Re Far East Structural Steelwork Engineering Ltd (in Liquidation)

HCCW 354/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 354 OF 2001

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Before: Hon. Kwan J. in Chambers

Date of Hearing: 24 September 2004

Dates of Further Written Submissions: 27 and 30 September 2004

Date of Handing Down of Decision: 27 October 2004

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D E C I S I O N

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1.This is an application under section 182 of the Companies Ordinance, Cap. 32 taken out by the liquidators of Far East Structural Steelwork Engineering Limited (“the Company”) against the Bank of China (Hong Kong) Limited (“BOC”), as the successor corporation of the Kincheng Banking Corporation (“Kincheng”). Section 182 provides that in a winding up by the court, any disposition of the property of the company made after the commencement of the winding up shall, unless the court otherwise orders, be void. The liquidators seek the following reliefs:

(1)     a declaration that certain debits made from the Company’s account held with Kincheng between 20 April 2001 and 21 July 2001 in the total sum of HK$656,043.01 constituted a disposition of property within section 182 of Cap. 32; and

(2)     an order that BOC do pay the said sum to the Company with interest.

2.BOC opposes the application on the basis that advances were made by Kincheng to the Company in the issuance of local letters of credit, and the Company had executed trust receipts to Kincheng as security for the advances. It is alleged that the debits made by Kincheng were pursuant to the security created in the form of a trust over the goods which were purchased with the funds advanced.

3.This application raises the question of the effectiveness of the security purportedly created in favour of Kincheng by this arrangement. Section 182 of Cap. 32 concerns only assets to which a company is beneficially entitled and which are capable of being realized for the benefit of creditors (Lee Tak Samuel v. Lee Tak Yan & Anr. [1999] 4 HKC 12 at 16F, 16I to 17B, 19E and 20E). If a valid and effective security had been created in favour of Kincheng, the liquidators accept that Kincheng was entitled to debit the amount in question and they cannot succeed in this application.

The background facts

4.The relevant background facts are not in dispute and may be stated as follows.

5.On 17 April 2001, a petition was presented to wind up the Company by a judgment creditor. The Company was ordered to be wound up on 6 August 2001 and the liquidators were appointed by the court on 15 November 2003.

6.After the presentation of the petition and between 20 April 2001 and 21 July 2001, these seven debits being the subject of the application were made by Kincheng from the Company’s bank account:

Payment date	Amount (HK$)
(1) 20 April 2001	15,142.07
(2) 23 April 2001	128,532.19
(3) 4 May 2001	29,006.82
(4) 7 May 2001	21,292.19
(5) 4 June 2001	52,000.03
(6) 15 June 2001	330,000.09
(7) 21 July 2001	80,000.00
	656,043.01

7.The Company was a customer of Kincheng since 25 November 1985, when it opened a bills account with Kincheng and signed a number of documents including these two documents both dated 25 November 1985:

(1)     a General Letter of Hypothecation which provided inter alia as follows:

“In consideration of Kincheng Banking Corporation, (hereinafter referred to as ‘the Bank’) granting to me/us such accommodation as from time to time the Bank in its discretion may think fit by way of loans, advances, discounts, overdrafts and/or letters of credit or otherwise, and/or, at my/our request or against my/our guarantee, granting accommodation to others, and in addition to other securities (if any) which I/we may have given or from time to time give to the Bank, I/we hereby pledge, … assign and transfer to the Bank all goods, … and all other properties or securities of mine/ours, or  in which I/we may have any interest, now or at any time hereafter deposited with the Bank by me/us …”

(2)     an Agreement which provided inter alia as follows:

“In consideration of your opening or establishing from time to time at our request such commercial credits as you may think fit we hereby agree that the following agreements and conditions shall apply to all such credits: …

We agree to provide you at or before maturity with funds to meet all your disbursements and/or acceptances and to pay all your commission and charges and interest including freight if any and all obligations liabilities and expenses of any nature incurred by you or your agents in connection with any such credit and we authorise you to debit our account with you with the amount of such disbursements and/or acceptances commission and charges and expenses …”

