BANK OF CHINA (HONG KONG) LTD v. WONG KAM HO AND OTHERS

HCMP 3324/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 3324 OF 2002

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J U D G M E N T

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I. INTRODUCTION

1.  In the trial of this action, the plaintiff, which I shall call the bank, seeks to recover from the 4^th defendant, whom I shall call Lee or the wife, on the basis of a deed of legal charge, the principal sum of $2,558,709.62 together with interest accrued and, failing payment of these sums, possession of two residential units, namely, Flats 9 and 10 on the 3^rd floor of Luen Tak Apartments, 45 Smithfield Road and 34 Forbes Street (“the Property”).  The 4^th defendant counterclaims for an order that the legal charge be rescinded.  The principal issue in relation to liability is whether the legal charge is vitiated by undue influence exercised on the 4^th defendant by her husband.

II.  FACTUAL BACKGROUND

2.  The 3^rd defendant, Yeung Chun Yee (“Yeung”), and his wife, Lee See Kuen, the 4^th defendant, both came to Hong Kong from Swatow.  Lee was born in 1943 and Yeung was seven years her elder.  They were married in the Mainland some 40 years ago.  Lee came to Hong Kong in 1973. They had three children all of whom were born in Hong Kong.

3.  Yeung had carried on a business of paper products manufacture in Hong Kong as a sole proprietor trading in the name of Hip Wah Paper Products Factory (“Hip Wah”).  The factory was located at Tin Lung Factory Building in Belcher’s Street in Western District.  The factory premises were initially rented.  Yeung and Lee purchased them on 12 September 1987.

4.  In 1989, Yeung decided to end the business of Hip Wah. Out of concern for three long-standing employees, however, he allowed a similar business to be carried on under a new name, viz. Sang Hip Wah Paper Products Factory (“Sang Hip Wah”), using the same machinery and premises.  Those employees were registered as partners in that business though it appears that they regarded themselves as no more than the employees of Yeung.  Lee was also registered as a partner.

5.  Sang Hip Wah ended its business in 1996.  In May 1996, Yeung and Lee sold the factory premises at Tin Lung Factory Building for $2.5 million.

6.  In January 1997, the 1^st defendant, Wong Kam Ho (“Wong”), and one Chan Chi Fung established the 5^th defendant, Wing Fat Paper Products Manufactory Limited (“Wing Fat”), a company that operated a business in paper products with a factory situated in Shenzhen.  The 2^nd defendant, Lau Kit Yuk (“Lau”), was Wong’s wife.  Wong and Lau charged their property, namely, Flat 4 on the 12^th floor of Block G of Siu Shan Court, Tuen Mun, to the bank to secure the banking facilities granted to Wing Fat by way of letter of credit and trust receipts.

7.  It appears that in late 1997, Chan Chi Fung decided to leave Wing Fat.  Yeung had come to know Wong through the introduction of a mutual acquaintance and was invited by Wong to join the business.  Yeung agreed and so in December 1997 he became, together with Wong, the only two shareholders of Wing Fat, holding 4,000 and 6,000 shares respectively out of a total of 10,000 issued shares.  Yeung and Wong were also the only two directors of Wing Fat.

8.  At the time when he joined Wing Fat, Yeung injected funds in the amount of $1 million into the company which were used to repay existing indebtedness to Wing Fat’s bank, namely, Kincheng Banking Corporation (which had merged with other banks to become the bank).  It appears from the available banking documents that new facilities were sought by Wing Fat, and that Yeung agreed to provide another $1 million for a pledged deposit with the bank as well as a legal charge on the Property, which was the family home and owned by him and Lee as joint tenants, to secure such new credit facilities.

9.  Wing Fat’s application for further credit facilities was approved by the bank.  The facilities to be granted included $3 million by way of documentary credit and $2 million by way of trust receipts.  On 6 February 1998, the bank gave instructions to Messrs Ford Kwan & Co to prepare, among other documents, an “all monies” legal charge.

10.  In mid-March 1998, Yeung and Lee attended the offices of Messrs. Ford Kwan & Co and executed a legal charge in respect of the Property (“Legal Charge”) to the bank to secure the indebtedness of Wing Fat.  The Legal Charge contains a personal covenant by Yeung and Lee to repay, without limit, all sums of money owing to the bank on account of the facilities granted to Wing Fat.  They also signed a document which confirms that:

“(i) the extent of general banking facilities available to the said Borrower upon execution of the said Legal Charge shall be limited to Documentary Credit of HK$3,000,000.00 and Trust Receipts Within Documentary Credit HK$2,000,000.00 subject to your right to adjust the same from time to time at your sole discretion.

(ii) interest on the said bank facilities of Documentary Credit of HK$3,000,000.00 shall be calculated at Bank’s Current Rate.

(iii) interest on the said banking facilities of Trust Receipts Within Documentary Credit HK$2,000,000.00 shall be calculated at Bank’s Current Rate.

(iv) the said banking facilities or any part thereof are repayable on demand.”

11.  Wong attended the solicitors’ office at the same time and he and Yeung signed (i) a resolution in writing of the shareholders of Wing Fat that part of the loan proceeds would be utilised to enable Yeung and Lee to redeem the existing mortgage of the Property with Ka Wah Bank; and (ii) a joint and several guarantee for an unlimited amount in relation to the indebtedness of Wing Fat to the bank.

12.  In the event, it appears that Yeung and Lee had sufficient money of their own (in the sum of $287,643.60) to redeem the existing mortgage of Ka Wah Bank without using any part of the facilities extended by the bank to do so.  The facilities drawn down were therefore used, presumably, entirely for the purposes of Wing Fat.

13.  Wing Fat’s business did not prosper.  Instead, it went into financial difficulties.  In May 2002, Wing Fat defaulted in repaying its debts to the bank.  By solicitors’ letters dated 2 July 2002, the bank made demands to all five defendants in this action to make payment of all money due together with interest.

14.  No repayment having been made, on 21 August 2002, the bank commenced the present action by originating summons for payment of money due and possession of the properties charged, namely, the flat in Tuen Mun of Wong and Lau and the Property.

15.  On 5 December 2002, after hearing the solicitors for the bank and a solicitor from Messrs. Lau Chan & Ko who purported to act for all five defendants and who indicated he had no instruction to contest the bank’s claims, Registrar Chan gave judgment in favour of the bank for payment of the sums due and for delivery of vacant possession of the properties within 28 days.

