The Sun Island Hotel (Hong Kong) Ltd v. The Canton Trust and Commercial Bank Ltd (in Liquidation)

HCA000613/1967

IN THE SUPREME COURT OF HONG KONG

ORIGINAL JURISDICTION

ACTION NO. 613 OF 1967

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Coram: W.A. Blair-Kerr, J.

Date of Judgment: 2 January 1968

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JUDGMENT

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1. On 12th May 1965 it was ordered that the defendant bank (hereinafter referred to as "the bank") be wound up. The Official Receiver was appointed liquidator. On 12th January 1966 the liquidator wrote to the plaintiff company (hereinafter referred to as "the company") demanding payment of the sum of $1,459,770.72, described in the letter of demand as an overdraft. In March 1967, a petition came before the court for the winding-up of the company; and, upon the hearing of that petition, the company applied for leave to bring this action against the bank for damages for breach of contract. Such leave was given; and the hearing of the petition for the winding-up of the company was, by consent, adjourned to 5th February 1968.

2. In this action the company claims damages for breach of a contract alleged to have been made between the parties in September 1963 whereby the bank is said to have agreed to lend the company $2,000,000. It is admitted by the bank that in October 1963 it approved an application by the company for "a loan or loans not exceeding $2,000,000"; but it pleads that the arrangement for advancing money to the company was as set out in their statement of defence.

3. It is common ground that the company's intention was to develop certain land by the erection of a hotel and residential buildings. On 26th October 1963 it wrote to the bank announcing its intention to carry out certain specified construction work in connection with this project and said:-

"We therefore apply from your bank for a loan to support the above-mentioned requirements."

The letter continued as follows:-

(Annexe)

Further applications in similar terms were made as follows:-

for $160,000 on 28th November, 1963;

for $250,000 on 27th January 1964;

for $1,070,000 on 17th June, 1964;

for $100,000 on 25th August, 1964.

The application of 28th November, 1963 referred to the $160,000 as "the second part of the loan". The application of 27th January, 1964 referred to the $250,000 as "the third part of the loan", and so on. In each application there was an undertaking to commence repayment of the total sums advanced at the rate of $200,000 per month commencing not later than June 1965; and the company undertook to repay all sums advanced, together with interest thereon, by August 1965.

4. It appears that during the first few days of February 1965 there was a "run" on the bank; and on the 8th February, 1965 it suspended payment. By that date $1,283,004.01 had actually been advanced to the company.

5. On 30th November 1965, the directors of the bank submitted to the liquidator their statement of affairs. In this document, the bank's investments in land were estimated as capable of producing some $13,000,000. The overall excess of liabilities over assets was estimated at approximately $41,000,000. In his preliminary report dated 7th January 1966, the liquidator estimated that the excess of liabilities over assets would be some $46,000,000, and that, in addition, bad and doubtful debts were in the region of $88,000,000. In paragraph 3 of the report, the liquidator states as follows:-

"In my opinion (the bank) failed because its loans were not made and controlled in accordance with prudent banking practice. In a great many cases, very substantial loans were made without adequate security to customers whose business record and financial position were such that a prudent banker would not have lent to them except upon the fullest security. The control over these loans, once made, was not effective and proper steps were not taken to ensure repayment ......."

Paragraphs 16 and 17 of the Statement of Claim read as follows:-

6. In its statement of defence the bank says it does not admit any of the allegations in paragraphs 16 and 17 of the statement of claim and says that it will aver that:

"the allegations pleaded in paragraphs 16 and 17 aforesaid are unnecessary, scandalous, vexatious, and tend to prejudice, embarrass and delay the fair trial of the action."

By the words "will aver", the bank presumably intend to take objection to the two paragraphs at the trial.

7. On 8th November 1967 the case came before the Registrar, and it was agreed that the parties should give mutual discovery. On 30th November the company's solicitor filed an affidavit in which he stated that the bank had not disclosed documents "relating to the allegations pleaded in paragraph 16 of the statement of claim which are not admitted in the statement of defence." This affidavit was filed in support of an application to be made by the company for an order requiring the bank to state what documents it has (a) relating to the granting and control of loans to all debtors classified as "doubtful" or "bad", and (b) relating to the bank's investments in land.

8. On being served with this summons for further discovery, the liquidator referred the matter to the firm of accountants who were conducting the winding-up on his behalf. The accountant in charge (Mr. R.F.K. Jones) has filed an affidavit dated 15th December, 1967 in which he deposes to the tremendous amount of work which would be involved in complying with an order for further discovery on the lines of the company's application. His affidavit has not been challenged; and, clearly, to comply with any such order would involve the examination and listing of thousands of documents and files. It would require many months of work and the cost of preparing such an affidavit as the company now seeks would be in the neighbourhood of $120,000.

