WING LUNG BANK LTD v. KONSUN INTERNATIONAL LTD AND OTHERS

HCMP 4499/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 4499 OF 1999

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J U D G M E N T

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1.  In these proceedings the Wing Lung Bank Limited, (the Bank), seeks to recover from the 3^rd defendant, (Peter Wong), and the 4th defendant, (Madam Wong), a sum allegedly due and owing under a guarantee of a mortgage given by the 1^st defendant.  The amount has now been agreed at HK$99,049,150.48 as at 30 June 2003.  I am not concerned with the issues of liability against the 1^st or 2^nd defendants.  Those issues have already been resolved.

The Witnesses:

2.  The determination of the arguments made by Peter Wong and Madam Wong turned on the credibility of the witnesses.  Both Peter Wong and Madam Wong gave evidence.  In assessing their evidence I made due allowance for the fact that Madam Wong was unrepresented, elderly, and that the witness statements were in English, and had to be read to he, in punti, before each witness gave evidence.  The evidence of both Peter Wong and Madam Wong was inconsistent with their witness statements and was inconsistent with each other.  Further, their evidence was at times internally inconsistent.

3.  For the Bank, evidence was given by bank officers, by Mr Rowland Chow, (Mr Chow), a solicitor, who acted for the Wong family and the Bank in the transactions, and Ms Iris Chow, (Ms Chow), a solicitor partner of Mr Chow.  I found the Bank’s witnesses to be honest and straightforward, giving clear and helpful answers.  While Mr Chow and Ms Chow did not record in writing the advice they gave on signing of the various documents, I found no reason to disbelieve them.

4.  Where there were factual conflicts of evidence, I consistently preferred the evidence given by the Bank witnesses, Mr Chow and Ms Chow, to that of Peter Wong and Madam Wong.  The facts I now set out are the facts I find them to be.

Background

5.  The debt now claimed arose in the following way.  Prior to 1980 the property at No. 115, How Ming Street, Kwun Tong, Kowloon, (the property), was owned by Mr Wong Po Ping, the husband of Madam Wong.  On the land was a factory building.  In about 1980 Mr Wong died leaving his estate to his son, Mr Peter Wong, and his daughters, Maria Wong, the 2^nd defendant, and Theresa Wong in unequal shares.  A solicitor, Mr Rowland Chow was acting in relation to the estate.  It is Madam Wong's case that Mr Chow suggested to her that the property could be redeveloped into an office and industrial building.  Whether he did suggest that or not is a matter I will address in due course, but in any event in 1993 Madam Wong decided to proceed with the redevelopment.

6.  Mr Chow introduced her to the Bank as a source of the money that would be required to finance the project.  Prior to that time the Wong family had banked with the Standard Chartered bank.  Madam Wong had not been a beneficiary in her husband’s estate.  On the advice of Mr Chow a company was formed to undertake the redevelopment.  That company was the 1^st defendant, Konsun International Limited, (Konsun).  That was plainly sensible advice, for a company structure is much better suited to undertake the type of very substantial borrowing that would be required and in respect of such a development.  An arrangement was made between the family members that Madam Wong, although she was not an owner of the property, would be a shareholder in the company, as well as her son and two daughters.  The shares were held as to 35% by Peter Wong, 15% by Madam Wong, and 25% each by Maria and Theresa.

7.  One of the daughters, Theresa, is a gynaecologist in Singapore.  She was apparently happy that her interest in property should be made available to the development, but the unchallenged evidence of Mr Chow was that she had instructed him that she did not wish to undertake any personal liability in the transaction.

The Bank loan application:

8.  On 3 February 1994, a mortgage loan application was made to the Bank by Madam Wong, for a building mortgage in the sum of $87 million.  I will later deal with the precise documentation required for that application.  The loan was granted and on 13 April 1994, the Bank gave instructions to Mr Chow to prepare the necessary documents.  On 14 May 1994, the four members of Wong family attended upon Mr Chow to execute the necessary documents.  It was first necessary to transfer the property to Konsun, which thereafter executed a building mortgage.  It was a requirement of the Bank that the shareholders of Konsun should give personal guarantees to the loan.  As Theresa was not willing to involve herself in any personal liability it had been necessary to negotiate a particular arrangement with the Bank so that personal guarantees were given only by Peter Wong, Madam Wong, and Maria Wong.  Following the execution of the building mortgage those three parties signed personal guarantees for the amount advanced.

