RE SOETRISNO FARIDA

HCB 3278/2018

[2019] HKCFI 2756

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS NO 3278 OF 2018

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J U D G M E N T

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I. Introduction

1.  There is before this court a bankruptcy petition (“Petition”) presented by the Petitioner against Madam Soetrisno Farida (“Debtor”).  The Petition is based on the non‑compliance with a statutory demand dated 14 March 2017 (“statutory demand”) for the sum of over HK$5.9 million (“Debt”).  There is no dispute as to service.

2.  The Debt in turn is due and owing by the Debtor under an all monies legal charge dated 26 October 2000 (“2000 Legal Charge”) executed by the Debtor and Mr Lee Wai Wan (“WW”) as mortgagors and by the Debtor, WW and Founder Industries Limited (“FIL”) as borrowers.  WW is the brother of the Debtor’s husband, Mr Lee Sai Wan (“SW”).

II. Background

3.  The Debtor and WW were at all material times the registered owners of the property situated at Flat G, 26/F, Block H-10, Fu Wah Yuen, No 10 Chi Fu Road, Chi Fu Fa Yuen, Hong Kong (“Property”), having acquired the same on 1 March 1993.  The purchase was financed by a legal charge dated 1 March 1993 (“1993 Legal Charge”) in favour of the Bank of Communications. 

4.  The Debtor said the Property was purchased by SW as the matrimonial home for WW who was about to get married but SW wanted the Debtor to be one of the joint registered owners so that WW could not deal with the Property alone.  The Debtor said she had never contributed to the purchase price or mortgage repayments. 

5.  The 1993 Legal Charge was discharged and replaced by a legal charge dated 12 May 1995 in favour of Wing Hang Bank Limited (“1995 Legal Charge”).  The Debtor and WW had also executed a Second Mortgage dated 12 May 1995 in favour of Wing Hang Bank Limited (“1995 Second Mortgage”) to secure general banking facilities granted by the bank to FIL.  The 1995 Legal Charge and the 1995 Second Mortgage were discharged and replaced by the 2000 Legal Charge on 26 October 2000.

6.  Under clause 2.1 of the 2000 Legal Charge, the Debtor, WW and FIL covenanted to pay the Petitioner on demand the Secured Indebtedness.  Secured Indebtedness was defined in clause 1 as inter alia “all monies, obligations and liabilities now or at any time hereafter due, owing or incurred to the Lender by the Borrower and the Mortgagor whether on any banking or other account or otherwise in whatever manner” and included “all fees, commissions and other costs, charges and expenses (including legal and other fees on a full indemnity basis) incurred by the Lender in relation to the Borrower and the Mortgagor and all other monies hereby secured”.

7.  Both SW and WW said FIL was WW’s company.  But according to the table set out in the 2^nd affirmation of Lam Hing Lun (“Lam”), Assistant Vice President of Credit and Investment Management Department of the Petitioner, (i) the Debtor was a director and 28% shareholder of FIL in 1986 and 1987, (ii) SW was a 20% shareholder of FIL in 1997 and 1998 and a 50% shareholder of FIL from November 1998 to February 2000, as well as a director of FIL from 1998 to 2005, and (iii) WW was a director and shareholder (directly and indirectly) of FIL both before and after the 2000 Legal Charge.  FIL was wound up by the Court on 2 August 2017.  It is not disputed that WW was also made a bankrupt in November 2017. 

8.  FIL had obtained various banking facilities from the Petitioner over the years.  On the materials before this court, there were a total of 17 banking facilities letters dated between May 2002 and November 2015. The Debtor had signed on most, if not all, of them as chargor, guarantor and/or mortgagor.  In the 29 November 2010, 24 February 2011 and 20 August 2012 facilities letters, for instance, the Debtor signed as mortgagor in support of the facilities granted. 

9.  FIL has failed to repay the facilities granted under 2 facility letters dated 24 September 2012 and 10 November 2015 and secured by the 2000 Legal Charge.  By a Letter of Surrender dated 16 July 2016, the Debtor and WW surrendered vacant possession of the Property to the Petitioner as mortgagee.  Clauses 2 to 5 of the Letter of Surrender provided as follows:

“2. That I/we confirm that upon my/our default in repayment of the principal and interest under the Mortgage executed by me/us in your Bank’s favour in respect of the Property for more than one month, a demand in writing was duly given by your Bank to me/us and I/we hereby acknowledge receipt of your Bank’s said demand.

