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

HCA 1995/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1995 OF 2008

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(By Order to carry on proceedings dated 7^th January 2009)

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J U D G M E N T

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1.  This is an application by the Plaintiff under Order 14 for summary judgment against all the Defendants for a sum of HK$36,030,376.64 together with interest thereon.

Facts of the Case

2.  The Plaintiff is a limited company carrying on the business of stock and share brokerage and marginal financing.  Both the 1^st and 2^nd Defendants are British Virgin Islands companies formerly operated by Mr. Lam Sai Wing (“the Deceased”) who passed away on 26 September 2008.  The 4^th Defendant was his wife and the 5^th Defendant was an employee of a publicly listed company referred to in this case as Hang Fung Gold.

3.  The 1^st and 2^nd Defendants opened margin accounts for buying and selling of shares operated by the Deceased with a facility limit of HK$50 million.  It is a requirement that the value of the securities for the facility must be maintained at a level of no less than 500% of the amount of liabilities (“the margin requirement”).  The two Defendants deposited shares of Hang Fung Gold as securities.  The 2^nd Defendant, the Deceased, the 4^th Defendant and the 5^th Defendant, each of them signed a Deed of Guarantee and Indemnity for the purpose of those margin accounts.  Their liabilities are specified not merely as guarantors but also as primary obligors.

4.  Because of the sudden downturn of share prices in Hong Kong, the price of each Hang Fung Gold share dropped drastically from $1.96 to $1.65 on 18 September 2008.  The Plaintiff asked the Defendants to meet the margin requirement or to repay the outstanding sum owing to the Plaintiff.  On 26 September 2008 Lam Sai Wing passed away.  The Defendants did not come up with further securities to meet the margin call or reduce the outstanding sum.

5.  On 15 October 2008 the Plaintiff exercised the power of sale and disposed of the Hang Fung Gold shares at a price of HK$0.1 per share.  After using the net proceeds of sale to set off part of the debt, the margin accounts remain to have an outstanding sum that the Plaintiff now claims.  The Defendants did not pay it.  The Plaintiff commenced its present proceeding and Messrs. K.C. Ho & Fong acknowledged receipt of service on behalf of all the Defendants.  The Plaintiff took out this Order 14 application.

Defence of the 1^st & 2^nd Defendant

6.  The 1^st and 2^nd Defendant had not filed their defence but a draft of which can be found in an exhibit to the 2^nd Affirmation of the 4^th Defendant in her capacity as a director of the 1^st Defendant and also as the wife of the Deceased who was the sole shareholder and director of the 2^nd Defendant.  Essentially it raises two issues: (a) the Plaintiff was acting in bad faith by selling the Securities at undervalue in a non arm’s length transaction and (b) it was unconscionable for the Plaintiff to increase the interest rate from SCB Prime Rate plus 5.5% per annum to 2.5% per month.

7.  At the hearing Messrs. K.C. Ho & Fong, though still solicitors on record for the 1^st and 2^nd Defendant, through Mr. K.M. Chong of counsel, informed the court that they had received no instruction from the 1^st and 2^nd Defendant.

Bad Faith

8.  The events leading to the sale of the Hang Fung Gold shares are generally not in dispute.  As stated earlier, the price of Hang Fung Gold shares suffered a significant drop on 18 September 2008.  The Plaintiff made a margin call.  On 26 September Lam Sai Wing passed away.  On 29 September 2008 Hang Fung Gold made a public announcement that had an adverse effect on its share price.  Trading of the shares at the stock exchange was suspended on that day.  On 30 September 2008 trading resumed and the price was further dropped to HK$0.65 per share.  Trading was suspended again at 2.30 pm and has not been resumed since then.

9.  There had been negotiation between the Plaintiff and the 4^th Defendant as the person representing the estate of the Deceased.  On 6 October 2008 newspapers reported that police had launched an investigation into the affair of Hang Fung Gold.  On the same day the Plaintiff decided to exercise the power of sale by sending out over 300 letters inviting bids for the Collaterals i.e. the Hang Fung Gold shares by way of private placement.  Only one responded and the shares were sold on 15 October 2008.

