Dbs Bank (Hong Kong) Ltd v. Lok’s Engineering Ltd and Others

HCA 2522/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 2522 OF 2009

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BETWEEN

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J U D G M E N T

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1.This is an appeal by the 3^rd defendant against the Decision of Master Hui dated 21 February 2014 in which the Master entered summary judgment against the 1^st, 2^nd, 3^rd and 4^th defendants.

Background

2.The plaintiff is a bank in Hong Kong and is the successor of the assets, liabilities and security interests of Kwong On Bank Limited, pursuant to the Dao Heng Bank Limited (Merger) Ordinance (Cap 1172).

3.The 1^st defendant is an engineering company of which the 2^nd defendant was a director and shareholder.  The 3^rd defendant is the 2^nd defendant’s wife and upon the evidence before me had no interest or involvement in the affairs of the 1^st defendant.  The 4^th defendant is a company owned and controlled by the 2^nd and 3^rd defendants and, inter alia, held the 2^nd and 3^rd defendants’ matrimonial home, in Villa Athena (“the property”).

4.By two “all monies” mortgages dated 21 March 1996 and 21 July 1997 the property, amongst other properties, which was then in the joint names of the 2^nd and the 3^rd defendant was charged to the Bank of America (“BOA”) to secure the 1^st defendant’s debts.  By virtue of Clause 2.01 of the two BOA mortgages, the 3^rd defendant covenanted that she would pay on demand to BOA all monies which might “from time to time become due and payable by the 1^st defendant in respect of any loan facility advanced by (BOA) to (the 1^st defendant) pursuant to the terms and conditions of any facility letter or any agreement between (BOA) and (the 1^st defendant) relating to such loan facility as amended or supplemented from time to time”. 

5.By virtue of this the 3^rd defendant’s liability could be varied without obtaining any separate consent from her, and could potentially be unlimited. 

6.In 2001, the 1^st defendant decided to switch its bank from BOA to Kwong On Bank, the plaintiff’s predecessor.  The banking facilities granted by Kwong On Bank were secured by an “unlimited first legal charge” dated 16 August 2001 made by Kwong On Bank as Lender, the 1^st defendant as Borrower and the 2^nd, 3^rd, and 4^th defendants as mortgagors (“the Legal Charge”).  Thus the 3^rd defendant charged her interest in the property to Kwong On Bank as security for the banking facilities granted to the 1^st defendant.

7.The Legal Charge was executed on behalf of the 3^rd defendant by the 2^nd defendant as her lawful attorney under a Power of Attorney dated 21 July 2001.  The Power of Attorney and the other documents relating to the Legal Charge are said to have been explained to the 3^rd defendant by a law clerk, a Mr Au of the firm Messrs. Fairbairn Catley Lo & Kwong.

8.As a result of the Legal Charge, Kwong On Bank advanced a sum of HKD2,999,000 to BOA in order to redeem the two BOA mortgages.

9.On 25 May 2009, the 2^nd and 3^rd defendants sold the property for HKD4,200,000 and after deduction of charges paid the same to the plaintiff.  By a release of the same date the Legal Charge was partially released in respect of the property. 

The 3^rd defendant’s case

10.In response to the plaintiff’s claims in this Action, the 3^rd defendant has raised the defence of undue influence.  Mr Jason Wong, Counsel for the 3^rd defendant has drawn my attention to the following matters in the evidence :-

(i) The 3^rd defendant describes herself as “a traditional housewife”.  She has only a primary school education and is unable to read and write English. 

(ii) The 3^rd defendant has never been involved in the business of the 1^st defendant.  She is neither a director nor a shareholder of that company.

(iii) The 3^rd defendant was not the effective borrower.

(iv) The 3^rd defendant does whatever her husband the 2^nd defendant asks her to do in matters concerning business and matrimonial property, including the mortgaging of their matrimonial home. 

(v) The 3^rd defendant disputes that the Power of Attorney, used by the 1^st and 2^nd defendants to effect the 3^rd defendant’s involvement with the various banking arrangements, was interpreted to her or that she was warned of the consequences of signing this Power of Attorney. 

(vi) As to the other banking documents which were purportedly explained to her, the 3^rd defendant was unaware of the unlimited extent of her potential liability.

(vii) As to the signing of the board of resolutions of the 4^th defendant which were connected with the approval of the execution of the Legal Charge, these were signed by the 3^rd defendant without explanation of their content or purpose, at the direction of a representative from Fairbairn Catley Low & Kwong. 

(viii) The 3^rd defendant has never seen any of the facility letters which detailed the various facilities that were, over time, granted to the 1^st defendant.

(ix) The Legal Charge dated 16 August 2001 was executed on the 3^rd defendant’s behalf when she was not in Hong Kong.

