BANK OF CHINA (HONG KONG) LTD v. WELL LOK PRINTING LTD AND OTHERS

HCMP 3925/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 3925 OF 2002

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J U D G M E N T

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Introduction

1.  This is a mortgage action by the Plaintiff (“the Bank”) to, initially, enforce three Legal Charges against the Defendants.  As I shall explain, these proceedings continue only against the 3^rd Defendant (“Choi”) and in respect of her alleged liability under the second of the three Legal Charges (“the 2^nd Charge”). 

2.  The 1^st Defendant (“Well Lok”) was a company in which the 2^nd Defendant (“Ko”) was a major shareholder.  It appears that Ko was a businessman and he made his living with Well Lok’s business.  Choi was (and is) Ko’s wife.  Back in June 1996, Hong Kong was undergoing a time of economic boom.  Ko was doing well with Well Lok’s business and he decided to provide a more comfortable home for his family with the purchase of a property in On Chak Mansion, Lei King Wan (“the On Chak Property”).  The 2^nd Charge was created by reason of the finance provided by the Bank for the purchase of the On Chak Property. 

3.  Turning the clock forward, Hong Kong was in a financial slump in 2002.  Fortune had changed for Ko and Well Lok.  Ko was unable to keep up with the monthly repayment under the 2^nd Charge.  At that time, by a Legal Charge dated 1 July 1992 (the first of the three Legal Charges), Well Lok was under an obligation to the Bank to repay, inter alia, general bank facilities.  It was unable to meet those obligations.  To complete the picture, there was a second Legal Charge in respect of the On Chak Property (the third of the three Legal Charges) (“the 3^rd Charge”) which was executed on 30 July 1998.  The 3^rd Charge was apparently taken out to secure, inter alia, general banking facilities granted by the Bank to Well Lok.  There was also default on repayment under the 3^rd Charge. 

4.  Demand letters were issued by the Bank’s solicitors in August 2002 against all 3 Defendants in respect of the 3 Legal Charges.  This action was commenced on the 26 September 2002.  Default judgment was obtained against all Defendants in January 2003.  The Judgment against Choi was set aside in January 2004.  Meanwhile, in April 2003, the Bank took possession of the On Chak Property and sold it in August 2003 for HK$1.86m odd.  The proceeds were insufficient to cover even the mortgage loan and interest thereon.  Pursuant to enforcement actions, Well Lok has been wound up and a bankruptcy order against Ko was obtained by the Bank.

5.  The dispute before this court centres upon the defence of Choi.  Pleadings have been filed in these proceedings.  Choi has had the benefit of legal representation until May 2006.  Her defence is based upon what is often referred to as “The O’Brien Principles” – a transaction (in this case the 2^nd Charge) entered into by a person (Choi), as a result of undue influence, misrepresentation or other legal wrong of a third party (Ko), may be set aside as against the other party to the transaction (the Bank) where it can be established that the other party (the Bank) had actual or constructive notice of the wrong in question. 

6.  In addition, Choi’s pleading contains allegations of “unconscionability” and failure to mitigate loss.  Let me say at the outset that I see no substance in these pleas.  In respect of the former, I disagree with the central element of this allegation that the 2^nd Charge was “vastly to [Choi’s] disadvantage” (the reason will become clear from the details of this case described below).  The ingredients of this cause of action – harsh and oppressive terms of the transaction and one of the parties to it having imposed the objectionable terms in a morally reprehensible manner [see Credit Lyonnais v Burch, CA, [1997] 1 All ER 144 at pp.152j to 153b] – are simply absent.  As regards the latter, there is no evidence before me to make good the claim. 

The law

7.  The O’Brien Principles have provided fertile ground for litigation in both the UK and Hong Kong.  Those principles were explained in Royal Bank of Scotland v Etridge (No 2), HL, [2002] 2 AC 773.  The latest authority from the Hong Kong Court of Final Appeal is Li Sau Ying v Bank of China (HK) Ltd [2004] HKCFAR 579.  There is an admirable summary of the legal principles and the policy reasons behind the same in Bank of China (HK) Ltd v Wong Yuk Ping, CFI, [2003] 1 HKLRD 1 at pp.16B to 23E.  For my part, I am content to rely upon that summary.  I hope I can be forgiven for not setting it out in this Judgment.  In dealing with the elements of Choi’s defence, I shall refer, where necessary, to the guidance contained in Li Sau Ying. 

The Evidence

8.  Choi has given evidence in this trial.  She was born in the Mainland in 1951.  She came to Hong Kong in 1962 and married Ko in 1966.  They have 3 children.  Their eldest son was born in 1967, their daughter in 1968 and their youngest son in 1971.  The daughter (“Wai Ying”) and the youngest son (“Man Ho”) have also given evidence in this trial.

9.  Choi is a person of limited education.  She did not complete her primary school education and is unable to read English documents.  She started to work after leaving school and has continued to do so.  She has always been a menial worker.  Since 1999, she has been working as a garment worker.  She is currently earning between HK$4,000 to HK$5,000 per month.  Until about 7 years ago when Man Ho left school, Choi had shared the financial burden of the family with Ko.  Since then, her income has been used for her personal expenses or saved. 