10.  According to Clause 3.8 in the Schedule to the Client Agreements signed by the 1^st and 2^nd Defendant, the Plaintiff has power to sell the securities in case of default.  Having considered the circumstances mentioned above, I find that the Plaintiff had committed nothing wrong in exercising the power of sale and disposed of those shares to a third party, the only person who bid for them.

Unconscionable interest rate

11.  I agree that there was a significant increase in the interest rate from 5.5% per annum over SCB prime rate (i.e. about 10.5% per annum) to 2.5% per month (i.e. 30% per annum).  However, we have to consider that as the 1^st and 2^nd Defendant failed to meet the margin call it was an event of default.  According to Clause 2.6 the Plaintiff could in its discretion from time to time by written notice specify the rate of interest payable by the Defendants.  I see nothing wrong with the increase.

12.  For the reasons above mentioned I find that the 1^st and 2^nd Defendant do not have any defence to the Plaintiff’s claim.

Defence of the 3^rd Defendant

13.  The 4^th Defendant was acting for the estate of Lam Sai Wing, the Deceased and in that capacity she was not legally represented.  At the hearing I invited Madam Chan to address me but she made no submission.  But, in her 3^rd Affirmation the 4^th Defendant exhibited a draft Defence and Counterclaim of the 3^rd Defendant, which is in effect substantially the same as that of the 1^st and 2^nd Defendant except with an additional issue.  It was intended to plead: “The Plaintiff was estopped from selling the Securities by reason of an express/implied representation and/or promise of the Plaintiff, made to the 4^th Defendant (representing the estate), with the intention that the 4^th Defendant should act on such representation and/or promise, which the 4^th Defendant did, in fact do.”

14.  The representation arose out of a meeting held on 7 October 2008 between the 4^th Defendant in that capacity and the senior management of the Plaintiff, among which was a certain Mr. Lee.  The conversation in Chinese in verbatim was as follows: The 4^th Defendant requested: “唔好將股票拋出街”.  Mr Lee’s reply was: “好啦” and also said: “免得人家話我欺負孤兒寡婦”.

15.  The 4^th Defendant’s request could be subject to at least two interpretations.  The first one as relied on by the 3^rd Defendant is that the Plaintiff agreed not to sell the shares for the time being.  The second one is that the shares were not to be sold in the open market at the stock exchange.  If it is the second one, the method used by the Plaintiff i.e. by private placement is not in contravention of the representation.

16.  Assuming the first interpretation was the correct one, the subsequent correspondence did not bear that out.  On 9 October 2008 the Plaintiff through its solicitors indicated that it would sell the shares and requested for immediate reply.  The then solicitor firm representing the 3^rd Defendant did not raise that issue in its letter of reply and made no mention that there was such representation and assurance or agreement.  Instead, it requested for more time to put in more collaterals.  If there were such assurance and representation or agreement, the solicitors firm would have mentioned it and would have taken appropriate legal action to stop the sale as the Plaintiff did not agree to the request.

17.  I agree with Mr. Patrick Fung S.C. for the Plaintiff that the terms of the so-called assurance, representation or agreement were so vague that I doubt it is enforceable.

18.  I find that the 3^rd Defendant’s defence is incredible.  I give judgment against the 3^rd Defendant.

Defence of the 4^th and 5^th Defendant

19.  Each of them has filed her defence respectively.  They raised all the issues raised by the 1^st and 2^nd Defendant as mentioned above and in addition, the allegation of undue influence.

20.  The point first appears in the defence in the following way: They were “induced to sign the Deed of Guarantee and Indemnity whilst acting under the influence of the Plaintiff’s solicitors”.

21.  Shortly before the hearing, the two Defendants sought to introduce the 4^th Affirmation of the 4^th Defendant and the 2^nd Affirmation of the 5^th Defendant respectively asserting that they signed the Deeds under the undue influence of the Deceased.  For the sake of completeness, I allowed the two Affirmations to be filed and served and to be included for consideration in this Order 14 application.

Solicitors’ Inducement

22.  In their defences both Defendants pleaded in great length how they attended the offices of Messrs. P.C. Woo & Co and under what circumstances they executed the two Deeds of Guarantee and Indemnity.  They alleged that the staff of the solicitor firm did not explain the documents to them.  Neither did the staff advise them that they were entitled to seek independent legal advice.  The two Defendants were simply being asked to execute the documents.  For these reasons the Defendants claimed that they were induced to sign the Deeds whilst acting under the influence of the Plaintiff’s solicitors.

