Dah Sing Bank Ltd v. Sing Hai Handbags Manufactory Ltd and Others
Read the full judgment text of HCMP 1250/2003 on BabelCite. This High Court CFI judgment.
1. The Plaintiff, a bank, who I will hereafter refer to as the bank, is seeking to enforce certain mortgages executed by the 4 th , 5 th and 6 th Defendants. The 1 st , 2 nd and 3 rd Defendants, not having entered an appearance, have had default judgments entered against them. The contesting Defendants, if I can so describe them, defend the case on the basis that the mortgages should be set aside by virtue of undue influence, misrepresentation and unconscionable conduct.
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HCMP 1250/2003 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE MISCELLANEOUS PROCEEDINGS NO. 1250 OF 2003 ____________
____________ BETWEEN
____________ Before: Deputy High Court Judge Carlson in Court Dates of Hearing: 10-12, 15 and 17 January 2007 Date of Judgment (Handed Down): 29 March 2007 _______________ J U D G M E N T _______________ Introduction 1.The Plaintiff, a bank, who I will hereafter refer to as the bank, is seeking to enforce certain mortgages executed by the 4th, 5th and 6th Defendants. The 1st, 2nd and 3rd Defendants, not having entered an appearance, have had default judgments entered against them. The contesting Defendants, if I can so describe them, defend the case on the basis that the mortgages should be set aside by virtue of undue influence, misrepresentation and unconscionable conduct. 2.In explaining the background it is helpful to start by setting out the relationship between the Defendants, which is central to the defences that have been raised. The prime-mover in this matter is the 3rd Defendant. He is the husband of the 6th Defendant who he married in 1979. I will refer to them as the husband and the wife respectively. The 4th Defendant is his mother-in-law, which is what I will refer to her as. At the time when these matters took place she was 72 years old. She is now 78. She was born of simple country people in Mainland China and received no education. She is illiterate. The 5th Defendant is the wife’s brother and the husband’s brother-in-law which is what I will call him. All of them are ordinary working people of no great sophistication. 3.In 1977, the husband went into business on his own account manufacturing handbags. He did so through the 2nd Defendant, a sole proprietorship or firm which he registered. In 1987, the husband incorporated the 1st Defendant to take over the business of the 2nd Defendant. It has two shareholders who are also its only directors. The husband owns 90% of the shares and the remainder are held by his brother Wong Hon Lung, who plays no part in this matter. 4.The wife went to work for the husband in 1977, two years before they married. In 1984, he moved the production facility to the Mainland although a warehouse and office were retained in Hong Kong. The wife says that after 1984 she involved herself less in the business. As a result she became unaware of its financial arrangements. She has had three children. The first was born in 1981 and the youngest in 1988. In January 1987, a flat at 44-46, Grampian Road, together with a car parking space, were purchased in the wife’s sole name for $650,000. This flat and the car park are two of the properties to which this action relates and to which I will need to give more detailed consideration presently. 5.The brother-in-law joined the business of the husband in March 1987 being responsible for the Hong Kong warehouse and he remained there until the business failed in about 2002. He prospered in that employment eventually earning a salary that was much in excess of what he had earned in his previous employments. 6.In 1991, the family emigrated to Vancouver to secure their position overseas in the run-up to the handover of Hong Kong in 1997. The wife and children made Canada their permanent home whilst the husband would frequently return to Hong Kong and the Mainland to take care of business. 7.There is no doubt that the husband’s business expanded and prospered. In August 1997, when the wife was in Hong Kong for the summer holiday, the husband asked her to execute a general power of attorney (“POA”) in his favour. This was done on 23 August at his solicitors’ offices at Mongkok. She says that he asked her to do this so that he might be able to rent out the flat and car park at Grampian Road. She agreed to do so only for this limited purpose. Having executed the POA she returned to Canada in September 1997. Whilst it is not precisely clear when the wife returned to live in Hong Kong, it seems to me that this must have been so by late 1999. In the meantime the brother-in-law and the mother-in-law had continuously remained in Hong Kong. The Proceedings 8.In terms of chronology this brings the matter up to the start of when the mortgages that are the subject matter of these proceedings were entered into and to which I must now turn. The proceedings have been brought by Originating Summons dated 20 March 2003. Notwithstanding the factually contentious basis of the case, the issues have been left to be divined from the affirmation evidence, there being no formal pleadings following the issue of the Originating Summons. 9.The bank’s claim relates to six properties. In relation to these three Defendants I am only concerned with four of those properties. Judgment in default has already been obtained in respect of the first two properties at 88, Lei Muk Road, Kwai Chung and Comfort Court, 88-90, Fuk Lo Tsun Road, Kowloon. This being so I need not make further reference to them, these being solely concerned with the first three Defendants, the third being the husband who has taken no part in these proceedings and who, according to the wife, has disappeared leaving her to face the consequences of the remainder of the bank’s proceedings against her, her brother and mother. 10.It is now necessary for me to set out the mortgages that I am required to consider and the properties to which they relate. They are these:
11.It is common ground that a total of $3,536,370.38 plus interest is owing to the bank [C/330]. There is no issue that the mother-in-law and the brother-in-law executed the 3rd Mortgage which relates to the 3rd Property. Secondly, that the wife executed the 4th Mortgage relating to the 4th and 5th Properties and the 5th Mortgage being a 2nd Mortgage on the same properties. The 4th Mortgage was executed on her behalf by the husband using the POA dated 23 August 1997, to which I have already made reference. Lastly, it is accepted that the mother-in-law executed the 6th Mortgage which relates to the 6th Property, which is her home. These matters not being in dispute I am only required to give detailed consideration to the circumstances and manner in which these mortgages were executed by the Defendants and the basis and manner of the provision of the POA by the wife in the husband’s favour. 12.The contest must centre on the allegation, by all three Defendants, contained in their affirmations and witness statements, that these documents were the result of undue influence exercised over them by the husband and/or misrepresentations practised on them by him for which the bank must now suffer the consequences of. There is also an additional defence which they raise to the effect that the mortgages also fall to be set aside because the staff of the bank’s solicitors did not explain to them the terms of the mortgages and because they failed to tell them with sufficient clarity that they could seek independent legal advice before executing the mortgages. 13.Whilst any decision by the court as to whether a plea of undue influence ought to succeed requires a clear understanding of the legal principles which govern the circumstances when undue influence can be relied on, the decision on whether that plea should succeed or fail is essentially based on fact requiring a proper analysis of the evidence called by both sides. The Written Evidence 14.Because of the importance of the evidence I wish to say something about the nature and content of the Defendants’ affirmations and witness statements which form a vital part of their case. As I have already said, and I hope they don’t mind my saying so, all of these Defendants are not persons of any great sophistication or education. They have said so themselves. Nevertheless, to read their affirmations one might think that they were very familiar with the law on undue influence and misrepresentation. Instead of preparing affirmations which reflect their individual versions of what happened and the circumstances in which they decided to execute these mortgages using, within reason, the sort of language that these witnesses would use in the course of their daily lives to provide an account of these events, whoever prepared this evidence on their behalf has produced affirmations and witness statements which give the impression that this evidence has been tailor-made to serve a case of undue influence. It reads as if it has been prepared by somebody with a legal text-book open in front of him, crafting the evidence to what the law says is required to prove a case on undue influence. 15.I will provide some examples. The mother-in-law’s affirmation at A/46F, para. 16:
