Kingston Finance Ltd v. Gaincourt Ltd and Others

HCMP 369/2024

[2025] HKCFI 2345

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 369 OF 2024

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D E C I S I O N

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1.There are several related matters before the Court:

(i)  Yang Linda (楊婉婷) (“Intervener”)’s appeal of the orders for possession and fieri facias dated 27 December 2024 for the property known as 5 Gough Hill Path (the “Property”) pursuant to the Notice of Appeal (“ NOA”) filed on 10 March 2025 (the “Appeal”);

(ii)  the Intervener’s summons dated 10 March 2025 seeking a stay of execution (on an inter partes basis) (the “Stay Summons”);

(iii)  the Intervener’s application dated 7 April 2025 for leave to rely on 3 affirmations[1] under RHC Order 58 rule 1 (5) for the Appeal (the “Leave Summons”); and

(iv)  Gaincourt Finance Limited (“P”)’s summons dated 11 April 2025 to exclude and expunge Yang 2^nd and LTY 2^nd from the Appeal (“P’s Summons to Exclude”).

Relevant background and procedural history

2.D1 is the legal owner of the Property. For tax planning purposes, the Property was purchased in D1’s name in January 2007.

3.At the time the Property was purchased, Gunter Gao (“D3”) was the sole shareholder and director of D1.

4.D3 and the Intervener are husband and wife and they have resided at the Property since it was purchased.

5.In June 2009, D3 allotted 1 share in D1 to the Intervener and they became equal shareholders.

6.In February 2013, 4999 shares were allotted to each of the Intervener and D3, and in June 2013, D3 appointed Lam Chi Keong (“Lam”) and Chan Kit Foo as directors.

7.D3 transferred half his shareholding to the Intervener in November 2018 and the remaining half to her on 10 December 2018 making the Intervener the sole shareholder of D1 as from that date.

8.On 21 June 2022, the Intervener as sole shareholder of D1, signed a shareholder resolution approving a loan between P and D1 secured by a 2^nd legal charge over the Property (the “Resolution”).

9.On the same day, P and D1 entered into a loan agreement for the principal amount of $80 million (the “Loan”) secured by a 2^nd legal charge over the Property. D2 and D3 provided corporate and personal guarantees for the Loan.

10.P brought proceedings on 4 March 2024 against D1 to D3 when D1 defaulted under the Loan. D1’s former solicitors attended hearings before Master D To and on 1 November 2024, judgment was entered against D1 to D3 together with a charging order granted over the Property.

11.On 19 February 2025, the Bailiff posted the Notice to Occupier to Quit on the Property requiring possession of the premises to be delivered to P within 7 days. D3 told the Intervener about these proceedings the following day.

12.The Intervener’s solicitors received some information about the present proceedings late in the evening of 21 February 2025 that led to the urgent application made to the Court on 25 February 2025 supported by Intervener 1^st.

13.The application was made on an urgent basis (ex parte on notice but there is some dispute as to notice and its sufficiency) as the Bailiff was scheduled to attend the Property the following morning to take vacant possession.

14.I allowed the Intervener to intervene (“Intervener Order”) and ordered a stay of execution pending appeal (“Stay Order”). The Intervener was ordered to take out an inter partes summons for the stay within 14 days.

15.At the directions hearing for the Stay Summons on 20 March 2025, DHCJ Norman Nip granted the Intervener leave to file further evidence, ordered that the Appeal and the Stay Summons be heard together and continued the stay pending their final determination (the “March 2025 Order”). Pursuant to the leave granted, on 1 April 2025, the Intervener filed Intervener 2^nd as well as the affirmation of Lam Tam Yuk (“Lam 1^st”).

16.Although the evidence for the Appeal would be the same as that for the Stay Summons, the Intervener first had to obtain leave to do so. She therefore took out the Leave Summons seeking leave pursuant to RHC Order 58, rule 1 (5) to rely on the same evidence that is before the Court for the Stay Summons, namely Intervener 1^st and 2^nd and Lam 1^st for the Appeal.

