Yat Tung Investment Co Ltd and Another v. Dao Heng Bank Ltd

HCA000969/1969

IN THE SUPREME COURT OF HONG KONG

ORIGINAL JURISDICTION

ACTION NO. 969 OF 1969.

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Coram: Pickering J. in Court.

Date of Judgment: 23 April 1971

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JUDGMENT

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1. In this action the plaintiffs claim:-

2. The first plaintiff limited company is an investment company and the second a construction company. Both are private companies in which, behind their corporate identities, the majority shareholder and the guiding spirit is a Mr. LAI Yung-kwong. Prior to its incorporation in December 1966 the second plaintiff company was known as the Mee Ah Hong Construction Company of which Mr. LAI Yung-kwong was the sole proprietor.

3. As its name implies, the defendant limited company is a bank and it will be convenient to refer to it in this judgment as "the bank".

4. Under a building mortgage dated 31st January 1964 the bank became the mortgagee of the property registered in the Land Office as Section 1 of Inland Land No. 2802. This mortgage was designed to secure the sun of $1,200,000 to be lent by the bank to the then owners of the property who were to develop the property by constructing a multi-storey building on the site. The contractor for the scheme under a building contract with the then owners dated 17th March 1966 was the Mee Ah Hong Construction Company and upon the incorporation of this firm in December 1966 the Limited Company of the same name (that is the second plaintiff company) superseded that firm as the contractor.

5. On 14th July 1967 the owners of the property (whom, for reasons which will become apparent, it will be convenient henceforth to refer to as "The former owners") created a further charge upon the property in favour of the bank to secure a further loan of $200,000 towards construction costs.

6. On 13th May 1968, the former owners having disappeared, the bank exercised - the plaintiffs would say purported to exercise - its power of sale under the Building Mortgage and Further Charge. On that date the site and the unfinished building upon it were sold by public auction. The first plaintiff company was the successful bidder but it is the contention of the plaintiffs that the sale was a sham and that it had previously been agreed between the bank and the first plaintiff company that the latter would buy the property on behalf of the bank and as its trustee. The plaintiffs also allege that in return for this arrangement the bank undertook to pay all the outstanding construction costs then due to the second plaintiff company as well as future construction costs and other incidental charges and promised further that upon any future sales of units in the new building, 40% of the proceeds of such sales would be paid to the second plaintiff company towards any outstanding construction costs. There is no evidence that the bank was made aware of the amount of the outstanding construction costs which it is alleged it was undertaking to pay.

7. The price at which the property was knocked down to the first plaintiff company at the auction was $880,000. The plaintiffs say that this figure had been agreed upon previously with the bank and that the 10% deposit which, under the Terms and Conditions of Sale was to be paid immediately after the sale, was not in fact paid.

8. On the 23rd May, 1968 the assignment of the property to the first plaintiff company was executed. The plaintiffs claim that no money was however paid to the bank. Instead, a building mortgage was executed by the first plaintiff company in favour of the bank to secure $1,000,000 to be payable by five instalments, and out of the first instalment of $940,000 the sum of $880,000 was retained by the bank as the nominal purchase price, a further sum of $24,551.00 was deducted as legal costs and stamp duty and of the balance of $35,449.00, $32,060.12 was paid to the first plaintiff company the remaining $3,388.88 being retained by the bank's solicitors. Of the remaining instalments under the building mortgage totalling $60,000.00, $55,000.00 have been paid towards the construction costs of the second plaintiff company leaving some $5,000.00 unpaid.

9. Subsequently the first plaintiff company, allegedly at the direction of the bank, assigned two units in the building namely the ground floors of Nos. 197 Johnston Road and 114 Thomson Road and the 14th floors of those same premises. The consideration for the former sale was $187,000.00 and that for the latter, $44,500.00 and this total sum of $231,500.00 was paid direct to the bank which, in pursuance of the agreement to which I have already referred, appropriated 40% thereof, or $92,600.00, to Mr. LAI Yung-kwong for the second plaintiff company towards construction costs. On the 29th May 1968 Mr. LAI Yung-kwong signed a promissory note for this sum in favour of the bank. Out of the said sum of $92,600.00 only some $50,000.00 was actually paid whilst the balance of $42,600 was deposited with the bank in a savings account the pass book in respect of which account was retained by the bank.

10. The plaintiffs claim that having taken into account the various sums which they admit having received from the bank (that is the three items, $32,060.12, $55,000.00 and $50,000.00 referred to previously), there remained owing to them on the 31st January 1969 the sum of $435,783.81.

11. On the 29th January, 1969 the first plaintiff company wrote to the bank requesting payment of this sum and requiring also that the property should be transferred back to the bank. The bank rejected these requests by a letter of the 5th February 1969 and the writ in this action was issued some six months later.

12. Since the date of the writ the bank has exercised - again the plaintiffs would say purported to exercise - its power of sale under the building mortgage with the first plaintiff company. The bank did so by means of a further auction on the 26th November 1969 when the property (less the two units already assigned by the first plaintiff) came under the hammer and was sold to a third party.

13. In addition to the sum of $435,783.81 which the plaintiffs say was owing to them on the 31st January 1969, the second plaintiff claims a further sum of $30,000 in respect of caretakers' charges from the 1st February 1969 to the 26th November 1969, the date of the second auction.

14. The plaintiffs now therefore claim the declarations to which I referred at the beginning of this judgment together with the sum of $465,783.81 with interest and costs.

15. The bank, for its part, admits that it was the mortgagee of the property under the $1,200,000.00 building mortgage with the former owners and admits that in exercise of its power of sale under that mortgage the property was auctioned on the 13th May 1968 when it was knocked down to the first plaintiff company at $880,000. That the sale was a sham in the sense that the bank was using the name of the first plaintiff company to buy the property for its own account, is however denied as is the alleged undertaking to pay all construction costs then due to the second plaintiff company as well as all future such costs and certain incidental expenses. It is further denied that there was any agreement for the bank to pay 40% of the sale proceeds of any units to the second plaintiffs or that the 10% deposit due to be paid immediately after that auction was not in fact paid. It is the bank's contention that Mr. LAI Yung-kwong, either on his own behalf or that of the first plaintiff company borrowed $88,000 from a Mr. AU Wai-choi who was then a sub-accountant in the Loans Department of the bank. Despite Mr. AU's position in the bank, this loan is said by Mr AU and the bank to have been a personal loan from Mr. AU and not one from the bank. Its purpose is claimed to have been the payment of the deposit on the purchase of the property at auction by the first plaintiff company and it is the bank's case that this sum was paid to it for that purpose in the name of the first plaintiff company.