16.  On 14 April 2003, bailiffs attended the Property with a view to obtaining vacant possession in execution of the judgment.  The bailiffs stated to Yeung and Lee that they were required to deliver vacant possession on 22 April 2003. 

17.  On 22 April, Yeung committed suicide.

18.  The bank recovered possession of Wong’s and Lau’s flat in Tuen Mun and sold it on 20 June 2003.  The proceeds were not sufficient to repay all the debts of Wing Fat.

19.  Lee obtained legal aid and on 10 March 2004, obtained an order from the court, by consent, setting aside the judgment against her on the basis that Messrs. Lau Chan & Ko did not in fact have authority to act for her in December 2002.  Directions were given for the proceedings to continue as if begun by writ.

20.  On 18 May 2004, Lee filed her defence and counterclaim, resisting the bank’s claim on the ground that the Legal Charge had been signed by her as a result of material non-disclosure and undue influence, and claiming an order that the Legal Charge be rescinded.

21.  There is no real dispute that the amount of the principal outstanding in respect of Wing Fat’s indebtedness, after setting off the proceeds of sale of the property of Wong and Lau, was HK$2,558,709.62.  As at 22 November 2011, the total amount of the bank’s claim including interest was HK$5,019,962.53.

III.  LEE’S DEFENCE

22.  Although the defence raised by Lee has been termed “material non-disclosure and undue influence”, the case advanced at trial is a compendious one based primarily on undue influence and I shall deal with it accordingly.

23.  In Royal Bank of Scotland plc v Etridge (No 2) [2002] 2 AC 773, at para 101, Lord Hobhouse stated that the “structured scheme for the decision of cases raising the issue of enforceability as between a lender and a wife … can be expressed by answering three questions”:

“(1) Has the wife proved what is necessary for the court to be satisfied that the transaction was affected by the undue influence of the husband? (2) Was the lender put on inquiry? (3) If so, did the lender take reasonable steps to satisfy itself that there was no undue influence? It will be appreciated that unless the first question is answered in favour of the wife neither of the later questions arise. The wife has no defence and is liable. …”

24.  I propose to analyse the present case in these three stages accordingly. 

A.  Proof of undue influence

25.  Undue influence is a doctrine of equity that enables the court to strike down a transaction where the intention to enter into it had been procured unconscionably.  This may arise where the claimant had been overborne or coerced by another person, or where a person in whom the claimant had reposed trust and confidence abused that relationship in procuring the claimant’s consent.  The forms that undue influence can take are infinitely varied and cannot be exhaustively set out, but they all result in the conclusion that the consent and intention of the claimant is so vitiated that it “ought not fairly to be treated as the expression of a person’s free will”: Etridge, supra, at para 7, per Lord Nicholls.

26.  Whether or not a transaction was brought about by the exercise of undue influence is a question of fact.  The burden of proving this fact lies with the person who asserts it, that is to say, generally, the person who claims to have been unduly influenced.  As with other matters of fact, this question can be determined by the court by reference to direct evidence, such as the oral evidence of the person complaining of undue influence that she signed the document in question as a result of being subjected to “excessive pressure, emotional blackmail or bullying”[1], or by inference from other, indirect evidence. 

27.  What facts can and should be found by inference is a question that depends on the circumstances of each case.  The question is “whether the evidence justifies the inference that, on a balance of probabilities, the impugned transaction was procured by undue influence, that is to say, by an abuse by the allegedly dominant party of the trust and confidence reposed in him by the allegedly subservient party”: Li Sau Ying v Bank of China (Hong Kong) Ltd (2004) 7 HKCFAR 579, per Lord Scott NPJ at para 34.

28.  In a case where a man is said to have unduly influenced his wife, the fact that the wife has reposed trust and confidence in the husband in relation to the management of her financial affairs, coupled with the fact that the transaction is one that calls for explanation, are normally sufficient basis, absent evidence to the contrary, to infer that the transaction was brought about by the husband’s undue influence over the wife.  In Etridge, supra, Lord Nicholls said at para 14:

“Proof that the complainant placed trust and confidence in the other party in relation to the management of the complainant’s financial affairs, coupled with a transaction which calls for explanation, will normally be sufficient, failing satisfactory evidence to the contrary, to discharge the burden of proof. On proof of these two matters the stage is set for the court to infer that, in the absence of a satisfactory explanation, the transaction can only have been procured by undue influence. In other words, proof of these two facts is prima facie evidence that the defendant abused the influence he acquired in the parties’ relationship. He preferred his own interests. He did not behave fairly to the other. So the evidential burden then shifts to him. It is for him to produce evidence to counter the inference which otherwise should be drawn.”

29.  The concept of a transaction that calls for explanation has been put in different ways, such as a transaction that is “not readily explicable by the relationship of the parties” (Etridge, supra, para 21, per Lord Nicholls), a transaction that is “not to be reasonably accounted for on the ground of friendship, relationship, charity, or other ordinary motives on which ordinary men act” (Allcard v Skinner (1887) 36 Ch D 145, 185, per Lindley LJ; Etridge, supra, paras 22, 29, per Lord Nicholls), and a transaction that “constituted an advantage taken of the person subjected to the influence which, failing proof to the contrary, was explicable only on the basis that undue influence had been exercised to procure it” (National Westminster Bank plc v Morgan [1985] AC 686, 704, per Lord Scarman; Etridge, supra, paras 25, 29, per Lord Nicholls).[2]  As will be seen, it is a concept quite separate and different from the question whether the third party is put on inquiry, which arises at the second stage of the analysis.

30.  Many of the cases that have come before the courts in both the United Kingdom and Hong Kong concern guarantees or securities provided by wives for the husbands’ business debts.  On this type of case, Lord Nicholls said in Etridge, supra, at paras 27, 30 and 31:

“27. The problem has arisen in the context of wives guaranteeing payment of their husband’s business debts. …

30. I do not think that, in the ordinary course, a guarantee of the character I have mentioned is to be regarded as a transaction which, failing proof to the contrary, is explicable only on the basis that it has been procured by the exercise of undue influence by the husband. Wives frequently enter into such transactions. There are good and sufficient reasons why they are willing to do so, despite the risks involved for them and their families. They may be enthusiastic. They may not. They may be less optimistic than their husbands about the prospects of the husbands’ businesses. They may be anxious, perhaps exceedingly so. But this is a far cry from saying that such transactions as a class are to be regarded as prima facie evidence of the exercise of undue influence by husbands.

