Habib Bank Zurich (Hong Kong) Ltd (Formerly Known As Hbz Finance Ltd) v. Creation Castle Ltd and Others

HCA 466/2018

[2020] HKCFI 1062

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 466 OF 2018

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BETWEEN

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J U D G M E N T

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A. INTRODUCTION

1.This is the plaintiff’s application for summary judgment against the 1^st and 3^rd defendants.

2.The plaintiff (the “Bank”) is a restricted license bank carrying on a banking business in Hong Kong.  The 1^st defendant (the “Company”) is a company incorporated in Hong Kong to procure and supply raw material to PT Midas Touch, a separate corporate entity with the same owners as the Company.  The 2^nd to 4^th defendants (D2, D3 and D4 respectively) are former directors of the Company.

3.On 18 August 2011, the Company opened a bank account with the Bank.  As part of the account opening process, D2 and D3 signed on behalf of the Company (i) a General Customer Agreement, (ii) an Application for Trade Finance Facilities and (iii) a Set-Off Agreement.

4.On 2 April 2013, D3 allegedly signed a Credit Facility Letter (the “Facility Letter”) on behalf of the Company and himself whereby the Bank agreed to provide the Company with various credit facilities totaling HK$6,000,000 in return for, inter alia, personal guarantees executed by D2 and D3.  I use the description “allegedly” because it is D3’s case (although no part of the Company’s case) that he did not in fact sign the Facility Letter.

5.The Facility Letter provided that interest would be charged on the credit facilities at the current prime rate as quoted by the Bank from time to time plus 2.5% p.a., with a minimum rate of 6% p.a..  Overdue bills would bear additional interest at the Bank’s prevailing overdue interest rate.

6.The Facility Letter further provided that:

(1)  It was a condition precedent of the Facility Letter that the Bank be provided duly executed personal guarantees of D2 and D3 along with their personal financial statements.

(2)  The credit facilities provided under the Facility Letter and their terms were “subject to revision or cancellation at any time at [the Bank’s] discretion” and that “[The Bank reserves] the right to require repayment and/or additional cash collateralization on demand of all amounts actually or contingently due to us”.

(3)  The Company and the Guarantors confirmed that the Company “may from time to time request [the Bank] to extend additional facilities, in excess of the facilities amount specified in this letter” and that if the Bank acceded to this request, “these additional facilities shall automatically be covered by the Security Documents and Collateral”.

7.Between 2011 and 2014, D2, D3 and D4 executed various Guarantees in favour of the Bank in respect of the Company’s liabilities:

(1)  On 18 August 2011, D2 and D3 jointly and severally entered into an Individual Guarantee and Indemnity in favour of the Bank in respect of all sums owing or incurred up to a maximum of HK$10,000,000 (the “1^st Guarantee”).

(2)  On 25 June 2014, D3 allegedly executed an Individual Guarantee and Indemnity in favour of the Bank in respect of all sums owing or incurred to the Bank (the “2^nd Guarantee”).

(3)  On 7 March 2014, D4 executed an Individual Guarantee and Indemnity in favour of the Bank in respect of all sums owing or incurred to the Bank (the “3^rd Guarantee”).

8.In or around November 2014, the Bank cancelled the Company’s credit facilities in purported exercise of its right under the Facility Letter and demanded that the Company immediately repay all outstanding amounts due and owing to the Bank.

9.On or around 24 February 2015, the Bank utilized the Company’s security deposit of US$300,511.62 to offset against D1’s outstanding indebtedness to the Bank.

10.Between 20 March 2015 and December 2016, the Company made partial repayments of its indebtedness totaling US$324,632.50 to the Bank.

11.By this action, the Bank seeks to recover from the Company the sum of US$1,643,368.19 and HK$9.63, being the amount of the Company’s indebtedness to the Bank allegedly due and owing as at 31 January 2018, plus interest.  The Bank further seeks to enforce the 1^st Guarantee against D2, the 2^nd Guarantee against D3 and the 3^rd Guarantee against D4.

12.The Bank obtained default judgment against the Company on 7 August 2018, but this was set aside by a consent order dated 12 November 2018 with costs to the Bank (the “Consent Order”).

13.The Bank had applied for default judgment against D3, but it was given leave to withdraw its application pursuant to an Order made by Master H Au-Yeung on 2 November 2018.

14.Default judgments were also obtained against D2 and D4.  I am given to understand that applications were made to set these judgments.

B.   ESTOPPEL / ABUSE OF PROCESS

15.The Company raised a preliminary objection to the Bank’s application, contending that the Bank is debarred from asserting that the Company has no meritorious defence to its claim by virtue of the Consent Order.

16.Mr Ng, who appeared for the Company, submitted that the default judgment was not set aside because of any irregularity in service of the writ.  Counsel drew my attention to a letter from the Bank’s solicitors dated 31 August 2018, which stated its opposition to the Company’s application to set aside the default judgment against it on the basis that “it is our firm view that … the Judgment dated 7 August 2018 against [the Company] (the “Judgment”) is a regular judgment” and that “in the absence of evidence in showing that [the Company] has a meritorious defence, ie a “real prospect of success”, it is obvious that an application to set aside the Judgment by [the Company] shall fail”.

17.Mr Ng submits that, having had the opportunity to resist the application to set aside the default judgment by arguing that the Company did not have a meritorious defence but having chosen not to do so, the Bank is now estopped from arguing the same.

