THE HONGKONG AND SHANGHAI BANKING CORPORATION LTD v. SY SHUN WU AND OTHERS

HCMP 3269/2016

[2018] HKCFI 247

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 3269 OF 2016

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REASONS FOR DECISION

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1.  This was an appeal by the plaintiff (“the Bank”) from an order dated 20 July 2017 of Master M Wong that the proceedings be continued as if they were begun by writ with directions for the filing of pleadings. At the conclusion of the hearing the appeal was allowed. The Reasons are set out below.

THE UNDERLYING PROCEEDINGS

2.  By an originating summons issued pursuant to Order 88 of the Rules of the High Court (“RHC”), the Bank sought payment of all sums of money due by the defendants under the several covenants contained in the three mortgages described below in respect of three mortgaged properties (“the properties”) and delivery by the 1^st defendant Sy Shun Wu (“Sy”), Billion Stage Limited (“D2”), Crown Fortune Inc Limited (“D3”) of possession of the properties respectively. 

3.  The three mortgages are the following:

(1)  a mortgage dated 8 November 2013 (“the D3 mortgage”) with D3 as the mortgagor and borrower, the property mortgaged being a workshop registered in the name of D3 (“the 3^rd property);

(2)  a mortgage dated 11 February 2015 (“the D1 mortgage”) with Sy as the mortgagor and Strong Trillions Limited (“D4”) as the borrower over what has been referred to as “the Wilton Place property” registered in SY’s name (“the 1^st property”); and

(3)  a mortgage dated 11 February 2015 (“the D2 mortgage”) with D2 as the mortgagor and D4 as the borrower over a property of which D2 was the registered owner (“the 2^nd property”). 

BACKGROUND FACTS

4.  Tang Tiang Pong (“Tang”) and Sy are the only shareholders and directors of D4, the sole parent company of D2 and D3.  Tang and Sy respectively own 60% and 40% of D4 and to all intents and purposes, Tang and Sy are and were business partners.  D4 was in the sourcing and trading industries.  For convenience, D2, D3 and D4 are collectively referred to as “the Group”. 

5.  The banking relationship between the parties first began in August 2012 when D4 opened an account with the Bank.  From mid-2013, D4’s application for banking facilities was handled by an officer of the Bank (“Yip”).  In September 2013, D3 also opened an account. 

6.  A meeting took place on or about 25 October 2013 among Tang, Sy and Yip when Tang on behalf of D3 and D4 executed a facility letter dated 23 October 2013 (“D3 Facility”) for a straight line loan of $700,000 to D3 and a facility letter (“GBF Facilities”) for general banking facilities for D4.  On the same occasion Tang and Sy executed a guarantee (“D1 Guarantee”) for an amount limited to $700,000 and D3 and D4 executed a cross guarantee for an unlimited amount (“D3 & D4 Cross Guarantee”) in favour of the Bank.  It is Tang’s evidence that prior to his signing the D3 Facility, he was given the assurance described in §29 below. 

7.  In August 2014, D4 also obtained a SME financing facility from the Bank.  That facility together with the facilities that had been granted in 2013 were renewed pursuant to the terms of renewal facilities letter dated 29 October 2014. 

8.  In late 2014, D4 intended to expand its business and required more banking facilities in support of which it had to provide further securities such as landed properties that could be mortgaged to the Bank.  As a result, two properties (namely the 1^st property and the 2^nd property) came to be mortgaged to the Bank (being respectively the D1 mortgage and the D2 mortgage). 

9.  There are conflicting accounts of the circumstances concerning the acquisition of the 1^st property and the execution of the D1 mortgage. 

10.  In summary, Tang’s evidence is that (i) the suggestion that Sy should purchase a flat to be used as security for D4’s application for additional banking facilities came from Yip and (ii) for that purpose Yip introduced an estate agent to Tang who recommended the 1^st property. 

11.  Yip denies the allegations contained in §10 above and gave his account of the events concerning the acquisition of the 1^st property and the execution of the 2^nd and 3^rd mortgages.  Be that as it may, Tang agreed a price with the agent for the 1^st property, paid the requisite deposit and instructed the agent to contact Sy for the signing of the sale and purchase agreement. 

