Worlder Shipping Ltd v. Bank of China (Hong Kong) Ltd

DCCJ 174/2006

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 174 OF 2006

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BETWEEN

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Coram : Her Honour Judge Mimmie Chan

Dates of hearing : 1^st –3^rd , 6^th August & 13^th-14^th September, 2007

Date of handing down Judgment : 5^th November, 2007

JUDGMENT

Background

1.Worlder Shipping Ltd. is guarantor of a debt of $125,000,000 due by Ten Cen International Finance Company Ltd. to Bank of China.  In May 2001, Worlder was requested by the Bank to make a token payment of $100,000 a month, as a sign of its commitment to meet its obligations as guarantor to repay the debt.  The monthly sum was to be paid into a separate, independent account and Worlder claims that the Bank had agreed to repay all monies in the account to Worlder after settlement of Ten Cen's debt to the Bank.  A total sum of $800,000 was paid by Worlder before it stopped payment after 8 months.  Worlder claims that Ten Cen's indebtedness was settled in 2003, when a sum of $22,000,000 was paid to an assignee of the Bank which had taken an assignment of Ten Cen's debt.  Worlder now seeks recovery of $800,000.

Issues

2.The issues for determination at trial are:

(1)	Was the $800,000 paid by Worlder a refundable security deposit, as Worlder claims, and not repayment of its debt due to the Bank?
(2)	Did Worlder and the Bank otherwise agree that the $800,000 could be refunded to Worlder, and if yes, what were the agreed conditions for the refund?
(3)	Were the conditions for refund under the agreement satisfied?
(4)	Was there a breach by the Bank in applying the $800,000 in partial discharge of Worlder's indebtedness?
(5)	If there was a breach by the Bank, did Worlder sustain any damage?

3.In this case, the key issues in dispute between the parties are primarily factual in nature.  In deciding the factual disputes involved, my considerations include: (1) the inherent probability of the parties' assertions; (2) whether the parties' assertions are consistent with their conduct and the contemporaneous documents; and (3) the credibility and demeanor of witnesses.  I do not think that it is necessary to repeat the numerous cases which discussed how these considerations work in resolving factual disputes.  If required, reference can be made to the more recent cases such as Esquire (Electronics) Ltd. v.  The Hong Kong& Shanghai Banking Corporation Ltd., CACV No. 312 of 2005 (12 October 2006) and Profit Boat Development Ltd. v. Craft Projects (Hong Kong) Company Ltd., HCCT 122 of 2000 (31 August 2007). 

4.When considering the testimony of the witnesses, I bear in mind that they are testifying as to events which took place in 2001, 2002 and 2003.  Although this is not an unusually long gap, it is nevertheless not a short delay between events and trial.  The accuracy of the memory of witnesses has therefore to be approached with some caution.  Comparison with contemporaneous documentation is always an aid to the reliability of oral testimony, unless there is reason to believe that the documentation is contrived or materially incomplete.  Where the passage of time between events and trial is long, and where there is a host  of contemporaneous documentation, it would generally be appropriate to place more reliance on contemporaneous documentation.

1. Was the $800,000 paid by Worlder a refundable security deposit, and not repayment of its debt due to the Bank?

5.Worlder claims that it was requested by the Bank to make a token payment of $100,000 a month, not for repayment of its very substantial debt which was then outstanding at $125,000,000, but as a sign of its commitment to meet its obligations as guarantor.  Worlder claims that the Bank knew that Worlder did not have the resources to make substantial repayments, but as the Bank was then preparing for its listing in Hong Kong, it was under pressure to reduce its bad debts.  Worlder alleges that the Bank had to show that Worlder's debt was still being serviced by monthly payments, and the Bank therefore only asked for a token monthly payment, which was to be deposited into a separate and independent account as a security deposit.  After settlement of Ten Cen's debt, Worlder claims that the money it had paid as a security deposit should be refunded in full to Worlder.

6.The contemporaneous documents of both parties show that the monthly payments by Worlder were to be accepted as monthly repayment of the indebtedness due to the Bank.  These contemporaneous documents include Worlder's written report dated 2 December 2001 to its parent company on its meeting with the Bank; Worlder's letter to the Bank dated 24 May 2001; and the Bank's fax message to Worlder dated 25 May 2001.

