Chairod Mahadumrongkul and Another v. Bank of Credit and Commerce Hong Kong Ltd (in Liquidation)
HEADNOTE Back-to-back loan and deposit transactions between bank, depositors and borrowers (the borrowers being companies controlled by one of the depositors) - Winding-up petition presented against the bank - By operation of the rule in Re Humber Ironworks & Shipbuilding Co. Ltd (1869) 4 Ch. App. 643 : cessation of the depositors' entitlement to interest on the deposits even while the bank's entitlement to interest on the loans continued - Judge held that the deposits were impressed with a trust requiring that they be set off against the loans - Bank appealed, contending that no such trust arose -Depositors cross appealed, contending that an automatic set-off arose (on a date slightly less favourable to them but still giving them substantial victory) on the true construction of the contractual documents - The Court of Appeal allowed both the appeal and the cross-appeal, holding that no trust arose but that, in the events which happened, an automatic set-off arose on the true construction of the contract.
----------------- Coram: Litton VP, Bokhary & Godfrey JJA in Court Date of Hearing: 21-22 November, 1996 Date of Handing down of Judgment: 10 December, 1996 ----------------- JUDGMENT ----------------- Litton VP: 1. The first judgment will be given by Mr Justice Bokhary JA. Bokhary JA: Introduction 2. We have before us an appeal and a cross-appeal. They come to us from originating summons proceedings before Deputy Judge Patrick Fung QC in the High Court. 3. Those proceedings were brought by two erstwhile customers against a bank in liquidation. For reasons which will become clear, I will refer to the plaintiff customers as "the Depositors". And for obvious reasons, I will refer to the defendant bank as "the Bank". 4. On June 7 this year, following a two-day hearing in April, the judge handed down a judgment in favour of the Depositors. Bank appeals and depositors cross appeal 5. The Bank appeals against that judgment. And the Depositors cross appeal against it even though it is in their favour. That is because their principal argument not only differs from the judge's reasoning but would, if accepted, lead to a different, although not very different, result. It would still be a victory for them. But it would be a victory somewhat less than the one which the judge gave them. They also seek, if necessary, to support the judge's result. Essentially, they seek to do so on grounds different - some very much so and some only slightly so - from the ones articulated by the judge. Circumstances of the case first 6. To understand the judge's Order, it is necessary to know something of the circumstances of the case first. So I will postpone describing that Order, and first say a few words as to those circumstances. 7. The Depositors are husband and wife. They are Thai citizens. The husband controlled four Thai companies: Prime Box Manufacturing Ltd; Serm Thamrong Co. Ltd; Thamrong Cin Co. Ltd and Prateep Thamrong Co. Ltd. For reasons which will become clear, I will refer to those four companies as "the Borrowers". 8. As to the transactions here in question, I gratefully adopt the description which the judge gave of them when he said:
9. Consequently upon the worldwide collapse of the BCCI banking network of which it was a part, the Bank closed its doors on July 8, 1991. The Commissioner of Banking stepped in on the same day to assume control of the Bank. Nine days later, on the 17th, three things were done in regard to the Bank: a "public interest" winding-up petition was presented; a provisional liquidator was appointed; and so were special managers. 10. In March the following year, a winding-up order was made on the 2nd, followed by a regulating order made on the 5th. 11. As can be seen, two sets of money are involved: one consisting of the deposits by the Depositors plus interest; and the other consisting of the loans to the Borrowers plus interest. 12. The two sides - one side consisting of the Depositors and the Borrowers and the other side being the Bank - corresponded over what ought to be done in regard to those two sets of money. 13. Such correspondence opened with a letter dated August 14, 1991, from the Depositors and Borrowers' solicitors to the provisional liquidator. The Bank's solicitors took the matter up. And a series of letters passed between the two firms. 14. The two sides were agreed that there had to be a set-off between the two sets of money. 15. But they disagreed over the date as at which such set-off was to be struck. 16. The Depositors and Borrowers said - doing so by the letter of August 14, 1991, which I have just mentioned - that the appropriate set-off date was July 8, 1991, the day on which the Bank closed its doors. 17. But the Bank said - doing so by its solicitors' letter of October 3,1993 - that the appropriate set-off date was July 16, 1992. That was 10 days from the date on which the Bank made demand upon the Borrowers for repayment within seven days of the loans with interest. 18. In December 1994 there was a payment to the Bank of $4.3 million in respect of the Borrowers' disputed indebtedness. That sum, which was paid without prejudice to the Depositors' rights, was put in an interest-bearing account to abide the outcome of contemplated legal proceedings. Relief sought by the Depositors 19. Then, on February 23, 1995, the Depositors took out their originating summons. 20. As re-amended, the relief sought by that originating summons was:
The judge's Order 21. By the Order which he made on June 7 this year, the judge:
22. Appealing against that Order, the Bank seeks the dismissal of the Depositors' originating summons. Declaration sought by Depositors in the cross-appeal 23. Cross appealing, the Depositors seek a declaration:
The judge's view 24. The judge said that the case was argued before him under four headings, which he identified as: (i) "a mandatory and self-executing set-off based on the true construction of the documents"; (ii) another "construction" arguments; (iii) a "duty on the part of the [Bank] as mortgagee"; and (iv) a "Quistclose trust" (by which the judge meant the sort of trust which operated in Barclays Bank Ltd v. Quistclose Investments Ltd [1970] AC 567). 25. Ultimately, the judge took the view which he expressed thus:
26. To that he added this:
Construction 27. As I see it, this case turns on the true construction of the contractual arrangements entered into by the parties. 28. One of the first things which impacted upon those arrangements was the presentation of a winding-up petition against the Bank on July 17, 1991. By the operation of the rule in Re Humber Ironworks & Shipbuilding Co. Ltd (1869) 4 Ch. App. 643, the right to interest on the Bank's debts, which included the deposits here in question, was nullified as from that date. That was subject only to something not relevant for present purposes, namely the possibility that the Bank would ultimately be shown to have been solvent. 29. One can readily understand the Depositors' unhappiness with a situation in which the Bank was charging interest on the loans to the Borrowers but they, the Depositors, were earning no interest on their deposits with the Bank. 30. They say that that situation was brought to an end on September 12, 1991, in regard to Prime Box by reason of a set-off on that date. And they say that no such situation ever arose in regard to the other three Borrowers since there was a set-off in the case of each of them on, as it happened, the very day on which the right to interest on the deposits was nullified, July 17, 1991. 31. All of that, they say, came about in this way. 32. On June 28, 1991, interest payments fell due on the loans to the three Borrowers other than Prime Box. But none of them made any payment on that date or at any time thereafter. 33. And on August 24, 1991, interest payments fell due on the loan to Prime Box. But it did not make any payment on that date or at any time thereafter. 34. There is no material difference between the contractual documents pertaining to each of the four Borrowers. Throughout the proceedings here and below, everybody has proceeded on those pertaining to Prime Box. And I will do so now. 35. Two provisions in particular are crucial. 36. One is this provision, under the heading "Events of Default" in the Loan Facility Letter of August 15, 1989, from the Bank to Prime Box:
37. The other is clause 2 of the Agreement Letter of the same date from the Bank to the Depositors in regard to the loan to Prime Box. The clause reads:
38. We are here concerned with amounts payable on the relevant due dates. 39. My reading of the "Events of Default" provision in the Loan Facility Letter in so far as it pertains to failure to pay any amount payable on the relevant due date is as follows. 40. Once such a failure occurs, the Borrower's indebtedness immediately becomes due and payable either upon a written demand or 10 days after such failure. The two things - one being a written demand following failure and the other being the passage of 10 days' time after failure - are different and disjunctive. 41. Once failure occurs, there is no need to wait for 10 days or at all before making a written demand. But once 10 days elapse following failure, there is no need for any demand. 42. Turning now to clause 2 of the Agreement Letter, I read it as bringing about an automatic set-off of the loans against the deposits within 10 days of the Borrower's indebtedness becoming due and payable under the "Events of Default" provision in the Loan Facility Letter following a failure to pay interest on the relevant due date. Conclusion: appeal and cross-appeal both allowed 43. In my judgment, the Depositors' cross-appeal succeeds. Such success leaves no room for the trust argument which the judge accepted or for any of the Depositors' other arguments. As to the trust argument which the judge accepted, I say no more than this. 44. I am not persuaded that the Depositors' trust argument would have been sound even it had not been ousted by the success of their construction argument. 