12.  According to Sy, until the commencement of these proceedings in November 2016, he was unaware that Tang was seeking additional banking facilities for D4 from the Bank and it was that Yip who had suggested to Tang the property be acquired in Sy’s name. 

13.  The first he knew of the proposed acquisition of the 1^st property was when he was contacted by someone who said he was a property agent, that Tang had arranged for Sy to purchase a flat and for that purpose made an appointment to meet with Sy the following day for the signing of a preliminary agreement.  The preliminary agreement came to be signed on 11 December 2014 in those circumstances and no payment was sought from or paid by Sy for its purchase. 

14.  Simon Reid-Kay (“SRK”) was the firm that came to be instructed to handle the D1 and D2 mortgages.  It also handled the purchase of the 1^st property.  How SRK came to be so instructed is again controversial.  Suffice it to say for present purposes that Tang’s allegation is that the firm was selected and instructions were given by the Bank to SRK directly.  The Bank has given its account of the circumstances in which SRK came to be instructed (which was with Tang’s agreement). 

15.  As regards the intended purchase of the 1^st property the Bank asked Tang and/or Robin Leow (“Leow”) (a representative of Sy and Tang) to contact SRK directly.  This aspect of its evidence is corroborated by the affirmation of Anver Ching (“Ching”), a senior legal executive of SRK. 

16.  Ching stated that in early December 2014, Yip introduced Tang to him as Tang’s companies were applying for facilities to be secured by, inter alia, two properties one of which was to be acquired.  To streamline the process, Tang instructed SRK to act in that purchase.  SRK’s instructions came from Tang (and not the Bank). 

17.  Thereafter, Ching’s only point of contact was Leow (Tang and Sy’s representative) who gave instructions that the 1^st property be acquired in Sy’s name and instructions regarding the execution of the D1 and D2 mortgages; he also made appointments for the execution of the documentation although Sy gives a different account of his first encounter with Ching. 

18.  According to Sy he received a call from a stranger (Ching) informing him (Sy) that the latter was contacting Sy at Tang’s behest to arrange for the signing of the formal agreement for the sale and purchase of the 1^st property at the offices of the Bank’s solicitors.  Sy complied with the request later the same day and accordingly met with Ching for the first time. 

19.  On 19 January 2015, the Bank issued a facility letter granting additional facilities under the GBF Facilities to D4 and another facility letter of the same date increasing its SME loan.  Both these facility letters were signed by Tang who said he was given the same assurance as that considered in §29 below.

20.  On 5 February 2015, D4 acquired D3 which was the registered owner of the 2^nd property. 

21.  On the same day, Sy attended SRK’s offices and in the presence of Ching signed (a) the assignment of the 1^st property and (b) the D1 mortgage and ancillary documents namely, an undated letter, a nomination form and a warning notice (both dated 5 February 2015) and explanatory notes. 

22.  On 6 February 2016, Tang signed the D1 mortgage on behalf of D4 and the D2 mortgage on behalf of D3 and D4 and other ancillary documents. 

23.  The Hong Kong Monetary Authority’s guidelines on Anti-Money Laundering and Counter-Terrorist Financing require banks to carry out ongoing transaction monitoring exercises.  In early April 2015 after noting an abnormality over the account activity of D3 and D4 that gave rise to concerns and suspicion over the identities of their buyers and suppliers, the Bank exercised its overriding right of, inter alia, suspension and temporarily suspended the credit facilities. 

24.  It would appear from the email correspondence exhibited to Tang’s affirmation that the suspension prompted a telephone call from Leow to the Bank on 8 April 2015.  In a follow-up email, Leow merely enquired if there was any update regarding the “highlighted concern” discussed during that call. 

25.  Tang then complained bitterly in his email to the Bank of 18 April 2015 about the Bank’s recent steps having caused “major hiccups” in his business.  A meeting took place 11 days later followed by the Bank’s written request to provide further information (including information on 15 trade counterparties specified in the letter) to address the Bank’s concerns.  Over the ensuing 1½ months part of the information sought was supplied but proved unsatisfactory to the Bank. 

