JUST CONDUCT LTD v. CHINA RISE FINANCE COMPANY LTD AND OTHERS

HCA 2283/2018

[2025] HKCFI 3875

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2283 OF 2018

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(BY ORIGINAL ACTION)

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(BY COUNTERCLAIM)

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JUDGMENT

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I.  INTRODUCTION

1.  This is the trial of the claim of Just Conduct Limited (“Just Conduct”) (as Plaintiff by original action) against Finance Company Limited (“China Rise”) (the 1^st Defendant by original action) and other Defendants, and the trial of the claim of China Rise against the other Defendants, who are all absent.

II.  BACKGROUND

2.  Just Conduct is limited company incorporated in Hong Kong. It has been a property-holding company. It has held in its name the following properties (collectively the “Properties”):-

(1)  Since 1985, No. 494 Reclamation Street, Kowloon;

(2)  Since 1988, Portion D, Ground Floor, No. 29A Mongkok Road; and

(3)  Since 1988, No. 498 Reclamation Street, Kowloon.

3.  Just Conduct is a family company. It has been owned by two shareholders, namely, Mr Li Hang Yin (“Father”) and Ms Tam Po Chun (“Mother”). They are parents (the “Parents”) of, among others:-

(1)  Ms Li Wing Shan Charlotte (“Charlotte Li”); and

(2)  The 4^th Defendant, Ms Li Wing Ka Chermaine (“Chermaine Li”).

4.  The Parents have been the directors of Just Conduct. From 12 January 2004 to 17 August 2015, Chermaine Li was also a director of Just Conduct, while Charlotte Li has since 12 January 2004 been a director of Just Conduct.

5.  Tang & Associates (“Tang & Associates”) (the 2^nd Defendant by original action) was a firm of solicitors. It had provided service to Father including retaining his will and documents relating to Father’s business. On 28 September 2016, the Law Society intervened into its practice. Just Conduct’s action against it has been discontinued.

6.  The following persons were all related to Tang & Associates:-

(1)  Wong Yuen Wah (“Wong Yuen Wah”) (the 3^rd Defendant by original action) and Tang Hin Ming Henry (“Henry Tang”) (the 5^th Defendant by original action) were solicitors and partners of Tang & Associates. Both of them have been adjudged bankrupt, and leave has been granted to Just Conduct to continue the present action against them. Both of them were absent at the trial.

(2)  Chermaine Li was an administrative clerk of Tang & Associates.

(3)  Cheng Chi Fai (“Cheng”), also known as Frankie Cheng, was a legal executive of Tang & Associates.

(4)  Yu Man Sang (“Yu”) was a legal clerk of Tang & Associates.

III.  JUST CONDUCT’S CLAIM

7.  There are two sets of documents which Just Conduct claims are invalid. The first set were all made in 2014, namely:-

(1)  An “all moneys” mortgage (the “First Mortgage”) entered into between Just Conduct as borrower (signed by Chermaine Li only though purported to be signed by Chermaine Li and Cheng) and China Rise as lender on 23 December 2014 to secure Just Conduct’s indebtedness. The First Mortgage was registered against the Properties on 26 February 2015;

(2)  The loan agreement dated 23 December 2014 (the “2014 Loan Agreement”) between Just Conduct as borrower and China Rise as lender for a loan of HK$30,900,000 (the “Loan”), in respect of which the First Mortgage was executed; and

(3)  The board minutes dated 23 December 2014 (the “2014 Board Minutes”) signed only by Chermaine Li purported to approve the First Mortgage and/or the 2014 Loan Agreement or authorise Chermaine Li to sign the First Mortgage.

8.  Just Conduct claims that the 2014 Board Minutes is invalid because:-

(1)  There was no board meeting on 23 December 2014 to authorise Chermaine Li to execute the First Mortgage and/or the 2014 Loan Agreement, contrary to what the 2014 Board Minutes stated;

(2)  Father never attended any board meeting on 23 December 2014 or any board meetings at all, to authorise Chermaine Li to execute the 2014 Loan Agreement and/or the First Mortgage, contrary to what the 2014 Board Minutes stated;

(3)  The board meeting would be attended by Chermaine Li only, and this did not constitute any sufficient quorum for the meeting by virtue of article 108 of Table A as modified by article 7 of Just Conduct Articles of Association, which required two, and in any event, Chermaine Li should not be counted because she was an interested director by virtue of article 86(2); and

(4)  Just Conduct never passed any or any valid resolution to approve the First Mortgage and/or the 2014 Loan Agreement or authorise Chermaine Li to sign the First Mortgage, contrary to the 2014 Board Minutes.

9.  Just Conduct claims that the 2014 Loan Agreement is invalid because Just Conduct never authorised Chermaine Li to enter into the 2014 Loan Agreement between Just Conduct as borrower and China Rise as lender for a loan of HK$30,900,000, contrary to the 2014 Board Minutes.

10.  Just Conduct claims that the First Mortgage is invalid because:-

(1)  No common seal of Just Conduct was affixed on the First Mortgage, as required by sections 127 and 128 of the Companies Ordinance (Cap 622);

(2)  The 2014 Loan Agreement was invalid; and

(3)  Chermaine Li and Cheng were not authorised to enter into the First Mortgage on behalf of Just Conduct.

11.  The second set of documents which Just Conduct claims are invalid are:-

(1)  A further “all moneys” mortgage (the “Further Mortgage” entered into between Just Conduct as borrower (signed by the Parents) and China Rise as lender on 21 November 2016 to secure Just Conduct’s indebtedness. The Further Mortgage was registered on 25 July 2018; and

(2)  a board minutes (the “2016 Board Minutes”) of a board meeting on 21 November 2016 signed by the Parents which according to the board minutes approved of the Further Mortgage.

