RESONA BANK, LTD v. LAM OI CHING AND ANOTHER

HCMP4368/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO.4368 OF 1999

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AND

HCMP4374/1999

MISCELLANEOUS PROCEEDINGS NO.4374 OF 1999

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AND

HCMP4376/1999

MISCELLANEOUS PROCEEDINGS NO.4376 OF 1999

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(HEARD TOGETHER)

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REASONS FOR JUDGMENT

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1. In these three mortgage actions, I gave judgment in favour of the mortgagee, against the 1^st defendant in each case, for a sum of money and for delivery up of vacant possession of the mortgaged property.  I now give reasons.

Background

2. The plaintiff is the Resona Bank Ltd (formerly known as the Daiwa Bank Ltd) (“the Bank”).  In brief, the mortgages arise out of the dealings between the Bank and one Lam Sie, and the companies which he operated, directly or indirectly, between 1989 and 1996.  Lam Sie’s wife is Lam Oi Ching (“Mrs Lam”) and their daughter is Lam Hin Ching Fion (“Ms Lam”).  The companies concerned in these actions are L.E. Garment Ltd (“L.E.”) and Apace Knitting Factory Ltd (“Apace”), the 2^nd defendant in all three actions.  Mr. Lam was a director and substantial shareholder of L.E., which was wound up in 1999.  He also owned or controlled a company named Koonhon Garment Ltd (“Koonhon”).  The wife and the daughter were and still are directors and shareholders, in the wife’s case a major shareholder, of Apace.  They were and still are the directors and shareholders of Wealthy Harvest Industries Ltd (“Wealthy Harvest”).

3. Two properties are concerned in HCMP No.4368 of 1999.  I will call them simply “Capital” and “Braga”.  Mrs Lam is the registered owner of them.  Originally Capital, which was already in the registered ownership of the wife, was mortgaged to the Bank in 1989 to secure the banking facilities of the borrower, one Sun Rise Knitting Factory, but by later deeds of variation, Apace and then L.E. were brought in as the new borrower, so that ultimately the property was mortgaged to secure the due payment of all moneys payable by Mrs Lam and/or Apace and/or L.E.

4. Braga was bought in 1993, using mainly funds provided by the Bank under a real estate loan, and it was mortgaged to the Bank to secure due payment of all moneys payable by Mrs Lam and/or Apace and/or L.E.

5. The property concerned in HCMP No.4374 of 1999 I will call “La Salle”.  It was also bought, in 1995, with funds provided by the Bank, and put in the names of Mrs Lam and Ms Lam.  It was mortgaged to the bank to secure due payment of all moneys payable by them, and/or Apace and/or LE.

6. The property concerned in HCMP No.4376 of 1999 I will call “No.77”.  Wealthy Harvest is now the registered owner.  The property was originally the subject of a 1984 mortgage between the Bank and the daughter, but Wealthy Harvest was brought in as mortgagor by a deed of variation dated 17 September 1996.  It is mortgaged to secure due payment of all moneys payable by Ms Lam and/or Apace and/or L.E.

7. The Bank says that by 1999, when the proceedings were issued, Apace and L.E. had got into default and owed it about $40 million; the figures are set out in detail in the affirmation evidence.  The final figure claimed as at the date of this hearing is $51,138,595.40, with interest on various figures at various rates; again, I do not need to set them out here.

8. In HCA No.11870 of 1999, the Bank sued Mr Lam and his wife, and one Shum Chi Man as guarantors of the indebtedness of L.E. and Apace.  The matter came before Tang J, as he then was, and summary judgment was granted on 26 November 2004.

The defence

9. The first ground of defence appears in affirmations made by Lam Sie.  It is that the Bank made unauthorised withdrawals from and deposits to the accounts of his companies.  He says that over the period from 1994 until he ceased his dealings with the Bank in early 1997, the Bank wrongfully debited the account of L.E. with over $39 million and the account of Apace with over $27 million.

10. The second ground of defence, put forward by Mrs Lam and Ms Lam in the first two actions, is undue influence exercised by Lam Sie over them.  This defence is of course not available to the corporate defendants in the third action.

The issues

11. The procedure for the hearing of an Originating Summons is set out in Order 28 of the Rules of the High Court.  It is akin to the procedure under Order 14 with the difference that the plaintiff must first demonstrate a prima facie claim, and once this is done the onus falls on the defendant to show a fair or reasonable probability that he has a real or bona fide defence.  The first issue is, therefore, whether the defence relating to unauthorised withdrawals is credible when viewed against the surrounding facts and the documents.  The second issue is whether the defence of undue influence is open to Mrs Lam and Ms Lam.

