my part I would dismiss this appeal, with an order nisi that costs of this appeal do follow the event, such costs to be taxed, if not agreed.

63. I further would order that this appeal be certified as fit for two counsel.

Hon Sakhrani J:

64. I agree with the judgment of Stone J.

(Maria Yuen)
Justice of Appeal

(William Stone)
Judge of the Court of First Instance

(Arjan Sakhrani)
Judge of the Court of First Instance

Mr Russell Coleman SC & Mr Jeremy SK Chan, instructed by Messrs Mayer Brown JSM, for the Appellants/1^st – 7^th Defendants

Mr Jat Sew-Tong SC & Mr Mike Lui, instructed by Messrs Li & Partners, for the Respondent/Plaintiff

Please refer to FAMV4/2012 for the relevant appeal(s) to the Court of Final Appeal.

CACV 94/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 94 OF 2010

(ON APPEAL FROM HCMP NO. 874 OF 2009)

____________

	IN THE MATTER of the property known as Office 1408 and Office 1409 on the 14^th floor of the Office Tower of Convention Plaza, 1 Harbour Road, Wanchai, Hong Kong (“1^st Charged Property”)
	and
	IN THE MATTER of a Mortgage in respect of the 1^st Charged Property dated 27^th December 1997 and registered in the Land Registry by Memorial No. 7397503
	and
	IN THE MATTER of a Second Mortgage in respect of the 1^st Charged Property dated 14^th December 2007 and registered in the Land Registry by Memorial No. 07123102250083
	and
	IN THE MATTER of the property known as Unit No. 5 (also known as House No. E) and Unit No. 6 (also known as House No. F) of Sunshine Villa No. 48, Mount Kellett Road, The Peak, Hong Kong (“2^nd Charged Property”)
	and
	IN THE MATTER of a Mortgage dated 9^th July 1997 and registered in the Land Registry by Memorial No. 7202604 and a Mortgage dated 9^th July 1997 and registered in the Land Registry by Memorial No. 7202605 in respect of the 2^nd Charged Property
	and
	IN THE MATTER of a Deed of Variation and Further Legal Charge in respect of the 2^nd Charged Property dated 9^th November 2002 and registered in the Land Registry by Memorial No. 8825242
	and
	IN THE MATTER of a Second Mortgage in respect of the 2^nd Charged Property dated 14^th December 2007 and registered in the Land Registry by Memorial No. 07123102250079
	and
	IN THE MATTER of the property known as Shops A and B on the Second Lower Ground Floor, Shop B on the First Lower Ground Floor of Orlins Court (雅蘭閣) (formerly known as Wah Yip Building), Nos. 419R, 419S, 419T Queen’s Road West, Hong Kong (“3^rd Charged Property”)
	and
	IN THE MATTER of a Mortgage in respect of the 3^rd Charged Property dated 3^rd August 1992 and registered in the Land Office by Memorial No. 5375237
	and
	IN THE MATTER of the Deed of Guarantee dated 23^rd October 1998 executed by CROSSPROFIT DEVELOPMENT LIMITED and OTHERS in favour of BANK OF CHINA, HONG KONG BRANCH (“the Guarantee”)
	and
	IN THE MATTER of Order 88 of the Rules of the High Court, Cap. 4A

____________

BETWEEN

	BANK OF CHINA (HONG KONG) LIMITED	Plaintiff
and
	TWIN PROFIT LIMITED	1st Defendant
	WELLCO DEVELOPMENT LIMITED	2nd Defendant
	JACKPOT DEVELOPMENT LIMITED	3rd Defendant
	WAY AND FUNG PROPERTY DEVELOPMENT LIMITED	4th Defendant
	SUMMIT FORTUNE INVESTMENTS LIMITED	5th Defendant
	CROSSPROFIT DEVELOPMENT LIMITED	6th Defendant
	WAY AND FUNG INVESTMENT LIMITED	7th Defendant

____________

Before: Hon Yuen JA in Chambers

Date of hearing and judgment: 14 October 2010

Date of reasons for judgment: 18 October 2010

__________________________

REASONS FOR JUDGMENT

__________________________

Hon Yuen JA:

1. This is an application for an order that a stay of execution granted on condition of payment into court of $100 m. be made unconditional, alternatively for an order that the sum of payment in be reduced. At the end of the hearing, I made an order that the sum of payment in be reduced to $70m. These are my reasons.