12.  Just Conduct claims that the 2016 Board Minutes was invalid because:-

(1)  Chermaine Li misled Parents into believing that because the 2^nd Defendant’s practice had been intervened by the Law Society, they had to sign certain documents in around November 2016 for transferring the papers retained by Tang & Associates to another solicitors’ firm;

(2)  The Parents had not read and did not, and did not have the English proficiency to, understand the nature and effect of the 2016 Board Minutes;

(3)  The contents of the 2016 Board Minutes were not explained to the Parents; and

(4)  The Parents had not been advised to seek independent legal advice before signing the 2016 Board Minutes.

13.  Just Conduct claims that the Further Mortgage was invalid because:-

(1)  The Further Mortgage was premised upon the validity of the 2014 Loan Agreement and the First Mortgage. However, none of these was valid. Therefore, the Further Mortgage was also invalid.

(2)  In any event, no common seal of Just Conduct was affixed on the Further Mortgage, contrary to what the Further Mortgage stated;

(3)  Chermaine Li misled Parents into believing that because the 2^nd Defendant’s practice had been intervened by the Law Society, they had to sign certain documents in around November 2016 for transferring the papers retained by Tang & Associates to another solicitors’ firm;

(4)  The Parents had not read and did not, and did not have the English proficiency to, understand the nature and effect of the Further Mortgage;

(5)  The contents of the Further Mortgage and the 2016 Board Minutes were not explained to the Parents; and

(6)  The Parents had not been advised to seek independent legal advice before signing the Further Mortgage.

14.  The loan under the 2014 Loan Agreement, in respect of which the First Mortgage was executed, was represented by a cheque drawn by China Rise in favour of Tang & Associates for a sum of HK$30,900,000 (the “Cheque”) on 23 December 2024. Tang & Associates issued a receipt to China Rise. However, neither Tang & Associates, nor Wong Yuen Wah, nor Chermaine Li, nor Henry Tang had ever released the HK$30,900,000 to the Plaintiff.

15.  Just Conduct claims against China Rise, Wong Yuen Wah, Chermaine Li and Henry Tang for declarations that the 2014 Board Minutes, the 2014 Loan Agreement, the First Mortgage, the 2016 Board Minutes and the Further Mortgage are invalid and not binding upon the Plaintiff.

16.  Further against Wong Yuen Wah and Henry Tang is Just Conduct’s claim for the return of the HK$30,900,000, or tracing, or damages.

17.  Further against Chermaine Li is Just Conduct’s claim for damages including exemplary damages to be assessed.

IV.  CHINA RISE’S CASE

18.  According to China Rise, around early November 2014, Cheng, the legal executive of Tang & Associates, applied to it for a loan of more than HK$200,000,000. It turned down the application.

19.  Subsequently, Cheng again approached China Rise for applying for five mortgage loans (“Cheng’s 5 Loans”). In particular, around late November 2014, Cheng referred Chermaine Li, then a director of Just Conduct, to apply for a mortgage loan secured by the Properties.

20.  On 12 December 2014, Cheng and Chermaine Li attended a meeting at China Rise’s office. At that meeting, they discussed the basic terms of a loan of around HK$30,000,000 to be secured by the Properties.

21.  In the morning of 23 December 2014, a meeting (the “23 December 2014 Meeting”) was held at China Rise’ office for discussing the arrangements of the said HK$30,000,000 loan. That meeting was attended by:-

(1)  The representatives of China Rise;

(2)  Chermaine Li and Cheng, both as directors and representatives of Just Conduct; and

(3)  Yu as the representative of Tang & Associates engaged by Just Conduct.

22.  At the 23 December 2014 Meeting:-

(1)  A Form ND2A was produced showing that Cheng had been appointed as a new director of Just Conduct and the Parents had resigned as directors at the same time;

(2)  Yu assured China Rise that the Form ND2A would be filed with the Companies Registry that afternoon;

(3)  A board minutes of Just Conduct dated 23 December 2014 (the “Other 2014 Board Minutes”) signed by Chermaine Li and Cheng as directors were produced, and the board minutes recorded that Just Conduct approved of the execution of the First Mortgage and authorised Chermaine Li to sign the First Mortgage with Just Conduct’s common seal; and

(4)  Yu confirmed that the title deeds of the Properties had been perused and were in the due and proper custody of Tang & Associates.

23.  In the circumstances, China Rise agreed to grant a loan of HK$30,900,000 based on its policy of granting a loan of 70% of the valuation of the net asset value of the security property, which was HK$47,000,000 for the Properties. Therefore, Chermaine Li signed the 2014 Loan Agreement on behalf of Just Conduct, and Chermaine Li and Cheng signed in their personal capacity as guarantors to the First Mortgage.

24.  Accordingly, the Cheque was issued payable to Tang & Associates and handed to Yu for Tang & Associates’ stakeholding. Cheng then issued to Just Conduct 13 post-dated personal cheques under a joint account of Cheng and Kwok Lai Ming maintained with HSBC for repayment of the loan.

25.  In the afternoon of 23 December 2014, Tang & Associates informed China Rise that Cheng could not act as a director of Just Conduct pending the resolution of certain issues concerning the sale and purchase of the shares in Just Conduct. Tang & Associates produced a fresh board minutes, namely, the 2014 Board Minutes.

26.  Between 2014 and 2016, partial repayments of the principal and interest were made on and off through cheques issued by Chermaine Li and/or Cheng. Further, Just Conduct requested time extension of various deadlines and redemption of the First Mortgage.

27.  On 21 November 2016, the Parents and Chermaine Li attended the office of Ho & Partners, a law firm representing China Rise back then. They were there to execute the Further Mortgage. During that meeting:-

(1)  The Further Mortgage was provided to the Parents to read before they signed it; and

(2)  Ho Chui Lin of Ho & Partners explained the terms of the Further Mortgage to the Parents.