3. That I/we have no objection whatsoever in your Bank’s selling of the Property and the selling price thereof shall be determined by your Bank at your Bank’s sole discretion, having regard to the then condition of and in the property market.

4. That the handing over of possession of the Property to your Bank does not under any circumstances exonerate me/us from my/our liabilities and/or responsibilities as the owner(s) of the Property and as the mortgagor under the said Mortgage, and all the terms and conditions thereof are still binding on me/us to their fullest extent.

5. That I/we am/are still absolutely liable for all the indebtedness due and owing by me/us under the said Mortgage and for all the costs and expenses (including but not limited to legal fees, rates, Government rent, management fees, and all utilities charges in respect of the Property) incurred/to be incurred by your Bank as a result of your Bank’s taking possession of the Property and the subsequent sale/attempted sale thereof.” (emphasis added)

10.  The Petitioner exercised its power of sale and sold the Property on 25 November 2016 at the price of HK$6.9 million. The proceeds from the sale of the Property were applied to reduce FIL’s outstanding indebtedness to the Petitioner.  As at 14 March 2017, the balance of HK$5,903,098.64 remained outstanding and hence the issue of the statutory demand and eventually the presentation of the Petition. 

III.  Deliberation

11.  It is well‑established that in order to successfully oppose a Petition, a debtor has to show a bona fide dispute to the debt on substantial grounds, by sufficiently precise evidence which is believable, and must establish that he actually has a defence of substance, not just a fair probability of one: Re Wong Lo Fung unrep, HCB 1864/2013, 29 August 2014 at [25]–[26].

12.  In the present case, the Debtor opposes the Petition on the basis that there is a bona fide dispute to the Debt on substantial grounds.  The two grounds relied upon by Mr Lam on her behalf are (i) non est factum and (ii) undue influence.  As confirmed by Mr Lam at the hearing, the Debtor does not take issue with the calculation of the Debt.

Non est factum

13.  Reliance is universally placed on signatures appended to documents by persons of full age and understanding as signifying the signatory’s assent or adherence to what that document states.  Where such a person has signed a document which purports to have legal effect, the law has never regarded it as enough to show that he signed without knowing its contents for the document to be disavowed: Ming Shiu Chung & Ors v Ming Shiu Sum & Ors (2006) 9 HKCFAR 334 at [84].  A person is bound by his signature to a document whether or not he reads it or understands it unless there is shown to be a recognized legal basis for concluding that his apparent consent has been in some way vitiated: Re Wong Lo Fung unrep, HCB 1864/2013, 29 August 2014 at [32].

14.  In Bank of China (Hong Kong) Ltd v Fung Chin Kan & Another (2002) 5 HKCFAR 515 at [51], Litton NPJ affirmed:

“... the fundamental principle that, generally speaking, when a person signs a legal document, he or she is bound by the act of signature: As a matter of general law, it is no defence to say that he or she did not understand the contents of a legal document; that person takes the chance of being bound by its terms, as he or she can take the simple precaution of not signing until its contents have been fully explained and understood. …” (emphasis added)

15.  The “key elements” for a successful plea of non est factum have been summarised in Chitty on Contracts 33rd Ed Vol 1 at para 3‑049:

a.  the belief of the signer that the person is signing a document of one character or effect whereas its character and effect were quite different;

b.  the need for some sort of disability which gives rise to that state of mind;

c.  the plea cannot be invoked by someone who does not take the trouble to find out at least the general effect of the document.

16.  There is a heavy burden of proof on the person who seeks to invoke this defence—it will be a rare case in which a person who does not suffer from a disability will be able to invoke non est factum when he has signed a document without checking to see what it is, or in what capacity he is signing it: Chitty on Contracts 33rd Ed Vol 1 at para 3‑056. 

17.  In her 5-page affirmation in opposition, the Debtor gave her background as follows.  She said she married SW in 1976 and has been a housewife since.  Her education level is high school in Indonesia and has limited knowledge of English.  She said she had always placed her full trust and confidence in SW to deal with financial affairs, and because of such trust and confidence, when SW asked her to sign documents, she would do so without questioning his requests.

