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Asian litigation

Set-off in liquidation

Lenders always seek to protect their interests over their loans or security when borrowers go into liquidation. However, it has increasingly been of interest to borrowers to know what happens to the loans or security when lenders go into liquidation. The statutory right of set-off in liquidation in Hong Kong in these circumstances was dealt with by the Judicial Committee of the Privy Council in Tam Wing Chuen & Anor v Bank of Credit & Commerce Hong Kong Ltd (in Liquidation) [1996] 1 HKC 692.

Facts

Tam Wing Chuen (the depositor) was a director and shareholder of a company. Bank of Credit and Commerce (the bank) extended credit facilities to the company against the depositor's deposit made with the bank. When a petition to wind up the bank was presented, the company had drawn down an amount which was less than that deposited in the bank. The depositor and the company therefore claimed declaratory relief that a statutory set-off in liquidation should be applied between the deposits and the outstanding debt. Judgment was given for the bank in both the High Court and the Court of Appeal. The depositor and the company then appealed to the Privy Council.

Statutory basis

Section 35 of the Hong Kong Bankruptcy Ordinance together with Section 264 of the Hong Kong Companies Ordinance provide for mandatory set-off in liquidation where there have been mutual debts or other mutual dealings between a debtor against whom a receiving order is made and any other person proving or claiming to prove a debt under the receiving order.

Security over deposit

Mustill LJ found no dispute that a security was created over the depositor's deposit in favour of the Bank because Section 15A of the Hong Kong Law Amendment and Reform (Consolidation) Ordinance enables A to create a legal or equitable charge or mortgage, in favour of B, over all or any of A's interest in a chose in action enforceable by A against B.

Triggering point

Lord Mustill agreed that there should be a set-off if the depositor had personal liability equal to the amount of outstanding indebtedness of the company at any time, but the only question to decide was whether a personal liability was created by the words of the financial agreement. Therefore it follows that a financial document does not automatically fix a depositor with personal liability for the loan secured by the deposits and personal liability is the prerequisite for the application of statutory set-off for security over the deposit.

Construction of financial documents

The financial document in question was held not to have imposed personal liability on the depositor for the company's indebtedness.

As regards the rule applied in construing financial documents, Mustill LJ held that the general assumption of law against personal liability was not applicable in construing financial documents. It was held that while the words of the financial documents relied on were consistent with personal liability, such consistency with a liability which could have been expressed was no ground for imposing a liability which was not expressed.

Mustill LJ also held that documents of this kind were designed to meet the contingencies that the party primarily responsible would be unable to satisfy his obligations and (where further security was taken) that any person assuming a secondary liability would fail and thus it was fanciful to suppose that whatever thought the parties might have given to the wording of the financial document would have taken into account the possibility that the lender, not the borrower, might become insolvent.


Landmark IP case

Following the first instance decision for Canon KK v Green Cartridge Co (HK) Ltd, reported in this column in International Financial Law Review, May 1995 (see page 55), Green Cartridge successfully appealed against the decision in the Court of Appeal.

Repair defence

The Court of Appeal clarified the scope of application of the repair defence laid down by the House of Lords in British Leyland Motor Corp Ltd v Armstrong Patents Co Ltd, [1986] 1 AC 577, and held that the repair defence was available in the case of copyright as well as in patent cases. There, the Court held that:

  • Where an article consisted of a number of components, one or more of them (even containing undecayed parts) might be replaced for the purposes of repair.
  • Where an article consisted of a single component, replacement of decayed parts could only be considered repairing.
  • Where purchasers bought articles without the replaced component, purchase of the same from sources other than the copyright owner would be considered repairing in the broad sense provided the number of persons buying articles without the replaced component are infinitesimal relative to those buying with the replaced component.

Grace Lee
Stephenson Harwood & Lo
Hong Kong

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