BANK OF CHINA (HONG KONG) LTD v. CHAN FOOK WING AND ANOTHER

HCMP 420/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 420 OF 2004

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J U D G M E N T

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INTRODUCTION

Background

1.  This is a mortgage action instituted by the Plaintiff against both defendants.  As the proceedings progressed, the 1^st Defendant was adjudged bankrupt on 25 November 2009 upon a petition filed by another of his creditors.  Thus, these proceedings continue only against the 2^nd Defendant.

2.  The Plaintiff is and was at all material times a banking corporation in Hong Kong.  With effect from 1 October 2001, it became the successor of a number of local banks, including Kincheng Banking Corporation, by virtue of the Bank of China (Hong Kong) Limited (Merger) Ordinance.  The Plaintiff and Kincheng Banking Corporation are referred to as “the Bank” and treated as one and the same legal entity.

3.  The 1^st and 2^nd Defendants are respectively husband (the “Husband”) and wife (the “Wife”).  On 16 December 1996, they jointly purchased an office unit in a commercial building in Mongkok (the “Property”) at a price of $1,800,000.  The Husband paid 40% of the purchase price.  The purchase was financed by a mortgage provided by Kincheng Banking Corporation.  The mortgage was negotiated between the Husband and a customers’ relations officer of the Bank.  On 24 December 1996, the Bank gave written instructions (the “Written Instructions”) to Messrs Gallant Y T Ho & Co (“GH”) to prepare the necessary documentations, including a deed of mortgage containing an “all moneys” clause (the “Mortgage”).

4.  On 15 January 1997, at the office of GH, the Defendants executed the Mortgage; a confirmation letter (“Confirmation Letter”); and a side letter (“Side Letter”) addressed to the Bank.  These three documents are collectively referred to as “the security documents”.  They also executed a letter addressed to GH stating that GH had advised them to seek independent legal advice but they elected not to do so (the “Consent Letter”).  A total sum of $1,080,000 was drawn down from the Bank and the purchase of the Property was completed.

5.  Eight months later, on 15 August 1997, the Husband purchased another residential property in Sea Crest Villa (“Sea Crest Villa”).  He executed a legal charge (the “Legal Charge”) on the property on in favour of the Bank to secure his indebtedness amounting to $5,236,000.

6.  Subsequently, the Defendants fell into arrears in repayment under the Mortgage and the Legal Charge.  On 3 February 2004, GH issued letters to the Defendants demanding payment of the outstanding indebtedness.  Upon default, the Bank commenced this action. 

7.  On 23 April 2004, the Bank obtained default judgment against the Defendants (“Default Judgment”) and took possession of the Property which was then sold on 15 October 2004.  The proceeds were applied to discharge the outstanding loan under the Mortgage but were not sufficient to satisfy the Husband’s indebtedness under the Legal Charge.  

8.  On 28 September 2009, Shanghai Commercial Bank Limited filed a petition for bankruptcy against the Husband in HCB 12742/2009. The Husband was adjudged bankrupt on 25 November 2009.

9.  On 3 August 2010, the Bank filed a petition for bankruptcy against the Wife and obtained a bankruptcy order against her on 29 September 2010.  Then, upon the application by the Wife, the bankruptcy order was annulled on 2 November 2011.  The Default Judgment was also set aside as against her on 20 June 2012.  On 30 July 2012, the Bank continued the action against the Wife by way of a statement of claim.

The parties’ case and the defence

10.  The Defendants do not dispute the Husband’s indebtedness under the Mortgage and the Legal Charge.  There is also no dispute that the Wife signed the Mortgage containing an “all moneys” clause (which in fact is not a single clause but a collection of provisions having that effect) to stand as surety for the Husband’s indebtedness, present and future.  Though the Husbands’ indebtedness under the Mortgage of which the Wife was a party was fully discharged, the Bank relies on the “all moneys” clause under the Mortgage to fix liability on the Wife for the indebtedness of her Husband under the Legal Charge of which she was not a party. 

11.  The Wife raises two defences.  First, the Mortgage was signed as result of undue influence exerted on her by her Husband.  There is no evidence at all of any actual pressure exerted by the Husband on the Wife to execute the Mortgage.  The Wife’s defence is based on inferred undue influence.  There are two aspects in this defence.  First, she says the Mortgage was so disadvantageous to her that the only reasonable inference is that it was the result of exercise of undue influence on her.  Second, the Wife says she reposed trust and confidence in the Husband.  This part of her case is built on three limbs.  First, GH, and therefore the Bank, knew about her marital relationship with the Husband.  Second, the Husband is a very dominating and autocratic person, while she is and was a very submissive housewife who would do whatever the Husband instructed her.  Third, GH did not explain to her about the content, nature and effect of the Mortgage and other security documents, in particular the “all moneys” clause.  Thus, she did not know that by signing the Mortgage she became a surety to the Husband’s all other debts other than the loan under the Mortgage. 

12.  The Wife’s second defence is that her liability under the Mortgage was limited to $900,000.  This is largely a question of construction of the Mortgage and other security documents.

Dramatis personae

13.  The Bank called three witnesses: Mr Lam Chiu Man (Mr Lam), Ms Li Kwai Fong Margaret (“Ms Li”) and Mr Chung Kwok Keung Tommy (“Mr Chung”).  The Wife and her Husband testified for the defence.  Their credibility is essential in considering the defence of undue influence.

Mr Lam Chiu Man

14.  Mr Lam is a manager of the Risk Management Department of the Bank.  He produced documents in connection with this case. His evidence is of a formal nature and is not in serious dispute.

Ms Li Kwai Fong Margaret

15.  Ms Li is a conveyancing clerk of GH.  She handled the security documents in relation to the Property, which is the subject matter of this trial.  The events took place eighteen years ago.  Now, she had no recollection of what happened then.  She could only testify according to her knowledge of the established practice and procedure of GH at the time and by looking at the documents.  She impressed me as an honest and straightforward witness.  I consider her evidence inherently probable and accept her evidence.

Mr Chung Kwok Keung Tommy

16.  Mr Chung is a solicitor of GH.  He was the supervising solicitor in charge of the Mortgage relating to the Property.  He attested the execution of the security documents.  His evidence revolved around a very small compass, namely whether he had ensured if Ms Li had explained the security documents to the Defendants and that they understood their content, nature and effect before signing them.  Again, the incident was eighteen years ago.  Mr Chung could only testify according to the established practice and procedure of GH at the time.  On the totality of the evidence, I consider his evidence inherently probable and accept his evidence.

The Wife

17.  The Wife is now 70 years of age.  She was 52 at the time she executed the Mortgage.  She received education up to Primary Two. She could read and write simple Chinese but is illiterate in English. In 1968, through the arrangement of her parents, she married her Husband whom she had never known before.  She was 23 years of age then, but two years older than the Husband.  She raised pigs and chickens which she sold to her neighbours.  In 1990, regardless of her feelings, the Husband arranged her migration to Quebec with her four children.  Her eldest son had already been studying there before her migration.  She acquired her Canadian citizenship in 1994.  Since then she returns to stay in Hong Kong for about three months every year and spends the rest of the year in Canada.

18.  She was on record the majority shareholder of Sun Hui Environment Protection Engineering Limited (“Sun Hui”) since 2008 until 12 September 2011 when she transferred all her shareholding to her son.  That, incidentally, was after she learned about the bankruptcy order made against her and less than two months before she successfully applied to have it annulled.  When cross-examined about her role in that company, she repeatedly answered that she could not remember.  But in her affirmation filed for the purpose of annulling the bankruptcy order, she said that her Husband was an adjudged bankrupt at the time and she held the shares in Sun Hui and directorship as nominee for her Husband because he was heavily in debt.  She said that the company was just a cleaning company and not a company of substance.  But, as the company documents show, the company occupied two units in a commercial building in Argyle Street after it started with one unit a year before. 

