Pacific & Orient Underwriters (HK) Ltd v. Wu Cheung Ling and Another

HCA000468/1977

-----------------

Coram: Li, J.

Date of Judgment: 4th October, 1978

-----------------

JUDGMENT

-----------------

1. By an Originating Summons the Plaintiff company claims against the 1st Defendant in her capacity as a mortgagor and the 2nd Defendant in his capacity as the requesting party on a second mortgage dated 17th February, 1976 for the sum of $478,144.14. The Plaintiff company is a limited company, the business of which had been mainly that of a licensed moneylender and motor insurance company. The 1st Defendant is the wife of the 2nd Defendant and, though nominally a partner to a firm of insurance brokers called the Universal Underwriters Company, takes no part in the administration of that firm. She is a housewife. The 2nd Defendant is at all times a public light bus driver although he also engaged in business as an agent for motor insurance of the business of the Plaintiff company.

2. Various affirmations have been filed by all parties concerned in support of, as well as in opposition to, this claim. When the Summons was before my brother Zimmern who, having heard counsel for both parties, ordered that the issue of non est factum as pleaded by the Defendants of the mortgage be first tried. The mode of trial of this issue shall be by way of viva voce evidence, the Defendants to begin and to call two witnesses, namely, the two Defendants themselves and so on and so forth. He further ordered, apart from that issue to be tried, that the other issue was to be adjourned sine die. The affirmations so filed as aforesaid were to be treated as pleadings for the parties. However, when this summons came before me the other day, the issue was more than that of non est factum. In addition, there is the issue of the Defendants' denial of debt. The affirmations were again treated as pleadings and oral evidence was adduced.

3. The Plaintiff's case is basically this. The Plaintiff relies on the second mortgage in which the Defendants acknowledged indebtedness, or the 2nd Defendant acknowledged having borrowed a sum of $606,144.14 which was to be repaid by monthly instalments of $10,000 each without interest, with the usual convenant that, if any instalment should fall into arrears, the full sum would then be payable. The Plaintiff alleges that by May 1977 the Defendants had paid a total of $123,000, leaving a balance of $478,144.14. At the hearing, counsel for the Plaintiff informs this Court that the Plaintiff is prepared to waive a further sum of the claim. The Plaintiff is prepared to give credit to commissions payable to the 2nd Defendant in respect of premia since collected from the clients introduced by the 2nd Defendant thereby reducing the actual debt to the sum of $432,353.52. Although the Plaintiff is entitled on the second mortgage deed to claim the full sum of $478,144.14 as the balance, the Plaintiff will waive a certain sum, thereby reducing the sum so paid to $432,353.52.

4. The Defence case is twofold. Chronologically, it may be put this way. As from 1973 the 2nd Defendant, who was then a public light bus driver, had been working and introducing insurance business to the Plaintiff company, for which he received commission or remuneration. He was dealing then with a gentleman by the name of Mandas. By March 1975, one Henry Edwards succeeded Mandas. From that time onwards Edwards suggested to the 2nd Defendant that they (the 2nd Defendant and Edwards) should form a firm of partnership to act as agents for the Plaintiff company. The post Edwards occupied in the Plaintiff company was that of Manager and Director. In order to maintain good relations, the 2nd Defendant agreed. A firm was established and named the Universal Underwriters (thereinafter referred to as the firm). The 1st Defendant and a nominee of Edwards were partners. The 2nd Defendant was the manager of the firm. By that way the firm was able to earn more money in commission. The 2nd Defendant said that between the 10th September, 1974 and the 8th April, 1976 he had paid over to Edwards a total sum of $245,217.70 in the form of premium he collected for the Plaintiff company.

5. Perhaps to understand why money was paid to Edwards it is necessary to refer to the 2nd Defendant's contention as to his modus operandi. He said that when a client had been found, someone from the firm would go to the Plaintiff company to obtain the insurance policy together with the Plaintiff company's official receipt for the premium. The firm would then hand over the policy as well as the official receipt to the insured and obtain payment by the insured. The insured drivers or owners sometimes paid the firm in cash or cash cheque or sometimes paid by cheque made payable to the Plaintiff company. Of the last category there would be no problem. In the case of payment in cash or cash cheque or cheque made payable to the firm, the 2nd Defendant would pay these cheques or cash into the 1st Defendant's personal account. The 1st Defendant would then draw a cheque left in blank. The 2nd Defendant would bring the cheque to Mr. Edwards and inform Mr. Edwards as to the total number of clients so found and the total sum of premia so collected in the period concerned. Then Mr. Edwards would fill in the blank cheque an amount equivalent to the nett premia due to the Plaintiff company after having deducted the appropriate commission for the firm. As far as the payee was concerned Edwards would fill in his name instead of the Plaintiff company or fill in the word cash. Having done that, Mr. Edwards would return or cause to be returned some of the yellow forms which have been exhibited in the agreed bundle in exhibit (1) at page 290. Any premium that had not been paid, an I.O.U., the acknowledgment of the policy and the official receipt of the Plaintiff company would not be returned to the 2nd Defendant.