10.  In 1988, Choi and Ko, in their joint names, purchased a property in Man Hong Apartment in Shau Kei Wan (“the Man Hong Property”).  It was used as the family home.  The purchase price was HK$400,000.  The down payment together with the legal costs and miscellaneous expenditures, amounting to HK$170,000, came from Choi’s savings.  She managed to put away that sum of money from what was left of her income and from careful management of the family budget over the years.  A mortgage loan of HK$252,000 was obtained from Standard Chartered Bank for the balance of the purchase price.  Ko was solely responsible for the monthly mortgage repayment of HK$3,000.

11.  The fortune of the Ko family appears to have taken a turn for the better after Ko started his business in 1989 or 1990.  In 1991, the mortgage on the Man Hong Property was paid off by Ko.  However, in the same year, the Man Hong Property was mortgaged with Sin Hua Bank (“SHB”) to raise finance for Ko’s business (Wai Wah Paper Product and Box Factory).  In 1993 or 1994, a second mortgage on the Man Hong Property was taken out with SHB for the purpose of raising funds to enable Ko to buy out one of his business partners.  Choi said that she initially disagreed with the second mortgage of the Man Hong Property, but she yielded to Ko’s request given the fact that he was the major contributor in respect of the purchase price of that property and the family expenses. 

12.  The Man Hong Property was sold in January 1997 after the acquisition of the On Chak Property for HK$1.32m.  The sale proceeds were deposited into a joint account of Ko and Choi, but the bulk of which was transferred out by Ko in a matter of days.  Choi knows not how the money was used, save she believes that it was used in Well Lok’s business. 

13.  As indicated above, Ko was doing well in his business in 1996 and he wanted a better place for his family.  Before going into the details concerning the purchase of the On Chak Property, I should consider further the relationship between Choi and Ko at the material time. 

14.  Wai Ying described her mother as a very traditional and typical Chinese woman.  Despite having a job of her own, Choi would return home after work everyday to take care of her family.  Apart from sharing the financial responsibility, Ko left the rest of the family burden to his wife.  He was described as very chauvinistic by Wai Ying.  He enjoyed the superior position at the head of the family.  He was pre-occupied with his business.  He did not like to discuss his financial affairs with his wife and his decisions were final as far as his family was concerned.  Wai Ying said that she had a close relationship with her mother.  Her mother was a submissive wife who always followed her husband’s decisions.  She was not familiar with matters of finance and was afraid to ask her husband about such matters. 

15.  Wai Ying’s evidence of the relationship between her parents is largely supported by that of Man Ho (and consistent with Choi’s evidence), and I believe her evidence.  I believe that such evidence is borne out by a number of objective indicia.  Firstly, Choi was not a well-educated woman.  She had always worked in a lowly position.  She had been pre-occupied with raising her children and making a living for many years.  It is clear to me that Choi was neither a confident person nor an assertive one (I have derived some assistance from observing Choi in the witness box).  Secondly, in contrast with Choi, although there is limited evidence on the personal circumstances of Ko, e.g., his education level, it is clear from the evidence that he was an experienced businessman and it follows (I so infer) that he was considerably more sophisticated than Choi.  Thirdly, the way in which the Man Hong Property was dealt with, most importantly how the sale proceeds were used, demonstrates strongly that Choi was a trusting wife who relied on and followed her husband’s wishes, especially in matters of finance.  Fourthly, Ko left Hong Kong in about the middle of 2002 and his whereabout is unknown to Choi.  Ko’s departure left his wife in a lurch, having to deal with the demands of the Bank by herself.  This is a reflection of Choi being in an inferior and helpless position. 

16.  In the premises, I find as a fact that at all material times Choi reposed trust and confidence in Ko (Mr Ng, who appears for the Bank, very fairly does not dispute this point.).  She had little understanding over matters of finance and would invariably follow Ko’s decisions on the same.  Further, I infer that Ko must have known about his wife’s limitations in matters of finance and that she trusted and relied upon his decisions on such matters. 

17.  Coming back to the purchase of the On Chak Property.  Choi’s evidence is that the purchase of the On Chak Property was a decision of her husband.  She was a little worried about the purchase at the time, because the price of that property was considerably higher than that of the Man Hong Property and therefore the monthly mortgage repayment would be much greater.  At that time, her income was limited and unstable.  However, she was told by her husband that Well Lok’s business was good, he could afford the mortgage repayment on his own and there was no need for her or the children to bear any of the financial burden.  He also said that he wanted the family to live more comfortably.  As always, Choi abided by her husband’s decision.  Importantly, she said that at the time of purchase she was not required to make any financial contribution and she was not a borrower of the mortgage loan needed for the purchase.  In fact, she was not at all involved in the borrowing (a fact confirmed by the Bank’s evidence). 

18.  The above circumstances gave rise to her understanding that her husband wanted to purchase a property in their joint names, but she was not required to make any financial contribution thereto.  The mortgage loan would be taken out by her husband alone and all that was required of her was to agree to have the property charged as security for the mortgage.  That was obviously needed because she would be one of the owners of the property.  She said that no one, including her husband, had ever disabused her of such understanding. 