18.Mr Ng relied on the case of Shenzhen Envirotec Electronics Co Ltd v Cellplus (HK) Ltd [2005] 4 HKLRD 217 for the proposition that an interlocutory consent order could nonetheless give rise to an estoppel or an abuse of process.  In that case, DHCJ Saunders held that the plaintiff’s application to seek interim payment for US$1.2 million under Order 29 rule 10, after its application for summary judgment six months earlier for a larger sum of US$2.9 million was dismissed by consent, was an abuse of process.  The learned judge observed at §14:

“ I am satisfied that in the present circumstances, to entertain the application for interim payment, when an opportunity to ask for conditions on leave to defend, effectively interim payment, albeit usually into court, has passed with the dismissal of the application for summary judgment, would be to allow the relitigation of a dismissed application. Even in cases where further evidence has been obtained, the reopening of an interlocutory issue has been refused: see Chanel Ltd v FW Woolworth & Co Ltd & Others [1981] 1 All ER 745. ”

19.Mr Ng also referred me to Liquidation Committee of Foshan Hongda Development Ltd v East Legend Investment Ltd [2009] 1 HKLRD 169, where the Court of Appeal held that it was an abuse of process for a defendant to challenge the standing of the plaintiff to sue as a result of an earlier consent order in which the defendant withdrew its application to strike out and the plaintiff was given leave to substitute into the action, and Great Harvest Property Investment Ltd v Ho Freeman Chi Man HCA 560/2010 (unrep, 5 Aug 2014), where the court held that the defendant was debarred from making a striking out application by virtue of his consent to an earlier amendment.

20.Mr Lok, who appeared for the Bank, submitted that Shenzhen Envirotec could be distinguished in that it is inherently inconsistent for a plaintiff to agree to grant a defendant unconditional leave to defend and then for the same plaintiff to seek interim payment, whereas no inconsistency necessarily arises between setting aside a default judgment and an application for summary judgment.  He noted that the Company primarily sought to set aside the default judgment on the grounds that it was irregular, and at best relied on the merits of its defence as an alternative, secondary basis.

21.He reminded me that a defendant is entitled to set aside an irregular judgment ex debito justitiae regardless of the merits of the proposed defence, and even in the case of a regular default judgment, the court’s power to set it aside is discretionary and unconditional: see Hong Kong Civil Procedure 2019 §13/9/4 and §13/9/12.

22.Despite Mr Ng’s able submissions, I agree with Mr Lok that no issue estoppel or abuse of process arises in relation to the present application.  While I have to accept that issue estoppel may in principle arise from consent orders (or even interlocutory consent orders), I do not think that the Consent Order has determined the issue which I have to decide, namely whether the Company had a meritorious defence for purposes of this present application.

23.The Consent Order does not record any agreement between the parties as to whether the default judgment was set aside because it was obtained irregularly, or because despite it having been obtained regularly, it ought to be set aside as a matter of discretion having regard to, inter alia, the merits of the Company’s defence.  No issue estoppel can possibly arise if it were the former, given that an irregular judgment may be set aside without the defendant having to show a defence on the merits: Po Kwong Marble Factory Ltd v Wah Yee Decoration Co Ltd [1996] 4 HKC 157 at 162A (Bokhary JA).  If it were the latter, I am inclined to think that there could be an issue estoppel, as it has been said that “it may be a sine qua non of the power to set aside that it should be shown that the defence has a good prospect of success”: Mullen v Conoco Ltd [1998] QB 382 at 391 (Evans LJ).  However, it is simply not possible for me to say, on the facts of the case, whether the default judgment was set aside as a regular judgment.

24.I do not agree with Mr Ng that the “firm view” of the Bank’s solicitors that the writ was validly served conclusively demonstrates that the default judgment was set aside as a regular judgment.  On the contrary, this was the primary issue in dispute between the parties, as made clear by the text of the Company’s summons to set aside the default judgment.  I do not think that the fact that the application was set aside with costs to the Bank is dispositive of the issue either.

25.As a result, unlike Shenzhen Envirotec, Foshan Hongda and Great Harvest Property, there is in my view no necessary contradiction between the Consent Order and the position taken by the Bank in its present application which is capable of giving rise to an abuse of process.

C.  THE COMPANY’S DEFENCE

26.I bear in mind the well-established principles governing applications for summary judgment which were cited by the parties.  I do not propose to repeat them here.

27.The Company resists the application for summary judgment on four main grounds, namely that:

(1)  The Bank’s calculations of the Company’s outstanding indebtedness were erroneous;

(2)  Certain transactions in the Company’s accounts were conducted without the Company’s prior authorization giving rise to a serious need for an inquiry;

(3)  The Bank had unilaterally increased the Company’s credit facilities from HK$6,000,000 without authorization from the Company, such that the Company is not liable for any amount in excess; and

(4)  The Bank unilaterally exercised its right to cancel the Company’s credit facilities in an unreasonable and/or irrational manner, causing the Company substantial loss and damage.

C1. Calculation of the Outstanding Indebtedness

28.The Company’s first point is that (subject to the defences, set-off and counterclaim below) the true sum owing by the Company to the Bank was not US$1,643,368.19 and HK$9.63 as alleged, but rather the sum of US$813,749.11 and HK$6.96.

29.The difference in the amount of the US dollar debt claimed by the Bank and that alleged by the Company is attributable to the following:

(1)  Disputed debts under “Account No 1” and “Account No 2” of US$125,680 and US$116,800 respectively;

(2)  Disputed “Invoice Financing” transactions in the sum of US$192,000; and

(3)  Interest accruing on the above sums until 31 January 2018.

30.As for the alleged amount of the Hong Kong dollar debt, the Company derives its figure from the amounts recorded in a statement of its outstanding liabilities supplied to it by the Bank dated 7 November 2014.

31.The Company also takes issue with the interest rates claimed by the Bank, saying that it had never been informed of the rates allegedly applicable and that the pleadings do not make clear how these rates were derived.