28.  China Rise’s case is that the Parents, and thus Just Conduct, knew full well what the Further Mortgage was.

29.  In early 2017, the remaining cheques issued as security under the 2014 Loan Agreement were all dishonoured. On 13 April 2017, upon China Rise’s instructions, its solicitors Ho & Partners issued a demand letter to Just Conduct for repayment. By that time, HK$9,400,000 of the principal had been repaid, and thus the outstanding principal was HK$21,500,000 plus interest.

30.  In the circumstances, China Rise says that the First Mortgage and the Further Mortgage were valid, and that it had no reason to suspect that they were not.

31.  I note that no plea of ostensible or apparent authority is pleaded, and that no plea of ratification of the First Mortgage and/or the 2014 Loan by the 2016 Board Minutes and/or the Further Mortgage is pleaded.

V.  CHINA RISE’S CLAIM AGAINST TANG & ASSOCIATES, WONG YUEN WAH, CHERMAINE LI AND HENRY TANG

32.  China Rise mounts a claim against Tang & Associates, Wong Yuen Wah, Chermaine Li and Henry Tang that if its case in its Defence is not accepted, China Rise was the victim of a conspiracy to defraud conspired by them. On this, China Rise claims damages of HK$21,500,000 with interest.

33.  Alternatively, China Rise claims against them for the restitution of the Cheque giving credit to the repayment of HK$9,400,000 based on unjust enrichment.

VI.  ISSUES

34.  The issues, as agreed by Just Conduct and China Rise, are:-

In respect of the First Mortgage

(1)  Whether the First Mortgage is valid and binding upon Just Conduct;

(2)  Whether China Rise has actual or constructive knowledge of any irregularity of the First Mortgage and/or 2014 Board Minutes as alleged by Just Conduct;

(3)  Whether Chermaine Li has actual or ostensible authority to enter into the 2014 Loan Agreement and the First Mortgage (although ostensible authority is not pleaded);

(4)  Whether the purported mortgage loan of HK$30,900,000 had ever been released to Just Conduct by Tang & Associates, Wong Yuen Wah and/or Henry Tang;

In respect of the Further Mortgage

(5)  Whether the Further Mortgage is valid and binding upon Just Conduct;

(6)  Whether China Rise has actual or constructive knowledge of any irregularity of the 2016 Board Minutes as alleged by Just Conduct;

(7)  Whether the Parents as directors of Just Conduct have actual or ostensible authority to enter into the Further Mortgage;

In respect of China Rise’s claim against Tang & Associates, Wong Yuen Wah, Chermaine Li and Henry Tang

(8)  Whether Chermaine Li, Father, Mother and/or other known persons committed fraud against the 1^st Defendant;

(9)  Whether Tang & Associates, Wong Yuen Wah, Chermaine Li and/or Henry Tang conspired to injure China Rise by unlawful means or dishonesty;

In respect of relief

(10)  What relief should be granted to Just Conduct; and

(11)  What relief should be granted to China Rise.

VII.  WHETHER THE FIRST MORTGAGE IS VALID AND BINDING UPON JUST CONDUCT

35.  Sections 127 and 128 of the Companies Ordinance (Cap. 622) are relevant. Section 127 provides that:-

“127. Execution of documents by company

(1) A company may execute a document under its common seal.

(2) If a company executes a document under its common seal, the seal must be affixed in accordance with the provisions of its articles.

(3) A company may also execute a document –

(a) in the case of a company with only one director, by having it signed by the director on the company’s behalf; or

(b) in the case of a company with 2 or more directors, by having it signed on the company’s behalf by –

(i) the 2 directors or any 2 of the directors; or

(ii) any of the directors and the company secretary of the company.

(4) …

(5) A document signed in accordance with subsection (3) and expressed (in whatever words) to be executed by the company has effect as if the document had been executed under the company’s common seal.

(6) In favour of a person specified in subsection (7), a document is to be regarded as having been executed by a company if the documents purports to have been signed in accordance with subsection (3).

(7) The person is a purchaser in good faith for valuable consideration and includes –

(a) a lessee;

(b) a mortgagee; or

(c) any other person who for valuable consideration acquires the property.

(8) This section also applies to a document that is executed, or purports to be executed, by a company in the name of or on behalf of another person whether or not that other person is also a company.”

36.  Section 128 provides that:-

“128. Execution of deeds by company

(1) A company may execute a document as a deed by –

(a) executing it in accordance with section 127;

(b) having it expressed (in whatever words) to be executed by the company as a deed; and

(c) delivering it as a deed.

(2) For the purpose of subsection (1)(c), a document is presumed, unless the contrary is proved, to be delivered as a deed on its being executed in accordance with section 127.

(3) If there is any conflict or inconsistency between this section and the provisions of any other Ordinance, this section prevails over those provisions to the extent of the conflict or inconsistency.”

37.  The First Mortgage is and purports itself to be a deed. However, there is no seal affixed upon it. In order to rely on sections 127 and 128, by virtue of section 127(3)(b), at least two of the directors of Just Conduct would have to sign the First Mortgage. However, only Chermaine Li signed the First Mortgage. The First Mortgage is therefore not properly executed and not valid.

38.  Mr Billy Poon, counsel for China Rise, tries to invoke section 117 of the Companies Ordinance. It provides that:-

“117. Transaction or act binds company despite limitation in articles etc.

(1) Subject to section 119, in favour of a person dealing with a company in good faith, the power of the company’s directors to bind the company, or authorize others to do so, is to be regarded as free of any limitation under any relevant document of the company.

(2) for the purposes of subsection (1) –

(a) a person deals with a company if the person is a party to any transaction or any other act to which the company is a party;

(b) a person dealing with a company is presumed, unless the contrary is proved, to have acted in good faith;

(c) a person dealing with a company is not to be regarded as acting in bad faith by reason only of the person’s knowing that an act is beyond the directors’ powers under any relevant document of the company; and

(d) a person dealing with a company is not required to inquire as to the limitations on the power of the company’s directors to bind the company or authorize others to do so.