19.  I shall have to revisit the evidence surrounding the purchase of the On Chak Property when I come to deal with the issue of undue influence.  However, at this juncture I should say that such evidence is not challenged as it is outside the knowledge of the Bank.  I have no difficulty in accepting the evidence of Choi.  I find her to be an honest witness.  She has tried her best to tell this court truthfully what took place some years ago in an unsophisticated but straightforward manner.  Most convincing of all, I find her evidence concerning the purchase of the On Chak Property consistent with what one would expect of her behaviour given her background (education level, etc.) and the relationship between her and her husband.  In other words, she went along with the purchase, doing what she was told by her husband, as a submissive wife.

20.  In respect of the mortgage, there is no dispute that on or about the 26 June 1996 Ko made an application with SHB for a loan in the sum of HK$2.73m for the purchase in question (“the Mortgage Loan”).  There is no controversy that the Bank is the successor corporation of SHB pursuant to the Bank of China (Hong Kong) Limited (Merger) Ordinance, Cap.1167.  In short, the Bank has stepped into the shoes of SHB.  From the evidence of Mr Lee Kwok Ming (“Lee”), who gave evidence for the Bank, and the Credit Application Form at C/222, it is quite clear that SHB was aware of the fact that Ko and Choi were husband and wife and the property to be purchased was to be used as their matrimonial home.  Lee was a clerk of the Loans Department of SHB at the time and he handled Ko’s application.  He said that despite the fact that the On Chak Property was going to be owned by Ko and Choi as joint tenants and was going to be charged as security for the Mortgage Loan, it was the general practice of SHB to let the loan applicant decide who was to be the borrower.  When asked, Ko told him that he would be the sole borrower of the Mortgage Loan.  At the bottom of the Credit Application Form (dated 27 June 1996), it was noted that there would be an “ALL MONIES” charge on the On Chak Property. 

21.  In addition to the Mortgage Loan, Ko also applied at about the same time for an overdraft facility of HK$350,000 (“the Renovation Loan”).  Lee has explained how that came about.  At the time, SHB had, in respect of mortgage loans for residential properties, a ceiling on the size of the loan equivalent to 70% of the value of the property.  The Mortgage Loan was the maximum that could be lent by SHB under this policy.  However, in order to “increase the bank’s profit margin”, it was also the policy of SHB to promote overdraft facilities to borrowers who had taken out mortgage loans with it to be used for renovation of the mortgaged properties.  The amount of such facilities was limited to 10% of the value of the property and the interest rate chargeable on the same was higher than mortgage loan rate (Prime Rate plus 2% p.a. as compared with Prime Rate plus 1%).  Lee asked Ko whether he was interested in such an overdraft facility.  In due course Ko made an application for the Renovation Loan, which amounted to 9% of the value of the On Chak Property.  In the Credit Application Form [C/228], it was stated that the Renovation Loan was to be unsecured (“免担保”).

22.  Both loans were duly approved.  There is a Facility Letter dated 31 July 1996 in respect of the Mortgage Loan [C/171].  Consistent with the fact that Ko was the sole borrower, it was signed by Ko alone (a fact I deduced from comparing the signature with the one on C/177).  However, the caption of this letter stated as follows :

“Re :  All Moneys Legal Charge of

FLAT D ON THE 8^TH FLOOR OF

ON CHAK MANSION, LEI KING WAN,

64 TAI HONG STREET, HONG KONG.

Amount Secured : All Moneys”.

23.  In respect of the Renovation Loan, there is an Undertaking For Repayment of Overdraft dated 22 July 1996.  Ko was the sole borrower.  It appears to me that there was in fact no restriction on how the Renovation Loan was to be used.  However, there is no issue that at least part of that loan was used for the renovation of the On Chak Property.

24.  It is undisputed that on the 31 July 1996, the 2^nd Charge was executed by Ko and Choi as mortgagors, with Ko being the borrower and SHB the lender.  The terms of the 2^nd Charge are not uncommon.  Pursuant thereto, the On Chak Property was charged to SHB by an all moneys charge (“the All Moneys Clause”).  This purports to make each of the mortgagors jointly and severally liable for all moneys and liabilities (past, present or future) owed by Ko (the borrower) to SHB on any account.  As will become apparent below, the All Money Clause is an important feature of this action.  It is in the following terms :

“… the Mortgagor and the Borrower do HEREBY JOINTLY AND SEVERALLY COVENANT with the Lender that, subject as hereinafter provided, the Mortgagor and the Borrower will ON DEMAND by notice in writing of the Lender made to the Mortgagor or the Borrower pay make good and discharge to the Lender all sums of monies obligations and liabilities whether past present or future actual or contingent which are now or may at any time hereafter be or become from time to time due owing or incurred to the Lender anywhere by the Borrower (whether alone or jointly with any other person in whatever style or form and whether as principal or surety) including … ”.

25.  Choi said that she went with her husband to a firm of solicitors, Messrs Ho & Chan, to execute the 2^nd Charge.  What happened at Ho & Chan prior to the said execution is of considerable importance.  I shall deal with that part of the evidence at a later stage.

26.  As stated in paragraph 3 above, the 3^rd Charge came into existence in 1998.  However, in this action the Bank is seeking only to enforce against Choi the 2^nd Charge to the extent of any outstanding liabilities under the Mortgage Loan and no more.

Whether the All Moneys Clause was intended

27.  Before I deal with the issue of undue influence, I should make a finding as to whether the All Moneys Clause was intended.  This point has assumed some prominence in the submissions made by Mr Ng.  It has an impact on, at the very least, the issue of undue influence.

