BANK OF CHINA (HONG KONG) LTD v. CHEUNG CHUN CHUN AND ANOTHER

HCMP258/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO.258 OF 2003

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J U D G M E N T

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The parties

1. The plaintiff is, with effect from 1 October 2001, the successor corporation to the Kwangtung Provincial Bank (“KPB”).

2. The 1^st defendant is the father of the 2^nd defendant and husband of Madam Chan Po Ping (“Madam Chan”).

3. The 1^st defendant and Madam Chan are respectively the registered owner of Workshop Unit 14, 6/F, Block A, Hoi Luen Industrial Centre, No.55 Hoi Yuen Road, Kowloon (“the 1^st Property”) and Flat H1, 4/F, Block H with Car Park No.22, Lower Ground Floor, Phoenix Court, Nos.5-7 Fessenden Road, Kowloon (“the 2^nd Property”).

4. The 1^st defendant founded one Kwong Fung Company (“Kwong Fung”) as sole proprietor in about 1976, engaging in the business of manufacturing plastic bags.  In about May 1996, Kwong Fung became registered under the 2^nd defendant’s name as sole proprietor.  But the 1^st defendant remained a signatory of Kwong Fung’s bank account with KPB.  The other signatory was the 2^nd defendant himself. 

Previous legal charges

5. Between 1986 and 1992, banking facilities had been granted by the Bank of Communications (“BOCOM”) to Kwong Fung upon the security of five legal charges.  Their particulars are as follows :

Date	Security	Mortgagee	Extent of loan
18/8/86	1st Property	1st defendant	HK$580,000
18/1/88	1st Property	1st defendant	All monies
30/12/89	2nd Property	2nd defendant	All monies
25/6/90	1st Property	1st defendant	All monies
29/4/92	2nd Property	2nd defendant	All monies

The Legal Charge

6. In about May or June 1996, an application was made to KPB to “re-finance” the banking facilities of Kwong Tung, that is, “switching” the banking facilities from BOCOM to KPB.  In the end, KPB granted to Kwong Fung various facilities totaling HK$4.5 million and Trust Receipt with a limit of HK$1 million.  The facilities were secured by :

(1)	A legal charge dated 1 August 1996 (“the Legal Charge”) executed by the 1st defendant and Madam Chan, charging the 1st and 2nd Property in favour of KPB; and
(2)	A personal guarantee dated 1 August 1996 (“the Guarantee”) executed by the 1st defendant.

7. The Legal Charge is an all monies mortgage.  The defendants and Madam Chan as mortgagors and Kwong Fung as the requesting party jointly and severally covenanted to repay on demand all sums due to KPB from Kwong Fung.

8. Out of the HK$4.5 million facilities granted by KPB, a loan of HK$1.5 million was applied to discharge the then outstanding loan of HK$2.8 million due to BOCOM by Kwong Fung.  The shortfall of HK1.3 million was provided by Kwong Fung.

Subsequent events

9. By a facility letter dated 21 January 1997, the facilities granted to Kwong Fung were amended.  This facility letter referred to the Legal Charge and the Guarantee as security for the amended facilities.  The 1^st defendant and Madam Chan signed on a letter to confirm, among other things, that the validity of these security documents shall be in full force.  The facilities were further amended in April and December 2000.

10. By a partial release and discharge dated 19 December 2000 (“the Partial Release”), the 2^nd Property was released.  The 1^st defendant signed on the Partial Release as confirmor.  Clause 3 of the Partial Release provided that nothing contained therein shall prejudicially affect the security of KPB upon the 1^st Property, the remaining subject to the Legal Charge, for all monies owing thereunder.

11. By facilities letter dated 3 May 2001, the facilities granted to Kwong Fung were yet further amended.  The 1^st defendant signed on this facilities letter as mortgagor of the 1^st Property to confirm his agreement to and acceptance of the terms and conditions therein.

Commencement of proceedings

12. Kwong Fung subsequently defaulted in repayment of the facilities.  By letter of demand dated 9 January 2003, the plaintiff demanded Kwong Fung for repayment of the outstanding loan then in the region of HK$1.8 million.  No repayment was however made.

