Bank of Credit and Commerce Hong Kong Limited v. Chairod Mahadumrongkul and Others (Hong Kong) [1997] UKPC 20

Judicial Committee of the Privy Council
Case No Privy Council Appeal No. 17 of 1997Venue FROM THE COURT OF APPEAL OF HONG KONG
Between
Bank of Credit and Commerce Hong Kong LimitedAppellantChairod Mahadumrongkul and Others (Hong Kong)Respondent
Before
Lord Goff of ChieveleyLord Slynn of HadleyLord Lloyd of BerwickLord Nicholls of BirkenheadLord HoffmannDate 8 May 1997
[1]The insolvency of Bank of Credit and Commerce International S.A. ("B.C.C.I.") and its subsidiaries has given rise to a mass of litigation all over the world. This is another such case. It concerns the effect of the insolvency of Bank of Credit and Commerce Hong Kong Limited ("the bank") upon an arrangement by which the bank lent money to four companies upon the terms of a standard facility letter addressed by the bank to the companies ("the Facility Letter") on the security of deposits made with the bank by the companies' principal shareholders. The terms of the deposit were recorded in a document addressed to the bank and signed by the shareholders ("the Security Document") and the deposit was linked to the advance by the terms of a letter addressed by the bank to the shareholders ("the Agreement Letter").[2]The documents relating to each of the four companies were in similar terms and their Lordships need refer only to those recording the advance of HK$60,000,000 to Prime Box Manufacturing Limited ("Prime Box"). First, the Facility Letter provided that the advance was for a fixed term of 5 years repayable on the fifth anniversary of draw down but subject to a right on the part of Prime Box to extend the term for another 5 years. Interest was payable annually in arrears. An arrangement fee of HK$75,000 was payable upon execution of the facility letter and the bank's reasonable costs and expenses in preparing and executing the documents (not exceeding HK$30,000) were payable on demand. A clause in the Facility Letter headed Events of Default read as follows:- "Upon the occurrence of any one of the following events, your indebtedness to us hereunder shall immediately become due and payable upon a written demand from us:- (a)if you shall fail to pay any amount payable hereunder on the relevant due date or, in relation to any sum payable upon demand forthwith upon demand or in either case within (10) days hereafter; or (b)if you shall dispose of the whole or any substantial part of your property, revenues or assets (whether by one transaction or by a series of transactions related or not) other than in the ordinary course of your business and for full consideration or if you shall cease or threaten to cease to carry on business; or (c)any order shall be made by any competent court or resolution passed by your shareholders or analogous proceedings taken for your winding up or dissolution or any encumbrancer takes possession or a receiver or similar officer is appointed of all or any material part of your assets, rights or revenue; or (d)if you shall stop payment or shall be unable to, or shall admit inability to, pay debts as they fall due, or shall enter into any composition or arrangement with your creditors, or an application or petition shall be presented against you for bankruptcy or insolvency; or (e)if any Thai or other governmental consent or approval at any time necessary to enable you to comply with your obligations hereunder shall be revoked or withheld or materially modified or shall otherwise not be granted or fail to remain in full force and effect; or (f)if you fail duly and punctually to perform, observe or comply in any material respect with any provision of this facility letter; or (g)if any situation shall occur which in our reasonable opinion will materially and adversely affect your ability to perform your obligations hereunder."[3]Secondly, the Security Document provided that the deposit was to be a continuing security for the punctual payment by Prime Box of all its debts to the bank, which gave the bank a power in the event of default by Prime Box to apply the deposit towards discharge of its obligations.[4]Thirdly, the Agreement Letter began "In consideration of your agreeing, at our request, to enter into the Security Document, we write to confirm the following:
". There followed a number of provisions, of which only the following is material:- "2.That, notwithstanding the terms of the Security Document ... (c)... it is agreed that upon any default by the Borrower to pay any principal, interest or margin owing in respect of the Loan within 10 days of the relevant due date we shall ... automatically apply any monies standing to the credit of the [Deposit] Account ... for the time being in settlement of the same and upon so doing shall to the extent of any monies so applied have no further redress or recourse against the Borrower ..."