28.  It is the Bank’s case that at the time when the 2^nd Charge was executed Ko was not indebted to SHB, putting aside the Mortgage Loan and the Renovation Loan.  Although at the time Ko was a guarantor for banking facilities granted by SHB to Well Lok, there was no default by Well Lok and therefore no liability on the part of Ko.  Further, Lee’s evidence is that “it was not [the Bank’s] intention under the 2^nd Charge to hold [Choi] responsible for the “other debts” of [Ko] (that is, apart from the mortgage and renovation loans) at the time when [the 2^nd Charge] was executed”.  The Bank’s case is that the All Moneys Clause was a standard term used at the time. 

29.  Based on the above, Mr Ng submits that the All Moneys Clause was not intended and, if this court finds it objectionable, “the court can look beyond the strict wording of a document to ascertain the real intentions of the parties”.  Hand in hand with that submission, and to minimise the impact of the All Moneys Clause, Mr Ng also relies on the Bank’s stance in confining the enforcement to the outstanding liabilities under the Mortgage Loan. 

30.  There are two aspects to these submissions – factual and legal.  On the facts, Mr Lam Chiu Man, a Senior Collection Officer who gave evidence for the Bank, accepted that at the time when the 2^nd Charge was executed there was existing potential liability on the part of Ko and such potential liability, if materialised, could be enforced against Choi under the 2^nd Charge. 

31.  Further, I am unimpressed by the Bank’s evidence that the All Moneys Clause was unintended.  Firstly, in my judgment, Lee’s evidence cannot be relied upon on this issue.  With respect, he was a junior staff and his responsibility did not extend to the matters of contractual terms.  More importantly, his evidence is contradicted by the Credit Application Form [C/222] which I understand was completed by him.  As noted in paragraph 20 above, the Form clearly stated that there would be an “ALL MONIES” charge.  The Facility Letter at C/171 is consistent with the Credit Application Form.  In the premises, I reject the factual basis of the suggestion that the All Moneys Clause was not intended.  Quite the contrary, on the weight of the documentary evidence, the irresistible inference is that the All Moneys Clause was intended and agreed to certainly by both SHB and Ko. 

32.  Furthermore, I cannot agree as a matter of law that the Bank can ask this court to ignore the All Moneys Clause by confining its case to the outstanding liabilities under the Mortgage Loan.  This court would not look at the matters from the wrong end of the telescope.  The proper approach is to decide whether the 2^nd Charge is lawful and therefore enforceable.  If it is tainted with illegality under The O’Brien Principles, then it is voidable at the option of the victim, Choi.  

Undue Influence

33.  First and foremost, this is not a case of actual undue influence.  I can certainly see no evidence of coercion, pressure or deliberate concealment or any action of such kind by Ko in relation to his wife. 

34.  I believe that the law under this head has been refined by Li Sau Ying.  According to that authority, the question here is simply 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” [Li Sau Ying, supra, at p.596C-D]. 

35.  Looking at the law as summarised by Deputy Judge Poon in Wong Yuk Ping, supra, at pp.18I to 19H in the light of Li Sau Ying, I believe that the position is that the two prerequisites of (a) trust and confidence and (b) a transaction which is not readily explicable remain the necessary ingredients for cases which fall outside actual undue influence (I avoid using the terminology of “presumed undue influence” (the notion of presumption is unhelpful in this area of the law – see Li Sau Ying, pp.594D-595B) and respectfully suggest that a more appropriate terminology may be “relationship based undue influence”.).  It is difficult to conceive a case of undue influence without those elements.  However, the task for the court is a fact finding exercise bearing in mind the observation of Lord Nicholls quoted at p.19F-G of Wong Yuk Ping.  Further, the burden of proof here is on the party alleging undue influence.

36.  As indicated in paragraph 16 above, the Bank does not quarrel with the fact that Choi reposed trust and confidence in her husband.  In respect of the second of the two prerequisites, Mr Ng has strongly argues that the transaction in question was not inexplicable by the relationship between Choi and Ko or manifestly disadvantageous to Choi.  Indeed, he submits that the transaction was positively advantageous to Choi in that she was “acquiring a share in On Chak without paying a single cent”.  The authority of Dunbar Bank v Nadeem, Ch D at [1997] 2 All ER 253 and CA at [1998] 3 All ER 876 is relied upon. 

37.  I find Nadeem to be a helpful authority, but I do not agree with Mr Ng’s interpretation of it.  The facts of Nadeem are not dissimilar to those before this court.  In that case a property was purchased by the husband in the joint names of himself and his wife.  She was not required to make any contribution to the purchase.  The mortgage loan was taken out in the joint names of the husband and wife [[1997] 2 All ER 253 at p.258c] and there was a provision in the legal charge similar to the All Moneys Clause [p.261b-c].  The learned trial Judge recognised that it was not a pure surety case (where a wife stood as surety for the husband’s borrowing) such as Barclays Bank v O’Brien [1994] 1 AC 180 or an ordinary case of joint borrowing for joint purposes as in CIBC Mortgages plc v Pitt [1994] 1 AC 200 [p.255d].  The learned Judge held that there was undue influence and based his finding on, inter alia, the fact that the all moneys provision rendered the transaction manifestly disadvantageous to the wife [p.266g]. 