Page A/46G, para. 20:
Page A/46H, para:
These are just examples of repeated use of such expressions by this lady who, I accept, is illiterate and yet one finds repeated references to “reposing trust and confidence”, being “induced” to sign mortgages and so forth. In the case of the brother-in-law there are equivalent examples. Page A/53H, para. 23:
Page A/53H, para. 24:
16.In the wife’s case, I refer to these examples. Page A/68R, para. 47:
17.What I have just recited are merely examples and indicative of an entirely misguided approach by the draftsman of the affirmations. At best this is the language of pleadings. The expressions used by lawyers can have no place at all in an affirmation or witness statement of a lay person who should provide an affirmation using every day words to express truthfully and accurately what he or she says happened or what he or she feels about any given relevant set of circumstances. 18.What I have been provided is ‘lawyerese’ designed to prove a case — to serve an agenda. This is quite wrong and at the end of the day it does the affirmant, be he the client or a witness called on behalf of a client, a great disservice. Where the affirmant’s are of basic, or in one case of no education, the affirmation becomes completely divorced from the affirmant. It is not his document but that of the draftsman who, armed with a knowledge of what the law requires to be proved, sets out to establish a case through the affirmant by using his language and not that of the witnesses. In an extreme situation, the draftsman may open himself up to a charge that he has put words into the affirmant’s mouth. It becomes a case of the evidence becoming what the person drafting the affirmation wants it to say rather than the true evidence and feelings of the affirmant. 19.I have taken the trouble to make these observations because in the course of the trial, I indicated that given the language of these affirmations I considered that it would be difficult for me to give the affirmations the weight that they were intended to have if their contents were accepted by me. I have re-read them for the purposes of this judgment and I stand by those comments. Fortunately, these Defendants have all given extensive oral evidence, using their own words and language as to these events and of course they have been cross-examined on that evidence as well as on their affirmations. In respect of their oral evidence, I am able to give full weight to what they have said and I must weigh and analyse what they have said and come to a conclusion as to what I accept or reject. In relation to their affirmations and witness statements insofar as they have sought to adopt these as part of their evidence in chief, I place very little weight on them for the reasons that I have given. Their cases must stand or fall very much on their oral evidence and so, in this case, their legal advisors must bear responsibility for that state of affairs. The Material Evidence 20.I now propose to provide a summary of the relevant evidence. The case of each defendant requires separate consideration. It is by no means the situation that their cases stand or fall together. 21.The overall thrust of the defences is that the husband, who was very much the person who operated the business of the 1st and 2nd Defendants kept the internal workings of his business very much to himself so far as his wife, brother-in-law and mother-in-law were concerned. None of them knew anything about its accounts or how well or badly it was doing. What they have all said is that they placed their trust in him. The mother-in-law has told me that he was very good to her and to her daughter and children. He provided for them and that he and her daughter had always taken proper care of her and showed her kindness and consideration. This was very much the basis upon which she placed her trust in him. Provided he and his business prospered then she would be very happy. He would then be in a position to provide well for her daughter and grandchildren and the business would also continue to provide her son (the 5th Defendant) with well paid employment and she would also continue to receive generous kindness and care from him and her daughter. So far as the brother-in-law was concerned he too was well disposed towards the husband who had treated him well as an employee. He had provided him with employment at the warehouse and was paying him, through the 2nd Defendant, in the order of $20,000 a month which was well in excess of what he had previously earned in his employments. He too trusted the husband and wished the business success. If the business prospered he would continue to have well-paid employment. If the business prospered so did he. In the wife’s case she too has spoken of the trust placed in her husband. He ran the business and she took care of the family. The family fortune was dependent on the business. She trusted what he said and was prepared to lend her name to the mortgages to secure further cash to enable the company to continue trading and hopefully continue to do well. 22.As will emerge when I come to the law, the burden is on the party asserting undue influence to establish its case. That burden is engaged after the party seeking to enforce the mortgage, the bank in this case, has established the basic elements of its claim. I am satisfied that, in this case, the bank has carried that burden and now that all the evidence is in, Mr Mak who appears for all of these defendants, accepts that this is so and that as a matter of calculation the monetary claim of $3,536,370.38 plus interest is correct and, subject to the defences which the defendants assert, is due and owing. The Bank’s Evidence as to Execution 23.As frequently happens, the bank appointed solicitors, in this case the experienced firm of Gallant Y T Ho & Co., to carry out all of the legal formalities that were required for the execution of these mortgages. And, as is also frequently the case with a firm of solicitors who do much of this type of work, it had devised a procedure by which the applicants for a mortgage, such as these defendants, would come to their offices and be seen by a member or members of its staff who would oversee the process of execution, by signature and witnessing of the signature, by the applicants. This work was assigned to conveyancing clerks who deal with such work as a matter of routine in the course of their employment. The signing of the mortgage would be witnessed by a qualified solicitor who would be brought into the room for that specific purpose once the preliminaries had been completed by the clerk who, in this case, happened to be ladies. 