|
HCA11077/1994
IN THE HIGH COURT OF THE
HONG KONG SPECIAL ADMINISTRATIVE REGION
COURT OF FIRST INSTANCE
ACTION NO.11077 OF 1994
-----------------------
BETWEEN
| |
ESQUIRE (ELECTRONICS) LIMITED |
Plaintiff |
| |
and |
|
| |
THE HONG KONG AND SHANGHAI |
1st Defendant |
| |
BANKING CORPORATION LIMITED |
|
| |
WAYFOONG PROPERTY LIMITED
(formerly known as HS PROPERTY
MANAGEMENT LIMITED) |
2nd Defendant |
-----------------------
AND BETWEEN
| |
MAGIC SCORE LIMITED |
Plaintiff |
| |
and |
|
| |
THE HONG KONG AND SHANGHAI |
1st Defendant |
| |
BANKING CORPORATION LIMITED |
|
| |
WAYFOONG PROPERTY LIMITED
(formerly known as HS PROPERTY
MANAGEMENT LIMITED) |
2nd Defendant |
(by original writ and order to carry on)
-----------------------
Before : Hon Waung J in Court
Dates of Hearing : 2 - 6, 9, 11 - 13, 16, 19 - 20, 23 - 27 February, 1 - 2, 5, 8 and 10 - 12 March 2004
Date of Handing Down of Judgment : 19 July 2005
-------------------------
JUDGMENT
-------------------------
1. This exceptionally difficult Action is concerned with whether the sale, against the wishes of the Plaintiff, Esquire (Electronics) Ltd. (“Esquire”) of its crown jewel of a building in May 1987 at the insistence of the Defendant, its banker, The Hong Kong And Shanghai Banking Corporation Limited (“the Bank”) to a close associate of the Bank, was such as amount to sufficient improper crossing of line in the behaviour of a bank so as to impose a liability on the bank to its former customer, Esquire. The compliant of Esquire consists of the behaviour of the Bank amounting to:-
(1) Economic Duress
(2) Undue Influence
(3) Intimidation and
(4) Breach of Fiduciary Duty.
The complaint is met by Defences of:-
(A) No breach
(B) Release of liability by contractual agreement
(C) Defence of time bar under the Limitation Ordinance in respect of some of the complaints.
MATERIAL FACTS
2. This is a case where a proper and correct understanding of the material facts is essential to the analysis of the legal consequences of the actions of the parties.
3. The main company of the Esquire Group, Esquire was first founded by Sabahagchand Choithramanni Gurdas (“Gurdas”) in 1965. Gurdas was the 50% shareholder of Esquire and the other 50% of Esquire was held by his brother Sabahagchand Choithramani Arajan (“Arjan”). The business of Esquire was in consumer electronics products. From 1970 onwards, the business grew quickly so that by the early mid ninety-eighties the Esquire Group with Esquire as its head enjoyed an annual turnover in excess of HK$500 million and was well-known in Asia and Middle East as one of the largest traders of electronics products.
4. The banking relationship between the Esquire Group and the Bank went back to the seventies. By the late seventies, the Bank was the main banker of the Esquire Group, although by the time the Esquire got into difficulties, the Esquire Group was also maintaining banking relationship, but on a much smaller scale, with other banks.
5. In the late seventies the Esquire Group with the encouragement and support of the Bank expanded rapidly, but not only in its core business of electronics products. It expanded also into properties. In October 1981, the Bank financed 100%, (with one third of the financing on a 2 year short-term basis) Esquire’s purchase of the property Li Fung House (“the Property”) at the price of $180 Million. The Property was mortgaged to the Bank and charged with $300 Million, the banking facility granted. The Bank of course enjoyed the usual rights of a mortgagee and the material Charge and Mortgage and the material Debenture and Mortgage contained amongst others, the usual right to require payment from Esquire of all sums outstanding upon demand in writing, the right and power of sale, the right and power to appoint receiver.
6. This purchase at the top of the market and at the very very high price of $180 Million, when Esquire Group was only able to use itself 4 of the 16 floors of the Property, turned out to be what eventually sank the Esquire Group. This unwise financing of the purchase of the Property by the Bank (when prime was 20% and Bank’s loan was at 2.25% above prime [1/47]), was what led to the Restructuring by all the bank creditors of the Esquire Group, less than 2 years after the purchase. The fact that this purchase was made at the very top of the market could be seen from Exhibit P2, which shows the valuation of the Property moving from $170 Million in October 1981, then down in February 1983 to $105 Million, then further down to $80 Million in January 1985, before it started moving up in July 1985 to $115 Million, in June 1986 to $130 Million, in December 1986 to $135 Million, and then rapidly up to $157 Million on 6th March 1987 and to $161 Million on 25th March 1987. The approval of the financing of the purchase was made by officers at the top of the Bank. The subsequent actions by the Bank to cause the sale of the Property (complained by Esquire) might suggest that the senior management of the Bank wished to see that this mistake of Bank’s finance and exposure be corrected. Whether this was done improperly by the Bank is the crucial question in this case.