38.  In the Court of Appeal, that finding was reversed on the basis that the legal charge was a plain mistake, because its terms were “radically different” to those of the facility letter and therefore could never be enforced [[1998] 3 All ER 876 at p.882b-g].  In the absence of the all moneys provisions, unsurprisingly, the CA held that the transaction was not at all disadvantageous to the wife.

39.  Like the learned trial Judge in Nadeem, I find myself dealing with a case which is not a pure surety case (There is no question in my mind that the effect of the All Moneys Clause is that Choi is standing as surety for her husband.  Indeed, Mr Ng is not seriously suggesting otherwise.).  Compared with Nadeem, one may say that the surety element was considerably more serious there, because Mr Nadeem was in a pretty precarious financial situation [[1997] 2 All ER 253 at p.261e-f].  In this case, one may say that Ko only had a potential liability.  On the other hand, in Nadeem there was an equity of redemption in the property with an estimated value of £140,000 [[1998] 3 All ER 876 at p.882f].  In other words, the property was worth significantly more than the mortgage loan.  There is no such evidence here. 

40.  However, I do not believe that the second prerequisite should be decided as a matter of quantitative approach, i.e., depending on how bad is the exposure of the wife under the surety.  The issue here is the nature of the transaction.  The transaction in question is one where the husband was buying a property and he wanted to benefit his wife by giving her a share in the property, but in doing so the wife was made to stand as surety for all his past, present and future liabilities to an unlimited extent.  I hold that such a transaction cannot be readily explicable by the relationship of husband and wife and it is manifestly to Choi’s disadvantage. 

41.  Next, I have to consider what I should be looking out for in answering the question of whether there was undue influence.  I remind myself of what “relationship based undue influence” is about :

“The second form arises out of a relationship between two persons where one has acquired over another a measure of influence, or ascendancy, of which the ascendant person then takes unfair advantage. … 

In cases of this latter nature the influence one person has over another provides scope for misuse without any specific overt acts of persuasion.  The relationship between two individuals may be such that, without more, one of them is disposed to agree a course of action proposed by the other.  Typically this occurs when one person places trust in another to look after his affairs and interests, and the latter betrays this trust by preferring his own interests.  He abuses the influence he has acquired. …

The law has long recognised the need to prevent abuse of influence in these “relationship” cases despite the absence of evidence of overt acts of persuasive conduct.  …

Proof that the complainant placed trust and confidence in the other party in relation to the management of the complainant’s financial affairs, coupled with a transaction which calls for explanation, will normally be sufficient, failing satisfactory evidence to the contrary, to discharge the burden of proof.  On proof of these two matters the stage is set for the court to infer that, in the absence of a satisfactory explanation, the transaction can only have been procured by undue influence.  In other words, proof of these two facts in prima facie evidence that the defendant abused the influence he acquired in the parties’ relationship.  He preferred his own interests.  He did not behave fairly to the other. …”.

[see Etridge (No 2), supra, at pp.795C to 796F]

42.  Based on the foregoing [see also Li Sau Ying at pp.595B-E and 596C-D], the law recognises (a) that for “relationship based undue influence” the complainant may not be in a position to point to any specific act of undue influence and (b) that a relationship of trust and confidence coupled with a transaction which calls for explanation will prima facie be sufficient to enable an inference of undue influence to be drawn. 

43.  Given the findings I have made thus far, I have no hesitation in coming to the conclusion that on the evidence before me I am entitled to draw an inference of undue influence in favour of Choi and there is no evidence to sway me from drawing such an inference. 

44.  However, in my view the evidence in this case goes further.  The evidence demonstrates that Ko had misused his influence over his wife.  He told her that she need not bear any financial burden over the purchase of the On Chak Property well knowing that she was an unsophisticated wife who believed what he said (see paragraph 17 above) (“the Conversation”).  I am alive to potential arguments over how to interpret the Conversation.  However, for the purpose of determining the issue of undue influence, I do not believe that the factual assessment should be subjected to “microscopic analysis”.  I am dealing with an unsophisticated middle age lady who had a short conversation with her dominant husband on the purchase of a new home over which she had little say.  I have no doubt that Ko intended to tell his wife that he alone would be responsible for the financial burden of the purchase and this was how it was understood by Choi.  

45.  Further, Ko must have known either before or after the Conversation that his wife would have to execute an all moneys charge.  He had never disabused Choi of the notion that she would not be financially responsible for the purchase.  Moreover, he should have appreciated that Choi would be misled not only by what he had told her, but also by the fact that she was not a borrower and not involved in any borrowing at all (save for charging the On Chak Property as security) (see paragraph 18 above). 

46.  In the premises, I come to the conclusion that the 2^nd Charge was executed by Choi under the undue influence of her husband.

Misrepresentation

47.  I believe that the case of misrepresentation pleaded on behalf of Choi is somewhat opaque.  However, in addition to what is pleaded, there is the evidence of the Conversation referred to in paragraph 17 above (Mr Ng, again very fairly, is taking no pleading point over this).  Given my conclusion that Choi has succeeded in proving undue influence, I shall deal with her complaint based on misrepresentation briefly. 