16. The bank admits the creation by the same company of a building mortgage in its favour in the sum of $1,000,000 and that $5,000 of that amount has never been advanced to the first plaintiff company. It is further the bank's case that out of the first instalment of the mortgage, that is $940,000, it retained the balance of the purchase price (after crediting the $88,000 received as deposit) namely $792,000 and that out of the balance of that first instalment ($148,000), $24,551 was expended upon costs and stamp duty leaving a remainder of $123,449. The bank claims that from this remaining sum Messrs. Patrick Poon & Company, solicitors, on the instructions of Mr. LAI Yung-kwong, paid $32,060.12 to Mr. LAI and $91,388.88 to Mr. AU Wai-choi this latter payment representing repayment of Mr. AU's personal loan of $88,000 together with an additional sum of $3,388.88 which additional sum was credited by Mr. AU to the sundry creditors account of the first plaintiff company with the bank and subsequently credited against interest owed by the first plaintiff company on the said building mortgage.

17. The assignments of the ground and fourteenth floors to which reference has already been made are admitted by the bank which claims that the proceeds of sale were not $231,500 but that sum less $1,307.50 costs and less a further sum of $600 being agreed interest retained by the purchasers of the units due to late completion of the building.

18. Moreover the $92,600 which the first plaintiff company claims to have received as representing 40% of the purchase price of the two units sold, is accounted for somewhat differently by the bank which says that before the sale prices of these two units were paid by the purchasers, Mr. LAI Yung-kwong approached the bank for a loan on his own behalf or on behalf of the first plaintiff company. The bank says that it agreed to make such a loan provided that Mr. LAI would be personally responsible for its repayment signing a promissory note therefor and provided that the amount of the loan would be applied in payment for lift works and other works done on the property by the second plaintiff company. Another condition was that the loan was to be repayable out of the proceeds of sale of the relevant two units. Upon these arrangements being agreed and the promissory note signed, the bank lent Mr. LAI some $92,600 being 40% of the anticipated proceeds of the sales of the two units and of this sum of $92,600, $50,000 was paid to Mr. LAI by a cashier order dated the 29th May 1968 and the balance of $42,600 was credited to a savings account in the name of "Dao Heng Bank Ltd., Loans Department, on behalf of Mr. LAI Yung-kwong of Yat Tung Investment Company Limited."

19. Upon payment of the $231,500 the purchase price of the two units, $98,296.76 being the aforesaid $92,600 plus interest was applied in satisfaction of the promissory note and $19,500 was paid by the bank on behalf of the first plaintiff company for monies owing on account of lift works in the building. The total of these sums plus the figures already mentioned of $1,307.50 for costs and $600 in respect of agreed interest is $119,704.26 leaving a balance from the $231,500 the proceeds of sale, of $111,795.74 which balance was credited against the building mortgage.

20. The bank agrees that $55,000 was drawn by the first plaintiff company out of the $60,000 representing the 2nd to the 5th instalments under the building mortgage, and that $5,000 has never been paid since, according to the bank, its payment has never been requested.

21. The bank has counterclaimed against the plaintiffs alleging that it has advanced to the first plaintiff company a total of $995,000 under the building mortgage which sum was reduced by the figure of $111,795.74 the balance of the proceeds of sale referred to above, and claims that as at the 15th of January 1969 the first plaintiff company owed the bank $883,204.26 as principal under the mortgage together with the sum of $182,187.21 in respect of unpaid interest. Deducting from the total of these two sums the figure of $1,040,000.00 which was the price obtained for the property when it was auctioned by the bank for the second time on the 26th of November 1969, the bank claims to have suffered a loss of $25,391.47 and to have incurred expenses of auction of $16,840.50 and legal costs of $3,000. The bank therefore counterclaims against the first plaintiff company in the sum of $45,231.97 together with interest from the 27th of November 1969, the day following the second auction. Since moreover the plaintiffs have registered the writ in this action as a lis pendens and since the plaintiff companies or one of them is still in possession of certain floors of the property, the bank further counterclaims for a declaration that it be indemnified against all costs, expenses and damages which may be caused or occasioned by the plaintiffs in respect of the lis pendens and their presence upon the property together with the cost of new locks and keys for the property.

22. Mr. LAI Yung-kwong, whom I have described as the major shareholder and the guiding spirit in each of the plaintiff companies, related in evidence details of the building contract (Exhibit A.2) entered into between the then unincorporated Mee Ah Construction Company and the former owners of the property together with details of an agreement in Chinese (Exhibit P.3) of the same date containing variations of the method of payment set out in the building contract (Exhibit A.2) as well as of the terms of a compromise agreement reached between the former owners and himself in O.J. Action 1200/66. In essence, this provided for 13 payments by the former owners, 70% of each of payments 1 to 12 to be made at certain specified stages of the construction work, and the 13th payment together with the outstanding 30% of each of the first 12 payments to be made within 6 months of the issue of the occupation permit.

23. Mr. LAI recounted how having started work towards the end of August 1966, he received 70% of each of the first 3 agreed instalments but that no further payments had been made by the time he had completed the 6th stage of the construction. At that point (20th February 1967) he stopped work on the building. Following discussions between the former owners, the Architect and Mr. LAI, Mr. AU of the bank met Mr. LAI at the site and told him if he would resume work the bank would make a loan of a further $200,000 to the owners. Eventually the bank according to Mr. LAI gave him $87,500, $63,000 of which he applied in satisfaction of 70% of the full amounts of the 4th, 5th and the 6th instalments under his arrangements with the former owners, handing over the balance of $24,500 to the former owners.

24. Having resumed work, Mr. LAI on behalf of the second plaintiff company was paid 70% of the monies due in respect of the 7th and 8th stages of the work. Although he completed all the work contracted for by the second plaintiff company by the 1st of October 1967, he received no further payments.