18.  At paragraphs 11 to 12 and paragraphs 16 to 17 of her affirmation, the Debtor explained how she came to sign the 2000 Legal Charge and her “complete surprise” about her liability under it:

“11. In about 2000, my Husband mentioned to me that LWW’s company needed to borrow money and the Property had to be mortgaged. He said that, since I was one of the named owners of the Property, I needed to sign on the documents for the mortgage. I followed his request and, upon LWW’s arrangement, I went up to a law firm to sign a document. Having now reviewed the Legal Charge with my legal advisers, I verily believe that the document which I signed at that time was the Legal Charge.

12. My Husband did not accompany me to the law firm to sign the document[1], but LWW was there. I do not recall that there was any discussion about the contents of the document and I was simply asked to sign the document. This was consistent with my belief that it was a simple matter of allowing LWW to use the Property as security to allow LWW’s company to borrow money.

…

16. Looking back on the matter, I verily believe that FIL was LWW’s company which borrowed money from the Petitioner on the strength of the mortgage of the Property.

17. This is completely different from what my Husband told me I was supposed to sign, which was a mortgage of the Property to enable FIL to borrow money from the Petitioner. I would never have signed the Legal Charge had I known that it was not just a mortgage but it imposed unlimited personal liability on me to pay off all the debts owed by FIL. There is no reason at all for me to be liable for FIL’s debts with no limit to the amount. I never had anything to do with FIL or its business.” (emphasis added)

19.  In this court’s view, such evidence can hardly support the defence of non est factum or be regarded as believable.  The reasons are numerous but this court needs only state three.

20.  First, the Debtor acknowledged that she was told that the Property had to be mortgaged to secure the borrowing of WW’s company and the document that she needed to sign was for the mortgage.  The 2000 Legal Charge was in substance a mortgage—there is no difference in terms of character and effect between what the Debtor believed she was asked to sign and the document that she actually signed.

21.  Second, the Debtor is a person of full age (according to Mr Lam for the Debtor, she was born in 1953) and does not allege she was suffering from any disability at the material time.  Further, as stated above, prior to the 2000 Legal Charge, she had already executed at least 2 legal charges, one in 1993 and then in 1995, both were to secure banking facilities to the extent of “all monies”.  It beggars belief when she said in her affirmation that “I would never have signed the Legal Charge had I known that it was not just a mortgage but it imposed unlimited personal liability on me to pay off all the debts owed by FIL.”  

22.  Third, the defence is not available to someone who does not take the trouble to find out at least the general effect of the document. According to the affirmation of Chan Man Hung, a partner of Messrs KB Chau & Co, for the Petitioner, it was his practice to interpret and explain the contents of the instruments which the parties and signatories were going to sign one by one. In respect of instruments involving legal charge or mortgage like the 2000 Legal Charge, his interpretation and explanation would include but not limited to (i) a brief description of the security to be given; (ii) effect of the charge; (iii) the extent of the liability of each party, in particular for instruments in “all monies” format; and (iv) consequences in the event of default.  It was also Mr Chan’s practice to ask and re-confirm with each party and signatory to ensure that he/she understood the contents of the instruments and to ascertain if he/she had any further questions or query before letting him/her sign and execute the same.

23.  It is not for the court on this occasion to resolve disputes of fact.  But even ignoring Mr Chan’s evidence for the time being, on the Debtor’s own evidence, she simply signed the 2000 Legal Charge at the law firm when she was asked to do so.  If she genuinely did not understand the 2000 Legal Charge was an “all monies” legal charge, she could have asked for the effect of the document to be explained to her.  There is nothing in her affirmation to show that she had done so. 

24.  All in all, for the above reasons, this court must reject the defence of non est factum.

Undue influence

25.  This court should first remind itself of the law.

26.  In Royal Bank of Scotland plc v Etridge (No 2) [2002] 2 AC 773, 8 appeals were before the House of Lords, each of which arose out of a transaction in which a wife charged her interest in her home in favour of a bank as security for her husband’s indebtedness or the indebtedness of a company through which he carried on business.  The wife later asserted she signed the charge under the undue influence of her husband.  At [101], Lord Hobhouse of Woodborough described the speech of Lord Browne-Wilkinson in Barclays Bank Plc v O’Brien and Anor [1994] 1 AC 180 as providing