31. I have emphasised the phrase ‘in the ordinary course’.  There will be cases where a wife’s signature of a guarantee or a charge of her share in the matrimonial home does call for explanation. Nothing I have said above is directed at such a case.”

31.  Similarly, in Etridge, supra, at paras 159 and 162, Lord Scott said:

“159. … In cases where experience, probably bitter, had led a wife to doubt the wisdom of her husband’s financial or business decisions, I still would not regard her willingness to support those decisions with her own assets as an indication that he had exerted undue influence over her to persuade her to do so. Rather I would regard her support as a natural and admirable consequence of the relationship of a mutually loyal married couple. The proposition that if a wife, who generally reposes trust and confidence in her husband, agrees to become surety to support his debts or his business enterprises a presumption of undue influence arises is one that I am unable to accept. To regard the husband in such a case as a presumed ‘wrongdoer’ does not seem to me consistent with the relationship of trust and confidence that is a part of every healthy marriage.

…

162.   In the surety wife cases it should, in my opinion, be recognised that undue influence, though a possible explanation for the wife’s agreement to become surety, is a relatively unlikely one.  O’Brien itself was a misrepresentation case. Undue influence had been alleged but the undoubted pressure which the husband had brought to bear to persuade his reluctant wife to sign was not regarded by the judge or the Court of Appeal as constituting undue influence.  The wife’s will had not been overborne by her husband.  Nor was O’Brien a case in which, in my opinion, there would have been at any stage in the case a presumption of undue influence.”

32.  I turn now to the allegations of undue influence in the present case.  The plea of how Lee was influenced by her husband to sign the Legal Charge is particularised as follows in the Defence and Counterclaim:

(1) Lee was married to Yeung for over 30 years and was a housewife throughout the marriage.

(2) Throughout the marriage, Lee “reposed full trust and confidence in [Yeung] in handling all matters, including all financial matters relating to [the Property], which … were their matrimonial home”.

(3) Lee did not know English.

(4) Yeung was, but Lee was not, a shareholder and director of Wing Fat.

(5) It was on Yeung’s persuasion that Lee attended an office on or about 19 March 1998 to sign a document.  Yeung did not tell Lee the contents of the document before or at the time when she signed it.

(6) Finally, there is a general, unparticularised paragraph (para 2(g)) that “[Yeung] exerted actual undue influence on [Lee] to sign the Legal Charge and/or [Yeung] was presumed to have exerted undue influence on [Lee] to sign the Legal Charge”.

33.  In the main witness statement of the wife, which was adopted as her evidence in chief, she described the circumstances in which the Legal Charge came to be executed by her as follows:

“20. … I remembered that in about 1998 (I forget the exact date), my husband brought me to a solicitor’s firm and said that I needed to sign a document. At the time, my husband did not tell me what document I was signing, and he did not tell me why I needed to sign that document. He just told me to act according to his wish.

21. On signing the document, I had not raised any query to my husband, because ever since the marriage, I always acted according to my husband’s wishes and I relied on my husband to decide on all important matters and completely trusted my husband’s opinion on all money matters.

…

25. My husband is a caring and responsible husband and father. When he was alive, he always took care of the family and I had complete trust in him handling family and money matters. I had never questioned the things he asked me to do. I just acted according to his wishes. Therefore, when he told me to sign that document, I did not ask him any question. And as a matter of fact, he did not tell me the name of that solicitor’s firm.

26. I mentioned earlier on that I had signed a document at a solicitor’s firm in 1998. When I followed my husband to that solicitor’s firm at that time, I saw Mr. Wong Kam Ho there and some other persons were there too. My husband did not tell me why Mr. Wong Kam Ho would appear there and due to the abovementioned reasons, I also did not ask my husband. My husband told me to sign on a document and I did so. After I finished signing, my husband told me to leave the solicitor’s firm and return home, so I left and went home. At the time when I left the solicitor’s firm, my husband, Mr. Wong Kam Ho and the other persons were still there. The time that I stayed in that solicitor’s firm was no more than a few minutes.

27. Before I do my signature in that solicitor’s firm, no one introduced himself to me as a solicitor or staff of the solicitor’s firm. And no one, including my husband, read or explained to me the contents of the document that I signed. No one explained to me why I needed to sign that document; no one explained to me the consequence of signing that document; no one told me that I had the freedom to choose whether to sign that document; and no one told me that I could seek legal advice before I signed that document. As a matter of fact, I did not seek or received legal advice before I signed that document. Since I completely trusted my husband and acted according to his wishes, I signed that document at that time. Now, my solicitors have explained everything to me and I believe that the document I signed that time is the Legal Charge of this case signed on 19^th March 1998.

28.     When I signed that document in 1998, I had no idea what that document was and I did not know that the document was related to Wing Fat, and no one ever told me that the document was related to Wing Fat.  Now, my solicitors have explained to me the contents of that document (that is the Legal Charge) and the liability that I had to bear.  I must stress that no one ever told me that I needed to bear any liability for signing the Legal Charge. Before 15th April 2003, I did not know the liability issue of the Legal Charge at all.”

34.  It seems to me that even if one accepts this evidence at face value, it does not demonstrate any undue influence exercised by Yeung. It is said that Lee completely trusted Yeung, and that she signed the document because Yeung told her to do so, without knowing what it was that she signed.  I accept there was a relationship of trust and confidence.  But such trust is not unusual between husband and wife.  It is as much in Hong Kong as in the United Kingdom “a part of every healthy marriage” (per Lord Scott in Etridge, supra, at para 159).  In my opinion, the transaction is not one that calls for explanation in the sense described in paragraph 29 above.  The business of Wing Fat was the business of Yeung (jointly with Wong), who was the breadwinner of the family.  What Yeung earned from that business would be the income of the family.  Lee had a real interest in seeing that business prosper, and therefore in providing her guarantee and security over the Property required for the borrowing necessary for the business.  The Property, which they jointly held, was acquired with funds earned from the husband’s previous business and had been charged before more than once for bank financing to support to husband’s business.  In the transaction in question, Yeung, the husband, also gave a guarantee for Wing Fat’s debts in favour of the bank.  The fortunes of the husband and wife were tied together. 