8.On 17 February 1993, the Company further signed a Running Trust Receipt Agreement in favour of the Bank. This provided inter alia as follows:

“ In consideration of your handing over to me/us at any time and from time to time the goods or Documents of Title to the goods hypothecated to you as collateral security or otherwise for the due payment of the relevant draft(s) for a total amount of not exceeding Hong Kong Dollars Six Million Five Hundred Thousand Only (HK $6,500,000.00)

I/We hereby undertake and agree

(1)     to hold the said documents and the said goods and the proceeds thereof as trustees for you and as your agents to land store and deliver the said goods to buyers and to pay you the proceeds of sale without any deduction and immediately upon the receipt thereof or of each portion thereof and that you shall have authority to demand and receive from any person or persons the purchase money of the said goods …

(2)     to keep the goods fully insured …

(3)     that you remain the owners of the said goods and that you and your agents shall be at liberty at all times without notice to enter and inspect them and retake possession thereof and to remove and to dispose of them by sale or otherwise as you think fit and otherwise to take whatever measures you may consider expedient for the protection of your interest therein;

…

(5)     to keep this transaction separate from all other transactions; …”

9.The seven debits in question made by Kincheng were in relation to the advances made in respect of two local letters of credit. These were the relevant documents executed in each transaction:

L/C No. F-34-S-32153

(1)     an application of the Company to Kincheng dated 7 September 2000 for issuing a letter of credit in favour of Hop Tak Lee Metal Company Limited in the sum of HK$161,103.40 for the supply of brass sheets by local delivery;

(2)     a Trust Receipt from the Company to Kincheng;

(3)     a Cargo Receipt from the Company to Hop Tak Lee Metal Company Limited dated 12 September 2000; and

(4)     an Inward Bill Advice dated 21 September 2000 issued by Kincheng to the Company, stating that the due date for repayment of the facility was 20 December 2000.

L/C No. F-34-S-32428

(1)     an application of the Company to Kincheng dated 14 October 2000 for issuing a letter of credit in favour of K.Y.H. Steel Company Limited in the sum of HK$514,325.24 for the supply of assorted steel materials by local delivery;

(2)     a Trust Receipt from the Company to Kincheng dated 15 October 2000;

(3)     a Cargo Receipt from the Company to K.Y.H. Steel Company Limited dated 16 October 2000; and

(4)     an Inward Bill Advice dated 24 October 2000 issued by Kincheng to the Company, stating that the due date for repayment of the facility was 22 January 2001.

10.The modus operandi for these transactions was like this. The Company applied to Kincheng for an advance for the purpose of issuing a local letter of credit in favour of the seller for the purchase of goods which would be delivered locally by a certain date. The documents to be presented under the letter of credit were signed local invoice in triplicate of the seller and a Cargo Receipt signed by the Company certifying that the goods had been received in good order and condition. The letter of credit was issued by Kincheng against a Trust Receipt signed by the Company in its favour. Kincheng effected payment when the negotiating bank presented the stipulated documents on behalf of the seller. By the Inward Bill Advice, Kincheng notified the Company of the due date of payment of the advance under the letter of credit.

11.The Trust Receipt signed by the Company in respect of the first letter of credit was returned to the Company upon retirement of the loan by the three debits made on 20 April 2001, 23 April 2001 and 4 May 2001 in the total sum of HK$172,681.08 (this represented the loan amount with interest), so a copy of this was not available for production in these proceedings. I understand this was in the standard form used by Kincheng. The Trust Receipt in respect of the other letter of credit was produced and this read as follows:

“ I/We acknowledge receipt of the goods and/or Documents of Title to the goods as per particulars at foot UPON TRUST for account and/or on behalf of Kincheng Banking Corporation Hong Kong branch and on the terms and conditions set out in the Running Trust Receipt Agreement and/or the General Commercial Agreement (if any) signed by me/us.”