9.  As it had been necessary to obtain approval of Government to a change in grant of the land comprised in property from industrial to office and industrial a premium was payable to Government on the issue of a new land grant.  That premium was fixed at $21.8 million.  In order to meet that sum, application was made to the Bank to increase the amount of the mortgage advance.  The application was duly approved.  In September 1997, with the redevelopment not yet completed, the loan was increased to pay the premium, and on 18 September 1997, Konsun executed a new building mortgage securing the existing borrowing and the increased borrowing.  At the same time, Peter Wong, Maria Wong, and Madam Wong each signed new personal guarantees.  In addition to the security of the property the Bank required a second mortgage over six additional properties, five of which were owned by company owned by the Wong family, May Yee Land Investment Company Limited, (May Yee), the other of which was owned by Madam Wong.

10.  Shortly thereafter, in anticipation of the completion of the building, and recognising that the Wong family would not have personal capital to repay the entire building mortgage, an application was made by Madam Wong to the Bank for a term loan over a 15 year period.  That loan was duly approved.

11.  Unfortunately, the redevelopment of the property had not proceeded as quickly as all had hoped.  Marketing the redeveloped building was not well following the market and property crash in October 1997.  The poor market conditions were such that the sale of floors in the newly completed building were slow, thereby further restricting the capital available to the Wong family.  Equally, leasing was slow, thereby restricting the income flow from the building.

12.  On 20 January 1998, Peter Wong, Maria Wong, and Madam Wong attended at their solicitors office to execute the necessary documents for the term loan.  Mr Chow was not available on that day and documents were attested by one of his solicitor partners, Ms Iris Wong.  Again, as well as Konsun executing the necessary mortgage, Peter Wong, Maria Wong, and Madam Wong each signed personal guarantees.

Konsun falls into default and demand is made on the guarantors:

13.  The poor market conditions in the Hong Kong following the Asian economic crisis of 1997 and 1998 are well known.  Sales of floors in the building did not take place and leasing was very restricted.  On the eighth monthly instalment Konsun fell into default.  There were the usual discussions and negotiations, and efforts were made by the Wong family to remedy the situation but to no avail.  On 10 July 1999, the Bank made formal demand upon Konsun to make repayment of the amount advanced together with outstanding interest which by that time totalled some $142.8 million.  Payment was not made.  At the same time demand was made by Bank on Madam Wong, Peter Wong and Maria Wong as guarantors.  They were not able to make payment.

14.  On 28 July 1999, the Bank exercised its powers under the mortgage to take possession of the mortgaged property, although it was not until 14 January 2000, that Bank obtained physical possession of the property.  The Bank exercised its power of sale in August 2001 and sold the property to Prompt Trading Limited for $80 million.  That price was below a free market value at the time, but above a forced sale value, as assessed by competent valuers.  Interest had continued to run, and after making allowances sale proceeds, and rentals received during the time the Bank was in possession of the property, the total amount of principal and interest owed to the Bank as at 30 June 2003 stood at the agreed figure of $99,049,150.48.

15.  The Bank commenced these proceedings in 1999, following default by Konsun.  Judgment was obtained against Konsun and Maria Wong without opposition.  The Bank now seeks judgment against Peter Wong and Madam Wong.

The defences:

16.  The defences raised by Peter Wong and Madam Wong overlap but are not entirely identical.  Peter Wong takes three points.  These three points are also taken by Madam Wong.  First, both say that the 1998 guarantee was not explained to them and they did not know that they were signing a personal guarantee.  In essence this is a plea of non est factum.  Next they say that at the time they signed the guarantee they were informed that the guarantee was a guarantee by Konsun, and that they believed they were signing it in their capacity as officers of Konsun, and is not in any personal capacity.  Third, they say that at the time they signed the relevant documentation Mr Chow, their solicitor, was acting not only for Konsun and themselves, but also for the Bank, and that he was accordingly in a position of conflict of interest of such a nature that they ought to be relieved from liability under the guarantee.  Finally, additionally for herself, Madam Wong contends that Bank unreasonably refused to consent to the sale of any of floors of the building or to the leasing of those floors, thereby preventing her from meeting interest instalments or reducing the capital outstanding.  Consequently, she says, she should be relieved from liability under the guarantee.

The involvement of Mr Rowland Chow, solicitor:

17.  At the heart of all matters raised by Madam Wong was an assertion that the decision to redevelop the property was a decision made on the advice of Mr Chow.  Madam Wong's case appeared to be, in part, that that was bad advice, and that as Mr Chow was also the solicitor for the Bank, she ought therefore to be relieved from any liability under the guarantee.  The issue of the conflict of interest was also part of the defence of Peter Wong.  I will deal with the issue of conflict of interest when considering the defences.

18.  There is no doubt that Mr Chow was closely involved in the Wong family affairs.  He was the family solicitor for a period of some 18 years.  He had handled the administration of the estate of the late Mr Wong, and had undoubtedly formed a close professional relationship with Madam Wong during that time.  He gave advice to the two family companies, May Yee, the property owning company, and Rich City, the trading company.  It is almost inevitable that in the course of such a professional relationship lay parties will come to place confidence in the advice of their solicitor.