19.  The Wife was very evasive about the Husband’s purchase of Sea Crest Villa.  She denied having lived there with the Husband, but admitted that her Husband had taken her there in 1996 and 1997 to watch firework.  It was a furnished apartment.  She did not know if her Husband had lived there or had rented it out.  She dared not ask for fear that her Husband would scold her.

20.  The Wife was also very evasive and inconsistent about where her Husband lived.  She said she had no contact with her husband and that his husband lived alone or with his sons or his mother in a squatter hut in Tsing Chuen Wai.  She said when she returned to Hong Kong, she also lived in the squatter hut.

21.  For reasons as I shall give in my analysis of the evidence, I do not consider the Wife a credible witness.  She was prepared to lie to conceal the truth where necessary.  Her evidence is not credible.    

The Husband

22.  The Husband is now 68 years of age and has retired.  He was a businessman in the transportation and cleaning business.  In 1990, he arranged his Wife and their four children to migrate to Quebec, while he stayed in Hong Kong to attend to his business. 

23.  In December 1996, he purchased the Property with the help of the Mortgage from the Bank, which he held in joint names with his Wife.  Eight months later, he purchased the Sea Crest Villa in his sole name, with the help of another mortgage from the Bank.  In addition, he probably owned another unit in Charming Garden, which was sold when his business collapsed.  He was adjudged bankrupt on 25 November 2009 upon the petition by Shanghai Commercial Bank Limited.  He was discharged from bankruptcy on 25 November 2013.

24.  He said he purchased Sea Crest Villa with a sitting tenant; and after the tenant left, it was left vacant for a few years until it was sold in 2003.  He went there to watch firework with his Wife in 1996 and 1997, but denied residing there.   Though not of much significance for the purpose of this trial, his evidence about Sea Crest Villa shows he is an incredible witness. 

25.  His evidence about his involvement in Sun Hui is inconsistent with the Wife’s.  He denied that the Wife held the shares and directorship in Sun Hui as his nominee.  He said Sun Hui was his Wife’s and son’s company and he was not involved in the affairs of that company.  I do not think the Wife could have been mistaken as to whom she was holding the shares and directorship for.  Rather, it was the Husband who was not telling the truth.  I prefer the Wife’s evidence on this issue.  Her evidence suggests that the Husband is person of low commercial morality and credibility.

26.  The Husband also gave evidence not contained in his witness statement, namely that he had told Ms Li that he wanted to make a gift of half share of the Property to the Wife.  This suggests he was concocting evidence as he was testifying.

27.  The Husband did not impress me as a person of candour.  On the totality of the evidence, I do not consider the Husband’s evidence inherently probable.

UNDUE  INFLUENCE

The legal principles

28.  The legal principles applicable to the defence of undue influence are well settled and are not in dispute.  They are admirably summarised by Recorder Ma SC, as he then was, in Bank of China (Hong Kong) Ltd v Wong King Sing[1] as follows:

“…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 victimisation 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 : see Allcard v. Skinner (1887) 36 Ch.D. 145, at 182-183; National Westminster Bank Plc v. Morgan [1985] AC 686, at p. 705. As Lord Nicholls of Birkenhead said in Royal Bank of Scotland v. Etridge (No 2) [2001] 3 WLR 1021 at p. 1029 para 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.”

29.  As was held by the Court of Final Appeal in Li Sau Ying v Bank of China (Hong Kong) Ltd,[2] the question to ask is whether the evidence justifies the inference, on a balance of probabilities, that the impugned transaction was procured by undue influence, that is to say, by an abuse by the alleged dominant party of the trust and confidence reposed in him by the alleged subservient party.  The Court of Final Appeal also noted that the current trend is to move away from presumptions arising from any particular relationship, as such an approach is likely to detract from the real issue.  However, the existence of such relationship is helpful in enabling the inference to be drawn.  The question is one of informed consent.  Undue influence may be actual or presumed (or “inferred” in the light of  the Court of Final Appeal’s observation in Li Sau Ying v Bank of China (Hong Kong) Ltd). 

30.  In case of actual undue influence, the subservient party has to prove affirmatively that the dominant party exerted influence on him which caused him to enter into the particular transaction impugned.  He has to prove that the alleged dominant party has the capacity to influence the subservient party; the influence was in fact exerted; the exercise of influence was undue; and the exercise resulted in the transaction complained of, although it need not be the only reason as long as it was a significant reason.

31.  Absence evidence of actual undue influence, the subservient party may rely on inferred undue influence.  In such a case, the subservient party has to show there was a relationship of trust and confidence between him and the dominant party of such a nature that it is fair to infer that the dominant party abused that relationship in procuring the subservient party to enter into the impugned transaction.  In the case of certain special relationships, such as solicitor and client, or doctor and patient, the law irrebuttably presumes a relationship of trust and confidence between the dominant party and the subservient party.  Where no such special relationship exists, the subservient party has to prove the de facto existence of a relationship under which he generally reposed trust and confidence in the dominant party.  Where the existence of such special relationship or de facto existence of a relationship is proven, the burden is shifted to the dominant party to prove that the subservient party entered into the impugned transaction freely, for example by showing that the subservient party had independent advice.  The ultimate question is whether the evidence justifies the inference that, on a balance of probabilities, the impugned transaction was procured by an abuse by the alleged dominant party of the trust and confidence reposed in him by the alleged subservient party.

32.  It is also the law that the relationship of husband and wife is not one of the established relationships where the law presumes that either of the parties has reposed trust and confidence in the other: see Bank of China (Hong Kong) Ltd v Wong Yuk Ping & Another[3]. However, that relationship is relevant.  Whether either and which of the parties has reposed trust and confidence in the other is all a matter of inference to be drawn from all the circumstances, including that husband and wife relationship. 

33.  The above discussion is relevant as regards the position as between the dominant party and the subservient party.  If the inference of undue influence could not be drawn, that is the end of the defence.  But, if the subservient party succeeds, he or she could only set aside the transaction as against the dominant party, but not against a third party, such as the lender who financed the transaction impugned.  To succeed against the lender, the subservient party would have to prove something more before the lender’s conscience is affected so that the lender is to be restrained from enforcing his legal rights against the subservient party: Royal Bank of Scotland Plc v Etridge (No.2)[4].  The subservient party has to prove either the dominant party is an agent of the lender or that the lender had actual or constructive notice that the transaction was affected by the undue influence of the dominant party. 

34.  As between spouses, it can rarely be said that the husband acted as agent of the bank when securing the wife’s agreement to act as surety: see Barclays Bank Plc v O’Brien[5].  As for notice, the subservient party has to show knowledge by the lender of the relationship between the dominant and subservient party and that the nature of the transaction is such as to be apparently disadvantageous to the subservient party, ie the surety: see Royal Bank of Scotland plc v Etridge (No.2)[6]. But, in the case of spouses, a bank is put on inquiry whenever a wife offers to stand as surety for her husband’s debt: see Royal Bank of Scotland Plc v Etridge (No.2)[7].  The lender can, however, show that he is not put on notice if the transaction is not apparently disadvantageous to the subservient spouse.

35.  Once the subservient party has proved that the lender is put on inquiry, the lender has to show he has taken reasonable steps to satisfy himself that there was no undue influence.

Whether the Mortgage was disadvantageous to the Wife: whether undue influence is to be inferred

36.  Mr Tsui, counsel for the Wife, argues that the Mortgage is not beneficial to the Wife.  By agreeing to stand as surety for Husband’s indebtedness under the “all moneys” clause she assumed a detriment. Hence, Mr Tsui submits, this is evidence that the Mortgage was executed by the Wife under undue influence of the Husband.