24.Because there is a divergence of recollection between the bank’s staff and the defendants as to what took place I need to set out the important parts of this evidence and make such findings of fact as I reasonably can on what in fact took place. I put it in this way because it needs to be understood that these events took place some time ago. The 1st mortgage in time was entered into on 18 February 1998 in respect of the 4th, and 5th Property which was executed by the husband on the wife’s behalf as her attorney making use of the POA dated 23 August 1997. She has sought to impugn that POA having regard to the circumstances and the basis under which she was persuaded to give it to the husband. This being so she was speaking of an event that took place about nine and a half years ago and it must follow that given this lapse of time memories are bound to fade. The remaining mortgages are all the subject of signatures by the Defendants at the solicitors’ offices in May 2000 and January 2001 respectively. In this case too, six and a half and six years has elapsed from their execution to the date of trial. The Bank’s Witnesses 25.The bank has called three witnesses. Miss Lydia Shum is a manager in its Commercial Banking Division and she has provided an overview of the bank’s practice and procedures in obtaining guarantees for loans and in the provision of all-monies mortgages as security for loans. By looking at the documentation in this case she has also spoken to the facts of the case by way of providing formal proof of the bank’s claim. She was not involved in the execution of the mortgages and has not met the Defendants. 26.The other two witnesses called by the bank are employees of Gallant Y T Ho & Co. It is these two witnesses who dealt with the Defendants. Neither of them has any meaningful recollection of the signing of the documents by the Defendants, which is not surprising, and so they have only been able to deal with this matter based on their knowledge and use of their employer’s practice and procedures in obtaining such mortgages from persons who apply to the bank to enter into these sort of arrangements. I now turn to consider the substance of their evidence. Miss Lydia Shum 27.I have already indicated that the outstanding amount of $3,536,370.38 which she has proved by reference to the banks documentation is not disputed. What should be noted is the background against which these mortgages were obtained. These were obtained by the bank as a package of measures commonly required by banks in such circumstances to secure the granting of general banking facilities to the business of the 1st and 2nd Defendants. Paragraph 10 of Miss Shum’s witness statement [B5] tells how pursuant to the six mortgages taken by the bank it granted and/or continued credit facilities to the 1st and 2nd Defendants by way of “Trust Receipt, Overdraft and Instalment Loan for sums of $2 million, $3.5 million and $1,152,308.42 with the latter to be repayable by 48 instalments and pursuant to the terms of a facility letter dated 15 May 2002 and a General Agreement for Commercial Business executed by the 1st Defendant dated 14 February 1998. On 11 February 2003 by two letters, the bank demanded repayment of these amounts from all the Defendants who bore joint and several liability, which was not forthcoming. Judgment was obtained against the first three defendants and pursuant to that judgment two of the six properties were taken possession of and sold for $2.28 million and $840,000 respectively. As a result of these sales the money judgment of $6,191,431.25 was reduced to the currently outstanding amount of $3,526,370.38 plus accumulating contractual interest at 6.5% p.a. from 23 December 2003. 28.Miss Man, for the bank, has examined Miss Shum on the differences in the bank’s practice between guarantors of a loan and mortgagors who provide security by putting up real property as security for loans either granted to them or to a third party as happened in this case. In the case of a guarantor the bank’s practice is to interview a guarantor personally in order to satisfy itself that the guarantor would be good for his liability. In the course of such an interview the terms of the written guarantee would be explained. The duties of the guarantor would be made known, the extent of the liability, be it a limited one or an unlimited one, and the circumstances in which the bank would demand payment from the guarantor. It would also explain when the guarantee could be revoked. The guarantor would be told that he or she could seek independent legal advice before entering into the guarantee. In the case of mortgages this task was delegated to the bank’s solicitors. They would have drafted the mortgages and are therefore in a position to explain the liability that this entailed for a mortgagor. There would be no need for the bank to interview a mortgagor to establish whether he or she would be good to meet his liability because, unlike a guarantor whose liability is personal, the bank is able to look to the security of the mortgaged property to secure repayment of the principal debtors’ outstanding debt. 29.Mr Mak, on behalf of the Defendants, has cross-examined Miss Shum on the Banking Codes of Practice in order to discover whether and, if so, to what extent the bank’s practices and procedures when obtaining mortgages comply with the Codes. Whilst these Codes do not have the force of law they must carry considerable weight in court in circumstances where the courts both in Hong Kong, and in England and Wales and no doubt in all the leading common law jurisdictions, have required a high degree of “consumer protection” when faced with a plea of undue influence by a defendant seeking to avoid mortgages such as these. This I will return to when I consider the state of the current law in Hong Kong. A breach of or a failure to comply with the banking code, whilst not fatal in itself, would amount to a highly relevant consideration for the court in deciding whether a mortgagor should be held to his or her obligations under a mortgage. 30.In relation to these Codes I propose to leave any issue that may arise on them to when I analyse the evidence which I will do presently. 31.Mr Mak has also cross-examined Miss Shum on the practice whereby the mortgagor or guarantor would not be made aware of any increase in the amount of the debt owed by the principal debtor and if the loan facility to the debtor was for a limited amount the mortgagor would nevertheless be required to provide a guarantee or mortgage for an unlimited amount. In relation to these matters it will be noticed, when I come to the Banking Codes, that at the time when the mortgages were executed there was no restriction on the Banks taking an unlimited guarantee and that there was no need to tell the guarantor that the principal debtor had had extended to him further loan facilities. These protections were still evolving and had not come into use on the occasions that I am concerned with. What Documents and Other Papers were Presented to these Defendants 32.Before I deal with the bank’s evidence as to the execution of these mortgages I propose to identify the documents which were presented to the Defendants for signature and/or for their information before they executed the mortgages. 33.These start at bundle B starting at page 26. Firstly, there is a letter from Gallant Y T Ho & Co. dated 8 May 2000 to the wife referring to a 2nd Mortgage on the 4th and 5th Properties (para.10 supra) being the 3rd Mortgage, also listed at para.10 supra. The letter was acknowledged by the wife who signed it. It identifies the mortgage and the two properties concerned and it encloses the mortgage document which includes a Notice (B27) which purports to comply with the requirements of the then Banking Code. Finally, it advises the prospective mortgagor that: “If you have any query on this letter or the draft documents enclosed please seek independent legal advice from other solicitors”. 34.The mother-in-law’s documents start at B29 with the letter which is in identical terms and it has been signed with an ‘X’ by her to acknowledge receipt. This relates to the 6th Property and the 6th Mortgage at para.10 supra. The Notice and the mortgage start on the following page including, in the Notice, the following observation:
The prospective mortgagor is also referred to the third schedule to the Mortgage [B/41] which sets out important provisions as to the status of the mortgagor — being jointly and severally liable with the principal debtor and that this is an “all monies” mortgage which explains that the mortgagor’s liability is unlimited as to amount and that the mortgagor would be liable for “all actual and contingent liabilities of the Principal whether now or in future”. There is also reference to the mortgage being payable on demand which would happen if any money owed by the principal to the mortgagee is outstanding. 35.At page B36 are the documents relating to the mother-in-law’s and the brother-in-law’s joint mortgage executed in respect of the 3rd Property being the 3rd Mortgage as it is referred to at para.10 supra. The documents comprise the standard accompanying letter, on this occasion not signed by either of them to acknowledge receipt, followed by the Notice and the mortgage at B37 which includes the third schedule, the content of which I have already referred to. 36.I should also draw attention to the 1st Mortgage over the 4th and 5th properties dated 18 February 1998 which was entered into by the husband on the wife’s behalf by means of the POA. This particular mortgage sets up a separate contest by the wife, by which she challenges the way in which she was persuaded to enter into the POA by the husband on 23 August 1997. The POA is at CI/243. I say that because unlike the other mortgages its validity does not require an examination by me of the meetings at the offices of Gallant Y T Ho & Co. when these three Defendants were seen by the bank’s staff. This mortgage had been entered into two years previously by the husband who showed the bank’s staff the POA which served as his authority to execute this mortgage on the wife’s behalf. Miss Ivy Tang 37.Miss Tang and her colleague Miss Ankie Wong are the two ladies who oversaw the execution of the mortgages. Both ladies had by then many years of experience in this type of procedure and both have said, and I accept, that at no time before or since have they had any complaint from any customer that they had not properly explained the nature and effect of the mortgages that were executed by the various and many mortgagors that they have dealt with. Nor has it ever been said that they failed to advise the individuals concerned that they could obtain independent legal advice if they wished to. 38.It is also right to remind myself that neither of them has any independent recollection of these events. They were instructed to follow a procedure established by their employer, no doubt in consultation with the bank, designed to inform the applicant for a mortgage what he was letting himself in for. As can be seen from the mortgage documents in this case these are long and detailed and in parts complex. They do not easily lend themselves to leisurely reading. Many of their terms have found their way into the final modern version from very much older precedents, nowadays using less arcane language. Plainly, the solicitor’s staff would not be expected to explain the document in any detail, clause by clause. Both Miss Tang and Miss Wong have emphasised that in every case they had explained the effect of “all monies” liability which is also explained in the Notice attached to the mortgage to which I have already referred. 39.Turning more specifically to Miss Tang’s evidence it was she who oversaw the signing of the 1st mortgage in respect of the 4th and 5th Properties that was signed by the husband on 14 February 1998 on the authority of the wife’s POA. She has provided a full explanation of what she did on that occasion in her witness statement at B/17. The real issue on this mortgage is engaged by the wife, not on the basis of the procedure used by Miss Tang in explaining matters to the husband but on whether she had been misled by the husband and his solicitors in August 1997 when she signed and gave him the POA. This matter needs to be fully canvassed when I consider the wife’s evidence on this issue. 40.Miss Tang’s next involvement concerned the 2nd Mortgage on the 4th and 5th Properties entered into by the wife in which she, on the bank’s instructions, started the procedure on 5 April 2000 by opening the file and preparing the documentation. This mortgage was signed by the wife on 8 May 2000 she having been interviewed by Miss Wong whose evidence I will turn to in a moment. 41.In respect of the 6th Property she prepared the documentation in preparation for execution by the mother-in-law which she did on 5 May 2000 also having been interviewed by Miss Wong. 42.On 19 January 2001, Miss Tang interviewed both the mother-in-law and the brother-in-law in relation to the mortgage executed on the 3rd Property. The mother-in-law signed this mortgage by placing a ‘X’. Miss Tang says that she did not recall why she signed in this way. Following her usual procedure, she said that she explained that this was an unlimited mortgage payable on demand and that the brother-in-law and mother-in-law bore joint liability. Her evidence is that having provided that explanation neither of them indicated to her that they did not understand, neither did they have any questions for her. As to this she accepted that she could not recall clearly but she was able to say that if they said that they did not understand she would have repeated the explanation to them. If they still did not understand she would have asked them to speak to a qualified solicitor from the firm. The practice then was that if they still did not understand, having spoken to the solicitor, the prospective mortgagor would be advised not to sign and told to go and see an independent solicitor. She says that this has never happened in all the time that she has carried out these duties. Once she had explained the mortgage liabilities and there was no indication of any problem and there were no questions asked of her, she would then call in a solicitor to witness the signatures which is what happened in this case when Mr Andrew Wong attended and witnessed the signatures. Finally, she was asked by Miss Man whether either of them had told her that the loan, which was to be secured by this mortgage, was for a limited amount. She replied that this had not happened and that if this had been said she would have told them that they could not sign the mortgage. 43.Mr Mak, who has dealt with this matter on behalf of the Defendants with the greatest possible care, asked Miss Tang whether she had been instructed to explain the banking codes to an applicant for a mortgage. She said that she had no such instructions but had some ‘rough’ knowledge of what the code said. As to the POA and the provision of the mortgage based on it, she agreed that she had no independent recollection. She could only speak to this mortgage based on the contemporaneous documents. She oversaw the execution of about five of these every week. She conceded that she was not fully familiar with the legal provisions governing the giving of a POA nor with most of the provisions of the Powers of Attorney Ordinance. She agreed with Mr Mak that when the husband executed this mortgage on the wife’s behalf she did not know whether the wife had agreed to mortgage the property or that the wife knew of the transaction. She had not telephoned her to find out. She also agreed that she did not know the amount of the loan that was being secured by this mortgage. She agreed that because this mortgage was executed on the strength of a POA, the mortgagor would not have received the papers which would usually be sent including the Notice which explains the obligations of a mortgagor and tells him that he (or she) can obtain independent legal advice. 44.Mr Mak then cross-examined her about the 3rd Property which refers to the 1st Mortgage executed by the mother-in-law and the brother-in-law. She explained that due to the urgency there was no time for the standard letter to be sent out to the prospective mortgagors first which included the Notice explaining their obligations and a right to seek independent legal advice. Notwithstanding this Miss Tang has said that when the two of them came to her office she explained their obligations to them before they signed. On this occasion, they were accompanied by the husband and by his brother, Wong Hon Lung who was, as I have already observed, a director and shareholder of the 2nd Defendant. She was also firm in saying that they could seek independent legal advice. Mr Mak put to her that the two mortgagors did not have the opportunity to understand what they were doing. She rejected that suggestion. 