LI SAU YING v. BANK OF CHINA (HONG KONG) LTD & ANOTHER

CACV 309/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 309 OF 2002

(ON APPEAL FROM HCA NO. 18515 OF 1999)

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J U D G M E N T

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Hon Rogers VP:

1. I agree with the judgment of Le Pichon JA.

Hon Le Pichon JA:

2. This is an appeal by the 1st defendant ("the bank") from the judgment dated 30 May 2002 of Deputy High Court Judge Bunting SC whereby the bank was ordered to pay the plaintiff $3.5 million. The bank was the mortgagee of a property ("the property") owned by the plaintiff and mortgaged to the bank in August 1996 ("the 1996 mortgage) for a loan of $6.5 million granted to Sunny Tech Company Limited ("Sunny"). The proceedings had been brought against the 2nd defendant ("Mr Li") for repayment of a loan and for damages for deceit or for misrepresentation. There were also allegations of undue influence on the part of Mr Li in that it was said that the 1996 mortgage had been procured by Mr Li who had exercised undue influence over the plaintiff. The trial had proceeded in the absence of Mr Li as he had no wish to take part in it. As against the bank, the plaintiff sought, inter alia, financial relief from the bank on the basis that it had constructive notice of Mr Li's wrongdoing in relation to the 1996 mortgage. This was in lieu of rescission which was not available as the property had been sold by the bank to a bona fide purchaser without notice.

3. The deputy judge dismissed the plaintiff's claims in misrepresentation against Mr Li and the bank. On the plaintiff's claim in undue influence, the deputy judge considered that 5 issues arose as between the plaintiff and the bank and found against the bank on all of them.

4. For a proper understanding of the plaintiff's claim and the way the issues were decided, it is necessary to set out the history of the 1996 mortgage which involve findings as to the relationship that existed between the plaintiff and Mr Li and their dealings prior to the 1996 mortgage.

Background

5. The plaintiff together with her husband and sister had been running a family business dealing in building material supplies through a company called Chung Ying Building Materials Company Limited ("Chung Ying") since 1974. Her role was an administrative one. In 1990, the plaintiff met the wife of Mr Li in a beauty salon and through her eventually came to know Mr Li in 1992. Amongst other things, Mr Li ran a social club in Kowloon. They became friends and met about once a month at dinners, social gatherings and at the club. In 1994, the plaintiff was one of a party of 30 persons invited by Mr Li on a trip to Zhuhai. Mr Li's business partner, one Mr Ip Man On ("Mr Ip") was also one of the party. The plaintiff believed that Mr Li had large investments in Zhuhai and thought he was wealthy, generous, kind, dutiful to his mother and resourceful in business. They addressed each other as elder sister and younger brother since they shared the same family surname, they were good friends and Mr Li did not have a sister. The plaintiff said she trusted Mr Li and had no doubt about his integrity.

6. By 1994, apart from having a 25% interest in Chung Ying which had an annual turnover by that date of about $10 million, the plaintiff also owned a company called Perfect Target Investment Company Limited ("Perfect Target") intended for trading, but a small part of its business included property investment. By that date, the plaintiff had already had 5 or 6 property dealings through Perfect Target.

The Perfect Target transactions

7. In 1994, Mr Li started ordering building materials from Perfect Target for delivery to Zhuhai. Perfect Target in turn placed the order for supplies either from Chung Ying or other suppliers. Perfect Target was used as supplier rather than Chung Ying because Mr Li suggested that he should place orders through a company wholly owned by the plaintiff rather than through Chung Ying in which she only had a 25% interest. Initially, Mr Li paid punctually but by the end of 1994, he was indebted to Perfect Target for over $1 million. When chased by the plaintiff of payment, he explained that although he had lots of assets, he suffered from a cashflow problem. No further orders were placed with Perfect Target after December 1994.

The Hillwood Road venture

8. Meanwhile, and before Mr Li had fallen into arrears with Perfect Target, about a month or so after the Zhuhai visit, Mr Li invited those who had gone to Zhuhai to a dinner at which he announced a business venture which was the acquisition of two shop properties on Hillwood Road, Kowloon and the running of a restaurant there ("the Hillwood Road venture"). The income from the restaurant would service the mortgage loan to be taken out to finance part of the acquisition. He needed to raise $12 million for the deposit, the shops themselves costing $32 million. The investments were to be in the form of shares in two limited companies, Fairsheen Limited and Bright Wick Limited. Formal documentation was to be executed at the solicitors. Mr Li and his wife were optimistic about the investment and thought it would produce a handsome profit. The plaintiff's brother-in-law ("Mr Lau") who by then had become friendly with Mr Li and his wife formed a positive view of the investment and suggested to the plaintiff that they should invest in the project together. The plaintiff deliberated on the proposal, working out how much money was available to her and how much she could invest. Eventually, she agreed to invest $750,000 and Mr Lau, $250,000. The monies were paid over in April, June and July and the restaurant opened in November 1994. The formal documentation relating to the Hillwood Road venture was not executed until April or May the following year.