…

(6) In this section –

relevant document (有關文件), in relation to a company, means –

(a) the company’s articles;

(b) any resolutions of the company or of any class of members of the company; or

(c) any agreements between the members, or members of any class of members, of the company.”

39.  However, to invoke section 117, at least two directors would have to act together: see Zhang Kan v SPH (Hong Kong) International Trading Co Ltd [2022] 3 HKLRD 813 at §§31-37[1]. Mr Poon submits that I should depart from that judgment and hold that even one director would be sufficient. However, Mr Poon advances no reason for me to depart from it. I have reviewed the reasoning there and maintain the same view that at least two directors would be required. Therefore, section 117 does not take China Rise anywhere, even if I am to assume that China Rise could rely on it despite not being pleaded.

40.  Mr Poon submits that the Turquand rule has been codified by section 117 of the Companies Ordinance. This submission is incorrect: see Report of the Standing Committee on Company Law Reform, February 2000, Chapter 12 R152. So, I take that Mr Poon would also, separately from section 117, rely on the indoor management rule and the Turquand rule. However, this is not pleaded in China Rise’s defence, and therefore is impermissible: see Pacific Foundation Finance Ltd v Fairyoung Holdings Ltd [1993] 3 HKLRD 153 at 157F-G per Mortimer VP with whom Rogers JA agreed. Mr Poon submits that section 117 has codified the indoor management rule or the Turquand rule, and since the codification, it would be unnecessary to plead the same given that it is a matter of law. I am unable to accept such submissions – to determine whether section 117 is applicable is a mixed question of fact and law.

41.  In conclusion, the First Mortgage was not properly executed, and is not valid and not binding upon Just Conduct.

42.  Further and in any event, I also find that there is no authority for Chermaine Li to enter into the loan agreement:-

(1)  Just Conduct’s evidence is that it did not receive any of the loan. China Rise does not have evidence to the contrary. Save and except for a mere, general allegation that the Parents or Just Conduct were part of a conspiracy to defraud China Rise, China Rise does not have any evidence at all to indicate that Just Conduct’s evidence that it did not receive any part of the loan is inaccurate. Mr Poon also fairly accepts that China Rise does not have any positive case of the whereabouts of the Loan, and fairly did not put to the Parents that Just Conduct received any part of the loan. On the evidence, I do not find any such conspiracy. I therefore find that Just Conduct did not receive any of the loan.

(2)  As such, in all probabilities, Just Conduct would not enter into the 2014 Loan Agreement for no advancement of any of the loan.

(3)  The Other 2014 Board Minutes was defective in that Cheng was not a director at the time of signing the board minutes (and he never was). However, the Other 2014 Board Minutes did show the attendance of Cheng and Chermaine Li to the meeting by their signatures against their names in the board minutes. On the contrary, the 2014 Board Minutes, of a board meeting purportedly attended by the Parents, just had the Parents’ names without any signature against them.

(4)  There are a few solicitors’ letters subsequently sent purportedly on behalf of Just Conduct to China Rise, one of which denied any loan from China Rise and others which accepted there were loans. Such evidence of subsequent conduct tends to support that the Parents knew at the outset the 2014 Loan Agreement and the First Mortgage. However, if that were the case, it is difficult to understand why the Parents would do so when Just Conduct did not receive any part of the loan and there is no allegation that they conspired to defraud.

(5)  Considering (1) – (4) above, I find that the Parents did not attend the purported meeting at all. Therefore, there was no meeting at all (as they were the only attendants according to the 2014 Board Minutes). In any event, even counting Chermaine Li, there was only one attendant. She should be discounted as an interested director, as recorded in the 2014 Board Minutes itself, and in any event, one director did not constitute sufficient quorum: see articles 101 and 108 of Table A.

43.  There is no meeting as recorded by the 2014 Board Minutes. The 2014 Board Minutes are therefore defective and have no effect.

44.  It also follows that there was no approval of the 2014 Loan Agreement and the First Mortgage. The 2014 Loan Agreement is invalid due to lack of the authority to enter into it on behalf of Just Conduct. Further, the First Mortgage is invalid also because of lack of such authority, independently of the ground that it was not properly executed.

45.  For completeness sake, even if there were such a meeting, the meeting was attended by Chermaine Li only. No proper resolution could be passed to approve the 2014 Loan Agreement and the First Mortgage.

VIII.  WHETHER CHINA RISE HAS ACTUAL OR CONSTRUCTIVE KNOWLEDGE OF ANY IRREGULARITY

46.  In any event, even assuming that China Rise would be permitted to rely on the indoor management rule, the Turquand rule and/or section 117, in my view, China Rise had at least constructive knowledge of the irregularity of the First Mortgage and the loan agreement. I say so because:-

(1)  The First Mortgage was purportedly signed by Cheng, who was to China Rise’s knowledge not a director. The fact that it was purported that Cheng had been appointed as director but the corresponding NDA2 form was to be filed and there was no proper resolution of such appointment, coupled with the fact that China Rise was informed that Cheng would not be appointed as director, must be sufficient to put China Rise on notice given that the First Mortgage was purportedly signed by Cheng as director.

(2)  There were two board resolutions produced to China Rise for the same transaction. The Other 2014 Board Resolutions purported Cheng to be a director and both Cheng and Chermaine Li signed on it as evidence of attendance, while the 2014 Board Resolution was produced shortly after the sudden cancellation of Cheng’s appointment as director and the Parents did not sign on it as evidence of attendance.

(3)  While the mere absence of the company’s common seal may not be regarded as any irregularity or notice of such because of sections 117, 127 and 128, however, in the present case, against the above backdrop, the absence of the common seal was another indicator of irregularity.