26.  When D3 and D4 started to default in repayment in late May, their current accounts were also suspended.  On 26 June 2015, a demand letter was sent to D4 for repayment of all outstanding indebtedness. 

27.  On 23 November 2016, the Bank commenced recovery proceedings by way of the Order. 88 summons.  As at the date of the hearing, the amount remaining due under the mortgages is HK$23,337,645.11 and US$1,787,073.69 or approximately HK$37.3 million in total. 

THE DEFENCE

28.  Three defences were raised.  They are outlined below. 

(1)     Collateral agreement

29.  The principal defence relied on is the alleged existence of a collateral agreement which was said to have arisen when Tang was asked to sign the D3 Facility prior to the signing of the D3 mortgage (see §6 above).  On that occasion, when Tang remarked that he considered the term in the facility letter giving the Bank discretion to determine loan and demand repayment as oppressive and not acceptable, Yip allegedly told and assured Tang that he did not have to worry and if D3 made monthly repayment when it fell due the Bank would not determine the loan and demand immediate repayment.  That pre-contractual assurance was said to give rise to a collateral agreement.  (As the GBF Facilities were granted at the same time, for present purposes, it will be assumed that the collateral agreement on which the defendants rely also applied to the GBF Facilities such that the right to determine the facilities would not be exercised absent any default in making the monthly payments.) 

30.  When Tang representing D3 was asked to sign the D3 Facility dated 29 October 2014, he was told it was for renewing the loan banking facilities granted under the old facility letter and relied on the assurance.  It is the defendants’ case that the collateral agreement carried through to the renewed D3 Facility.

31.  Yip does not recall making such a statement or giving such assurance to Tang.  He further stated that if Tang did raise such a query, he (Yip) would have told Tang that the Bank has the overriding right to demand immediate repayment at any time but would not usually exercise such right under normal circumstances. 

(2)     Misrepresentation

32.  This defence concerns the D1 mortgage.  It is Sy’s case that at the time of signing the mortgage on 11 February 2015, Ching did not explain that it was to secure a past loan of D4 or that Sy would be made personally liable for loan facilities granted or to be granted to D4 and that it was not simply a charge of the 1^st property for financing its purchase and, further, that he was not told that banking facilities had already been granted to D4 under the 1^st, 2^nd and 3^rd D4 Facilities.  It was asserted that Sy that he does not read, speak or understand English although Yip’s evidence contradicts that.  Be that as it may, it is to be noted that the D1 mortgage signed by Sy included explanatory notes that were in Chinese.  

33.  Given the lapse of time, Ching was not in a position to recall in great detail the conversation he had with Sy.  Ching is senior legal executive of SRK where he has been since it was established in March 2012.  However, he has more than 28 years’ experience working for the principal of SRK in three different firms for over 25 years.  His evidence set out his usual or standard practice developed through years of handling loan and security transactions.  He was no stranger to the Bank’s security documentation as he has been doing such transactions for the Bank for more than 15 years. 

34.  The documentation involved concerning the D1 and D2 mortgages required to secure the additional banking facilities were in standard form and typical for this type of loan transaction.  Ching’s evidence deposed to his usual practice in attending such meetings with the Bank’s clients who have applied for banking facilities for which security (whether from the borrower or a third party) was to be provided.  In short, he would have explained the contents of the documents to be signed notwithstanding that the signatories were not SRK’s clients, asked if they had understood the terms of the documents to be signed, whether they had any questions and that they could seek independent legal advice before signing. 

(3)     Undue influence

35.  Mr Chong (counsel for the defendants) relying on certain matters set out in §25 of his written submissions (considered in §§37 – 38 below) which formed the basis of his misrepresentation defence submitted that it was arguable that there existed a relationship of trust and confidence between the Bank on the one hand and Sy and Tang on the other giving rise to a presumption of undue influence under Class 2B adopting the classification set out in Barclays Bank Plc v O’Brien [1994] 1 AC 180. 

36.  Before assessing whether any of the defences raised is arguable on the material before the court, it would be convenient to consider the matters relied on in §25 of the defendants’ written submissions as they are relevant to both the misrepresentation and undue influence defences. 