37.  On the other hand, Mr Chong, counsel for the Bank, argues that the mortgage loan of $900,000 was used to acquire the Property to be held by the Husband and Wife in their joint names and the Wife acquired a half share in the Property without having to pay anything.  Hence, Mr Chong submits that the Wife certainly obtained a benefit in the Mortgage; and transaction of this nature does not call for explanation.  As for the “all moneys” clause, he argues that it cannot be said that every such transaction must be one which, failing proof to the contrary, is explicable only on the basis that it has been procured by the exercise of undue influence by the party guaranteed.

38.  As I said, it is all a matter of inference.  In Bank of China (Hong Kong) Limited and Leung Wah and Chau Yun Dip[8], the parents mortgaged their property as security for banking facilities for their son.  Rogers VP upheld the finding at first instance that although the parents and son relationship was a loving one, there was no ascendancy by the son over the parents and the parents had not placed trust and confidence in the son in relation to the management of their financial affairs.  The same could be true in the case of a wife entering into a surety arrangement for the husband.  She may do so out of love and affection rather than trust and confidence.  In Bank of China (Hong Kong) Limited and Personal Representative of Fu Kit Keung[9], the husband’s business was, as in this case, the main source of family income. The husband and wife charged their matrimonial home and executed an “all moneys” mortgage to secure credit facilities for the husband’s business. Chu J, as she then was, held that in such a case it could not be said that charging the matrimonial home as security for the husband’s business borrowings or acting as a guarantor is necessarily disadvantageous to the wife.

39.  In an appropriate case, as in Bank of China (Hong Kong) Limited and Personal Representative of Fu Kit Keung, where the husband is the sole breadwinner of the family and family assets are charged to enable the husband to generate income for the family, the husband and wife can be fairly treated as one economic entity.  What is beneficial for the husband is also beneficial for the family and therefore for the wife.  Furthermore, the wife also has a duty to contribute to the welfare and wealth of the family.  The detriment to the wife by charging joint property as security or standing in as surety for the family business dwarfs into insignificance in the face of the greater benefit to the family.  Such arrangements are often a business decision, whether with or without an element of love and affection, but not one of reposing trust and confidence. 

40.  The situation in the present case is precisely the same.  The Husband was the sole breadwinner of the family.  He paid 40% of the purchase price of the Property to obtain a mortgage to finance its purchase and put it under joint names with the Wife.  The Wife acquired a 50% interest in the Property without having paid any consideration.  The Property was to be used for the Husband’s business which was the sole source of the family’s income.  It was only right and proper for the Wife to assist the Husband by standing in as surety for the borrowing of the family business which financed the family business, paid the family expenses and the Mortgage so as to perfect her 50% interest in the Property.  Viewed in this light, not only was the arrangement not a disadvantage to the Wife, it was intended to be a benefit, though it turned out to be otherwise.  Whether the arrangement was disadvantageous was to be decided at the time when the arrangement was entered into.  It is wrong to judge with hindsight.  In conclusion, I am unable to find the Mortgage to be a disadvantage to the Wife.  I decline to draw on this basis the inference that it was executed as result of undue influence.

Wife’s case of de facto relationship of reposing trust and confidence

41.  The relationship of husband and wife is not one which the law presumes the existence of a relationship of trust and confidence.  Thus, to establish undue influence, the Wife has to prove the de facto existence of a relationship under which she generally reposed trust and confidence in the Husband.  The Wife’s case of undue influence is that her Husband is a chauvinistic and autocratic person who assumed the position as the head of the family or master of the house and she was just a submissive housewife.  The Husband made all decisions on financial and business matters.  She never dared to ask anything about his business or finance.  She only concentrated in taking care of the children.  She did anything her Husband told her to.

42.  The Wife referred, as evidence of this dominant and subservient relationship, to her migration to Canada in 1989.  She said that regardless of her feeling and opposition, the Husband decided to migrate to Canada and made her sign immigration documents.  After landing in Quebec and without her and the children’s consent, the Husband left them and flew back to Hong Kong to attend to his business.  

43.  She said she heard from her mother and siblings that the Husband had a mistress.  Her relation with the Husband was poor.  They were living apart.  She was living in Montreal in Quebec, while the Husband was living in Hong Kong.  They seldom contacted one another.  Their marital relationship was breaking down.  She contemplated a divorce, but gave up that idea because of the children. 

44.  Then on 14 January 1997, the Husband told her to go with him to the office of GH to sign some mortgage documents.  She had no confidence in her Husband.  She dared not ask why and thought he was taking her there to sign some divorce documents.

45.  At the office of GH, Ms Li did not explain the content, nature and effect of the Mortgage and other security documents to her. As her Husband was by her side all the time, she dared not ask Ms Li because she was afraid it would make her Husband unhappy.  So the Wife says that she signed the documents without understanding its content, nature and effect.  Now, she alleges undue influence on the part of her Husband; and failure on the part of the Bank and its solicitors to ensure she had independent legal advice before executing the Mortgage and security documents.

The execution of the Mortgage

46.  The Wife bears the burden of proving undue influence.  To consider this defence, it would be best to test the Wife’s case against the evidence surrounding the execution of the Mortgage on 15 January 1997. 

47.  Ms Li and Mr Chung could not remember the events which occurred eighteen years ago.  They could only testify according to the established practice of GH and the records.  According to Ms Li, GH’s standard practice and procedure insofar as is relevant was as follows.  Upon receipt of instructions from the Bank, a conveyancing clerk would contact the intended mortgagors and borrowers.  A solicitor would be assigned to supervise the handling of the conveyancing and security documents.  After the documentations were completed, the conveyancing clerk would contact the mortgagors and borrowers to arrange an appointment to execute the documents.  Upon their arrival, the clerk would invite them to a room, check their identity cards and make copies thereof.  The clerk would explain to them the contents, effect and nature of the documents to be executed.  In particular, if the mortgage was intended for securing facilities to an unlimited extent, the clerk would explain and highlight the effect of the “all moneys” clause contained in the mortgage and all other notices and documents.  The clerk would deal with any query raised by the intended mortgagors and borrowers.  If the clerk encountered any difficulties in answering the query, he or she would refer the matter to the supervising solicitor.  If the intended mortgagors and borrowers still did not understand the nature and effect of the documents they would be advised not to sign.  After explanation, the clerk would invite the supervising solicitor to enter the room to attest the execution of the conveyancing and security documents.  The solicitor would ascertain from the intended mortgagors and borrowers if the documents had been explained to them, if they understood the documents and if they had any questions thereon.  If the solicitor was required to answer any queries raised by the intended mortgagors and borrowers, the clerk would be present throughout.  When the solicitor was satisfied that the above procedures had been completed, he would attest the execution of the documents.

48.  Ms Li confirmed that according to the documents, she was the conveyancing clerk responsible for handling that Mortgage and Mr Chung was the supervising solicitor who attested the execution of the Mortgage and other security documents.  Based on the records, she confirmed receiving the Written Instructions from the Bank for preparation of the Mortgage to secure general banking facilities to an unlimited extent.  She prepared the necessary documentation, including the Mortgage containing an “all moneys” clause.  Then she contacted either of the Defendants and asked them to attend the office of GH to execute the documents.  She could not recall which one of the Defendants she contacted and could not recall if she had been told by the Husband that they were husband and wife. 

49.  Based on the records, Ms Li said that on 15 January 1997 she led the Husband and Wife to a room and explained the Mortgage and other security documents to them, in particular the “all moneys” clause in the Mortgage.  She asked if they fully understood the content, effect and nature of the documents.  Upon their confirmation that they did and had no questions, she asked Mr Chung to come into the room and attest the execution of the documents.  Upon arrival, Mr Chung ascertained from the Husband and Wife that the documents had been explained to them and drew their attention to the effect of the “all moneys” clause.  Upon being satisfied that they fully understood and raised no question, Mr Chung attested the execution.