The 1994 mortgages

9. Shortly after the opening of the restaurant, in late December 1994, at a time when Mr Li had run up debts of over $1 million to Perfect Target, he approached the plaintiff for a loan. He explained that he was short of cash, having spent a great deal of money to open the restaurant and on his Zhuhai investments and not having collected from all the investors. He was confident that his investments would produce huge profits. He maintained that he would be in a position to repay in six months or at most a year and promised security. Initially, the plaintiff refused. Mr Li continued to press her and she in turn chased him for repayment of the debt owed to Perfect Target as Perfect Target was experiencing cashflow problems.

10. Mr Li ascertained from the plaintiff that she owned the property which had been mortgaged to the Nanyang Commercial Bank ("NCB") for about $3.2 million. Mr Li found lenders prepared to advance a loan of $6.5 million secured on the property to be repaid within 12 months. According to the plaintiff, Mr Li told her that the mortgage would be repayable by instalments. Eventually, the plaintiff did decide to help Mr Li out of his financial difficulties by re-financing the mortgage, releasing equity of some $3.3 million. It was agreed between them that (1) Mr Li would discharge his indebtedness to Perfect Target out of the loan, (2) the loan would be repayable in six months, (3) it would be secured by additional shares in the Hillwood Road venture, (4) the plaintiff would be the borrower under the mortgage, and (5) Mr Li would pay the principal and interest due to the lenders but the amount representing what the plaintiff owed NCB would be deducted from the plaintiff's loan to Mr Li.

11. On 23 December 1994, the plaintiff together with Mr Li and Mr Ip attended the offices of the mortgagee's solicitors and executed two mortgages, one in favour of Yu Tai Hing Company Limited being a first charge securing a facility of $5 million to Fairwealth Industries Limited ("Fairwealth"), (a company substantially owned by Mr Ip,) later re-named Keeland ("Keeland"), for which the plaintiff was jointly liable, the whole loan being repayable in 12 months and the other in favour of Sinohill Holdings Limited, being a second charge on the property securing a loan of $1.5 million in general credit facilities to Fairwealth to an unlimited extent, repayable on demand and for which the plaintiff was jointly liable. Out of the $6.5 million raised, approximately $3.2 million was applied to pay off the NCB mortgage. Of the balance of $3,301,960.27 paid to the plaintiff, approximately $1.1 million was applied to repay Perfect Target and $2 million was taken by Mr Li in cash as a loan.

12. The deputy judge noted that the 1994 mortgages had three major features: first, the loan of over $3 million to Mr Li was totally unsecured; under each of the 1994 mortgages, Fairwealth was the borrower and there was no limit to the amount secured by the Sinohill mortgage which rendered the plaintiff potentially at the mercy of Fairwealth, and the plaintiff did not benefit at all except through Mr Li's repayment of the debt to Perfect Target. The deputy judge found that there was no real quid pro quo for the loan: rather, the plaintiff's wish to accommodate and please Mr Li went hand in hand with her trust and confidence in him.

The 1995 mortgage

13. Mr Li failed to repay the 1994 mortgages. He told the plaintiff that the Yu Tai interest rate was too high and that the mortgage should be changed to Luk Fai Investment Limited which would charge less interest. Although the plaintiff wanted to be repaid and put an end to the matter, Mr Li maintained that he had no funds with which to make repayment. On 4 August 1995, the plaintiff executed a mortgage with Luk Fai ("the 1995 mortgage"). The plaintiff was given a $6.5 million loan secured on the property. It was repayable on 4 February 1996 with interest at 21.6% per annum, payable in equal monthly instalments of $117,000 and default interest at 4% per month. The loan was applied in redeeming the 1994 mortgages. Thereafter the plaintiff did not see Mr Li as often, meeting him only once every two or three months at chance meetings at Mr Li's club. She remained in frequent telephone contact, partly social and partly to press for repayment.

14. This was the history of the relationship and dealings between the plaintiff and Mr Li prior to the execution of the 1996 mortgage to the bank which lies at the heart of this appeal. The deputy judge's findings as to that mortgage are set out below.

The 1996 mortgage

15. Some time prior to 29 August 1996, the plaintiff said that Mr Li asked her to "transfer" the 1995 mortgage to the bank because it could offer a lower rate of interest and the borrower and the owner would remain the same. The plaintiff was anxious to be repaid and Mr Li told her that he would be getting some money in six months or a year at most. He explained that under the new arrangement with the bank, there would be a $4.5 million instalment loan and a $2 million overdraft facility which together would pay off the 1995 mortgage. Mr Li said nothing to indicate that the arrangement would be any different from the terms agreed for the original loan in 1994.

