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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. 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.

Debtor's Liquidators successfully sought a declaration from the Court of First Instance of the High Court of the Hong Kong Special Administrative Region, Kwan, J., that this debit constituted an improper disposition of Debtor's property. The Court of First Instance granted Liquidators an order for repayment. Bank filed an appeal of the Court of First Instance's finding that the Trust Receipts and Cargo Receipts do not come within the exception of bill of sale. On appeal, the High Court of the Hong Kong Special Administrative Region Court of Appeal, Le Pichon, Cheung, and Yuen, JJA., reversed.

The statute in question, Chapter 44 §2 of the Bill of Sale Ordinance, does not define a bill of sale, but rather provides a list of documents that may constitute a bill of sale, with the exception of documents "used in the ordinary course of business as proof of the possession or control of the goods."

The High Court found that:

...The creation of a pledge over the goods and trust over their proceeds was clearly within the intention of the Company and the Bank as expressed in the letter of hypothecation, cargo receipts and trust receipts...[which] may be regarded as creating an equitable charge, which does not depend for its efficacy on possession... They would not be required to be registered if they are 'used in the ordinary course of business as proof of the possession or control of goods.'

The High Court noted that trust receipts and cargo receipts are commonly used in LC transactions and fall within the exemption from registration under the Bills of Sale Ordinance, and are proof of possession and control.

The High Court cited a concession made by Liquidators:

If a valid and effective security had been created in favour of Kincheng, the liquidators accept that Kincheng was entitled to debit the amount in question and they cannot succeed in this application. (Emphasis added [by the High Court]).

The High Court ruled that Bank was entitled to carry out the debits, reversing the order of the Court of First Instance.

[JEB/dgd]

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