45.She was then questioned about the letter at B/26 sent to the wife in respect to her application to provide a 2nd Mortgage over the 4th and 5th Properties. She was asked why the wife’s signature was not there evidencing her receipt of the letter. She did not know why that was so. She agreed that there was no other form of receipt to prove that the wife had actually received this letter and its accompanying documents referred to in the letter. She also said that she could not now recall the relationship between the mother-in-law and the brother-in-law to the husband. Finally, Mr Mak suggested that she had failed in her basic duty of informing these two mortgagors of their obligations under the mortgage nor that they could seek independent legal advice. She firmly rejected these suggestions. When re-examined by Miss Man, she said that she had followed the bank’s instructions on what to do when a prospective mortgagor came to the office to execute a mortgage. Miss Ankie Wong 46.She joined Gallent Y T Ho & Co. in 1984 as a conveyancing clerk and has been the head of her department since 1990. She has never had any complaint from anybody that she has neglected to explain these sort of documents to clients and mortgagors alike. 47.She dealt with the execution of the mortgage of the 6th Property by the mother-in-law, this being the 6th Mortgage as referred to in paragraph 10 above, and she also saw to the execution of the 2nd Mortgage on the 4th and 5th Properties by the wife, this being the 3rd mortgage referred to in paragraph 10. She has described all of this is in her witness statement at B/45. By looking at the contemporaneous documents, she has being able to describe the course of events. Very frankly she has admitted to not having a specific recollection of these matters. 48.She says that on 5 May 2000 the mother-in-law attended her firm’s head office, accompanied by the husband and his brother, to execute the 6th Mortgage. She said that the mother-in-law was aware of the terms of the mortgage particularly insofar as she had been made aware that the liability was unlimited and that the mother-in-law did not raise any point about her understanding her liabilities. As to the fact that she had not signed her name but marked an ‘X’ instead, Miss Wong says that if an old person came to sign a mortgage and said that he or she could not write or was not very literate they would sign with an ‘X’. This was not an uncommon occurrence. She said that she was not aware of the relationship of the mother-in-law and the husband. Typically she also would conduct between four or five mortgage signing procedures every week. She explained that there might be a difference in the date, as happened here, between the date of the signing of the mortgage, in this case the 5th May and the date of the mortgage, the 10th May which is the date when the money secured by the mortgage was transferred to the borrower. She has also explained that it frequently happens that people who came to sign mortgages would be accompanied by others; friends or relatives. In such circumstances, only the identity of the mortgagor would be verified and not that of those who accompanied her. Asked by Miss Man as to how often people would avail themselves of the right to seek independent advice, she said that this happened only once or twice a year, in which case the independent solicitor who they would go to, would write in and be sent a copy of the proposed mortgage. 49.Miss Wong also gave evidence as to the signing of the 2nd Mortgage by the wife in respect of the 4th and 5th Properties which she signed on 8 May 2000. She confirmed having explained the mortgage and the mortgagor’s liabilities. She told me that if somebody said to her that she did not understand she would repeat the explanation and if after that she still had not understood she would not proceed with the execution of the mortgage. She also explained to the wife that this was a 2nd Mortgage on these two properties. She explained that this was a mortgage of unlimited obligation and that the bank had the right to call for repayment and that the property was liable to be sold in order to obtain repayment. Miss Wong has explained that once the wife appeared to have understood her liability, she invited a solicitor to come in and witness her signature. At no time had the wife indicated that she did not understand what she was entering into and certainly did not misunderstand the fact that her liability under the mortgage was an unlimited one. She did not say that the borrower had told her that there would be a limit to her liability. 50.In cross-examination, she said that she was not a qualified solicitor and could not give legal advice. She merely followed her firm’s guidelines. She agreed that she did not explain the banking code. Mr Mak challenged her as to whether there were two meetings on 5and 8 May. He suggested that there had only been one but she said that having consulted the documents there were in fact two. He then asked her whether she would inform the mortgagor of the draw-down date on the mortgage and she said this would be done, although she could not be sure about it because this was being dealt with by the Tsuen Wan branch and she was at the Central branch. She was asked whether the mortgagors would be allowed enough time to read the documents and she said that they would. If they wished to they could read all the documents. She was challenged in this regard and her response was that they could if they wished to but they did not say that this is what they wanted to do. Mr Mak drew attention to the fact that the letter which enclosed the documents did not have a ‘certificate’ to say that its contents had been interpreted to the mortgagors nor was there any written acknowledgement that the recipient had understood it. She agreed that this was so but their procedure required her to provide an explanation which she always did. That is what she was employed to do. The notice and the mortgage contained all the information that was required and this she had explained. She certainly made clear that the mortgage carried an obligation to pay an unlimited amount. She conceded that she was not in a position to tell the mortgagor the amount of the facility that was being given to the borrower because she was not provided with this information. She also agreed that the letter enclosing the documents and the Notice would usually only be given to the mortgagor at the meeting. She disagreed that they would not have sufficient time to read it if they wished to read it. They had all the time that they required. She disagreed that these meetings were perfunctory affairs lasting a very short time. She said that they usually lasted 20 minutes or so. General Tenor of the Bank’s Evidence 51.Without detracting from the detail, what has been said, in effect, is that the prospective mortgagors in this case were brought to Gallant Y T Ho’s offices and had explained to them what it was that they were letting themselves in for. Principally, that this was an unlimited liability, that it was payable on demand and that if they wished to they would take independent advice. Before signing, each of them appeared to understand this and willingly consented to sign the mortgage. The Defendants’ Evidence The mother-in-law 52.I have already indicated that she is illiterate. As to the 3rd Property, she purchased this jointly with her son (the brother-in-law). The money came from compensation paid to her when the family home in the Kowloon Walled City was demolished. As to the husband, she has told me that she knew that he manufactured handbags. She believed in him. He came to see her. He told her: “Mother can you give me the deeds to take to the bank and get a cash flow of $500,000. I believed in him. I said that’s fine.” She then told her daughter what had happened and that he had asked her to go with him to the solicitors’ firm. She asked her daughter to accompany her. She and the husband accompanied her. At the solicitors’ firm she said that the lady asked her to sign. She told her that she did not know how to sign and she said that she put a ‘X’. Her evidence in chief is that: “Nothing special happened. Nothing was said”. She told me that she signed and then left. It was all over very quickly. Mr Mak asked her what she thought she had done. She replied: “Nothing at all. I thought that I was helping him to get cash flow.” She said that she gave the deed so that he could have a loan as a security and he could get $500,000. 