32.Mr Ng then drew my attention to the various clerical errors made by the Bank in calculating the amount outstanding throughout the course of the action. In its pre-action correspondence, the Bank initially claimed the sum of US$1,661,021.17 as being due on 31 December 2017.  It then pleaded in its Statement of Claim a lower figure of US$1,643,373.91, before further revising it to the final amount of US$1,643,368.19 and HK$9.63.  The interest rates claimed on the outstanding sums were also revised downwards from 11.5%, 12% and 11% p.a. to 9.5%, 10% and 9% p.a. respectively.

33.He submitted that overall, this exemplified the Bank’s “rather cavalier attitude” in calculating the amount owing by the Company, especially when considered alongside the Company’s own calculations.  On this basis, he submitted that “something went wrong” and that, following Billion Silver Development Ltd v All Wide Investments Ltd [2000] 2 HKC 262, the court should not make tentative assessments of the respective chances of success of the parties and should instead give unconditional leave to defend for these matters to be ventilated at trial.

34.I am not persuaded by Mr Ng’s submissions.

35.Firstly, as Mr Lok points out, clause 12.04 of the General Customer Agreement provides that a certificate by an officer of the Bank as to the sums and liabilities owing by the Company to the Bank “shall, in the absence of manifest error, be conclusive evidence thereof”.  As he submitted, such “conclusive evidence clauses” are readily given effect to by the court: see, for example, Standard Chartered Bank (Hong Kong) Ltd v Pak Kwan Ho HCA 1269/2015 (unrep, 26 Aug 2016) at §15 (DHCJ Wilson Chan).

36.I do not think that Mr Ng has demonstrated any manifest error in the sense explained by DHCJ Wilson Chan in Pak Kwan Ho, ie an error “which is obviously or easily demonstrable without extensive investigation”.  I will deal with the disputed items in turn:

(1)  Account No 1 and Account No 2: The Company disputes these items on the basis that it has no knowledge of the sums incurred under these two accounts.  Mr Ng refers me to the Bank’s own evidence that it lacks full records of the applications of Account No 1 and Account No 2 as they were done orally between D3 on behalf of the Company and a Mr Syed Ather Ali (“Mr Ali”), a former employee of the Bank who had since been dismissed for failure to comply with internal processes, and suggests that there is a real possibility of a defence even on the Bank’s evidence alone.

(2)  The difficulty I have with this submission is that by a letter dated 4 February 2015, the Company stated that “We do find that there is a discrepancy in the amount due as reflected by [the Bank’s records] which stands at USD1,875,953.81 as at 7^th November 2014 and as per our records given to you. However in order to show our genuineness in settling this issue and to move forward positively we accept the liability as shown in your records” (emphasis added).

(3)  I consider this to be a clear and unambiguous admission of liability in respect of the sum of US$1,875,953.81 which, according to the breakdown dated 7 November 2014 supplied by the Bank to the Company includes the sums under Account No 1 and Account No 2.  The Bank’s unchallenged evidence, supported by the extensive correspondence exhibited by the parties, is that it refrained from taking enforcement action against the Company in respect of the debt in reliance of this admission, but rather worked with the Company to formulate a repayment plan.  Accordingly, in my judgment the Company is now estopped from challenging its liability in respect of these sums.

(4)  Invoice Financing: The Company says that these transactions are suspicious on the basis that each of the standard form applications for invoice financing submitted by the Company to the Bank instructed the Bank to “please effect payment to our supplier” but then listed the Company itself as payee.

(5)  With respect, I do not think that this apparent technical discrepancy gives rise to any arguable defence.  As Mr Lok pointed out, quite apart from the fact that these application forms were all executed by the Company, the forms contemplated that payment would be made to the named “Supplier / Payee”. Therefore, it is clear that there was no requirement that loans made under the invoice financing facility be directly paid to the Company’s suppliers.

(6)  The Company faces a further obstacle in the form of its admission of liability.  The Company’s indebtedness under “Invoice Financing” was clearly listed in the Bank’s records referred to by the Company in its letter dated 4 February 2015.  It is therefore not open to the Company to dispute its liability in respect of these transactions.

37.As for the dispute in relation to the amount of the Hong Kong dollar debt, I consider that there is a complete answer in the 5^th affirmation of Mr Abedi Syed Raza Hasan (“Mr Hasan”) (“Hasan 5^th”), which explains that the amount of HK$6.96 was the amount due as at 7 November 2014 whereas the amount of HK$9.63 claimed by the Bank is inclusive of interest accruing from 7 November 2014 until 31 January 2018.

38.I also agree with Mr Lok that there is nothing in the Company’s point in relation to the applicable interest rates:

(1)  The Bank claims interest of (i) 9% p.a. on the amount of US$1,245,874.67 outstanding from the bills facilities provided under the Facility Letter, (ii) 9.5% p.a. on the amount of US$52,078.62 being the amount overdrawn on the Company’s US dollar current account, and (iii) 10% p.a on the sum of HK$9.63 being the amount overdrawn on the Company’s Hong Kong dollar amount.

(2)  The 9% p.a. interest rate charged on the outstanding amount under the bills facilities corresponds to the Bank’s prime rate then in force plus 2.5% plus 2% p.a (on account of the fact that the amounts are overdue).  This is entirely in line with the terms of the Facility Letter which were pleaded in paragraph 4 of the Statement of Claim and which are set out above.

(3)  The Bank’s entitlement to interest on the US dollar overdraft and Hong Kong dollar overdraft is contained in clause 10 of the General Customer Agreement, which provides that “[the Company] shall pay interest at such rate or rates as shall from time to time be agreed with [the Bank] or, in the absence of such agreement, specified by [the Bank]”.  This is pleaded in paragraph 3 of the Statement of Claim.

