RE LAI YIN SHAN

CACV 2024/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 2024 OF 2001

(ON APPEAL FROM HCB NO. 992 OF 2000)

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J U D G M E N T

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Hon Rogers VP:

1. This is an appeal from a judgment of Deputy High Court Judge Woolley given on 7 August 2001 whereby he adjudicated Lai Yin Shan, the debtor, bankrupt. At the conclusion of the hearing this court reserved its judgment which we now hand down.

Background

2. The bankruptcy petition was founded upon a claim in the sum of $20,269,802.95 plus interest. That amount is said to arise under two guarantees signed on 20 March and 27 June 1997 respectively. Those guarantees were in favour of the petitioning bank in respect of monies owing by Chit Lee Marble & Minerals Company Limited ("Chit Lee"). No judgment has been obtained against the debtor. There is no dispute that the debtor was a director and secretary of Chit Lee as well as having a 30% shareholding therein. For present purposes there is no dispute as to the amount owing by Chit Lee.

3. The debtor made an affirmation in which she claimed that she was simply a nominal director of Chit Lee. She said that she never involved herself in her husband's business and that she became a director and shareholder at her husband's request and that the business was still managed and controlled solely by him. Furthermore, in August 1996 she had gone to Canada with her daughter and had lived there. In May 1997, her husband had visited her and the daughter in Canada and asked her to sign a document saying that it was a bank credit rearranging document and that "everything would be secured by the mortgage of property and as we were the directors of the Company, we had to sign on the documents but all the liabilities would be borne by the Company in the end." Apart from that she said that she could remember that most of the page which she was asked to sign was a printed form which had not been filled in except for the part that bore the signature of her husband.

4. In June 1997, her husband again visited her and the daughter in Canada and asked her to sign another similar page, again saying that it was a "bank credit re-arranging document" and repeating that there was no risk at all. She said "as I trusted my husband, I signed as requested without further inquiry." The debtor returned to Hong Kong with her daughter and her husband in late June 1997. Her affirmation concludes with the statement that she was unaware that the documents which she had signed were personal guarantee documents and that if she had been aware of the matter she would not have signed the documents.

5. The only evidence in answer was an affidavit from a solicitor employed by the petitioner's solicitors. That for the most part exhibited company documents showing the debtor as a director, shareholder and secretary and also a copy of the mandate which had been executed in January 1996 which permitted the debtor to sign on the company accounts.

6. The debtor's evidence was confirmed by her husband who also said that he alone had contact with the petitioning bank who had never met his wife during or before the signing of any documents and that the bank had simply sent him blank forms and asked him to obtain his wife's signature.

7. Ms Ismail, who appeared on behalf of the petitioning bank confirmed what is stated in the judgment below that it was the bank's case that it knew that the debtor was Mr Wong's wife.

The judgment below

8. The hearing of the petition was conducted on the basis solely of the affidavit evidence. There was no cross-examination. The judge came to the conclusion that there was undue influence by the husband who had induced the debtor to enter the guarantees. The judge considered the judgment in Barclays Bank Plc v O'Brien and Another [1994] 1 AC 180. He said that unless it could be said that the husband had been acting as the bank's agent, the creditor could still enforce a guarantee which had been signed in circumstances of undue influence unless it was put on inquiry. He considered that that would entail the bank being aware of the relationship of husband and wife, that the transaction on its face was not to the financial advantage of the wife and that there was a substantial risk that the husband had committed a legal or equitable wrong that would entitle the wife to set aside the transaction. He held, however, that the debtor was a substantial shareholder and "active director" and that the loan was therefore at least partly for her own benefit. He went on to say that there was nothing to put the bank on inquiry "dealing, as they had every right to believe, with the company, one of whose directors was the wife of another, but who herself had a not insignificant interest in the business, and who appeared on the face of it to be an active participant."

This appeal

9. Since the judgment below the House of Lords has given judgment in the case of Royal Bank of Scotland v Etridge (No. 2) [2001] 4 All ER 449. The speech of Lord Nicholls clearly commanded the respect of the House. Naturally, the previous decisions of the House of Lords were considered including, in particular, O'Brien's case. At paragraph 6 of the report, the judge commenced consideration of the law of undue influence. At paragraph 14, he pointed out that should it be proved 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, it would normally be sufficient, failing satisfactory evidence to the contrary, to discharge the burden of proof that there had been undue influence. Paragraphs 32 and 33 of the judgment came under the general heading "A Cautionary Note" which the judge said that he added in view of some of the decisions under review. He went on to say:

" [32] ... In the eye of the law, undue influence means that influence has been misused. Statements or conduct by a husband which do not pass beyond the bounds of what may be expected of a reasonable husband in the circumstances should not, without more, be castigated as undue influence. Similarly, when a husband is forecasting the future of his business, and expressing his hopes or fears, a degree of hyperbole may be only natural. Courts should not too readily treat such exaggerations as misstatements.

