Bank of China (Hong Kong) Ltd v. Leung Wah and Another

CACV 107/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 107 OF 2010

(ON APPEAL FROM HCMP NO. 1634 OF 2009)

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BETWEEN

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Before: Hon Rogers VP, Le Pichon JA and Stone J in Court

Date of Hearing: 24 November 2010

Date of Judgment: 24 November 2010

Date of Handing Down Reasons for Judgment: 30 November 2010

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Hon Rogers VP:

1.This was an appeal from a judgment of Deputy High Court Judge L. Chan given on 23 April 2010. The matter before the judge was an appeal from an order made by the master who had refused the plaintiff’s application for judgment on an originating summons and had ordered that this matter be converted into a writ action. When doing so he gave directions for filing the statement claim.

2.The judge set aside the master’s order and gave judgment against the first and second defendants in the sum of HK$2,500,509.49 secured by a charge dated 4 June 1998 together with interest at different rates in respect of the different amounts which went to make up the judgment sum.  The judge also ordered that the first and second defendants should deliver up the premises known as Unit 6 on the 5^th floor of Lot 29, Heng Fa Chuen, 100 Shing Tai Road.

3.At the conclusion of the hearing of this appeal this court dismissed the appeal with costs with reasons to be given in writing.

Background

4.The history of the matter is set out in paragraphs 2-8 of the judgment below.  Since no issue has been taken on the facts set out therein it is convenient to repeat those paragraphs here:

“ 2. This is a mortgage action. The defendants are husband and wife. They together with their son Leung Chi-shing applied in about May 1998 for general banking facilities from the plaintiff for the son’s use. The application was approved on 15 May 1998. The facilities were an overdraft up to HK$1.8 million and an instalment loan of HK$380,000, to be repaid over 8 years.

3. The facilities were made available subject to the terms and conditions of two facility letters, both dated 20 May 1998. The facility letter in respect of the HK$1.8 million overdraft facility required the defendants to execute a first legal charge on their flat in Heng Fa Chuen, Chai Wan, in favour of the plaintiff to secure the repayment of the overdraft. The facility letter in respect of the instalment loan also required the defendants to execute an all moneys first legal charge on this flat in favour of the plaintiff as security.

4. The defendants signed both facility letters. They also signed to acknowledge receipt of an English warning letter dated 20 May 1998 addressed by the plaintiff to them. The letter advised them that the plaintiff intended to grant general banking facilities to Leung Chi-shing against the security of a mortgage over their property. It further advised them to obtain independent legal advice before entering into the deed as they would by the deed become liable for all the moneys that Leung Chi-shing may owe the plaintiff. The letter also said that the liability was unlimited as to amount.

5. The defendants then executed an all moneys first legal charge on their flat on 4 June 1998 at the office of the plaintiff’s solicitors. The defendants were the mortgagors. Their son, Leung Chi-shing, also executed the charge as the requesting party. The defendants covenanted in the charge to pay the plaintiff on demand all sums of money as may be due from the requesting party, either alone or jointly with or as security for others.

6. The defendants have also signed two English letters, both dated 4 June 1998 and addressed to the plaintiff’s solicitors and the plaintiff respectively. In the letter to the plaintiff’s solicitors, the defendants acknowledged that the plaintiff’s solicitors had explained the charge to them and invited them to seek independent legal advice on the transaction, but they did not see the need for such advice. In the letter to the plaintiff, they confirmed that the plaintiff’s solicitors had explained the charge to them and they understood that their liabilities under the charge was unlimited. They also confirmed that they had been advised by the plaintiff’s solicitors to seek independent legal advice, but they declined to do so.

7. On 2 June 1999, the defendants and Chi-shing signed another facility letter to renew the overdraft of HK$1.8 million. The letter again provided that the overdraft facilities were available upon the provision by the defendants of a first legal charge on their flat in favour of the plaintiff. This charge is the charge that they had executed on 4 June 1998. They also signed to acknowledge receipt of an English warning letter dated 2 June 1999 from the plaintiff to them. The content of this warning letter is the warning letter dated 20 May 1998.

8.         On 21 June 2000, they signed a further facility letter.  This was for an instalment loan of HK$1.7 million and repayable in 240 instalments. The loan was to be made in favour of Chi-shing.  The loan was available also subject to an all moneys first legal charge on the defendants’ flat as security.  This charge is also the charge executed by the defendants on 4 June 1998.  On the same day they signed to acknowledge receipt of another English warning letter, the content of which is the same as the previous ones.”

5.It only remains to be said that Leung Chi-shing defaulted on the repayment and it was thus that the plaintiff called in the various loans.  Before proceeding further, it is a fair inference to draw that the defendants would not have been able to understand the English letters. Nevertheless, the basis on which the defendants rely in answer to the plaintiff’s claim is that they entered the various transactions under the undue influence of their son, Leung Chi-shing.  The defences of non est factum and unilateral mistake are no longer pursued.

