Background information (Jurisdiction HK/UK)

-ABC Ltd (the "Company") is a private company incorporated in Hong Kong in 2012. Alan Au and Bob Biu are the founders of the Company. They are also the only directors and shareholders. Ever since its incorporation, ABC Ltd has been engaged in distribution and retail business of Swiss upmarket timepieces. It runs a chain of retail outlets in Hong Kong. It enjoyed a steady growth in the past few years and the number of its retail outlets has increased from 2 to 5 during the period between 2016 and 2018. The Company owns a 900 square-foot office unit in Chaiwan but does not own any premises for its retail outlets. All these shops are located in prime commercial and tourist areas throughout the territory.-

Since October 2019, however, the Company has been experiencing a significant drop in business due to the fact that mainland visitors are spending less money on expensive items because of the continuing trade war between China and the US. The unfavourable market condition caused immediate hardship on the Company because the monthly rent of its retail outlets paid to landlords amounts to 70% of the Company's overall expenses. In January 2020, the Company tried to negotiate with various landlords with a view to persuading them to reduce the rent but most of the landlords declined to do so. In March 2020, the Company started to face cash flow problems. It approached North Bank for an urgent term loan of HK$6 million. North Bank was only prepared to advance the loan if the loan was secured by a floating charge over the Company's whole undertaking and a joint and several guarantee from all the directors of the Company. Both the charge and the guarantee were executed on 31 March 2020 and the charge was duly registered at the Companies Registry.

The loan from North Bank did not last long. The Company subsequently negotiated with South Bank for another term loan of HK$12 million. This loan was covered by a fixed charge over the Company's office premises. This charge was created on 31 July 2020 and was duly registered at both the Companies Registry and the Land Registry on the same day.

-By September 2020, the Company failed to meet the monthly instalments to both North Bank and South Bank. It also owed wages to its employees for the previous 2 months. On 20 October 2020, SHK Properties Ltd ("SHK"), one of the landlords of the Company, presented a petition for a winding up order against the Company. It is very likely that the court will make a winding up order against the Company in January 2021.Additional Information-The debenture creating the North Bank charge contains, inter alia, the following clauses:-

3.01

The Company, as beneficial owner, hereby charges to North Bank as continuing security for the payment of all moneys and the discharge of all obligations and liabilities hereby covenanted to be paid or otherwise hereby secured:

(a)by way of first floating charge over all the undertaking and all other property assets and rights of the Company whatsoever and wheresoever both present and future including but not limited to the stock-in-trade of the Company..... (b)....

5.01

The Company covenants with North Bankthat .... the Companyshall not (without prior consent in writing of North Bank) create any mortgage, pledge, charge, debenture, lien or otherwise encumbrance upon the undertaking and assets hereby charged ranking in priority to or pari passu with this Debenture..."

6.01

The floating charge hereby created ... shall automatically without notice operate as a fixed charge instantly upon the occurrence of any of the following events:

(a).... if the Company charges pledges or otherwise encumbers any of the undertaking and assets hereby charged without prior consent in writing of the Lender...;or

(b).... if a chargee takes possession or exercises or attempts to exercise any power of sale or a receiver is appointed of the whole or any part of the undertaking, property, assets or revenue of the Company; or .....

-Before the execution of the fixed charge, South Bank's solicitors conducted a company search and only checked the statement of particulars of charge (Form NM1)

They found neither clause 5.01 nor 6.01 of the North Bank charge from their search because they did not review the terms of the debenture.

-On 15 September 2020, South Bank, upon the Company's failure to meet the repayment instalments, appointed a receiver to the Company to enforce their security. North Bank did not know the existence of the fixed charge until the appointment of the receiver by South Bank.

-The following are extracted from the financial statements of the Company as of the end of September 2020:-

Assets--Market value of the office premises: HK$10 million

--Market value of stock-in-trade: HK$2 million

--Cash at banks: HK$300,000

--Book debts: HK$500,000

Liabilities

--Total amount (including principal and interest) outstanding to North Bank: HK$5.6 million

--Total amount (including principal and interest) outstanding to South Bank: HK$11.8 million

--Arrears of wages owed to employees: HK$800,000

--Amounts owned to other unsecured creditors: HK$4.6 million

Answer the following questions.

(1)Advise North Bank and South Bank the validity of the charges created in their favour respectively.

(2)Given that the Company is likely to be in liquidation, to what extent will the two banks be in competition for repayment out of assets of the Company?

Many thanks in advance:))