[33] Inaccurate explanations of a proposed transaction are a different matter. So are cases where a husband, in whom a wife has reposed trust and confidence for the management of their financial affairs, prefers his interests to hers and makes a choice for both of them on that footing. Such a husband abuses the influence he has. He fails to discharge the obligation of candour and fairness he owes a wife who is looking to him to make the major financial decisions."

10. In my view, the judge below was entirely correct in saying that there had been undue influence to induce the wife to enter the guarantees. Her evidence, untested by cross-examination, was that her husband had misrepresented the effect of the documents which she was asked to sign in a very material way and that she had signed them because she trusted him.

11. The question then arises as to whether the petitioning bank is affected by this. It is in this context that Lord Nicholls made particular reference to O'Brien's case. The question which arose was in what circumstances a party to a contract may lose the benefit of the contract which, upon his part he entered into in good faith if he ought to have known that the other party's concurrence had been procured by misconduct by the third party. Lord Nicholls was careful to note that a bank was not required to make enquiries and that the use of the expression "put on inquiry" had a particular meaning in the context of cases such as O'Brien's case. He noted in particular that there was a low level for the threshold which had to be crossed before a bank was "put on enquiry". When referring to Lord Browne-Wilkinson's statement in O'Brien's case that :

"(a) the transaction is on its face not to the financial advantage of the wife; and

(b) there is a substantial risk in transactions of that kind that, in procuring the wife to act as surety, the husband has committed a legal or equitable wrong that entitles the wife to set aside the transaction." (See [1994] 1 AC 180 at 196.),

he said that this passage really meant that a bank was put on inquiry whenever a wife offers to stand surety for her husband's debt. See paragraph 44 of the judgment. In paragraph 48, he distinguished circumstances where money was advanced jointly to husband and wife and in paragraph 49, he said:

"Less clear cut is the case where the wife becomes surety for the debts of a company whose shares are held by her and her husband. Her shareholding may be nominal, or she may have a minority shareholding or an equal shareholding with her husband. In my view the bank is put on inquiry in such cases, even when the wife is a director or secretary of the company. Such cases cannot be equated with joint loans. The shareholding interests, and the identity of the directors, are not a reliable guide to the identity of the persons who actually have the conduct of the company's business."

12. Ms Ismail took issue with this last paragraph saying that it was not in line either with what had been said later at paragraph 87 in Lord Nicholls's judgment nor was it in line with general Company Law. She said that if a person had acted as a shareholder and a director as well as a secretary of a company they should be liable for the documents which they signed even in their personal capacity. To do otherwise would be to confound company law and to risk opening the flood gates of unmeritorious defences. In my view, it cannot be said that Lord Nicholls erred in saying what he did in paragraph 49. His words were obviously deliberately and carefully chosen. He was there addressing "non-commercial" relationships between the debtor and the surety as is evident from what he said in paragraph 43. The fact that the wife was a shareholder and director did not render it a commercial relationship. This is reinforced by paragraph 88 where Lord Nicholls explained what he regarded as a 'commercial' relationship:

"as where a guarantor is being paid a fee, or a company is guaranteeing the debts of another company in the same group."

13. The effect of a party, in this case the bank, being put on inquiry is that it should take reasonable steps to satisfy itself that the practical implications of a proposed transaction have been brought home to the relevant person, namely in this case wife, in a meaningful way. The purpose is that the wife should enter into the transaction with her eyes wide open so far as the basic elements of it are concerned. In this case there was no attempt to do that. It might be said in passing that the wife gave evidence that in respect of an earlier transaction in March 1996 she had been asked to go to a law firm where she had been given certain advice as to the effect of some other document which should be asked to execute on that occasion.

14. The judge below reached the conclusion that the petitioner was not put on enquiry because the wife had a 30% shareholding and on the face of the documents appeared to be an active participant in the company. Quite apart from the fact that her evidence throws open the question of the extent of her beneficial interest, her 30% shareholding was less than half that of her husband's and yet the guarantee was for the full amount of the company debts. Moreover the company documents do not demonstrate an active participation, they merely show her appointment as a director and secretary and her shareholding.

15. Whilst a summary hearing of a bankruptcy petition is an occasion where the court may in some circumstances take a more robust view of a defence than it would do on an Order 14 application, in my view, this case was not suitable for summary disposal. The matter should go to a fully contested hearing where the wife's evidence can be fully tested by cross-examination. For these reasons I would allow this appeal, set aside bankruptcy order and make an order nisi that the costs here and below be in favour of the debtor.

Hon Le Pichon JA:

16. I agree.