25. According to Mr. LAI, Mr. AU of the bank told him towards the end of 1967 that the property would be auctioned, and in March 1968 invited Mr. LAI to lunch at the Hilton Hotel where he suggested that at the auction sale Mr. LAI should bid for the property on behalf of the bank. In the upshot, about one week before the auction, which took place on the 13th of May 1968, Mr. LAI promised Mr. AU that he would bid for the property but pointed out that he did not have the necessary money whereupon Mr. AU said that the bank would take care of everything since it was not in a position to bid itself for property belonging to persons who owed the bank money. Mr. LAI further claimed that Mr. AU told him to bid $880,000 adding that after the sale the property would again be mortgaged to the bank, this time by the first plaintiff company, for $1,000,000; but from this sum $880,000 would be deducted in payment of the purchase price and the balance applied in payment of 70% of the 9th, 10th, 11th and 12th instalments due to the second plaintiff company. Mr. LAI then suggested to Mr. AU that the remaining 30% of the first 12 instalments should be paid by crediting to him 40% of the sale price of any flats sold, a proposition to which Mr. AU agreed. The 13th and final payment was likewise to be paid from an allocation of 40% of the proceeds of sale of flats.

26. Mr. LAI told the court that he was not altogether sure that Mr. AU had authority for the course which he was proposing to adopt and that he, Mr. LAI, went to see Mr. TANG Pang-yuen who was both the Chief Manager and a Director of the bank, some three days before the auction querying whether it was in order for him to bid for the property for the bank, whereupon Mr. TANG said that it was in order, that he confirmed on behalf of the bank whatever Mr. AU had said and that Mr. LAI should discuss the question of construction costs with Mr. AU.

27. According to Mr. LAI, he started the bidding at the auction at $800,000 having been told that a Mr. TUNG of the bank would theoretically contest the bidding with him. Mr. TUNG bid $850,000, whereupon Mr. LAI bid $880,000 which was the maximum he had been authorized to go to by Mr. AU. There were no further bids and the property was knocked down to Mr. LAI at $880,000. He thereupon signed the contract for sale and purchase in the auction rooms in the name of the first plaintiff company but paid no deposit and received no receipt for $88,000.

28. It was Mr. LAI's understanding that any monies to be paid to him under the proposed $1,000,000 mortgage as well as sums paid to him from the proceeds of sale of units in the building were to be outright payments in respect of building costs and were not to be repayable to the bank. Moreover, although the building mortgage provided for the instalments payable thereunder to be paid only against architect's certificates, he never subsequently produced any architect's certificates for any of the monies he received under the mortgage.

29. Mr. LAI complained that the $32,060.12 which was the balance received by him of the first instalment of $940.000 due under the building mortgage constituted a shortfall of $3,388.88. As a matter of pure arithmetic this is correct but how this odd figure was arrived at has remained a mystery throughout the case and why it was dealt with as it was remains a matter of dispute. It will be recalled that Mr. LAI claims that the sum was retained by the bank's solicitors but Mr. AU says that the solicitors forwarded him a cheque for $91,388.88 which sum, it will be observed, is the total of the $88,000 said to have been loaned by Mr. AU to Mr. LAI for the purpose of paying the deposit after the auction, and of the mysterious figure $3,388.88. Mr. Patrick POON, solicitor, who acted both for the bank and for the first plaintiff company in regard to the assignment of the property by the bank to that company and in regard to the subsequent building mortgage by that company to the bank, says that Mr. LAI instructed him to pay the sum of $91,388.88 to Mr. AU and at Mr. POON's request signed a written authority to that effect. This document was produced in Court (Exh. "M"). Mr. LAI denies giving any such instruction and produced three carbon copies (Exhs. D1, 2 and 3) of audit notes addressed by him to Patrick Poon & Co. requesting their confirmation of a credit balance in his favour of $3,388.88. No replies were received to these requests.

30. It was further Mr. LAI's allegation that of the $92,600 representing 40% of the purchase price of the ground and 14th floors, he paid $50,000 to the architect at Mr. AU's request to induce the architect to withdraw from the scheme in favour of another who was to obtain the occupation permit. No receipt was given to him in respect of this payment which was said to have been made in cash. Mr. LAI, having first testified that the architect had refused to give him any receipt for this sum, subsequently said that he never asked the architect for a receipt since for "this sort of thing" no receipt would be given. The reason for persuading the architect to withdraw was said to be that Mr. AU did not see eye to eye with him and according to Mr. LAI, because Mr. AU was afraid that Mr. LAI might not hand the $50,000 to the architect, Mr. LAI was required to sign the promissory note for $92,600 it being agreed that the note would be cancelled upon the issue of the occupation permit.

31. Despite the production in evidence of a bundle of debit notes (Exh. F) dated between the 3rd June 1968 and the 3rd June 1969, issued by the defendant bank to the first plaintiff company and expressed to be for interest, Mr. LAI claims that the bank never made any demand upon him for interest until by a letter from Patrick Poon & Co., Solicitors, (A24) dated the 12th June 1969. There was, Mr. LAI claimed, no obligation to pay interest since he had merely bought the property on behalf of the bank. He admitted receiving the debit notes (the first seven or eight of which incidentally contained certain inaccuracies not corrected until December 1968) but claimed that he did not consider that he was really intended to pay or be debited with the interest stated therein but thought the issue of the notes merely had something to do with the bank's accounting system.

32. On the 9th January 1969, Mr. LAI wrote to the bank (A15) asking to be allowed to purchase the 2nd, 3rd and 4th floors of the property and to pay for them over a period of 10 years. Coming as it did from the registered owner of the property, this request can only be regarded as extraordinary and must, at any rate on the face of it, lend some colour to Mr. LAI's assertion that he bought the property not on his own account but merely as trustee for the bank. No reply was received from the bank to this letter, which Mr. LAI claims was written by him on Mr. AU's suggestion. The letter produced in Court was Mr. LAI's copy. The original was never produced it being the evidence of Mr. AU that there is no record in the bank of any such letter ever having been received.

33. On the 29th of the same month Mr. LAI wrote a further letter to the bank (A16), again, according to him, at Mr. AU's suggestion. In that letter he proposed that the bank should accept the re-transfer of the property and he claimed payment of $435,783.81 in respect of construction costs and other matters. This, together with interest and a further $30,000 claimed by the second plaintiff company, is the pecuniary claim under the present writ. The bank rejected this suggestion and claim by letter of the 5th February 1969 (A17).