48.  I am against Choi on this part of her case.  The primary reason is that I am not convinced that there is a false statement of fact on which the complaint can be based.  Insofar as it may be argued that the Conversation constituted a representation of intention as to future arrangement over the payment for the On Chak Property, I agree with Mr Ng that there was no misrepresentation, because (a) Ko did have that intention at the time; (b) the genuineness of that intention is borne out by the fact that Ko was solely responsible for the financial obligations for some 6 years until his business ran aground; and (c) Ko could not have contemplated the collapse of his business in 6 years.

Constructive Notice

49.  As in Nadeem, this case is neither a pure surety case nor a case of joint borrowing for joint purposes.  In para. 48 of Etridge (No 2), Lord Nicholls said that :

“As to the type of transactions where a bank is put on inquiry, the case where a wife becomes surety for her husband’s debts is, in this context, a straightforward case.  The bank is put on inquiry.  On the other side of the line is the case where money is being advanced, or has been advanced, to husband and wife jointly.  In such a case the bank is not put on inquiry, unless the bank is aware the loan is being made for the husband’s purposes, as distinct from their joint purposes.  That was decided in CIBC Mortgages plc v Pitt …”.

50.  In Pitt, the purpose of the loan was to discharge an existing mortgage on the matrimonial home which was in the joint names of Mr and Mrs Pitt and to purchase a holiday home.  At p.211D, Lord Browne-Wilkinson said this :

“So far as the plaintiff was aware, the transaction consisted of a joint loan to husband and wife to finance the discharge of an existing mortgage on 26 Alexander Avenue, and as to the balance to be applied in buying a holiday home.  The loan was advanced to both husband and wife jointly.  There was nothing to indicate to the plaintiff that this was anything other than a normal advance to husband and wife for their joint benefit. …”.

51.  I am prepared to accept Mr Ng’s submission that the Renovation Loan does not per se change the complexion of this case given that part of it was used for the renovation of the On Chak Property.  However, I cannot agree with Mr Ng that this case “falls squarely within the principle in [Pitt]”.  I cannot ignore the All Moneys Clause. 

52.  When pressed by me in the course of his submission, Mr Ng suggests that the test which I should apply in determining whether SHB had constructive notice of the wrong in question is as follows – The court is required to examine the entirety of the transaction to see if it is in substance one where the advance was predominantly for the benefit of the husband and wife. 

53.  None of the cases referred to me by Mr Ng answers the question on the applicable test here.  The closest one gets is the first instance decision in Nadeem where the question of constructive notice was answered against the bank, but it was a finding based on the particular facts of that case [see pp.270f and 270j to 271e].  Although that decision was overturned on appeal, as explained above the Court of Appeal allowed the bank’s cross-appeal on the ground that the learned trial Judge was wrong to take the legal charge at face value.  Consequently, the Court of Appeal did not have to deal with the finding on constructive notice.

54.  I believe that I must be guided by the basic principles, instead of pre-occupying myself with the analysis of whether this case is closer to a pure surety case or a case of joint borrowing for joint purposes.  I respectfully adopt the observation made by the learned Judge in Nadeem at p.270f:

“It is a question to be decided on the precise facts of each individual case whether or not the circumstances were such as to put the creditor on enquiry that there might have been undue influence …”.

55.  I hold that SHB was put on inquiry by reason of the following facts :

(i)  The nature of the transaction, namely, Ko was buying a property and he wanted to benefit his wife by giving her a share in the property, but in doing so the wife was made to stand as surety for all his past, present and future liabilities to an unlimited extent;

(ii)  Ko did have potential liabilities to SHB;

(iii)  Choi was not a borrower;

(iv)  Choi had no dealing whatsoever with SHB before the execution of the 2^nd Charge;

(v)  (iii) and (iv) gave rise to the possibility that Choi did not appreciate that she would be exposed to unlimited liability under the 2^nd Charge.

Reasonable Steps

56.  By reason of my finding that SHB had constructive notice of the undue influence exercised on Choi, the next issue is whether SHB had taken reasonable steps to bring home to Choi the practical implications of the transaction in question.

57.  What are reasonable steps depend on the facts of each case [Li Sau Ying, p.598D].  A personal meeting with the surety is not the only way in which this obligation can be discharged [Etridge (No 2), pp.805H-806A].  Here, the Bank relies upon nothing but an explanation given by a conveyancing clerk to Choi prior to the signing of the 2^nd Charge.  Mr Ng relies upon Li Sau Ying where the Court of Final Appeal overturned a finding by the trial Judge and held that the explanation by a conveyancing clerk of the salient features of a mortgage document was sufficient to constitute reasonable steps in that case [pp.590D-F, 597J-598C and 598G]. 

58.  I now consider the evidence concerning the meeting at Ho & Chan during which the 2^nd Charge was executed.  Ho & Chan were acting for SHB.  There is no evidence as to whether Ho & Chan were acting for Ko and Choi and I shall assume that they were not so acting.  Ms Lau Pui Wan (“Lau”) gave evidence on behalf of the Bank.  At the material time, she was a conveyancing clerk at Ho & Chan.  She confirmed that Ho & Chan were acting for the Bank, which fortifies the above assumption.  She had been employed in that position by Ho & Chan from May 1992.  I therefore infer that she was experienced in her job. 

