SUN HUNG KAI INVESTMENT SERVICES LTD v. QUALITY PRINCE LTD AND OTHERS

CACV 278/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 278 OF 2009

(ON APPEAL FROM HCA NO. 1995 OF 2008)

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REASONS FOR JUDGMENT

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Hon Kwan JA:

1.  This is an appeal of the plaintiff from the decision of Suffiad J giving unconditional leave to the 4^th and 5^th defendants to defend the plaintiff’s claim arising out of separate deeds of guarantee they executed in its favour. The judge held there was a triable issue on the defence of undue influence. We dismissed the appeal at the conclusion of the hearing, and ordered that the costs of this appeal be the defendants’ costs in the cause of the action. These are the reasons for that judgment.

The background

2.  The relevant background facts, most of which are taken from the judgment, may be stated as follows.

3.  At all material times, the plaintiff was engaged in the business of share-broking, underwriting initial public offers and margin financing. The 1^st and 2^nd defendants were private companies incorporated in the British Virgin Islands and effectively were owned and controlled by Lam Sai Wing (“Lam”).  Lam passed away on 26 September 2008. He was the chairman and founder of a publicly listed company known as Hang Fung Gold Technology Limited (“Hang Fung Gold”). His estate was sued as the 3^rd defendant. The 4^th defendant was his wife. The 5^th defendant was the Chief Executive Officer of Hang Fung Gold.

4.  On 21 March 2005, Lam on behalf of the 1^st defendant opened a securities trading account with the plaintiff with margin financing. He executed documents prepared by the plaintiff for this purpose, and provided a personal guarantee in a Deed of Guarantee and Indemnity, by which he, as primary obligor and not merely as surety, irrevocably and unconditionally guaranteed the discharge by the 1^st defendant of all its obligations to the plaintiff which might at any time thereafter become due.

5.  On 22 March 2005, the 4^th defendant and 5^th defendant executed separate Deeds of Guarantee and Indemnity in favour of the plaintiff in identical terms to the deed executed by Lam the day before. These are the guarantees in respect of which the plaintiff brought its claim against the 4^th and 5^th defendants.

6.  Lam caused the 2^nd defendant to open a securities trading account with the plaintiff with margin financing on 5 September 2007.

7.  The loan facility granted by the plaintiff to the 1^st defendant in March 2005 was $30 million. This was raised to $50 million in March 2008. The loan facility granted by the plaintiff to the 2^nd defendant in September 2007 was $2 million. It was stipulated in the loan facility letters that the value of the collateral must at no time be less than 500 per cent of the amount of the liabilities then outstanding. The 1^st and 2^nd defendants had deposited shares of Hang Fung Gold with the plaintiff as collateral.

8.  The share price of Hang Fung Gold had a significant drop on 18 September 2008 with the outbreak of the financial tsunami. The plaintiff requested the 1^st and 2^nd defendants the following day to meet the margin requirement in respect of their accounts or to repay the outstanding sum owing to the plaintiff. This request had not been complied with when Lam passed away on 26 September 2008. Trading in the shares of Hang Fung Gold was suspended on 29 September, and again on 30 September, and remained suspended thereafter. On 15 October 2008, the plaintiff informed the defendants’ solicitors it had exercised its power of sale and disposed of the shares deposited by the 1^st and 2^nd defendants to a purchaser. After the proceeds were applied to set off part of the liabilities, the 1^st defendant remained indebted to the plaintiff in the sum of $36,089,604.66.

The proceedings

9.  The plaintiff issued the writ in this action against the five defendants on 14 October 2008 and a statement of claim was served on 24 October. The claim was for $36,089,604.66 plus interest.

10.  On 8 December 2008, the 4^th and 5^th defendants filed separate defences. The plaintiff applied for summary judgment against all the defendants on 23 December.