47.  Mr Liu Kam Lung (“Liu”), the Chief Executive Officer of China Rise, explained in oral evidence that all these legal matters were left to Tang & Associates for their handling. This, however, cannot be any step to discharge the constructive knowledge, because Tang & Associates were China Rise’s agent and thus China Rise should still be held responsible to take steps to discharge the constructive knowledge. Any fault or liability-allocation between China Rise and Tang & Associates as client-and-solicitors does not affect Just Conduct as the outsider. In any event, China Rise never pleads that there was no constructive knowledge or the constructive knowledge was discharged because of the delegation of the matter to Tang & Associates.

48.  Therefore, I find that China Rise had constructive knowledge of the irregularity of the First Mortgage and the 2014 Board Minutes, as well as the 2014 Loan Agreement.

IX.  WHETHER CHERMAINE LI HAS ACTUAL OR OSTENSIBLE AUTHORITY TO ENTER INTO THE 2014 LOAN AGREEMENT AND THE FIRST MORTGAGE

49.  During the opening submissions, Ms Alison Choy, counsel for Just Conduct, raised that the defence of ostensible authority is not pleaded. To rely on this defence, it must be pleaded and particularised: see Yip Lai Fong & Anor v Sin Tung Hng & Ors [2004] 3 HKC 153 at §17 per Lam J (as Lam PJ then was). Among the particulars that must be pleaded are the alleged representation by the principal of the authority for the agent and the reliance thereon. In China Rise’s defence, I cannot ascertain any particular representations or reliance thereon were relied upon as such particulars.

50.  In any event, given my finding above that China Rise had constructive knowledge of the irregularity of the First Mortgage, the 2014 Loan Agreement and the 2014 Board Resolution, China Rise would not be able to avail itself of the defence of ostensible authority.

X.  WHETHER THE LOAN OF HK$30,900,000 HAD EVER BEEN RELEASED TO JUST CONDUCT BY TANG & ASSOCIATES, WONG YUEN WAH AND/OR HENRY TANG

51.  For the reason set out in §42(1) above, I find that Just Conduct did not receive any part of the loan.

XI.  WHETHER THE FURTHER MORTGAGE IS VALID AND BINDING UPON JUST CONDUCT

52.  The Further Mortgage was to extend the term of repayment of the Loan and to charge the Properties for the extended Loan, as recited by the Further Mortgage itself. Given my finding that the 2014 Loan Agreement is invalid and Just Conduct did not receive any part of the Loan, there was nothing for the Further Mortgage to extend and there was no loan in respect of which the Properties could be charged.

53.  However, Mr Poon takes a valid pleading point that Just Conduct never relies upon the validity or invalidity of the 2014 Loan Agreement and/or the First Mortgage as the basis for arguing that the Further Mortgage is invalid. While I can see there may be mistake as to the substratum of the contract and/or total failure of consideration, I agree that these must be pleaded so that China Rise would be afforded a fair chance to respond by raising other defences (for example, unilateral mistake, partial performance, contract terms severable). Therefore, I do not think it appropriate for me to find that the Further Mortgage is invalid based on the invalidity of the First Mortgage. That said, since there was no loan in respect of which the Properties could be charged, I do not see any reason why the Mortgage could still be said to relate to any interest in the Properties. Therefore, valid or not, it should not stay as registered in the Land Registry.

54.  Should I find the Further Mortgage invalid based on Just Conduct’s pleaded case? Its pleaded case in this respect is set out in §24 of its Amended Statement of Claim. In gist:-

(1)  Non est factum: the Parents did not understand what they signed, namely, the 2016 Board Minutes and the Further Mortgage, and was not legally advised, but instead was misled by Charlotte Li to think that they were signing documents for the purpose of transferring their documents from the previous solicitors to new ones; and

(2)  The Further Mortgage was not affixed with the company seal of Just Conduct;

(3)  No valid board meeting was convened as purported by the 2016 Board Minutes to approve the Further Mortgage; and

(4)  China Rise knew or ought to have known that the Parents did not acknowledge the validity of the First Mortgage.

55.  For non est factum, Just Conduct has a heavy burden to establish that (1) the Parents were under a disability; (2) the 2016 Board Minutes and the Further Mortgage were documents fundamentally different from what they thought they were signing; and (3) they were not careless in signing the documents: see Keswani Soshila v Keswani Motiram [2022] 2 HKLRD 822 at §§34-35 per Chu JA (giving the Reasons for Judgment of the Court).

56.  The Parents’ evidence is, in gist, that on 22 November 2016, they attended Ho & Partners’ office to sign documents which they now believe are the 2016 Board Minutes and the Further Mortgage. They did not understand English. Before the meeting, Chermaine Li told them that because the law firm they had engaged had ceased in practice or had been intervened, it was necessary for them to sign certain documents for transferring papers from the law firm to a new one. In cross-examination, the Parents also say, in respect of the demand letters issued by China Rise to Just Conduct for repayment of the Loan that came to their attention, that they did make enquiry with Chermaine Li and Chermaine Li answered that there was some mistake and she would handle and follow up. The Parents trusted Chermaine Li.

57.  The Parents’ evidence about the meeting at Ho & Partners is that because they arrived at Ho & Partners’ office late near the close of office hours, the whole process was in a rush, and no one explained the document to them. They further allege that they were simply asked to sign, and they did sign believing Chermaine Li’s explanation that they had to sign for transferring papers to a new law firm.

58.  Liu and Ms Ho Chui Lin (“Ms Ho”) of Ho & Partners also attended the meeting. They both say that Ms Ho explained the documents to the Parents, and that the Parents instructed Chermaine Li to issue four cheques at the meeting. Liu further says that the Father asked him during the meeting how the repayment of the Loan would be affected if one of the Properties would be sold. Ms Ho, however, does not mention this part of Liu’s evidence.