59.  Lau said that she had no recollection of the details of the conversation between her and Ko and Choi.  However, she said that she did interpret the 2^nd Charge to them on the 31 July 1996.  In saying so, she relied upon her practice of providing an explanation of the document before asking any person to sign it.  She also said, based on her practice, that the 2^nd Charge was signed by Ko and Choi after they had confirmed to her that they fully understood its content.  Lau sought to rely upon a letter from Ho & Chan to SHB dated 31 July 1996 [C/193-4] in support of her evidence.  I can derive no assistance from that letter.  The signatures of Ko and Choi on that letter were provided as specimens. 

60.  In elaboration of her evidence, Lau said that normally she would not explain every clause of the document (the 2^nd Charge was a 46 page document).  She said that she would normally explain who were the parties to the transaction; the property; the consent to charge the property; and the all moneys provision, which meant an unlimited sum liability.  In addition, she would explain that if the borrower could not repay the mortgagor would be liable; the bank could auction the property and any outstanding balance would be recoverable by the bank; the bank might call for the repayment at anytime; no tenancy agreement was allowed without the bank’s consent; the need for fire insurance; the custody of the title deeds; and the redemption. 

61.  Lau also said that July 1996 was a time of “peak property market”.  She had to handle many transactions everyday.  She would do the same for every transaction, i.e., adopt the same procedure, but some adjustments would have to be made in respect of the details like the parties to the transaction.  At that time, she was handling some 60 or 70 files, exclusive of “project” files.  She described her workload as “very high”.  Exclusive of project cases, she had to see on average 7 or 8 “clients” everyday and carry out similar work in explaining documents to them.  She normally spent about 25 minutes with a mortgagor client, covering the whole process.  I understand that to mean that from the time she met the client until the documents were signed it would typically take 25 minutes.  The meetings with clients took up some 4 hours of her time everyday and she had to do her paperwork in the evening. 

62.  To her credit, Lau accepted that during such hectic days she might have overlooked some of the terms in the explanation exercise, but she said that the main terms, such as that for unlimited liability, would not be missed. 

63.  Choi’s evidence is that she played a passive role during the meeting at Ho & Chan.  She attended the solicitors’ office in the afternoon and the meeting with the solicitors’ representative took about 30 minutes.  She said that some explanations were given by the solicitors’ representative.  I infer that the explanation must have been over the 2^nd Charge.  Choi cannot recall what was explained, but she was adamant that there was no explanation over any unlimited liability and if she had heard any such suggestion, she would have been alarmed and asked about it. 

64.  Choi was subjected to fairly vigorous cross-examination.  She was asked many questions about her previous experience in executing similar documents concerning the Man Hong Property (two legal charges, one in 1991 [C/290] and one in 1993 [C/338], and a novation in 1992 [C/324]), all of which contained an all moneys provision.  Her evidence is certainly unsatisfactory in terms of clarity.  In particular, it is not clear from her evidence whether any of the all moneys provisions was explained to her.  However, one has to bear in mind that these were matters which took place many years ago and she is an unsophisticated person.  When pressed about the signing of the 2^nd Charge, Choi stood firm on her case that no one had explained to her that she was incurring a personal liability. 

65.  In respect of Lau, I believe that she is an honest witness.  I believe that more likely than not she had explained to Ko and Choi the salient features of the 2^nd Charge.  The fact that an explanation was given is supported by Choi’s own evidence.  However, as to the quality of that explanation, I have to bear in mind that, firstly, Ho & Chan were not acting for Ko and Choi.  I believe that if they were their solicitors the explanation would have been carried out with a good deal more care and likely to have been more detailed.  Secondly, Lau was under great work pressure.  It is not difficult to envisage the situation Lau was in.  Perhaps in a small room with piles of conveyancing files, having to pick up the correct one shortly before the meeting and trying hard to master the details.  In these circumstances, I believe Lau’s explanation was unlikely to be careful and detailed.  More likely than not, it was a mechanical exercise.  The consequence is that there is a real possibility that whilst explaining the salient features to Ko and Choi Lau did not impress upon Choi that although she was not the borrower she nevertheless would be personally liable to an unlimited extent for any debts of the borrower. 

66.  As regards the evidence of Choi, I warn myself of her motive to lie.  I do not believe that very much turns on her experience in respect of the Man Hong Property.  She said that she and her husband were both borrowers in respect of the Man Hong Property mortgage back in 1988.  That I believe is an important distinction.  In respect of the subsequent mortgages, they came into being by reason of her husband’s need to raise finance, with his companies being the borrowers.  I believe that for someone unsophisticated like Choi such experience does not necessarily displace the belief which she had in respect of the 2^nd Charge, namely, when she had made no borrowing and only agreed to mortgage a jointly owned property as security for her husband’s borrowing she would not stand to lose more than the property.  It follows that I disagree with Mr Ng’s sweeping submission that no one can believe that “a bank has no recourse against a debtor if a flat is insufficient to pay the debt”.

67.  I find as a fact that Choi was under the belief which I have just described.  With that belief, she would undoubtedly have been alarmed if she was made aware of an unlimited liability.  However, I cannot eliminate the possibility that Choi was inattentive during the meeting.  Indeed, more likely than not, Choi was inattentive to the explanation of Lau.  I say so for a number of reasons – (a) she believed what was said to her by her husband; (b) she was only there to complete some legal procedures over which she had little understanding; and (c) she relied on her husband being there to look after the matter.  I believe that this picture is consistent with that of a submissive wife who went along with her dominant husband to a solicitors’ office having been told what she should do beforehand. 