11.  Both defences of the 4^th and 5^th defendants alleged that they signed their Deeds of Guarantee and Indemnity on 22 March 2005 at the offices of the plaintiff’s solicitors, that the solicitors did not explain the contents of the documents to them, that they were not advised to seek independent legal advice on the documents, and that they were asked to sign without having the contents explained.  It was alleged they were induced to sign “whilst acting under the influence of the plaintiff’s solicitors.” There was no allegation in the pleadings filed that they had executed the Deeds under the undue influence of Lam.

12.  It was only belatedly in the affirmations made by these defendants in April 2009 that they mentioned for the first time matters suggesting they had executed the Deeds under the undue influence of Lam.

13.  Master C. Chan heard the application for summary judgment in May 2009. He gave summary judgment against all five defendants in the amount claimed. As mentioned in his judgment, the 4^th and 5^th defendants seemed to have abandoned the allegation the Deeds were signed at the offices of the plaintiff’s solicitors. The allegation that these defendants had executed the Deeds under the influence of the plaintiff’s solicitors was dropped without explanation. The Master rejected their defence of undue influence on the part of Lam.

14.  The 4^th and 5^th defendants appealed the judgment of the Master. Suffiad J allowed their appeal and granted unconditional leave to defend on 7 August.

The judgment of Suffiad J

15.  The only defence raised before the learned judge was the undue influence of Lam. The judge summarised the bases upon which this defence was run by the 4^th and 5^th defendants in the following terms.

16.  In respect of the 4^th defendant, she had deposed that:

(1)     Lam was the sole shareholder of the 1^st defendant and the only person who was authorized to operate the margin accounts for his own benefit;

(2)     she was Lam’s wife but she had no interest in the 1^st defendant, nor did she have any authority or right to operate the margin accounts;

(3)     she signed the Deed of Guarantee and Indemnity because she knew that Lam had signed a similar document;

(4)     the contents of the Deed were not explained to her nor the risk of signing it.  She was not told of her right to seek independent legal advice; and

(5)     she received little formal education, only up to Form 2 level in China with very limited ability to communicate in or understand English.  She was a submissive wife and throughout her marriage, Lam had made all the decisions relating to the Hang Fung Group.

17.  As for the 5^th defendant, she had deposed that:

(1)     she was neither a director nor shareholder of the 1^st defendant and had no connection or interest in the 1^st defendant;

(2)     she was an employee of the Hang Fung Group and worked under and upon the instructions of Lam;

(3)     although she was given the title as a director of the Hang Fung Group, all decisions of the Group were made by Lam;

(4)     she signed the Deed of Guarantee and Indemnity because Lam had asked her to sign it, as he had done with other similar documents; and

(5)     the contents of the Deed of Guarantee and Indemnity were never  explained to her.

18.  The judge then referred to the established classification of undue influence cases into actual undue influence (Class 1; where the complainant is required to prove the wrongdoer exerted undue influence) and presumed undue influence (Class 2; where the complainant only has to show there was a relationship of trust and confidence with the wrongdoer of such a nature that it is fair to presume the wrongdoer exerted undue influence, the burden then shifting to the other party to prove that the impugned transaction was entered into freely). Class 2 is sub-divided into 2(A) (in which certain relationships as a matter of law would raise the presumption that undue influence was exercised) and 2(B) (in which the complainant has to prove the de facto existence of a relationship by which he reposed trust and confidence in the wrongdoer). The 4^th and 5^th defendants contended they fall within Class 2(B).

19.  After citing a passage from the speech of Lord Browne-Wilkinson in Barclays Bank Plc v. O’Brien [1994] 1 AC 180 at 189[1] relating to Class 2(B) cases, the judge said this in paragraph 44 of his judgment:

“Applying the words cited above, seemingly it would be sufficient for the 4^th and 5^th defendants in this case to raise the presumption of undue influence of the Deceased, by showing that they reposed trust and confidence in the Deceased which led to their signing the Deeds.  That necessarily arise from the relationship of being the wife (in the case of the 4^th defendant) and being the employee (in the case of the 5^th defendant) of the Deceased.”

