DAH SING BANK, LTD v. SING HAI HANDBAGS MANUFACTORY LTD AND OTHERS

CACV 157/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 157 OF 2007

(ON APPEAL FROM HCMP NO. 1250 OF 2003)

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J U D G M E N T

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Hon Rogers VP:

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

Hon Le Pichon JA:

2.  This is an appeal by the fifth and sixth defendants from a judgment of Deputy High Court Judge Carlson of 29 March 2007 made in Order 88 proceedings brought by the plaintiff bank to enforce certain mortgages.  At the conclusion of the hearing judgment was reserved which we now give.

Background

3.  The bank brought these proceedings against six defendants.  The central figure was the third defendant (“the husband”) who is the husband of the sixth defendant (“the wife”) and the brother-in-law of the fifth defendant (“the brother-in-law”).  The fourth defendant is the mother-in-law of the husband but is not a party to this appeal, having succeeded in defending the plaintiff’s claim below.

4.  From about 1977, the husband conducted a handbag business through the second defendant, a sole proprietorship.  The first defendant was incorporated in 1987 to take over much of that business.  Default judgments have been obtained against the first, second and third defendants who did not appear to defend the proceedings.

5.  The wife met the husband in 1977 when she went to work for him.  They married in 1979.  The first of three childen was born in 1981.  In 1984, the production facility was relocated to the Mainland and the wife ceased to be involved in the business and devoted her time to caring for the family.  In January 1987, the husband purchased a flat in the wife’s sole name in Grampian Road together with a car parking space for $650,000 (collectively “the Grampian Road property”).  On the same day, the wife executed a legal charge in favour of another bank over that property to secure the unlimited liability of the second defendant and for all monies due under general banking facilities granted by that bank.  That legal charge was discharged in November 1997 and is not the subject-matter of these proceedings.

6.  The brother-in-law began working for the husband in March 1987, being responsible for the Hong Kong warehouse until the business failed in 2002.  It is common ground that the arrangement was much to his advantage in that he was earning considerably more than in his previous employments.

7.  In 1991, the family emigrated to Canada with the husband making frequent trips back to Hong Kong and the Mainland to look after the business.  In August 1997, when the wife was in Hong Kong for the summer, at the husband’s request, she executed a general power of attorney that had been prepared by a firm of solicitors in his favour.

8.  The properties affected by this appeal are the Grampian Road property and a flat inYik Kwong Building registered in the joint names of the mother-in-law and brother-in-law (“the Yik Kwong property”).

9.  The plaintiff had two mortgages over the Grampian Road property.  The first is a mortgage dated 18 February 1998 (“the 1998 mortgage”) with the first defendant as principal and the wife as mortgagor, being an all monies charge to secure repayment to the plaintiff of general banking facilities granted by the plaintiff to the first defendant.  It was executed by the husband on the wife’s behalf under the power of attorney.  The other is a second mortgage dated 10 May 2000 in similar terms except that the principal was the second defendant and the wife executed it herself as mortgagor.

10.  The Yik Kwong property which was in the joint names of the brother-in-law and his mother were mortgaged by them to the bank in May 2001 to secure repayment of general banking facilities granted by the plaintiff to the first and second defendants.

11.  The bank sought to enforce these mortgages but the proceedings were defended on several grounds: (1) undue influence by the husband; (2) misrepresentations by the husband; and (3) unconscionable conduct i.e. the failure of the staff of the bank’s solicitors to adequately explain the terms of the mortgages and their failure to explain with sufficient clarity that the mortgagors could seek independent legal advice before executing the mortgages.

12.  The general tenor of the bank’s evidence was that the staff of the firm of solicitors acting for bank had explained to the prospective mortgagors what it was that they were letting themselves in for: that it was an unlimited liability, payable on demand and if they wished to they could take independent advice.  Against that backdrop, the judge went on to assess the evidence of the wife, the brother-in-law and the mother-in-law.  He began (at § 75) with a general appraisal of that family’s history and circumstances:

“… It is true of course that [the husband] was the person who everybody looked to for their financial well-being.  The wife had not worked since 1984 and so in their immediate family unit he was the sole breadwinner.  For the brother-in-law, he provided him with his employment — he was his employer, albeit also his brother-in-law.  The family ties were long-standing and close.  For the mother-in-law, I expect she looked to the husband and the wife as a source of money if she needed it, as she did to the brother-in-law and her other children in the traditional way that retired parents look to their children to keep them in their old age.  The other way to view this is that the husband’s business was very much a family business.  His own brother was his business partner, he employed another brother and the brother-in-law.  They were all in it together.  Whilst I have been told that at one point the business employed up to 800 people on the Mainland, the husband was no sophisticated businessman.  Whilst not wishing to appear patronising, these are working class people, with everybody joining in to do their bit working in the business, as the wife had done in a substantial way in the early years until she pulled back in 1984 and concentrated on the family.”