6. This went on well and business increased. As I have said, the 2nd Defendant continued paying Edwards that way. This lasted until some time in January or February of 1976. Edwards, one evening, went to visit the 2nd Defendant and the 1st Defendant in their home. The Defendants were informed that the Plaintiff company would henceforth terminate their agency agreement and would not issue any new policy through the 2nd Defendant or through the firm. That was because the company found out that a huge sum of money, as worked out by the Plaintiff and exhibited in affirmations, to the sum at that time of some $600,000. Edwards confessed to the two Defendants that he had misappropriated the $245,217.70 to his own use. He asked the Defendants whether they had any assets. It was found that the 1st Defendant owned a flat, which is the subject matter of the second mortgage, and that the flat had been mortgaged once to the First National City Bank. Thereupon Edwards told the 2nd Defendant that, if the 1st Defendant were willing and prepared to deposit her flat as some form of guarantee to their credit-worthiness and also the 2nd Defendant would undertake to collect $10,000 per month in the form of outstanding debts and premium from new policy-holders, then he would be in a position to recommend to the Plaintiff Company to continue the firm's agency with the Plaintiff company. Edwards further represented to them that, whatever document and guarantee that was signed, it was merely a formality and the company was not going to enforce that instrument or to touch the flat. Upon this basis, so the Defendants allege, they went to a solicitors' office - to the office of Fairbairn, Kwok & Wang - to sign the document on the 17th February. They said that prior to signing or immediately after signing the document had not been explained to them at all. They were just told to sign and that a Mr. Clarke, an employee of the Plaintiff company, told them that it was a mere formality and the instrument was not going to be enforced. For this reason they never knew that the document was a second mortgage of the 1st Defendant's flat, nor did they know that the document was in fact a document containing a receipt clause saying they had received a sum of $606,144.14.

7. In their affirmations in reply filed by Edwards and William Kwok and Yau Kwok Keung, the Plaintiff join issue with the Defendants. They explained the various payments alleged that had been made by the 2nd Defendant to Mr. Edwards and they also tendered evidence as to the circumstances under which the second mortgage was executed. The explanation given by Mr. Edwards as to the cheques made payable to him personally was that he, Edwards, from time to time gave loans to the public light bus drivers personally in order to attract them to maintain their custom with the Plaintiff company. He also paid from time to time accident claims put in by the public light bus drivers when there is an accident. This was necessary, he said, to preserve the goodwill and the good name of the company because accident claims need time to be investigated and the public light bus drivers wanted to have their claims expedited. Very often Edwards would pay off the claims as soon as the claim was ascertained before investigation. After investigation the Plaintiff company would make out a cheque to the 2nd Defendant or to the insured. Such cheque - the same sum - would be paid back to Mr. Edwards. The loans, too, would be paid back to Mr. Edwards. Hence, these various payments in the name of Mr. Edwards and payments in favour of him into his account.

8. According to the oral evidence by the parties, I find that there are thus two issues. One is the denial of debt, the other is non est factum. Having heard evidence relating to these two points in issue, I find that the Defendants must fail on both points founded upon their allegation. I will deal with the denial of debt first.

9. The 2nd Defendant in his affirmation produced no less than forty-six cheques, three of which were in duplicate, thereby making a nett total of forty-three cheques which he alleged were the payment of premia through Mr. Edwards to the Plaintiff company and which cheques and sums the 2nd Defendant alleged Mr. Edwards had misappropriated or embezzled instead of paying over to the Plaintiff company. This sum, represented by the forty-three cheques I mentioned, amount to the total of exactly $245,217.70. That tallies with the 2nd Defendant's affirmation that, from the 10th September, 1974 and the 8th April, 1976 he had paid to the Plaintiff this sum of money. That is in his affirmation dated the 16th September, 1977. Pausing here, one would find it odd. The 2nd Defendant said that the payments were made between the 10th September, 1974 to the 8th April 1976 to a sum total of $245,217.70. It would be hardly possible for Mr. Edwards, however, stupid, to acknowledge embezzlement in February, 1976 of this sum of money. It will be observed from a list produced by the Plaintiff in Edwards' affirmation that the sum paid in by the 2nd Defendant through Edwards was nowhere near $245,000. That is not all. Edwards, in his affirmation, traced all the copies of cheques produced by their serial numbers and put in an affirmation which were supplied by the accountant of the Plaintiff company to show that all the cheques paid up to the 31st July, 1975 had been paid already into the Plaintiff company's account. Of the total of forty-three cheques, at least thirty-four of these cheques had been paid into the Plaintiff company's account, thereby leaving a balance as from the 1st August, 1975 a balance of outstanding premium owed to the Plaintiff company an outstanding balance of $102,821.20.