13. On 18 January 2003, the plaintiff commenced the present action under Order 88, Rules of the High Court.  The 2^nd defendant had already been adjudicated bankrupt earlier on 6 January 2003.  The proceedings against him were therefore discontinued in about July 2003.

14. On 21 July 2003, the action was ordered to continue as if it had been begun by writ.  Relying on the Legal Charge, the plaintiff sought against the 1^st defendant monetary judgment of some HK$1.9 million and vacant possession of the 1^st Property.  (The plaintiff did not seek to rely on the Guarantee.)

Defence and counterclaim

15. In the defence and counterclaim, the 1^st defendant raised the defence of undue influence.  He alleged that the 2^nd defendant, in order to induce him to sign the Legal Charge, had represented to him that the signing of the Legal Charge was a mere formality and part of the standard procedure; that the signing of the Legal Charge would not have serious or any consequence adverse to him; and that the 2^nd defendant was in a good financial position and would be able to make punctual monthly payments, whereas he was in fact in serious financial difficulties and would not be able to do so.  He had habitually reposed trust and confidence in the 2^nd defendant and was therefore subject to his undue influence.  He complained that the Legal Charge was manifestly disadvantageous to him and that KPB had actual or constructive knowledge of the same.  He sought to set aside the Legal Charge.

Counterclaim to counterclaim

16. The plaintiff contended in the counterclaim to counterclaim that if the Legal Charge were liable to be set aside on the ground of undue influence, the 1st defendant is still liable to make counter-restitution, by way of equitable compensation and/or by the plaintiff’s subrogation to BOCOM’s rights by repaying the plaintiff the loan of HK$1.5 million referred to in paragraph 8 above.

The central issue

17. The central issue arising from the pleadings is : whether the Legal Charge is liable to be set aside on undue influence as alleged.

The law

18. For present purposes, it is sufficient to just state the applicable law thus.  As between a complainant who alleges that he entered into the impugned transaction with a creditor under the undue influence exerted on him by a dominant party, that transaction is liable to be set aside if :

(1) the dominant party was an agent of the creditor; or

(2) the creditor had actual or constructive notice.

19. The complainant must first prove undue influence.  If he fails, it is pointless to go any further to consider the extent the creditor is affected : Royal Bank of Scotland v. Estridge (No.2) [2001] 3 WLR 1021 at para.101, Bank of China (Hong Kong) Ltd v. Wong King Sing [2002] 1 HKLRD 358 at p.375F-J, Bank of China (Hong Kong) Ltd v. Wong Yuk Ping & Another [2003] 1 HKLRD 1, para.58 at p.20.

20. Here, the father and son relationship between the 1^st and 2^nd defendants, of itself, does not give rise to any presumption of undue influence : see Chitty on Contracts, 29^th edn, Vol.1, para.7-063 at p.546.  The 1^st defendant therefore bears the burden to prove by evidence the undue influence as alleged.

Execution of the Legal Charge

21. Before I proceed to examine the 1^st defendant’s evidence, it is convenient to first consider how the Legal Charge was executed.  For it is the 1^st defendant’s major complaint both in his oral testimony and final submissions.

22. The execution of the Legal Charge was attended by Mr David Ng Kam Cheong (“Mr Ng”), then senior conveyancing clerk of Messrs Ford, Kwan & Co.  In his witness statement filed on 4 July 2004, which he adopted as evidence-in-chief, Mr Ng described the execution thus :  