16. The plaintiff took some time to consider the proposal. One of the options she considered was whether or not to sell the property as by August 1996 its value had increased considerably. She wanted to be repaid and achieve a clean break with Mr Li so far as the mortgage was concerned but not on a personal level. Previous oral promises by Mr Li had been broken. She wanted a promise in writing and Mr Li was willing to promise in writing to pay off the $2 million overdraft in six months. Ultimately, she decided to go along with Mr Li's suggestion. The reasons she advanced were that the bank had agreed to give a mortgage and she was relying on Mr Li to repay the $2 million facility within six months.

17. On 29 August 1996, the plaintiff and Mr Li attended the solicitors' offices. The first thing Mr Li did was to prepare the note recording his promise to repay the plaintiff. The plaintiff did not ask for a similar promise in relation to the $4.5 million instalment loan.

18. Although dated 4 September 1996, the 1996 mortgage was signed by the parties on 29 August 1996. Under that mortgage, the plaintiff was the mortgagor and Sunny (a company substantially owned by Mr Ip and in which Mr Ip and his sister were the sole directors and shareholders) was the borrower. The instalment loan of $4.5 million was to be granted to Sunny so were general banking facilities which were secured on the property, such facilities being unlimited and payable on demand.

19. The deputy judge rejected the plaintiff's evidence on several key elements of her case, namely, that Mr Li had represented that the only difference between the 1995 and the 1996 mortgages would be the interest payable, that she did not know the borrower was Sunny and that the amount of security was limited to $6.5 million. He was favourably impressed by the evidence of Winnie Chan, the conveyancing clerk at Tsang, Chau & Wong, the bank's solicitors and preferred it to the plaintiff's evidence. The deputy judge found that the salient terms of the 1996 mortgage had been explained to the plaintiff by the bank's solicitors. These included the following:

* the property would be charged to the bank to secure general banking facilities without limit

* the banking facilities would be granted to Sunny

* the meaning of an "all monies" mortgage

* the mortgagee's power to sell the property and to claim against each of the parties for any shortfall

* an instalment loan of $4.5 million and general banking facilities of $2 million would be granted to Sunny (as set out in the facilities letter)

* despite the amount stated in the facilities letter, the bank would not be required to execute further charges should it grant further facilities to Sunny as the mortgage was an "all monies" mortgage.

20. For completeness, it should be mentioned that in early December 1998, Mr Li informed the plaintiff that the amount outstanding under the 1996 mortgage was $9.3 million because he had not been making any monthly instalment repayments. The plaintiff panicked and agreed to execute a second mortgage ("the 1998 mortgage") in favour of the bank which paid off the principal debt under the 1996 mortgage (but not the $1.25 million of the accrued interest), secured general banking facilities up to $9.35 million granted to Fairwealth under its new name Keeland and the plaintiff's maximum liability was limited to the sale proceeds of the property subject to certain safeguards. This mortgage was executed on 31 December 1998. No relief was sought by the plaintiff in respect of the 1998 mortgage since she was no worse off under that than she had been under the 1996 mortgage.

21. In about June 1999, the plaintiff and the other investors in the Hillwood Road venture came to learn that the shares in Fairsheen and Bright Wick which held the two Hillwood Road properties were never registered in their names and that the registered owner (Mr Ip) had transferred those shares to a third party in 1998. In short, there was nothing left of their investments in the venture.

The judgment below

22. As noted above, the deputy judge took the view that the plaintiff's claim in undue influence involved 5 issues, namely : (1) whether the 1996 mortgage was procured by Mr Li's undue influence; if so, then (2) whether the bank was put on enquiry; if it was, then (3) whether the bank did all that it should have done to reduce the risk of the transaction being entered into under undue influence; if it had not, then (4) whether in principle the plaintiff can claim compensation; and if so, (5) the amount of compensation. His conclusions may be summarised as follows:

(1) Whether or not the 1996 mortgage had been procured by Mr Li's undue influence depended on two sub-issues, namely, (1) whether the plaintiff reposed trust and confidence in Mr Li, and (2), whether the 1996 mortgage was readily explicable by the relationship between them. The deputy judge found that the plaintiff did repose trust and confidence in Mr Li, and that the 1996 mortgage was not readily explicable by friendship alone.

(2) The bank was put on enquiry because it had no reason to think that there had been commercial dealings between the plaintiff and Sunny: the bank had conducted a company search and knew that the plaintiff was neither a shareholder nor director of Sunny.

(3) The bank did not take sufficient steps to bring home to the plaintiff the risks she was running.

(4) Though the remedy of rescission was not available to the plaintiff, the court had the power to achieve practical justice between the parties by ordering equitable compensation.