7. The loan taken out by Esquire for the purchase of the Property required a heavy debt servicing of $31 million per year which the Esquire Group could not meet from its trading activities. By mid 1983, the Esquire Group found that it was necessary to seek restructuring of its loans from its bankers. A restructuring agreement was therefore entered into between the Esquire Group (including Gurdas and Arjan as Guarantors) and some five creditor banks. This restructuring agreement dated 22nd February 1984 [1/93-133] (“1984 Restructuring Agreement”) was to be effective from 13th September 1983 and was to expire on 31st December 1984. Five Banks were parties to this 1984 Restructuring Agreement, namely the Bank, Bank of America (“BA”), Banque Nationale de Paris (“BNP”), BCCI Finance International Ltd. (“BCCI”) and Indian Overseas Bank. The Lead Bank in this Restructuring was naturally the Bank, as the largest amount owing by the Esquire Group was to the Bank, to which was mortgaged the most valuable asset of Esquire namely the Property. The loans outstanding to the Bank by the Esquire Group as stated in the 1984 Restructuring Agreement totaled some $309 Million, whereas the loans outstanding to the other banks were $24 Million (BA), $23 Million (BCCI), $14 Million (BNP) and $15 Million (Indian Overseas Bank), a total of only $76 Million.
8. Contemporaneous with the 1984 Restructuring Agreement, as amongst the five banks, they signed an Inter-Bank Agreement [2/79-92] dated 22nd February 1984 (“1984 Inter-Bank Agreement”) which provided the rights and limitations of the five banks, as to who and what could be done or not done vis-à-vis:
each other;
the Esquire Group and;
the assets of the Esquire Group (held as securities or otherwise).
9. The following are some of the central features of the 1984 Restructuring Agreement:-
| (A) |
The Lender’s Portion of Esquire to the Bank was expressed to be $309 Million consisting of Non-Property Portion of $127 Million and Property Portion of $182 Million (Clause 3.01 & Schedule II at 99 and 127); |
| |
|
| (B) |
No interest on the Lender’s Portion shall accrue or be payable (Clause 3.02 at 100); |
| |
|
| (C) |
Lender’s Portion shall be repaid in monthly installments from the Escrow Account (Clause 3.03 and Clause 6.06 at 100 and 102); |
| |
|
| (D) |
Esquire was to have only three accounts, namely the Working Account, the Property Account and the Escrow Account (Clause 6.03(a),(b) and (c) at 101-2); |
| |
|
| (E) |
The Working Account into which was to be paid all income except income from Properties (Clause 6.04 at 102) and out of which was to be paid all expenses including in particular payments to the Escrow Account (Clause 6.03(a) and 6.04 at 101-2); |
| |
|
| (F) |
The Property Account into which was to be paid all income from Properties (Clause 6.04 at 102) and out of which was to be paid all rents, rates, other overheads and expenses directly related to the Properties (Clause 6.03(b) and 6.04 at 101-2); |
| |
|
| (G) |
The Escrow Account into which was to be paid each business day $160,000 from the Working Account (Clause 6.03 (c) and 6.05 at 101-2) and out of which was to be paid, at the end of each month and at the end of each Quarter, to each Lender its respective share of the repayment of its respective Lender’s Portion (Clause 6.06 and 6.07 at 102-3); |
| |
|
| (H) |
The Bank was to advance new facility through the Working Account on commercial terms for use by Esquire to be determined by Esquire in conjunction with the Controller and as condition of such new facility being given, Esquire Group agrees that the Bank was to be the sole banker of the Esquire Group and that Esquire Group was not to negotiate or open any account with any other bank (Clause 5 at 100-1); |
| |
|
| (I) |
Esquire was to pay a Controller (Peats) whose duty was to supervise all aspects of the financial affairs of Esquire Group and the Controller was to report on a regular basis to the Lead Bank (Clause 7.01 and 7.02 at 103-4); |
| |
|
| (J) |
Esquire was to have the power, with the consent of the Bank, to sell any of the properties (including the Property) (Clause 8.01 at 105); |
| |
|
| (K) |
The Bank was to have the power as mortgagee to sell the Property (Clause 8.01 at 105); |
| |
|
| (L) |
Without fettering the Bank’s right as mortgagee in it discretion to sell, the Bank agreed with the other Lenders that in reaching a decision to sell, it would |
|