35.  There is no suggestion there was any coercion, pressure or bullying on the part of Yeung to make Lee sign the Legal Charge.  Nor is there any allegation of misrepresentation by Yeung to Lee about the nature of the transaction or documents.  The case advanced by Lee is not unlike that in Barclays Bank plc v Harris, which is one of the appeals in Etridge, as to which Lord Scott said at para 244 as follows:

“… Was this a case in which, on Mrs Harris’ pleading, there was an arguable case of undue influence? The relationship of trust or confidence was certainly present. Mr Harris conducted the businesses from which the family income was derived. It was he who negotiated the financial arrangements with Barclays Bank. He did not explain the arrangements to his wife. He simply asked her to sign the legal documentation. But there is no pleaded allegation of misrepresentation. His statement, express or implied, that he would be able to trade his way out of his financial difficulties may have been an expression of over optimism but cannot be, and has not been, suggested to be a misrepresentation. There was no allegation of any bullying of Mrs Harris or of any pressure on her to sign that could be characterized as excessive. She signed, without knowing what she was signing, because she trusted him. This pleaded story does not, in my opinion, raise any presumption of undue influence. It does not, in the absence of any other evidence, justify an inference that Mr Harris brought undue influence to bear in order to persuade her to sign. Her agreement to do so is consistent with a normal, trusting, relationship between a married couple. …”

36.  In my opinion Miss Sit who acts for the bank is correct in submitting that the evidence adduced does not support an inference of undue influence.

37.  In any event I have to say that I have not found Lee to be a reliable witness.  It seems to me that she has exaggerated her lack of knowledge.  She gave oral evidence of an important matter which had not been remotely mentioned in her statements and which I regard as highly suspect.  In important aspects she changed her evidence in the course of her oral evidence. She also gave answers that are inconsistent with her own evidence.

38.  To give one illustration of how Lee’s evidence in material respects changed substantially in the course of the proceedings, I refer to the evidence about previous mortgages.  To rebut her defence of undue influence, the bank had referred to six deeds of mortgage or charge that Lee had executed prior to the Legal Charge.  These mortgages may be described as follows:

(1) a mortgage dated 12 September 1987 on the premises in Tin Lung Factory Building executed by Yeung and Lee to secure the general banking facilities granted by Ka Wah Bank to Yeung trading in sole proprietorship as Hip Wah in the amount of $1,200,000;

(2) a mortgage dated 18 April 1988 on Flat 9 of the Property executed by Yeung and Lee to secure the general banking facilities granted by Ka Wah Bank to Yeung trading in sole proprietorship as Hip Wah in the amount of $180,000;

(3) a mortgage dated 15 June 1989 on Flat 9 of the Property and the premises in Tin Lung Factory Building executed by Yeung and Lee to secure the general banking facilities granted by Ka Wah Bank to Lee, Lim Hong Yeng and Cheung Yee Wing trading in partnership under the name of Sang Hip Wah in the amount of $1,650,000;

(4) a mortgage dated 30 May 1991 on Flat 10 of the Property executed by Yeung and Lee to secure the general banking facilities granted by Ka Wah Bank to Yeung in the amount of $400,000;

(5) a mortgage dated 8 September 1995 on the premises in Tin Lung Factory Building executed by Yeung and Lee to secure the general banking facilities granted by Ka Wah Bank to Lee trading as Sang Hip Wah in the amount of $750,000; and

(6) a mortgage dated 11 October 1996 on Flat 9 of the Property executed by Yeung and Lee to secure the general banking facilities granted by Ka Wah Bank to Yeung in the amount of $100,000.

39.  In her second witness statement filed on 15 February 2006, Lee said “no one has ever explained to me the content of the … documents and I do not have knowledge as to the content of these … documents”. 

40.  This prompted the bank to make enquiry with the solicitors who handled the first five of these mortgages at the time, namely, Messrs Iu Lai & Li.  Eventually the conveyancing clerk at Messrs Iu Lai & Li, Mr Leung Kam Man, who was recorded on four of those five mortgages to have interpreted the documents to Yeung and Lee, was called by the bank to give evidence at trial.  He testified, based on his firm’s and his own general practice, that he would have explained the documents to Yeung and Lee and ascertained that they understood and agreed to their contents before asking them to execute the documents.

41.  Nevertheless, in her evidence-in-chief, Lee adopted her witness statements, including the assertion that no one ever explained the documents to her.  However, when she came to be cross-examined, she said she could not remember anything about the circumstances of the execution of those documents.

42.  Later, when she was cross-examined further, she re-asserted that no one ever explained anything to her on the occasions when she executed those documents.  Yet later she said there were discussions and conversations at the time in the solicitors’ office but she did not pay attention to what was being said.

43.  Further, in cross-examination, when asked about those mortgages, Lee initially claimed that her husband never told her that the mortgages were for the purpose of obtaining facilities or loans from banks. When it was pointed out to her that she had said in her own witness statement that her husband had told her he needed to borrow money from the banks, she said she could not remember.  Yet later she changed her evidence to say that her husband did inform her about borrowing from banks.  Lee’s evidence here is thoroughly unsatisfactory.  It seems to me more likely than not that the conveyancing clerks who attended to the execution of the above mortgage documents did explain the documents to her and that she knew at least the broad nature of those documents.

44.  As can be seen from those parts of her witness statement quoted in paragraph 33 above, Lee’s case was essentially that she was not told anything by her husband about the nature or purpose of the document she was asked to sign at the solicitors’ office in March 1998.  During her cross-examination, however, she gave evidence of a conversation that related directly to the execution of the Legal Charge.  She said that Yeung told her he was doing business jointly with Wong.  He told her she needed to sign a document so that if he died, there would be proof of his interest in the business.  She claimed to have a clear recollection of this conversation but this was never mentioned in any of her three witness statements or in her affirmations or in oral evidence in chief.

45.  To my mind, the alleged conversation did not make sense.  It is also inconsistent with Lee’s evidence in her statement that she did not know why Wong was present at the solicitors’ office in 1998 when she went to execute the document.  I reject her evidence of that conversation.