34. Mr. LAI agreed in evidence that he has kept the keys of the building and nailed up certain doors thereof, despite his claim that the building is not his. He had also caused notices to be posted on different units of the building forbidding entry; all this had been done because he had not yet received his construction costs.

35. No documents were produced in evidence to support Mr. LAI's assertion that he was only the nominal buyer of the premises, holding them on trust for the bank.

36. At the time of the advance by the bank of an additional $200,000 by way of further charge to the former owners, Mr. LAI executed a guarantee under which he undertook to complete the work on the building for a sum of $160,000. In evidence he claimed that he could not have completed the building without receiving more money than $160,000 and said that he had not understood the document to be a guarantee of completion on receipt of such further sum. The interpretation clause on the document was false and the clerk of Messrs. Yung, Yu, Yuen & Co. had not in fact interpreted the document to him, which had been merely explained to him by Mr. AU to the effect that Mr. AU would give Mr. LAI some $200,000, in return for which Mr. LAI would give the guarantee of completion of the building. He signed the guarantee in the presence of Mr. YUNG Kwok-yue of Yung, Yu, Yuen & Co., telling Mr. YUNG that the document had in fact been interpreted to him and making it clear to Mr. YUNG that he was going to complete the building upon payment of a further $200,000 and nothing less. He claims that Mr. YUNG confirmed to him just before he signed the guarantee that he would be getting $200,000. On being pressed as to whether Mr. YUNG had deceived him, Mr. LAI was extremely reluctant to use that term but maintained his evidence that Mr. YUNG had told him that he was to receive $200,000, and whilst baulking at the word "deceived" he did say that Mr. YUNG had not told him the truth about the contents of the guarantee, which he would not have signed had he understood the contents.

37. In regard to another solicitor, Mr. Patrick POON, Mr. LAI was less reticent stating unequivocably that Mr. POON had certainly conspired with the bank against him. Mr. POON had been at the auction sale at which Mr. LAI had bought the property for $880,000 and had there told him that on the bank's instruction he was to act for both vendor and purchaser and that if Mr. LAI came to his office in a few days' time the documents would be ready for him to sign. On the 23rd May Mr. LAI attended Patrick POON's office, when he signed a number of documents not really knowing what he was signing. These documents included Exh. M, the authorisation to Patrick POON to pay Mr. AU $91,388.88. Somewhat contradictorily Mr. LAI said that at no time did he authorise Mr. POON to pay this sum to Mr. AU.

38. Mr. LAI agreed that the first plaintiff company had in fact produced a brochure for the sale of the units in the property with its own name on the front cover, but claimed that the company was offering the premises for sale on behalf of the bank, which had instructed him verbally to put out the brochure.

39. Following Mr. LAI's letter to the bank of the 29th January, 1969 (A16) and the bank's rejection of the request contained therein that they should accept the re-transfer of the property and pay some $435,783.81, Mr. LAI claims to have sought an interview with the Chief Manager of the bank and, the latter being too busy to see him, actually to have had an interview with Mr. TANG Kong-yuen, brother of the Chief Manager, who agreed that the building should be re-transferred to the bank but demurred at the size of Mr. LAI's pecuniary claim and suggested that the bank should pay only $350,000.00. To this proposal Mr. LAI says that he acceded, whereupon Mr. TANG Kong-yuen said that it would be necessary for Mr. LAI to see the Chief Manager, Mr. TANG Pang-yuen, again. At the subsequent meeting Mr. TANG Pang-yuen, according to Mr. LAI, retracted everything which Mr. TANG Kong-yuen had promised and said "I have taken advantage of you. Go ahead and sue me; you have no case."

40. Mr. LAI was shown a letter (H1) dated 29th October, 1969 addressed by the first plaintiff company to the bank requesting that "for audit purpose" the bank would confirm to the first plaintiff company's auditors that that company had a debit balance of $765,407.50 with the bank at the close of business on 31st March, 1969. When he was asked if this requested certificate, which must have been false had the first plaintiff company genuinely only been a trustee for the bank in the purchase of the property, was intended for tax return purposes, I warned Mr. LAI that he was not obliged to answer the question if he thought that the result of his answer might be to incriminate him. His reply was that he claimed privilege. The bank replied neither to this request nor to reminders addressed to it by the first plaintiff company.

41. It was a fact that after the auction on the 13th May, 1968 at which Mr. LAI purchased the property through the medium of the first plaintiff company, allegedly as a trustee for a bank, Mr. Lai continued to expend monies upon the building notably for the connection of electrical installations. He said he had not insisted that the bank should pay this charge because Mr. AU had asked him to pay it on behalf of the bank for the time being and if he had not done so the building could not have been effectively completed in that there would have been no connection of the electricity supply.

42. It was further Mr. LAI's evidence that he did not know what he was signing when he signed the promissory note (A13) for $92,600.00. The same remark applied to the guarantee (A14). Mr. Patrick POON has caused him to sign the promissory note without explaining it and whilst Mr. AU, upon the same occasion in Mr. Patrick POON's office, had explained the contents of the guarantee to him, his explanation had been false. Upon the terms of the guarantee being read to the witness in court, he claimed then to understand the document for the first time and said that Mr. AU had told him that the document was an acknowledgment of Mr. LAI's receipt of the $92,600.00 which he was to receive and which represented forty percent of the sale proceeds of the ground and fourteenth floors. Mr. LAI denied that he knew full well at the time of signature what the promissory note and the guarantee were and said that he was given a bundle of documents and just signed them.

43. Mr. AU, according to Mr. LAI, had represented himself as head of the Loans Department of the bank but on the evidence of the bank's officials it is clear that this was not Mr. AU's position at the relevant time.

44. It was Mr. LAI's evidence that over a period of about 5 months in 1967 he had expended approximately $70,000.00 on the property although this was shortly after he had been forced to sell a plastic business for the purpose of raising funds to fight another court case. His explanation for his ability to make these payments was that he came into receipt of money as and when debtors repaid their loans to him. When asked if he could produce his bank statements for the relevant period he said he could not because he had lost them all and was unwilling to ask the bank to provide copies.