68.  It is possible that if Choi was attentive to what was said by Lau she could have picked up that something was not right from the mechanical explanation.  However, I do not believe that it changes the picture in relation to SHB’s duty to take reasonable steps.

69.  My analysis of the evidence drives me to the conclusion that, in the circumstances of this case, SHB had not taken reasonable steps to bring home to Choi her exposure under the 2^nd Charge by simply relying upon their busy solicitors to explain the salient features of the 2^nd Charge to Choi.  One must remember that by definition SHB was dealing with a wife who might be under her husband’s undue influence.  It would not have been at all onerous to have, e.g., a personal meeting with Choi by one of the bank’s staff or a staff from its solicitors for the purpose. 

70.  In coming to my conclusion, I have not lost sight of the fact that SHB was only required to take reasonable steps, and such steps might not succeed in achieving the purpose.  It should be noted that in Li Sau Ying, the Court of Final Appeal held that it was “important” that the banking facility was limited to a particular sum despite the fact that the mortgage contained an all moneys provision.  The acceptance of the explanation by a conveyancing clerk as reasonable steps was made in the circumstances of that case (it was not a husband and wife case) [pp.591F-G and 598D-G].

Partial Enforcement

71.  Mr Ng submits that even if I find the 2^nd Charge to be unenforceable due to the commission of a legal wrong, I should nonetheless enforce it to the extent of the Mortgage Loan. 

72.  I believe that the factual basis of this submission is that Choi had agreed to be responsible for the Mortgage Loan.  This is inconsistent with my above finding.  Choi agreed to have the On Chak Property mortgaged, but she was not aware that she would be liable for the Mortgage Loan.

73.  As to the law, Mr Ng has pointed out to me the conflicting authorities on the question of “partial rescission”.  The English authorities[1] are to the effect that rescission is an “all or nothing” remedy.  TSB Bank v Camfield, CA, [1995] 1 WLR 430 is the leading English authority in this area.  In that case there was an innocent misrepresentation that the wife’s liability was limited to £15,000 when in fact it was unlimited.  The Court of Appeal rejected the bank’s contention that the mortgage be enforced to the extent of £15,000 [see pp.435E-437F and 438G-439E].  On the other hand, the High Court of Australia in Vadasz v Pioneer Concrete (SA) Pty Ltd (1995) ALR 570 held that there could be partial rescission.  In that case the defendant complained that there was a misrepresentation that the guarantee was limited to the future indebtedness of the debtor.  The Court held that the lender could enforce the guarantee limited to the future indebtedness [see pp.576-579].  The Court held that Camfield should not be followed [p.579].  Mr Ng invites me to follow the High Court of Australia given the weight of the legal commentaries[2] in support of the Australian decision.

74.  I respectfully decline Mr Ng’s invitation for two reasons.  Firstly, the Australian decision contradicts with the English law which has been applied in Hong Kong.  I respectfully rely upon the analysis of Colman J in De Molestina v Ponton [2002] 1 Lloyd’s Rep 271 at 286 to 288.  In para. 6.7 at p.288, Colman J stated his conclusion after reviewing the law in this area as follows :

“I conclude that on this issue the present state of English law is not in any doubt at all and nothing in Vadasz renders it doubtful, whatever may be the position in Australia.  By reference to the state of English law as so far developed at House of Lords level that case was wrongly decided.  Unless and until the House of Lords overrules the analysis by Lord Browne-Wilkinson in Barclays Bank v O’Brien and its particular application in TSB Bank v Camfield, the principles binding on this Court are well settled.  The scope of the equitable discretion in a rescission claim is confined to adjustments to achieve substantial restitution to accommodate events that have occurred after the contract has come into force and does not extend to the general reconstruction of the bargain to achieve an objectively overall fair result.”.

75.  Secondly, I believe that the matter should be approached on restitution principles.  That was the approach taken by the Court of Appeal in Nadeem.  In short, as between a bank and a wife in a situation of this nature, the wife’s rescission of the impugned transaction is conditional upon her making counter restitution.  In simple terms, she has to make restitution to the bank the benefits she derived from the transaction lest she would be unjustly enriched [see Nadeem, CA, at pp.884h-885g, 886e-888a and 888e-f].  In this case, Choi has retained no interest in the On Tak Property and there can be no question of her making counter restitution. 

76.  In the premises, both on the facts and the law, I reject the Bank’s case on partial rescission.

Conclusion

77.  For these reasons, I dismissed the Bank’s action against Choi and grant the declaration sought in the Counterclaim that the 2^nd Charge ought to be set aside as against Choi.  I order that the costs of the action, including the costs of the Counterclaim, be paid by the Bank to be taxed if not agreed. 

[1]  TSB Bank v Camfield [1995] 1 WLR 430, Castle Phillips Finance v Piddington (1994) 70 P & CR 592 and De Molestina v Ponton [2002] 1 Lloyd’s Rep 271

[2]  The Law of Restitution by Goff & Jones, 6^th ed, pp.356-8, “Justifying Partial Rescission in English Law” (2005) LQR 273, “Rescission on Terms” by L Proksch [1996] RLR 71, “Partial Rescission - Removing the Restitution from a Contractual Doctrine” by Meikle (2003) 19 JCL 40 and “Partial Rescission for Misrepresentation Rejected” by P Ferguson (1995) LQR 555