20.  The judge went on to consider how the undue influence would impact on a third party such as the plaintiff here. He quoted another part of Lord Browne-Wilkinson’s speech at 191[2], and he had this to say in paragraph 47 of his judgment:

“Applying those words cited above to the present case, whether or not the plaintiff bank has actual or constructive notice of undue influence presumed upon the 4^th and/or 5^th defendants by the Deceased will be a question of fact. That can only be resolved after hearing the evidence including cross-examination.”

21.  The judge then held the Master had been in error in deciding that the evidence as it stands at present cannot raise the presumption of undue influence by Lam. Since the presumption of undue influence had arisen, it was for the plaintiff to rebut it, and the Master was in error in finding on affidavit that the presumption had been rebutted, as there was clearly a triable issue of fact which can only be determined after trial.

The plaintiff’s arguments on appeal

22.  Mr. Whitehead, SC argued on appeal that the judge had erred in law in his application of the aforesaid dicta of Lord Browne-Wilkinson in Barclays Bank Plc v. O’Brien and that the judge had failed to apply the later authorities which qualified, distinguished and explained the O’Brien case, namely, Royal Bank of Scotland Plc v. Etridge (No. 2) [2002] 2 AC 773, Bank of China (Hong Kong) Ltd. v. Wong King Sing [2002] 1 HKLRD 358, and Li Sau Ying v. Bank of China (Hong Kong) Ltd. (2004) 7 HKCFAR 579. He pointed to paragraphs 44 and 47 of the judgment set out above and made the following broad points:

(1)     The statements in these paragraphs portrayed a misplaced application of the issue of undue influence. The judge concentrated on the presumption which was said to arise, “necessarily … from the relationship of being the wife (in the case of the 4^th defendant)  and being the employee (in the case of the 5^th defendant)” of Lam.

(2)     The judge erred in law in holding that the 4^th and 5^th defendants had sufficiently raised a presumption of undue influence by simply showing they reposed trust and confidence in Lam. More is needed before the stage is reached at which, in the absence of any other evidence, an inference of undue influence properly can be drawn or a presumption of undue influence can be said to arise[3].

(3)     In Class 2(B)  cases, for a presumption of undue influence to arise, there are two prerequisites. The complainant has to show that he placed trust and confidence in the influencer or that the influencer acquired ascendancy over him, and that the transaction could not otherwise be readily explicable by the relationship of the parties[4]. Here, when the judge adopted a presumption of undue influence based on the relationships of trust and confidence the 4^th and 5^th defendants had had with Lam, he did not go on to consider the second prerequisite, namely, whether the transaction could be readily explicable by the relationships of the parties.

(4)     The issue of undue influence ought to be decided on the state of the evidence and not because of some artificial legal presumption to the effect that there must have been undue influence[5]. Concentration on a so-called ‘presumption of undue influence’ is likely to detract from the real issue, which is whether the evidence justifies a conclusion that the impugned transaction was procured by undue influence[6]. Here, the judge had failed to concentrate on the evidence when he concluded that the defendants had raised an arguable case as to the undue influence of Lam.

23.  The judge also had made no reference to the evidence filed by the plaintiff seeking to cast doubt on the defendants’ assertion that they had executed the Deeds under the undue influence of Lam. Nor did he mention the second prerequisite for the presumption to arise, namely, whether the transaction could be readily explicable by the relationship of the parties. Although the fact that a judge does not specifically refer to a matter does not mean he must have failed to take it into consideration, I am left in some doubt if, in coming to the conclusion that the defendants have raised a triable issue on undue influence, the judge had considered properly the whole of the evidence, and not merely relied on a presumption by virtue of the relationship of trust and confidence.

24.  I am inclined to think Mr. Whitehead has made some valid criticisms.  The next matter to consider is whether there is indeed a triable issue that the transactions were affected by the undue influence of Lam, in the light of the whole of the available evidence.