7.Worlder’s report to its parent company clearly referred to the Bank's request for a token "repayment" of part of Worlder's debt, and Worlder's proposal to "repay" the Bank's debt through the development of a Shanghai property.  Worlder's letter to the Bank dated 24 May 2001 again referred to the Bank's request for Worlder's token "repayment".  Finally, the Bank's fax message to Worlder dated 25 May 2001 referred to the Bank's acceptance of the proposal for monthly "repayment" of HK $100,000.

8.Worlder claims that the Bank's assertion that the monthly payments  of $100,000 were sought as repayment is inherently improbable, when the total debt due for repayment was at the material time in the region of $125,000,000.  I do not agree, when the request is considered in the context of the Bank's explanation given at the time. Even on Worlder's case, the Bank had explained that the monthly payment was sought as a sign of Worlder's sincerity, and its commitment to meet its obligations as guarantor to repay the debt, to show that such debt was still being serviced at a time when the Bank was preparing for its listing in Hong Kong.

9.So far as contemporaneous documents and the witnesses' evidence are concerned, I find that in this case, the contemporaneous documents are more reliable than the witnesses' recollection of the oral discussions held some years ago, their retrospective interpretation of the meaning and effect of the payments made and their unilateral declaration of their intention in making the payments.  The documents referred to in paragraphs 6 and 7 above are clear on their face that the monthly payments were sought and accepted as monthly repayment of the debt.  It was only after the commencement of these proceedings that Worlder seeks to argue that the meaning and effect of the parties’ agreement on the monthly payments is that the payments constituted a "security deposit".

10.The Bank does not dispute that it had agreed with Worlder that the monthly payments would be made into a separate "suspense" account, and that the money paid into such account would be repaid to Worlder on fulfillment of certain conditions.  Worlder's written report dated 2 December 2001 also referred to the money in the independent account being refundable. Even on Mr.Meng's evidence, although Worlder had understood that the monthly payments would be refunded, this was only if there was sufficient repayment such that the matter could be "settled" or "resolved".

11.The Bank's case is that the agreement to put the monthly payments into a separate or "suspense" account does not mean that the Bank had to open a new account with a different account number for Worlder or Ten Cen.  It was simply a case of designating or marking the funds received by clear accounting entries in the books of the Bank, as was shown to have taken place in this case.  This is consistent with trite banking law principles that money received by a bank is not held on trust for the customer, but becomes the money of the bank, with a chose in action arising in favor of the bank customer as creditor and the bank as debtor in respect of the funds received.  The Bank argues that any suggestion that the monthly payments it had received from Worlder were not placed in a separate or suspense account because no new account was opened in the name of Worlder or Ten Cen is misconceived.

12.On the evidence,  I find that the Agreement between Worlder and the Bank was that the monthly payments of $100,000 were to be paid into a separate or suspense account by way of repayment, but that such payments were to be refunded to Worlder upon certain conditions being fulfilled.

2. Did Worlder and the Bank otherwise agree that the $800,000 could be refunded to Worlder, and if yes, what were the agreed conditions for the refund?

13.Although the Bank contends that the payments to be made monthly were by way of repayment of the loan due from Ten Cen and Worlder, it does not dispute that the $800,000 paid could be refunded to Worlder.  In dispute are the circumstances in which the sum should be refunded.

14.Worlder claims that it was agreed that the $800,000 was to be refunded upon the settlement or  resolution （ "解決" ）of the debt due from Ten Cen and from Worlder under its guarantee.  There is no clear evidence from Worlder as to what the parties had intended "settlement" or "resolution" to mean, except for Mr. Meng’s reference to there being sufficient repayment.  It claims that as a sum of $22,000,000 was paid to and accepted by the Bank's assignee (which had purchased the debt from the Bank) in 2003, the $800,000 paid by Worlder should be refunded by the Bank pursuant to the Agreement.

15.The Bank claims that under its Agreement with Worlder, Worlder was to make monthly payments of $100,000 on the 30th of each month into the suspense account, and the money in the account would only be refunded upon full discharge of the debt due from Ten Cen and Worlder, using the proceeds of sale of a property development in Shanghai in which Ten Cen had an interest and which was then in the course of construction.