“	6.	On 31st July 1996, Madam Chan and the 1st and 2nd Defendants went to the head office of Ford Kwan.  I made a photocopy of their identity cards and then told them the instructions given by KPB to Ford Kwan and the results of our investigation of the title deeds of Property 1 and Property 2.  I also confirmed with them the amount required to redeem the BOC Charges and the amount of legal fees of Ford Kwan for this transaction.  Thereafter, I explained to them that under the Charge, Madam Chan as the mortgagor of the property situated at Flat H1, 4th Floor, No.7 Fessenden Road, Kowloon (Block H of Phoenix Court) and Car Park No.22, Lower Ground Floor, Nos.5-7 Fessenden Road, Kowloon (also known as Blocks G and H of Phoenix Court) and the 1st Defendant as the mortgagor of the property situated at Workshop Unit 14, 6th Floor, Block A, Hoi Luen Industrial Centre, No.55 Hoi Yuen Road, Kowloon had charged Property 1 and Property 2 in favour of KPB as security for the banking facilities to KFC to such extent as KPB may from time to time determine.  Then, I confirmed the ownership details of KFC with them.  After that, I explained to them that the Charge was an ‘all moneys’ mortgage, i.e. the Charge would extend to cover all different types of facilities granted by KPB to KFC, and that it was to an ‘unlimited extent’, i.e. there was no cap for the amounts secured.  I further explained to them that under the Charge, Madam Chan, the 1st Defendant and KFC had jointly and severally guaranteed to pay to KPB all sums of money due and owing to KPB in respect of the banking facilities granted to KFC.  I also explained to them the repayment terms of the instalment loan granted by KPB to KFC in the sum of HK$1,500,000.00 (‘Loan’).
	7.	I went on to explain to Madam Chan and the 1st and 2nd Defendants that KPB had a right to release any of the properties charged under the Charge without obtaining the consent of the mortgagor of the other property still being charged under the Charge and the obligations on their part to punctually discharge all rates and management fees of Property 1 and Property 2.
	8.	Before I requested Madam Chan and the 1st and 2nd Defendants to sign on the Charge, I asked them whether they understood and satisfied with the terms of the Charge.  They signed on the Charge after they indicated to me that they understood and satisfied with its terms.
	9.	As the incident took place on 31st July 1996, I cannot remember the detailed circumstances under which the Charge was executed.  But I am sure that I explained the terms of the Charge to Madam Chan and the 1st and 2nd Defendants as stated above because it is my invariable practice to explain the terms of the charge to the borrower and the mortgagor in such manner.”

23. In his oral testimony, Mr Ng went on to explain that at the time, other than the Legal Charge, the 1^st defendant had also signed on the Guarantee.  The 1^st and 2^nd defendants and Madam Chan also provided their specimen signatures in a letter issued by Messrs Ford, Kwan & Co. dated 1 August 1996 to KPB.  He confirmed that he had explained these additional documents to them before they were executed.  Incidentally, Mr Ng was also the clerk who attended the execution of the Partial Release by the 1^st defendant.  Mr Ng testified that he had explained the Partial Release to the 1^st defendant before execution.  He said it was necessary to obtain the 1^st defendant’s consent and signature of the Partial Release because under Clause 3 thereof, the 1^st defendant would remain responsible solely under the Legal Charge.

24. Under cross-examination, it was put to Mr Ng that he did not explain the contents of any of the security documents to the 1^st defendant, that he only told the 1^st defendant that it was a mere formality and that he asked the 1^st defendant to sign at various places.  These Mr Ng all denied.

25. I have carefully considered Mr Ng’s evidence and the way he testified.  I am of the view that he has not been shaken a bit under cross-examination.  I find him a truthful and reliable witness and accept his evidence accordingly.

Rejecting the 1^st defendant’s version

26. I now turn to the 1^st defendant’s evidence.  In his witness statement filed on 31 December 2003, which he adopted as evidence in chief at trial, the 1^st defendant had this to say :