9. The bank then decided to apply under 0.18, r.19 for an order that paragraphs 16 and 17 of the statement of claim be struck out on the grounds that:

Upon the hearing of this application, Counsel for the bank withdrew his objection to paragraph 17; and the order now sought is that paragraph 16 should be struck out.

10. There is a counterclaim by the bank for the sum of $1,689,830.59. This represents the sums advanced by the bank up to 8th February, 1965 together with accrued interest thereon up to the date of the writ. It does not appear that this counterclaim will be seriously contested. What is alleged by the company is that its claim for damges for breach of contract may well exceed what it owes the bank on the counterclaim. Its claim is not for the balance of the $2,000,000. Damages for breach of a contract to lend money may be nominal or substantial, depending on the circumstances. As Chitty, L.J., said in South African Territories v. Wallington⁽¹⁾:-

"The measure of damages is the loss sustained by the borrower through the breach, the rule in Hadley v. Baxendale⁽²⁾ being applied when the circumstances justify its application. If the intended borrower, being a man of good credit, can readily obtain the loan from another person on the same terms, the damages would be nominal. If he cannot obtain the money except at a higher rate of interest or for a shorter term of years, or upon other more onerous terms, the damages would be greater and might be very substantial. The burden of proving the amount of the loss sustained rests on the plaintiff."

What the company is alleging in paragraphs 16 and 17 is that the bank carried on its business in such an imprudent fashion that it ought reasonably to have foreseen that it would have to suspend payment; that such a suspension of payment would lead to a lack of confidence in, and "runs" on, Chinese banks generally throughout Hong Kong; that this would cause the "bank crisis"; that such a "bank crisis" would cause a severe curtailment of credit by all banks, and that the company would consequently be unable to borrow, from any other source, such proportion of the $2,000,000 as might be outstanding at the date when payment would be suspended or indeed such further sums as might be required to complete the building works. Paragraph 17 goes further and alleges that the slump in real property values in 1965 was a direct result of the bank crisis; and that, as a result of this slump in real property values, the company was unable to sell its partly-constructed building. The allegation is, of course, that the bank should have foreseen that all this would be caused by the improvident manner in which it conducted its banking business.

11. Counsel for the bank admits that it is open to the company to plead as they have done in paragraph 17; but it is his contention that the causes of the bank's suspension of payment are irrelevant to these proceedings; that suspension of payment by any large bank, even if this is caused through no fault of the bank concerned, is bound to cause rumours, which in turn sets in motion the series of events pleaded in paragraph 17; and that such rumours would have occurred quite irrespective of the manner in which the bank had been conducting its business.

12. It may be that the company is going to have a herculean task in proving the sequence of events which are alleged to have occurred, events which culminated in its being unable to borrow from any other source the balance of the money needed to complete the building - assuming the intention to complete the building. But the fact that it may well fail to prove its allegations is no ground for the court acceding to an application to strike out a pleading under O.18 r.19. In an application of this kind it is not for the court to prejudge a party's chances of success. In this case the question which I have to ask myself is simply this: Assuming that the company succeed in proving a breach of contract on the part of the bank, are the allegations in paragraph 16 relevant on the question of quantum of damage? Having regard to the way in which the application was argued before me and in particular to the fact that counsel for the bank eventually conceded that it was open to the company to plead as it has done in paragraph 17, I do not think that I should order that paragraph 16 be struck out. If the company succeed in proving a breach of contract on the part of the bank, the allegations in paragraphs 16 and 17 may well be relevant on the quantum of damage. (On this application I do not, of course, purport to give any ruling on relevancy which would bind the trial judge. All I say is that the company's allegations, if proved, may well be relevant on the question of quantum of damage.) At this stage, I find myself quite unable to agree with the submission that the court should start with the fact of suspension of payment on 8th February 1965. If (as counsel for the bank asserts) the causes of the crisis were "rumours", it is surely relevant to examine not only the precise character of those rumours but also the question of how far the alleged rumours were well-founded. Such an inquiry may include a kind of "post-mortem" into the bank's methods of doing business during the years preceding the "bank crisis". This may cause a great deal of work to many persons; the final outcome of the trial may well be delayed for many months; and this may cause the bank (or the liquidator) embarrassment. But I do not think that it is the kind of delay or embarrassment which is visualised by 0.18 r.19; nor, in my view, are the allegations in paragraphs 16 and 17 frivolous, scandalous, or vexatious.

13. For the above reasons the bank's application under O.18 r.19 is refused.

2nd January, 1968.

Representation:

O. V. Cheung, Q.C., & Gittons, Q.C., (Ho & Wong) for the Plaintiff.

Robert Wei (Francis Chaine & Co.) for the Defendant.

(1) (1897) 1 Q.B. 692 at 696

(2) (1854) 9 Ex.341