23.  The Plaintiff filed an Affirmation of Ms. Ho Kit Hung Josephine to refute such allegations.  Ms. Ho was the solicitor in charge of the whole transaction.  She set out the facts and gave various reasons, which are very convincing, to show that the Deeds were not signed at the solicitors office.

24.  Mr. Leung King Yuen in his 3^rd Affirmation described how the two Deeds got into the hand of the 5^th Defendant.  He stated that on 21 March 2005 Mr. Francis Leung, a credit manager of the Plaintiff, attended and brought a number of documents to the Defendants’ office.  After signing the documents by the Deceased, Mr. Lee left the two Deeds with the 5^th Defendant to be signed by her and the 4^th Defendant.  Later, the two forms were signed and dated 22 March 2005 with the 4^th and 5^th Defendant witnessing the signatures of each other.

25.  Mr. Chong of counsel for both Defendants did not make any submission on whether the two Deeds were signed at the solicitors’ offices.  He said that for the sake of this application assuming that they were signed at the Defendants’ office, the facts remain the same:

(a)  The Deceased was the sole shareholder of the 1^st Defendant and the only person who operated the margin accounts for his own benefit.

(b) Neither the 4^th nor the 5^th Defendant had any interest in the 1^st Defendant.  Nor did they have the right to operate the margin accounts.

(c)  They signed the Deeds because they knew that the Deceased had signed it.

(d) No one interpreted the contents of the Deeds to them or explained the risks of signing such documents.

(e)  They were not informed of their right to seek independent legal advice.

(f)  In the case of the 4^th Defendant, she received very little formal education only up to the level of Form 2 in China with very limited ability to communicate with other in English.  She was a submissive wife and throughout her marriage the Deceased made all the decisions relating to Hang Fung Group.  She did not dare to raise any contrary view.

(g)  In the case of the 5^th Defendant, she had worked for the Deceased since 1991.  She knew the character of the Deceased; she dared not comment or express any view on what the Deceased said or acted.  She was very loyal, faithful and obedient to the Deceased.  The Deceased was from Chiu Chow, a very traditional and conventional boss, he was in charge of all the operations, gave instructions and expected all his colleagues to follow them.  The 5^th Defendant had no choice but to carry them out.

26.  Both Defendants seemed to have abandoned the argument that the Deeds were signed at the solicitor’s office.  Even if not, comparing and considering the evidence of Ms. Ho, the solicitor in charge, buttressed by the 3^rd Affirmation of Leung King Yuen against the allegations set out in the Defences and the Affirmations of both Defendants, I find that the story given by the Defendants was unbelievable.  There is no explanation given why they witnessed each other’s signature if the documents were signed in the presence of a solicitor.

Undue Influence of the Deceased

27.  Both Defendants did not tell us how the Deceased actually influenced them to sign the Deeds.  The only evidence I can find is in paragraph 12 of the 4^th Affirmation of the 4^th Defendant and also in paragraph 10 of the 2^nd Affirmation of the 5^th Defendant; both said in the same way:

“I verily affirm that I signed the document titled ‘Deed of Guarantee and Indemnity’ dated 22^nd March 2005 because my late husband (in case of the 5^th Defendant ‘my late boss’) had signed similar document.”

28.  Would this fact together with the facts pointed out to us by Mr. Chong support a case of undue influence as a defence?

Law

29.  Both counsel relied very heavily on the case of Royal Bank of Scotland plc v. Etridge (No. 2) [2002] 2 AC 773.  Different parts have been cited to me in length.  The most helpful passage is found in the speech of Lord Scott of Foscote on page 841 at paragraph 158 discussing the presumption in Class 2B cases after referring to a passage in O’Brien:

“158  In my respectful opinion, this passage, at least in its application to the surety wife cases, has set the law on a wrong track.  First, it seems to me to lose sight of the evidential and rebuttable character of the Class 2 presumption.  The presumption arises where the combination of the relationship and the nature of the transaction justify, in the absence of any other evidence, a conclusion that the transaction was procured by the undue influence of the dominant party.  Such a conclusion, reached on a balance of probabilities, is based upon inferences to be drawn from that combination.”