10. Then on his own admission in evidence the 2nd Defendant agreed and said that of the nine remaining cheques he said he had paid in favour of Edwards, at least two of them, totalling a sum of $61,081.93, was to repay Mr. Edwards in respect of Edwards' advance payment of the accident claim. That leaves a balance of something like $30,738.23. This total sum was well covered by the balance of the other seven cheques. I need not work out the figures in detail. It is quite right that there might be a dollar more or less here or there. But one thing which stands out a mile is that the 2nd Defendant's and the 1st Defendant's allegation about Mr. Edwards' confession as to embezzlement is totally untrue and a complete fabrication on their part. There are bundles of I.O.U.s still not yet returned to the 2nd Defendant, the I.O.U.s or acknowledgments which the 2nd Defendant agreed to sign in respect of the official receipt and the insurance policy handed over to him by the Plaintiff company. Such I.O.U.s or such yellow forms as in exhibit 1 (290) are still in possession of the Plaintiff. There is no need, indeed, to refer to other discrepancies, and there are lots of them in the 2nd Defendant's evidence. Indeed, learned counsel for the Defendants has not even seen fit to argue further on the evidence on this point. It must fail. I am satisfied that at the time when the Defendants signed the document on the 17th February an outstanding debt was owed by the 2nd Defendant or the firm - the Universal Underwriters - of which the 1st Defendant was a partner, in the sum of $606,144.14.

11. The reason why there was such an acknowledgment clause of the receipt is due to the fact that this sum although accumulated debts, was treated as a lump sum then owed by the Defendants. The Defendants acknowledged receipt of it. This is in the evidence of Henry Edwards' affirmation and his evidence by saying that the accountant worked out a sum and he told the Defendants that, in order to do business with the Plaintiff company, first of all the Defendants must clear the arrears of premium collected but not yet paid to the Plaintiff company. The sole purpose for the second mortgage was to enable the Defendants time to repay by instalments of $10,000 each month, free of interest. In the meanwhile the Defendants would be able to continue work for the Plaintiff company as its agent so long as he kept up the repayment by monthly instalments of $10,000 each. On this, I accept Mr. Edwards' evidence. I reject the Defendants' evidence as untrue. The Defendants must fail on this point. I am satisfied that the Defendants were genuinely indebted to the Plaintiff company.

12. Now I come to the defence on non est factum. According to the Defendants, this so-called mortgage or second mortgage was induced by Edwards as a result of Edwards' confession of embezzlement in the amount of $245,217.70. He said that Edwards asked the 1st Defendant to deposit her flat as some form of guarantee so as to enable the 2nd Defendant or the firm to continue its agency business with the Plaintiff company. It would show as an assurance that the 2nd Defendant would find new clients for the insurance business and would collect premia, whether they were outstanding premia in arrears or premia in respect of new policy-holders, to the extent of at least $10,000 per month. On that basis the Defendants agreed. They said that they have gone to the solicitors' office Fairbairn, Kwok & Wang once. When they arrived there they were ushered into a room. The solicitors' clerk whom they found as a Mr. Yau was leafing up pages after pages of the document and told them nothing but just pointed at a dotted line for them to sign. As a result they didn't know what they signed was, in fact, a mortgage. They always found it was a guarantee. They said that no one explained the contents of the document to them. Nor did they know the character of that document. They signed, thinking that it was some form of guarantee to their credit-worthiness.

13. I must observe that, having found the Defendants' allegation about Mr. Edwards' confession as to embezzlement was a lie and a fabrication, half the basis of the reason why they had to sign this document is gone. On the evidence of the Plaintiff, no less than four witnesses were called on this issue. Mr. William Kwok, the solicitor concerned, said that the Defendants had been to his office twice. The first time was a couple of days prior to the 17th February, 1976. When he saw the two Defendants he explained the general purport of the document to the two Defendants and he explained the operative and vital clauses as to indebtedness, mode of repayment, obligation and results as to failure to repay, to the Defendants. There was only one query raised by the 2nd Defendant and that was the sum that was alleged to have been owed. The Defendants refused to sign the document and left the office. On the second occasion the two Defendants indicated that they were willing to sign the document because they have checked the figures. At that time as he was busy he instructed his clerk, Mr. Yau Kwok Keung, to witness the signatures.