“	2.	I was born in the Mainland China in 1940 and brought up in a traditional Chinese family therein.
	3.	The 2nd Defendant (‘Cheuk Fai’) is my eldest son.  He was born on 26th August 1971.  His other siblings are Cheung Cheuk Kuen (張焯權) born on 23rd November 1972, Cheung Cheuk Ho (張焯豪) born on 2nd November 1975, Cheung Cheuk Wai (張焯偉)born on 22nd March 1978 and Cheung Ka Yan (張家欣) born on 1st February 1980.
	4.	Cheuk Fai and I have all along been living together at various places.  Even now we are still living together at Flat 1716, 17th Floor, On Lam House, Tsui Lam Estate, Tsueng Kwan O, New Territories, Hong Kong.
	5.	(a)	In about 1988, I planned to send Cheuk Fai to Australia for further studies.  However, in October 1989 my younger son Cheung Cheuk Ho (張焯豪) suddenly contracted an illness and was in coma for more than 4 months.
		(b)	As I spent a lot of time in hospital to take care of Cheuk Ho, I did not have enough time to manage my business.  As I spent a lot of money on medical expenses, I could not afford to send Cheuk Fai to Australia for further studies (he repeated Form 5 at an evening school) and assisted me in my business.
		(c)	Cheuk Fa worked hard throughout the years.  As my health was deteriorating and I could not spend so much time on my business, I gradually delegated my works to Cheuk Fai.
		(d)	Since about 1993, Cheuk Fai had in effect the sole breadwinner of the family.
	6.	In about 1996, Cheuk Fai asked me to close down my business [Kwong Fung] and transferred all the business to a new company with the same name registered in his name.  Since then I completely retired from my work.  I have never participated in the new business solely run by Cheuk Fai.  I had at all time placed complete faith, trust and confidence in Cheuk Fai.
	7.	In mid 1996, Cheuk Fai told me that an old secondary school classmate of his joined Kwangtung Provincial Bank.  Cheuk Fai advised me to use the banking facilities of Kwangtung Provincial Bank.  Cheuk Fai made arrangements for my wife Chan Po Ping and me to sign some documents so that [the 1st and 2nd Property] would be charged to Kwangtung Provincial Bank to secure banking facilities.
	8.	Cheuk Fai made certain misrepresentations to me in persuading me to sign the Mortgage.
		(a)	Cheuk Fai told me that my signature of the Mortgage was a mere formality required by the Plaintiff as part of its standard procedures.
		(b)	Cheuk Fai told me that the signing of the Mortgage by me would not have serious or any consequences adverse to my interest.
		(c)	Cheuk Fai told me that he was in a good financial position and would be able to punctually make the monthly repayments whereas in reality he was in serious financial difficulties and would not be able to punctually make the monthly repayments.
	9.	On or about 1st August 1996, I, together with my wife and Cheuk Fai, attended the office of the Plaintiff’s solicitors Messrs. Ford, Kwan & Co.  A clerk explained that I had, as a mere formality, to sign a document for Cheuk Fai to obtain a loan from Plaintiff.  He showed a document and requested me to sign my name on the document.
	10.	I signed the document (which is in the English language) in the presence of Cheuk Fai.  No one explained to me the nature or effect of the document or advised me to seek independent legal advice.  Since then and prior to the matters giving rise to these proceedings, no one had ever discussed with me about the document.  I signed the document without considering the consequences to me of so doing.  I signed the document solely because of the trust I placed in Cheuk Fai.
	11.	The document so signed was in fact a Mortgage in favour of the Plaintiff to guarantee the debt owed by Cheuk Fai to the Plaintiff.
	12.	The Plaintiff knew that I was the father of Cheuk Fai.  The Plaintiff knew that the Mortgage was manifestly to my disadvantage.  The Plaintiff was aware of the risk that I might have been subject to the misrepresentation and undue influence of Cheuk Fai.”

27. The 1^st defendant’s evidence does not stand up to a closer scrutiny.

28. First, I have considerable doubt if the 1^st defendant retired completely from Kwong Fung’s business since 1996 and left it to the 2^nd defendant as alleged.  According to the credit report prepared by an officer of KPB at the time of Kwong Fung’s application (“the Credit Report”), the 2^nd defendant was registered as Kwong Fung’s sole proprietor in 1996 because, among other things, the 1^st defendant had to spent most of his time in the Mainland and did not have the spare capacity to deal with its business in Hong Kong.  Such information in all probabilities could only have come from either of the defendants.  And the 1^st defendant has not challenged its accuracy.  Further, his story of retirement did not sit well with his oral evidence that in 1996, he used to spend about 10 days per month in Kwong Fung’s factory (run in cooperation with some other entity); and (2) the fact that he remained as one of Kwong Fung’s signatories for its bank account.

29. Second, I find his allegation that he reposed trust and confidence in the 2^nd defendant hollow.  By 1996, the 1^st defendant had about 20 years of experience in running Kwong Fung’s business, which far exceeded the 6 years of experience that the 2^nd defendant had.  More importantly, on the evidence before me, the operations of Kwong Fung had all along been financed by facilities raised by way of security upon the 1^st and 2^nd Property.  In other words, Kwong Fung was in substance supported by the 1^st defendant and Madam Chan financially.  Would the 1^st defendant in such circumstances repose trust and confidence in his son as alleged?  I think not.