16.The Bank further contends that it was a term of the Agreement that the outstanding debt should be discharged within a reasonable time, and that Worlder was to use its best endeavours to expedite the completion of the Shanghai development and the discharge of the debt within a reasonable time.

17.Mr. Lee, an assistant manager of the Bank, attended the meeting with Worlder on 9 February 2001, when the terms of the monthly payments were first raised.  His evidence in court was forthright.  He admitted he had not mentioned full repayment of Ten Cen's indebtedness at the meeting as a condition for refund, and that the parties present had not discussed full repayment through the proceeds of sale from the Shanghai development.  Mr. Lee's evidence was that the parties had at all material times throughout only discussed repayment of the debt and that throughout, Worlder had only raised, and the parties had understood, that there was only one possible source of repayment of Ten Cen/Worlder's indebtedness, and that was the Shanghai development.  This accords with the evidence of  Mr. Meng who gave evidence for Worlder, and who said that at the initial meeting on 9 February 2001, the parties had discussed only the "big concept" of Worlder's repayment of the debt owed by Ten Cen, but not the small details as to how the repayment was to be made, although the only practical method of repayment discussed was through the Shanghai development.  Mr. Meng’s evidence was that if the Shanghai development could solve the matter of Ten Cen's indebtedness and a one-off repayment was made, the deposit would be returned, but Worlder would not be able to get a refund if the Shanghai development could not solve the matter and no other solution for the debt problem could be found.

18.On the evidence, I find that the parties agreed in May 2001 that the money paid by Worlder into the separate or suspense account would be refunded upon repayment of Ten Cen/Worlder's debt, whether in part or in full, by way of full settlement.

3. Were the conditions for refund under the Agreement satisfied?

19.There is no dispute that apart from the payment of the total sum of $800,000 into the independent account by 31 December 2001, no other repayment was made by Worlder/Ten Cen to the Bank.  It was only some time around May 2005 that a sum of $22,000,000 was paid to the Bank's assignee of the Ten Cen/Worlder debt, in full and final settlement of their indebtedness. 

20.The agreement to make refund of the sum in the independent account was contained in the Agreement concluded between Worlder and the Bank in May 2001.  Such Agreement had already been terminated by the Bank on 24 July 2003, before the settlement in May 2005.

21.The Bank's Progress Report supports the Bank's case that on 24 July 2003, Mr. Lau of the Bank had informed Mr. Huang of Worlder that the proposals made for settlement of the Ten Cen/Worlder debt through the Shanghai development were not accepted by the Bank, and that absent further negotiations, the Bank would be taking legal action against Worlder. On Worlder's contention, the essence and effect of the Agreement was that the Bank would forbear from taking legal action against Worlder whilst the agreed monthly payments were made and the negotiations for settlement of the debt continued to be in place.  The intimation made to Worlder on 24 July 2003 clearly has the effect of informing Worlder that the Agreement had come to an end.  Any agreement to make refund of the money in the suspense account was likewise terminated.

22.Worlder denies that it had ever been informed by the Bank of the termination of the Agreement, despite the entry made in the Progress Report on 24 July 2003. 

23.The record of the proceedings will reveal that the Bank's witnesses were examined at length on the entries and records made in the Bank's Progress Reports.  The Progress Reports were diary like entries by way of record of communications which officers of the Bank had with representatives of Worlder, and of actions taken by the Bank.  They contain entries of the days on which progress was made in the collection of the debt, with a brief summary or synopsis of the communication made, or the telephone conversation held, or meeting which took place on the day in question.  Different officers of the Bank were in charge of the Worlder/Ten Cen account at different times. Mr. Lau was the last officer in charge of the account and who had the responsibility of keeping the Progress Report.  Although only Mr. Lau gave evidence on behalf of the Bank in relation to all the entries in the Progress Reports, I find no reason to believe that any of the officers who had made the relevant entries at the material time would have reason to lie about the entries recorded, or to falsify any of the entries in question.  I consider the reasoning adopted by Chu, J in Lee Tak Wan v. Chekiang First Bank Ltd. HSCD 14 & 15/2000, 3 November 2000 to be relevant and applicable to my consideration of the relevance and probative value of the Bank's Progress Reports as evidence in this case.