59.  In assessing the credibility of the relevant evidences, I shall bear the following facts in mind:-

(1)  Just Conduct did not receive any part of the Loan;

(2)  There is no evidence that Just Conduct and/or the Parents were part of the conspiracy to defraud China Rise;

(3)  There is no evidence that Just Conduct and/or the Parents benefited from the Loan;

(4)  There is no suggestion that the Parents knew Chermaine Li had on behalf of Just Conduct unduly entered into a loan agreements and/or that the Parents would like to assist Chermaine Li in respect of the Loan;

(5)  The Parents are heavily interested in the outcome of the present case;

(6)  Similarly, Liu is heavily interested in the outcome;

(7)  Ms Ho is relatively, though not wholly, independent; she is not wholly independent in the sense that she was a solicitor for China Rise and she might be liable if the Further Mortgage would be held not valid due to her default; and

(8)  Ms Ho did not take any attendance notes of the 21 November 2016 meeting and her evidence about the meeting was first recorded down in her witness statement dated 25 September 2023, that is, almost 7 years after the event.

(9)  Ms Ho was at the meeting a solicitor acting for China Rise.

60.  In respect of the Parents, (1) – (4) above points towards that the Parents would have no reason to knowingly sign the 2016 Board Minutes and the Further Mortgage. I note, however, that the Father’s oral evidence is not satisfactory. He appeared quite forgetful to me. I bear in mind that he is in his 70s, but his forgetfulness only means that I cannot rely on his evidence too much. On the contrary, the Mother’s evidence is relatively clear and therefore, where there is inconsistency between the two, I would rely on the Mother’s evidence.

61.  In respect of Liu, he has a clear tendency, understandably, to say that the matter was handed over to China Rise’s lawyers to handle and consider. Since his evidence in respect of the meeting is largely consistent with Ms Ho’s, their evidence should be considered together. That said, I note two inconsistencies between the two: first, Ms Ho’s evidence did not mention any discussion between the Father and Liu about sale of one property as alleged by Liu; second, Ms Ho’s evidence did not mention the Parents’ instructions to Chermaine Li to issue “personal” cheques while Liu did mention “personal” cheques.

62.  Before I consider their evidence together, I should point out that in respect of Ms Ho, (7) above points towards that Ms Ho would have little incentive not to tell the truth according to her recollection, (8) above points towards that howsoever Ms Ho would like to tell the truth, her recollection may fail her because there were no written records, and (9) points towards the likelihood or unlikelihood of whether Ms Ho would take care of the Parents’ interest or not.

63.  As I said, Liu’s and Ms Ho’s evidence is largely consistent. Both of them said that:-

(1)  The meeting started “at around 16:20pm” (§25 of Liu’s Witness Statement dated 26 September 2023; §5 of Ms Ho’s Witness Statement dated 25 September 2023); and

(2)  The meeting ended “around 17:30pm” (§25 of Liu’s Witness Statement; §5 of Ms Ho’s Witness Statement).

64.  However, during cross-examination, when asked how she could remember the time even though roughly without any attendance notes, Ms Ho’s first answer was that she remembered it was in the afternoon, and her second answer, upon being pointed out that there would be a range for an afternoon, was that it was the late afternoon. In respect of the end time of “around 17:30pm”, she also explained that because her explanation of the documents to the Parents took about 20 minutes, and with the signing and the photocopies and receipts of cheques, it was thus roughly about one hour and so she thought roughly the meeting ended at “around 17:30pm”. Ms Ho admitted in the witness box that it was not appropriate for her to state the time, but Ms Ho explained that she had a strong recollection of this case because in this case, the previous mortgage (that is, the First Mortgage) was not registered only until very late and the loan had been outstanding. That may well be a reason for her to remember this case. However, it is not a reason for her to state the time in the Witness Statement when she herself has to admit that her recollection of the time was rough and that it was not appropriate for her to state the time in this manner.

65.  But the unusual feature is that howsoever rough and inappropriate to state the time, Liu’s evidence states exactly the same time in the same manner concerning the meeting on 21 November 2016. There is no evidence that Ms Ho had consulted Liu about the time, but on the contrary, it is Ms Ho’s own evidence that it was her own rough recollection. Further, in Liu’s statements to the police made on 18 September 2018, 21 May 2019 and 28 February 2021, Liu did not these mention the time of the meeting as he now has in his Witness Statement made in September 2023. In my view, it would be too coincidental to have such rough recollection coincide with Liu’s. The basis for Liu’s evidence about the time of the meeting is inexplicable. Liu does not have any notes of the meeting either. It seems to be that “in the late afternoon”, as testified by Ms Ho before me, is a more accurate phrase to describe the timeframe of the meeting.

66.  Before I go on to consider other evidence, I should note that Ms Ho’s oral evidence that the meeting took place in the “late afternoon” is consistent with the Parents’ evidence that they attended the meeting towards the close of office hours.

67.  I add that in this case, Ms Ho tends to be rough in terms of preparing documents. Not only the time in the Witness Statement. Ms Ho also frankly admits that the 2016 Board Minutes were prepared by her but not accurately reflecting the truth. She admits that the address of the 2016 Board Minutes should not be stated as the “registered office” of Just Conduct because the 2016 Board Minutes were meant to be signed at her office. She also admits that the time “10:00am” of the board meeting was incorrect because the meeting was in the late afternoon. Put in the most favourable term to her, she admits that she could have done better in preparing the 2016 Board Minutes.

68.  Therefore, even if there were attendance notes, I would have examined the same closely. But the fact is that there are no attendance notes. In my view, it is unusual for solicitors not to take any attendance notes of meetings, as solicitors have to rely on attendance notes as evidence of their work, of what happened, of what were said. There is no evidence that Ms Ho was a less-than-prudent solicitor. Therefore, in all likelihood, that there were no attendance notes would mean that the meeting was a run-of-the-mill meeting where she did not say much and she did not do much. This likelihood is also consistent with the fact that Ms Ho was not a solicitor for the Parents or Just Conduct. She had no duty to explain the documents to them and/or ask them to seek independent legal advice unless there was evidence of undue influence or duress. But since the Loan was on the face of it for Just Conduct, there was no such evidence. This likelihood is consistent with the Parents’ evidence that the documents were not explained to them at the meeting.