19.  Madam Wong’s evidence was that the first suggestion to redevelop the property came from Mr Chow.  That may or may not be right, but whether it is right is entirely irrelevant to the decision that I have to make.  Although Madam Wong reasserted on a number of occasions that Mr Chow advised her to undertake the redevelopment it is abundantly plain from her witness statement that she made the decision to redevelop only after considerable independent investigation and advice from sources other than Mr Chow.  Her witness statement, which was read and understood by her before she gave evidence, and from which she did not resile, makes it plain that on at least two occasions before making the final decision she rejected the notion.  The witness statement makes it equally plain that her final decision to go ahead with the development was one made only after taking advice from others than Mr Chow.

20.  While I have a great deal of sympathy for Madam Wong, and the predicament she has found herself in, I am obliged to reject any argument made by her that her predicament was somehow Mr Chow’s fault.  The decision to redevelop was one made perhaps with his encouragement, but it was plainly a decision made by the Wong family, together, after taking professional advice from architects and others.  The validity or appropriateness of any such advice received is quite irrelevant to the issues before me.

The Bank’s claim:

21.  There is no dispute that monies were advanced as alleged by the Bank and that the mortgages and guarantees were in proper form and were signed by Peter Wong and Madam Wong.  Issues were raised during the course of the trial as to the amount due, and I am grateful to the solicitors Peter Wong and the Bank for the assistance they gave me in sensibly discussing the amount due with Madam Wong in order that her queries maybe satisfied, and she was ultimately able to agree the amount due.  She was right to raise those queries; they resulted in a reduction in the amount of the claim by some $10 million.

The misrepresentation, or non est factum defence:

22.  The allegation was made by both Peter Wong and Madam Wong that when they went to execute the 1998 guarantee, the documents were not explained to them by a solicitor, but that they were merely given the documents to sign by a clerk.  They said that that clerk did not explain the documents to them, with the exception of a brief explanation as to the guarantee.  In this respect it was contended that the clerk told them that the guarantee document was a guarantee by Konsun of the liabilities, and that consequently they believed they signed that document as officers of Konsun.

23.  I have already indicated that I prefer the evidence of Ms Iris Wong as to what took place when the documents were signed.  But apart from that, the suggestion that Konsun would guarantee its own liability is simply untenable.  It is a contradiction in terms and would have been understood by both Peter Wong and Madam Wong to be so.  Both were thoroughly familiar with the concept of a personal guarantee.  They had both given a personal guarantee in respect of the first loan in 1994.  Subsequently, between July 1994, and August 1997, Peter Wong and Madam Wong signed no less than 8 different guarantees to borrowing by Rich City, from the Bank, which borrowing was secured against property owned by May Yee.  They did not suggest that those documents had not been properly explained to them or that they did not understand the nature of the guarantees involved. 

24.  Further, at the time each loan application was made, both Peter Wong and Madam Wong were required to complete a document for the Bank entitled a “Supplementary Sheet For Loans Customer Information”.  In each of these, the person providing the information was required to indicate their “customer status” by ticking the corresponding box to indicate whether they were providing that information as a borrower, mortgage or, a guarantor.  Over the years both Peter Wong and Madam Wong signed a large number of such Supplementary Sheets, all indicating their capacity as guarantors.  Both sought to assert that the documents were not filled out by them, but pre-completed by the Bank, and subsequently signed by them.  When it was pointed out to them that the documents were in both English and Chinese and could easily be read by them, both was sought to assert that the documents were blank and signed by them in blank.

25.  That assertion does not assist them.  In so far as it constitutes a plea of non est factum, the plea is not available to anyone who has signed a document without taking the trouble to find out, at least, the general effect of the document: see Gallie v Lee [1971] AC 104.  The argument is stronger when a person signs a document in blank leaving for others to complete the content.

26.  Notwithstanding her presentation as an innocent, inexperienced housewife and widow, I am satisfied that Madam Wong was a capable and experienced business woman who had, albeit with assistance, successfully run her late husband’s business following his death.  Further, she had undertaken the investigation of the concept of the redevelopment of the property, and the redevelopment itself.  Her daughters both lived overseas and it appears that Peter Wong, when he was in Hong Kong, was primarily interested in the operational side of the family business, which was managed by his mother.  During this time she was able, through the medium of May Yee, to amass a significant property portfolio.  I am completely satisfied that both she and Peter Wong well knew the concept of a personal guarantee to corporate borrowing and the nature of the documents they were required to sign.

The conflict of interest defence:

27.  There is no doubt that throughout the whole of the relevant period, when acting for the Bank in the preparation of the security documents, Mr Chow was also acting both for the Wong family.  In addition, throughout that time, Mr Chow held a formal appointment as a part time General Counsel to the Bank.  This was an appointment which required him from time to time to spend several days a week at the head office of the Bank giving advice on various matters.