(4)  The Bank has produced Schedules of Charges showing that the interest rate applicable to Hong Kong dollar overdrafts was 10% p.a. as at 31 January 2018.  As for the US dollar overdraft, while the Bank is unable to produce any Schedule of Charges definitively stating the interest rate of 9.5% p.a. as at 31 January 2018, it has produced its Schedule of Charges for 2017 stating the then-applicable interest rate of “8.75% p.a. subject to change in Prime Rate”, and its Schedule of Charges with effect from June 2018 stating the then-applicable interest rate at “10% p.a. subject to change in Prime Rate”.

(5)  The Company has not challenged the veracity of these figures, and only complains that it had not been informed of these rates.  However, I fail to see how this is relevant.  The Bank was plainly entitled to charge interest in accordance with its prime rate and its Schedules of Charges under the terms of the Facility Letter and the General Customer Agreement.  These terms were clearly pleaded in the Statement of Claim.  The Bank has also confirmed in its evidence that the Schedules of Charges were available on its website at all times, and I do not understand the Company to be suggesting otherwise.  The Company’s knowledge of the rates then in force (or lack thereof) is beside the point.

39.Finally, I do not think that it is possible to infer from the fact of the Bank’s clerical errors that “something went wrong”. I think Mr Ng makes too much out of these errors when he says, for example, that the misstatement of the Hong Kong dollar debt of HK$9.63 as US$9.63 resulting in the amount of the debt being “wrongly exaggerated by around 7.8 times”. In fact, these were all typographical errors which were spotted, corrected and explained well before this application for summary judgment was made, and as Mr Lok pointed out, these revisions were all in the Company’s favour. The Bank has also since produced detailed tables in Hasan 5^th setting out how it arrived at the amount due.

40.I agree with Mr Lok that the Bank is not prevented from relying on the conclusive evidence clause merely because of its earlier arithmetic errors.  I gratefully adopt DHCJ Le Pichon’s observation in DBS Bank (Hong Kong) Ltd v Chan Chesta [2018] HKCFI 978 HCMP 281/2017 (unrep, 9 May 2018), supra, at §29 that “the notion that any correction made by the Bank would have the effect of negating a conclusive evidence clause is contrary to common sense”.

41.Accordingly I reject the Company’s first ground of defence as being unmeritorious.

C2. Unauthorized transactions / Mismanagement of account

42.The Company’s second argument is that numerous spurious transactions were conducted on its account without prior authorization.  It produced a spreadsheet setting out a list of disputed transactions, primarily “Packing Loans”, “Invoice Financing”, “Trust Receipts”, an “Arrangement Fee” paid to the Bank, and transfers between the Company’s HKD and USD accounts.

43.The Company also relies on the fact that when it raised concerns about the outstanding sums due, Mr Abid Ali Baig (“Mr Baig”), a Senior Vice President of the Bank at the time replied by an email dated 20 November 2015 that “the amount of debt outstanding is a result of improper trade transactions presented by you where trade was non-existent and where funds were used to fill the then existing gaps in your finance, in connivance with the bank manager who has since been dismissed from service”.

44.Again, the Company submits that there are doubts and suspicions about the Bank’s case and asks me to infer that “something went wrong”.

45.I do not accept the Company’s submissions.

46.As Mr Hasan explains on behalf of the Bank, the Packing Loans and Trust Receipts are not part of the subject matter of the present claim, as the Bank applied the Company’s security deposit to offset the Company’s indebtedness under these two headings.  Whether these transactions are disputed is therefore prima facie irrelevant.

47.Mr Ng then sought to argue that the amount to which the Bank is entitled in summary judgment should be reduced by the amount of these disputed sums (ie essentially asking me to set off the security deposit against the present claim instead of the Packing Loans and Trust Receipts).  However, I consider that the Company faces insuperable hurdles in the form of clause 2 of the Set-Off Agreement and clause 12.02 of the General Customer Agreement, which provide, respectively, that:

(1)  “[The Company] agrees that, until the Liabilities have been fully discharged and [the Bank’s] obligations to [the Company] have ceased, [the Bank] may, at its discretion at any time and without prior notice to the Borrower:

(a) Set-off or apply all or any part of the Balances against the Liabilities

(b) Use all or any part of the Balances to buy such other currencies as may be necessary to effect such set-off or application…”, and

(2)  “Any sum payable to [the Bank] by [the Company] shall be paid without any set-off, counterclaim, withholding or condition of any kind…”.

48.As for the disputed sums under “Invoice Financing”, the Company’s points of contention are essentially those arguments discussed and rejected in section C1 above.

49.As for the “Arrangement Fee”, Mr Hasan explains that this was charged pursuant to the Facility Letter, which provides that “A limit renewal fee will be payable annually if the facilities are continuing”.  Insofar as the Company does not challenge the validity of the Facility Letter, I do not think this explanation can seriously be disputed.

50.Finally, as for the transfers between the Company’s USD and HKD accounts, Mr Hasan explains that these transfers were effected by the Bank pursuant to clause 2 of the Set-Off Agreement (set out above) (i) to cover overdrafts and (ii) to make payments instructed by the Company when there were insufficient funds in the account from which it was to be made.  The Company does not dispute having entered into the Set-Off Agreement, nor does it dispute having instructed the Bank to make those payments.  As a result, I am satisfied that this is a complete answer to the Company’s concerns about these transactions.

51.All in all, I do not think that the Company has raised any triable issue in relation to the various disputed transactions.

C3. Unilateral increase in credit limit

52.Under this heading, the Company alleges that it never sought nor authorized an increase in its credit limit under the Facility Letter beyond HK$6,000,000, and only became aware of the fact that its debt had escalated to over US$1.8 million when the Bank’s officers visited the Company’s Indonesian offices in November 2014.