50.  The Husband’s and Wife’s evidence is a total denial that Ms Li had explained the security documents to them.  According to the Wife, she went with the Husband to the office of GH on 15 January 1997. She was met by Ms Li.  Ms Li just told her to sign her name on some documents. Ms Li did not explain to her what those documents were.  In particular, Ms Li did not tell her that she was signing as a guarantor or explain to her about the unlimited guarantee.  Ms Li just told her to sign and nothing else.  She thought the documents were divorce documents.  She looked at Ms Li.  Ms Li then told her, “Don’t be afraid.  Your Husband bought a flat to make a gift to you. It would not jeopardise you.”  The Wife asked the Husband if they were signing divorce documents.  The Husband replied “no” and told her that he was making a gift of the Property to her.  She thought the Husband was trying to make her happy and to mend their relationship.  Then a man, presumably Mr Chung, came in.  That man did not say anything or explain anything to her. 

51.  The Husband generally corroborated the Wife’s evidence.  In 1996, he decided to purchase the Property for the use of his business instead of renting the existing accommodation.  He decided to hold the Property in joint names with his Wife thereby making a gift to her of half of the beneficial interest in the Property.  He did so in order to mend his relation with his Wife as a crisis was developing in their marriage.  As was consistent with his chauvinistic behaviour, he did not consider it necessary to tell the Wife he was buying a property in joint names and giving her a half share.  He just told his Wife to go to the office of GH with him to sign some documents.  He did not tell her what the documents to be signed were.

52.  The Husband’s evidence is that at some stage, presumably on 14 January 1997 when Ms Li made an appointment with him to execute the Mortgage, he told her to add the Wife’s name to the documents as he wanted to make a gift of the Property to her.  I believe this was said to boost the credibility of their allegation about Ms Li’s remark that the Husband was a caring person making a gift of the Property to the Wife so as to support her case that GH, and through it the Bank, knew about her marital relationship with the Husband.  That is a piece of gratuitous evidence not contained in the Husband’s witness statement.  This allegation about Ms Li’s remark is an important part of the Wife’s case.  I would be very surprised that this assertion by the Husband, which formed the basis of their allegation about Ms Li’s remark, was not disclosed in the Husband’s witness statement.  This gratuitous piece of evidence bears the hallmark of an impromptu concoction in the witness box.  In any event, this assertion has not been put to Ms Li in cross-examination.  I have no opportunity of observing Ms Li’s reaction.  I give no weight to this piece of evidence.

53.  The Husband went on to say that in the course of negotiating the mortgage with the Bank he had been informed by the customers relations officer that apart from the need to give guarantee for the mortgage loan of $900,000, the mortgagors, ie he and his Wife, were also required to act as guarantors for his other or future debts.  But he did not tell that to his Wife as he did not foresee his business would collapse and it was never his practice to explain his financial dealings to his Wife.  So he asserted that his Wife did not know anything about the “all moneys” clause and that by signing the Mortgage she would have to be liable for his other or future indebtedness to the Bank. 

54.  Ms Li and Mr Chung disputed the Husband’s and Wife’s evidence.  Ms Li said that had she been informed that the transaction was a gift by the Husband to the Wife, it would have alerted her about estate duty implications.   This was because under sections 5, 6(1)(c) and 18(1)(a) of the Estate Duty Ordinance applicable at the time, the title of the Property might be affected by a possible charge for payment of estate duty if the donor died within three years from the date of the deed of gift.  Hence, it was a rule of thumb that neither the Bank nor GH would treat a deed involving an element of gift as a good and valid immediate title.  But Ms Li admitted under cross-examination that where, as in the present case, the property transaction was not by way of a deed of gift, potential estate duty would not arise. However, she insisted that it was GH’s practice to report the matter to the Bank for the Bank to decide whether to proceed with the mortgage.  Mr Tsui considers such prudence exaggerated because the transaction was stated to be for valuable consideration and doubts the credibility of Ms Li’s assertion. With respect, I think Mr Tsui misses the point.  The issue is not whether the vendor made a gift of half share of the Property to the Wife, but whether there was an estate duty issue arising in this Mortgage where the Husband purchased half share of the Property as a gift to the Wife financed by a mortgage of the Property.  In my view, such prudence could not be criticised.  If that was a matter of concern to GH, Ms Li would not have failed to recollect the incident unless she was being deliberately dishonest.  I do not think she was.

55.  Quite apart from this academic argument on the impact of estate duty, the Wife’s allegation is not inherently credible.  There is no dispute that Ms Li did not know the Husband and Wife before.  Even assuming that the Husband had told Ms Li beforehand that he wanted to make a gift of the Property to his Wife, it does not appear credible to me that as a stranger Ms Li would, all out of the blue, begin a conversation with the Wife, whom she had never met, by making such a personal remark.

56.  As a matter of impression, plainly, Ms Li’s evidence is more cogent and inherently credible, while the Husband’s and Wife’s evidence is obviously full of exaggeration and inherently incredible.  It was Ms Li’s duty as conveyancing clerk to explain the content, nature and effect of the security documents to her client.  It was also Mr Chung’s duty as an attesting solicitor to make sure that the persons signing understood the content, nature and legal effect of the documents they were signing before he attested his signature.  Yet, the Husband and Wife alleged, not only Ms Li, but also Mr Chung, a solicitor, were in total and wanton disregard of their duty and were lying in court to cover up their neglect of duty. 

57.  The Wife told, what I consider to be a fairy tale, that she was waken up from her nightmare of being asked to sign what she anticipated to be divorce documents to find Ms Li comforting her and telling her not to be afraid and the Husband confirming that he was making her a gift of a property. This “fairy tale” was blown up by her own answer in cross-examination that she absolutely did not recall signing the sale and purchase agreement in respect of the Property one month ago.  There is incontrovertible evidence that on 16 December 1996, the vendor of the Property signed that agreement in the presence of his solicitor, Messrs Ford, Kwan & Co, and that the Wife and her Husband signed the same agreement in front of the same Mr Chung and Ms Li and after the agreement had been duly interpreted to her.  That sale and purchase agreement was registered in the Land Registry on 8 January 1997, seven days before the “fairy tale”.  Would Ms Li also not have explained the sale and purchase agreement to the Wife on 16 December 1996?  Would Mr Chung not have ascertained that she understood that agreement before attesting his signature?  Would the Wife have never been informed by the Husband before 15 January 1997 about the purchase of the Property in joint names?  These series of rhetoric questions point to one and only one answer: the Husband and Wife were plainly lying in court.  That seriously damaged their credibility in their assertion that Ms Li had not explained the content, nature and effect of the Mortgage to her.  

58.  I reject the Husband’s and Wife’s evidence.  I accept Ms Li’s and Mr Chung’s evidence.  I find that the Wife knew full well a month ago when she signed the sale and purchase agreement of the Property that the Husband bought the Property in joint names with her.  I find that prior to signing the sale and purchase agreement on 15 January 1997 Ms Li had not told the Wife that the Husband was a caring husband and made a gift of the Property to her or words to that effect.  I find that Ms Li had explained the content, nature and effect of the Mortgage and related documents to the Wife, in particular the “all moneys” clause; and that the Wife indicated that she understood.  I find that on the same occasion Mr Chung had enquired and ascertained from the Wife if the Mortgage and other security documents had been explained to her; that she understood them and had no query before he attested the execution of the Mortgage and other security documents.