46.  Lee also claimed that during the time when she was at the solicitors’ office, the representative from the solicitors firm did not say one word to her, and did not even ask who she was or verify her identity.  I find that to be incredible.

47.  I accept that Lee has had little formal education or work experience and that she had been a housewife who took care of the home and the children.  But she appears to me to have sought to exaggerate her ignorance.  At the beginning of her testimony she suggested she was unable to identify the large letter “B” on the spine of one of the trial bundles.  Later, however, she admitted she was able to recognise “A”, “B” and “C”.  Lee also said she could only understand numerical figures up to five digits, and not six digits and beyond.  She also claimed she did not understand what the sign “HK$” meant, which I find to be incredible.  As she admits, she had helped her husband transfer a sum of HK$280,000 through her bank account to Wing Fat.  I also reject her claim that she would simply rely on the bank teller and not check anything herself when she conducted banking transactions.

48.  As a matter of fact Lee was entrusted by Yeung to sign some cheques for Sang Hip Wah.  I do not believe her when she claimed she did not know the figures on the cheques and would just sign them and leave.

49.  Mr Allen Lam who appears for Lee submits that I should not look at Lee’s evidence under a microscope and that I should consider the whole of her evidence.  I have adopted this approach.  I accept that Lee may not be very sophisticated but making all due allowance I am unable to characterise the unsatisfactory features of her evidence as minor matters.  I did not expect her to speak with great clarity and precision and I do not take her failure to do so against her.  But the exaggerations, inconsistencies and changes in the evidence cannot in my view be attributed to her lack of formal education or of sophistication.  They fundamentally undermine the reliability of her evidence in all contentious respects.  In the result I am unable to accept her evidence that she did not know at all what she was signing in March 1998.

50.  The defence also called Cheung Yee Wing (“Cheung”) to give evidence.  He is one of the long-standing employees of Yeung who went on to work in Sang Hip Wah.  He testified that Yeung set up Sang Hip Wah to enable him and a few other former employees of Hip Wah to continue to work in the industry.  Although registered as a partner, he said he was in fact only an employee. He said that Lee (who was also registered as a partner) did not take part in the business of Hip Wah or Sang Hip Wah either. 

51.  In relation to the mortgage dated 15 June 1989 referred to in paragraph 38(3) above, which Cheung also signed as one of the borrowers, Cheung said that Yeung had asked him to go to a solicitors’ firm to sign some documents.  Yeung had told him it was about mortgaging the factory premises to the bank for a loan for running the business of Sang Hip Wah, but did not tell him the details such as the amount of the loan.  He said he had asked Yeung whether he had to bear any legal liability and Yeung told him not to worry and that he (Yeung) would shoulder any liability.  Cheung also said that the solicitors’ staff did not explain clearly to him the contents of the document signed.  However, in cross-examination, he admitted that the solicitors’ staff had spoken to those present, including himself, for half an hour, although he paid no attention at all to what she said.

52.  I find Cheung to be a credible witness.  In my view, however, his evidence does not make it more probable that, as a matter of fact, Yeung had unduly influenced his wife.  It is significant that Yeung told Cheung that the documents were about mortgaging the factory premises for a loan from Ka Wah Bank.  Yeung did not hide it from Cheung or make any misrepresentation to him about the document he wanted Cheung to sign.

53.  There is no dispute that the burden of proving that Yeung exercised undue influence on her rests on Lee.  In my judgment she has failed to discharge that burden.  On the evidence I find that undue influence has not been proved.  I am not satisfied that there was anything more than the usual trusting relationship between husband and wife and the usual confidence a housewife placed in these matters on her husband who is better versed in business.  I do not think the evidence bears out the suggestion (even if it was open to the defence to make) that Lee was completely dominated by Yeung and that she regarded herself to be obliged to be wholly subservient and obedient to her husband.  Rather, it was a case of there being respect, loyalty and confidence.  In any event I agree with Miss Sit that a case of habitual and total domination and subservience, which resembles that in Barclays Bank plc v Coleman (see Etridge, supra, at paras 282-293), would have to be properly pleaded.  Further, I do not accept Lee’s evidence that she was told nothing by Yeung about charging the Property to the bank for credit facilities for the business of Wing Fat.  In all likelihood she would have been told by Yeung that the Property was going to be charged to the bank for Wing Fat’s borrowing.  On the totality of the evidence, I am not satisfied that Yeung in any way unconscionably abused the trust and confidence that his wife placed in him.

B.  Put on inquiry

54.  In case I am wrong in my conclusion above, I shall set out briefly my views on the second and third stages of the analysis assuming, contrary to my view, that the wife has proved that she executed the Legal Charge under the undue influence of the husband.

55.  On the second question of whether the bank was put on inquiry, the law imposes a low threshold, which is quite simply that a bank is put on inquiry “whenever a wife offers to stand surety for her husband’s debts”: Etridge, per Lord Nicholls at paras 44-48, 84, per Lord Hobhouse at paras 108, 110.  Although Mr Choi Ping Man, the conveyancing clerk in Messrs Ford Kwan & Co who attended upon the parties executing the Legal Charge, said he did not ask the parties about their relationship, it would have been apparent to him that Lee was neither a shareholder nor director of Wing Fat.  The bank itself admitted in an affirmation made in 2003 that it knew that the Property was jointly owned by Yeung and his wife.  It seems to me that the bank was plainly put on inquiry in the relevant sense.  Indeed, counsel for the bank does not contend otherwise.

C.  Taking reasonable steps

56.  The third stage of the analysis is to ask whether the lender took reasonable steps to satisfy itself that there was no undue influence.

57.  On this question I accept the evidence of Mr Choi Ping Man.  His evidence is understandably based on his usual practice at the time and he spoke of what he would have done rather than recalled specifically what he had actually done.  I find that, more likely than not, he explained the nature of the Legal Charge and its key terms to the parties.  I find that he asked Lee to consider whether she wished to seek independent legal advice.  It was only after Lee indicated that she had no question and did not wish to seek independent legal advice that he asked her to execute the Legal Charge.

58.  I reject the wife’s allegation that Choi did not speak a word to her and did not even check her identity before allowing her to sign on the Legal Charge.  I do not accept the wife’s evidence that she paid no attention whatsoever to what was said to her by Choi at that meeting.  In any event even if she was not paying attention at all to what he said I do not think that would have been apparent to Choi.