45. Mr. AU confirmed that in about June, 1967 he was the second-ranking officer in the Loans Department of the bank, some of his responsibilities being to handle applications for loans and check the security therefor. He himself had no authority to grant a loan, which authority was vested in a Loans Committee, the members of which were the Chairman of the Board, the Chief Manager and three other Managers, and the system was that either the Chief Manager alone or any two members of the Loans Committee could approve a loan.

46. The witness confirmed that the former owners had mortgaged the property to the bank and, having encountered difficulties, had suggested to the bank that a further charge of $200,000.00 should be granted to them to enable them to complete the construction work. The witness thereupon arranged a meeting between himself, the former owners and Mr. LAI, whom he understood to be the contractor, and this meeting took place at the office of Mr. YUNG Kwok-yue, solicitor. At the meeting Mr. LAI said that about $160,000.00 was needed to complete the building. The bank regarded it as essential that this money should reach the hand of Mr. LAI, the contractor, direct and also that the contractor should execute a guarantee undertaking that upon receipt of $160,000.00 he would complete the building up to the stage of the issue of the occupation permit and that whether or not more than $160,000.00 proved to be necessary for that purpose.

47. Mr. AU said that after the bank had eventually given instructions to have the building mortgage and further charge in favour of the former owners called in, Mr. LAI came to see him at his office, saying that if the bank was to auction the property he would be unable to receive payment of the construction monies owed to him by the former owners; that all the ready cash of the second plaintiff company had been invested in the site, that his own financial position was straitened in regard to an ink factory which he ran, and that if he could not obtain payment of his construction costs from the former owners he might have to go bankrupt. Mr. AU claims to have replied that the bank had already decided upon the auction and that if Mr. LAI wanted to get his money he should buy the property at the auction, estimate the amount necessary for the completion of the building and, following completion, sell the property unit by unit. This discussion continued until lunchtime and was resumed over lunch at the Hilton Hotel, where Mr. LAI said that he estimated that after completion the various units of the building could be sold for a total of $1,700,000 or $1,800,000 and that he needed approximately $150,000 in order to complete the building, which lacked mosaic flooring, plastic water tanks in the toilets, electric and fire prevention works and a lift. He said that he himself did not have the money to bid at the auction and asked if the bank would lend him sufficient money both to buy the incomplete building and to finish it. Mr. AU said that he would study the situation and, having returned to the bank, turned up the records and saw that the former owners owed the bank a little over one million dollars. His own estimate of the worth of the building after completion was $1,600,000, and he made a report to the Loans Committee suggesting that they advance a loan of one million dollars to any successful bidder at the auction, including Mr. LAI. This recommendation was accepted by the Loans Committee.

48. Some five or seven days later at a further lunch at the Hilton Hotel, Mr. AU claims to have told Mr. LAI that the bank had agreed in principle to advance one million dollars to a successful purchaser at the auction upon the security of the property and to have asked Mr. LAI whether, if he should be successful at the auction, he could obtain money from other sources to complete the building, to which Mr. LAI replied that he could obtain materials on credit and could, if necessary, mortgage his residence in Stubbs Road. His anxiety, however, was in respect of the payment of the 10% deposit if successful at the auction and he requested Mr. AU to devise ways and means of raising the deposit money for him, at which Mr. AU eventually said that if absolutely necessary he would assist Mr. LAI in his own personal capacity. Mr. AU said that his motives for this apparently altruistic gesture were, first, that he was very anxious to solve the mortgage problem for the bank and, secondly, that he expected that if he lent money to Mr. LAI in a personal capacity the latter would pay him interest thereon. This expectation did not materialise, Mr. LAI apparently offering no interest and Mr. AU being embarrassed to ask for it.

49. Mr. AU emphatically denied that he had asked Mr. LAI to bid at the auction as a nominee of the bank or that he had promised Mr. LAI on behalf of the bank to pay outstanding and future building costs in connection with the scheme. He had never discussed with Mr. LAI any liability on the part of the bank to recompense Mr. LAI for compensation paid to sub-contractors by reason of the fact that work on the building had at one time been interrupted for a period of months. Similarly, there had been no undertaking on his part that the bank would pay the wages of employees retained on the site during the stoppage of work and it was untrue that he had instructed Mr. LAI to write the letter of the 29th January 1969 (A16) to the bank claiming payment of more than $435,000 and requesting the bank to accept a re-conveyance of the property.

50. Similarly, Mr. AU denied that before the auction there had been any agreement between Mr. LAI and himself as to the amount to be paid for the property, namely $880,000; he was in no position to forecast the amount of the successful bid or the identity of the successful bidder. He attended the auction, having previously instructed the auctioneer that the upset price of the property was to be $700,000 and that bids should be accepted in units of $5,000. There were, he said, two or three bids and the property was knocked down to Mr. LAI at $880,000; none of the other bidders was known to him and none was from the bank. Following the sale he paid a deposit of $88,000 in the auctioneer's office on behalf of Mr. LAI. The witness identified his personal cheque (Exhibit W), and, asked if he would have any objection to producing his bank statements for the two or three months around May 1968 said, in marked contrast to Mr. LAI's reply to a similar question, that he would have no objection. The witness did in fact subsequently produce these accounts and certain internal documents of the bank.

51. Mr. AU agreed that after the assignment of the property to Mr. LAI and the execution of the building mortgage by Mr. LAI in favour of the bank in the sum of one million dollars, he did receive from Patrick Poon & Co. a cheque in the amount of $91,388.88. He did not understand why the cheque was $3,388.88 in excess of the $88,000 which he had lent to Mr. LAI for the purpose of paying the deposit and caused that surplus sum to be entered into a provisional temporary receipt item as being the money of the first plaintiff company.

52. Some days later Mr. LAI told him that the balance of the monies remaining from the mortgage of one million dollars was insufficient to enable him to complete the building, which still required a lift, fire prevention installations and wiring, and Mr. LAI requested a further loan of $100,000 from the bank. Since Mr. AU understood that there were in existence agreements for the sale of the ground and 14th floors at a total price of about $230,000, he suggested to the Loans Committee that they should give Mr. LAI a further loan amounting to 40% of that purchase price, namely $92,600. This was done, it being a condition of the loan that Mr. LAI signed a promissory note and a pledge to the effect that repayment of this sum was to be realised out of the sale proceeds of the ground and 14th floors of the property.