69.  As regards issuance of cheques, when asked, Ms Ho said that after the signing of the documents, cheques were then issued and received. She did not mention the Parents’ instructions. However, when pointed specifically to her own allegation in her own Witness Statement that it was the Parents who instructed Chermaine Li to issue cheques, her answer was only that it was her recollection. In the evidence, there are copies of China Rise’s receipts of the cheques on 21 November 2016.

70.  Relatedly, I should also mention one more matter: when asked what she explained to the Parents, she almost read the Further Mortgage term by term and said that she must have explained the documents this way. But she admits that it was her guess, because if she would have to explain the documents, she would read term by term. In my view, her recollection without written documents must be scrutinised very skeptically. This brings me back to the receipts of the cheques – while Ms Ho may rely on the receipts as evidence of issuance of cheques that day, I do not pay much regard to her evidence that it was the Parents’ instructions.

71.  Liu’s evidence in respect of the meeting is, like Ms Ho’s, based on his recollection. His evidence about the time of the meeting, coinciding with Ms Ho’s original evidence subsequently changed to “late afternoon”, has me cast skeptical eyes on his evidence in this respect. His evidence that Ms Ho explained the documents to the Parents is not supported by any attendance notes which I opine above would have been prepared had there been such explanation.

72.  Further, his evidence that the Father asked him at the meeting about sale of one property is not even supported by Ms Ho’s evidence, and his evidence that the Parents instructed Chermaine Li to issue “personal” cheques is also not supported by Ms Ho’s evidence that the Parents instructed Chermaine Li to issue cheques.

73.  The Parents’ recollection is also not satisfactory. In particular, the Father does not remember any detail, and even differs from the Mother’s evidence that Chermaine Li accompanied them to the office for the meeting on 21 November 2016, saying that Chermaine Li only took them to the entrance of the building where the office was situated but did not go up with them. In case of inconsistency, I prefer the evidence of the Mother, which appeared to me to be more firm and reliable. Be that as it may, their evidence that they relied upon Chermaine Li to handle the demand letters issued by China Rise and that Chermaine Li told them to sign documents for transferring papers to a new law firm remains intact. Such intact evidence is consistent with the matters set out in §59(1) – (4) above.

74.  Having considered the above evidence iteratively, on a fine balance, I prefer the Parents’ evidence over Liu and Ms Ho’s evidence in respect of what happened at the meeting on 21 November 2016, that is:-

(1)  The Parents were misled by Chermaine Li to believe that they were going to sign documents for transferring papers;

(2)  They did not understand English; and

(3)  The documents were not explained to the Parents during the meeting and they signed them still believing that the documents they were signing were for transferring papers.

75.  In the circumstances, it is clear that elements (1) and (2) of non est factum are established (see §55 above). As regards element (3) (not careless in signing the documents), the burden of proof also lies upon Just Conduct. The Father’s evidence is that the Parents did not think that Chermaine Li was especially trustworthy or untrustworthy, but the fact was that whenever the Parents would need lawyers’ assistance, they would consistently go to Chermaine Li (working in law firms) first. At the meeting, Ms Ho was not Just Conduct or the Parents’ legal advisers. It was not careless for them to rely upon what Chermaine Li had told them (whether she accompanied them to the meeting or not), Chermaine Li being their daughter and the one they had gone to when they needed legal assistance.

76.  Therefore, I am also satisfied that element (3) is proved.

77.  In the circumstances, I find that the 2016 Board Minutes and the Further Mortgage were void on non est factum.

78.  In the light of my finding of non est factum, it is unnecessary for me to rule on §54(2) – (4) above in detail. Suffice to say that:-

(a)  For (2), no company seal could be cured by sections 123 and 124 of the Companies Ordinance given that the Further Mortgage was signed by two directors;

(b)  For (3), while the address and time of the meeting were not accurately reflected in the 2016 Board Minutes, if the Parents understood the contents, the substance would still be that they approved the Further Mortgage and I do not think that the inaccuracy of the address and time would trump the substance; and

(c)  For (4), China Rise’s knowledge would only be relevant if actual or constructive knowledge would become relevant. However, whether or not non est factum is established, such knowledge is irrelevant.

XII.  RATIFICATION AND ACKNOWLEDGEMENT?

79.  Although no ratification is mentioned in the Agreed List of Issues, Mr Poon raised this point in his written opening submissions, contending that the signing of the 2016 Board Minutes and/or the Further Mortgage constituted ratification of the 2014 Loan Agreement and the First Mortgage. At the Closing Submissions, Mr Poon told me semantically that he does not run ratification anymore. However, he submits that the 2016 Board Minutes and/or the Further Mortgage constituted acknowledgment whereby the 2014 Loan Agreement and the First Mortgage have been validated. “Acknowledgment” cannot be an acceptance of offer, as I shall explain in the next Part why the Further Mortgage cannot constitute a standalone agreement. It also cannot be any kind of estoppel, because it and its elements are not pleaded. This “acknowledgment” is effectively ratification. In my view, Mr Poon still runs ratification.

80.  Ratification here is one that would validate a transaction vis-à-vis outsiders (see Bowstead & Reynolds on Agency (23^rd ed) §2-069) (as opposed to ratification of directors’ default by shareholders). To establish such ratification, in general, the company “should have full knowledge of all the material circumstances in which the act was done”: see Bowstead & Reynolds on Agency, supra §2-071 (for example, in the present context, the knowledge that Just Conduct did not receive the Loan at all). In other words, such ratification is an element necessary to give validity to the transaction in question, and certain knowledge is required for such ratification. As such, such ratification must be pleaded. As it is not pleaded, not even on the Agreed List of Issues, I do not have to deal with any submissions on ratification.