If there is a triable issue on undue influence

25.  In considering the defence of undue influence raised by 4^th and 5^th defendants, there are three questions for determination[7]:

(1)     have the defendants proved what is necessary for the court to be satisfied that the transactions were affected by the undue influence of Lam?;

(2)     was the plaintiff put on inquiry?; and

(3)     if so, did the plaintiff take reasonable steps to satisfy itself that there was no undue influence?

26.  Unless question (1) is answered in favour of the defendants, questions (2) and (3) do not arise. Mr. Whitehead contended that the defendants do not have a credible case on question (1), and so it would not be necessary to consider the submissions made by Mr. Strachan for the defendants on questions (2) and (3).

27.  Question (1) would be answered with reference to the two prerequisites mentioned earlier, namely, if there is proof that the 4^th and 5^th defendants reposed trust and confidence in Lam, or Lam had acquired ascendancy over them, and the transactions could not readily be explained by the relationship of the parties. If these matters are established in the defendants’ favour, the evidential burden then shifts to the plaintiff to counter the inference that otherwise might be drawn that the transactions were affected by the undue influence of Lam.

28.  Mr. Whitehead referred the court in some detail to the evidence filed by the plaintiff to make good his submission the defendants do not have a credible case. In summary, his submission was that the 4^th and 5^th defendants occupied important positions of responsibility in a listed company, they were paid very substantial remuneration for their work, and both had considerable experience in business.

29.  The 4^th defendant held a number of committee positions and public positions, and was bestowed the prestigious honour of a fellowship of The Professional Validation Council of Hong Kong Industries. The 5^th defendant was a university graduate and as the Chief Executive Officer of the Hang Fung Group, was responsible for product and market development and the formulation of the sales and marketing strategies of the Group. Furthermore, during 2000 to 2003, the 4^th defendant had executed seven previous guarantees to guarantee the 1^st defendant’s indebtedness to the affiliate companies of the plaintiff, and on at least six occasions, the content and effect of these documents were explained to her by a solicitor, who advised her of the desirability to seek independent legal advice if she should have any questions.

30.  All this undisputed evidence would go to refuting any claim that the 4^th and 5^th defendants had just blindly followed the acts of Lam. They did not say they did not understand the nature of the document each had executed, nor was there evidence to suggest they were forced, tricked or misled in any way by Lam into executing the Deeds. Mr. Whitehead urged the court to apply a large degree of common sense to the matter, and not to follow the principles mechanically as if they were formulas[8].

31.  As a fallback position, he submitted that the defence of undue influence of Lam is at best shadowy, and that if leave to defend were to be granted, it should be on condition that the sums claimed by the plaintiff be paid into court. He pointed out that the defence of undue influence of Lam was advanced only at the eleventh hour. Until that time, the 4^th and 5^th defendants had been content to advance a totally different defence, being undue influence by the plaintiff’s solicitors. This apparently untruthful defence had been abandoned without explanation.

32.  For his part, Mr. Strachan took the court to other parts of the evidence not covered by the judge’s summary of the defendants’ case, showing that Lam was a dominant character at home and in the office, with a traditional Chiu Chow background and a wholly chauvinistic personality.  He submitted that a particular cultural context is a factor that might take a case out of the ordinary situation of a married couple, in which a wife generally reposes trust and confidence in her husband and agrees to become surety to support his debts or business[9].  Thus, he said, the court is required to look at all the circumstances, as it does not necessarily follow that a person who is successful, able and confident would not be unduly influenced by someone[10].

33.  He submitted that notwithstanding that the judge did not appear to have dealt with the question whether the transactions were readily explicable by virtue of the defendants’ relationship with Lam, it was plain there was a triable issue on this question. The Deeds of Guarantee constituted a disadvantage sufficiently serious not to be reasonably accounted for on the ground of the parties’ relationship. The defendants had committed themselves to guaranteeing liabilities unlimited in scope and amount, for the operation of margin accounts for the sole benefit of Lam. In the case of the 5^th defendant, who had no blood relationship with Lam, there remained an even stronger case for explanation.       