Whether Wife has proved existence of a de facto relationship of trust and confidence

59.  I have outlined the Wife’s background in paragraph 17 above.  I have also outlined the parties’ case about the execution of the Mortgage and other documents in paragraphs 49 and 50, and my finding of fact in paragraph 58.  These findings significantly dented the Wife’s and Husband’s credibility and damaged their case of existence of a de facto relationship of trust and confidence.  Though the Wife said she was submissive and the Husband assumed the position as the supreme head of the family or master of the house and made all decisions on financial matters, it is far short from saying that she generally reposed trust and confidence in the Husband. 

60.  The Wife relied on her migration to Quebec against her wish as evidence of her submissiveness.  But on the other hand, that shows she had always been living an independent life and making independent decisions since 1990.  She had spent six years and brought up four children single-handedly in French speaking Quebec where French was a language totally alien to her.  She alleged that the Husband arranged her migration against her wishes.  Yet, after she acquired Canadian citizenship in 1994, she continued to stay in Quebec out of her own free will and despite three of her children had returned to Hong Kong.  She continues to be resident in Quebec as of today and only returns to Hong Kong a few months every year.  This is inconsistent with her evidence of being forced to migrate to Quebec.  Clearly, the Wife was capable of making and did make independent decisions of her own and was not subject to influence of her Husband. 

61.  At the material time when the Wife executed the Mortgage, she was 52 and two years older than the Husband.  She had led six years of independent life in Quebec, free from the influence of her Husband.  According to her evidence, she had contemplated divorce, though she gave up the idea because of the children.  She was not as submissive or vulnerable as she wished me to believe.

62.  The Wife’s “fairy tale” about the execution of the Mortgage was such an exaggeration that it seriously dented her credibility generally.  I do not believe in her evidence of being a submissive wife and reposing trust and confidence in the Husband.  I also reject her evidence about Ms Li’s remark suggesting that Ms Li knew about her marital relationship with the Husband.  I accept the evidence of Ms Li and Mr Chung.  I find that the content, nature and effect of the Mortgage and other security documents, in particular the “all moneys” clause, had been explained to the Wife and she indicated that she understood.  I find that Mr Chung had also ascertained that the Wife understood them before attesting his signature on the documents.  I find that she understood the content, nature and effect of the Mortgage she was asked to sign and she signed out of her own free will and not as result of her reposing trust and confidence in her Husband.  It may well be that despite the explanation, the risk that she would have to bear other and future indebtedness of the Husband did not appear real to her.  As the Husband said, he never foresaw his business would collapse.  Certainly, neither would the Wife.  Probably, at the happy moment of becoming a joint owner of their office unit, she happily overlooked or ignored the risk, regardless of the explanation.  That would not assist the Wife.  

63.  In conclusion, I am not satisfied that the Wife has discharged the burden of proving the de facto existence of a relationship under which she generally reposed trust and confidence in the Husband.   There is no question of the Husband having abused that trust and confidence.

Whether GH and the Bank knew of the husband and wife relationship

64.  On my finding of fact, Ms Li had not said words to the effect that the Husband made a gift of the Property to the Wife to support the Wife’s case that the Bank knew about her relationship as the wife of the Husband.  Ms Li was unable to tell if she was told by the Defendants that they were husband and wife.  But it is her evidence that clients would not disclose their relationship on their own volition.  The closest evidence of the Husband’s and Wife’s relationship is the Bank’s Written Instructions to GH showing that they shared the same business address and that they were to purchase the Property to be held in their joint names for use as the Husband’s place of business.  There is no other evidence of the Bank’s knowledge of their relationship. 

65.  Mr Chong referred me to the following dicta of Lord Scott of Foscote from Court of Final Appeal in Li Sau Ying[10]:

“It must be borne in mind, however, that the relationship between the surety and the principal debtor must be looked at with the eyes of the bank.  The bank would generally, but not always, know whether the surety was the wife of the principal debtor, its customer.  Some wives, however, do not take their husbands’ surnames and the concept of a “non-commercial” relationship is inherently imprecise.  It is certainly not necessary for a proposed mortgagee to make inquiries about the relationship between its principal debtor and the proposed surety/mortgagor before deciding on the steps it should take to satisfy itself that the surety understands the transaction he or she is entering into.  Nothing Lord Nicholls said in  Royal Bank of Scotland Plc v Etridge (No 2) suggests the contrary.  And for a bank/mortgagee to make inquiries of that character would in most cases be an unwarrantable impertinence.”

66.  There is nothing to suggest this is not the general or usual type of case to which the above comments apply.  It is impossible to draw as the only reasonable inference from the mere fact that a man and woman sharing a commercial business address purchasing another commercial premises to be used as the business address of one of them that they are a married couple. 

Conclusion

67.  For the above reasons, I find that the Wife has failed to discharge the burden of proving the de facto existence of a relationship under which she generally reposed trust and confidence in the Husband.  There is, therefore, no question that the Husband having abused that trust and confidence.  I find that the content, nature and effect of the Mortgage and other security documents, in particular the “all moneys” clause, had been explained to the Wife and she indicated that she understood before executing the Mortgage and other security documents.  I find that she signed them out of her own free will without any undue influence exerted on her by the Husband.  That must be the end of her defence of undue influence. 

68.  In view of my finding above, whether the Bank was put on inquiry becomes a non-issue as the Wife has failed to prove the de facto existence of a relationship of trust and confidence in the Husband; and the Bank’s knowledge of her marital relationship with the Husband.  More fatally, on my finding, the Mortgage was not disadvantageous to the Wife.  Had it been necessary for me to come to a decision on that matter, I would have no difficulties to find that the Mortgage was not one which calls for enquiry.   

THE TRUE CONSTRUCTION OF THE MORTGAGE: WHETHER THE WIFE’S LIABILITY  WAS LIMITED TO $900,000.

The Wife’s case

69.  By this defence the Wife alleges that the intention of the parties was that her liability under the Mortgage was limited to $900,000.  Her case is that despite the “all moneys” clause, the Bank specifically instructed GH to secure a written acknowledgement in the form of a Confirmation Letter from her that the banking facilities available to the Husband was limited to $900,000 and $900,000 only was paid over and acknowledged by her and the Husband.  She also relies on the fact that the Bank had not advised her of any variation of the loan limit or the Husband’s liability under the Legal Charge.  In addition, she repeats her allegation, which I have rejected, that the Mortgage and related documents had not been explained to her. 

70.  The issue raised by this defence is one of construction of documents. Mr Tsui argues that on the true construction of the Mortgage, the Wife’s liability was limited to the instalment.  He relies on the Bank’s Written Instructions to GH, GH’s letter to the Bank dated 15 January 1997 confirming that the extent of facilities granted to the Husband and Wife was $900,000; the Side Letter; the Confirmation Letter and the Consent Letter.  In ascertaining the common intention of the parties, all these documents have to be construed together.  These documents will be examined in turn.

The Mortgage

71.  The Mortgage was entered into between the Husband and Wife as owners and mortgagors of the Property, the Husband as the Principal or borrower and the Bank as Mortgagee or lender, granting general banking facilities or such further general banking facilities to the Husband.  The recital of the Mortgage states that:

“the Mortgagor shall furnish security for the due payment to the Mortgagee of all moneys now owing or which may from time to time be owing to the Mortgagee in respect of any account whatsoever between the Principal and the Mortgagee …”

72.  The following clauses in the Mortgage are relevant:

“1. … the Principal hereby jointly and severally covenant with the Mortgagee that the Mortgagor and/or the Principal will on demand in writing of the Mortgagee :-

(a) pay to the Mortgagee all present and future indebtedness of the Principal to the Mortgagee according to the books of the Mortgagee on any current or other account …

(b) …

(c) discharge or satisfy all other liabilities and/or obligations of the Principal to the Mortgagee according to the books of the Mortgagee whether present future actual or contingent or as principal or guarantor and whether due alone or with any other person, …

…

5. It is hereby declared and agreed as follows :-

(a) This Mortgage is in addition to and shall not affect or be affected by any other security or guarantee which the Mortgagee may now or at any time hold or take from the Mortgagor or from any other person in respect of the moneys hereby secured.