28.  Both Peter Wong and Madam Wong contended that these circumstances gave rise to a conflict of interest on the part of Mr Chow to such an extent that it ought to relieve them from their liability under the guarantees.  No authority was cited for the proposition.  Rule 5C of the Solicitors’ Practice Rules, made under the Legal Practitioners Ordinance, Cap 159, deals with issues of representation in conveyancing transactions.  The rules make it clear that a solicitor, or two or more solicitors practising in partnership, shall not act for both the vendor or and the purchaser on a sale or other disposition of land for value.  That is an entirely sensible rule designed to avoid the obvious conflict of interest that arises in such a transaction.  However in r. 5C(6), the rule specifically provides that it shall not apply to a mortgage of land.  I am completely confident that if any genuine conflict of interest arose in a solicitor who acted both for a mortgagee bank and the mortgagor the Solicitors’ Practice Rules would prohibit such a transaction.  That they do not is a telling indication that there is no conflict of interest.

29.  In any event, it was completely clear from the evidence of Peter Wong that right from 1994 he knew that Mr Chow acted both for the Bank and for the Wong family.  He elected to proceed with the transactions in that knowledge.  His evidence was that he did not trust Mr Chow nor did he consider that he could rely upon Mr Chow.  Notwithstanding that evidence he did not point to one single occasion from 1994 to 1997 during which time Mr Chow and his firm acted both for the Bank and the Wong family, in relation to both mortgages given by Wong family companies and personal guarantees given by Peter Wong, in which he sought independent advice.

30.  Peter Wong’s evidence was that when he was telephoned in early 1998, and asked to come to Hong Kong from Canada to sign the documents, he requested that all documents be forwarded to an independent solicitor for advice.  His evidence was that he repeated that assertion to both Mr Chow’s secretary and to Ms Iris Wong, both before and after signing of the documents.  Notwithstanding that he knew that the documents had not been sent for independent advice prior to signing, he elected to sign them.  Following signing he took no steps whatsoever to follow up the alleged instruction and did not even know whether the documents had been sent to the named independent solicitor.  His evidence was that at no stage had he personally, or through anyone else, given instructions to that independent solicitor in relation to the documents.  Quite how he thought that because his wife and the solicitor’s wife, both in the United Kingdom, were personal friends, that would mean that a solicitor in Hong Kong, without anything else, would know why a resident of Canada would require of a set of documents to be sent to that solicitor, was something I simply could not discern from his evidence.  I reject completely the contention that any such request or instruction was given.

31.  I am satisfied that not only was Mr Chow not in a circumstance of a conflict of interest, but that even if he was, there is no legal basis upon which, in the circumstances, that conflict should lead to the guarantees not being enforceable by the bank.

The failure to explain defence:

32.  Both Madam Chow and Peter Wong asserted that the 1998 guarantee was not explained to them.  I am satisfied from the evidence of Ms Iris Wong that it was properly explained.  The assertion made by Madam Chow and Peter Wong was quite inconsistent with the assertion that the document was described to them as a guarantee by Konsun.  Again, if as they say the document was not explained to them, then that does not assist them, for they each elected to sign it without bothering to find out what it meant.  The law is clear.  The court will not assist a person who signs a document without taking the trouble to find out what the document means.

The refusal to agree to a sale defence:

33.  Madam Wong contended that by refusing to agree to the sale of individual floors of the property or individual leases of units in building the Bank had prevented her from securing either capital or income to reduce the principal sum under the mortgage or make interest instalment payments.

34.  Again, I regret to say, that the law is clear.  It has been established since 1860, and was reasserted, specifically in relation to Hong Kong, by the Privy Council in 1990, that a creditor owes no duty to a guarantor in the exercise its power of sale of the mortgage securities, and could decide in its own interest whether to sell and when to do so: see China & South Seas Bank Ltd. v George Tan [1990] 1 AC 536.  This defence must fail.

35.  Each of the defences having been pleaded and argued by Peter Wong and Madam Wong have failed.  There must be judgment for the Bank for the agreed sum owing, together with interest at judgment rate from 30 June 2003.

Costs

36.  I am satisfied that there are provisions in the documents which make provision for contractual costs on an indemnity basis.  Costs are a matter which are in the discretion of the court, but the usual rule is that where there is a contractual entitlement for costs the discretion should be exercised according to the contractual arrangement.  Notwithstanding my sympathy for Madam Wong, and the losses that she and the family have suffered, there is nothing in the circumstances of this case to persuade me to depart from that usual rule.  There will accordingly be an order for costs to be taxed if not agreed on an indemnity basis.  Disbursements to follow in the usual way.