(5) The appropriate compensation was the difference between the value of the property in 1996 and the cost of redemption of the 1995 mortgage.

This appeal

23. The bank's appeal relates to the first, second, fourth and fifth issues considered by the deputy judge although it is fair to say that the focus of the appeal was largely on the first issue to which I now turn.

Undue influence

24. As Lord Clyde observed in Royal Bank of Scotland plc v Etridge (No. 2) [2002] 2 AC 773 at 816 A-B, the concept of undue influence is not easy to define. It is something more easily recognized when found than exhaustively analysed in the abstract. With this in mind, I turn to Barclays Bank Plc. v. O'Brien [1994] 1 AC 180 which serves as a convenient starting point.

25. O'Brien was a husband and wife case where a second mortgage was executed on the matrimonial home to secure overdraft facilities extended by the bank to a company in which the husband, but not the wife, had an interest. The issue was whether the bank was entitled to enforce its security vis-à-vis the wife. The wife signed without reading the second mortgage in reliance on the husband's false representations that it was limited to $60,000 and would only last 3 weeks. The House of Lords held that where a wife had been induced to stand as surety for her husband's debts by undue influence or any other legal wrong, she had an equity against him to set aside the transaction which was enforceable against a third party who had actual or constructive notice of the circumstances giving rise to the equity. In O'Brien, Lord Browne-Wilkinson sought "to provide practical solutions" to the problems which surety wife cases give rise "whilst recognising the conflict between the interests of the commercial community and the need to protect vulnerable members of society from oppression or exploitation." See Etridge at para. 98, per Lord Hobhouse.

26. Undue influence was categorized by Lord Browne-Wilkinson (at 189-190) as follows: Class 1 concerned actual undue influence which is not the present case. Class 2 concerned presumed undue influence. This was how it was put:

"Class 2: Presumed undue influence

In these cases the complainant only has to show, in the first instance, that there was a relationship of trust and confidence between the complainant and the wrongdoer of such a nature that it is fair to presume that the wrongdoer abused that relationship in procuring the complainant to enter into the impugned transaction. In Class 2 cases therefore there is no need to produce evidence that actual undue influence was exerted in relation to the particular transaction impugned: once a confidential relationship has been proved, the burden then shifts to the wrongdoer to prove that the complainant entered into the impugned transaction freely, for example by showing that the complainant had independent advice. Such a confidential relationship can be established in two ways, viz.,

Class 2(A)

Certain relationships (for example solicitor and client, medical advisor and patient) as a matter of law raise the presumption that undue influence has been exercised.

Class 2(B)

Even if there is no relationship falling with Class 2(A), if the complainant proves the de facto existence of a relationship under which the complainant generally reposed trust and confidence in the wrongdoer, the existence of such relationship raises the presumption of undue influence. In a Class 2(B) case therefore, in the absence of evidence disproving undue influence, the complainant will succeed in setting aside the impugned transaction merely by proof that the complainant reposed trust and confidence in the wrongdoer without having to prove that the wrongdoer exerted actual undue influence or otherwise abused such trust and confidence in relation to the particular transaction impugned."

Subject to the criticism of one point of categorisation concerning Class 2(B) (see Etridge at paras. 17, 92, 98, 104-107, 157-166), the House of Lords in Etridge endorsed the essential structure of O'Brien.

27. In every case where it is alleged that a transaction has been brought about by undue influence, the relevant question is one of fact and degree and of the evaluation of evidence. The burden is on the complainant. As Lord Nicholls explained in Etridge (at para. 13), the evidence required depends on the nature of the alleged undue influence, the personality of the parties, their relationship, the extent to which the transaction cannot readily be accounted for by the ordinary motives of ordinary persons in that relationship, and all the circumstances of the case. He observed (at para. 32) that "undue influence has a connotation of impropriety. In the eye of the law, undue influence means that influence has been misused." Lord Hobhouse did not consider the Class 2(B) 'presumption' a useful forensic tool since the wife or other person must prove that she was the victim of an equitable wrong. That burden can be discharged by establishing a sufficient prima facie case to justify a decision in her favour on the balance of probabilities, the court drawing appropriate inferences from the primary facts proved. Once that initial burden is discharged, the burden shifts to the other party who has to adduce evidence sufficient to displace that conclusion. See Etridge at para. 107.

28. O'Brien and Etridge were both husband and wife cases. Whilst a husband and wife relationship is not one of the relationships where the law presumes, irrebuttably, that one party had influence over the other (such as parent and child, trustee and beneficiary, solicitor and client relationships), it is a relationship which normally involves a high degree of trust and confidence and emotional interdependence and so provides scope for abuse in that one party might take advantage of the other's vulnerability. Lord Scott regarded the relationship of trust and confidence between husband and wife as the norm rather than something special. Where experience has led the wife to doubt the wisdom of her husband's financial or business decision, Lord Scott still would not regard her willingness supported those decisions with her own assets as an indication that he had exerted undue influence. Rather, he saw her support as "a natural and admirable consequence of the relationship of a mutually loyal married couple." (at para. 159) He went on to say this:

"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."