…

(e) This security shall be a continuing security and shall be applied to any ultimate balance which shall remain due as aforesaid and shall not be discharged or affected by …

…

9. It is hereby further agreed as follows :-

…

(g) The Mortgagee may enforce this security whether or not the Mortgagee chooses to enforce any other charge, guarantee or security now or hereafter held by the Mortgagee whether from the Mortgagor, the Principal or any other person. …”

(My emphasis underlined.)

73.  From the recital, it is clear that the common intention of the Wife as mortgagor and the Bank as mortgagee was that the Wife shall provide security for the due payment to the Bank of all moneys not only arising from the Mortgage then owing, but also all future indebtedness of the Husband which may arise from time to time and that the Husband’s indebtedness included those arising from the Mortgage and any other accounts held with the Bank.

74.  The other clauses which I have quoted above clearly reflect that common intention.  The use in clauses 1 and 5 of phrases such as “all present and future indebtedness”, “any current or other account”, “all other liabilities”, “whether present future actual or contingent” are unequivocal of that common intention.  Clause 9 also envisaged that the Husband may enter into other security arrangements with the Bank, provide security and incur other indebtedness. 

75.  These provisions are plain and unequivocal. They are very wide in ambit.  On the face, they covered not only the Wife’s liability for the Husband’s instalment loan under the Legal Charge, but also any other indebtedness of the Husband with the Bank, whether present or future, actual or contingent, in the Mortgage account concerned or any other account, so long as it is an account with the Bank.  These are usual provisions in security documents.  They have the effect contended by the Bank.  Apart from guaranteeing repayment of the loan advanced under the Mortgage, the Wife was standing as surety for the Husband’s all other indebtedness with the Bank, present or future.

The Written Instructions and GH’s confirmation to the Bank

76.  The Wife relied heavily on the Bank’s Written Instructions to GH and GH’s confirmation to the Bank.  The Written Instructions requested GH to prepare a legal charge in respect of the Property.  On the first page of the instructions, it stated that the legal charge was for an instalment loan of $900,000 and a fixed charge and banking facilities which were left blank.  The second page contained additional instructions of which the following instructions are of relevance:

(A) GH to prepare a legal mortgage to secure general banking facilities to an unlimited extent;

(B) the mortgagors and the principal were to acknowledge in writing that the banking facilities available to them shall be limited to the extent of $900,000 only; and

(C) GH to prepare a Side Letter for the mortgagors and the principal to agree that out of the said general banking facilities an instalment loan of $900,000 was to be repaid in the manner as specified in the first page of the Written Instructions.

77.  After execution of the Mortgage, GH wrote to the Bank stating that it had complied with the Written Instructions and forwarded to the Bank the Side Letter.  Mr Tsui argues that this was GH’s acknowledgment that the extent of facilities granted to the Husband and Wife was $900,000.  I am quite unable to read the letter as such.  It said no more than having complied with the Written Instructions and forwarded the Side Letter and Confirmation Letter to the Bank.

The Side Letter

78.  The relevant parts of the Side Letter read as follows:

“I/We hereby acknowledge receipt from you the sum of [$900,000] being the money (or part of the money, as the case may be) (“the Instalment Loan”) advanced to me/us pursuant to and secured by the Mortgage of the above property on the following terms and conditions :-

 …

Notwithstanding any provisions herein contained and/or the complete or partial repayment of my/our indebtedness to you and/or the complete or partial cancellation of the General Banking Facilities granted, the security constituted by the Mortgage shall remain a continuing security and the Mortgage shall continue to secure all sums of money owing by me/us to you and all my/our other liabilities and/or obligations to you as provided in the Mortgage.

…

This letter is supplemental and additional to the Mortgage and shall not in any way prejudice or affect the Mortgage.  …”

(My emphasis underlined.)

79.  Mr Tsui relies on the first paragraph of this Side Letter quoted above as evidence of the parties’ intention that the instalment loan of $900,000 advanced to the Husband was all that was secured by the Mortgage.  With respect, Mr Tsui has overlooked the other parts of this Side Letter which I have underlined.  The effect of the underlined parts is that the security remains a continued security not only in respect of the instalment loan but also any other liabilities of the Husband as provided in the Mortgage, which are the liabilities quoted in paragraph 72 above.  In particular, the last paragraph of the Side Letter quoted above expressly provided that the Side Letter is supplemental and additional to the Mortgage and shall not in any way prejudice or affect the Mortgage.   I do not think this Side Letter assists Mr Tsui’s construction of the Mortgage.

The Confirmation Letter

80.  Next, Mr Tsui referred to the Confirmation Letter signed by the Husband and Wife, which reads:

“I/We, the undersigned, hereby confirm that without first consulting with you and subject to your overriding right of reducing, increasing, cancelling or otherwise varying the General Banking Facilities granted to me/us under the Mortgage of the above property, I/We will utilize the said General Banking Facilities only up to the extent of HK$900,000.00, notwithstanding the fact that the Mortgage was created to secure General Banking Facilities to an unlimited extent. I/We further confirm that the Mortgage is an all-monies Mortgage securing all sums owing by me/us without limit as to extent and your rights, powers and remedies under the Mortgage will not be prejudiced or affected by this letter.”

(Emphasis underlined by Mr Tsui.)

The gist of Mr Tsui’s argument is that based on the part underlined, the loan granted and secured under the Mortgage was $900,000 regardless of the agreement that the Mortgage was created to secure general banking facilities to an unlimited extent.

81.  Mr Tsui submits that in interpreting the meaning of words, their natural and ordinary meaning should be adopted: see Marble Holdings Ltd v Yatin Development Ltd[11]. He then quotes Official Receiver & Trustee in Bankruptcy of Chan Wing Hing & Another v Chan Wing Hing & Another v Secretary for Justice[12] as authority for his proposition that provisions after the word “notwithstanding” do not have overriding effect.  By the same token, Mr Tsui submits the words “that the Mortgage was created to secure General Banking Facilities to an unlimited extent” have no overriding effect on the words “the said General Banking Facilities only up to the extent of HK$900,000.00”.

82.  Again, with the greatest respect to Mr Tsui, the construction as summarised by Mr Tsui is precisely the very opposite of what the Court of Final Appeal held.  Official Receiver & Trustee in Bankruptcy of Chan Wing Hing & Another v Chan Wing Hing & Another v Secretary for Justice[13] is a case of statutory construction of subsection 30A(10) of the Bankruptcy Ordinance.  Subsections (1) to (3) of that section provide for automatic  discharge of a bankrupt from bankruptcy by expiration of the relevant period.  Subsection (10) provides:

“Notwithstanding subsections (1) to (3), where a bankrupt –

(a) has, before the commencement of the bankruptcy, left Hong Kong and has not returned to Hong Kong, the relevant period under subsection (1) shall not commence to run until such time as he returns to Hong Kong and notifies the trustee of his return;

(b) after the commencement of his bankruptcy –

(i) leaves Hong Kong without notifying the trustee of his itinerary and where he can be contacted; or

(ii) fails to return to Hong Kong on a date or within a period specified by the trustee,

the relevant period under subsection (1) shall not continue to run during the period he is absent from Hong Kong and until he notifies the trustee of his return.”

