Two recent Court of Appeal decisions in Hong Kong each touched on an issue of concern to banks in their dealings with customers and third parties: first, whether a mortgagee is bound by a Mareva injunction, and secondly whether a trust can be impressed on deposits secured by contract.
In SA Development v Fair Fashion Company Limited and Wing Hang Bank Limited (Civ Appeal No. 190 of 1996), proceedings were brought by SA Development (the plaintiff) against Fair Fashion (the defendant) in respect of dishonoured cheques for HK$798,472.33 (US$103,000). A Mareva injunction had been granted by Woo J restraining the defendant from disposing of or otherwise dealing with its assets save in so far as they exceeded the amount claimed, and the injunction was served on the defendant's bank, Wing Hang Bank, San Po Kong Branch.
Three months later judgment was granted in favour of the plaintiff, which sought to execute that judgment by means of a charging order on a property owned by the defendant. The plaintiff discovered that:
- there was an existing mortgage over the property in favour of the bank to secure general banking facilities; and
- the bank had obtained possession of the property (by agreement with the defendant) following default in repaying an overdraft by the defendant and had sold it at a public auction.
The plaintiff claimed that the defendant had disposed of its assets by handing over the property and the bank had wilfully disobeyed the terms of the Mareva injunction by aiding and abetting the disposal of the property. The plaintiff issued an application for an Order that the "officers of [the bank] be committed to prison for contempt of court". The defendant then issued a Summons opposing this committal application. The defendant succeeded in opposing the application for committal and the plaintiff appealed against this.
The Court of Appeal was unanimous in its decision that the appeal was groundless and should be dismissed. In taking possession of the property, the bank was exercising its rights as mortgagee in accordance with the mortgage. Further, the surrender of possession by the defendant did not amount to a dissipation of its assets. Any rights which the appellant had acquired under the terms of the Mareva injunction were subordinate to the property rights of a secured chargee, the bank.
The case of Chairod Mahadumrongkul and Orawan Mahadumrongkul v Bank of Credit and Commerce Hong Kong Limited (in liquidation) (Civ Appeal No. 149 of 1996) was an appeal by Bank of Credit and Commerce Hong Kong Limited (in liquidation) and a cross-appeal by two customers of the bank (the depositors) against a judgment against the bank by the depositors.
The depositors were in control of four Thai companies (the borrowers) and, as part of a tax-saving scheme, entered into an agreement with the bank whereby the bank would grant loans to the borrowers secured by deposits made by the depositors.
As a provisional liquidator was appointed in respect of the bank in Hong Kong on July 17 1991, the depositors' right to interest on the bank's debt was terminated as from that date. Following an exchange of correspondence, an agreement was reached that the monies deposited would be set off against the outstanding loans of the borrowers but there was no agreement on the date of the set-off.
The depositors and the borrowers argued that the appropriate date should be July 8 1991, the date on which the bank closed for business. The bank's view was that the set-off date should be July 16 1992, 10 days after the bank had issued a demand to the borrowers for repayment of the outstanding indebtedness.
In December 1994, in the absence of agreement and in contemplation of imminent proceedings, the borrowers paid the bank HK$4.3 million. This was paid into an interest-bearing account without prejudice to the rights of the depositors.
The depositors then issued an Originating Summons for a declaration, inter alia, that the bank was bound to set off the money due from the borrowers with effect from July 17 1991 (being the date of appointment of the provisional liquidator). Deputy judge Patrick Fung in the High Court ruled in favour of the depositors and ordered that the bank be bound to set off the money owing with effect from July 17 1991. This was because a trust had been impressed on the monies deposited and that the bank was under a duty to apply the deposits in setting off the borrowers' indebtedness, on the basis that a trustee should not act in a way detrimental to the beneficiaries. He also referred to the terms of the original agreements between the parties, but concluded that these were not relevant in view of the existence of the trust.
The bank appealed on the basis that no such trust arose. The borrowers cross-appealed on the basis that the set-off provisions in the original agreements were contractually binding and that the existence of a trust was irrelevant. The Court of Appeal allowed both the appeal and the counter-appeal, referring to the automatic set-off provisions contained in the original agreements which required immediate setting off of the monies on deposit in the event of default by the borrowers. The existence of a trust which was relied on at first instance was not relevant; this was solely a matter of contract and the contract covered everything.
Stephenson Harwood & Lo