13.  He then posed the question he had to consider (at § 77):

“The real question is whether the husband had achieved such dominance or ascendancy over them, so that they really left it all to him.  Whether as a result they did indeed repose trust and confidence in him of the type which the law requires?”

14.  As to the wife’s evidence, he found that she was not a truthful witness and rejected her evidence that the effect of the second mortgage which she executed had not been explained to her at the time.  On the question whether undue influence existed as between the wife and the husband, the judge concluded that there was none, observing (at § 81) that:

“… what the husband was doing was in everybody's interest.  The family as a whole –their’s and the wife’s.  If the business remained afloat they all remained afloat.  These transactions were in her interest as much as they were in the husband’s.  In such circumstances her case on undue influence must go.”

Then, in case that conclusion is held to have been wrong and on the supposition that this had been a Class 2B case of presumed influence, his finding would have been the following:

“The fact is that this lady was perfectly clear that the company needed money to borrow and she was content to turn up at the solicitors’ offices to provide the mortgages that would have secured those funds.”

He rejected the wife’s case on undue influence.

15.  The judge found the brother-in-law’s situation identical to the wife’s:

“83.      … He was very much part of this family business venture.  A well-paid employee, but more than just an employee.  This was the family’s livelihood and although nobody suggests that he was happy to give the security that he did he realised that this was necessary to secure the family business; future and with it his employment.”

The judge went on to hold that the brother-in-law had not made out a case of undue influence and, in any event, given the interview process, his consent was voluntary and fully informed.

16.  As to the mother-in-law, she succeeded in discharging the burden of showing undue influence.  Although the judge also rejected her account of what was said in the interviews, that was outweighed by other considerations.  She was 72 years old at the time and illiterate.

“85.      … she had to face her son-in-law and her two children who were in effect saying to her, it is alright, do it — let him have the deed … Her son-in-law (the husband) and her daughter were the two people that she loved - they were good to her and she trusted them.  She was widowed and her husband was not there to help and advice her.  This is a clear case of undue influence.”

17.  The judge ordered the wife to deliver vacant possession of the Grampian Road property to the plaintiff, ordered the brother-in-law to deliver vacant possession of the Yik Kwong property to the plaintiff and entered judgment against them in the sum of just over $3.5 million together with interest and costs.

This appeal

18.  This appeal has been brought by the wife and the brother-in-law.

The brother-in-law

19.  Mr Mak began the appeal with that of the brother-in-law.  He submitted that as the judge had found undue influence in the case of the mother-in-law, he ought also to have found undue influence in the case of the brother-in-law.  He submitted the brother-in-law had simply followed the directions of his mother “because the [brother-in-law] believed his half share belonged to his mother”.  The court was referred to the transcript (at 145A-C) where his evidence was that the property was “my mother’s”.  This appeared to suggest that the fifth defendant (the brother-in-law) had no beneficial interest in the Yik Kwong property which was not the case run below.

20.  After a short adjournment to enable Mr Mak to take instructions as to whether he wished to run a new case on the basis that the fifth defendant was trustee for his mother with all its ramifications, the court was informed that the appeal would not be run on that basis.

21.  What was left of the brother-in-law’s case was simply that he had followed the directions of his mother, the fourth defendant.  But the fact that the fifth defendant was filial and would do his mother’s bidding in the sense of going along with her decision to agree to the husband's request that the Yik Kwong property be mortgaged to assist the business is simply irrelevant to the question whether or not the brother-in-law was under the undue influence of the husband.  It could conceivably have been of some relevance had the issue been one of the fifth defendant’s ascendancy over her son.  Since that is not the issue here, then, short of overturning the very clear findings of fact made by the judge (see § 15 above) as to which, as far as I can see, there is no challenge, there would not appear to be any basis on which the fourth defendant could possibly succeed on this appeal.

The wife

22.  It is common ground that the wife did not know about the 1998 mortgage of the Grampian Road property at the time it was executed because the husband had done so on her behalf by exercising the power of attorney granted by her in August 1997. 

23.  The wife’s stance was that she had executed the power of attorney for the limited purpose of enabling the husband to rent out the Grampian Road property because by then she and her family had settled in Canada.  She knew nothing about the 1998 mortgage.  But as recorded in § 60 of the judgment, her statement recognised that the power of attorney:

“authorised (husband) to handle the business and properties in Hong Kong.  But … the (solicitors’ staff) never told me that the [power of attorney] could authorise (him) to convey or mortgage properties.”

That would suggest that she knew that the powers granted were far broader than for renting out the property.  Nevertheless, the wife maintained that in her mind that was its sole purpose.

