The China and South Sea Bank, Ltd. Hong Kong Branch v. Yuen Hing Medicine Manufactory Ltd. and Others

HCA 6947/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 6947 OF 1998

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J U D G M E N T

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Background:

1. The 2nd and 3rd defendants were directors of the 1st defendant company which manufacture Chinese medicine. The medicine was invented by the 3rd defendant who is a Chinese herbalist. In July 1996, the 2nd and 3rd defendants for and on behalf of the 1st defendant opened a saving account with the plaintiff bank. On 24 October 1996, they executed a deed of guarantee in favour of the plaintiff in consideration of the plaintiff granting banking facilities to the 1st defendant. The deed of guarantee is a continuing guarantee subject to a maximum of $800,000 together with interest and costs. The 1st defendant was unable to repay the loan granted under the facilities. As at 6 March 1998, the 1st defendant was liable to the plaintiff in the amount of $5,402,303.23. The plaintiff issued a writ against the defendants and obtained judgment against the 1st defendant in respect of the debt and against the 2nd defendant in respect of his guarantee. The present proceedings are concerned with the plaintiff's action against the 3rd defendant in respect of his guarantee. The 3rd defendant's defences are non est factum, misrepresentation and undue influence.

The facts:

2. The 2nd defendant had been a client of the Jordan Sub-Branch of the plaintiff bank. At his request Mr Lam of the plaintiff bank opened a saving account for the 1st defendant in July 1996. Mr Lam was the plaintiff's marketing officer who handled the formalities and witnessed the 3rd defendant signing on the specimen signature form and other documents.

3. Towards the end of July 1996, Ms Tsiang the Sub-Branch Manager, Mr Chan Hon Ting the Senior Manager of Sub-Branch Supervision Department of the plaintiff and Mr Lam paid a courtesy visit to the 1st defendant's factory in Tai Lin Pai Road when they happened to be at the building visiting another client. They were met by the 3rd defendant. The 2nd defendant joined them about half an hour later. During that visit, nothing was mentioned about the opening of the account or banking facilities.

4. Subsequent to that visit, the 2nd defendant requested for banking facilities for the 1st defendant. In due course, Mr Lam gave the 3rd defendant a guarantor information form to complete. He could not recall how the form was given to the 3rd defendant and whether it was sent to him by post or by hand, but he denied the suggestion that it was given to the 3rd defendant via the 2nd defendant. He recalled, however, that he telephoned the 3rd defendant and told him about the need to complete this form in connection with the 1st defendant's application for banking facilities. In due course, he received the duly completed form signed by the 3rd defendant. Again, he could not recall how he came to receive it, but he certainly did not witness the 3rd defendant signing on the form which, however, is not important as witnessing of the signature was not required in respect of the signing of that form.

5. After internal processing by the plaintiff and when the facilities were approved, Mr Lam gave the deed of guarantee and the facility letter to the 2nd and 3rd defendant for signature. He personally took the documents to the 2nd defendant's office in Sheung Wan and to the 3rd defendant's home or clinic in Kwai Fong for their signature. He could not remember to whom he took the documents for signature first. But he was able to recall that these documents were signed separately at the office of the 2nd defendant and at the home or clinic of the 3rd defendant and that he had explained briefly the nature of the documents to the 3rd defendant.