12.Each of the Cargo Receipts signed by the Company and addressed to the seller in question contained an identical provision as stated below:

“This is to certify that the following goods under the captioned letter of credit covering your invoice(s) [the invoice numbers are stated] have been received in good order and condition upon trust for and/or on behalf of Kincheng Banking Corporation Hong Kong.”

13.The debits from the Company’s bank account were made by Kincheng when it received verbal instructions and authorisation from the Company. In respect of the second letter of credit, the advance made was repaid only in the amount of HK$483,292.31. In a letter of the solicitors for BOC to the liquidators dated 19 January 2004, it was asserted that the goods covered by the letters of credit were sold by the Company and that after the sale of the goods the Company paid the proceeds of sale to its bank account.

14.As these transactions covered the delivery of goods locally, no bills of lading (which are effective documents of title) were used. Hence, the Cargo Receipt was treated as a document of title for the purpose of creating a security purportedly in the form of a trust over the goods purchased locally with the funds advanced. This is the evidence of the manager of the Wanchai Road branch of BOC, who also deposed that this method of creating security for an advance in respect of a local letter of credit is widespread in the commercial community in Hong Kong and if the liquidators’ challenge of this form of security by “the established local custom” were successful, this would have profound commercial implications.

The issues

15.The issues for determination, as formulated by Miss Linda Chan who appeared for the liquidators, are as follows:

(1)    what is the nature of the security purported to have been created in favour of Kincheng under the two letter of credit transactions; and

(2)    whether the security created in favour of the Company is valid against the liquidators.

16.To answer these questions, it is necessary to go back to first principles.

The nature of the security created

17.As stated in Legal Problems of Credit and Security by Roy Goode, 3^rd ed., at para. 1-42, there are only four types of consensual security known to the law: the pledge, the contractual lien, the mortgage and the charge. Mr. John Kerr, who appeared for BOC, submitted that the security of Kincheng was in the nature of a trust in that the trust receipts meant that the Company received the goods and held the goods on trust for Kincheng and also held the proceeds of sale of the goods on trust for Kincheng. I reject this submission. The trust is not an independent security device. The position is clearly stated in the aforesaid work at para. 1-53:

“The pledge, a contractual lien, the mortgage and the charge encompass all the forms of consensual security known to English law.  The trust, if created for the purpose of securing an obligation, is not an independent security device, merely a form of equitable mortgage, which may be effected either by the debtor declaring himself a trustee of the asset for the creditor or by his transferring the asset to a trustee to hold it on trust for the creditor.”

18.It is equally clear that no mortgage was created in this instance, as there was no transfer of ownership of the asset by way of security upon the express or implied condition that ownership would be re-transferred to the debtor on the discharge of his obligation. A contractual lien can also be ruled out, as this is dependent on the creditor retaining possession of the asset previously delivered to him as security for payment. This leaves the device of a pledge and that of a charge.

19.A pledge is the actual or constructive delivery of possession of an asset to the creditor by way of security and since a pledge depends on possession, an asset is not pledgeable unless it is reducible to possession (Legal Problems of Credit and Security, para. 1-44). A clear exposition of a pledge was given by Lord Wright in Official Assignee of Madras v. Mercantile Bank of India Ltd. [1935] A.C. 53 at 58 to 59:

“At common law a pledge could not be created except by a delivery of possession of the thing pledged, either actual or constructive. It involved a bailment. If the pledgor had the actual goods in his physical possession, he could effect the pledge by actual delivery; in other cases he could give possession by some symbolic act, such as handing over the key of the store in which they were.  If, however, the goods were in the custody of a third person, who held for the bailor so that in law his possession was that of the bailor, the pledge could be effected by a change of the possession of the third party, that is by an order to him from the pledgor to hold for the pledgee, the change being perfected by the third party attorning to the pledgee, that is acknowledging that he thereupon held for him; and was thus a change of possession and a constructive delivery: the goods in the hands of the third party became by this process in the possession constructively of the pledgee.  But where goods were represented by documents the transfer of the documents did not change the possession of the goods, save for one exception, unless the custodier (carrier, warehouseman or such) was notified of the transfer and agreed to hold in future as bailee for the pledgee.  The one exception was the case of bills of lading, the transfer of which by the law merchant operated as a transfer of the possession of, as well as the property in, the goods.  This exception has been explained on the ground that the goods being at sea the master could not be notified; the true explanation may be that it was a rule of the law merchant, developed in order to facilitate mercantile transactions, whereas the process of pledging goods on land was regulated by the narrower rule of the common law and the latter remained stereotyped in the form which it had taken before the importance of documents of title in mercantile transactions was realised.  So things have remained in the English law: a pledge of documents is not in general to be deemed a pledge of the goods; a pledge of the documents (always excepting a bill of lading) is merely a pledge of the ipsa corpora of them; the common law continued to regard them as merely tokens of an authority to receive possession, though from time to time representations were made by special juries that in the ordinary practice of merchants transfers of documents were understood to pass possession, as for instance  in 1815, in Spear v. Travers (1815) 4 Camp. 251. The common law rule was stated by the House of Lords in William McEwan & Sons v. Smith (1849) 2 H.L.C. 309. The position of the English law has been fully explained also more recently in Inglis v.  Robertson [1898] A.C. 616 and in Dublin City Distillery, etc., Ltd. v. Doherty [1914] A.C. 823.”

20.In the present situation there was no actual delivery of the goods. Did Kincheng take constructive delivery, either of a valid document of title or because of an acknowledgment by the custodier of the goods that he held the goods to the order or at the disposition of Kincheng?

21.The only documents held by Kincheng were the Cargo Receipts and the Trust Receipts. As mentioned earlier, it was deposed to in the affirmation filed on behalf of BOC that the Cargo Receipts were treated as documents of title. In his submissions, Mr. Kerr contended that the Trust Receipts constituted documents of title. I turn to consider the status of these documents.

22.As appeared from the speech of Lord Wright, bills of lading are the only documents recognised by the common law as having an exceptional status. It is well established that they represent the goods to which they relate, so that the transfer of the bill of lading of itself constitutes a transfer of the goods themselves. Although the class of documentary intangibles is not closed, as it may be expanded through mercantile usage, in considering whether a document is or is not pledgeable, there are certain attributes that one must bear in mind, as could be gleaned from these extracts in Legal Problems of Credit and Security at paras. 1-44 and 1-45:

“In practice, pledges are confined to goods and to documentary intangibles, that is, documents embodying title to goods, money or securities such that the right to these assets is vested in the holder of the document for the time being and can be transferred by delivery of the document with any necessary indorsement.  Put another way, the obligor’s delivery or payment obligation is owed not to the original obligee as such but to whoever is the holder of the document and presents it for delivery or payment. … We can say with confidence that a pledge may be taken of bills of lading and other documents of title to goods (e.g. warehouse and dock warrants or receipts which by statute or custom are negotiable), and of negotiable instruments and negotiable securities, but that it is not possible to pledge ordinary written contracts such as building contracts or hire-purchase agreements, the production of which is not a condition of the obligor’s duty of payment or other performance.  Between these are documents and commercial paper which are not negotiable in the ordinary sense, but are commonly deposited with banks by way of security.  Examples are non-negotiable transport documents, non-negotiable instruments, certificates relating to registered shares and debentures, and insurance policies.  Some of these are normally required to be produced before the obligor will perform and to this extent they differ from the documents previously mentioned.  However, their possession does not of itself confer rights against the obligor and there is therefore little doubt that they too are non-pledgeable …

A document of title to goods, such as a bill of lading, embodies an undertaking by the carrier to surrender the goods to whoever is the holder of the document and presents it at the destination. Delays in the arrival of bills of lading have led increasingly to the use of non-negotiable transport documents, such as sea waybills, which constitute a receipt by the carrier and evidence the terms of the contract of carriage but do not require to be produced by the consignee in order to obtain possession of the goods. Delivery of such a document to a bank by way of security does not of itself confer on the bank any right to delivery of the goods.  Accordingly it is not effective to create a pledge and at most evinces an intention to create an equitable mortgage or charge.”