37.  It was submitted that:

(1)  “although D1 [Sy] is the 40% shareholder and director of D4, he is completely dependent on the decision making of Mr Tang and have [sic] little or no participation in the business of D3 and D4”.  (That conclusion was based on the matters outlined in §38 below.) 

(2)  The signing of the D1 mortgage was the only occasion when Sy had to sign a legal document (relevant to this action) not in the presence of Tang. 

38.  The matters relied on for the inference the court was asked to draw were that Sy signed the D1 Guarantee at Tang’s request upon Tang’s assurance (relying on the collateral agreement) that there would be no risk in signing; the D1 mortgage resulted from Tang taking the initiative to seek more banking facilities and who alone made the decision regarding the subsequent purchase of the 1^st property; Sy was not asked to pay anything towards the acquisition of the 1^st property; the fact that Sy made a will (implicitly suggesting that it was at the time he executed the D1 mortgage) bequeathing the 1^st property to Tang upon Sy’s death, believing that it was required by Tang; and Sy was not involved in the email correspondence with the Bank after the suspension of credit facilities to resolve cash flow problems. 

39.  In relation to the will mentioned in §38, Ching denies that it was signed on 5 February 2015.  Rather, a few days after that, he was contacted by Leow who advised Ching that Sy wanted to appoint Tang as his lawful attorney for the purposes of managing/leasing/selling the 1^st property.  The power of attorney was signed on 11 February 2015.  After that Leow contacted Ching again giving instructions on Sy’s behalf to prepare a will bequeathing the 1^st property to Tang.  The will was executed on 13 February 2015. 

WHETHER TRIABLE ISSUES ARISE

(a)     The overall context

40.  It is necessary not to lose sight of the overall context of these proceedings.  It concerns trading companies obtaining banking facilities secured by mortgages for the operations of the business.  The Group is owned by two individuals in the proportions 60:40, they being the sole directors and shareholders.  The documentation involved nothing out of the ordinary: they are standard and typical for loan and security transactions of the kind question. 

41.  While there is little information about the business itself other than that it concerned sourcing and trading, the facilities obtained and now owing to the Bank (including interest) exceed $37 million.  The size of the outstanding debt must have a bearing on the size of the Group’s business operations.  There is no evidence that the directors were non-executive directors.  As management, the directors themselves must have made financial decisions such as the obtaining of credit facilities.  While there is no evidence concerning the directors’ respective areas of responsibility in the business, Sy’s defence is premised not only on his not having a role in the Group’s management and taking no part in its financial decisions, but also that he was under the undue influence of Tang.  But direct evidence on those matters is absent.  

42.  Sy has refrained from making positive assertions.  The assertion made in §25 of the defendants’ skeleton cited above came not from Sy but his counsel.  There is a deafening silence from Sy as to his relationship with Tang, how he came to have a 40% interest, what if any understanding he had with Tang when D4 was incorporated, whether he was a passive investor and/or whether and if so how he was prevented from taking an active part in the operations of the business in which he had a 40% interest (which, while being a minority interest it is nonetheless substantial) and/or how he was unduly influenced by Tang. 

43.  The defendants’ evidence made no mention of the respective roles or area of responsibility of each of the directors in the business and how decisions were made particularly those relating to the financing of the business.  Instead, the court is asked to infer that Sy was “under Tang’s thumb” and required to do as Tang dictated from a number of what, in the context, can only be tangential matters.  One may well ask why should such an inference be made?  It simply does not add up particularly when, for the purposes of undue influence, the court was asked to infer that even Tang who had executed the D2 and D3 mortgages in his capacity as director of D2 and D3 did not appreciate what liabilities the mortgages were to secure.  All that defies belief. 

44.  There is then the episode regarding the acquisition of the 1^st property.  Tang’s evidence (upon which Sy relies) is that it was Yip who had suggested that the 1^st property for securing the additional facilities be made in Sy’s name.  There is no rational explanation (and none is proffered) as to why an officer of the Bank would make such a suggestion and, beyond that, to effect an introduction to a property agent. 