Lord Hobhouse shared this view. (See Etridge at para. 105).

29. Lord Scott proceeded to give examples (at para. 160) of how that trust and confidence might be abused the husband.

"He may do so by expressions of quite unjustified over-optimistic enthusiasm about the prospects of success of his business enterprises. He may do so by positive misrepresentation of his business intentions, or of the nature of the security he is asking his wife to grant his creditors, or of some other material matter. He may do so by subjecting her to excessive pressure, emotional blackmail or bullying in order to persuade her to sign. But none of these things should, in my opinion, be presumed merely from the fact of the relationship of general trust and confidence. More is needed before the stage is reached at which, in the absence of any other evidence, an inference of undue influence can properly be drawn or a presumption of the existence of undue influence can be said to arise."

His conclusion was that in the surety wife cases, undue influence is a relatively unlikely explanation for the wife's agreement to become surety, pointing out that O'Brien itself was a misrepresentation case. The undoubted pressure the husband had brought to bear to persuade the wife to sign in that case did not constitute undue influence as the wife's will had not been overborne by her husband.

30. As Sir John Salmond put it in Brusewitz v Brown (1922) 42 NZLR 1106 at 1109-1110,

"... The Law in general leaves every man at liberty to make such bargains as he pleases, and to dispose of his own property as he chooses. However improvident, unreasonable, or unjust such bargains or dispositions may be, they are binding on every party to them unless he can prove affirmatively the existence of one of the recognised invalidating circumstances, such as ... undue influence."

Millett LJ did not dissent from those observations which he cited in Credit Lyonnais Bank Nederland NV v Burch [1997] 1 All ER 144 at 153d and f. Undue influence is about unacceptable conduct or impropriety arising out of a relationship between two persons. That relationship has been variously described: "where one has acquired over another a measure of influence, or ascendancy" (Etridge at para. 8); "some special relation of confidence, control, domination, influence or other form of superiority" per Sir John Salmond in Brusewitz v Brown (supra) cited with approval by Millett LJ in the Burch case at 153h.

31. As noted earlier, in a husband and wife situation, evidence would not normally be necessary to establish the existence of that trust and confidence since its existence would be the norm rather than something special. The corollary is that when the relationship is not that of husband and wife, one would expect such evidence to be adduced which is the present case. The deputy judge summarised the evidence of the relationship between the plaintiff and Mr Li at para. 106 of the judgment in these terms:

"106. When the Plaintiff met Mr Li in 1992 he must have been a person of some social accomplishment, running a no doubt successful social club. The Plaintiff obviously liked him and enjoyed his company. Though their relationship was that of friends, their calling each other brother and sister indicates a special friendship. It is clear that the Plaintiff was very considerably impressed by what she believed to be Mr Li's great wealth. She evidently believed him when he claimed to have turned down an offer of $200m for his Zhuhai investments. She was also considerably impressed by what she believed to be his fine qualities. He was a very rich friend whom she could trust implicitly."

The plaintiff and Mr Li were thus no more than friends. There was no suggestion or evidence of emotional interdependence. Nor was there anything that suggested dominance or ascendancy.

32. The deputy judge appears to have treated the various transactions or dealings between her and Mr Li leading up to the 1996 mortgage as buttressing the allegation of trust and confidence, if not evidencing it. It was said that because those transactions were not to the plaintiff's advantage or were inexplicable by a relationship of friendship, they somehow demonstrated that the plaintiff had reposed trust and confidence in Mr Li. In my view, that approach was quite wrong. Trust and confidence are not to be extrapolated from what, with hindsight, turned out to be improvident or ill-advised transactions. That was the gist of Sir John Salmond's observations in Brusewitz. What the plaintiff must do is to prove the circumstances of the relation between the parties as would establish a relation of superiority on the one side and inferiority on the other. In a very loose and general sense, one 'trusts' one's friends. But that does not mean that the friend is necessarily in a position of influence or dominance. That has to be established by evidence. If, for example, he had, in the relationship, acquired the role of 'confidant' or adviser or had been entrusted with the management of the former's financial affairs or everyday needs, that may well be sufficient. But that was not the case here.

33. On closer examination of the dealings between the parties, they do not assist the plaintiff in discharging the burden of proof that rested on her:

(1) The Perfect Target transactions

These were arms' length commercial dealings. The fact that the plaintiff might have been unwise in entering into them is a different issue and does not establish that she reposed trust and confidence in Mr Li.