34.  Mr. Strachan also contended that apart from presumed undue influence, the defendants have a triable issue on actual undue influence. The critical question here is whether the defendants were allowed to exercise an independent and informed judgment. The 4^th and 5^th defendants had said expressly in their affirmations they would not dare raise any views contrary to Lam, and that it had been their practice to sign documents Lam had asked them to sign without any explanation from him.

35.  Thus, if the court is satisfied there is a triable issue on question (1), Mr. Strachan submitted that the defendants would probably have questions (2) and (3) determined in their favour since the plaintiff was put on inquiry as the evidential threshold is set at a low level where a wife offers to stand surety for her husband’s debts[11], and there is no evidence the plaintiff had taken any of the prescribed steps which it was required to take to bring home to the defendants the risks they were running by standing as sureties[12].

36.  Lastly, Mr. Strachan drew attention to the following dicta of Lord Hobhouse in Royal Bank of Scotland Plc v. Etridge (No. 2) at para. 123, which may have particular relevance to an application for summary judgment where undue influence is raised in this kind of situation:

“There is an important distinction to be drawn between cases which have been tried where the parties have been able to test the opposing case and the trial judge was able to make findings of fact having seen the critical witnesses and evaluated the evidence. By contrast, in those cases where the lender is applying for an immediate possession order without a trial or to have the defence struck out, the court is being asked to hold that, even if the wife’s allegations of fact be accepted, the wife’s case is hopeless and bound to fail and that there is no reason why the case should go to trial. This conclusion is not to be arrived at lightly nor should such an order be made simply on the basis the lender is more likely to succeed. Once it is accepted that the wife has raised an arguable case that she was in fact the victim of undue influence and that the bank had been put on inquiry, it will have to be a very clear case before one can say that the bank should not have to justify its conduct at a trial.”

37.  In my judgment the case before this court is not such a clear case. It cannot be said on the available evidence the case of the 4^th and 5^th defendants is hopeless and bound to fail.  The defendants have succeeded in raising a triable issue on this defence, albeit this has been advanced at a very late stage.

38.  True it is that I have some misgivings on the bona fides of this defence, having regard to the abandonment of the untruthful defence of undue influence of the plaintiff’s solicitors. However, these misgivings are not sufficiently grave to cause me to think that the latest defence is clearly a sham so that leave to defend should only be given on appropriate condition, although it is for this reason that I declined to award costs of this appeal to the 4^th and 5^th defendants in any event.  In my view in these very particular circumstances justice would be better served by ordering the costs of the appeal to be these defendants’ costs in the cause of the action, so they would recover the costs of this appeal only if they should succeed at the trial.

 Hon Stone J:

39.  I agree with the Reasons for Judgment of Kwan JA, and in deference to an interesting argument wish to add a few words of my own.

40.  I confess that from a purely commercial viewpoint I had some sympathy with the frustration Mr Whitehead SC evidently felt when recounting in argument the evidential twists and turns which have taken place in the case as advanced by the 4^th and 5^th defendants, and with his submission that in order to decide this appeal in his favour, and thereby to restore the Order of Master C Chan, that the court should not hesitate to employ “a strong degree of common sense” when evaluating the cumulative affirmation evidence relied upon by these defendants.

41.  Tempting though this invitation was in the particular circumstances, in my view it would have been in error simply to have assumed from the unfortunate forensic history of this matter that the belated defence of undue influence should, without more, simply be categorized as a ‘sham’ and consigned to the box marked ‘wholly unworthy of belief’ and ‘bound to fail’, which in practical terms remains the benchmark which the plaintiff was required to meet in order to succeed on this appeal and for judgment to be entered in its favour.