45.  That aside, the call from the agent to Sy regarding the purchase of the property in Sy’s name apparently came out of the blue without any prior notice or warning as far as Sy was concerned.  All the agent told Sy was that Tang had asked the agent to contact Sy for the signing of an agreement to purchase a property in his name.  Without as much as a telephone call to Tang (and there is no evidence or suggestion that he tried to do so but Tang was not reachable to verify the matter, Sy signs the preliminary agreement exposing himself to the risk of having to pay the balance of the purchase price on completion. 

46.  There is then an interval of about three weeks before Sy received the call from Ching for the signing of the formal agreement and a further month before completion and the execution of the D1 mortgage. Implicit in Sy’s account is that he had no communication whatsoever with Tang in the intervening period of altogether eight weeks. 

47.  One’s credulity is stretched to breaking point (especially given the absence of evidence on the matters outlined in §§41 – 43 above) when the fact is that Sy has a 40% interest in the business and was personally on the line to pay $726,600 on or before 2 January 2015 by way of further deposit and the balance of the purchase price of $9.342 million on completion on 11 February 2015. 

(b)     Collateral agreement

48.  Whether or not a collateral agreement exists depends purely on whether the assurance was qualified by the term “usually” as the Bank maintains.  It is not disputed that prior to the suspension, the defendants were up-to-date with their monthly repayments and not in default. 

49.  In considering the question whether the defence of a collateral agreement is believable, one of the factors to be taken into account is that the clause in question is a standard clause invariably found in banking facility letters.  It was not an unusual provision or one specifically tailored to cater for a particular client.  Prima facie, it would be wholly extraordinary and unusual if an officer of a bank were to give the assurance as alleged since that would be contrary to the clear terms of the Bank’s provisions. 

50.  Further, carried to its logical conclusion, the effect of the collateral agreement would be an indefinite and open-ended loan. It would mean that the capital would be irrecoverable so long as interest payments were not in default.  It is difficult to conceive of a rational business reason for a bank to agree to such a term. 

51.  Be that as it may, it is striking from a perusal of the email correspondence the defendants rely on that despite voicing numerous complaints and objections to the suspension of credit facilities, singularly absent was any mention of the collateral agreement. 

52.  In my view, it defies belief that had such a collateral agreement existed, it would not have featured in the forefront of the defendants’ communications (whether by telephone or email) with the Bank as soon as credit facilities were suspended.  The irresistible inference from the absence of any mention (much less assertion) of the existence of the collateral agreement in the email correspondence and taking into account the matters set out in under the heading “the overall context” in (a) above, is that there was no such agreement. 

53.  All that leads to the inevitable conclusion that the defence of there being a collateral agreement is pure “moonshine” and not believable. 

(2)     Misrepresentation and (3)   Undue influence

54.  I have grouped these two defences together because Mr Chong appeared to rely on the matters enumerated in §25 of his written submissions (mentioned in §§37 – 38 above) to show undue influence but then also relied on the same matters for the purposes of his misrepresentation defence. 

55.  It was suggested that Yip had actual and/or constructive notice that Tang exercised undue influence over Sy because Yip had been informed that Tang was intending to purchase the 1^st property for his personal use and it transpired that Sy was the sole name.  It was submitted that those matters would put the Bank on enquiry. 

56.  I confess to having difficulty in comprehending the argument.  Insofar as reliance is placed on the passage in Chitty on Contracts, Volume 1, 32^nd edition at 8-117 and the citation from Mahon v FBN Bank (UK) Limited [2011] EWHC 1432 (Ch) [51] in footnote 567, the reliance is misplaced because in the present case there is no evidence that Sy’s interest in the Group was titular rather than substantive.  There is simply no evidence that to show that his 40% interest was not real or that the only person who could ever benefit from the business was Tang.  By no stretch of the imagination was Sy a ‘vulnerable’ person within the example given in Mahon.

57.  Against the backdrop of the broader canvass and having regard to the matters highlighted, I have no hesitation in concluding that the defences of misrepresentation and undue influence are not arguable on the evidence presented. 

58.  For all the above reasons, the appeal was allowed with costs.