59.  On these facts, had the bank taken reasonable steps to satisfy itself that there was no undue influence?  I remind myself that what the bank has to do in this type of case is to take reasonable steps to satisfy itself that the wife has had brought home to her, in a meaningful way, the practical implications of the proposed transaction: Etridge, supra, at para 54 per Lord Nicholls.  As Lord Scott emphasised in Li Sau Ying, supra, at paras 38 and 39, the bank is not required to see to it that the wife understood the risks, but to take reasonable steps to bring her to an understanding of the implications.  What are reasonable steps will depend on the facts of each case.

60.  In the present case the Legal Charge was executed in 1998, that is to say, after the decision of the House of Lords in Barclays Bank plc v O’Brien [1994] 1 AC 180 but before its decision in Etridge, which was decided in October 2001.  As is well known the House of Lords in O’Brien recommended the practice of the bank having a private meeting with the wife in this kind of case.  Thus Lord Browne-Wilkinson said at pp 196-197:

“… for the future in my judgment a creditor will have satisfied these requirements if it insists that the wife attend a private meeting (in the absence of the husband) with a representative of the creditor at which she is told of the extent of her liability as surety, warned of the risk she is running and urged to take independent legal advice. If these steps are taken in my judgment the creditor will have taken such reasonable steps as are necessary to preclude a subsequent claim that it had constructive notice of the wife’s rights.

…

… In the normal case, a financial institution will be able to lend with confidence in reliance on the wife’s surety obligation provided that it warns her (in the absence of the husband) of the amount of her potential liability and of the risk of standing surety and advises her to take independent advice.”

61.  There was no such private meeting in this case.  Indeed the bank’s staff never met Lee. 

62.  It is clear that a private meeting between the bank and the wife is not the sine qua non for showing that the bank took reasonable steps: Etridge, supra, at para 55.  It is not the only way to discharge the bank’s burden.  An acceptable alternative course is for the bank to rely on the fact that the wife has received separate legal advice from a solicitor who, in that respect, acts solely for her.  Here, however, there was no separate legal advice given to the wife.  Irrespective of whether or not Messrs. Ford Kwan & Co were on record solicitors for the borrowers and mortgagors (as well as for the bank), there is no suggestion that Choi was, or considered himself to be, acting solely for Lee, when he explained the documents to her (amongst others).

63.  In other words, there was simply nothing in addition to a meeting in which all the relevant persons including both the husband and wife attended, to whom, collectively, the conveyancing clerk explained the main terms of the documents in a routine manner.  Since the reasonable steps required by the law are aimed at reducing the risk of the wife entering into the transaction as a result of undue influence by her husband, explanation given at a meeting to a group of individuals including the husband would be unlikely to be effective.  A separate meeting with the bank or with a solicitor would give some assurance that the wife received advice free of her husband’s influence (the very kind of influence that these steps sought to protect her against).  There is no satisfactory explanation why that practice was not followed by the bank in the present case.

64.  Moreover, the explanation was given to the wife only on the day when the parties went to the solicitors’ office for the purpose of executing the documents.  It would in my view be unrealistic to expect the wife on such an occasion, in the presence of her husband, to think independently of her own interests, call a halt to the transaction, demand to see an independent lawyer, and insist that she would only sign any document after receiving such advice.

65.  In these circumstances, if undue influence had been established, I would have held that the bank had not discharged the burden of showing that it had taken reasonable steps to bring home to the wife, in a meaningful way, the implications of the Legal Charge.  In light of my finding on the first stage of the analysis, however, the question does not arise.

IV.  QUANTUM

66.  I proceed to consider the quantum of the bank’s claim. Of the amount claimed by the bank, there is evidence that the amount of the principal outstanding stood at HK$2,799,531.21 up to 20 June 2003, was repaid in part from the proceeds of sale of the property charged by Wong and Lau, and has since stood at HK$2,558,709.62.  This is not seriously challenged by the wife.  I accept that evidence.

67.  The bank claims interest on the principal at the rate of 11.125% p.a. (being 6% plus the then prime rate) for the period from the date of demand (2 July 2002) to the date of judgment entered by Registrar Chan (5 December 2002) and thereafter at judgment rate until judgment herein. 

68.  The following issues potentially arise from the bank’s claim for interest:

(1) whether the bank is entitled to claim interest at 11.125% p.a. up to 5 December 2002 or at all having regard to its pleading;

(2) whether the bank is entitled to claim interest at judgment rate between 5 December 2002 and the date of judgment herein; and

(3) given that Wing Fat has been wound up and dissolved, whether the bank is entitled to claim interest beyond the date of the petition for the winding up of Wing Fat (29 April 2004) or at any rate the date of the winding up order (30 June 2004).

A.  Interest for the period up to 5 December 2002

69.  Mr Lam submits on behalf of the wife that the bank is not entitled to claim interest at the rate of 11.125% per annum at all because there is no pleading of that specific rate of interest.  However, the bank has pleaded the provision in the Legal Charge that the 3^rd, 4^th and 5^th defendants would pay all sums of money owing “together with interest at the current rate or such other rates as may be charged by the Plaintiff from time to time in accordance with the covenant for payment as set out in the Legal Charge”.

70.  The evidence suggests that the rate of 11.125% per annum was the then current default rate of interest (being prime rate plus 6%) applied by the bank at the time.  The same rate was adopted in the judgment entered against the other defendants.  I do not think that the absence of the specific figure in the pleading is critical.  I find that the bank is entitled contractually to claim interest at the rate of 11.125% per annum up to 5 December 2002.

B.  Interest for the period between 5 December 2002 and judgment herein

71.  The bank accepts that it is not entitled to charge interest at the rate of 11.125% p.a. after 5 December 2002, which is the date of the judgment entered against, inter alios, Wing Fat.

72.  Miss Sit explains the bank’s concession in this way: (i) the Legal Charge is, on its proper construction, in the nature of a guarantee, not an indemnity, despite the presence of a “principal debtor” clause in the instrument; (ii) the liability of the wife as surety ought therefore to be co-extensive with Wing Fat’s; (iii) the cause of action against Wing Fat has merged into the judgment dated 5 December 2002; (iv) thereafter interest did not accrue (as against Wing Fat) at the contractual rate but at judgment rate.