81.  In any event, given my finding of non est factum above, there can be no ratification by signing the 2016 Board Minutes and/or Further Mortgage.

82.  Still in any event, assuming that my finding of non est factum were wrong and that the Parents should be held to the 2016 Board Minutes and the Further Mortgage, there is no suggestion that when signing these documents, the Parents had the “full knowledge of all the material circumstances in which the act was done”. One such material circumstances I can think of (not pleaded by China Rise) would be that the Loan was never to be received by Just Conduct itself, although Just Conduct would have liability to repay under the 2014 Loan Agreement and the First Mortgage. As ratification was not pleaded, it was not surprising that no cross-examination on the Parents’ knowledge of such circumstances was made.

83.  As I would not be able to find any ratification in any event, even assuming that the Parents should be held to the 2016 Board Minutes and the Further Mortgage, the 2014 Board Minutes, the 2014 Loan Agreement and the First Mortgage would remain invalid as found above. Logically, therefore, it would still remain that the Further Mortgage would have no loan to cover and therefore could not charge any Properties.

XIII.  WAS FURTHER MORTGAGE A STANDALONE LOAN AND CHARGING AGREEMENT, A COLLATERAL AGREEMENT AND/OR A VARIATION?

84.  In his Closing Submissions for China Rise, Mr Poon for the first time contended that the Further Mortgage would be regarded as a standalone agreement for the Loan and the mortgage over the Properties, without regard to the validity of the 2014 Loan Agreement and the First Mortgage. With respect, I reject such contention because:-

(1)  the Further Mortgage as a standalone agreement constituting the 2014 Loan Agreement and the mortgage must, in my view, be pleaded but this has never been pleaded and not put in issue, although Just Conduct’s pleading at §22 of the Amended Statement of Claim makes it clear that Just Conduct’s case about the Further Mortgage is that the Further Mortgage was to extend the term of repayment of the loan already granted and to charge the Properties for the repayment of the loan;

(2)  in any event, such contention is completely contradicted by the recitals and the terms of the Further Mortgage; and

(3)  such contention was not even put to the Parents for their comment.

85.  Mr Poon also submits that the Further Mortgage could be regarded as a collateral agreement or a variation of the 2014 Loan Agreement and the First Mortgage. All these are not pleaded and China Rise is not permitted to run these points. In any event, similarly, such case is completely contradicted by the recitals and the terms of the Further Mortgage and not put to the Parents for their comment.

XIV.  WHETHER THE PARENTS AS DIRECTORS OF JUST CONDUCT HAVE ACTUAL OR OSTENSIBLE AUTHORITY TO ENTER INTO THE FURTHER MORTGAGE

86.  Since ostensible authority is not pleaded, China Rise is not permitted to run this point: see §49 above.

87.  As regards actual authority, the Parents did not have actual authority because there was no proper board resolution passed to confer upon them the authority, and in any event, they did not understand the Further Mortgage in the non est factum sense.

XV.  WHETHER CHERMAINE LI, FATHER, MOTHER AND/OR OTHER KNOWN PERSONS COMMITTED FRAUD AGAINST THE 1^ST DEFENDANT

88.  In the Counterclaim (not settled by Mr Poon), China Rise pleads no particulars of the conspiracy or fraud. There is also no such evidence. China Rise fails to establish with particulars and cogent evidence their such serious allegation.

XVI.  WHETHER TANG & ASSOCIATES, WONG YUEN WAH, CHERMAINE LI AND/OR HENRY TANG CONSPIRED TO INJURE CHINA RISE BY UNLAWFUL MEANS OR DISHONESTY

89.  In the Counterclaim, China Rise pleads no particulars of the conspiracy or dishonesty. There is also no such evidence. China Rise fails to establish with particulars and cogent evidence their such serious allegation.

XVII.  UNJUST ENRICHMENT?

90.  In the Counterclaim, China Rise pleads at §51 of the Counterclaim that Tang & Associates, Wong Yuen Wah, Chermaine Li and Henry Tang were enriched with the value of HK$30,000,000 under “(i) a mistake on the part of China Rise (i.e. dishonestly and/or fraudulently led to be mistaken that the respective agent(s) were authorised) and/or there was (ii) a total failure of consideration”.

91.  Again, there is no particular of the alleged dishonesty and fraud. It is also not clear how each of them misled China Rise to believe that Chermaine Li or the Parents were authorised. While there seem to be the case that China Rise was somehow misled, on such pleading, I have difficulty in pining down the responsible persons on proper causes of action.

XVIII.  RELIEF

92.  In the circumstances, as between Just Conduct and China Rise as well as all the other Defendants (except the 2^nd Defendant against whose claim has been discontinued), I make the following order:-

(1)  A Declaration that each of the 2014 Board Minutes, the 2014 Loan Agreement, the First Mortgage, the 2016 Board Minutes and the Further Mortgage were void ab initio; and

(2)  An Order that the First Mortgage and the Further Mortgage shall be vacated from the Land Registry.

93.  I make a costs order nisi that China Rise shall pay Just Conduct costs of the action (including all costs reserved), to be taxed if not agreed. In respect of the main claim, I also make a costs order nisi that there shall be no order as to costs as between Just Conduct and the other Defendants.

94.  For China Rise’s Counterclaim, since it has failed to establish any cause of action against Wong Yuen Wah, Chermaine Li and Henry Tang, and since the claim against Tang & Associates has been discontinued (as the firm has ceased), I dismiss the Counterclaim. I make a costs order nisi that there shall be no order as to costs in respect of the Counterclaim.

95.  Lastly, I thank Ms Choy (for Just Conduct) and Mr Poon (for China Rise) for their assistance.