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Perfecting or utilising security?

26 Jun 2024  |  Author: Jonathan Lee

After a 12-year saga, in Indian Overseas Bank v Seabulk Systems Inc [2024] HKCA 522, the Court of Appeal re-affirmed the established principle that a mortgagee-creditor owes no obligation to utilise security but left open the issue of how far a creditor may need to go to perfect any such security.

Relevant Background

The 1st Defendant (“Seabulk”) is a Canadian company, which had been awarded a contract for the design, supply, installation and commissioning of a bulk material handling system at the Port of Quebec (“Quebec Contract”) in 2007. Seabulk purchased one lot of newly manufactured bulk material handling equipment (“Equipment”) from a Shanghai company, ZPMC (“ZPMC Contract”) for the Quebec Contract. Seabulk then approached the Plaintiff (“IOB”), an Indian bank, for financing, in particular for the purchase price of the ZPMC Contract, which IOB agreed. The banking facilities were in turn secured by the personal guarantees of the 2nd and 3rd Defendants and the assignment of, inter alia, advance performance guarantees (“APGs”) by way of Assignment Agreements to be provided by ZPMC (issued by BOC) in favour of Seabulk.

What went wrong

Under these APGs, the beneficiary is entitled to demand payments from BOC for the specified amounts provided that they assert that ZPMC was in breach of the ZPMC Contract. On 3 and 4 May 2010, IOB issued demand letters and SWIFT messages respectively to BOC invoking the APGs and demanding payments from BOC under the APGs on the grounds that ZPMC was in breach of the ZPMC Contract. It was only on 10 May 2010, after the expiry of the APGs on 7 May 2010, that BOC responded to IOB rejecting the demands. This then led to a series of proceedings in the PRC between IOB and BOC, which ultimately established that IOB in fact had no right to make demands under the APGs in its own name but was required to do so in the name of Seabulk. IOB then brought a claim against the Defendants seeking repayments of the sum due under the facilities and the guarantees.

Duty to perfect security

In equity, a creditor-mortgagee is obliged to “perfect” any security because a mortgagee is generally under a duty to hand over the security, on redemption, to the mortgagor (or the surety if it is he who redeems). If he fails to do so, the indebtedness is liable to be reduced pro tanto. The majority of instances where a creditor is said to have failed to perfect securities involve a neglect to register an instrument or to serve notice of an instrument when this is necessary to make it effective or to secure priority.

In General Mediterranean Holding SA SPF v Qucomhaps Holdings Ltd William James Harkin [2018] EWCA Civ 2416, the English Court of Appeal observed that the duty to perfect the security has a degree of flexibility. However, the duty is not an absolute or onerous one. The creditor is not obliged to incur any sizeable expenditure or to run any significant risk to preserve or maintain a security. Some earlier cases also suggested that a creditor-mortgagee may need to take possession of the mortgaged property for the purposes of perfecting its security.

On the strength of these authorities and others, the Defendants submitted that the duty to perfect security has a substantive element and that IOB’s failure to properly understand the claiming procedure and failure to espouse a claim under the APGs in a timely manner, which ultimately resulted in the loss of the APGs, constituted a failure to perfect the security. The debt owed by the Appellants to IOB is therefore liable to be reduced pro tanto.

However, the Court of Appeal found that it was not necessary to consider the authorities and to determine the precise limits of the duty to perfect security. This is because it considered that there was nothing “imperfect” or required to be “perfected” about the APGs in any way on the basis that the Assignment Agreements were valid, BOC was notified of and proceeded to register the assignments, even though the right to make a demand had not been properly assigned.

The Court of Appeal therefore rejected the Defendants’ argument that IOB has failed in its duty to “perfect” the security and contended that the Defendants’ complaint is in substance that IOB failed to properly utilise the security to reduce their indebtedness. It re-affirmed the established principle that a mortgagee-creditor owes no duty to the surety (or the principal debtor) to exercise its power of sale over the mortgaged securities and could decide in its own interest whether to sell and when to do so. It follows that a mortgagee-creditor is under no duty to utilise as security in good time.

Key Takeaways

  • The Court of Appeal has re-affirmed the established position that a creditor-mortgagee has near unfettered power in deciding whether and if so, how to utilise its security.
  • However, it remains to be seen whether the duty to perfect a security is purely formal in nature or whether a creditor may in some instances be required to take more substantive steps to preserve or maintain a security and to make it available.


The full judgment is available at


Jonathan Lee acted for the 1st and 3rd Defendants. Charles Sussex SC, leading Michael Ng, acted for the Respondent. Barrie Barlow SC acted for the 2nd Defendant.

member acted for the 1st and 3rd Defendants
member acted for the 2nd Defendant
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