53. It was Mr. AU's version of events that, having signed these two documents, Mr. LAI was given $50,000 in the form of a cashier order and said that he would give this sum to the former architect, who had failed to inform the Public Works Department that he had resigned from the job with the consequence that Mr. LAI was having difficulty in employing a replacement architect. Mr. AU claims that Mr. LAI requested him to retain the balance of $42,600 and hold it against subsequent payments in respect of the installation of the lift. Mr. AU did so retain this money, opening a savings account in the name of "Dao Heng Bank Ltd., Loans Department, on behalf of Mr. LAI Yung-kwong of Yat Tung Investment Co. Ltd." Subsequently Mr. AU effected payment from this account to the Ryoden Electrical Engineering Co. Ltd. of $27,500 in respect of part payment for the installation of a lift.

54. I have already observed that Mr. LAI claims to have written a letter of the 9th January 1969 to the bank (A15) in which, inter alia, he requested the bank to permit him to buy the 2nd, 3rd and 4th floors of the premises, effecting payment over a period of 10 years. Mr. AU said in evidence that there is no record in the bank that such a letter was ever received and that the first time he became aware of the allegation was when he saw a copy of this letter at Messrs. Patrick Poon's office during the preparation of this case. It was true that in January 1969 Mr. LAI had verbally made such a proposition to him, requesting that the bank release those three floors to Mr. LAI lending him the necessary money which would be repaid over a period of 10 years. Mr. AU considered the request very unreasonable as calculated to extinguish the bank's security to the extent of three floors of the building and refused Mr. LAI verbally on his own responsibility.

55. Mr. AU denied that he was acting as a mere conduit pipe for the bank when he lent the $88,000 to Mr. LAI for the purpose of paying the deposit and denied also that anybody called TUNG was at the auction or that a person of that name was a professional bidder for the bank at auction sales.

56. The Auctioneer who conducted the auction on the 13th of May, 1968 gave evidence and said that there were two persons bidding, and that in all thirteen bids were made. He had no written record of the bids but from memory specified the sequence of the bidding and the actual amount of each bid. Since that time he had conducted some fifteen auctions of landed property and approximately two every month of chattels. I hope that I am not doing the auctioneer an injustice when I say that such total recall at an interval of more than two and a half years during which period he had conducted another fifteen auctions of land and property, seems to me improbable, but however that may be I do not think that the evidence of the auctioneer advances the case one way or the other.

57. Mr. Patrick POON was present at the auction but, sitting at the front of the room, was unable to see the bidders behind him, nor could he recall the number of bids made. Mr. POON said that he did not know whether or not the sale of the property to Mr. LAI was a collusive sale and that the conveyancing instructions to him would have taken the same form whether or not collusion existed between Mr. LAI and the bank. However, he was not concerned in any arrangement with the bank to "do Mr. LAI down". Mr. POON was insistent that Mr. LAI gave him instructions to pay $91,388.88 to Mr. AU, and that when he signed the authorisation to that effect (Exh. M) Mr. LAI was well aware of what he was signing. Had this not been so, Mr. POON added, Mr. LAI would have queried the amount of the cheque which he received representing the eventual balance due to him on completion of the building mortgage.

58. Mr. LO Hing-sheung, a clerk with Messr. Yung, Yu, Yuen, solicitors, testified that he drew up Exh. O, the guarantee and undertaking signed by Mr. LAI, and that he explained it including the proposed advance of $160,000 to Mr. LAI asking him if he was clear about the matter. The guarantee was not drawn up by Mr. AU, and Mr. YUNG Kwok-yu, solicitor in whose presence Mr. LAI signed the guarantee, had repeatedly asked Mr. LAI whether he understood it. This witness was not shaken in cross-examination, and Mr. YUNG who gave confirmatory evidence as to the circumstances under which Mr. LAI signed the guarantee and undertaking, was not cross-examined on that aspect of his evidence.

59. Mr. TAM Sang-kin, a conveyancing clerk with Patrick Poon & Co., testified that he explained the Building Mortgage to Mr. LAI, who wanted the term of the deed to be for two years instead of eighteen months as drafted. Mr. TAM said that he obtained agreement by telephone to this alteration from Mr. AU, and that he thereafter interpreted the salient points of both the Assignment and the Building Mortgage to Mr. LAI. Mr. LAI had signed Exh. M, the authorisation to Patrick Poon & Company to pay $91,388.88 to Mr. AU in the witness's presence, and had also signed the promissory note in his presence after it had been explained.

60. Mr. TANG Pang-yuen, the Chief Manager of the bank, described the whole transaction regarding the property in dispute as a normal banking transaction. He denied that the transaction was a sham or that Mr. AU had any authority to enter into any such sham. He had not ratified or purported to ratify an agreement made by Mr. AU with Mr. LAI for a bogus sale of the property and had indeed seen Mr. LAI only once - and that in 1969 after the date of the auction - when he told Mr. LAI to deal with the Loans Department. Mr. TANG explicitly denied any conversation in which he had said to Mr. LAI, "I have taken advantage of you. You can sue me. You have no case." He further denied that he had sent anybody from the bank to bid at the auction. He was prepared to give assistance to a successful bidder at the auction to the extent of one million dollars, but had he been aware that Mr. AU was personally lending money to Mr. LAI for the purpose of paying the deposit on the purchase price for the property he would not have approved such a transaction. He was unaware that Mr. LAI was on the verge of bankruptcy, and had Mr. AU revealed this to him, as he ought to have done, the witness would not have agreed to finance a building contractor in that position.

61. Mr. Douglass John Brassett, a Distribution Engineer with the Hong Kong Electric Company, was called for the plaintiffs and identified a letter which he had written on behalf of the company, and which had been signed by a Mr. Collins, who is no longer in Hong Kong. The letter, which was dated 24th of July, 1968, was addressed to an architect and began:-

The witness said that he had used the term "part owners" in relation to the bank quite deliberately in the light of what he understood following a conversation with Mr. AU.

62. In cross-examination it was put to the witness that Mr. AU had said that since the bank were mortgagees they were in fact the legal owners, to which Mr. Brassett replied that the impression he had at the time was that they were part owners. It could be that Mr. AU had said the bank were the mortgagees, but the witness felt that the impression with which he had been left in July 1968 was that the bank were "part owners".

