Belgian Bank v. Sino Global International Ltd and Others
Read the full judgment text of HCMP 4950/2001 on BabelCite. This High Court CFI judgment was delivered on 12 September 2005.
1. These are consolidated actions. The primary claim under number HCMP 4950/2001 is by the Belgian Bank, hitherto known as Fortis Bank Asia HK, to recover moneys due and payable under mortgages to the bank from each of two companies called Wall International Investments Limited (Wall International, the 2 nd defendant) and Great Honour Investments Limited (Great Honour, the 3 rd defendant), and for possession of the properties secured by the mortgages. The mortgages were taken by the bank as se
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HCMP 4950/2001 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE MISCELLANEOUS PROCEEDINGS NO. 4950 OF 2001 ____________ BETWEEN
____________ HCA 298/2002 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE ACTION NO. 298 OF 2002 ____________ BETWEEN
(By Original Action) AND BETWEEN
(By Counterclaim) ____________ Before: Deputy High Court Judge Gill in Court Dates of Hearing: 18-22, 25 July, 24-26, 29-31 August 2005 Date of Judgment: 12 September 2005 ______________ J U D G M E N T ______________ Introduction 1.These are consolidated actions. The primary claim under number HCMP 4950/2001 is by the Belgian Bank, hitherto known as Fortis Bank Asia HK, to recover moneys due and payable under mortgages to the bank from each of two companies called Wall International Investments Limited (Wall International, the 2nd defendant) and Great Honour Investments Limited (Great Honour, the 3rd defendant), and for possession of the properties secured by the mortgages. The mortgages were taken by the bank as security for facilities made available to a customer called Sino Global International Limited (Sino Global, the 1st defendant), whose default precipitated the suit. In fact the bank already has default judgment against Sino Global, but that remains wholly unsatisfied. 2.There are additional claims, counterclaims and indemnities which are being sought under this action and the separate but now consolidated action number HCA 298/2002 which I shall come to in due course. History 3.Wang Yan is a well-to-do businessman whose principal home and commercial base is in Beijing. He is married with a family. He is known as Dr Wang by reason of the doctorate in Business Administration he is studying to achieve at Tsing Hua University. At the material time and to date he has been the CEO of a multi-national group of companies under the name Wall International Group, which has business connections and corporate interests in the US and Hong Kong. The Group’s primary activity is to manufacture and trade in telecommunications equipment in the PRC. It also exports to the USA. 4.In March 1999 whilst Dr Wang was engaged on a business trip to Hong Kong he met a young lady called Ko Yin, who is locally resident and permanently living here. Soon afterwards they began what was to become an intimate relationship. In August and December 1999 Dr Wang with very large cash deposits in his name in Hong Kong funded from these resources the purchase of two apartments. One, in Convention Plaza, was to become Ms Ko’s home and his also when he was in Hong Kong. The other as he says was for his parents to live in should they come to live in Hong Kong, which in the event did not come to pass. Title was taken in companies, hitherto shell companies. These are Great Honour and Wall International which were to become the 2nd and 3rd defendants in the primary action. Dr Wang allocated to himself 90% of the capital in each case, and the remaining 10% he gifted to Ms Ko. They were both appointed as directors. At or about this time a third company called Wall Group Limited came to be acquired and was similarly restructured, but it did not invest in real estate. 5.Ms Ko was put in charge of completing the two purchases. The respective Boards passed resolutions giving her the appropriate authority, including appointing her as sole signatory to the affixing of the common seals. Ms Ko instructed a firm of solicitors called Li Wong & Lam (LWL) to complete the appropriate resolutions and otherwise undertake the conveyancing. Those tasks were shared by solicitors called Jimmie Wong, then a principal of the firm, and Clifton Wong, then an assistant solicitor. 6.In material dispute and central to the outcome of these proceedings is whether at the time Ms Ko was given additional authority to commit Great Honour and Wall International; in particular, to mortgage the properties each had taken title to. 7.What is not disputed is that on 25 December 1999 Ms Ko and Dr Wang as directors of Great Honour and Wall International signed directors’ resolutions purporting to vest in Ms Ko the sole authority she now claims. 8.I copy these below verbatim:
The Great Honour resolution was backdated to the date of completion of the purchase by it of Convention Plaza. That of Wall International was forward dated to the completion date of the Elizabeth House purchase. 9.At or about the time of the purchases Ms Ko had a half share of Sino Global. The other shareholder was called Sino Century Limited (Sino Century) whose majority shareholder is called Wang Jian Sung (J S Wang). He is not related or otherwise connected to Dr Wang, and Dr Wang does not have nor has he had any registered interest or held office in Sino Global. Ms Ko said that Sino Global came into being when she and J S Wang, who is chairman of a listed company and otherwise has a stake in many enterprises, were preparing to trade in the PRC using Sino Global as the prospective vehicle. But in fact by the end of 1999 and thereafter there was no activity, and the company had no assets. Some time before May 2000 Ms Ko assigned 20% of her shares in Sino Global to Sino Century. Then in May 2000 the Belgian Bank granted overdraft and letter of credit facilities in favour of Sino Global in the total sum of $9m. Security for these advances included mortgages from Great Honour and Wall International over their properties in Convention Plaza and Elizabeth House and a personal guarantee from Ms Ko. She signed the guarantee and was the sole signatory to the affixing of the companies’ common seals to the mortgages. That was in accordance with the Articles of Association of both companies and the resolutions originally prepared for the purchase of the Convention Plaza and Elizabeth House apartments. But whether she was in fact authorized to commit the companies to the mortgages is hotly disputed. The solicitors LWL were again engaged to handle the conveyancing, representing the bank as well as the mortgagors. 10.Sino Global was permitted to utilize the credit facilities until April 2001. It was then that Dr Wang reported to the bank that he had just learned of the mortgaging of the two properties, protesting that this had been without his authority and knowledge, and thus without the authority and knowledge of the companies. The bank reacted by calling in the debt and when nothing was forthcoming sued the principal debtor Sino Global and the two mortgagors Great Honour and Wall International as 1st, 2nd and 3rd defendants in the primary proceedings HCMP 4950/2001. Its judgment against Sino Global entered by default on 25 August 2003 is for $1,217,321.94 and US$596,347.55. In a separate action it also has judgment for these amounts against Ms Ko under her personal guarantee. That too is unsatisfied. 11.Great Honour and Wall International dispute liability upon the grounds that neither had authorized the commitments entered into on their behalf by Ms Ko, and counterclaim for declarations that the mortgages are null and void. By notice against their co-defendant they seek indemnity from Sino Global as the principal debtor. 12.The events and revelations of April 2001 resulted in a confrontation between Dr Wang and Ms Ko; she alleged that he assaulted her and she filed a complaint and moved out of the Convention Plaza apartment. That signalled the end of their relationship. The police investigated the complaint but laid no charges. Both parties gave statements and subsequently filed witness statements in the civil proceedings that emerged. 13.Dr Wang’s account was that Ms Ko by subterfuge tricked him into signing an authorization which on the face of it gave her the right to mortgage the two apartments and then she did so without telling him. Had he known of her intentions before the event he would most assuredly not have permitted it. In fact at first he alleged that resolutions carrying his signature purporting to authorize her to mortgage the properties were forgeries. He went to the police about that. Subsequently he dropped that allegation, substituting for that the claim that he had signed without being told and not realizing that the resolutions empowered the mortgaging. 