14. Mr. Yau gave evidence corroborating of Mr. Kwok's. He said that on the second occasion he ushered the Defendants to other rooms and he explained again clause by clause the document to the Defendants before they finally signed the document as well as the receipt clause. Mr. Choi who was at one time an employee of the firm who said he accompanied the Defendants to the solicitors' office at least on one occasion and he heard and witnessed the document being explained to the two Defendants. There is this Mr. Clarke who is, in fact, an insurance assessor. Although he is from time to time employed or engaged by the Plaintiff company to do damage assessments for the Plaintiff company, he is not exactly an employee of the Plaintiff company, He is in private practice. He has his own firm. He again said that he witnessed the explanation and it was how he knew the contents of the documents and of the exact sum owed at the time. He never told the Defendants, he said, that the document was a mere formality.

15. Such are the diametrically opposite evidence of the Plaintiff and that of the Defendants.

16. The foundation of the Defendants' allegation for the necessity of this document was Edwards' confession of misappropriating funds. That has gone, the carpet is somewhat pulled away under the Defendants' feet. The 2nd Defendant in his evidence admitted that, before he signed or even in the course of his conversation with Mr. Edwards he knew that the document was to be in the form of a guarantee. When he was asked what did he understand by guarantee and what was the document supposed to guarantee, his answer, after a lot of unsatisfactory evasions was that it was to guarantee that he continued with his agency and that he would collect some $10,000 per month from outstanding premia and from premia of new policy-holders. Why the Defendants should sign some form of guarantee is quite inexplicable. If the guarantee was merely one to pay premia direct to the plaintiff company there was no necessity for this guarantee at all. All the Plaintiff company need do, if the guarantee was not for payment of arrears of premia still owed by the Defendant, all the Plaintiff company need do was to lay down the conditions that, as from March or February 1976, all new premia payable to the Plaintiff company must be paid directly to the Plaintiff company. In that case, the money would be taken out of the hand of the 2nd Defendant or the firm. It would be taken out of the hands of Mr. Edwards. But Mr. Edwards said the system of the company was that all premia paid to the company must be made payable in the name of the Plaintiff company. There was no such thing as paying the Plaintiff company through Mr. Edwards or anybody.

17. Another surprising thing is that, as the Defendants alleged that Mr. Edwards was a partner to the firm, the Defendants should give a guarantee which covered the other half of Mr. Edwards' liability if there is any non-payment. The 2nd Defendant, in his evidence, has shown himself to be a person of the easy-going type, adopting a couldn't-care-less attitude. He admitted that he did not check his account with the Plaintiff company how much he owed and how much there was outstanding, but at no time could he produce any exact amount as to his indebtedness or otherwise to the Plaintiff. On the contrary, the Plaintiff, through the affirmation of Mr. Edwards, dated the 28th November, 1977, would show in exhibit 3, page 3 to 8, that the total sum, after various payments, was of $432,353.52.

18. Having considered the foundation for the necessity of this document, having considered the evidence of Mr. William Kwok and Mr. Yau as solicitor and solicitors' clerk of the firm of Fairbairn, Kwok & Wang, and the evidence of the firm's former employee, Mr. Choi, and having considered the evidence of an independent witness, Mr. Clarke, all to the effect that the contents as well as the character of the documents had been explained to the Defendants, I find it difficult to believe the 1st or 2nd Defendant as to their account on the circumstances when the documents were signed. I am satisfied on the evidence as a whole that before the 1st and 2nd Defendants executed the document as a second mortgage in exhibit 1, page 1, the character as well as the contents and material terms of that document had been explained to them. They knew well at that time they were in arrears on the 17th February, 1976, to the sum of $606,144.14. Since then, there had been some payments by instalments by the 2nd Defendant or the firm. Further commissions were payable to the 2nd Defendant. The final account as struck by the Plaintiff is that the Defendants still owe the Plaintiff company $470,355.52. Technically and legally the mortgage is for $600,000 and more. In fact, the Plaintiff are satisfied that the Defendants owed a total sum of $470,355.52, nett. Accordingly, there will be judgment in that sum in favour of the Plaintiff and with costs.

19. I also find that the application to stay for three months is unduly long, taking into consideration the conduct of both Defendants - and also that the action started some time in July 1977, that the Defendants could well be honest about it and make alternative arrangement or whatever arrangement that was necessary by facing facts rather than resorting to fabrications to stall the Plaintiff's action until today. I cannot accede to the Defendant's application. For this reason, the application to stay for three months is refused. Obviously this is a sizeable sum. Even if the Defendants were to make arrangements, they would need some time. I grant a stay of twenty-one days.

20. I would not be inclined to award interest as from the date of the writ.

Representation:

C. Mumford (Fairbairn, Kwok & Wang) for Plaintiff

B.K. Ho (K.Y. Woo & Co.,) for Defendants