42.  It strikes me that in instances in which the defence of undue influence is raised it will be difficult to obtain summary judgment in face of this type of allegation, which by its very nature must be ‘fact sensitive’ within potentially a huge range of circumstances, and, it has to be said, further has been the subject of a good deal of judicial observation (of varying complexity) in the leading cases on the subject.

43.  Clearly the form this allegation now has taken in this instance was but lately relied upon, but as Mr Strachan pointed out, in respect both of the positions of the 4^th defendant, qua wife, and the 5^th defendant, qua senior and long-time employee, the factual matrix surrounding their respective relationships with a dominant Chinese husband/employer of ‘the old school’ was not such as to make this argument a clear non-starter, and certainly was not one which was susceptible to cogent and reliable evaluation on the face of the affidavits alone.

44.  True it is that the manner in which this defence now has emerged is likely to presage some stringent cross-examination at trial, but at bottom this is nothing to the point: in my judgment a triable issue has been raised, and a trial there must be.

45.  In this context it is perhaps worth reflecting on the procedural history of this case and the practical utility of seeking summary judgment; had a different approach been adopted, I dare say that with appropriate handling in an appropriate list that by now this case could have been done and dusted, whatever its ultimate result, and thus a good deal of money and time saved by moving to trial as quickly as possible at the expense of extended interlocutory debate.  Yet again, it seems, Order 14 procedure has seduced but failed to satisfy.

[1] The relevant passage reads: “In a Class 2(B) case therefore, in the absence of evidence disproving undue influence, the complainant will succeed in setting aside the impugned transaction merely by proof that the complainant reposed trust and confidence in the wrongdoer without having to prove that the wrongdoer exerted actual undue influence or otherwise abused such trust and confidence in relation to the particular transaction impugned.”

[2] The relevant passage reads: “But in surety cases the decisive question is whether the claimant wife can set aside the transaction, not against the wrongdoing husband, but against the creditor bank.  Of course, if the wrongdoing husband is acting as agent for the creditor bank in obtaining the surety from the wife, the creditor will be fixed with the wrongdoing of its own agent and the surety contract can be set aside as against the creditor.  Apart from this, if the creditor bank has notice, actual or constructive, of the undue influence exercised by the husband (and consequentially the wife’s equity to set aside the transaction) the creditor will take subject to that equity and the wife can set aside the transaction against the creditor (albeit a purchaser for value) as well as against the husband.”

[3] Royal Bank of Scotland Plc v. Etridge (No. 2), supra., para. 160, per Lord Scott

[4] Royal Bank of Scotland Plc v. Etridge (No. 2), supra., para. 21, per Lord Nicholls; Bank of China (Hong Kong) Ltd. v. Wong King Sing, supra., paras. 47 and 48, per Ma J.

[5] Royal Bank of Scotland Plc v. Etridge (No. 2), supra., para 106, per Lord Hobhouse

[6] Li Sau Ying v. Bank of China (Hong Kong) Ltd., supra., paras. 30 and 34, per Lord Scott

[7] Royal Bank of Scotland Plc v. Etridge (No. 2), supra., para.101, per Lord Hobhouse

[8] Bank of China (Hong Kong) Ltd. v. Wong King Sing, supra., para. 34

[9] Bank of China (Hong Kong) Ltd. v.Well Lok Printing Ltd., CACV386 of 2006, 23 January 2008, paras. 15 to 20, per Le Pichon JA

[10] Bank of China (Hong Kong) Ltd. v. Wong King Sing, supra., para. 73

[11] Barclays Bank Plc v. O’Brien, supra., at 196, per Lord Browne-Wilkinson; Royal Bank of Scotland Plc v. Etridge (No. 2), supra., paras. 44 to 48, per Lord Nicholls

[12] Royal Bank of Scotland Plc v. Etridge (No. 2), supra., paras. 50 to 80, per Lord Nicholls