23.Of similar effect is the following passage in Documentary Credits by Raymond Jack, Ali Malek and David Quest, 3^rd ed., at para. 11.9:

“Where the credit calls for a transport document which is not a bill of lading, in some cases it may nonetheless be capable of argument that by modern mercantile usage the document is a negotiable document of title and so the bank has a pledge (a candidate is the ‘combined transport bill of lading’). But otherwise the bank will be unable to put itself forward as a pledgee.”

24.Here, the Cargo Receipt was not a document capable of transfer by delivery and indorsement, nor was this required to be produced before the Company was to perform its obligation to Kincheng. Possession of the Cargo Receipt does not of itself confer on Kincheng any right to delivery of the goods. It could not be a pledgeable document. As there was no constructive delivery of the goods by taking possession of the Cargo Receipt, a pledge was not created when the Cargo Receipt was deposited with Kincheng purportedly by way of security.

25.As for Mr. Kerr’s reliance on the Trust Receipts themselves as constituting documents of title, this reliance is misplaced. As pointed out by Miss Chan, it was stated in the Trust Receipt exhibited that the Company acknowledged receipt “of the goods and/or Documents of Title to the goods as per particulars at foot”. The “Documents of Title” mentioned in the Trust Receipt must have been a reference to some other document, not the Trust Receipt itself.

26.Moreover, in Re David Allester Ltd. [1922] 2 Ch. 211 at 216 and 217, Astbury J had analysed the use of a trust receipt and the purpose served by a trust receipt in these terms:

“The pledge rights of the bank were complete on the deposit of the bills of lading and other documents of title. These letters of trust are mere records of trust authorities given by the bank and accepted by the company, stating the terms on which the pledgors were authorised to realise the goods on the pledgees’ behalf. The bank’s pledge and its rights as pledgee do not arise under these documents at all, but under the original pledge: see Ex parte Hubbard 17 Q.B.D 690, 697. The bank as pledgee had a right to realise the goods in question from time to time, and it was more convenient to them, as is common practice throughout the country, to allow the realisation to be made by experts, in this case by the pledgors. They were clearly entitled to do this by handing over the bills of lading and other documents of title for realisation on their behalf without in any way affecting their pledge rights: see North Western Bank v. Poynter [1895] A.C. 56. …

In the present case the letters of trust were not issued for the purpose of creating a security at all; the security existed, and they were mere records of authorities given to the pledgors to act as trustee agents for sale on behalf of the bank.”

27.Thus, the rights of the bank to the security would have arisen from the pre-existing pledge, not from the trust receipt which merely authorises the release of the goods to the pledgor for realisation. The device of a trust receipt cannot be used if the documents which come into the bank’s hands through the credit are not such that the bank becomes a pledgee of the goods, as the release of such documents to the buyer under a trust receipt will not protect the bank’s interest (Documentary Credits, para. 11.13).

28.Mr. Kerr had cited to me the cases of In re Hamilton Young & Co. [1905] 2 K.B. 772 and U.D.I. (H.K.) Limited v. Fantana Limited, HCCW No. 19 of 1976, 3 May 1978, Li J, in support of his submission that as trust receipts are “documents of title to goods” as defined in section 2 of the Factors Ordinance, Cap. 48 and in section 2 of the Sale of Goods Ordinance, Cap. 26 in that they come within “any other document[s] used in the ordinary course of business as proof of the possession or control of goods”, it must follow that Kincheng’s security rights were secured by the trust receipts which constituted “documents of title”.