24.  Her evidence at trial was that the husband’s solicitors who had prepared the document and who had arranged for her signature had actively misled her as to its extent and purport.  That evidence the judge specifically rejected.  At § 80 of the judgment, the judge said this:

“… I simply do not accept this at all.  She has decided not to tell the truth on this in order to get out of the use to which the POA was put to by the husband in executing the 2^nd Mortgage on her behalf in 1998.  I do not for one moment believe that the solicitors in August 1997 would have stooped so low as to mislead her when all they had to do was to prepare and explain this commonplace document.”

It was suggested that the judge was unduly harsh.  A possible scenario posited by Mr Mak was that the solicitors who had prepared the power of attorney were simply negligent by not having given the wife a proper explanation.

25.  It is not disputed that at the time the 1998 mortgage was executed, the bank’s solicitors did not know if the wife was aware of the transaction or the amount of the loan or had agreed to the mortgage; nor did they try to contact her.  They simply acted on the power of attorney which was a professionally drawn document.  The power conferred on the attorney was cast in very wide terms as can be seen from the following provision:

“16. (a) To mortgage charge or pledge the said property or any part thereof to secure loans advances or facilities to be granted to any party including the Attorney for any purpose and in any manner, so that no mortgagee shall be concerned to see whether the money is wanted or whether more than is wanted is raised or as to the application thereof.”

26.  Mr Mak made the point that in fact the 1998 mortgage had been executed by the husband in two separate capacities: first, as director for the first defendant as principal debtor and, second, as attorney for the wife as mortgagor.  That fact, it was submitted, meant that the bank was put on notice of an apparent breach of fiduciary duties by the husband as donee of the power, entering into the mortgage for the benefit of his own company for general banking facilities.  In support of his proposition, Mr Mak cited the following passage from the judgment of Rogers VP in Hongkong Chinese Bank Ltd & Another v On Link Investments Ltd & Others [2003] 3 HKLRD 491:

“16.      … It was at once apparent that the donee of the power, the second defendant, was a shareholder and the director of the company whose borrowings were being secured by the mortgage.”

27.  In that paragraph of his judgment, Rogers VP was dealing with the facts of that case that supported the conclusion that the plaintiff had notice that the power of attorney was being used by the donee in breach of fiduciary duty.  The passage quoted constituted but one of several matters that led to the conclusion in that case.  Fairly read, it was not a statement or proposition of law of general application which Mr Mak (erroneously, in my view,) perceived it to be.

28.  As I understand it, the thrust of Mr Mak’s submissions comes to this: the judge’s approach regarding the power of attorney was flawed.  As this was one of the reasons on which his evaluation of the wife’s credibility was based, that evaluation itself would be undermined and so vitiate the findings of fact dependent on that evaluation.

29.  As regards the power of attorney, Mr Mak’s submission is far reaching.  It is tantamount to saying that solicitors may not accept or act on any power of attorney at face value where the donee of the power stands to benefit from the transaction in a different capacity (in the present case, as a director of the principal debtor).  And in such a case, a solicitor must take necessary steps to ensure that the grantor of power understood the nature of the power granted.  Other than Hongkong Chinese Bank (which, as earlier noted, is not an authority for the proposition Mr Mak seeks to advance) no other authority was cited.

30.  In the present case, the power of attorney was professionally drawn.  There was nothing untoward about the instrument which, after all, is fairly commonplace.  Moreover, the solicitors would have known from the land search that the wife had herself executed a mortgage when the property was put into her name to secure general banking facilities for the second defendant.  I accept that different consideration may apply if the solicitors had actual knowledge of ‘untoward’ or ‘unusual’ circumstances concerning the power of attorney.  But there were no special circumstances that should have put the solicitors on notice as to any irregularity or breach of duty such as would have necessitated inquiries to be made of the wife.  The notion that solicitors have to go behind every power of attorney in order to satisfy themselves that all is well would destroy the very purpose of powers of attorney.

31.  In so far as Mr Mak sought to challenge the judge’s finding of the wife’s credibility on the basis that his approach regarding the power of attorney was flawed, that challenge is misconceived and must fail.  The necessary consequence is that the wife remains bound by the 1998 mortgage.

32.  Turning to the second mortgage executed in 1990, the challenge was essentially predicated on his succeeding on the power of attorney point, thus undermining the judge’s conclusion on the wife’s credibility.  There is no independent challenge to the clear findings of fact made by the judge.  Since Mr Mak has not been successful on the power of attorney point, I can see no basis for challenging the validity of the second mortgage.

Conclusion

33.  I would dismiss this appeal.  I would also propose that there be an order nisi of costs in favour of the bank and the fifth and sixth defendants’ own costs be taxed in accordance with the Legal Aid Regulations.

Hon Sakhrani J:

34.  I agree.

Hon Rogers VP:

35.  There will accordingly be an order in terms of paragraph 33.