The Intervener’s defences to P’s claim for possession

17.The Intervener’s defences to P’s claim are threefold:

(i)  the Intervener is the beneficial owner of the Property or acquired an interest as a result of her contributions made to the Property and the family:

(ii)  Non est factum applies to the signing of the Resolution; and

(iii)  The Resolution was signed under D3’s undue influence.

P’s written submissions

18.In his written submissions, Mr Sunny Chan, counsel for P, intimated that he had no objection to the Court reading Intervener 2^nd and Lam 1^st de bene esse, notwithstanding P’s summons filed on 11 April 2025 to expunge and/or exclude those affirmations for the purposes of the substantive hearing.

19.§2 of P’ s written submissions states that

“[a]t all material times, it was an openly known fact that the Intervener was the sole shareholder of D1, the corporate vehicle which in turn holds the Property.”

20.There is a footnote to the word “Property” in the following terms:

“Given the fact that Intervener owned all the shares of the Company that owns the Property, the Intervener’s constructive trust analysis becomes artificial in that the Intervener was already the owner of the Property at the time of the Mortgage. The real dispute is whether she has given consent and whether the consent was valid”

21.§3 of P’s written submissions then identified the key question for determination as

“whether the Intervener can disown her consent to the [Resolution].”

The Appeal

22.At the outset of the hearing, Mr Toby Brown, counsel for the Intervener, noted (1) P’s acceptance that the evidence be dealt with on a de bene esse basis, and (2) P’s acceptance that the Intervener has an interest in the Property, being its ultimate beneficial owner.

23.In view of those 2 matters, Mr Brown considered it unnecessary to go into constructive trust, gifts etc to establish the Intervener’s interest in the Property and, instead, focused on the key question identified for determination.

24.The basis for the Intervener’s case that the Resolution is not binding on her are her defences of non est factum and undue influence. Mr Brown submitted that both those defences turn on highly factual matters.

25.He submitted that at a summary judgment stage, this highly factual question is not open to serious challenge from P. For the most part, P is not in a position to contest the facts the Intervener puts forward, for example, about what D3 told her, her relationship with D3 or her understanding of English or what she understood the document to mean.

Non est factum

26.It is common ground that the legal requirements for establishing a defence of non est factum are those set out in Dah Sing Bank v Sun Create Richly Holdings (Asia) Ltd [2024] HKCFI 1512 at §34:

“it has to be established that (i) the defendant was under a disability, whether permanent or temporary; (ii) the document he signed was fundamentally different from what he thought he was signing (iii) he was not negligent in appending his signature to the document: Saunders v Anglia Building Society [1971] AC 1004. The defendant bears a heavy burden of proof, and he must establish each of the three components.”

27.The question for this Court is whether, on the evidence before it, non est factum could constitute a defence that would allow the Intervener to go to trial.

28.The Intervener’s evidence[2] is that since D1’s incorporation, D3 has been responsible for making decisions relating to D1 and its day-to-day management. The Intervener as a shareholder of D1 did not have to concern herself with D1’s management or affairs. She signed whatever documents D3 told her to sign. She placed her entire trust in D3 and did anything he requested her to do. D3 never explained to her the operation of D1 or the nature of its transactions. D1 was incorporated for the purpose of holding the Property.

29.The Intervener does not have an understanding of English[3]. She was presented with a document in English for signature which she could not read. The Intervener’s evidence is that she did not know about the Loan. D3 misled her into signing the Resolution under the guise that it was merely a routine company document of D1. She had no reason to think that it was a document of consequence.

30.The Resolution is undeniably a document of consequence. That is clear because its execution was made a condition precedent to the loan and the mortgage. Without it, the loan and the mortgage could not have proceeded.

31.Chengde Financial Limited v Passport Travel Management & Ors unrep., HCMP 1174/1997, 18 August 1999 concerned the defence of non est factum raised by an elderly Chinese person in an interlocutory application. The uncontested facts were that he could not read or write English and the document being in English was meaningless to him. He had relied on his son to tell him the nature of the document he was asked to sign. Waung J rejected the submission that the defendant was unarguably negligent, concluding that the defendant had demonstrated a viable defence of non est factum.