Proceedings

2. On 8 May 2009 the Plaintiff bank issued mortgage proceedings against the Defendants by way of originating summons. It claimed repayment of sums lent with interest and costs, and delivery of vacant possession of various properties which had been charged by some of the Defendants as security for the loans.

3. The Defendants applied for an order that the proceedings be continued as if by writ and for other directions.

Master de Souza’s Order

4. On 25 January 2010 Master de Souza dismissed the Defendants’ application and gave judgment to the Plaintiff in the sum of approximately $265m with interest and costs. He also ordered the 2^nd Defendant to deliver up vacant possession of the 2^nd Charged Property which comprises 2 houses on the Peak, and the 5^th Defendant to deliver up vacant possession of the 3^rd Charged Property which comprises 3 shops.

Fok J’s Judgment

5. The Defendants appealed. On 30 March 2010, Fok J dismissed the appeal (Judgment reported at [2010] 2 HKLRD 1065).

Appeal from Fok J’s Judgment

6. The Defendants are appealing Fok J’s Judgment in CACV94/2010. The appeal is due to be heard on 19 November 2010.

Proceedings for possession

7. In the meantime on 23 July 2010, the Plaintiff issued a writ of possession and fi.fa. combined for the purpose of obtaining possession of the 2^nd and 3^rd Charged Properties.

Application for Stay of execution

8. On 10 August 2010 the Defendants applied for a stay of execution of Fok J’s judgment until the determination of the appeal.

Fok J’s Decision on Stay application

9. On 27 August 2010 Fok J refused a stay of execution of the order for the payment of money, but granted a stay of execution of the order for possession on condition of payment into court of $100m.

10. In his decision given extemporaneously, Fok J considered the principles governing applications for stay of execution pending appeal (paras. 8-10). Applying those principles, the learned judge held that the merits of the Defendants’ appeal were not so strong as to entitle them, without more, to a stay of execution. Indeed he indicated that he did not consider the appeal even arguable, but he was prepared to assume that it was (para. 12). He accepted that if execution of the Judgment for possession was not stayed, the Plaintiff might sell the Charged Properties before the hearing of the appeal (para. 15) and that would render the appeal against the possession orders nugatory (para. 20). However the judge was not prepared to grant a stay of execution unconditionally as there was no evidence from the Defendants as to their financial status or their inability or otherwise to pay the judgment sum (paras. 16-17).

11. Accordingly the judge granted a stay of execution of the order for possession conditional upon the Defendants’ payment into court of a sum of $100m being the approximate difference between the judgment sum ($265m) and the value of the 2^nd and 3^rd Charged Properties ($162m). Valuations of the properties done in June 2010 had indicated a value of $150m. for the 2^nd Charged Property and $6.6m for the 3^rd Charged Property.

12. After the judge gave his decision, counsel for the Defendants asked for leave to file evidence to demonstrate that they were unable to fulfill that condition. After the judge noted that the condition was not one imposed in an application for summary judgment, he indicated to counsel that it may well be that he would have to go to the Court of Appeal to have the conditional stay he had granted either made unconditional or extended if necessary. The judge also noted that he would probably be functus in any event after giving the decision.

Application to Court of Appeal for Stay

13. On 10 September 2010 the Defendants issued a summons before this court for an order that the conditional stay granted by Fok J be made unconditional.

14. Mr Mok Wei Tak, a director of each of the Defendant companies, made an affirmation (his 5^th) 4 days after Fok J’s Decision, alleging that the Defendant companies were financially unable to furnish any security. He exhibited trial balances of the Defendant companies and said “all the account receivables in the current assets columns are either connected companies’ investments or credit balances which have been carried over for at least 10 years or more with the prospect of recovery virtually non-existent” (para. 7). There was made on 29 September 2010 and filed on 30 September an affirmation of Chan Suk Kin, the Financial Controller of the 6^th Defendant who is also responsible for the accounts of the other Defendant companies, containing a short analysis of the trial balances.