(2) The Hillwood Road venture

This was nothing other than an investment decision on the part of the plaintiff. She together with others including Mr Lau, was invited to take up an investment opportunity which was essentially 'a property play', the profit being dependent on the property market going up. Mr Lau was apparently enthusiastic about the proposition. It was he who suggested to the plaintiff that they should invest together. The plaintiff's decision was made after 'deliberation'. That the investment turned out to be a bad one or that the documentation was not as it should have been is of no assistance in establishing the requisite trust and confidence.

(3) The 1994 mortgages

Whilst effectively the plaintiff was re-mortgaging her property to release the balance of her equity of some $3 million to lend Mr Li, approximately $1.1 million was applied to discharge Mr Li's debts to Perfect Target which had created a cashflow problem for that company. Allowing for this, she was lending $2 million to Mr Li. As noted above (at para. 12), the deputy judge was of the view that the transaction had three major features. But as will become apparent, that view is questionable.

Although the deputy judge concluded that the loan was unsecured, he appeared to have overlooked the fact that, according to the plaintiff, the loan was to be secured by Hillwood Road shares. At that stage, it could not be said that the shares were worthless, given that the restaurant had only opened a month or so before the date of the 1994 mortgages. It was too early to say how the venture would turn out. Nor was there evidence to suggest that that offer of security would not have been implemented had the plaintiff pursued it. Further, whilst Fairwealth was nominally the borrower and the Sinohill mortgage was unlimited in amount, it is to be noted that there were odd features to the transaction that do not appear to have been explored at trial. What was not required for the redemption of the NCB mortgage of over $3 million came into the plaintiff's hands. Although the deputy judge stated (at para. 39) that there was no evidence as to who made that payment to the plaintiff, in her witness statement, the plaintiff stated that she received a cheque in the sum of about $3 million from the solicitors' firm. Why should that be, one may well ask, in circumstances where the documentation showed the borrower to be Fairwealth? Moreover, the deputy judge did not deal with the fact that Mr Ip who had a substantial interest in Fairwealth was present when the mortgages were executed on 23 December 1994 (see para. 35 of the judgment) in circumstances where the plaintiff's case was that one of the terms agreed with Mr Li was that she would be named the borrower. (See para. 32 of the judgment.) Why was Mr Ip there? Did the plaintiff not raise any query as to his presence? Moreover, the fact that these mortgages were discharged with the loan of $6.5 million advanced under the 1995 mortgage (as to which see below), meant that no further advances had been made by Sinohill to Fairwealth after the initial advance in December 1994. So although the plaintiff's potential exposure was unlimited under the Sinohill mortgage, as matters turned out, her liabilities had not in fact been increased. All these matters lead to the conclusion that the major features found by the deputy judge and which caused him to take a certain view of the 1994 mortgages were not what they appeared to be.

(4) The 1995 mortgage

This 'replaced' the 1994 mortgages. The deputy judge found that the 1995 mortgage had been entered into at the instigation of Mr Li. Whilst the plaintiff was in a much safer position as a result in that Fairwealth had dropped out of the picture and the plaintiff was once more the borrower, the deputy judge remarked that there was no evidence to explain how that came about, not even whether the form of the mortgage adopted had been at the initiative of the lender, the plaintiff or Mr Li. In these circumstances, it is difficult to see how the 1995 mortgage can help to establish that the plaintiff had reposed trust and confidence in Mr Li.

34. Mr Leong SC submitted that trust and confidence and ascendancy or domination were two sides of the same coin. In the course of argument, he conceded that each of the pre-1996 mortgage transactions taken alone 'was neither here nor there'. The Hillwood Road venture, for example, taken alone might be viewed as nothing more than a foolish decision on the part of the plaintiff but he submitted that the series of dealings between the plaintiff and Mr Li, taken in the round, can only be explained by undue influence. If I have not misunderstood the submission, it amounted to this: that the sum is greater than its parts. That submission is misconceived. Undue influence is but one of many competing explanations for the transactions such as imprudence, foolishness, stupidity, bad judgment, naivety.

35. In my view, the evidence before the deputy judge did not warrant any conclusion that the relationship between the plaintiff and Mr Li was such that she had reposed trust and confidence in him. The plaintiff had not even begun to make a showing of the existence of influence on the part of the allegedly dominant party, much less than it had been misused.

36. Having reached this conclusion, none of the other issues arises for consideration. Even if (contrary to my view), the deputy judge's finding of undue influence were correct, the plaintiff still stands to fail on the other issues for reasons which are briefly explained below.

Was the bank put on enquiry?