73.  The bank claims interest instead at the (lower) judgment rate between 5 December 2002 and the date of judgment against the wife herein.  I have some difficulty with this claim.  I can readily understand that the bank would be entitled to interest at judgment rate against Wing Fat, being a party against whom the bank had obtained judgment.  It is however hard to see why it follows that interest would accrue against the wife at judgment rate between 5 December 2002 and now, a period during which there was no judgment against the wife. 

74.  In my view, the bank’s claim against the wife for interest at judgment rate during that period is contrary to both principle and authority.  As far as Wing Fat is concerned, the liability to repay the bank pursuant to the covenants contained in the Legal Charge had merged into the judgment obtained on 5 December 2002.  The amount of indebtedness became a debt owed by Wing Fat under the judgment, not under the Legal Charge or any loan agreement. Wing Fat’s covenant to pay interest, which is ancillary to the covenant to pay the principal, also merged into the judgment: In re Sneyd; ex parte Fewings (1883) 25 Ch D 338, 349-350, 355; Director General of Fair Trading v First National Bank plc [2002] 1 AC 481 at para 3.  This much is accepted by the bank, which concedes it cannot claim interest at the contractual default rate of 11.125% p.a. against either Wing Fat or the wife in respect of the period in question. 

75.  After 5 December 2002, interest accrued against Wing Fat not pursuant to any loan agreement or the Legal Charge, but under s. 49 of the High Court Ordinance, which provides:

“(1) Judgment debts shall carry simple interest-

(a) at such rate as the Court of First Instance may order; or

(b) in the absence of such order, at such rate as may be determined from time to time by the Chief Justice by order,

on the aggregate amount thereof, or on such part thereof as for the time being remains unsatisfied from the date of the judgment until satisfaction.”

76.  As the Court of Final Appeal stated in Man Ping Nam v Man Fong Hang (No 2) (2007) 10 HKCFAR 140 at para 23, the prescribed judgment rate is generally “charged at a significantly higher rate than applies to commercial borrowings to give the judgment debtor an incentive promptly to satisfy the judgment debt”.  In The Hongkong Electric Co Ltd v Commissioner of Rating and Valuation (2012) 15 HKCFAR 1 at para 5, Ma CJ said: “It is clear that this rate of interest is imposed not so much to compensate a successful party, but to encourage the paying party to honour any money judgment as quickly as possible.”  There being no judgment against the wife, there is no basis under s. 49 to make her liable for interest for the relevant period at judgment rate.

77.  The relevant provisions of the Legal Charge include the following:

“1. In pursuance of the said agreement and in consideration of the said premises the Mortgagor and the Borrower hereby jointly and severally covenant with the Lender that the Mortgagor and the Borrower will pay to the Lender on demand by notice in writing of the Lender made to the Mortgagor and/or the Borrower all sums of money now or hereafter owing to the Lender on account of banking facilities granted to the Borrower either alone or jointly with other persons firms or corporations in respect of the matters aforesaid together with interest at the current bank rate or at such other rate as may be charged by the Lender from time to time in similar matters with monthly rests and all commission or other usual and lawful charges and all costs and expenses which may be incurred in respect thereof.

…

4. IT IS HEREBY AGREED AND DECLARED as follows:-

…

(h) Although as between the Borrower and the Mortgagor the Mortgagor is a surety only for the Borrower yet as between the Mortgagor and the Lender the Mortgagor shall be the principal debtor for the moneys hereby secured and accordingly the Mortgagor and the said premises shall not be released by time given to the Borrower or by any act matter or thing whereby the Mortgagor as a surety only or the said premises comprised in this security might have been released.

…

(j) This security shall be construed as a guarantee of the whole of the principal money and interest owing or to become owing as aforesaid and the Mortgagor shall not be entitled as against the Lender to any right of proof in the bankruptcy or insolvency of the Borrower unless and until the whole of such principal money and interest shall have first been completely discharged or satisfied.

…”

There is in my view nothing in the Legal Charge by which the wife is made liable as guarantor for any interest accruing under a judgment obtained against Wing Fat by the bank. 

78.  Miss Sit submits that the liability of the surety and the principal debtor must in general be co-extensive, relying on O’Donovan and Phillips, The Modern Contract of Guarantee (English 2^nd ed. 2010), para 1-25.  But that is a broad statement which does not assist the bank in this context.  Where a judgment has been obtained against the principal debtor, judgment interest accrues not only on the outstanding principal sum but on the entire judgment sum which includes arrears of interest accrued up to the date of judgment.[3] Here, the bank claims judgment interest from the wife only on the amount of principal outstanding.  The liability of the surety and the principal debtor are thus not co-extensive on the bank’s own approach.

79.  Further, the bank submits that as the wife is a surety she stands liable for Wing Fat’s liability which has merged into the judgment. I am unable to accept this submission.  The textbook cited by Miss Sit, O’Donovan and Phillips, The Modern Contract of Guarantee (2^nd English ed. 2010) contains the following passage at para 5-81 (in a section dealing with the guarantor’s liability for interest accruing on the principal transaction):

“The creditor’s right to recover interest is also affected by the obtaining of a judgment against the principal debtor … When a judgment is obtained, the accepted position is that the cause of action against the principal is merged in the judgment so that interest does not thereafter accrue pursuant to the contractual obligation but under the rules of court.”

80.  On the face of this passage it is not entirely clear whether or not it is being said that a guarantor becomes liable for interest under the judgment obtained against the principal debtor.  One of the authorities cited in the footnote, Faber v Earl of Lathom (1897) 77 LT 1, however, makes it clear that what the authors mean by that passage is not that the guarantor becomes liable to pay interest at judgment rate under the rules of court after judgment is entered against the principal debtor, but that the guarantor is generally not liable for such interest.