53.The Company says that the Bank used this unilaterally increased credit to offset the Company’s existing debts so to avoid having the malpractice of its employees, in particular Mr Ali, being caught by its internal audit department.

54.At the outset, I observe that the Company’s assertions as to the motivations of the Bank in extending credit facilities to the Company in excess of its credit limit are entirely speculative and unsupported by evidence.  The Company also never raised any complaint about the exceeded limit until these proceedings, despite having been aware of the amount of its outstanding indebtedness since at least early November 2014.

55.Secondly, I do not accept Mr Ng’s submission that the credit limit stated in the Facility Letter has the effect of capping the amount for which the Company is liable to the Bank.  While Mr Ng may be right when he says that any contractual claim founded solely on the Facility Letter is limited to the amount stated in the Facility Letter unless that limit is revised in accordance with its terms (and I express no definite view on the matter), I note that the Bank’s claim is not only founded on the Facility Letter but also the General Customer Agreement, which provides in clause 1 that “[The Company] shall pay to [the Bank] on demand or on their respective due dates all sums paid or advanced by [the Bank] to or for the account of us or any other person at our request and all other sums of whatever nature for which we may be indebted or liable to [the Bank] on any account or in any manner whatever and whether alone or jointly with any other person”.

56.Thirdly, I note that the terms of the Facility Letter do not require the Company to explicitly request increases in its credit limit (eg in writing).  Instead, it simply states that:

“ [The Company] may from time to time request [the Bank] to extend additional facilities, in excess of the facilities amount specified in this letter. If [the Bank] accedes to this request, these additional facilities shall automatically be covered by the Security Documents and Collateral. ”

57.Insofar as the Company did request and receive facilities in excess of the credit limit, the fact that it did not separately authorize an increase in its credit limit is simply neither here nor there.  In this regard, I bear in mind that the Company does not dispute having requested the bulk of the credit facilities which form the subject matter of the claim (which exceed the original credit limit in and of themselves), namely “Export Document Collection Purchase Sight” of US$447,110 and “Export Document Discount under Usance LC” of US$509,946.68.

58.Finally, and in any event, I consider that the Company is estopped from contending that its liability to the Bank is limited to HK$6,000,000 in light of its unequivocal admission of liability “in the amount of US$1,875,953.81” as discussed above.

C4. Cancellation of the Company’s credit facilities

59.Finally, the Company says that the Bank’s contractual right to cancel its credit facilities under the Facility Letter (set out above) must not be exercised irrationally.  Mr Ng relies on, inter alia, Socimer International Bank Ltd v Standard Bank London Ltd [2008] Bus LR 1304, Pa Sam Nang v Hongkong and Shanghai Banking Corp Ltd HCA 1020/2015, (unrep, 7 Mar 2016), and Property Alliance Group Ltd v Royal Bank of Scotland [2018] 1 WLR 3529.

60.The Company alleges that the Bank cancelled its credit facilities due to the Company’s purported failure to notify the Bank about changes of its directors and shareholders, and that this exercise of discretion was irrational.  It goes on to say that as a result of the cancellation of these facilities, the Company’s core business of procuring and supplying raw material to PT Midas Touch came to a sudden halt.  PT Midas Touch suffered order cancellations of US$6,300,000 as it was unable to fulfil its own contractual obligations, and suffered further losses of inventory and assets in the sums of US$936,402.9 and US$10,102,687.27 respectively.  Mr Ng asks me to infer that the Company in turn suffered substantial losses, given that PT Midas Touch was its major contractual counterparty.

61.On the other hand, Mr Lok submits that the Bank’s contractual right to cancel the Company’s credit facilities was unfettered.  He says such a right is consistent with the terms of the General Customer Agreement, including the following:

(1)  The preamble to the General Customer Agreement provides that “In consideration of [the Bank] granting or continuing credit, financial accommodation and facilities or services to us for so long as [the Bank] may deem fit, we, Creation Castle Limited … hereby agree as follows” (emphasis added).

(2)  Clause 1 provided that “[The Company] shall pay to [the Bank] on demand or on their respective due dates all sums paid or advanced by [the Bank] to or for the account of us or any other person at our request and all other sums of whatever nature for which we may be indebted or liable to [the Bank] on any account or in any manner whatever and whether alone or jointly with any other person”.

(3)  Clause 17.02 provided that “Nothing herein shall impose any obligation on [the Bank] to provide or continue any credit facilities or other accommodation or services to [the Company]”.

62.For authority, Mr Lok relies on, inter alia, Citibank v Days Properties Limited [2013] 4 HKLRD 264 and Chapman v Barclays Bank [1998] PNLR 14.  He then points me to the Bank’s evidence that it cancelled the credit facilities not because of any failure to inform the Bank of changes to its directors and shareholders, but because of the Company’s continued failure to repay its steadily accumulating indebtedness to the Bank.

63.I have reviewed the authorities cited to me by counsel and on the whole I prefer the submissions of Mr Lok.  I am of the view that the Bank’s contractual right to withdraw its credit facilities and demand repayment of all outstanding sums is not subject to any implied limitation that it not be exercised irrationally.  My reasons are as follows.

64.The starting point is Socimer International Bank, supra, in which Rix LJ held that where a contract allocates only to one party a power to make decisions under the contract which may have an effect on both parties, it is plain from the authorities that this discretion “will be limited, as a matter of necessary implication, by concepts of honesty, good faith, and genuineness, and the need for the absence of arbitrariness, capriciousness, perversity and irrationality”: §66.

65.In Mid Essex Hospital Services NHS Trust v Compass Group UK and Ireland Ltd [2013] EWCA Civ 200, however, Jackson LJ noted that “an important feature” in the Socimer line of authorities was that in each case “the discretion did not involve a simple decision whether or not to exercise an absolute contractual right” but rather “involved making an assessment or choosing from a range of options, taking into account the interests of both parties”.  In those cases the term was implied as the contract would not have made sense without it; it would have been absurd to read the contract as permitting the party in question to exercise the discretion in an arbitrary, irrational or capricious manner: §82–83.