83.  At paragraph 27, Li CJ said:

“There can be no doubt that s.30A(10)(b)(i) overrides s.30A(1), (2) and (3). This is plain from the use of the word “notwithstanding”. Where the circumstances trigger its operation, its effect is that irrespective of s.30A(1), (2) and (3), the relevant period “shall not continue” for the period specified therein.”

(My emphasis underlined.)

By no reading of the above dicta could they be construed, as Mr Tsui put them, as meaning that provisions after the word “notwithstanding” do not have overriding effect. The learned Chief Justice meant precisely the opposite.  What follows after the word “notwithstanding” overrides the preceding provisions under section 30A(1), (2) and (3). 

84.  Sections 30A(1) to (3) provide for a statutory scheme of automatic discharge from bankruptcy upon expiration of the relevant period.  Section 30A(10) dis-applies that scheme under specific circumstances where the bankrupt left Hong Kong as specified under paragraphs (a) and (b) of that subsection.  That subsection does not apply indiscriminately across the board.  It was in that context that the Court of Final Appeal held that under those specified circumstances the relevant period under subsection (1) (the preceding provision) shall not commence or continue to run.  In other words, the provisions after the word “notwithstanding” have an overriding effect on the preceding provision under subsection (1).  Thus, under those specified circumstances, but not otherwise, subsection (1) is dis-applied. That construction makes good sense under the statutory scheme.  I do not think the Court of Final Appeal was laying down a rule of construction that any provisions after the word “notwithstanding” do not have overriding effect on the preceding provision.

85.  Furthermore, if the construction as contended by Mr Tsui is applied to the Confirmation Letter, the result would be absurd. Unlike section 30A(10) which is only triggered under specified circumstances of the bankrupt leaving Hong Kong, there is no trigger in the Confirmation Letter and its provisions apply under all circumstances.  Hence, applying Mr Tsui’s construction, the phrase “notwithstanding the fact that the Mortgage was created to secure General Banking Facilities to an unlimited extent” would be rendered absolutely meaningless.  Why would the parties say in so many words to mean nothing?  The construction contended by Mr Tsui is not what was held by the Court of Final Appeal.  It is absurd and manifestly contrary to the express intention of the parties. 

86.  Mr Lam Chiu Man, the Bank’s manager explained the purpose of the Side Letter as follows.  The Mortgage was drafted as an “all moneys” mortgage to cater for the future needs of the borrower.  If in future the borrower would wish to increase the amount of loan and if the security would be adequate, the Bank would advance more money to the borrower without the borrower having to incur time and costs to execute another set of security documents.  Hence, at the time of the execution of the Mortgage, the Husband and Wife were required to acknowledge their agreement that the banking facilities granted to them was limited to $900,000 notwithstanding that the Mortgage was for banking facilities of an unlimited extent.  Mr Tsui submits that that was the subjective intention of the Bank and not the common intention of the parties.  It has no bearing on the construction of the Mortgage or the Side Letter.  Be that as it may, that purpose fits well with the construction contended by the Bank and makes good sense.  It supports the construction as contended by the Bank.

87.  In Bank of China (Hong Kong) Limited v Senlaveer (Pacific) Company Ltd[14], the defendant mortgagors executed a similar confirmation letter containing a similar undertaking that they will only utilize the general banking facilities granted to the borrower under the legal charge of the mortgaged property only up to the extent of $2.4 million notwithstanding the fact that the legal charge was created to secure general banking facilities to an unlimited extent.  In rejecting the mortgagors’ argument that their liability is limited to $2.4 million, Woo JA, as he then was, held[15]:

“19. I do not agree. The plain and ordinary meaning of the two facility letters is that the 1^st defendant and the 4^th defendant acknowledged to the bank that they would only use banking facilities to the extent of the stated sums. As the 4^th defendant was not the principal borrower and it was the 1^st defendant who proposed to borrow from the bank, it was mainly the 1^st defendant who acknowledged to the bank that it fully understood that the extent of the banking facilities to be made available by the bank under the two legal charges was the stated sums. This plain meaning was supported by the fact that at the time of the execution of the two legal charges, the bank had already granted banking facilities to the 1st defendant and the aim of the creation of the two legal charges in favour of the bank was to enlarge the banking facilities to be made available to the 1^st defendant by the bank, but only to the extent of the two stated sums. By signing the two facility letters, the 4^th defendant also made the same acknowledgement to the bank, whereby she was supposed to know that the banking facilities to be made available to the 1^st defendant was not to exceed those two sums. It does not, however, mean that there was any agreement that her liability under the two legal charges, and in particular, her personal covenant to pay in full the outstanding indebtedness of the 1^st defendant owed to the bank was limited to those two sums. If Mr Yau's argument is correct, then whenever a legal charge containing a personal covenant to pay all outstanding indebtedness contains a term that the banking facilities or bank loans advanced under the legal charge are limited to a certain amount, the personal covenant would be devoid of any effect or would only be of limited effect. This must be incorrect. In other words, such a limit of the loans secured by a legal charge that is agreed by a bank to be made available pursuant to the security does not derogate from the effectiveness of the personal covenant contained in the legal charge to pay all the outstanding indebtedness.”

(My emphasis underlined)

Thus, in effect, the Court of Appeal held that there were two covenants under the mortgage: one to repay the loan secured by the legal charge on the property, and another a personal covenant to pay all other outstanding indebtedness of the borrower. 

88.  Mr Tsui seeks to distinguish Senlaveer on three factual basis.  First, he submits that in that case when the facility letters were signed by the surety, banking facilities had already been granted to the borrower.  The facility letters were merely to enlarge the facilities to be granted to the extent of the limits.  In the present case, the loan of $900,000 was clearly for the purchase of the Property.  Second, in return for the surety providing the mortgage for obtaining banking facilities, the borrower gave two guarantees to the surety, paying her $30,000 and $100,000 respectively per month, which the Court of Appeal found to be consistent with the surety’s knowledge of the unlimited nature of the legal charges concerned.  In the present case, the Legal Charge was executed by the Husband alone.  Third, there was evidence that the limit in the facility letters had not been exceeded, whereas in the present case, the total liability which the Wife is now asked to bear far exceeds the $900,000 she had guaranteed.  In my view, these are distinctions without any difference insofar as construction of the security documents are concerned.  In Senlaveer, the Court of Appeal was construing similar security documents.  I can see no reason to depart from that construction.

The Warning Letter

89.  Lastly, Mr Tsui referred to the Warning Letter signed by the Husband and Wife addressed to GH.  This letter reads:

“I/We … am/are the owner(s) of the above property now willing to pledge it to [the Bank] as guarantee for the Application to the Bank by [the Husband] for being given the permission to use the banking facility amount in question. I/We fully understand that if [the Husband] cannot or refuse to repay the Bank will have the right to auction the Property for repaying the principal, interest and auction fees etc. If there is any shortfall, the Bank can demand direct and personal payments from me/us. Your Firm have already advised me/us to hire our own lawyers for obtaining independent legal Advice on the content of the relevant documents and the question on duty and liability. But after consideration, I/we decide that it is not necessary to hire independent lawyers, and willing to be subject to all liabilities without any disagreement at all.”

(Emphasis underlined by Mr Tsui)

Mr Tsui referred to the phrase “for being given the permission to use the banking facility” and argues that it is worded in past tense.  He submits that it is significant that the Warning Letter made no reference to future indebtedness or facilities to an unlimited extent. Hence, he argues, when the Wife signed the Warning Letter, she understood her liability would be limited to the loan of $900,000.  He also argues that the Warning Letter was prepared by the Bank’s solicitors, the contra preferentum rule applies.

90.  The Warning Letter was addressed to GH and not the Bank.  As explained by Mr Chung, it was executed at the request of GH as evidence that GH had advised the Husband and Wife to seek independent legal advice.  It was executed for GH’s protection.  It does not form part of the security documents and was executed for the purpose of GH and not the Bank.  It carries little weight in the construction of the Mortgage.