45. In any event, once their construction argument succeeds - as I hold that it does - their trust argument cannot even arise. That is because the consequences of a contractual automatic set-off of the deposits against the loans include these. There is simply no room or need for any primary trust impressed upon the deposits in the first place. And there is no failure of the purpose of the deposits. That purpose arises under contract and is secured by contract. Axiomatically therefore, there can be no question of any secondary trust attaching itself to the deposits upon a failure of primary trust or purpose. For there was no primary trust at all and no failure of purpose. In short, it was solely a matter of contract, and the contract covered everything. 46. Accordingly, I would - with an expression of my deep indebtedness to counsel on both sides - allow both the appeal and the cross-appeal. I have already recited the terms of the declaration which the Depositors seek by way of cross-appeal. In allowing their cross-appeal, I would grant them a declaration in those terms save that I would simply use the expression "set off" rather than the expression "apply and/or set off". 47. As to costs, the Depositors have, through the success of their cross-appeal, retained the bulk of their victory even though the Bank's appeal also succeeded. So I would make an order nisi: (i) that there be no order as to the costs of the appeal; (ii) that the costs of the cross-appeal be awarded to the Depositors against the Bank; and (iii) that the order as to costs made in the court below be left undisturbed. Godfrey JA: 48. I agree with Bokhary JA that the fate of the appeal, and of the cross-appeal, depends in each case on the construction to be placed on the documentation which recorded the arrangements made on 15 August 1989 between the bank, the borrowers and the depositors. 49. The crucial provision at the heart of the case is, as it seems to me, clause 2(c) of the letter of that date ("the agreement letter") under the umbrella of which letter the other documents (the "facility letter" and the "security document") referred to therein were executed. (If there is anything in the facility letter or the security document which is inconsistent with anything in the agreement letter, it does not matter, since, even if there is, there can be, as I think, no doubt but that the contents of the agreement letter would in those circumstances prevail.) 50. In his judgment, Bokhary JA has set out in full clause 2 of the agreement letter: I need not do so again. The provisions of clause 2(c), like the provisions of clause 2(a) and 2(b), were clearly intended, in my opinion, to protect the interests of the depositors by circumscribing what would otherwise have been the rights of the bank. In particular, clause 2(c), with its requirement that the bank was "automatically" (which must in this context mean "immediately") to settle any default by the borrowers by recourse to the relevant deposit, was surely intended to have, and, in my judgment, did have, the curative effect, in the event of any such default, of forthwith rectifying it; and so debarring the bank from relying on the default to trigger the rights and remedies which, but for clause 2(c), would otherwise have been available to the bank as a result of the default. To hold otherwise would, I think, be to deprive the provision for the "automatic" operation of clause 2(c) of any effective meaning. 51. For these reasons, I would grant the depositors the relief they seek in the form of the declaration mentioned by Bokhary JA in his judgment. 52. I would add only that, like Bokhary JA, I do not accept that (as the judge thought) this was a case in which the deposits made were impressed with a trust. The deposited moneys became available to the bank to apply as its own moneys, in accordance with the ordinary principles of the law governing the relation between banker and customer, as soon as they were deposited with the bank. The bank received the deposited moneys as banker; not as a trustee for the depositors or anyone else. 53. For these reasons, I would concur in the order which Bokhary JA proposes we should make. Litton VP: 54. I also agree. The Order is therefore the one proposed by Bokhary JA.
Representation: Mr R Faulkner (instructed by Johnson Stokes & Master) for the Bank (the appellant in the appeal and the respondent in the cross-appeal) Mr R Tang QC & Mr J Mok (instructed by Deacons, Graham & James) for the Depositors (the respondent in the appeal and the appellant in the cross-appeal) |