30.  In other words, I should not simply look at the relationship alone.  I have to consider the nature of transaction and all other evidences.  If there are no other evidences, by balance of probabilities I have to ask whether the conclusion of undue influence could be reached.  It is not an automatic conclusion.

31.  I believe such principle of law is applicable to the employer and employee relationship in the case of the 5^th Defendant.

The 4^th Defendant

32.  It is not disputed that the 4^th Defendant was the Deputy Chairman of Hang Fung Gold, a publicly listed company.  She has had vast experience in jewellery industry.  She had been handling the business of Hang Fung Gold in China.  She holds certain high positions in public organizations like being Committee Member of the Chinese People’s Political Consultative Conference of China Committee of ShangDong and JiNan respectively and executive committee member or director of difference associations in their trade.

The 5^th Defendant

33.  The 5^th Defendant is the Chief Executive Officer of Hang Fung Gold.  She joined the Group in 1990 and had been assisting the Deceased and his wife in handling all documentation.  She holds a Bachelor degree from a famous university in Canada and a Diploma from a reputable gemological association.

Both

34.  Both of them drew substantial sums as remunerations.  The public place their trust and confidence in them to look after the affairs of the public company.  No one would have expected that they did not exercise their own independent judgment in handling their own affairs, and claimed that they just blindly followed the acts of the Deceased.

35.  Even if it were so, they themselves chose to ignore the risks and the legal consequences that would follow by signing the Deeds.  I find that the Plaintiff owed them no duty to advise them that they should seek independent legal advice.

Decision

36.  I rely my decision on another passage of Lord Scott’s speech in the same case on page 842 at paragraph 159:

“For my part, I would assume in every case in which a wife and husband are living together that there is a reciprocal trust and confidence between them.  In the fairly common circumstance that the financial and business decisions of the family are primarily taken by the husband, I would assume that the wife would have trust and confidence in his ability to do so and would support his decisions.  I would not expect evidence to be necessary to establish the existence of that trust and confidence.  I would expect evidence to be necessary to demonstrate its absence.  In cases where experience, probably bitter, had led a wife to doubt the wisdom of her husband’s financial or business decisions, I still would not regard her willingness to support those decisions with her own assets as an indication that he had exerted undue influence over her to persuade her to do so.  Rather I would regard her support as a natural and admirable consequence of the relationship of a mutually loyal married couple.  The proposition that if a wife, who generally reposes trust and confidence in her husband, agrees to become surety to support his debts or his business enterprises a presumption of undue influence arises is one that I am unable to accept.  To regard the husband in such a case as a presumed ‘wrongdoer’ does not seem to me consistent with the relationship of trust and confidence that is a part of every healthy marriage.”

37.  Such remarks could equally and fairly apply to the employer and employee relation.

38.  In support of my view I would like to refer to what Lord Scott said in a Court of Final Appeal decision in the case Li Sau Ying v Bank of China (Hong Kong) Ltd (FACV No. 9 of 2004) where he expressed his view about the so-called presumption of undue influence in Class 2B cases in paragraph 30 of the judgment:

“30.  The strong message from Etridge 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.”

39.  I ask myself the question: “Is there any evidence that justifies the conclusion that the two Deeds of Guarantee and Indemnity executed by the two Defendants were procured by undue influence of the Deceased?”

40.  I find none whatsoever.  I dismiss their defence of undue influence.

Judgment

41.  For the above reasons I enter judgment against all Defendants for the sum of $36,030,376.64 with interests thereon at the rate of 30% per annum from 14 October 2008 until judgment and thereafter at judgment rate until full payment.

42.  I make an order nisi as to costs that the Defendants pay the Plaintiff’s costs of the whole action including all costs reserved and the costs of the Order 14 application together with certificate for one counsel comparable to the experience, seniority and standing of Mr. K.M. Chong.

43.  I fix 29 May 2009 at 9:30 a.m. for hearing of the application for variation of the order nisi, if any, and also for assessment of the Plaintiff’s costs with half an hour reserved.  The Plaintiff is required to prepare, file and serve a statement of costs before the hearing.  Counsel is excused from attending such hearing.