24.Mr. Lau's evidence is that the entries in the Progress Reports were made contemporaneously or nearly contemporaneously, and before these legal proceedings were commenced or could have been contemplated.  The unchallenged evidence of Mr. Lau is that the Bank's computer system automatically blocked access to the Progress Report after the Bank's sale of its debt in December 2003, and thereafter it was not possible for the Bank to alter the records in the Progress Reports.  This is a further reason for my accepting that the Progress Reports are reliable and probative evidence of events which took place at the material time from 2001 to 2003.

25.I find that on 24 July 2003, as recorded in the Progress Report, Worlder was informed that the Agreement was at an end.  From the evidence, it cannot be disputed that the Agreement did come to an end on 24 July 2003.  It is common ground that by then, the monthly payments had stopped.  It is also clear that after 24 July 2003, the parties stopped all negotiations for the settlement of the debt due from Worlder, whether through the Shanghai development, or in any other way.  The Ten Cen/Worlder debt remained unpaid.

26.As at 24 July 2003, the debt of Ten Cen/Worlder had not been settled in any way - whether in part, or in full.  I find therefore that whether on the Bank's contention or on Worlder's contention, the condition for the refund of the money in the separate or suspense account was not fulfilled before the termination of the Agreement on 24 July 2003.

27.By the time there was full "settlement" of the Ten Cen/Worlder debt in May 2005, the Bank was no longer under any obligation to make the refund of $800,000.

4. Was there a breach by the Bank in applying $800,000 in partial discharge of Worlder's indebtedness?

28.The Bank claims that as a result of Worlder's breach of the Agreement in failing to make the monthly payments after 31 December 2001, and in failing to expedite the completion of the Shanghai development or to discharge its indebtedness within a reasonable time, it had applied the $800,000 in partial discharge of the outstanding debt due from Worlder on 3 April 2002.

29.Worlder claims that the Bank had no right to apply the $800,000 in the independent account in partial discharge of Worlder's indebtedness to the Bank under the Guarantee.  In addition to claiming that the $800,000 was never made as repayments, it claims it was not in breach of the Agreement when it stopped making the monthly payments of $100,000 after December 2001.  Worlder claims that its Mr. Huang had informed Mr. Yuen of the Bank in early 2002 that Worlder would stop paying the monthly payments of $100,000 after the eighth payment, and the Bank had never complained about its failure to pay, as they had by then reached some consensus about the resolution of the Shanghai development and the settlement of the debt.  Due to lapse of time, Mr. Yuen has no recollection of whether Mr. Huang had called him about stopping the monthly payments, as alleged by Mr. Huang.  The Bank's Progress Report does not contain any entry recording such a call, as Mr. Yuen was not the officer handing the Worlder account at the material time in early 2002.

30.The Bank therefore denies that it had agreed to Worlder stopping the monthly payments after December 2001.  It contends that even if there was any breach of the Agreement on its part in applying the $800,000 in partial settlement of Welder's indebtedness, the Bank's Progress Report shows that Mr. Zhang of Worlder had been informed by the Bank on 16 December 2002 that $800,000 had been repaid by Worlder to the Bank.  Worlder had not complained about the alleged repayment in any way and had affirmed the Agreement.

31.If, as Worlder contends, the money paid into the independent account was as a security deposit and not as repayment, the Bank's claim that Worlder had made repayment of $800,000, or that the Bank had received repayment of $800,000, would be untrue and should have indicated to Worlder that the Bank had acted in breach of the Agreement.  Yet, Worlder has not been able to adduce any record or other evidence of any protest or complaint made by Worlder when it was told by the Bank in December 2002 that there was repayment of $800,000.  This can only mean that Worlder had all along treated the monthly payments as repayments, and further, that there was no breach of the Agreement when the Bank applied the $800,000 in partial repayment of Worlder’s indebtedness.  It also shows that even if there was any breach of the Agreement by the Bank in applying the $800,000 to discharge the Ten Cen/Worlder debt, Worlder had waived such breach in continuing the negotiations with the Bank after 16 December 2002 on the terms of using the Shanghai development to settle the debt.