53.She then gave evidence about the other mortgage which she executed, being the 1st Mortgage referred to at paragraph 10 dated 19 January 2001, the earlier one having been dated 10 May 2000. She said that the husband asked for the deed to this property as he was in need of cash flow. She said that she would have to discuss it with her son. Having spoken to her son, he told her that if she agreed then that was alright by him. They all went to the solicitors’ offices. She took the deed with her. She said that having waited a while a lady came out and asked them to sign. She did not know what she signed. Nothing was said. That was her evidence. She told them that she did not know how to write and so she put an ‘X’ down. She was never told that she could seek independent advice nor that she would be taking on an all monies liability. Finally, she was asked again about the 4th Mortgage that she had previously signed and she said that on this occasion as well, she had not been told that she could ask for independent legal advice nor that she was taking on unlimited liability. She was receiving no benefit from these mortgages. She only did this to help the husband who had been ‘filial’. 54.Miss Man cross-examined her to the effect that she had always had a good relationship with the husband. She said that she was very happy when he gave her son (the brother-in-law) a job in his business. That improved the brother-in-law’s situation. She said that she immediately agreed to help the husband with his cash flow problems. She was closely questioned by Miss Man as to what might happen if she refused his request for help. Miss Man asked if a refusal might disturb her daughter’s marriage with him. She said that she had thought of that and that if his business prospered then her daughter’s ‘living’ would be better as well. She also agreed that this would be better for her son as well. If the business prospered then his job would be more secure. Then there was this exchange:
55.She was then cross-examined about the mortgage on the 6th Property. Her evidence was that the lady from the solicitors told her that the liability would be limited to $500,000. “She only told me this mortgage was for $500,000.” She was insistent in evidence that this was the amount that she would have consented to. The Brother-in-Law 56.He was born in Hong Kong but only went to primary school. He is not very literate. The husband was already employing his younger brother and he followed in about 1987 for a salary of $7,000 a month. The Mainland factory employed up to 800 people when the business was thriving. The Hong Kong office employed five people. In 1987, in addition to his basic salary of $7,000 he would get bonuses which took his earnings to between $10,000 and $20,000 in 1987. By 2001 his basic salary was $16,000. If he went to the Mainland to supervise, he would get double pay. 57.In cross-examination he agreed with Miss Man that he was pleased with his pay which was much more than he had previously earned. Previously he had made as little as $5,000 a month. He worked for the husband for many years and was happy working there. The husband came to him in 2000 and asked for his help. He told him that he had orders and needed money and that he would like to borrow the brother-in-law’s property in order to get a loan from the bank. He told the husband that this would be the 1st Mortgage that he had entered into and that he knew nothing about such things. The husband told him that it would be simple. “… go up there and sign.” The husband told him that he needed $500,000. The mortgage would be the security for the loan. The husband said that if the loan was not repaid he would bear the responsibility. The brother-in-law told Miss Man that he thought that: “May be the property would be possessed by the bank.” 58.As to the signing he too says that they were not properly informed about their obligations. Miss Man put to him that if the business did not go well he would lose his job and he agreed with that. Miss Man put to him:
But then he went on to explain that he did it because he thought that his liability would be limited to $500,000 and also because he believed that the husband would repay the mortgage very soon. This was the main consideration for him. He was willing to help to that limit. The Wife 59.Her evidence is that she had been in charge of the production-line management in the husband’s business but stopped working there in 1984. She agreed with Miss Man that she depended on the business to provide for herself and the children. The husband had disappeared in April 2003 and she had not seen him since. She has had to put up with many creditors calling at home. For a while she lived in rented premises to avoid them. She now works as a cleaner and has returned to live at the 4th Property. 60.As to the POA, the family was then living in Canada and that when in this part of the world the husband mostly spent his time on the Mainland. He therefore suggested that the 4th Property could be rented out and in that way make some additional income. When she signed the POA in August 1997, she thought that it would only be used by him to rent out the property. He could sign a lease on her behalf. Miss Man reminded her that in her statement at page 68H/A, paragraph 18, she said that the POA:
Miss Man’s point was that the POA could be used for more than just renting the property. The wife said that in her mind it was just for that purpose. 61.As to these mortgages, she said that he had told her that the company needed $1 million because he wanted to expand the business. He also told her that he needed to mortgage her mother’s property as well. She agreed that she felt that she had to let him use this property because he had provided the money for it. It was put to her:
She agreed with Miss Man that if the factory was expanded they, including her brothers, would be better off and that is why she agreed to this. She was insistent that had she known of the risk and that liability was unlimited she would not have signed. 62.She too has spoken of the perfunctory nature of the signing process at the solicitors and that Miss Tang and Miss Wong did not explain that these were unlimited mortgages, payable on demand nor that they could seek independent legal advice before signing. The Law 63.The relevant law on undue influence has now been elaborated for Hong Kong by Mr Recorder Ma, SC, as he then was, in the important case of Bank of China (HK) Ltd v Wong King Sing & Ors (2002) HKLRD 358. In that decision the learned Recorder took the opportunity to traverse all the main authorities starting with the judgment of Cotton LJ in Allcard v Skinner [1887] 36 Ch D 145 and finishing with the decision of the House of Lord in Royal Bank of Scotland v Etridge (No.2) [2001] 3 WLR 1021. As a result, we now have in Hong Kong, under one roof as it were, an analysis of the main relevant aspects of this area of the law which I am able to apply having arrived at the necessary findings of fact that I will shortly be required to determine. 64.The following basic principles can be shortly stated. What the court is required to enquire into is whether these Defendants had, in executing these mortgages, freely consented to do so and with full knowledge of the consequences of the transactions. If the evidence persuades the court that a Defendant has given his or her informed consent that would be the end of the matter, no matter how improvident the transaction may appear to be to an objective observer. See Bank of China supra, p.366G-I. The legal burden is on these Defendants to prove that there was undue influence exercised on them by the husband. It is not for the bank to show that the transaction was entered into with a full understanding of what was involved. 65.But, it must be carefully observed that this evidential burden may shift onto the bank if the factual matrix, given the relationship between the alleged influencer and the Defendant is such that the court will, in certain circumstances, presume the existence of undue influence. In that event, it will be for the bank to prove that the Defendant entered into the impugned transaction freely. 