63. I do not propose to deal in detail with all the aspects of Mr. Swaine's cross-examination of the defence witnesses. The plaintiff having proved a poor witness and an inadequate protagonist in his own cause, such cross-examination largely represented an indefatigable attempt by digging, delving and probing into the documentary exhibits, to discredit the defence and assert the allegedly bogus nature of the sale by auction of the 13th May 1968 and of the subsequent building mortgage entered into between the first plaintiff company and the bank.

64. The cross-examination of the defence witnesses constituted a very thorough fishing expedition on the part of counsel for the plaintiff who, whenever he found himself in waters for which he lacked the appropriate tackle, induced the defence witnesses to lend it to him. This they did very willingly by producing, at Mr. Swaine's request, Mr. AU's bank statements, all available documents regarding Mr. AU's overdraft facilities with the bank and certain internal documents of the bank.

65. Every apparent discrepancy discovered by minute scrutiny of the numerous documentary exhibits was made the object of a cast but the catch was small indeed. Thus was queried the fact that the building mortgage was dated 27th May 1968 whereas the deed of assignment of the property by the bank to the first plaintiff company was dated 23rd May 1968. Mr. Patrick POON solicitor, who had acted for both parties in these transactions explained that the mortgage was not signed on behalf of the bank until the 27th whereupon the deed was so dated and described this as quite normal conveyancing practice. The mortgage deed was further queried as reciting that the one million dollars to be advanced thereunder was for the purpose of "completing" the building whereas in fact $880,000 thereof represented the purchase price of the incomplete building. Mr. POON described this form of recital as usual in a building mortgage even where the greater part of the sum to be advanced represents the purchase price of the property. Whilst the recital is undoubtedly loose and inaccurate, I can perceive nothing sinister in it nor does it appear to me to add any weight to the plaintiffs' contention that the document together with the deed of assignment, was a sham. Exh. X¹, the application to the bank for the loan of $1,000,000 also describes the loan as to be used for the "completion" of the building and whilst that statement is substantially inaccurate, I cannot attribute to it the significance which Mr. Swaine invites. That largely incorrect description of the purpose of the loan does not go any distance to assist the plaintiff to put upon its feet his assertion that the whole transaction was a sham. Another document probed was Exh. A9 the printed particulars and conditions of the sale at auction of the 13th May 1968; Mr. Swaine was concerned to know why the property was not therein expressed to be sold subject to the two agreements previously entered into by the former owners of the sale of the ground and 14th floors respectively. Mr. POON's explanation was that this was unnecessary because the mortgage by the former owners in favour of the bank was registered prior to the registration of those agreements and took priority over them so that any purchaser from the bank would acquire the property free from any obligation under such agreements.

66. The lack of any architect's certificate before payment was made of the later instalments under the building mortgage, the bank's motive in having the property sold by auction instead of foreclosing upon it, Mr. AU's failure to charge interest upon the $88,000 which he lent to Mr. LAI to enable him to pay the deposit upon the purchase price of the property, Mr. AU's choice of his current account rather than his overdraft account as the source of this $88,000, the acceptance by Mr. Patrick POON of Mr. AU's personal cheque in payment of the deposit of $88,000 instead of, as stipulated in the particulars and conditions of sale either cash or a banker's order, the willingness of the bank to advance $1,150,000 to a company having an authorised capital of only $20,000 (explained by the fact that the loan was not a credit loan but a loan upon the security of a building estimated to be worth $1,600,000 when completed), were amongst other matters the subject of cross-examination by Mr. Swaine and were all either completely or substantially satisfactorily explained.

67. If the attempt to establish the plaintiff's case by attacking the defence witnesses and their documents failed, it was not for want of industry on Mr. Swaine's part but in my view fail it did. The onus of proof - and by the very nature of the allegations made it is a heavy onus - is upon the plaintiff and is not to be discharged in a case of this nature by a rearguard action however valiantly fought. The plaintiff himself never really put his own case upon its feet despite the fact that the sheer boldness of his assertions initially lent to them a certain superticial credibility.

68. Despite the sometimes unsatisfactory mechanics of the transactions between the plaintiff companies and the bank and some inaccurate book-keeping by the bank, uncovered by Mr. Swaine in the course of his very searching cross-examination of defence witnesses, as well as certain other matters to some of which I shall refer, Mr. LAI is far from showing that the assignment and mortgage were sham transactions.

69. On the contrary the evidence shows him to be a man who, as Mr. Gittins aptly put it, labours under an obsession in regard to these premises. Certainly his conduct in the pursuit of his claim (which is essentially to recover that proportion of his building costs which he alleges rightly or wrongly never to have been paid) has been extravagant. He has accused two solicitors, alleging that Mr. Patrick POON conspired with the bank to cheat him and that Mr. YUNG Kwok-yu had deliberately misled him as to the contents of the Guarantee (Exh. 0) before asking him to sign it. He has charged his own solicitors with failure to carry out his instructions to reply to letters addressed to them by Patrick Poon & Co. (Exhs. A26 and A27) on the 21st August and 10th October, 1969 respectively and of failing to correct, on his instruction, certain mistakes appearing in their letter of 4th July 1969 to Patrick Poon & Co. (Exh. A25). He has also accused Mr. AU of deceiving him in regard to the contents of the guarantee (Exh. "0"). Despite the fact that contends that he is not and never has been the true owner of the premises he continues to occupy, through the medium of the two plaintiff companies, three floors thereof and has nailed up the entrances to the other floors and put up notices denying admission to all and sundry.

70. His allegations in regard to Mr. POON and Mr. YUNG were not pursued by his counsel and were refuted by the evidence of those gentlemen themselves and that of clerks in the employment of the respective firms of which they are members. His assertion that Mr. AU misled him as to the terms of the Guarantee (Exh. "0") were likewise demolished by the evidence of the clerk who drafted the document and explained it to him and by that of Mr. YUNG. His charges against his own solicitors remained uncontradicted but significantly nobody from that firm came into the witness box to support Mr. LAI's charges and agree that from oversight or some other cause, their client's instructions had indeed not been carried out.