6.The judge analysed the defence and came to the clear conclusion that the defence of undue influence simply did not lie in the present case.  He considered what had been said by the defendants in their affirmations and then went on to consider the law relating to undue influence as set out in the cases of Royal Bank of Scotland Plc v Etridge (No. 2) [2002] 2 AC 773 and Li Sau Ying v Bank of China (Hong Kong) Ltd7 HKCFAR 579.  In paragraph 31 of the judgment he said in relation to whether Leung Chi-shing had exercised influence over his parents:

“31. On the defendants’ evidence, there was no doubt a loving relationship between them and Chi-shing, but I do not think it was a relationship where they had placed trust and confidence in Chi-shing in relation to the management of their financial affairs. There was no ascendancy by Chi-shing over them.”

7.The judge then went on to consider separately, whether there had been any undue influence.  Having regard to his finding that the defendants had not established a case where there had been influence, he did so on a hypothetical basis namely: “even if there were a relationship of influence or an irrebutable presumption of a relationship of influence”.  The judge, nevertheless, came to the conclusion that, even on that hypothetical basis, the defendant still could not succeed in setting aside the charge.

This appeal

8.On this appeal, Mr Egan, who appeared on behalf of the defendants, argued that the decision of the master should the reinstated because he was correct in having formed the view that there were substantial issues which needed to be tried.  Relying on what was said in the defendants’ affirmations he sought to draw the conclusion that it must have been Leung Chi-shing who had approached the bank and had all relevant discussions with the plaintiff.  In respect of the question of influence, he then relied upon, for example, paragraphs 11 and 12 of the first affirmation of the first defendant which, in translation, reads:

“11. At that time, Chi Shing proposed his investment plan to my wife and said he required some capital funds. He persuaded my wife to mortgage the property jointly owned by me and my wife and located at Room 506, Block 29, Heng Fa Chuen, Chai Wan, Hong Kong (‘that property”) to secure a loan money for him to achieve his business plan. Chi Shing would be responsible for the repayment of the loan. Chi Shing repeatedly assured us that he would repay the loan punctually and we would not be liable for any debt.

12. My wife and I recall that Chi Shing claimed that the most he required was HK$800,000.  My wife and I considered that we could undertake such amount and would stand as guarantors for the sum of HK$800,000.  We were definitely certain that at that time Chi Shing did not mention that our undertaking for him could exceed the value of that property or be unlimited.”

9.Mr Man, who appeared on behalf of the plaintiff, pointed that for the defendants to succeed they had to show that there was an underlying wrong.  He reminded this court of the evidence given not only by the first defendant but also by the second defendant, particularly in her second affirmation.  The law was clear that there was no presumption that a parent would place trust and confidence in a son.  The evidence simply amounted to the defendants trusting a son that he would repay and having confidence in his commercial ability.  Counsel argued that that was not sufficient to raise any presumption of undue influence.  On the cases there had to be dominance or control for such a presumption to apply.

10.In my view there was no relationship which would give rise to a presumption of undue influence.  The defendants’ evidence showed that they knew they were mortgaging their flat and they chose to do so.  The only matter that they were unaware of was that the terms of the mortgage entailed an “all monies” mortgage.  But clearly they were happy to support their son in his new venture.

11.Having failed to show that there was any influence in the sense of dominance or control, the defendants have also clearly failed to show that there was any undue influence.  In keeping with Lord Scott of Foscote NPJ’s exhortation in paragraph 34 of his judgment in the case of Li Sau Ying v Bank of China (Hong Kong) Ltd 7 HKCFAR 579 to:

“..concentrate on whether the evidence justifies the inference that, on a balance of probabilities, the impugned transaction was procured by undue influence, that is to say, by an abuse by the allegedly dominant party of the trust and confidence reposed in him by the allegedly subservient party.”

the facts simply do not bear that out.  There was no abuse in this case, by the son or by anybody else.  What there was, were loving parents who were prepared to back their son in his new venture because they admired and respected his apparent commercial prowess.  Unfortunately, the son’s, no doubt, sincere expectations of fulfilling his commitments could not be achieved.

12.It was for these reasons that I considered that the plaintiff was correct that there was no defence.  In so saying I can only repeat my expressed sympathy for the parents who have lost the major asset that they have worked all their lives to attain.

Hon Le Pichon JA:

13.I agree with the Reasons for Judgment of Rogers VP.

Hon Stone J:

14.I agree with the Reasons for Judgment of Rogers VP.

Mr Bernard Man, instructed by Messrs Gallant Y.T. Ho & Co., for the Plaintiff/Respondent

Mr Kevin B Egan & Ms Angel Mak, instructed by Messrs C.K. Mok & Co., for the 1^st and 2^nd Defendants/Appellants