Conclusion

91.  To conclude, I find on the true construction of the Mortgage and other security documents that the common intention of the parties was that the Wife was to stand as surety for the instalment loan of $900,000 and as surety for the Husband’s all other indebtedness to the Bank, present or future.  Her liability is not limited to the instalment loan of $900,000.

COLLATERAL OR COMPOSITE AGREEMENT

92.  Notwithstanding the above construction of the Mortgage, Mr Tsui further argues that there was a collateral agreement or composite agreement that the Wife’s liability is limited to $900,000.  He relies on the Court of Final Appeal’s decision in Bank of China (Hong Kong) Ltd v Fung Chin Kan and Anr[16]. In that case, the defendants who were also husband and wife and co-owners of a flat mortgaged the flat to a bank as security for a $4 million loan to a company.  Subsequently, the defendants agreed with the company to replace the mortgage with one on more favourable terms with another bank, which happened to be the Bank in this action.  The parties instructed solicitors to prepare the necessary documentation.  The draft documentation included a draft undertaking by the company to indemnify the defendants for $3.3 million.  The Bank instructed its solicitors to prepare a legal charge of the flat as security for the company “for the time being agreed at $3.3 million”.  Despite the instruction, the solicitors prepared the legal charge on the Bank’s standard forms, which were the same documents as those used in this case, for an unlimited amount in respect of the company’s liability to the Bank.  Thus, the defendants executed similar security documents containing an “all moneys” clause as in the present case.  Litton NPJ, with whom the other members of the Court of Final Appeal agreed, held that it was strikingly obvious that the solicitors had made a mistake in preparing the charge which did not reflect the intention of the parties and which the Bank  subsequently sought to take advantage of.  The court held that there was a collateral agreement that the defendants’ exposure to financial risk should be limited to $3.3 million and the Bank could not rely on the mistake of their solicitors.  The other members of the court, except Litton NPJ, also held there was a single composite agreement, of which the legal charge was one component and the instruction imposing a ceiling on the liability of the defendants another.   Litton NPJ said[17]:

“57. A collateral agreement, like any other contract, must be objectively viewed, so the test must be this: On the totality of the evidence, must the parties be taken to have intended that the representation made by one of them should form part of the basis of the legal relationship between them?

58. Here, the position was simply this: In consideration of Mr and Mrs Fung executing the bank's standard form of legal charge to be prepared by the solicitors, charging their flat to the bank as security for facilities to be granted to SMC, the bank agreed that their exposure to financial risk should be limited to $3.3 million, unless agreed otherwise. The bank was, in law, bound by that agreement and could not rely on the solicitor's mistake in failing to put a limit of $3.3 million in the written instrument to saddle the respondents with SMC's total liability.”

The test of collateral agreement is an objective one, which is what on the totality of the evidence the parties must be taken to have intended.

93.  Mr Chong submits that the facts in Fung Chin Kan & Another were peculiar.  Whether that case is to be explained on the basis of collateral agreement or composite agreement, a distinguishing feature in that case was the court’s finding that the parties’ intention was that the defendant mortgagors’ exposure to financial risk was to be capped at $3.3 million, but owing to the mistake of their solicitors the defendants executed a mortgage containing an “all moneys” clause guaranteeing the company’s indebtedness to an unlimited amount.  These features are wanting in the present case.  Applying the objective test as lay down by Litton NPJ to the facts in this case, I am unable to find any common intention that the Wife’s liability should be limited to $900,000 or that there was any agreement to that effect. There is absolutely no basis to ignore the “all moneys” clause.  In Bank of China (Hong Kong) Limited v Senlaveer (Pacific) Company Ltd[18], which I have referred to in paragraph 87 above, Woo JA, as he then was, also distinguished Fung Chin Kan & Another on the same basis. 

94.  Next, Mr Tsui argues that the Legal Charge executed by the Husband on 15 August 1997, more than six months after the execution of the Mortgage, was to cover banking facilities of $5,236,000 secured by another property at Sea Crest Villa, to which the Wife was not a party and had no knowledge of.  She had never consented to assume liability as surety to that level under the Mortgage.  He submits, quoting the following passage from Bank of China (Hong Kong) Ltd v Wong King Sing & Others[19], that the Bank could not enforce the Mortgage for its failure to disclose to the surety facts which materially affected her liability:

“To these general statements of principle, however, is an important qualification. Where there exist facts (in this context usually arrangements between the creditor and the principal debtor (in the present case, WKS)) of which the surety is unaware and which he could not, in the circumstances, be expected to know, but which materially affect his liability or potential liability, it is then incumbent on the creditor to disclose such facts to the surety. A failure to disclose would result in the creditor being unable to enforce the contract signed by the surety. Just as a surety will in general be discharged if the contractual arrangements between the creditor and the debtor are materially altered without his consent (since the surety's risk will be different to that which he had originally assumed) so the surety will not be liable in the first place where he has not been informed of matters or arrangements which he might not reasonably expect to have been a part of the risk he would bear under the contract with the creditor.”

Mr Tsui submits that there is no evidence that the Wife had been informed of and accepted her liability beyond $900,000, not to mention anywhere near $6,756,359.34, which was 7.5 times the original loan amount.

95.  With respect, the above dicta were quoted out of context.  In the above passage, Recorder Ma SC, as he then was, was referring to the defence of non-disclosure of material facts at the time the contract was made which induced a party to enter into the contract.  Here, the Wife assumed liability for future indebtedness of her Husband, as if she were signing a blank cheque.  There was no question of non-disclosure.  In Hang Seng Bank Limited v Leung Shui Chung[20], the Court of Appeal rejected similar argument that the bank was under a continuing obligation to give the mortgagor notice of extraordinary increases in borrowings (ie future indebtedness) or, viewing it from the mortgagor’s perspective, in exposure or liability.  The Court of Appeal held that no term could be implied to contradict or undermine the express provisions of the mortgage.

96.  Mr Tsui also tries to draw support from the following dicta of the Court of Final Appeal in Fung Chin Kan & Another[21]:

“The lack of mutual agreement on the increase of banking facilities and the absence of notice of any such stipulation by the bank strongly supports the contention that the bank not only was aware of and had agreed to the limit …, but was also prepared not to resile from such agreement.”

Again with respect, the Court of Final Appeal was addressing the issue of the parties’ common intention that the mortgagors’ liability should be capped at $3.3 million.  There is no evidence of any similar agreement reached by the parties in the present case.  These dicta cannot improve the Wife’s case.

97.  In conclusion, I am unable to find any collateral agreement or composite agreement limiting the Wife’s liability to $900,000.  Indeed, as noted by the Court of Final Appeal in Fung Chin Kan & Another, the courts have always leaned against such an approach in the past.

CONCLUSION

98.  I find that the 2^nd Defendant executed the Mortgage on her own free will and not as result of any undue influence on the part of the 1^st Defendant. I find on the true construction of the Mortgage and the other security documents that the 2^nd Defendant assumed liability to stand as surety for the 1^st Defendant’s indebtedness in respect of the instalment loan under the Mortgage and any future indebtedness owed to the Plaintiff.  I am unable to find any collateral or composite agreement limiting the Wife’s liability to $900,000.  There is no dispute as to the calculation and the amount of the 2^nd Defendant’s indebtedness to the Plaintiff as shown in the certificate produced at trial. Accordingly, I enter judgment for the Plaintiff in the amount of $8,718,310.30 and further interest on the outstanding principal sum of $3,511,606.45 at judgment rate until payment.  The 2^nd Defendant shall also pay the Plaintiff’s costs on indemnity basis.