71. All these matters together with Mr. LAI's assertion, unsupported by any evidence, that the purchaser of the property at the second forced sale by auction on the 26th November 1969, is also only the nominal owner of the property whilst the bank remains the true owner, leave him devoid of credibility as to his main contention which is the very bold one that the bank conspired with him to buy in the property at auction for its own account but in the name of the first plaintiff company. How the bank could be certain of obtaining the property at an advertised public auction for precisely the prearranged sum of $880,000 was never explained.

72. There was no corroboration of Mr. LAI's story the evidence of Mr. Brassett, of the Hong Kong Electrical Company being too tenuous to carry any weight.

73. Another matter which goes to the credit of Mr. LAI is his palpable inflation of his monetary claim. Even his counsel who strove so assiduously on his behalf was obliged to state frankly in his closing address that he could not support the full quantum of the claim. In particular Mr. LAI claims to have retained all his workmen between February and July 1967 a period during which all work had stopped on the site as a result of the former owners being in arrear with the payment of construction costs. Quite apart from any obligation to mitigate damages that claim, together with Mr. LAI's assertion that during this period he disbursed more than $70,000 in paying wages to workmen with no work to do and in compensating subconstractors, must be regarded with considerable scepticism the more so since no receipts or other documentary evidence was produced to support it and Mr. LAI refused to ask his bank for copies of his bank statements which he said he had lost.

74. Yet another factor militating against the contention that the assignment and building mortgage represented a sham transaction is the history of District Court action 1494 of 1969. In that action the first plaintiff company was sued for $4,650 in respect of fire equipment installed in the premises and judgment was obtained for this amount. It is Mr. LAI's story that his then solicitors (not the solicitors now acting for him) advised him that he had no defence to the action - and this despite the fact that he had disclosed to them that he was a mere trustee for the bank which was the real owner of the property. Had that disclosure genuinely been made it is highly improbable that the advice given would have been that there was no defence to the action and much more probable that Mr. LAI would have been told that he had a defence based upon his capacity as an agent or nominee or that he could bring in the bank as a third party to the action. No witness was called from this firm of solicitors to corroborate Mr. LAI's evidence of having instructed that he was only the nominal and the bank the true owner of the premises. There must be a strong inference that no such instructions were ever given and that at that time Mr. LAI knew full well that he was both the legal and the beneficial owner of the property and had not yet mentally formulated his present claim that the sale to him was a sham.

75. Mr. Swaine placed great emphasis upon the fact that Mr. LAI put up none of the money either for the purchase-price of the incomplete building or for its completion whereas the bank was prepared to advance him $1,150,000 upon the security of property which had been knocked down at auction for $880,000. I found nothing surprising in this latter fact for the bank was ensuring, for a total advance of $1,150,000 upon which it was to receive interest, the completion of a building which would then be worth, and offer it a security of, $1,600,000. In those circumstances it was quite unnecessary for the bank to call upon Mr. LAI, who was known to Mr. AU to be financially pressed, to put up any money. Moreover when the building had been completed to the stage contemplated by the second plaintiff company's building contract with the former owners, certain work not included in that contract remained to be performed, notably the electric wiring and the connection of the electrical supply. It is to be observed that it was Mr. LAI and not the bank (which, he says, is the true owner of the building) who paid for this and his explanation in evidence that Mr. AU asked him to do so for the time being and on behalf of the bank, appears unlikely.

76. All this is not to say that the bank's case is without its weaknesses. Thus the form of exhibit HH³, an internal document of the bank recording the loan by the bank to Mr. AU of the $88,000 which Mr. AU subsequently lent to Mr. LAI for the purpose of paying the deposit upon the purchase of the property was never completely satisfactorily explained. Again Mr. AU was somewhat vague as to precisely when the amounts of the various instalments under the building mortgage and the contingencies upon which they were to be paid, were discussed between him and Mr. LAI. Moreover Mr. LAI's failure to sell any of the units in the property except the two previously contracted to be sold by the former owners, raises the suggestion that this is peculiar if he or his first plaintiff company was in fact the owner. On the other hand it is the fact that Mr. LAI put out a brochure designed for would-be purchasers and that brochure was in the name of the first plaintiff company. Mr. LAI's request to buy three floors of the property, admitted by Mr. AU to have been made verbally to him, also accords ill with the action of an owner of the property. And it is a matter for comment that the brother of the Chief Manager of the bank was not called to deny his offer to settle Mr. LAI's pecuniary claim at the figure of $350,000.

77. When all these matters are taken into consideration however, it remains the fact that such of the explanations of the bank as may not be considered entirely satisfactory are quite insufficient to offset the inadequacy of the plaintiffs' case. The onus of proving their claims on the balance of probabilities is upon them and they have failed to discharge it. Mr. LAI was a very inadequate witness and the witnesses for the bank were far more credible.

78. I find that there was no agreement between the bank on the one hand and either of the plaintiff companies or Mr. LAI on the other that the property should be bought by anybody as trustee for the bank; that the deed of assignment of the property from the bank to the first plaintiff company dated 23rd May 1968 was a genuine deed of assignment; that the building mortgage executed by the first plaintiff company in favour of the bank and dated 27th May 1968 was a genuine building mortgage; that there was no undertaking by the bank to pay all the outstanding construction costs due as at the date of the auction to the second plaintiff company and no undertaking to pay future construction costs and other incidental charges.

79. It follows that the declarations sought must be refused and the plaintiffs' pecuniary claim dismissed. All these claims are dismissed with costs.

80. I have already set out the details of the bank's counterclaim. Its pecuniary claim against the first plaintiff company succeeds but the judgment will not carry interest as claimed since the effect would be to award interest upon interest because the second sale by auction, that of the 26th November 1969, yielded the bank $1,040,000 which was sufficient to extinguish the first plaintiff company's principal indebtedness and also extinguished the greater part of its indebtedness in respect of interest. The remaining indebtedness represents interest upon which I cannot award further interest. (See Supreme Court Ordinance s.30A (2)(a))

81. The bank is also entitled as against both plaintiff companies to the declaration as to indemnity sought in para.20(b) of its Defence and Counterclaim together with the costs of the counterclaim.

Representation:

Swaine (Lau, Chan & Ko) for the Plaintiffs.

Gittins, Q.C. & C. Ching (Patrick Poon & Co.) for the Defendant.

Judgment handed down.

Please refer to CACV23/1971 for the relevant appeal(s) to the Court of Appeal.