“a structured scheme for the decision of cases raising the issue of enforceability as between a lender and a wife. It can be expressed by answering three questions: (1) Has the wife proved what is necessary for the court to be satisfied that the transaction was affected by the undue influence of the husband? (2) Was the lender put on inquiry? (3) If so, did the lender take reasonable steps to satisfy itself that there was no undue influence? It will be appreciated that unless the first question is answered in favour of the wife neither of the later questions arise. The wife has no defence and is liable. It will likewise be appreciated that the second and third questions arise from the fact that the wife is seeking to use the undue influence of her husband as a defence against the lender and therefore has to show that the lender should be affected by the equity—that it is unconscionable that the lender should enforce the secured contractual right against her.” (emphasis added)

27.  In Hong Kong, the leading authority is Li Sau Ying v Bank of China (2004) 7 HKCFAR 579, a Court of Final Appeal decision which is binding on this court.

28.  The factual context can be gleaned from the judgment of Lord Scott of Foscote NPJ at [2]:

“In 1996 the appellant, Catherine Li Sau Ying, granted a mortgage over a flat she owned (‘the Property’) to … ‘the Bank’. The 1996 mortgage was granted by the appellant as security for the indebtedness to the Bank of Sunny Tech Ltd (‘Sunny’), a company in which the appellant had no interest. Sunny was substantially owned and controlled by a Mr Ip. … The appellant had granted the mortgage at the suggestion of a friend of hers, Mr Li Hung Hon, the second defendant, who appears to have been in some respects a business associate or, perhaps, partner of Mr Ip. ...”

29.  Madam Li sought to set aside the 1996 mortgage on the ground of undue influence by Mr Li in whom she reposed trust and confidence.  In upholding the validity of the 1996 mortgage, the Court of Final Appeal took the opportunity to clarify the principles of law expounded in Barclays Bank Plc v O’Brien and Anor [1994] 1 AC 180 and Royal Bank of Scotland plc v Etridge (No 2) [2002] 2 AC 773.

30.  In Li Sau Ying, Lord Scott observed at [28]-[30]:

“28. This is not a case in which the relationship between the appellant and Mr Li was one of the well established categories of relationship where the relationship as such would lead the court to presume that undue influence had been exerted unless evidence was adduced proving the contrary (see Slade LJ in Bank of Credit and Commerce International v Aboody [1990] 1 QB 923 at 953). It was not, using Slade LJ’s categorisation, a Class 2A case. Both the Deputy Judge and Le Pichon JA asked themselves whether the case was a Class 2B case, i.e. a case in which on its particular facts a relationship not falling within the Class 2A category had been shown to have become such as to justify the court in applying the same presumption …

29. Lord Browne-Wilkinson’s approach in O’Brien was broadly endorsed and built upon by the House of Lords in Royal Bank of Scotland plc v Etridge (No. 2) [2001] UKHL 44 but the use of the expression ‘presumed undue influence’ and, in particular, its use in connection with Class 2B cases was deprecated. Lord Nicholls of Birkenhead at paras 16 and 17 made clear that the expression connoted no more than a shift in the evidential burden of proof, ‘the equitable counterpart of common law cases where the principle of res ipsa loquitur is invoked’. Lord Hobhouse of Woodborough said, at para. 98 that the Class 2A and Class 2B categorisation derived from the Aboody case had been ‘the source of much of the confusion which has ensued’ and, at para. 105, that ‘the language of presumption is likely to confuse rather than assist’ He said that:

‘… If at the end of the trial the wife succeeds on the issue of undue influence, it will be because that is the right conclusion of fact on the state of the evidence at the end of the trial, not because of some artificial legal presumption that there must have been undue influence.’ (para. 106)

Lord Hobhouse concluded that:

‘... the so-called Class 2(B) presumption should not be adopted. It is not a useful forensic tool.’ (para. 107)

And I expressed similar views at para. 161:

‘For my part, I doubt the utility of the Class 2B classification … The presumption in Class 2B cases, … is doing no more than recognising that evidence of the relationship between the dominant and subservient parties, coupled with whatever other evidence is for the time being available, may be sufficient to justify a finding of undue influence on the balance of probabilities …’

30. The strong message from in Royal Bank of Scotland plc v Etridge (No. 2) [2001] UKHL 44 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. The present case is a very good example of the need for that message. …” (emphasis added)

