Hu Kee Pui and Another v. Dah Sing Bank, Ltd

[English Translation]

CACV 977/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 977 OF 2000

(ON APPEAL FROM HCMP NO. 6841 OF 1999)

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BETWEEN

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Before: Hon Leong CJHC, Woo JA and Chung J in Court

Date of Hearing: 1 November 2001

Date of Judgment: 7 November 2001

Date of Handing Down Written Judgment: 7 November 2001

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JUDGMENT

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Hon Leong CJHC (giving the judgment of the Court):

1.The plaintiffs in this case, Hu Kee Pui and Hu Teng Yueh O, are the administratrix of the estate of the late Mr Chen Wei Hann (“the deceased”). Prior to his death, Mr Chen was the sole proprietor of Hanita Marking Company and had a number of bank accounts with the defendant Dah Sing Bank for business purposes. Mr Chen died of illness on 29 June 1997, and Letters of Administration in respect of Mr Chen’s estate were granted to the plaintiffs on 24 November 1998. At the time of his death, Mr Chen had the following accounts with the defendant bank which were still active: a current account with a credit balance of HK$589,245.64, a savings account with a credit balance of JPY3,996,934 and HK$777.50, and a fixed-term deposit account with a balance of JPY14,249,279. There was also a mortgage loan account of HK$1,595,960.60 secured by a property at Room 2314, 23/F, Honour Industrial Centre, Chai Wan; and a transit receipt loan account of HK$239,025.95.

2.After Mr Chen’s death, the plaintiffs failed to repay the monthly instalments in respect of the mortgage loan. By a letter dated 3 August 1998, the defendant bank demanded the plaintiffs to settle the outstanding mortgage loan of HK$1,560,429.34 and accrued interest within five days, failing which the bank would exercise its right of set-off against the credit balances of the deceased’s aforesaid current account and deposit accounts. The plaintiffs did not respond to this demand, and the bank exercised its right of set-off on 16 September 1998, following which the outstanding loan was partially offset by the credit balances of the deceased’s accounts and reduced to HK$572,810.29. Between September 1998 and 5 August 1999, the plaintiffs did make monthly repayments, which further reduced the outstanding loan to HK$543,750.53. Thereafter, the bank made repeated demands for repayment against the plaintiffs, but the plaintiffs made no response. Instead, they issued an originating summons against the bank on 3 November 1999, claiming for the credit balances in the deceased’s accounts, interest and other damages. Their case was that the bank dealt with the deposits in the deceased’s accounts unlawfully and without authorization.

3.The defendant bank filed a counterclaim, seeking an order for possession of the mortgaged property at Room 2314, 23/F, Honour Industrial Centre, Chai Wan by reason of the default on the repayment of the mortgage loan. The bank also sought an order against the plaintiffs for repayment of the outstanding loan of HK$561,439.49 or, in the event that the set-off was found to be invalid, an order against the plaintiffs for repayment of HK$1,553,115.86.

4.The main issue at trial was whether the bank could exercise its right of set-off or consolidate the deceased’s accounts and deal with them together before the plaintiffs were granted the Letters of Administration. The second issue was whether, by making the set-off, the bank had intermeddled with the deceased’s estate. In his judgment, Waung J stated that it was abundantly clear that, under the general agreement between a bank and its customer, the bank normally had the right of set-off. This was no different from the terms in other contracts which gave a contracting party the right of set-off under certain circumstances. This right would not be affected by the death of the other contracting party. It was beyond dispute that the defendant bank had this right, as the contract between the deceased and the defendant bank expressly provided that: (1) the bank had the right of set-off; (2) the right of set-off survived death of the customer. The clauses that Waung J referred to are clauses 4, 24 and 26 of the General Agreement between the bank and its customer and clauses 2.01, 4.01 and 5.01 of the Security Over Deposit Agreement. The thrust of these clauses is that the right of set-off survives death of the customer. Accordingly, Waung J found that the bank could still exercise its inherent right of set-off despite Mr Chen’s death and that the bank was acting properly when it effected the set-off on 16 September 1998. Therefore, the plaintiffs could not reproach the defendant in this respect. Regarding the plaintiffs’ complaint of intermeddling, Waung J found that in the circumstances of the case, there was no question of the bank intermeddling with the estate, because the bank had never taken possession of any part of the deceased’s estate or any asset of the deceased. The rights of the bank vis-a-vis the deceased were the rights of a creditor vis-a-vis a debtor. The money deposited by the deceased with the bank was money which the bank owed to the deceased, and the deceased had not specified which deposits of his formed part of his estate. The appropriation by the bank of the deposits in the deceased’s accounts was done pursuant to its contractual relationship with the deceased and did not constitute intermeddling. For these reasons, Waung J dismissed the plaintiffs’ claims and gave judgment for the defendant bank on its counterclaim.

5.The plaintiffs now appeal on the following grounds: (1) a contract which cannot be performed effectively due to the death of a contracting party should be regarded as void; (2) a contract cannot prevail over laws enacted by the government, such as section 24 of the Estate Duty Ordinance, and therefore the contract in question should be regarded as void.

6.In their written grounds of appeal, the plaintiffs contend that the bank had committed the tortious act of intermeddling before the granting of the Letters of Administration, for the reason that the bank was contractually entitled to consolidate the accounts. Under the common law, a contract would become void upon the death of a contracting party. The plaintiffs also contend that the bank could not treat the contractual terms as prevailing over the laws on estate. The plaintiffs further allege that, as a result of the bank’s tortuous act, they have suffered direct and indirect financial losses which exceed HK$10,000,000. One of the plaintiffs Hu Teng Yueh O has been hospitalized due to the present litigation. The plaintiffs allege that all their financial losses are caused by the defendant bank and hence the counterclaim must fail.