32.In the Dah Sing Bank case at §49, I explained that to focus solely on knowledge of the English language of the party raising the defence of non est factum misses the point. The real question is whether there is evidence that the Intervener understood the nature of the document she was signing.

33.Mr Chan took issue with the Intervener not asking D3 about the nature of the document she was asked to sign. As her evidence is that she would sign anything that D3 put before her, that showed carelessness on the Intervener’s part which, he submitted, is fatal to her defence of non est factum.

34.That the Intervener should repose trust in her husband who took care of all business and financial matters since their marriage is unexceptionable. The evidence shows that there has been a history where she rightly trusted her husband over the years of signing documents at his request with no reason to doubt his bona fides and all had been fine. D3 had described the document the Intervener was asked to sign as “a routine company document”. It was not a situation where the document was put in front of the Intervener for signature devoid of context.

35.As regards the absence of evidence from D3, P’s written submissions[4] described the explanations[5] given by the Intervener for failing to produce evidence from D3 as cryptic, it being in her power to ask him to give evidence and that she elected not to do so.

36.Properly read, the passage relied on in fact shows that the Intervener did ask D3 but, obviously, she was not in a position to compel him to give evidence. In refusing to provide any affirmation, D3 told the Intervener that he was acting on legal advice not to do so on the Intervener’s behalf. The criticism that the Intervener elected not to ask D3 to give evidence is thus entirely misplaced.

37.At this interlocutory stage, I do not consider that the Intervener was unarguably negligent in relying on D3. She should be given the opportunity to have her evidence properly tested at trial.

Undue influence

38.In Wing Hang Bank Ltd v Liu Kam Ying & Ors, HCMP 2519/2001, unrep., 6 March 2002 (at §§17-18) Ma J (as he then was) held as follows:

“17. Where third parties such as banks are involved and it is alleged that the relevant contract (in the present case a guarantee) came about as a result of undue influence being exerted on the party sued thereunder, there are three questions that the Court must deal with :

(1) Has it been proved that the transaction was affected by undue influence in the first place?

(2) Was the third party put on inquiry?

(3) If the third party was put on inquiry, did he take reasonable steps to satisfy himself that there was no undue influence?

See : Royal Bank of Scotland v. Etridge at p.1054 at para.101 per Lord Hobhouse of Woodborough.

18. Only if all three questions are answered in favour of the party being sued, would the defence succeed.”

39.Mr Brown submits that the Intervener’s evidence is clear that she did repose trust and confidence in her husband and that he told her something that was factually incorrect about the Resolution. That evidence shows that D3 did abuse the trust and confidence the Intervener reposed in him. It should be tested at trial.

40.As far as P’s knowledge is concerned, at the time of the loan, P knew[6] that D3 and the Intervener were husband and wife. P knew that the Intervener was living in the Property with D3 and their family, and that the Property was subject to a lease in favour of D2, a company owned by D3 and the Intervener. P also knew that the Intervener was the sole shareholder of D1 and the true owner of the Property[7].

41.Clause 3.1 of the loan document states that the Loan “shall be used by the Borrower (D1) “as its general working capital”. However, D1 is a property holding company that did not carry on any other kind of business[8]. In those circumstances, it makes little commercial sense that D1 needed to borrow $80 million as its working capital. However, P made no enquiries or sought any explanation from D1.

42.Sometime in May 2022, P informed Lam that it wished to inspect the Property as part of its normal approval procedure for 2^nd mortgage properties.

43.When P’s staff attended the Property for inspection on or about 26 May 2022, Lam (who was present at the Property) did not allow an internal inspection because of Covid. P’s staff conducted an external review of the Property and its surroundings and asked who was living in the Property. Lam told him that Chairman Gao (D3), Mrs Gao (the Intervener), their daughter, Gao’s mother-in-law, and maids resided at the Property.

44.P had an obligation to make inquiries where the spouse is in possession of the Property. It is not discharged simply because a proper inspection could not be carried out.

45.Yet, P never attempted to communicate with the Intervener at all during the approval process for the Loan despite knowing the matters described in §§40 and 43 above.