[5]The relevant facts can be shortly stated. On 2nd March 1992 the bank was ordered to be wound up upon a petition presented on 17th July 1991. On 14th August 1991 the plaintiffs (the respondents) and their companies demanded repayment of the deposits with interest up to 8th July 1991 and claimed that the money be applied towards repaying the companies' debts as at that date and the surplus (about HK$7.5m) be returned to the plaintiffs. The annual instalments of interest payable by three of the companies fell due on 28th June 1991 and by the fourth company on 24th August 1991 but payments were not made. The bank did not however make a written demand for repayment of capital until 6th July 1992, by which time the continued accrual of interest on the loans, together with the cessation (as from the commencement of the winding up) of the bank's liability to pay interest on the deposit, meant that the money owing to the bank exceeded the amounts of the deposits.[6]These events gave rise to the following dispute. The plaintiffs claimed that the bank held the deposit on a trust which, in the events which had happened, required the bank to repay itself the advances as at the commencement of the winding up. Accordingly, the effect of the trust was to extinguish the liability of the companies and leave a balance owing to the plaintiffs. Deputy Judge Patrick Fung Q.C. accepted this submission but the Court of Appeal rejected it. The plaintiffs have not raised the point again in their printed case and their Lordships need therefore say no more than that they agree with the Court of Appeal. There is nothing to suggest that the relationship between the bank and the plaintiffs was anything other than debtor and creditor.[7]The plaintiffs claim in the alternative that, by virtue of clause 2(c) of the Agreement Letter, the deposits should have been set off against the loans 10 days after any sums had fallen due. In the case of interest, the 10 day period would run from the annual payment date and in the case of capital, from 10 days after that, when the capital became payable on account of Event of Default (a). The bank accepts that clause 2(c) required the deposit to be applied in paying the interest 10 days after it fell due. But it denies that any capital became due before its written demand on 6th July 1992. Accordingly, no obligation to apply the deposit in discharge of the capital could have arisen until 16th July 1992.[8]The learned Deputy Judge rejected the plaintiffs' alternative argument on clause 2(c) but the Court of Appeal accepted it. The dispute turns entirely upon the Event of Default clause and the view taken by the Court of Appeal was succinctly stated by Bokhary J.A. as follows:- "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. 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. Once failure occurs, there is no need to wait 10 days or at all before making a written demand. But once 10 days elapse following failure there is no need for any demand."[9]Godfrey J.A. said that clause 2(c) was intended to have the curative effect of forthwith rectifying any default. The bank does not disagree with this proposition and accepts that it was operative to rectify the default in the payment of interest. But Godfrey J.A. does not explain how, on the construction of the Facility Letter, there was (in the absence of a written demand) any default in respect of capital which clause 2(c) was required to rectify. One must assume that on this point he agreed with the construction adopted by Bokhary J.A.[10]This construction, as elaborated by Mr. Tang Q.C. in his very clear and helpful submissions, treats the written demand required by the opening words of the Event of Default clause as applicable only to the first limb of paragraph (a), namely, failure to pay on the relevant due date or to pay a sum payable on demand forthwith upon demand. The second limb, referring to a failure to pay within 10 days thereafter, is treated as a freestanding condition of the indebtedness becoming due and payable without the need for any written demand.[11]This construction involves treating the requirement of a written demand as temporarily welded onto the first limb of paragraph (a) so as to leave the second limb free to operate independently, but then detached again to serve as an additional condition in relation to the remaining six paragraphs. These are heroic methods, to be employed only under dire necessity. Mr. Tang says that they are made necessary by the difficulty of otherwise giving a sensible meaning to paragraph (a). In his submission, the paragraph would otherwise contain, in relation to each kind of sum payable, two alternative events of default: in the case of sums payable upon a fixed date, failure to pay on that date or, presumably at the bank's option, failure to pay within 10 days thereafter; in the case of sums payable on demand, failure to pay forthwith on demand or, alternatively, failure to pay within 10 days thereafter. The only way to distinguish the alternatives is to say that, in the first alternative, default must be coupled with a written demand whereas in the second alternative it need not be.[12]Their Lordships do not think that the difficulty which Mr. Tang's construction is designed to overcome really exists. If paragraph (a) had simply said that one of the events of default which would entitle the bank to make a written demand for the whole indebtedness was failure to pay interest "on the relevant due date or within 10 days thereafter", no one would have had any doubt that payment at any time within the 10 day period would prevent a default from occurring. All that paragraph (a) does is to extend the same concept of a 10 day period for payment to sums payable on demand. There are no alternative events of default in respect of the same payment: the default is not to pay a sum falling due on a given date within 10 days of that date or a sum payable on demand within 10 days of demand. In both cases, the effect of the default is to trigger the bank's right to make a written demand for the full indebtedness but no liability to repay that indebtedness (to which paragraph 2(c) of the Agreement Letter can apply) can arise until such written demand has been made. This was the conclusion reached by the learned Deputy Judge, with which their Lordships agree.[13]Their Lordships will therefore humbly advise Her Majesty that the appeal should be allowed, the judgments of the Court of Appeal and of Deputy Judge Fung set aside and a declaration made that the effective date for the set off of the principal and interest due by the appellant bank to the respondents in respect of the various deposits against the principal of the loans owing by the four companies was 16th July 1992. The respondents must pay the appellant's costs before their Lordships' Board and in the courts below.