32.I have already found that the money paid into the separate suspense account was by way of repayment of Worlder's indebtedness to the Bank, to be refunded only in the event of full settlement of the debt.  On the evidence, it appears that the parties had not discussed how the money in the account should be disposed of in the event that the Ten Cen/Worlder indebtedness was not "settled".  However, since the money was repayment, and since the condition for refund was not fulfilled, the money would, by its very nature as repayment, go to the Bank to discharge the debt.

33.I accept, on the evidence, that the Bank was not in breach of the Agreement in applying the $800,000 towards discharge of Worlder's indebtedness under the Guarantee on 3 April 2002.  Further, any such breach on the Bank's part had been waived by Worlder.

34.The Bank also argued that it had an express contractual right under clauses 14 and 16 of the Guarantee signed by Worlder to apply the money paid in the suspense account towards discharge of Worlder's indebtedness to the Bank.

35.Clause 14 of the Guarantee provides as follows:

"

Payment into suspense account: Any money paid to BOC under this Guarantee may be placed and kept by BOC in a separate or suspense account for so long and in such name as BOC may in BOC's absolute discretion think fit without applying the same or any part thereof in or towards discharge of any debt or liabilities due or incurred by the Principal to BOC so as to enable BOC to preserve intact the Principal's liability to BOC and to sue ..  the Principal in the entirety of the debt or liabilities owing without taking into account any sum so paid under this Guarantee."

Clause 14 only deals with the right of the Bank to place and keep the money received from Worlder in a separate or suspense account.  It does not deal with the Bank's right to apply the money in the account in discharge of Worlder's indebtedness.

36.Clause 16 of the Guarantee provides as follows:

"	Set-Off and lien : … BOC may at any time, without prior notice to me … (a) to set off and appropriate and apply any credit balance on any account… of which I am beneficially entitled at any of BOC's office … against or on account of all or any liabilities of me to BOC hereunder…"

By its very nature as "repayment" as I have found, I am not satisfied that clause 16 of the Guarantee is applicable to the Bank's right to apply the money in the suspense account towards discharge of Worlder's indebtedness.  Clause 16 refers to the Bank's right to apply any credit balance on any account of which Worlder as guarantor is "beneficially entitled".  On my finding that the money in the suspense account is repayment to the Bank, it is not money in an account of which Worlder is beneficially entitled.

5. If there was a breach, did Worlder sustain any damage?

37.Even if I am wrong in my conclusion under issue (4) on whether there was a breach, and the Bank is in breach of the Agreement by applying the $800,000 towards discharge of Worlder's indebtedness, I accept the Bank's contention that Worlder had not sustained any damage at all as a result of the Bank's breach.  Worlder's indebtedness to the Bank has been reduced by $800,000.  When Worlder's debt was assigned by the Bank, the assigned debt reflected the reduction of $800,000 from Worlder's indebtedness.  When payment of $22,000,000 was made in 2005 in settlement of Worlder’s indebtedness, such payment was in settlement of a debt which reflected the reduction of $800,000.

38.Since Worlder did not suffer any damage as a  result of any breach on the Bank's part, it is not entitled to the sum of $800,000 by way of damages.

39.On the same reasoning as that set out in paragraph 37 above, if I am wrong in my finding that the Agreement had been terminated on 24 July 2003, and if it can be argued that the condition for refund of the money in the separate suspense account was fulfilled upon settlement of Worlder's indebtedness in May 2005, I fail to see how Worlder can still seek a refund from the Bank, when the $800,000 was already deducted from the assigned debt for which the payment of $22,000,000 was made by way of settlement.

Conclusion

40.Worlder has failed to establish its claim for payment of the sum of $800,000.  The action is dismissed.  I would make an order nisi that the costs of the action be paid by the Plaintiff to the Defendant, with certificate for counsel, to be taxed if not agreed.

Mr. Lee Yee Hung & Ms. Angel Mak, instructed byY. C. Lee, Pang & Kwok, ,for the Plaintiff

Ms. Eva Sit, instructed by K. W. Ng & Co, for the Defendant