(x) A confirmation letter which the 3^rd defendant purportedly signed to confirm the authority of the 2^nd defendant to execute the Legal Charge on her behalf was not in fact signed by the 3^rd defendant, nor does she understand the content of this letter.  Additionally, although attempts have been made by the 3^rd defendant’s solicitors to obtain and inspect the original of this confirmation letter, apparently the original cannot now be located.

(xi) In relation to the original BOA mortgages, the 3^rd defendant was similarly ignorant of their terms and effect and simply signed the same at the direction of the 2^nd defendant.  Furthermore, she has no idea why the loans extended to the 1^st defendant were “swapped” from the BOA to the Kwong On Bank.

11.Mr Wong further submits that in considering the above matters, this case is clearly fact sensitive and is wholly unsuitable for summary judgment.  Mr Wong has drawn my attention to the Court of Final Appeal decision in Li Sau Ying v. Bank of China (Hong Kong) Ltd. [2004] 7 HKCFAR 579 in which the Court held at paragraph 30 (Lord Scott MPJ) :-

“The strong message from Royal Bank of Scotland PLC v Etridge (No2) [2001] UKHL44 therefore is that, particularly in class 2B cases concentration on a so-called presumption of undue influence is likely to detract from the real issue, namely whether the evidence justifies a conclusion that the impugned transaction was procured by undue influence.”

12.Mr Wong submits that the matters listed above provide ample evidence, certainly at a summary judgment stage, that the impugned transactions may have been procured by undue influence. 

13.Mr Wong further submits in effect, that from the bank’s perspective it is certainly arguable, at least at the summary judgment stage, that in the circumstances the bank was put on inquiry as to whether or not the wife really understood the nature and effect of the transactions she was entering into. 

14.In Li Sau Ying v. Bank of China (Hong Kong) Ltd., Lord Scott at para 36 considered the dicta of Lord Nicholls in Royal Bank of Scotland PLC v Etridge No 2 [2001] UKHL 44.  At para 54 Lord Nicholls said:-

“The furthest a bank can be expected to go is to take reasonable steps to satisfy itself that the wife has had brought home to her, in a meaningful way, the practical implications of the proposed transaction. This does not wholly eliminate the risk of undue influence or misrepresentation. But it does mean that the wife enters into a transaction with her eyes open so far as the basic elements of the transaction are concerned….”

and then at para 147 of that judgment Lord Scott said 

“‘On inquiry’ in my opinion as to whether the wife understood the nature and effect of the transaction she was entering into ….what Lord Brown-Wilkinson had in mind was that the bank should be expected to take reasonable steps to satisfy itself that she understood the transaction she was entering into.”

15.Lord Scott concluded (at para.39):-

“In my opinion, on the authority of Royal Bank of Scotland PLC v. Etridge (No 2) [2001] UKHL44, the standard required of a mortgagee placed ‘on inquiry’ is to take ‘reasonable steps’ What are ‘reasonable steps’ must depend on the facts of each case.”

16.Mr Wong submits that there is sufficient evidence at this stage for a Court to consider at trial whether the bank was put on inquiry and took reasonable steps to satisfy itself that the 3^rd defendant understood the nature and effect of the transactions she was entering into.

The plaintiff’s case

17.Mr George Hui, Counsel for the plaintiff bank has submitted that in order to succeed, the 3^rd defendant needs to establish four elements as follows:

(i) A relationship of trust and confidence.

(ii) That the impugned transaction calls for an explanation.

(iii) That the bank was put on inquiry at the time of the transaction.

(iv) That the bank has failed to take reasonable steps to explain the transaction.

18.Mr Hui has sensibly accepted that for the purposes of the present argument one may assume a relationship of trust and confidence.  Mr Hui further submits that it can again, for the purposes of the present argument, be assumed that the solicitor’s clerk Mr Au did not properly explain the relevant documents to the 3^rd defendant.  I think that this is a fair concession at this stage.  With respect to Mr Au he is a clerk apparently without any formal legal qualifications.  It is therefore a question of fact as to whether or not he is or was able to properly explain the legal effect of the various contractual documents and Power of Attorney to the 3^rd defendant.  Furthermore and importantly, there is no evidence from Mr Au as to what he actually told the 3^rd defendant in respect of any of these documents. 

19.Mr Hui instead concentrates his attack on elements (ii) and (iii) above, submitting that in the circumstances of this case, the impugned transactions did not call for any explanation, and the bank was not and could not have been put on inquiry as to the same. 