30. Third, there is no substance in his allegation that the 2^nd defendant had made the misrepresentations to him.  To recap, there were three misrepresentations :

(a)	His signature to the Legal Charge was a mere formality.
(b)	His signing of the Legal Charge would not have serious or any consequence adverse to his interest.
(c)	The 2nd defendant was in good financial position when in fact it was not the case.

31. The 1^st defendant is no stranger in providing all monies mortgages on the strength of the 1^st Property in order to finance Kwong Fung’s operations.  See paragraph 5 above.  He must have known what an all monies mortgage is and its effect.  It cannot be a mere formality or standard procedure as alleged.  In fact, he confirmed in his oral testimony that he knew he was signing a mortgage and that by signing it, he attracted certain legal responsibility.  Thus his evidence on the 1^st and 2^nd representations cannot be true.  As to the 3^rd representation, it is contradicted by the Credit Report.  Indeed, as rightly pointed out by Mr Ng, counsel appearing for the plaintiff, how would KPB have provided the facilities if Kwong Fung was not financially sound?

32. Fourth, the 1^st defendant’s case is inconsistent with his conduct subsequent to the execution of the Legal Charge.  If his story were true, he would not have agreed to the various amendments of the facilities and the Partial Release.  See paragraphs 9 to 11 above.

33. Finally, the 1^st defendant said he knew that if Kwong Fung defaulted, the plaintiff would be entitled to recover vacant possession of the 1^st Property.  But he complained that neither the 2^nd defendant nor the plaintiff had explained to him that the Legal Charge was an all monies mortgage.  In light of my acceptance of Mr Ng’s evidence on the execution of the Legal Charge, I reject this complaint.  I find that the defendant knew that he was providing the 1^st Property as security under the Legal Charge for the banking facilities to be granted by KPB to Kwong Fung and he was fully aware of the extent of his liability under the Legal Charge before execution.

34. Having considered carefully his evidence, I am firmly of the view that the 1^st defendant is a poor and unreliable witness.  I have no hesitation to reject his version of the events.

No misrepresentation or undue influence

35. For the above reasons, I find that the 1^st defendant did not execute the Legal Charge under any misrepresentation or undue influence as alleged or at all.  His case fails in limine.  It is therefore not necessary to go on to consider the question of notice, actual or constructive, on the part of KPB or indeed any further issues arising from the pleadings.

Outstanding indebtedness

36. According to Mr Ho Yat San, officer of the plaintiff’s Retail NPL Division of Special Assets management Department, as at 19 May 2004, the outstanding indebtedness due from the defendants were HK$2,128,401.50, comprising of :

Temporary Overdraft Facility
Outstanding Principal	HK$897.88
Accrued Interest	HK$186.71
Instalment Loan
Outstanding Principal	HK$1,770,202.01
Accrued Interest	HK$349,946.90
Late Payment Charge	HK$4,000.00
Insurance Premium for the Property	HK$3,168.00

37. Mr Ho’s evidence is not challenged by the 1^st defendant.  I accordingly accept it in full.

Conclusion

38. I will therefore enter judgment in favour of the plaintiff against the 1^st defendant for :

(1)	the sum of HK$1,900,979.47;
(2)	interest on the sum of HK$897.88 at the rate of 15% per annum (i.e. 10% per annual plus prime rate), subject to fluctuation, from 21 March 2003 to the date of actual payment in full;
(3)	interest on the sum of HK$1,770,202.01 at the rate of 11% per annum (i.e. 6% per annual plus prime rate), subject to fluctuation, from 21 March 2003 to the date of actual payment in full; and
(4)	vacant possession of the 1st Property, to be delivered by the 1st defendant within 28 days from the handing down of this judgment.

39. I will further dismiss the 1^st defendant’s counterclaim and make no order on the plaintiff’s counterclaim to counterclaim.

40. I see no reason why costs should not follow the event.  Thus there will be an order nisi that the plaintiff shall have the costs of the action, including any costs reserved, to be taxed if not agreed.