66.So in Hodell v Clydesdale Bank Plc [2018] EWHC 1009 (QB), a decision which Mr Ng very fairly drew to my attention, HHJ Rawlings held, sitting as a judge of the High Court, that:

“ Clause 3.1 of the 2008 Facility Agreement provides a contractual right to the Defendant enabling it to cancel all or any part of the facility (and to demand repayment of the facility). As in Compass Group UK and Ireland Ltd (t/a Medirest) v Mid Essex Hospital Services NHS Trust, the Defendant here is entitled, in accordance with its contractual right under clause 3.1 of the 2008 Facility Agreement, to demand repayment of the facility and/or to withdraw all or part of the facility, those are, in my judgement, contractual rights, the fact that the clause gives the Defendant a discretion as to how it chooses to exercise its contractual rights (in whole or in part) in my judgement does not detract from them being contractual rights. I do not see the Supreme Court case of Braganza […] as saying that merely because a party has a choice as to how they exercise their contractual rights, that choice should be made subject to the Implied Term. ”

67.In my judgment, the present case is on all fours with Hodell.  I respectfully agree with the learned judge that a clause which grants a bank the contractual right to cancel credit facilities and demand immediate repayment (under which the bank has a discretion as to how it chooses to exercise this right) is materially distinguishable from one which grants a contracting party the power to make an discretionary assessment on behalf of both parties (as was the case in Socimer and Braganza), and that a Socimer-type implied term is not reasonably necessary to give business efficacy to the contract insofar as the former category of contractual terms is concerned.  In passing, I also note that the clause in the instant case is in effect a contractual termination clause, and I think that the courts are rightfully slow to imply restrictions on a party’s ability to exercise such a clause: see, for example, Financings v Baldock [1963] 2 QB 104 at 115 (Upjohn LJ).

68.I do not think my analysis is affected by the fact that the termination clause uses the word “discretion”.  It is clear that this “discretion” simply refers to the Bank’s power to choose whether or not to exercise its contractual right, and not a discretion in the wider sense identified by Jackson LJ in Compass Group.

69.Furthermore, it is trite that the court will not imply terms which are inconsistent with the express terms of the contract or the nature of the contractual relationship between the parties.  In this regard, I find that, as with Chapman v Barclays Bank and Citibank v Days, it was fundamental to the relationship between the Bank and the Company that the credit facilities were terminable on demand.  It was part of the bargain between the parties, and this much is clear from the provisions of the General Customer Agreement.  To use the words of Kempster J in Lloyds Bank International ltd v Dericourt Investments Ltd [1983] 2 HKLR 409 at 413I–414A, the Company simply made a commercial judgment and “expressly accepted loans on these terms with all the attendant risks”.

70.It is for this reason that I consider the present case distinguishable from Pa Sam Nang, a decision relied on by the Company in its submissions. There, HSBC exercised its contractual power to freeze the plaintiffs’ accounts pending satisfactory completion of compliance investigations on the accounts.  The learned judge found that this power was subject to an implied limit that it not be exercised unreasonably, noting that such a power was prima facie contrary to the debtor-creditor relationship between a bank and its customer: an instruction to a bank to release funds is in effect a demand made by a creditor for the repayment of a debt, and HSBC prima facie had a contractual duty to follow this instruction: §28(a), §46.  Unlike the present case, those limits on the bank’s power to freeze accounts were entirely consistent with and necessary to give effect to the banker-customer relationship between the parties.

71.For completeness, I record my agreement with Mr Lok that the Company’s alleged counterclaim is wholly unparticularised as far as loss and damage is concerned.  I do not think it is possible to infer, even on a preliminary basis, that the Company suffered substantial losses merely from the fact that its main contractual counterparty suffered losses, let alone the potential quantum of such a claim.  And insofar as the alleged loss is said to arise as a result of PT Midas Touch’s “potential claim for loss and damages against the Company for non-performance of their contractual obligations” (as D3 alleges in §28 of his 1^st affirmation given on behalf of the Company), there is simply no evidence before me in support of the assertions that (i) PT Midas Touch suffered losses of nearly US$17,500,000 and that (ii) the Company is contractually liable to PT Midas Touch for the same amount.  As stated in §14/4/14 of Hong Kong Civil Procedure 2019 that:

“ It behoves the defendant to particularise the amount of his set-off or counterclaim or to specify or indicate how it is made up or calculated, so that the court has the necessary material on which to make the proper order – if the court is entitled to grant leave to defend or a stay of execution (as the case may be), the order will be in respect of the whole claim if the amount of set-off or counterclaim exceeds the plaintiff’s claim; if the amount is less, the plaintiff will be entitled to judgment for the difference. (emphasis added) ”

D.  D3’S DEFENCE

72.D3 raises two further grounds in defence.  He contends that while his signatures appear on the Facility Letter, the 1^st Guarantee or the 2^nd Guarantee, he never signed any such document, and that in any event, he had not been advised by the Bank’s representatives as to the nature and effect of the guarantees nor advised to seek independent professional advice in relation to the same.

73.D3 alleges that on some of his visits to the Bank’s offices, he was asked by the Bank’s representatives, Mr Ali and Mr Alam Khan (“Mr Khan”) (both of whom are no longer employed by the Bank), to sign undated, blank documents and/or documents containing only his name.  He alleges that the Bank’s representatives informed him that this was part of the Bank’s standard operating procedure for overseas customers to ensure that the operation of the account was not affected by failure or delay in obtaining signatures.