The hearing

12. The plaintiff was represented by Mr Chan Chi Hung, SC.  Mrs Lam and Ms Lam appeared in person.  They had been represented by solicitors up to the last minute, when they gave notice of intention to act in person.  In respect of the corporate defendants in HCMP No.4376 of 1999 and application had already been filed, for Wealthy Harvest to be represented by a director.  This had not yet come before the Registrar but I allowed the application so that Ms Lam could represent the company.

13. Mrs Lam and Ms Lam had applied for legal aid on 13 January 2006.  The plaintiff applied for the mandatory stay to be lifted and I allowed that.  I gave reasons at the time, and will not repeat them here, save to say that the defendants did not have a strong case and the inference from their conduct was that they were trying to delay the evil hour of the outcome of the Originating Summonses.

Unauthorised withdrawals

14. Mr Lam says that some time after June 1994 he found out that there were transfers between the accounts of his companies and other accounts which had no connection with his business.  He took up the matter with the Bank’s branch manager, Mr Joseph Luk, but he never got any satisfactory answer.  He continued to use the accounts, because he could not afford to do otherwise.  Meanwhile, Mr Luk procured him to sign blue forms and blank cheques.  This went on until he finally stopped all his dealings with the Bank in February 1997, having, in the meantime, opened accounts with another bank.  He exhibits a set of statements and vouchers showing unauthorised removals of money from the Apace’s account (Exhibit LS-5), a similar set for L.E.’s account (Exhibit LS-6) and a set of three schedules showing the amounts of deposits and withdrawals which he says are unauthorised (Exhibits LS-5 to LS-7).

15. The evidence of the Bank’s witnesses is that Mr Luk left the Bank in about May 1997.  Mr Lam made no complaints about unauthorised withdrawals, until the Bank’s staff visited him on 1 August 1997 to chase repayment of the indebtedness in the accounts of L.E. and Apace.  He said that L.E. had been involved in the transfer of funds between accounts since 1993.  He had tried to cease such transfers.  But Mr Luk’s assistant, Mr William Ng, had asked him to lodge blank cheques of the companies for the convenience of fund transfers after he had enjoyed the benefit of borrowing without collateral from unknown sources.  However Mr Ng denied this.  He said that on occasion signed blank cheques had been handed over, for completion on Mr Lam’s instructions given later, but there were no blank cheques as collateral for any lending and no unauthorised transactions.

16. According to the Bank, blue transfer forms, written in English and Chinese, were used, so Mr Lam must have known what they were.  On occasion oral instructions were accepted from Mr Lam as an “acquainted customer” from whom such instructions could be accepted, but they had to be covered by a blue form duly signed later.  The Bank would send Mr Lam such a form and chase him to sign and return it.

17. As to Mr Lam’s exhibits LS-5 to LS7, the Bank officer, Mr Wu said that he had re-sorted these and prepared corresponding tables.  These show that many of the unsigned transfers were actually transfers between L.E., Apace and Koonhon.  The list in LS-7 showed companies, allegedly unknown to Mr Lam, which had in fact had previous or subsequent dealings with one or more of his companies.

18. There are some transfers to and from companies listed in LS-7 in respect of which the vouchers are not signed.  The Bank explains this by the practice of accepting oral instructions to be backed by a later signed blank cheque or blue transfer form.

19. Mr Lam also refers to another case brought against the Bank, in which allegations were made that it was running a “pooling scheme” whereby some of its customers agreed to allow banking facilities to be granted to them, but those facilities would be used by other customers who were in need of money.  Those customers who allowed this would get 2% of the credit.  Mr Lam does not, however, say that he had agreed to take part in any such scheme.  Mr Wu also refers to cases in which this allegation was made, specifically against Mr Luk and in which, he says, the allegation did not avail debtors of the plaintiff.   He sets out excerpts from some of the judgments.

20. As I have mentioned, Mr Lam and Mrs Lam were sued as guarantors in HCA No.11870 of 1999.  Practically the same defence was raised and the same evidence put forward in support of it.  Tang J found the defence incredible, and gave judgment in favour of the Bank.  The judgment is reported at [2004] 4 HKC 601.  The defendants appealed in CACV No.383 of 2004 but their appeal was dismissed.