14.Ms Ko’s account was that the borrowing from the Belgian Bank was part of a scheme that Dr Wang not only knew about but devised, amongst a series of commercial activities in which she was to play a central role. The principal one was that it was Dr Wang’s intention to achieve a listing on one or other of Hong Kong’s exchanges for the Wall Group. Ms Ko was asked to assist for which she would be paid by an allocation of 10% of the shares in the listed company. If listing was not achieved she would be compensated by payment of US$1m. On the strength of this promise she resigned from her job which was as an insurance sales representative to devote her time to helping Dr Wang. However, whilst some steps were taken towards a listing, it was decided on advice that the timing was not right and in the event it did not go ahead. The second project was to provide the vehicle which Dr Wang could use to purchase shares and otherwise trade in shares without personal exposure. She proposed that Sino Global be used; at the time it was a dormant company. It was Dr Wang’s idea that she transfer 20% of her existing holding (that is 10% of the capital) to her co-shareholder Sino Century, which might encourage J S Wang’s agreeing to the idea. And in fact, on her account, he did agree. 15.So it was that the raising of capital on the security of a personal covenant from Sino Global, the two mortgages and her guarantee was undertaken on Dr Wang’s instructions, and she committed herself to the guarantee on his promise to indemnify her for any loss. But that is not going to happen, at least not voluntarily; she now is a judgment debtor for the amount outstanding to the bank resulting from Sino Global’s default. 16.The second action brought under number HCA 298/2002 began life in January 2002 at the behest of Dr Wang as a derivative action. Now it has been taken over by Great Honour and Wall International as plaintiffs against Ms Ko, Sino Global and LWL as 1st, 4th and 5th defendants, in which they seek to recover such loss they are up for in the action by the Belgian Bank. Ms Ko is sued in breach of her fiduciary duty owed to each plaintiff as a director for having committed them to the mortgages thereby putting them at risk of loss. Against Sino Global the plaintiffs seek an indemnity. LWL as solicitors in the transactions are joined and sued in negligence and breach of duty owed their clients. 17.Ms Ko for her part counterclaims against Dr Wang for the US$1m fee that she had earned for pursuing the listing, a declaration that she holds the shares in Sino Global in trust for Dr Wang, and against Dr Wang or the two companies an indemnity for the amount she is liable to the Belgian Bank for in the judgment entered against her. The Issues 18.Central to the matters to be determined in HCMP 4950 of 2001 is whether Ms Ko had the actual or ostensible authority of Great Honour and Wall International to commit them to the mortgages to secure the facilities the Belgian Bank provided Sino Global. It is the bank’s position that the resolutions speak for themselves; furthermore, Ms Ko’s account that it was Dr Wang’s orchestration that brought about the commitment. Dr Wang’s counter is that he signed the resolutions for another reason; namely, to give Ms Ko the authority to complete the purchases. The raising of money for Sino Global was a frolic of Ms Ko in which he played no part and which he had not authorized. Furthermore, Ms Ko’s personal interest in the borrower Sino Global would or ought to have been known by the bank either directly or through LWL who acted for all parties. With the bank thus having actual or ostensible knowledge of her breach of fiduciary duty owed the companies the mortgages were rendered unenforceable. LWL’s knowledge and failure to alert its corporate clients of Ms Ko’s special interest put it in breach of its duty to its clients, and liable for their loss in the event that the mortgages are found enforceable. 19.Subsidiary issues are various consequential indemnities, Ms Ko’s claim for indemnity from her judgment debt and further reward. 20.The accounts of the principal protagonists Dr Wang and Ms Ko are materially at odds; I come to deal with them next. The Evidence 21.Dr Wang said that Ms Ko held the formal documents and common seals of Great Honour and Wall international once they were restructured for convenience because of her permanent presence in Hong Kong. It was for this reason that he was content to authorize her by resolution to have sole signing rights for completion of the purchases. On the all important issue of the signing of the resolutions, said to be on Christmas day 1999, he stated in a witness statement he adopted as his evidence:
22.I have to say that I pay lip service only to Dr Wang’s professed lack of competency in English. He cannot be head of a global organization with a significant presence in Hong Kong and the US without fluency and the resolutions are hardly complex in the reading. He says he read them, albeit briefly; that would have been sufficient to show the extent of Ms Ko’s power he was committing the companies to. 23.Dr Wang went on to say that in April 2001 he was intending to raise money on the two properties and to that end approached Citibank for assistance. He was told to provide the title deeds, and only then came to learn that they were already committed as collateral security for the advance to Sino Global. He tackled Ms Ko about this; she confessed her role, and to using the resolutions originally signed, apologized and promised to repay all the money that had been advanced. He reiterated that he had played no part in the transaction not having known about it; certainly he did not, contrary to Ms Ko’s case, direct it or authorize it. He did not have nor has he ever had any connection with Sino Global, the principal borrower. Indeed, he had not heard of Sino Global until its sudden emergence into his life in April 2001. 24.He denied having committed to an arrangement whereby if Ms Ko assisted a prospective listing for a holding company of the Wall Group he would reward her with a significant allocation of shares, or that if the listing were not to proceed she would be paid US$1m as remuneration. In fact he denied any discussion in that regard. 25.Ms Ko’s account is materially different. She said she gave up her fulltime occupation as an insurance sales agent when Dr Wang asked her to look after his interests in Hong Kong; in particular, to help with a public listing, prospectively using Wall Group Limited as the holding company. Far from not knowing about Sino Global, it was Dr Wang who proposed that it be utilized for trading in shares, for a specific reason; namely, that he was expecting to be appointed to a senior position in a listed company called Chengdu Telecom which would restrict his being able to buy and sell Chengdu Telecom shares. He wanted to use Sino Global for that purpose. She was to encourage J S Wang to agree to this course with a ‘gift’ of 10% of its capital; that thereafter she would be deemed to hold the remaining 40% in trust for Dr Wang. Meanwhile she had all along sole signing rights on the account of Sino Global; that was maintained. 26.The terms of the borrowing by Sino Global documented in the Belgian Bank as being for trading purposes, Ms Ko said that Dr Wang instructed that moneys be borrowed in part for the purpose of providing funds to Great Honour and Wall International to meet their monthly commitments on Convention Plaza and Elizabeth House. She agreed to enter into a personal guarantee only because Dr Wang directed it, and promised to indemnify her against any loss. 27.In the event, as Dr Wang told her, he was not appointed to hold office in Chengdu Telecom. Thus she was directed to use Wall International to trade in shares and he invested funds in Wall International for the purpose. 28.In short, all that she did she did at Dr Wang’s direction; in particular, mortgaging the two properties, restructuring Sino Global and generally trading in shares, and committing herself to a personal guarantee because he had promised her US$1m and that he would indemnify her against any loss. His failure to do either was a breach of that commitment. 29.Other evidence pertinent to the issues was adduced by the solicitors Jimmie Wong and Clifton Wong. From them it was established that the directors’ resolutions of Great Honour and Wall International reproduced above came into being in December 1999 for the purpose of verifying the execution by the two companies of the assignments to purchase, by Ms Ko alone witnessing the affixing of the common seal. Originally, the forms of the resolutions only went as far as authorizing execution by the company going to the purchase in each case. The inclusion of the clauses giving Ko Yin the power to commit the companies to mortgage and otherwise deal with the properties was a late addition ordered by Ms Ko, from whom all along they had taken instructions. It is a small step only to surmise why she ordered the expanded version. 30.It was Clifton Wong who had charge of the files opened to deal with the mortgages. Instructions came from the Belgian Bank in May 2000. The borrower was named as Sino Global. Sino Global’s current records were searched to establish details including who should witness the common seal. Mr Wong said that to ensure the two mortgagor companies had authorized the commitment to mortgage he instructed that there be resolutions drafted to verify this, for execution by both the shareholders and directors. But when Ms Ko attended to complete the signing, she said that Dr Wang was not in Hong Kong and was thus not available to sign either as shareholder or director. She said she still had possession of the directors’ resolutions which purported to give her sole signing rights, and queried whether these would suffice. Clifton Wong studied the same and formed the view that they would, and execution of the mortgages proceeded on the basis of those authorities. 31.That said, Clifton Wong accepted in cross-examination by Mr Leong SC for Dr Wang, Great Honour and Wall International that he knew, from the company search if not from Ms Ko herself, that she had a 40% interest in Sino Global and was a director, whilst Dr Wang, the majority shareholder of Great Honour and Wall International had no interest in Sino Global. There followed a telling exchange which I reproduce from my notes:
32.He went on to confirm that the ‘usual practice’ he spoke of was departed from because the resolutions Ms Ko produced provided, in his view, sufficient authority. He was as he said aware that the mortgage was to secure indebtedness of a third party rather than in each case the mortgagors. He conceded that with Dr Wang out of Hong Kong, a faxed signature from him would have been acceptable. And there was this further exchange:
Findings of Fact 33.There is so much of Ms Ko’s evidence that is patently out of touch with reality that it is difficult to know where to begin. Her account that Sino Global was targeted by Dr Wang as being the vehicle to be utilized for irregular share trading makes little sense; why would Dr Wang propose a company whose majority shareholder was a stranger? There was no corroboration or justification for the transfer of some of her shares to Sino Century, nor for her bare assertion that the remainder she thenceforth held for Dr Wang. Where was the assignment, the declaration of trust or at least some diary note of this significant transaction, if it took place? And why would Dr Wang want to use Sino Global, in which she (and if she was to be believed, he) held a minority interest, to borrow up to $9m? Her evidence that money was needed to meet the outgoings on the Convention Plaza and Elizabeth House apartments was a nonsense, given the bank’s instructions, which were to secure advances only to a third party for the purposes of trading, and given the input by Dr Wang into Wall international, and his cash wealth in Hong Kong. If Dr Wang had not only known but had directed the loan and the securities to be proffered, why would he make a fuss as if he was not aware, at the bank, in April 2001? Making a fuss does not cancel a mortgage. 34.Overall, Ms Ko’s account of events was at times convoluted, inconsistent and bizarre; it follows that on all pertinent issues I cannot believe her. Thus, as I find, Dr Wang at no time had any interest in Sino Global, did not specifically authorize the security and did not know of it until his chance encounter a year later. This was, as I am satisfied, a frolic of Ms Ko. She had sole signing rights of the account of Sino Global. Having convinced Clifton Wong that she had sole rights to commit Great Honour and Wall International, she had by this means access to $9m of credit from the Belgian Bank, and made use of more than $5m of that before the plug was pulled. 35.As to the resolutions that Clifton Wong allowed the bank to rely on as authority from Great Honour and Wall International to commit to the mortgages; I have Dr Wang’s evidence that he was tricked into signing these; that he understood he was committing the companies to the purchases and not the future dealing that was contemplated. He may well have been tricked; that Ms Ko directed the late inclusion of the paragraphs 4 is a compelling insight into her future intentions. But I do not accept, as I have earlier intimated, that Dr Wang would have been unable to read or understand what in plain English the resolutions recorded. It was hardly as if the commitment had been buried in the small print using hard to understand jargon. If he chose to sign them without reading them, then he cannot escape the consequences because of that. But were these resolutions adequate to commit the companies to the mortgages that were executed? I come to that next. Ms Ko’s Self-Interest 36.From my findings of fact it follows that by virtue of Ms Ko’s interest in Sino Global, and her right solely to operate its bank account, Ms Ko had a special interest in Sino Global that her co-shareholder and director in Great Honour and Wall International did not enjoy. It is also evident from the bank’s instructions that the accommodation to be made available was solely to Sino Global. It would also have been apparent to Clifton Wong and thus LWL that she had this special interest; indeed he said as much. In legal parlance, LWL had notice of her special interest. LWL acted for the Belgian Bank and thus the bank through such agency also had notice; see Bowstead and Reynolds on Agency, seventeenth edition, 8-207. 37.The bank probably also would have had that notice in its own right; after all, Sino Global was its customer and it would have likely had sufficient detail in its mandate documents to know of Ms Ko’s particular participation. 