15. There were also filed subsequently an affirmation of the Plaintiff’s solicitors referring to updated valuations of the 2^nd and 3^rd Charged Properties undertaken by a number of valuers, and a further affirmation of Mr Mok (his 6^th) containing a valuation by Savills of the 2^nd Charged Property.

Reasons for decision

16. Mr Lui, counsel for the Plaintiff, advanced the preliminary argument that this court should refuse to entertain the application. He accepted that the Court of Appeal has concurrent jurisdiction to hear an application for stay of execution (O.59 r.13 RHC) but he argued that as Fok J did not refuse a stay, this court should not hear the application and should remit it to be dealt with by Fok J. He argued that as the learned judge’s order was not sealed until 22 September 2010, it was open to the Defendants to ask the judge to vary his order on considering the new evidence.

17. Whilst that may have been the position with Mr Mok’s 5^th affirmation, I note that the Defendants had other evidence being prepared (Mr Chan’s analysis and Savills’ valuation) and it would have been a race against time to have these ready for a hearing before Fok J’s order was sealed, the date of that act not being known to the Defendants. That was probably what Fok J had in mind when he indicated to counsel for the Defendants at the hearing that he would have to go to the Court of Appeal to have the conditional stay varied. So I think it was probably sensible for the Defendants to have lodged this application before this court.

18. Coming then to the merits of the application, it is well-established that it is for the party applying for a stay of execution to show that a refusal would render the appeal nugatory. Where, as in this case, the Defendants say that the stay should be granted unconditionally (or as Mr Coleman SC for the Defendants suggest, at a reduced payment in), the onus is on them to show they are unable to provide the required funds.

19. Although Mr Mok said in his 5^th affirmation that “all the account receivables in the current assets columns are either connected companies’ investments or credit balances which have been carried over for at least 10 years or more with the prospect of recovery virtually non-existent”, the analysis of the 7^th Defendant’s trial balances exhibited to Mr Chan’s affirmation shows the following accounts receivable which (in contradistinction to other entries) were not marked “non-recoverable”:-

- Mok Wei Tak $ 7,285,863.54
- Feng Xiao Ping $ 8,968,271.50

No explanation has been proffered as to why the 7^th Defendant has not taken any steps to recover these loans from Mr Mok and Mr Feng who control the Defendants.

20. It would also appear from the same analysis that a company called Express Million Development Ltd was lent $ 2,138,707.22 and a company called Intro United Development Ltd was lent $23,904,205.17 for investments in certain projects. Neither company is involved in these proceedings. Neither loan has been marked “non-recoverable” or as “inter-company balances”.

21. Nothing has been disclosed in Mr Mok’s affirmations about these loans. It would appear that the Defendants’ own analysis is inconsistent with their assertion that they are unable to raise any funds and that must cast doubt on the reliability of the Defendants’ case on this application, where the burden is on them to show that they are unable to meet the condition of payment in.

22. However I was prepared to reduce the amount of payment in having considered the updated valuations. I have taken the average of the updated valuations referred to in the Plaintiff’s affirmation filed on 8 October 2010. As for the Savills valuation, it would be noted that of the two comparables given, the higher one was based on “hearsay market news” only. Accordingly I have not included this.

Order

23. Deducting the approximate average of the valuations of the Charged Properties from the judgment sum with interest, I ordered that the condition of payment in (for a stay of execution of the order for possession) as ordered by Fok J be varied by a reduction of the sum of payment in to $70m. to be paid within 14 days.

Costs

24. I also ordered that the Defendants pay the Plaintiff the costs of this application. As the Plaintiff has not prepared a gross sum estimate of costs, I ordered that costs be taxed if not agreed and to be paid in any event.

(MARIA YUEN)
Justice of Appeal

Mr Russell Coleman SC and Mr Jeremy S.K. Chan, instructed by Mayer Brown JSM, for the Defendants (Applicants)

Mr Mike Lui, instructed by Li & Partners, for the Plaintiff (Respondent)

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

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