37. Lord Nicholls was of the view that O'Brien decided that a bank is put on inquiry whenever a wife offers to stand surety for her husband's debts. The underlying rationale was said to be found in the combination of two factors: (a) the transaction is not on its face to the wife's financial advantage; (b) the existence of a substantial risk that the husband has committed a legal or equitable wrong which entitles the wife to set aside the transaction. See Etridge at para. 44. So, in the typical surety wife transaction, W becomes surety to B for H's debts as a result of H's undue influence over W. In such a case H is the principal debtor to whom B advances the loan. The present case is atypical in the sense that A (the complainant) becomes surety to B for X's debts as a result of undue influence not on the part of X but of Y over A. Lord Scott noted (Etridge at para. 148) that it is the bank's perception of the risk that the wife's consent may have been procured by the husband's misrepresentation or undue influence that is central to Lord Browne-Wilkinson's scheme for the protection for vulnerable wives. Earlier (at para. 146) he had explained that:

"... in the 'bank v surety wife' cases the constructive notice that is sought to be attributed to the bank is not constructive notice of any pre-existing prior right or prior equity of the wife. The husband's impropriety, whether undue influence or misrepresentation, in procuring his wife to enter into a suretyship transaction with the bank would not entitle her to set it aside unless the bank had had notice of the impropriety. It is notice of the husband's impropriety that the bank must have, not notice of any prior rights of the wife. It is the notice that the bank has of the impropriety that creates the wife's right to set aside the transaction. The wife does not have any prior right or prior equity."

It is in this context that one has to consider whether the bank had any notice of Mr Li's impropriety.

38. The plaintiff had put forward a positive case regarding the 1996 mortgage that was something quite different from the findings made by the deputy judge. Her positive case involved the following key elements:

* she was unaware that Sunny was the borrower and had she known, she would not have signed the mortgage documents

* the conveyancing clerk from the solicitors acting for the bank failed to give her any explanation of any of the documents

* Mr Li made representations to the effect that she was the borrower and that the amount secured by the mortgage was limited to $6.5 million

The deputy judge found against the plaintiff on each of those matters.

39. At this juncture, it becomes relevant to mention certain matters disclosed by the bank's documentation and evidence adduced on behalf of the bank which were not challenged. These matters did not feature in the judgment but, in my view, are of crucial importance.

40. It is relevant to note that the bank's documents which were before the court disclosed that (i) at the time of the 1996 mortgage, Mr Ip had been a longstanding client of the bank being chairman of a group of companies involved in construction projects in China; (ii) Sunny was a newly established company; (iii) given the recession, Mr Ip was switching his business into other areas and the purpose of the application was for documentary credit facilities to introduce the pager into China; (iv) he was perceived by the bank to be a person of financial ability. In addition to the mortgage, the bank required personal guarantees from Mr Ip and his sister ("the Ips"). Whilst the property to be mortgaged was beneficially owned by the plaintiff who was ostensibly neither a director or shareholder of Sunny, nevertheless there were minutes recording the passing of an ordinary resolution on 3 September by the shareholders of Sunny at an EGM authorising the bank's solicitors to pay the loan from the bank of $6.5 million to Luk Fai to redeem the 1995 mortgage and that

"... the approval pursuant to Section 157H3(b) of the Companies Ordinance be made in respect of the said advance by the Company to the said Madam Li Sau Ying [the plaintiff]."

3 September 1996, the date of the resolution, is also the date of (1) a commitment letter addressed to the bank signed by both the plaintiff and the Ips on behalf of Sunny, and (2) an acknowledgement letter also signed by the plaintiff and Sunny to the effect that the bank was under no obligation to advance more than $6.5 million.

41. It will be appreciated that the bank's relationship was thus not with Mr Li, the alleged influencer, but with Mr Ip who owned Sunny, which was a newly established company. In fact, there was no evidence that the bank had any dealings with Mr Li in respect of the 1996 mortgage or otherwise. As noted in paragraph 40 above, Mr Ip had been a longstanding customer of the bank whose commercial interests in China were known to the bank. It was he and not Mr Li who had applied for facilities in relation to a new business venture in China. Sunny was to be the borrower supported by (1) a mortgage over the property which the bank knew was beneficially owned by the plaintiff and (2) personal guarantees from Mr Ip and his sister.

42. I now turn to the resolution passed at an EGM of Sunny held on 3 September 1996. The significance of second part of the resolution is that, contrary to what the deputy judge thought, Sunny was to receive no part of the advances of $6.5 million despite the personal guarantees from the Ips. But the more intriguing part of the resolution was the approval under section 157H(3)(b) of the Companies Ordinance. Section 157 prohibits loans to directors with certain exceptions: under this subsection the prohibition does not apply, in the case of a private company to anything done by the company which has been approved by the company in general meeting. The resolution did not appear to have attracted attention in the proceedings below: it was not mentioned anywhere in the judgment. It is also impossible to tell whether it was dealt with in oral evidence as only part of the transcript was before this court, although it would seem not as the court's attention had not drawn attention to this document.