74.D3 draws attention to the fact that the parties’ details in the 1^st and 2^nd Guarantees were printed in a different font to the pro forma text, suggesting that this text was typed onto the documents after they were originally printed.  He says that in his experience the bank would usually type in the parties’ details into the guarantee before they were printed, and that this “highly unusual” practice is consistent with D3’s defence that the documents were amended by the plaintiff and used to make it appear that he executed the two Guarantees.

75.Mr Brown, who appeared on behalf of D3, submitted that these allegations are not incredible when considered against the background of admitted misconduct on part of the Bank.  Counsel highlighted the following:

(1)  The Bank itself accused Mr Ali of conniving with the Company to effect improper trade transactions on the Company’s account with the Bank, and dismissed him for failing to comply with its internal processes.

(2)  The Bank has so far failed to provide details of Mr Ali’s misconduct nor has it explained why Mr Khan came to leave the employ of the Bank.

(3)  The Bank has not adduced any evidence from anyone personally involved in or present at the execution of the 2^nd Guarantee confirming that its procedures were complied with.

(4)  When the Company raised concerns about the Bank’s practice of taking signatures on blank forms and documents in a letter dated 23 November 2015, the Bank conspicuously failed to respond to these allegations.

76.In response, the Bank relies on the evidence of Mr Hasan and Mr Baig, who depose to the Bank’s “established practice” of having its representative explain the nature and content of all banking documents to the signatory before execution.  In relation to the 1^st Guarantee, the Bank adduces the evidence of Mr Istafa Syed Mohammed (“Mr Mohammed”), Chief Manager of the Bank at the material time, who confirms that he adopted the Bank’s usual practice when D2 and D3 executed the 1^st Guarantee in his presence.

77.As for the different fonts appearing on the 1^st and 2^nd Guarantees, Mr Hasan explains that it is the Bank’s practice to have its standard form guarantees printed in bulk by its commercial printers on distinctive, watermarked, green paper and permanently bound together in booklet form by gold-coloured eyelets.  This is done to ensure that pages cannot be readily removed from (or added to) the booklet.  When preparing a guarantee for execution, an officer of the Bank would feed the standard form guarantee (folded so that the execution page is at the front) into a manual typewriter to type out the parties’ respective details.

78.Mr Lok further relied on the following features of the case in support of his submission that D3’s allegations were simply incredible:

(1)  There is nothing in the evidence given by D3 in support of the Company’s alleged defence that the Facility Letter was forged by the Bank.  Indeed, D3 confirmed (on oath, on behalf of the Company) that “the Facility Letter was only signed on 2 April 2013”.  D3 also exhibited a signed copy of the Facility Letter as part of his evidence on behalf of the Company.  All this is particularly telling when D3 is the only person who has given evidence on behalf of the Company in this application.

(2)  It was a condition precedent of the Facility Letter that there be executed personal guarantees by D2 and D3.  Therefore, Mr Lok says, having indisputably signed the Facility Letter, it is not open to D3 to assert that he never executed the 1^st and 2^nd Guarantees.

(3)  The Bank adduced and relied on minutes of a meeting of Company’s Board on 23 April 2013 signed by D3 (as Chairman of the Board) resolving to enter into the Facility Letter (the “Minutes”), and D3 does not suggest in his evidence that he did not sign these Minutes.

79.D3’s allegations are serious, and in considering whether this gives rise to a triable issue, I remind myself of the need to test this defence against all the available evidence and bear in mind the inherent probabilities of such a claim.

80.I agree with Mr Brown that the Bank’s evidence as to the “usual practices” adopted when executing documents is no answer to D3’s allegations.  Given the Bank’s admission that Mr Ali had failed to comply with its internal processes in the past, it is simply not possible (especially in the context of a summary judgment application) for me to infer from the mere existence of the Bank’s established practices that they were complied with in the instant case.

81.I also do not think it is possible to place much weight on the condition precedent in the Facility Letter insofar as the 2^nd Guarantee is concerned (and I note that the Bank’s only pleaded claim against D3 is one founded upon the 2^nd Guarantee).  This is because, on the Bank’s own case, the 2^nd Guarantee was only signed on 25 June 2014, well over a year after D1 and D3 purportedly entered into the Facility Letter.

82.Nonetheless, in my judgment D3 has not raised a credible defence to the Bank’s claim.  I reach my conclusion based on the following considerations:

(1)  On the Bank’s evidence of how the 1^st and 2^nd Guarantees were printed and prepared, it is simply not possible to add or remove pages from the booklets without damaging the paper.  This evidence is not challenged by D3, and is backed up by the fact that the gold eyelets are clearly visible on the copies of the Guarantees exhibited in this application.  All this plainly flies in the face of D3’s case that he signed blank pieces of paper which was then appended to the Guarantees.

(2)  D3’s allegation in his evidence that he never signed the Facility Letter (whether on behalf of the Company or himself) is clearly inconsistent with the evidence he gives on behalf of the Company, which does not once challenge the validity of the Facility Letter.  Mr Brown tried to downplay this “knock out point”, arguing that D3 did not explicitly admit to signing the Facility Letter in his evidence on behalf of the Company, but I think that this is a mere technicality.  The clear thrust of D3’s evidence on behalf of the Company is that the Company had validly entered into and was bound by the Facility Letter. He notes, for example that “Despite the 2011 Loan being granted, the [Facility Letter], however, was only signed on 2 April 2013”.  Since D3 was the only person who purportedly signed the Facility Letter on behalf of the Company, I do not think it is open to him to simultaneously accept (on behalf of the Company) that the Company was bound by the Facility Letter and allege (on behalf of himself) that he did not sign this document.