29.The question for determination in Hamilton Young was whether the documents described as letters of lien, by which the debtors declared they held the goods mentioned on account of the bank, were bills of sale and void for want of registration or whether they fell within the statutory exception in the Bills of Sale Act in that they were “any other documents used in the ordinary course of business as proof of the possession or control of goods”. The goods claimed by the bank were in the possession of the debtors or the bleachers to whom the goods were sent to be prepared for shipment, and not all of the goods claimed were the subject of letters of lien. Although there was nothing to show that the bleachers would have given up the goods to the bank on production of the receipts issued by the bleachers, there was attornment to the bank before the act of bankruptcy in all but one case of the bleachers to whom notice of the bank’s claim was given. It was held that the bank was entitled to a lien or charge on the goods, whether they were the subject of letters of lien, save in the instance where there was no attornment, and that the letters of lien with the accompanying bleachers’ receipts came within the statutory exception of the Bills of Sale Act.

30.The second case U.D.I. (H.K.) Limited followed Hamilton Young in holding that the trust receipts were “documents used in the ordinary course of business as proof of the possession or control of goods” within the statutory exception in section 2 of the Bills of Sale Ordinance, Cap. 20, having found that the facts were practically on all fours with the English decision.

31.It is not surprising that there was no discussion or analysis in these authorities that if the letters of lien or the trust receipts under consideration had the attributes of a document susceptible to pledge, as appeared from the extracts in Legal Problems of Credit and Security that I have quoted extensively, as the issues for determination were framed on a somewhat different footing. The way that “documents of title to goods” have been defined for the purpose of Cap. 48 or Cap. 26 and that trust receipts might have constituted “documents of title to goods” as statutorily defined for a particular purpose or that they come within the statutory exception of a bill of sale are not relevant to the question if the document is of a nature that is susceptible to pledge. It is pertinent to note also that the documents described as letters of lien in Hamilton Young were a misnomer, for the bank had neither the goods nor documents of title (Paget’s Law of Banking, 12^th ed., para. 31.14). I do not think these decisions cited by Mr. Kerr are of assistance; they do not provide support to the contention that the Trust Receipts in the present case were pledgeable.

32.Mr. Kerr also referred me to Re Wing Hong Woo Co. Ltd. [2001] 4 HKC 99 at 106C to F, contending that the Court of Appeal had relied on the trust receipts alone as creating a security in favour of the bank. This is not a proper reading of the relevant dicta of Rogers VP, as the Vice-President had stated at 106E that “the documents and the goods which were the subject of the trust receipts were subject to actual, or at least de facto, security in favour of the bank.”

33.The remaining possibility of a constructive delivery of possession for there to be a pledge is an attornment by the custodier of the goods that he agreed to hold the goods as bailee for Kincheng. Mr. Kerr contended that Kincheng had acquired constructive possession when the Company acknowledged receipt of the goods on behalf of Kincheng from the seller and thereafter attorned to Kincheng by giving it the Cargo Receipts which acknowledged that the Company was holding the goods on trust for Kincheng.

34.An attornment consists of “any overt or positive acknowledgment by a possessor that he now holds goods as bailee for someone other than the party who originally bailed them to him” (Palmer on Bailment, 2^nd ed., page 1368). This could be brought about by a third party previously holding identified goods for the debtor when the third party intimates to the creditor that those goods will now be held to the creditor’s order; it could also be brought about by the debtor himself when he attorns to the creditor while retaining physical possession of the goods (Commercial Law by Roy Goode, 3^rd ed., pages 649 and 45; Dublin City Distillery Co. Ltd., supra. at 852 to 853, per Lord Parker of Waddington; Paget’s Law of Banking, para. 31.4). The process required for an attornment where the current owner of goods which are in the possession of a bailee seeks to pledge them was comprehensively stated by Lord Wright in Official Assignee of Madras in the passage that I have quoted earlier. I reject the submission of Mr. Kerr that it is irrelevant whether the Company had taken physical delivery of the goods, the decision he cited (Hong Kong Hua Guang Industrial Co. v. Midway International Limited & Ors. [2000] 2 HKC 348) is not an authority for the proposition that a debtor with only an immediate right to possession may attorn to the creditor.