43. The deputy judge found that the parties executed the mortgage and the other documentation on 29 August 1996 although the mortgage itself was dated 4 September and the commitment and acknowledgment letters and personal guarantees from the Ips were all dated 3 September. But the bank did not advance the monies secured by the mortgage until 4 September. This is apparent from the confirmation letter dated 3 September 1996 from the bank's solicitors to the bank to which was attached, inter alia, a certified copy of the minutes and the following document addressed to the bank also dated 3 September 1996:

"Kindly credit the sum of HK$4,500,000.00 being the mortgage money into our account (being A/C No. 030-550-0-019942-1) and confirm that the enclosed cheque for HK$2,000,000.00 has been cleared on 4th September 1996 before 10:00 a.m."

This document was signed by both the plaintiff and Sunny. The release of the 1995 mortgage was dated 4 September. The resolution passed on 3 September thus preceded the advance. When juxtaposed with the minutes recording the resolution, the ineluctable inference is that the plaintiff must have been a 'director' of Sunny: if not, the section 157H(3)(b) resolution would be totally inexplicable and otiose. Whilst the application form by Sunny for banking facilities stated that the shareholders and directors were the Ips only and did not show the plaintiff as either shareholder or director, that was dated 15 July 1996, some 6 weeks before the execution of 1996 mortgage. By the time the 1996 mortgage came to be executed, the purpose of the loan had clearly changed since the monies were to be advanced to the surety and not for introducing the pager business into China. Although the deputy judge referred to the conveyancing clerk's evidence to the effect that a company search was done before taking the mortgage, quite when that was done is unclear. The search is not in the appeal bundles. In any event, the resolution can only have come about and presented to the bank for cause and if it was necessary, the only legitimate inference is that, by then, the plaintiff had become a director.

44. From the bank's perspective, this was a loan by Sunny, ostensibly, to a director. Hence the resolution authorising payment by the bank's solicitors to Luk Fai to discharge the 1995 mortgage. The monies advanced were thus to be applied for the benefit of the surety. In these circumstances, I fail to see how the bank would have been put on inquiry even assuming (contrary to my view), that the plaintiff had entered into the 1996 mortgage as a result of undue influence on the part of Mr Li. Mr Li simply did not feature in the bank's dealings relating to the 1996 mortgage which were with the principal debtor i.e. Sunny and the Ips who were required to provide personal guarantees.

45. The present case is far removed from the surety wife cases. Lord Nicholls' observations as to a wider principle (Etridge at paras. 82-89) were strictly obiter since Etridge was a surety wife case. Even if the wider principle were applicable, in my view, it would not have produced a different result.

Equitable compensation

46. It is therefore unnecessary to consider the remaining issues. I would merely add a few observations as to the juridical basis (if any) that would entitle a court to order equitable compensation by the bank to the plaintiff where the equitable remedy of rescission was not available. The deputy judge appeared to break new ground: O'Sullivan v Management Agency and Music Ltd [1985] 1 QB 428 and Mahoney v Purnell [1996] 3 All ER 61 were cases where equitable compensation was granted in circumstances where rescission was not possible between the immediate parties to the transactions subsequently impugned by reason of one party's undue influence over the other. Here the deputy judge sought to order compensation to the mortgagor where the impropriety (if any) was on the part of someone not a party to the mortgage. Nocton v Lord Ashburton [1914] AC 932 would not render any assistance since no fiduciary relationship existed between the plaintiff and the bank.

47. Mr Leong submitted that the court may exercise its equitable jurisdiction to do "practical justice". I would only say this: it would be unfortunate if this epithet serves to obfuscate the basis for the exercise of the court's equitable jurisdiction which should not be regarded as 'free-wheeling' and free from established principles for its exercise.

Conclusion

48. The principle underlying the equitable doctrine of undue influence is to save persons from being victimised by other people and not to save them from the consequences of their own folly. To protect people from being forced, tricked or misled in any way by others into parting with their property is one of the most legitimate objects of all laws; and the equitable doctrine has grown out of and been developed by the necessity of grappling with insidious forms of spiritual tyranny and with the infinite varieties of fraud. See per Lindley LJ in Allcard v Skinner (1887) 36 Ch. D. 145 at 182-183. As Sir Raymond Evershed MR observed in Tufton v Sperni [1952] 2 TLR 516 at 519:

"[e]xtravagant liberality and immoderate folly do not of themselves provide a passport to equitable relief."

49. For all these reasons, the judgment below must be set aside. I would allow the appeal. I would also make an order nisi for costs in favour of the bank.

Hon Cheung JA:

50. I agree.

Hon Rogers VP:

51. There will therefore be an order as set out in paragraph 49.