20.In this regard, Mr Hui relies heavily upon the Li Sau Ying v Bank of China (Hong Kong) Ltd. case and in particular that the Legal Charge in this case was not a fresh mortgage but, as in the Li Sau Ying case, was a replacement mortgage, replacing the mortgages granted by BOA in 1996 and 1997.  Mr Hui points out that in these circumstances the 3^rd defendant had at all material times been liable for the 1^st defendant’s indebtedness.  Mr Hui says that the 3^rd defendant could not have been discharged from her potential unlimited liability under the two BOA mortgages without first entering into the Legal Charge, and that in consequence the 3^rd defendant received a commercial advantage.

21.Mr Hui further points out that the 3^rd defendant was involved in the sale of the property for HKD4,200,000, and that when the sale proceeds were then paid to the plaintiff, the 3^rd defendant did not challenge or question the validity of the Legal Charge or the Power of Attorney.

22.Mr Hui further submits that it is wholly irrelevant whether the 3^rd defendant signed the confirmation letter or the Legal Charge or whether the 2^nd defendant signed as her attorney pursuant to the Power of Attorney.  Mr Hui says these matters are irrelevant because at all material times the 3^rd defendant was fully aware that she had entered into the legal charge, and that she had paid the sale proceeds of the property to the plaintiff pursuant to the charge. 

23.In these circumstances, Mr Hui submits there was no need to take any reasonable steps as the plaintiff’s predecessor (Kwong On Bank) was not “put on inquiry” in the first place.

Discussion

24.It is important to bear in mind that summary judgment applications are designed for clear cases in which there is no serious factual dispute.  The defendant must show that there are triable issues.  In this regard the Court asks itself, is what the defendant says credible, and is there a fair or reasonable probability of the defendant having a real or bona fide defence?

25.It is also important to bear in mind that this case involves a husband and wife situation.  Upon the present evidence the wife had no involvement or participation in the 1^st defendant’s business.  She was not the effective borrower.  She has a limited education.  The husband appears to have been making the decisions in relation to matters effecting the wife’s potentially unlimited liability, employing a Power of Attorney the legal effect of which the wife says was not explained to her. There is a question as to whether the related banking documents were properly explained to the 3^rd defendant and whether she in fact signed or even understood the importance of the confirmation letter.  These are fact sensitive matters.  The fact sensitive nature of undue influence cases was acknowledged in Li Sau Ying v Bank of China (Hong Kong) Ltd. (at para 11).  In Dah Sing Bank Ltd v. Sing Hai Handbags Manufactory Ltd & ors [2007] 3 HKC 515 which involved allegations of undue influence amongst family members in a family business, Deputy Judge Carlson observed (at para.67):-

“It seems to me that few areas of the law can be more fact sensitive than this.”

26.The facts of the Li Sau Ying v Bank of China (Hong Kong) Ltd. case can be distinguished from the present case in a number of aspects.  Firstly, of course this case actually went to trial, and the conclusions reached by the Court were based upon evidence which had been tried in tested.  Furthermore, it’s plain that Ms Li in that case was an experienced and educated business person who was (unlike in this case) intimately involved in the transactions concerning the banks, and indeed specifically limited her liability. 

27.I am conscious that Mr Hui’s argument as to a “replacement mortgage” is a powerful argument which may ultimately defeat the 3^rd defendant’s claims.  However, this argument in my view, is not at this stage conclusive of this matter, and should be considered within the factual framework referred to by Mr Wong. 

28.I have considered whether there is evidence that may justify a conclusion that the impugned transaction was procured by undue influence.  I find that there is.  I have also considered whether the evidence may justify a finding that there was an appreciable risk that a person in the 3^rd defendant’s position may not have understood the nature and effect of the transaction(s) she was entering into, such that the bank should have taken reasonable steps to bring home to her in a meaningful way the practical implications of the transaction.  Again, I find there is.  Furthermore, I have considered whether it may be said that the steps the bank did take were in all the circumstances reasonable ones.  This is a matter of disputed evidence and as such not a question to be answered by affidavit evidence. As noted in the Li Sau Ying case, what are reasonable steps must depend on the facts of each case.

29.Considering all these matters in the context of a summary judgment application, I have no doubt that the evidence in this case raises triable issues, and as such this case is not an appropriate one for summary judgment.

30.I set aside the judgment against the 3^rd defendant, dated 21 February 2014, and I grant the 3^rd defendant unconditional leave to defend these proceedings. 

31.I make an order that the costs of an occasioned by these proceedings including the costs of and occasioned by the application below be paid by the plaintiff to the 3^rd defendant, the same to be taxed if not agreed.  This costs order will become absolute 14 days from the date of this judgment unless either party raises an objection thereto.

Mr George Hui, instructed by Siao, Wen and Leung, for the plaintiff

Mr Jason Wong, instructed by Ng & Co, for the 3^rd defendant  

Eric Lai, Jason Cheung & Co for the 1^st, 2^nd and 4^th defendants was absent