66.This class of case would be concerned with what is commonly referred to as a Class 2B case of presumed inference. Both counsel are agreed as to that. It would therefore be an unnecessary exercise to refer, for the purpose of this judgment, to cases giving rise to actual undue influence, Class 1, nor to Class 2A presumed undue influence which arises from certain categories of relationship such as solicitor and client or doctor and patient, where, as a matter of law, undue influence is presumed to exist. With a Class 2B case, which falls outside the proscribed categories of relationship, the Defendant is required to prove the de facto existence of a relationship under which the Defendant generally reposed trust and confidence in the influencer. If that is done the law will presume undue influence. In such circumstances, the burden will shift onto the bank, in this case, to show that the transaction was entered into with an independent mind and free from undue influence. If the bank fails to discharge that burden, the transaction will be set aside without the need to prove actual undue influence. In this class of case the bank has the evidential burden of proving that the transaction was entered into freely by the Defendants with full knowledge. What these Defendants need to show in order to engage the presumption is that each of them individually had placed trust and confidence in the husband and that he had acquired an ascendancy or domination over them and, further, that the transaction cannot be readily explained by the parties relationship. See Bank of China, page 370E-F. 67.The learned Recorder held that in approaching this type of case the court must apply a large degree of common sense and not apply the principles in a mechanical way as if they were formulas. It seems to me that few areas of the law can be more fact sensitive than this. 68.In this regard, it is helpful to refer to some comments that he made as to how the evidence would need to be approached and analysed [372G to 373I]:
69.Once this type of undue influence is to be presumed the next step in the process is to decide whether the bank has been placed on enquiry. That will be shown if there is knowledge by the bank of the relationship between the husband and the Defendants and also that the nature of the transaction is such as to be apparently disadvantageous to the Defendants. 70.If that position is reached the bank is required to show that it took reasonable steps to satisfy itself that the Defendant’s agreement had been properly obtained. It will do so by:
71.This therefore is the regime that the law has established in this category of case and which I am required to follow in determining the outcome of this matter. Banking Codes 72.Given a rise in the number of disputes that had been coming before the courts and the law’s increased vigilance in seeing that people are not being taken unfair advantage of, the banks in particular took it upon themselves to take measures which in turn protected themselves from challenges by individual guarantors and mortgagors. Following trends in England and Wales, the Hong Kong banks have drawn up Codes which have sought to mirror the law’s requirements as reflected in the various decisions of the courts culminating in Royal Bank of Scotland v Etridge supra and now in Hong Kong in Bank of China. 73.The bank’s concern in this case is well reflected in minutes of meetings of the Bank’s Risk Management Committee. (See CII 842-845). Mr Mak has cross-examined Miss Shum at some length with regard to the bank’s compliance with these codes. It is sufficient to observe that the bank in this case had complied with all the codes as they came into effect. Banks were required to show compliance within six months of the starting date and so banks complied on different dates. The latest code then in effect was one dated December 2001. The bank complied with its requirements within the six months period, as it had for previous codes. This being so I do not propose to examine this issue further. FINDINGS OF FACT 74.These will need to be made in relation to each of the issues that call for determination by me. The starting point is to decide whether each of the Defendants has shown that undue influence is present. 75.It is helpful to begin with a general appraisal of this family’s history and circumstances, with particular reference to their relationship with the husband who I have not seen and whose character and personality I have not been able to judge. It is true of course that he was the person who everybody looked to for their financial well-being. The wife had not worked since 1984 and so in their immediate family unit he was the sole breadwinner. For the brother-in-law, he provided him with his employment — he was his employer, albeit also his brother-in-law. The family ties were long-standing and close. For the mother-in-law, I expect she looked to the husband and the wife as a source of money if she needed it, as she did to the brother-in-law and her other children in the traditional way that retired parents look to their children to keep them in their old age. The other way to view this is that the husband’s business was very much a family business. His own brother was his business partner, he employed another brother and the brother-in-law. They were all in it together. Whilst I have been told that at one point the business employed up to 800 people on the Mainland, the husband was no sophisticated businessman. Whilst not wishing to appear patronising, these are working class people, with everybody joining in to do their bit working in the business, as the wife had done in a substantial way in the early years until she pulled back in 1984 and concentrated on the family. 76.It is really from this position that Miss Man submits that these mortgages, which were a source of then much-needed extra funding for a family business that was clearly coming under severe financial pressure, were entered into for the benefit of the whole family. It was to the advantage of each of them that they provided these properties to secure the further loans. 77.The real question is whether the husband had achieved such dominance or ascendancy over them, so that they really left it all to him. Whether as a result they did indeed repose trust and confidence in him of the type which the law requires? The Wife 78.The cases show that wives are something of a protected species, if that is not too strong and inelegant way of putting it. This is particularly so if they do not work and leave the breadwinning to the husband. In determining this question, I am required to assess the wife’s credibility as a witness on all of the evidence including her evidence which may not have a direct bearing on this particular issue. A prime example of this type of evidence is her account of what was said by Miss Tang and Miss Ankie Wong when the mortgages were executed. This evidence only has a direct bearing if the Defendants can show a Class 2B presumed undue influence and relates to the question of whether the bank has discharged the evidential burden of showing that it has seen to it that these Defendants had made a free and fully informed decision when entering into the mortgages. Nevertheless, if I were to hold that the wife has not been truthful on this part of the case, it seems to me that I am entitled to bear that in mind in deciding whether to accept other parts of her evidence. 