7.According to the common law rule on contract, a contract is still valid even if one of the contracting parties has died. The contractual obligations of the deceased still have to be fulfilled by his or her successor. An exception to the above rule is a contract of a personal nature, namely, a contract which must be performed by the contracting parties personally. This type of contract will be terminated upon the death of one of the contracting parties. A contract between a bank and its customer is not a contract of a personal nature. What the deceased in the present case and the defendant bank had entered into is a general agreement between the bank and its customer. Clause 4 of the agreement makes it clear that the agreement is a continuing one and all the rights, powers and remedies given to the defendant bank by the agreement shall apply to all the deceased’s past, present, future and/or contingent obligations and liabilities to the bank. These obligations and liabilities will not be affected by the death, incapacity or bankruptcy of the deceased. Clause 24 stipulates that the rights, powers and remedies given to the defendant bank by the agreement shall be in addition to all other rights, powers and remedies given to the bank by virtue of any other security, rule of law or equity. The clause also stipulates that the defendant bank can appropriate the credit balances in the customer’s accounts for the satisfaction of any debt owed by the customer to the bank. Clause 26 provides that if the defendant bank grants loans to the deceased, it may at its discretion apply any credit balance in the deceased’s accounts towards partial or full repayment of the outstanding loans.

8.The deceased had entered into a Security Over Deposits Agreement with the bank when he applied for loans. The agreement stipulates that the deceased’s deposits in the accounts of the defendant bank are pledged as security for the loans. If he fails to repay the loans, the defendant bank can offset the outstanding loans against all the credit balances in the deceased’s accounts, or appropriate the credit balances for the settlement of the deceased’s liabilities. According to the relevant clause, the bank is absolute entitled to consolidate the various accounts of the deceased when he fails to repay the loans. The clause also stipulates that the security pledged by the deceased is binding on his successors, administrators or agents.

9.The law on the consolidation of accounts has been canvassed in some authoritative legal textbooks. In Paget’s Law of Banking, it is stated that there exists only one type of relationship between a bank and its customer, regardless of the number of accounts that the customer has with the bank, and at any point of time, that relationship is based on the customer’s deposits with the bank and the debt owed by the customer to the bank. Derham on Set-off explains the law as follows: if a customer has two accounts with the bank, one of which has a credit balance and the other has a debit balance, the bank can consolidate the two accounts and deal with the total deposits or liabilities. The book further explains that under the common law, a bank can consolidate the accounts of its customer even when the agreement between them contains no express provisions to that effect. The law provides, rather, that unless the parties enter into an agreement which expressly forbids the consolidation of accounts, the bank can consolidate the accounts as a matter of course.

10.We agree with the written submission of Mr Michael Liu, Counsel for the defendant bank, that, whether under the common law or pursuant to the terms of the agreement between the parties, the bank was entitled to consolidate the accounts of the deceased and exercise its right of set-off by virtue of their relationship. The death of Mr Chen did not affect the legal and contractual rights of the bank. This is because, as far as the contractual relationship between a bank and its customer is concerned, the death of the customer merely terminates the authorization given to the bank to act as his or her representative and does not destroy the creditor-and-debtor relationship between them. Furthermore, if the claim can be offset against the deceased’s estate, the deceased’s death will not extinguish the creditor’s rights over the estate, provided that both the creditor and the deceased are not bankrupt.

11.On the issue of whether the defendant bank’s acts constituted intermeddling, section 24 of the Estate Duty Ordinance provides that any person who, being neither the executor appointed by the will of the deceased nor the person entitled in priority to the administration of the estate, shall be liable to a penalty if he or she takes possession of or in any way administer the estate without lawful authority or excuse. Therefore, in order to establish a claim of intermeddling against the defendant bank, the claimant has to prove that the bank had taken possession of or administered any part of the estate of the deceased. The plaintiffs argue that, by consolidating the accounts of the deceased and exercising its right of set-off, the defendant bank had committed the act of intermeddling. We do not agree. Those were lawful acts taken by the bank pursuant to the agreement. We agree with Mr Liu’s submission that the credit balances in the deceased’s individual accounts did not form part of the estate; only the total balance (whether credit or debit) after the consolidation of accounts would form part of the estate. The consolidation of accounts, therefore, cannot be regarded as taking possession of or administering the estate. Even if it bordered on intermeddling, the bank would still have lawful authority and excuse to do so by virtue of the abovementioned rules of common law and contract law.

12.We are also satisfied that if any person makes a claim for possession of a deceased person’s estate, and the claim is based on the claimant’s own rights which are distinct from the deceased person’s rights, then the claim cannot be regarded as intermeddling.

13.Section 58 of the Probate and Administration Ordinance provides that any person who obtains, receives or holds any movable or immovable property of a deceased person to the defrauding of creditors or without full valuable consideration shall be charged to the extent of the property received after deducting any debt due to him from the deceased person at the time of his death. Mr Liu argues that, even if the defendant bank were to be charged for the consolidation of accounts and set-off, this would not include the outstanding loan owed by the deceased.

14.In conclusion, the defendant bank was entitled to consolidate the accounts of the deceased to ascertain the net balance. It was also entitled to appropriate the total credit balance in the accounts of the deceased for the settlement of the outstanding loans. In our judgment, these acts of the bank did not constitute intermeddling. The judgment of Waung J is correct and proper, and the plaintiffs’ complaints against that judgment are not made out. We dismiss the appeal and make an order nisi that the plaintiffs shall pay to the defendant bank costs of this appeal.

The plaintiffs in person

Mr Michael Liu, instructed by K.B. Chau & Co., for the defendant

Translated by the Judgment Translation Unit of the Judiciary and approved by Mr. Edmund Cham, Solicitor