(3)  The fact that D3 exhibited the Facility Letter on behalf of the Company in his affirmation to set aside the default judgment is also relevant.  D3 has not explained how he obtained a copy of the Facility Letter despite his claim that he had never signed the Facility Letter at all, there being no suggestion that the Bank subsequently supplied him with a copy.  Overall, I consider that that D3’s evidence in relation to the Facility Letter is incapable of belief, and this in turn casts serious doubt on the veracity of D3’s evidence in relation to the 2^nd Guarantee.

(4)  Finally, I do not think I can place much weight (if at all) on the Bank’s apparent failure to respond to the Company’s allegations in its letter dated 23 November 2015.  This is because the Company never exhibited the complete chain of correspondence between the parties to make good its assertion. In the Company’s further letter dated 8 December 2015, the Company “confirmed receipt of [the Bank’s] letter consisting of 2 pages dated Dec 3, 2015”, but this letter of 3 December was never placed before me.  This point therefore does not take D3’s case any further.

83.Lastly, as for D3’s subsidiary defence that he was never advised by the Bank’s representatives as to the nature and effect of the 2^nd Guarantee nor advised to seek professional advice, I do not see how this can succeed as a matter of law.  I agree with Mr Lok that the Bank owed no duty to D3 to advise or warn him of the risks of entering into the 2^nd Guarantee: DBS Bank (Hong Kong) Ltd v Young & Fortune Ltd HCMP 1838/2014 (unrep, 15 Jan 2016) at §34 (Au-Yeung J).  A fortiori, such a failure to advise (even if proven) is in my view incapable of sustaining a defence based on the doctrine of non est factum.

E.   CONCLUSION

84.For the above reasons, I grant summary judgment to the Bank against both the Company and D3 in the sum of US$1,643,368.19 and HK$9.63, plus interest as follows from 1 February 2018 to the date hereof:

(1)  Interest at a rate of 9.00% p.a. on the sum of US$1,245,874.67;

(2)  Interest at a rate of 9.50% p.a. on the sum of US$52,078.62; and

(3)  Interest at a rate of 10.00% p.a. on the sum of HK$9.63.

85.Mr Ng submitted that, even if I were to grant summary judgment, there should be a stay of execution until trial of the counterclaim. He submitted that the Company’s counterclaim will be stifled otherwise as it simply does not have the means to make any payment to the Bank given the significant losses it has suffered.

86.The relevant principles are set out in Hong Kong Civil Procedure 2019 §14/4/14:

“ 1. where the defendant can show an arguable set- off, whether equitable or otherwise, he is entitled to leave to defend to the extent of the set- off and the court has no discretion;

2. where the defendant sets up a bona fide counterclaim arising out of the same subject-matter as the action and connected with the grounds of defence, the order should not be for judgment on the claim, subject to a stay pending trial of the counterclaim, but should be for unconditional leave to defend, even if the defendant admits the whole or part of the claim;

3. where there is no defence to the claim but a plausible counterclaim of not less than the claim is set up, judgment should be for the plaintiff on the claim with costs, stayed until trial of the counterclaim;

4. where the counterclaim arises out of a separate and distinct transaction or is wholly foreign to the claim, judgment should be for the plaintiff with costs without a stay; the lack of clarity between classes 2, 3 and 4 gives the court freedom to respond to the perceived justice of the individual case. ”

87.At §14/4/14B, it is further said that “although, as with a claim, the court cannot under O.14 try a counterclaim yet if the counterclaim is frivolous or untenable, it will be disregarded”.

88.For the reasons explained above, I do not think that the Company’s counterclaim is tenable in its present form.  Weighing all the circumstances of the case, and notwithstanding the Company’s stated financial difficulties, I do not consider this an appropriate case to exercise my discretion to order a stay of the Bank’s claim.

89.Costs should follow the event.  There was, however, some dispute as to the proper scale of costs which I should award.

90.Mr Lok submitted that the Bank is entitled to its costs assessed on an indemnity basis in the event that it succeeded in its application.  He referred me to the indemnity provisions in the General Customer Agreement and the 2^nd Guarantee, which are in the following terms:

(1)  Clause 9.02 of the General Customer Agreement provides that “[The Company] shall indemnify [the Bank], its officers and employees against all liabilities, claims, costs and damages of any kind which may be incurred by any of them and all actions or proceedings which may be brought by or against them in connection with the Documents and/or the Goods and the exercise of the powers and rights of [the Bank] under this Agreement, unless due to the negligence or willful default of [the Bank], its officers or employees.”

(2)  Clause 1.01(c) of the 2^nd Guarantee provides that “[D3] hereby unconditionally guarantee(s) and agrees on demand by [the Bank] to pay (on a full indemnity basis) all costs and expenses arising out of or in connection with the recovery or attempted recovery by [the Bank] of moneys due under this Guarantee.”

91.Mr Ng, on the other hand, referred me to the decision of the Court of Final Appeal in Bank of China (Hong Kong) v Twin Profit Ltd (2012) 15 HKCFAR 560 in which Ribeiro PJ observed that an indemnity clause only “provides the starting point for the discretionary exercise”: §21.

92.I do not think there can be any quarrel with Mr Ng’s submission that, notwithstanding the indemnity provisions in the General Customer Agreement and the 2^nd Guarantee, the question of costs ultimately remains a matter of the court’s discretion.  However, I do not see any reason to depart from the parties’ agreement that the Bank’s costs be paid on an indemnity basis: see also Twin Profit, supra, §20.

93.Accordingly I make an order nisi that the Company and D3 pay the Bank’s costs of these proceedings on an indemnity basis, to be taxed if not agreed.

Mr Michael Lok, instructed by Wilkinson & Grist, for the plaintiff

Mr Tom Ng, instructed by Robertsons, for the 1^st defendant

Mr Toby Brown, instructed by Gall, for the 3^rd defendant