79.This being the case, I propose to rule on this aspect first for the reasons that I have just given. Having heard Miss Tang and Miss Wong, I am entirely confident that they have given a truthful account of what happened and where their evidence differs from that of the wife I accept their account and I reject her’s as fabrication. These two ladies have told me, without exaggeration, that they have no independent recollection of these matters. They were there to perform a set procedure which is to inform the mortgagor of his or her liabilities as to the mortgage’s unlimited liability, the fact that it is payable on demand and that the prospective mortgagor could take independent advice from other lawyers. I have no doubt that these highly experienced ladies, experienced in precisely this kind of work, performed their task faithfully. Something they have done for 20 years without complaint from anybody. It is a fabrication by the wife that this was not done by Miss Tang and/or Miss Ankie Wong. I am satisfied that fearing the awful prospect of losing her home due to the failure of the business of the 1st and 2nd Defendants, she has deliberately decided not to tell the truth in order to obtain a favourable outcome for herself in the action. I propose to take into account this lack of frankness on her part on this issue in assessing her evidence as a whole. 80.On the question of credibility it is also convenient at this point to resolve the issue of the circumstances in which the POA was procured from her in August 1997. She has gone as far as to say that the husband’s solicitors who prepared the document and who arranged for her signature, actively misled her as to its extent and purport. I simply do not accept this at all. She has decided not to tell the truth on this in order to get out of the use to which the POA was put to by the husband in executing the 2nd Mortgage on her behalf in 1998. I do not for one moment believe that the solicitors in August 1997 would have stooped so low as to mislead her when all they had to do was to prepare and explain this commonplace document. It is these same motives to which I have already referred that have caused her not to tell the truth about the interviews with Miss Tang and Miss Wong which have persuaded her to try and impugn the POA. I do not believe her evidence. 81.Having found that she has not told the truth in respect of two very important aspects of the case, I now return to decide the issue of whether undue influence exists as between her and husband. I am persuaded by Miss Man that none is present here. What the husband was doing was in everybody’s interest. The family as a whole — their’s and the wife’s. If the business remained afloat they all remained afloat. These transactions were in her interest as much as they were in the husband’s. In such circumstances her case on undue influence must go. 82.In the event that I am held to have been wrong to have come to that conclusion, I propose to consider what my finding would have been had I held this to be a Class 2B case. In this regard, the wife’s lies on the interviews and the POA are very telling. I have already referred to the fact that the interviews proceeded as Miss Tang and Miss Wong have told me. It seems to me that this very adequate explanation would have been sufficient to demonstrate that the wife had made a voluntary and fully informed decision. The fact that the survival of the business was very much in her interest, it is not at all surprising therefore to find that she was prepared to execute the mortgages. Whilst the husband may have told her that his initial loans would be limited to $500,000 on each occasion, she received, on my finding, a clear explanation that her liability was to be an unlimited one, albeit privately hoping that the loan would not exceed $500,000. The fact is that this lady was perfectly clear that the company needed money to borrow and she was content to turn up at the solicitors’ offices to provide the mortgages that would have secured those funds. The Brother-in-Law 83.I find his situation identical to the wife’s. He was very much part of this family business venture. A well-paid employee, but more than just an employee. This was the family livelihood and although nobody suggests that he was happy to give the security that he did he realised that this was necessary to secure the family business; future and with it his employment. In his case too I find that he has been deliberately untruthful about the course of the interviews with Miss Tang and Miss Wong. I am satisfied that his motive for lying is exactly the same as the wife’s. I find as a fact that the solicitors’ staff put him fully in the picture as to his liability and his right to get independent advice. 84.In his case too he has failed to show undue influence and if he had done I am fully satisfied that the bank by its interview process has done enough to show that his was voluntary and fully informed consent and that he should be held to his bond. The Mother-in-Law 85.In her case it seems to me that wholly different considerations must apply. Although not very old, 72 of the time, she is a person of no education and as a result illiterate. Whilst it is attractive to say that she too was to gain from these loans which hopefully would have secured the future of the family business, she had to face her son-in-law and her two children who were in effect saying to her, it is alright, do it — let him have the deed. Although in her case too I reject her account of what she says happened during the interviews, I am prepared to hold that she has carried the burden of showing Class 2B undue influence. Her son-in-law (the husband) and her daughter were two people that she loved — they were good to her and she trusted them. She was widowed, her husband was not there to help and advise her. This is a clear case of undue influence. 86.Once she came for interview the warning bells should have rung loud for the solicitors’ staff who saw her. She was plainly a senior citizen and, to their knowledge, illiterate who was putting forward her properties to secure unlimited amounts. This was an exceptional case. The bank should have insisted (emphasis added) that she seek independent advice. Even though she may have given the impression of a very willing signatory, the solicitors should have refused to deal with her, in its interest and the banks as much as her’s, until she had obtained independent legal advice. She is just the sort of person that the law will protect in these circumstances and although I absolve the solicitors’ staff of any sort of sharp practice they were not, on my finding, sufficiently prudent in this lady’s case. 87.It may be said that she should at least be held to the extent of $500,000 which is the figure that she says she agreed to with the husband but in her case these two interviews were not sufficient given the weight of influence, primarily from her son-in-law (the husband) but also coming from her daughter. She was in an impossible position where she was really never going to refuse the two of them. In truth the bank should have refused her until she had a letter from an independent solicitor eliminating any possibility of undue influence. In her case I will set aside her mortgages. Misrepresentation 88.Mr Mak also relies on this, being the husband’s alleged misrepresentation as to the amount of the loans, $500,000, and the nature of the liability that the Defendants would be taking on. I find as a fact that the bank and its agent Gallant Y T Ho & Co. had no knowledge, actual or constructive, and so even if these misrepresentations had been made by the husband they could not infect the bank. That is sufficient to dispose of this part of the complaint by the Defendants. RESULT 89.In the circumstances, the bank will have all the orders that it seeks against the wife and the brother-in-law. In the case of the mother-in-law, the mortgages which she executed will be set aside. In such circumstances, where in the case of the 3rd Mortgage in which she assumed a joint liability with her son (the brother-in-law) the bank must take its own course as to how the brother-in-law’s liability on this mortgage will be enforced. As to costs the bank will have the costs orders that it asks for under the originating summons against the two unsuccessful Defendants and the mother-in-law will have her costs of the originating summons against the bank. The Defendants’ costs will be taxed in accordance with the Legal Aid Regulations. These costs orders will be orders nisi in the usual way.
Phoebe Man, instructed by Messrs K B Chau & Co., for the Plaintiff Andrew Mak, instructed by Messrs Fong, Chan & Lee, for the 4th, 5th and 6th Defendants Appeal by the 5th and 6th defendants to Court of Appeal dismissed. Please refer to CACV157/2007 dated 13 November 2008 |
Cases cited in this judgment
Further hearings and rulings under HCMP 1250/2003