21. So far as Mrs Lam is concerned, it is argued that issue estoppel arises because she was a party to this litigation and so she cannot now dispute the debts due by L.E. and Apace.  I think this is right, at any rate up to the sum awarded.  

22. On the question of credibility I respectfully agree with the approach taken by Tang J.  There is simply nothing in the way of accounts to show that the various companies have lost anything by way of the alleged unauthorised withdrawals.  The fact that this allegation was first made to senior officers of the bank only after the operation of the accounts had ceased, and they were chasing the companies for default, suggests that it cannot be true.  If Mr Lam’s companies were being bled of money by the branch with which he dealt since 1994 he would surely have taken the matter up at a higher level.  Such evidence as Mr Lam can produce does not stand up to inspection in most cases.

23. The allegation about a “pooling scheme” does not assist.  It may be that such a scheme did exist, and even that Mr Luk was running it.  Such a scheme would necessarily be dishonest, and unknown to the Bank.  However, Mr Lam does not say that he was a party to it.  If he had been, I cannot see that he or his companies would have any recourse against the Bank for losses arising from it.  But if such a scheme was operated, involving consenting bank customers it would not follow that unauthorised withdrawals or deposits would have been made in the accounts of customers who had no part in it.

24. It is true that some unsigned vouchers have been found.  As Tang J noted, this raises suspicion.  But like him, I do not see that it makes the defendant’s case of unauthorised withdrawals any more credible.  I do not see that there is a credible defence here.

Undue influence

25. A rebuttable presumption of undue influence may arise, in relationships where the law does not presume trust and confidence, if it is proved that trust and confidence was indeed reposed.  This is “Class 2B” undue influence; see Barclays Bank Plc v. O’Brien [1994] 1 AC 180.  There is evidence from Mrs Lam and Ms Lam that they reposed trust and confidence in Mr Lam.

26. Here the defendants entered into mortgages to secure loans to Mr Lam’s companies.  In such a situation, undue influence, if proved, affects the mortgagee if it can be shown that the borrower acted as its agent in procuring the mortgagor’s signature to the mortgage, or if it had actual or constructive notice of the undue influence.  Constructive notice arises if the mortgagee is put on inquiry, and fails to take reasonable steps to verify if the mortgagee is asserting her rights.  The mortgagee is put on inquiry if the transaction is to the manifest disadvantage of the mortgagor (O’Brien) or not readily explicable by the relationship of the parties : Royal Bank of Scotland v. Etridge (No. 2) [2002] 2 AC 773.

27. However, at any rate in the case of husband and wife, where the transaction itself is for the benefit of the mortgagor as well as the borrower, the mortgagee is not put on inquiry, because there is nothing to indicate that the transaction is anything other than a normal advance to husband and wife for their joint benefit.  See CIBC Mortgages PLC v. Pitt & Anor [1994] 1 AC 200.  This was followed in Hong Kong in ABN AMRO Bank NV v. Mody & Anor, CACV No.434 of 2002.  

28. Here there is no evidence that Mr Lam acted as the Bank’s agent or that the Bank had actual notice of any undue influence.  The question is whether there was anything to put the bank on inquiry in respect of the mortgages concerned in HCMP Nos.4368 and 4374 of 1999.

29. The mortgaged properties concerned in HCMP No.4368 of 1999 are Capital and Braga.  The latter was bought by Mrs Lam with funds borrowed under the mortgage.  The loan was for her own benefit, and the Bank would not be put on inquiry.

30. Capital already belonged to Mrs Lam.  Both it and Braga were mortgaged to secure the banking facilities of Apace.  Mr Lam was not a director or shareholder of Apace, but Mrs Lam was the majority shareholder.  This is not the situation where the wife mortgages property to secure the debts of the husband’s company.  Mrs Lam mortgaged her property to secure the debts of what was, in effect, her own company.  There was no manifest disadvantage to the mortgagee which would put the Bank on inquiry.

31. The property concerned in HCMP No.4374 of 1999 is La Salle.  This too was bought with money borrowed under the mortgage, and to that extent it was for the benefit of the mortgagors.  The mortgage was also to secure the facilities of Apace; and again, this was Mrs Lam’s company, in that she was the major shareholder; and Ms Lam was also a shareholder.  The loan was not to their manifest disadvantage and there was nothing to put the Bank on inquiry.

32. It follows that, while Mrs Lam and Ms Lam might have some evidence to support the defence of undue influence, that defence would not be effective against the Bank.

Result

33. In the result, none of the defendants in these three actions has a real or bona fide defence.  I therefore gave judgment against them.