46.Although P needed the Resolution signed by the Intervener, P did not send it to her directly for signature. Had P done that, there would have been a covering letter to her explaining its contents. Rather, P dealt with D1/D3 to her exclusion.

47.Having regard to the matters set out above, I accept that P was put on inquiry but failed to take reasonable steps to satisfy itself that there was no undue influence.

48.P then raised an issue of law, submitting that the doctrine of the constructive notice has no application in the present context because it only applies to suretyship transactions. P cited Fine Talent Finance Limited v The Estate of Leung Pak Wai Deceased and Anor [2022] HKCFI 1482 (at §121) for the proposition that:

“the doctrine of constructive notice in undue influence applies only to surety transactions where the wrongdoer (usually the borrower) has improperly procured the complainant to act as surety/guarantor, not the other way around.”

49.The proposition (quoted above) as well as its rationale (set out in rest of §121) were the submissions counsel for the plaintiff in Fine Talent which the Judge appeared to accept. The rationale part (of §121) appears to be largely taken from an extract under the rubric “Suretyship transactions” from Nelson ‌‌Enonchong’s treatise entitled Duress, Undue Influence And Unconscionable Dealing, 4^th edn., (at §23-014) explaining why the O’Brien[9] extension was confirmed in Etridge[10]. As far as the proposition itself is concerned, the phrase “not the other way round” is nowhere to be found in §23-014.

50.Mr Brown expressed reservations regarding blanket statements that undue influence can only apply to the guarantor and not the borrower. He questioned why it should only work one way. The situation §121 addresses is the typical situation where the borrower is getting the benefit (i.e. the loan) and the guarantor is taking the risk and has no upside. It puts the lender on notice. However, there can be reverse situations where the borrower is taking all the risk because he is putting up the property but the money is going to the guarantor. The relevant question, he submitted, is to identify who is getting the benefit of the transaction and who is taking the risk and to ask whether the person getting the benefit unduly influenced the other.

51.Mr Brown’s approach finds support in §23-015 of Duress which is directly applicable to the present case:

“Although in Etridge it was said that the O’Brien doctrine is directed at suretyship transactions, it seems that the doctrine will apply equally to other transactions which have features similar to a suretyship transaction. This will be the case for example where the debtor is the sole legal owner of the property offered as security, but the creditor requires a form of consent from a resident spouse consenting to the loan and agreeing that her interest in the property would be postponed to the interest of the creditor. Such a transaction has all the relevant special features associated with the suretyship contract. It is in effect a kind of suretyship transaction because its effect is to make the resident spouse’s equitable interest subject the creditor’s security. Like a suretyship transaction, it is a tripartite arrangement, in that the borrower will normally ask the resident spouse to sign it in favour of the creditor. And the creditor will normally be aware that the relationship between the parties is non-commercial and that the facility is being advanced to the borrower alone so that, in signing the form, the resident spouse is in effect giving the creditor security for the facility. Therefore a creditor who seeks to obtain such a consent form from a spouse should proceed with the same precautions as if the resident spouse is being asked to guarantee the debts of the borrower.”

52.It is clear from what is set out above (which Fine Talent did not refer to) that the O’Brien doctrine is equally applicable to transactions other than suretyship transactions so long as they have features similar to them. I do not therefore accept the proposition stated in §48 above. Nor do I accept the correctness of last sentence in §121[11]. The authority cited does not support the proposition advanced. For those reasons, I do not accept P’s submission that the lender only needs to make inquiries as to undue influence in relation to a guarantor and not a borrower.

53.In my view, the Intervener has made out a viable case of a defence based on undue influence.

The Stay Summons

A.  Notice

54.P is critical of the Intervener’s ex parte (on notice) application on 25 February 2025 for a stay made in the timeframe described in §§11-13 above.

55.On 24 February 2025, the Intervener’s solicitors[12] sent a letter to P’s solicitors[13] giving them notice of a court application to set aside the order for possession of the Property. At that stage, KBC believed the judgment was a default judgment and that D1 would be the applicant to set it aside not appreciating that D1 had legal representation at the time.