81.  In Faber, Montagu had advanced £1,400 to Gye on the security of three life policies.  Gye had covenanted to keep up the premiums on the policies and to pay interest at 3% p.a. on the loan.  The Earl of Lathom and another were sureties for Gye, and covenanted that “they or one of them will, during the continuance of the present security, in the event of the premiums on the said policies … and the interest in respect of the said principal sum of £1,400 not being paid, as to the premium within three days, and as to the interest within thirty days, of their falling due by Gye … duly pay the premiums … and also pay the interest on the said sum of £1,400.” Judgment had been obtained for the principal sum against Gye.  In the action brought by Faber as Montagu’s executor against the Earl of Lathom, Hawkins J held (at p 3):

“By that judgment, which included the principal debt of £1,400 and all interest due at the time it was signed, the interest became merged in the judgment debt, since which the plaintiff’s testator and the plaintiff, as his representative, have been entitled to 4 per cent. interest on the whole judgment debt, but Captain Gye was no longer liable to be sued upon his covenant to pay either principal or interest, and with the judgment Lord Lathom’s liability to be sued on his covenant as surety also ceased.”

82.  Faber was applied in Mercantile Credits Ltd v Buckeridge [1980] WAR 1 at 9, where the Full Court of Western Australia held that the recovery of judgment against the principal debtor operates to relieve the surety from liability to pay future interest.[4]  The same principle[5] was applied by Young J of Supreme Court of New South Wales, Equity Division, in Eagle Star Trustees Ltd v Tai Ping Trading Pty Ltd (No 2) (unreported, 30 October 1990), where the learned judge said:

“It is quite clear that if a person has guaranteed a principal debtor’s obligation to pay principal and interest under a deed and the creditor obtains a judgment against the principal debtor, then, unless there are some special words in the guarantee, the guarantee will not extend to interest after judgment. This is because interest after judgment does not accrue under the deed but rather under the rules of Court.”

83.  As explained above, there are no special words in the Legal Charge whereby the wife is made liable for interest accruing at judgment rate either on the judgment sum against Wing Fat or on the principal debt outstanding.  It follows that the bank is not entitled to claim interest from the wife at judgment rate between 5 December 2002 and now.  Nor is the bank entitled to claim interest for that period on its current default rate, as it accepts. 

84.  In the originating summons by which these proceedings were commenced, the bank claims against, inter alios, the wife “[p]ayment of all moneys due … under the covenants contained in [the] Legal Charge … together with interest at the current rate or as [sic] such rate as the Plaintiff may from time to time charge in accordance with the covenant for payment as set out in the … Legal Charge”.  In its statement of claim against the wife, the bank pleads its claim for interest in this way:

“3. The Legal Charge contains, inter alia, the following provisions:

(a) the 3^rd, 4^th and 5^th Defendants jointly and severally covenanted with the Plaintiff that the 3^rd, 4^th and 5^th Defendants would pay to the Plaintiff on demand all sums of money then or thereafter owing to the Plaintiff on account of the said banking facilities and/or loan granted to the 5^th Defendant together with interest at the current rate or such other rates as may be charged by the Plaintiff from time to time in accordance with the covenant for payment as set out in the Legal Charge.

…

10. An order by Registrar Chan dated 11^th December 2002 was made against the 3^rd, 4^th and 5^th Defendants for payment … The said Order for payment and possession was set aside by an Order made by consent dated 10^th March 2004 …

11. As at 14^th April 2004 (inclusive), the 3^rd, 4^th and 5^th Defendants were and are still indebted to the Plaintiff in the sum of HK$2,754,953.54, particulars of which are as follows:

…

Interest accrued up to and including 14^th April 2004

HK$168,243.92

Further interest shall accrue from 15^th April 2004 at judgment rate until the date of payment in full pursuant to the said Order.

AND THE PLAINTIFF CLAIMS AGAINST THE 4^TH DEFENDANT FOR:-

1. The total sum of HK$2,754,953.54 being moneys due to the Plaintiff under the covenants contained in the Legal Charge … together with interest at such rate as the Plaintiff may from time to time charge in accordance with the Legal Charge;

2. Failing payment of the aforesaid sum with interest within 14 days, possession of the Mortgaged Property;

3. Costs on full indemnity basis; and

4. Further and/or other relief.”

85.  It seems to me that the pleaded claim for interest has been confined to a claim for interest under the Legal Charge.  There is no claim for interest specifically pursuant to s. 48 of the High Court Ordinance, or even a vaguely-framed claim for “interest pursuant to Ordinance” (such as in Prague Enterprises Ltd v Chan Miu Cheung (personal representative of John Gilbert, deceased) [1994] 3 HKC 175, 179F) or for interest at the court’s discretion (such as in Grandyield Knitters Ltd v MBE Engineering Ltd [2002] 2 HKLRD 88 at para 16).  Unlike the statute considered in Grandyield Knitters Ltd, s. 48 of the High Court Ordinance empowers the court to award interest “[s]ubject to rules of court” (see s. 48(1)).  RHC Order 18 rule 8(4) provides: “A party must plead specifically any claim for interest under section 48 of the Ordinance or otherwise.”  In these circumstances it is in my view unnecessary to consider whether and, if so, how the court should exercise its discretion to award interest under s. 48: Ward v Chief Constable for Avon and Somerset (1985) 129 Sol Jo 606.

C.  Effect of winding-up of Wing Fat

86.  Wing Fat was wound up by the court on 30 June 2004 upon the petition of the bank presented on 29 April 2004.  It is common ground that the bank as a creditor is not entitled to prove in the winding up of Wing Fat for any interest accruing after the date of the winding up order: Re Moulin Global Eyecare Trading Ltd, HCCW 471/2005, 24 July 2007.[6]  In the light of my decision above on the effect of the judgment entered against Wing Fat, it is unnecessary to delve into the intricate question of whether, had the bank not obtained judgment against Wing Fat, its winding up would have disentitled the bank from recovering interest as against the wife for any period of time after the winding up.[7]

V. CONCLUSION AND ORDERS

87.  There will therefore be judgment in favour of the bank for the principal sum of HK$2,558,709.62 together with interest on HK$2,799,531.21 at the rate of 11.125% p.a. from 2 July 2002 to 5 December 2002. 

88.  There will be interest on the aggregate judgment sum from the date of this judgment until payment at judgment rate pursuant to s. 49 of the High Court Ordinance (Cap 4).

89.  There will be an order that, failing payment of the judgment sum together with interest within 42 days, the bank is entitled to recover possession of the Property.  There will be liberty to both parties to apply in connection with the order for possession.

90.  The wife’s counterclaim is dismissed.

91.  There will be an order nisi that the wife is to pay the bank’s costs on a party and party basis, to be taxed if not agreed. Her own costs are to be taxed in accordance with the Legal Aid Regulations (Cap 91A).