35.Before the goods in the present case were sold by the Company as alleged by the solicitors of BOC in their letter to the liquidators, what evidence is there as to the physical possession of these goods? It is true that by the Cargo Receipts, the Company had acknowledged receipt of the goods upon trust for and on behalf of Kincheng; this, however, is not tantamount to physical possession of the goods by the Company, without which there could be no attornment by the Company to Kincheng. If the goods were in the physical possession of some third party custodier such as the seller, carrier or warehouseman and later delivered by the bailee direct to the sub-buyer of the Company, there is no evidence that the Company had ever given any direction to the bailee of the goods (except in the case of the seller) that the goods were to be held for and on behalf of Kincheng, and that the change of possession was perfected by the bailee acknowledging that he held the goods for Kincheng and had thereby attorned to Kincheng.

36.There is insufficient evidence that a change of the possession of the goods had taken place to constitute a valid attornment. It does not appear to me that the change in the character of possession upon a sale and leaseback arrangement, considered to be sufficient to establish a constructive delivery in Michael Gerson (Leasing) Ltd. v. Wilkinson [2001] 1 Q.B. 514, is relevant to the present situation.

37.Mr. Kerr further relied on Kum v. Wah Tat Bank Ltd. [1971] 1 Lloyd’s Rep. 439 in support of the proposition there may be another form of constructive delivery to complete a pledge at common law. In that case, the Privy Council held that there was delivery to the bank upon shipment of the goods consigned to the bank by the borrower, as delivery to the ship was as bailee for the bank, so that the pledge was thereby completed in that the bank alone was given the right of possession to the goods. The act of shipment constituted unconditional appropriation and delivery under the contract of pledge. I am unable to see how this is applicable to the present situation.

38.For the above reasons, I hold that BOC has failed to establish that there was a valid pledge in respect of the goods or of any documents of title to the goods covered by the letters of credit in question. 

39.The last device by which consensual security may be created is that of a charge.

40.By the delivery of the Trust Receipts and Cargo Receipts to Kincheng, there would appear to be an intention to create an equitable charge (see the extract from Legal Problems of Credit and Security at pages 11 and 12 quoted earlier; Dublin City Distillery Limited, supra. at 858 per Lord Parker; Official Assignee of Madras, supra. at 66 to 67 per Lord Wright; and Paget’s Law of Banking, para. 31.14). An equitable charge, created either by trust or by contract, constitutes the right of the creditor to have a designated asset of the debtor appropriated to the discharge of the indebtedness, and the right is satisfied out of the proceeds of sale of the asset. It is merely an incumbrance and can exist only in equity or by statute (Commercial Law by Roy Goode, page 587).

The validity of the security created

41.Under section 2 of the Bills of Sale Ordinance, Cap. 20, a bill of sale is defined to include:

“bills of sale, assignments, transfers, declarations of trust without transfer, inventories  of goods with receipt thereto attached, or receipts for purchase moneys of goods, and other assurances of personal chattels, and also powers of attorney, authorities, or licences to take possession of personal chattels as security for any debt, and also any agreement, whether intended or not to be followed by the execution of any other instrument, by which a right in equity to any personal chattels, or to any charge or security thereon, is conferred, but does not include the following documents; that is to say, assignments for the benefit of the creditors of the person making or giving the same, marriage settlements, transfers or assignments of any ship or vessel or any share thereof, transfers of goods in the ordinary course of business of any trade or calling, bills of sale of goods in any place outside Hong Kong or at sea, bills of lading,  India warrants, warehouse keepers’ certificates, warrants or orders for the delivery of goods, or any other documents used in the ordinary course of business as proof of the possession or control of goods, or authorizing or purporting to authorize, either by indorsement or by delivery, the possessor of such document to transfer or receive goods thereby represented …”.