56.On further consideration, KBC decided that the applicant should be the Intervener. An application for a stay was made on that basis under very tight time constraints given that the Bailiff was due to take possession on 26 February 2025. P takes the view that there was no basis for the Intervener proceeding ex parte as a matter of urgency or secrecy.

57.That the application was urgent is obvious. On 25 February 2025, Court papers were lodged mid-afternoon and KBC sent an email to KCHF’s office address to notify them of the stay application. Apparently, that address was not monitored. The application was heard at the end of the afternoon. KCHF’s complaint is that KBC should have notified them by telephone.

58.With hindsight, there is often a more efficient or better way of doing things. Given the time constraints, KBC did what they could to give notice but which, regrettably, failed to achieve its objective. There is no evidence that KBC knew that KCHF’s address was not monitored.

B. Non-disclosure

59.P’s case on non-disclosure relates to the following matters:

(i)  D2’s tenancy agreement and the inspection of the Property by P’s staff;

(ii)  the Intervener’s directorships of various companies;

(iii)  the Intervener’s limited English proficiency;

(iv)  details of undue influence only emerged in Intervener 2^nd; and

(v)  the Towngas account and repairs carried out at the Property.

60.The Intervener’s response:

(i)  The Intervener did not know of the tenancy agreement or the attendance for inspection at the time of the Intervener 1^st. That information was only made available after her application on 25 February 2025.

(ii)  The Intervener was made a nominee director by D3 of his companies. But she was never active as a director in any of those companies and has no experience in running companies. Being a nominee director does not lead to the conclusion that she knows English and would have understood the Resolution.

(iii)  What the Intervener did was to amplify the reason for her limited English proficiency by explaining that the education she received in the PRC did not extend to the English language[14].

(iv)  Elaboration of the broader dynamics of her relationship with D3 does not detract from the fundamental point made at the ex parte hearing that the Intervener signed the Resolution under D3’s undue influence.

(v)  Those matters were not included in Intervener 1^st because of time pressures. They would only have been relevant to the question about whether or not she had an interest in the Property which is not a live issue at this hearing.

61.Having reviewed the evidence, I do not accept that there was material non-disclosure on the part of the Intervener when she applied for a stay.

The Leave Summons and P’s Summons to Exclude

62.These Summonses are really two sides of the same coin. They can be considered together.

63.The Intervener’s application seeks leave to rely on the same evidence as for the Stay Summons. The Intervener accepts that Intervener 2^nd and Lam 1^st must satisfy the conditions[15] laid down in Ladd v Marshall [1954] 1 WLR 1489 before leave would be granted.

64.P’s opposition to the evidence is not based on Ladd v Marshall grounds. Rather, it would appear that the objection is that the evidence is in breach of the March 2025 Order made at the 1^st call over hearing for directions.

65.The Intervener’s written submissions dated 18 March 2025 for that hearing stated (at §5) that Intervener 1^st for the urgent hearing was (a) filed under great time pressure and where it was not possible to take full instructions on all matters; (b) for the purpose of obtaining the interim stay. It went on to state:

“It is for that reason that it is appropriate that the Stay Summons is supported by a new affirmation. In particular the urgency of the original application should [not] limit [the Intervener’s] ability to provide relevant evidence in support of the Stay Summons absence (sic) any real prejudice to P. P’s only complaint can be that the process of dealing with the stay is 14 days longer than it otherwise would be, but that is minimal in the scheme of the matter …”

66.The only contentious issue at that hearing was whether the Intervener is entitled to file further affirmations in support of the Stay Summons or whether Intervener 1^st must stand as her primary evidence.

67.The Judge granted leave for the Intervener to file her supplemental affirmation in support of the Stay Summons without imposing any restrictions or conditions. In those circumstances, I see no basis for not acceding to the Leave Summons. It follows that P’s Summons to Exclude must fail.

Disposition

68.Having regard to the matters set out above, the Intervener should be joined as the 4^th Defendant and I so order.

69.The parties are directed to submit an agreed draft order for approval within the 7 days.

70.I make an order nisi that costs be in the cause.

Mr Sunny Chan, instructed by K C Ho & Fong, for the Plaintiff

Mr Toby Brown, instructed by K B Chau & Co., for the Intervener