38.Ms Ko as director of Great Honour and Wall International owed a fiduciary duty to disclose to both her special interest, yet there was no evidence she did; indeed there was a conspicuous and rather obvious election on her part not to do so. Clifton Wong knew of the obligation and the consequences of non-disclosure. Inexplicably, he did not seek to protect the validity of the proposed transaction by insisting that the shareholders’ resolutions (and, for good measure, directors’ resolutions) going to the specific transaction be executed; and a fax transmission would have sufficed. 39.The resolutions that Clifton Wong relied on did not adequately deal with the matter. The authority to Ms Ko, whilst general and far-reaching, did not amount to authorizing a future commitment which on the facts (as I have found) concerned a commitment in which she had an undisclosed special interest. 40.Ms Ko was in breach of her fiduciary duty; LWL knew of that; thus so did the bank. Clifton Wong got it right when he said that in such circumstances the mortgages executed in favour of the bank were and are unenforceable. 41.That deals with the outcome of the primary action HCMP 4950/2001. I come to those matters in HCA 298/2002. Indemnity and/or Damages claimed by Great Honour and Wall International 42.Although my finding that the companies are not liable to the bank rules out the need to seek substantial recompense from Ms Ko, the 1st defendant, and LWL, the 5th defendant, there may be residual claims still on foot such as the balance costs in HCMP 4950/2001 following taxation. It follows from those findings that Ms Ko’s breach of fiduciary duty owed to both renders her liable for such losses that the two companies have or will be sustaining. 43.The claim for indemnity and/or damages against LWL goes to the relationship of solicitor client between the parties. Were LWL negligent in their duty of care owed Great Honour and Wall International? 44.It is apparent from the unchallenged evidence and my resultant finding that Clifton Wong and thus LWL knew of Ms Ko’s special interest and chose not to explore the prospect that the pending transaction might have been unauthorized. He knew what the law was on the point and the consequences; of course he is a qualified lawyer. He had the means available to satisfy himself on the issue of disclosure and absolution; ironically, merely to pursue the ‘usual procedures’ as he described them would have dealt with that. But for some reason he chose not to, and thus put his clients at avoidable risk, for which there is, or may be, residual loss and for which LWL is liable. 45.The claim for indemnity against Sino Global falls away as a consequence of my findings in HCMP 4950/2001. The Counterclaims by Ms Ko 46.I have already made adverse findings against her on the issue of credibility. Her claim for recompense and reward for US$1m as ‘promised’ is a bare assertion not backed by any corroboration whatsoever. Furthermore, it is quite apparent that she had no experience, expertise or qualification in the field of IPOs or all other essential prerequisites to a public listing. The burden was on her to prove her case; she did not even get off the ground. Similarly, she has failed to establish an entitlement to an indemnity from any of Great Honour, Wall International or Dr Wang, and she has failed to establish that she was holding her shares in Sino Global in trust for Dr Wang. The Result 47.In respect of HCMP 4950/2001 – the claims by the plaintiff are dismissed. 48.The declaration sought in the counterclaim (appropriately amended in light of the ruling that the mortgages are unenforceable) are allowed. Costs on the claim and counterclaim are to the 2nd and 3rd defendants taxed if not agreed. (The costs order is nisi) 49.In respect of HCA 298/2002 – the claims for indemnity, loss and damages to be assessed as against the 1st and 5th defendants are allowed. Liberty to apply. The claim against the 4th defendant is dismissed. Costs on the claims are to the plaintiffs against the 1st and 5th defendants taxed if not agreed. (The costs order is nisi) 50.The counterclaim by the 1st defendant is dismissed. Costs on the counterclaim of the plaintiffs and the 3rd defendant (by counterclaim) are to be met by the 1st defendant taxed if not agreed. (The costs order is nisi)
Mr C W Ling instructed by Messrs Wilkinson and Grist for the plaintiff in HCMP 4950/2001 Mr A Leong SC leading Mr B Man instructed by Messrs Anthony Siu & Co., for D2 and D3 in HCMP 4950/2001 and the plaintiffs and D3 in HCA 298/2002 Ms C Fung instructed by Messrs Alan Ho & Co for D1 and D4 in HCA 298/2002 Mr K Ng instructed by Messrs Deacons for D5 in HCA 298/2002 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Cases cited in this judgment
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Further hearings and rulings under HCMP 4950/2001