42.Having come to the view that there was no valid pledge and that the security created was an equitable charge in each instance, the Trust Receipts and the Cargo Receipts would come within the definition of a bill of sale, as one or more of the following: declarations of trust without transfer; other assurances of personal chattels; authorities or licences to take possession of personal chattels as security for any debt; or any agreement by which a right in equity to any personal chattels or to any charge or security thereon is conferred.

43.Further, if contrary to my holding in that the Cargo Receipts did constitute valid attornment by the Company to Kincheng on the premise that the pledge did not come into existence independently of any document, the attornment in writing would also have come within the definition of a bill of sale, as “the effect of which is to complete a common law pledge by passing to the pledgee the possession of the goods the subject of the pledge, [and] is an assurance of personal chattels within the definition, even if it be not also a licence to take possession of the goods” (Dublin City Distillery Limited, supra. at 855, per Lord Parker; Halsbury’s Laws of England, 4^th ed. 2002 Reissue, vol. 4(1), para. 621).

44.The Trust Receipts and Cargo Receipts cannot be brought within the statutory exception of a bill of sale. They were not warrants or orders for the delivery of goods, and in order to bring them within “other documents used in the ordinary course of business as proof of the possession or control of goods, or authorizing or purporting to authorize, either by indorsement or by delivery, the possessor of such document to transfer or receive goods thereby represented”, it must be proved they are such documents used in the ordinary course of business and this was not proved by evidence (Dublin City Distillery Limited, supra. at 850 per Lord Atkinson, 856 to 857 per Lord Parker, and 867 per Lord Sumner).

45.As for the cases of Hamilton Young andU.D.I. (H.K.) Limited, and other cases on the topic whether or not the document in question is one “used in the ordinary course of business as proof of the possession or control of goods” within the statutory exception, it would appear from the analysis in Paget’s Law of Banking, para. 31.14 that the authorities are confusing, they are based on a finding of fact that the particular documents were used in the ordinary course of business as proof of possession or control of goods, and there is difficulty in drawing out of them any principles of general application. I agree with the author that it is unsafe to rely on them as support for the effectiveness of any document not strictly on all fours with that considered in the particular case.

46.Under sections 80(1) and 80(2)(c) of Cap. 32, where a charge created or evidenced by an instrument which, if executed by an individual, would require registration as a bill of sale, the charge shall be void against the liquidator and any creditor of the company unless the particulars of the charge are delivered to or received by the Registrar of Companies for registration within five weeks after the date of its creation. There was no registration of the charges in the present case.

47.Miss Chan further submitted that if a charge was created over the money deposited by the Company at Kincheng, this would be in substance a floating charge on the undertaking or property of the Company, and is also void against the liquidator for want of registration by reason of section 80(2)(f) of Cap. 32. This seems to be a valid point. I would also add that in so far as proceeds of sale of the goods were charged to Kincheng, this would constitute a book debt and is void against the liquidator for want of registration by reason of section 80(2)(e) of Cap. 32 (Ladenburg & Co. v. Goodwin, Ferreira & Co. Ltd. [1912] 3 K.B. 275).

48.For the above reasons, I hold that the security created by the Company in favour of Kincheng is void against the liquidators and that Kincheng is not entitled to debit the account of the Company purportedly in the exercise of its rights under the security. I grant the reliefs sought by the liquidators in the terms as set out in the beginning of this decision. I make an order nisi that BOC is to pay the liquidators’ costs of this application.

Miss Linda Chan, instructed by Stephenson, Harwood & Lo, for the Applicants.

Mr. John Kerr, instructed by K. W. Ng & Co., for the Respondent.