Article

Note: Far East Structural Steelwork Engineering Limited (Debtor) maintained an account with the Bank of China (Hong Kong) Limited (Bank), for the purpose of purchasing materials from its suppliers. The Bank's predecessor, Kincheng Banking Corp had debited Debtor's account for a total of HK$ 656,043.01 after a petition to wind up Debtor had been filed. The applicable statute, the Companies Ordinance, Cap. 32 §182, provided that any disposition of the property of the company made after the commencement of the winding up shall be void, unless otherwise ordered by the court. Applicant's liquidators sought the return of the amounts debited by Bank on the grounds that the debit constituted an improper disposition of property. The Court of First Instance of the High Court of the Hong Kong Special Administrative Region, Kwan, J., granted the relief sought by the liquidators.

The debits were made in connection with two local LCs, as explained by the court:

The documents to be presented under the LC and a Cargo Receipt signed by [Debtor] certifying that the goods had been received in good order and condition. The LC was issued by [Bank] against a Trust Receipt signed by [Debtor] in its favour. [Bank] effected payment when the negotiating bank presented the stipulated documents of behalf of the seller. By the Inward Bill Advice, [Bank] notified [Debtor] of the due date of payment of the advance under the LC. The Trust Receipt signed by [Debtor] in respect of the first LC was returned to [Debtor] upon retirement of the loan by... debits...

Bank asserted that, when the goods covered by the LCs were sold, Debtor had the proceeds paid to its account and then authorized the debits. Because the transaction was local, cargo receipts were used in lieu of bills of lading, which was used to create a security interest in the goods. There was testimony that this process was "widespread" in Hong Kong: "if the liquidators' challenge to this form of security by the 'established local custom' were successful, this would have profound commercial implications."

Bank declined to provide the debited funds to the liquidators, claiming that Bank had issued LCs for which the deposited funds were collateral. Bank argued that, because the funds were so disposed of before Debtor's liquidation, the funds were not subject to liquidation claims.

The court concluded that the security created in the form of trust receipts in favor of Bank was void against the liquidators, and that Bank had improperly debited Debtor's account.

The court noted that a trust in trust receipts is not an independent security device. The court also concluded that there was no pledge, contractual lien, mortgage, or charge which it characterized as the "only four types of ... security known to the law" citing Roy Goode's Legal Problems of Credit and Security (3rd ed.). The court noted that a pledge requires actual or constructive delivery of the thing pledged. The court also noted, quoting Lord Wright in Official Assignee of Madras v. Mercantile Bank of India Ltd., that:

Where goods are represented by documents the transfer of the documents [does] not change the possession of the goods, save for one exception, unless the custodier (carrier, warehouseman or such) [is] notified of the transfer and agree[s] to hold in future as a bailee for the pledge. The one exception [is] the case of bills of lading, the transfer of which by the law merchant operated as a transfer of the possession of, as well as the property in, the goods... A pledge of the documents (always excepting a bill of lading) is merely a pledge of the ipsa corpora of them; the common law [continues] to regard them as merely tokens of an authority to receive possession.

As there was no actual delivery of the goods, the court concluded that Bank did not take constructive delivery by virtue of a valid document of title or an acknowledgement by a bailee that the goods were being held for Bank. The court stated:

Here, the Cargo Receipt was not a document capable of transfer by delivery and indorsement, nor was this required to be produced before [Debtor] was to perform its obligation to [Bank]. Possession of the Cargo Receipt does not of itself confer on Bank any right to delivery of the goods. It could not be a pledgeable document. As there was no constructive delivery of the goods by taking possession of the Cargo Receipt, a pledge was not created when the Cargo Receipt was deposited with [Bank] purportedly by way of security.

Nor did the court find that there was an agreement by the custodian of the goods to hold the goods as bailee for Bank on attornment. The court ruled that a statement that the goods received in trust for Bank "is not tantamount to physical possession of the goods by [Debtor], without which there could be no attornment by [Debtor] to [Bank]."

[JEB/dgd]

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