31.  In Bank of China v Wong King Sing[2002] 1 HKLRD 358 at [34]-[35], Recorder Ma, SC (as he then was) said:

“34. I should preface the discussion of this defence [of undue influence] with the observation that, as with all aspects of the law, one has to apply a large degree of common sense to the matter. … it is to be borne in mind that the defence of undue influence is ultimately a simple concept. It has all to do with informed consent. Once a court forms the view that consent was freely given with full knowledge of the consequences of entering into the relevant transaction, that is the end of the matter, however improvident the transaction may objectively appear. The rationale for the defence of undue influence is to prevent the victimization of the complainant. It is there to protect people from being forced, tricked or misled in any way by others into entering into a disadvantageous transaction … As Lord Nicholls of Birkenhead said in Royal Bank of Scotland v. Etridge (No 2) [2001] 3 WLR 1021 at 1029 paragraph 8, the unacceptable conduct lies in ‘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.’

35. The burden is of course on the person seeking to set aside or avoid liability under the relevant transaction. It is not for the other party to prove that the transaction was entered into with full understanding of the nature and consequences of the transaction. This reversal of the burden of proof is commonly referred to as the ‘Romilly heresy’: see Barclays Bank Plc v. O’Brien [1994] 1 AC 180, at 193A–B.” (emphasis added)

32.  The real issue is thus whether or not the evidence as a whole justifies a conclusion that the Debtor’s execution of the 2000 Legal Charge had been procured by SW’s undue influence or, looking at it from another angle, whether the Debtor consented to the execution of the 2000 Legal Charge with full knowledge of the consequences of doing so. 

33.  This court has already set out above the Debtor’s evidence as to how she came to sign the 2000 Legal Charge.  Even if one accepts her evidence at face value, it does not support a finding that SW had exercised any undue influence over the Debtor. 

34.  First, the Debtor was fairly told that the Property had to be mortgaged to secure the borrowing of WW’s company and the document that she needed to sign was for the mortgage. SW had not made any misrepresentation to the Debtor about what she was asked to do. 

35.  Second, the Property was purchased with SW’s funds but assigned into the joint names of the Debtor and WW—according to SW, he paid the bulk of the purchase price, about HK$1.8 million out of HK$2.2 million, for the Property. There was no motive or need for SW to “force, trick or mislead” the Debtor into entering into the 2000 Legal Charge to help out his brother.  To the knowledge of the Debtor, in the first place, the purchase of the Property in 1993 was to help out WW when he was about to get married so as to give him a matrimonial home.

36.  Thirdly, there is clear evidence that in the past the Debtor had been prepared to execute the 1995 Second Mortgage to secure the borrowings of FIL from Wing Hang Bank.  The fact that the Debtor has signed numerous banking facilities letters over a long period of time in connection with FIL’s borrowings from the Petitioner also strongly suggests the absence of any motive or necessity for SW to exercise undue influence on her—there being no suggestion that the Debtor was under the undue influence of anyone when she executed the 1995 Second Mortgage or when she signed those facilities letters. 

37.  Lastly and most importantly, the fact that the Debtor was prepared to sign the Letter of Surrender and surrendered vacant possession of the Property to the Petitioner without resisting it by invoking undue influence of her husband is a strong indication that the Debtor herself acknowledged the lack of merits of her present undue influence defence—otherwise, she would, in all probabilities, have strenuously resisted the Petitioner exercising its power of sale under the 2000 Legal Charge. 

38.  Hence, even if the Debtor had reposed complete trust and confidence in her husband, this court takes the view on the evidence that such trust and confidence is not unusual between husbands and wives who have been married for decades—it is as much in Hong Kong as in the United Kingdom “a part of every healthy marriage”: Bank of China (Hong Kong) Ltd v Wong Kam Ho [2014] 1 HKLRD 41 at [34]. 

39.  Since the Debtor cannot satisfy this court that she had been victimised or taken advantage of by SW, a critical element of the defence is missing ie her signature on the 2000 Legal Charge was affected by the undue influence on the part of her husband. The Debtor might or might not have been under the influence of SW, but there was nothing undue about it.  Putting it in another way, this court is not satisfied the Debtor has established by believable evidence that there was no informed consent on her part when she signed the 2000 Legal Charge.

40.  For the above reasons, this court rejects the defence of undue influence. 

IV.  Disposition and costs order nisi

41.  In these circumstances, this court is satisfied that the Petitioner is entitled to a bankruptcy order against the Debtor and hereby grants the usual bankruptcy order against her and, on a nisi basis, with costs to the Petitioner.