6. Mr Lam denied allegations that the deed of guarantee was given by him to the 2nd defendant to procure the signature of the 3rd defendant. The 3rd defendant said he only saw Mr Lam twice; once when he signed the specimen signature card on opening the bank account for the 1st defendant and next when Mr Lam and his colleagues visited his factory in Tai Lin Pai Road in July 1996. But Mr Lam said he saw the 3rd defendant more than twice but not more than five times. He recalled that he had been to the 3rd defendant's home or clinic when delivering documents for him to sign. He could not give the address. Had he wished to do so, he could easily have read the documents during the adjournments and impressed me of his memory, but he did not. However, he was able to recall how to go there, that the factory and the home or clinic were on the opposite side of Kwai Chung and that he had to exit from a different exit from the MTR to go to his home or clinic. He was able to recall that his home or clinic was a small unit in an old domestic building. He was able to identify the 3rd defendant in court. If he had only met the 3rd defendant under the two uneventful occasions as alleged, he might not have been able to recognize him after five years. I am satisfied that he had met the 3rd defendant more than twice. I am also satisfied that he had in fact been to the 3rd defendant's home or clinic for the purpose of delivering documents to him for signature, otherwise he could not have any recollection about the 3rd defendant's clinic or home after these five years. Mr Lam impressed me as a responsible and reliable witness. Though there are a lot of details surrounding the execution of the deed of guarantee and the facility letter which he could not remember, he was firm about witnessing the 3rd defendant's signature on the deed of guarantee, the facility letter and specimen signature card. He impressed me as a responsible officer who knew well what signatures required to be witnessed and what signatures did not so require and that he faithfully adhered to that requirement. He handled over a hundred clients. Delivering documents to clients for signature and witnessing execution was just part of his routine. The present incident was just one of the many in the past few years. When the incident occurred, it was just routine and uneventful, unlike a police officer witnessing a crime and making a statement shortly afterwards. It would be unrealistic to require that he should recall all the details of an uneventful incident which occurred five years ago. I am satisfied that Mr Lam is an honest witness. I am satisfied that he had an established procedure to follow in respect of documents the signature on which were required to be witnessed, he faithfully adhere to that procedure and that was what happened in relation to the signing of the deed of guarantee and facility letter in the present case.

7. The 3rd defendant's account is that he came to know the 2nd defendant through one of his patients. The 2nd defendant was introduced to him as a very rich person, living in mid level, driving a Mercedes, a chairman of a United Nations company, a duty officer of the Hong Kong Stock Exchange and who has an office occupying two storeys in Sheung Wan. He agreed with the 2nd defendant to incorporate the 1st defendant company so as to have his factory listed on the Stock Exchange and to have his medicine distributed all over the world. Under that agreement the 2nd defendant was to provide the finance and he was to provide the know how. The 2nd defendant impressed him as a very kind hearted rich man and drove him around to see patients. He said that the 2nd defendant told to him to sign the guarantor information sheet saying that it was required for listing of the 1st defendant company. He said that the 2nd defendant commended him before his mother on his mother's birthday dinner and promised to obtain a global agency for his medicine. Then a few days later, the 2nd defendant told him over the telephone to sign a global agency agreement which would be delivered to him for signature by the 2nd defendant's amah. Accordingly he received the deed of guarantee and signed it thinking it was the global agency agreement. The 2nd defendant also suggested to open a second account to be operated by the factory manager so as to save the unnecessary trip in bringing over cash to the manager for minor reimbursements. Accordingly he was told to sign the facility letter which he signed thinking it was the document for opening this second account. He denied that the deed of guarantee and facility letter were given to him for signature by Mr Lam and that he had ever been explained by Mr Lam the nature of those documents.

8. The 3rd defendant tried to paint himself as a very busy Chinese herbalist devoted to treating patients and inventing medicine and has no time to attend to financial affairs of the 1st defendant. He said he had no business experience and reposed trust and confidence in the 2nd defendant. He signed anything the 2nd defendant told him to. He said he graduated from a medical school in China. Presumably he must be a person of good intelligence. On cross examination, he said since 1991 and prior to knowing the 2nd defendant he had been operating Vital Medicine Factory in Hong Kong with a processing factory in China. He employed three to four employees including a Mr Tsang Kwok Keung who then became the factory manager of the 1st defendant. Mr Tsang has some knowledge of the English language and arranged registration of his medicine for him in Hong Kong. So in the course of his operation of Vital Medicine Factory he must have had some knowledge about account opening procedure and what those documents were like and has many years of business experience.

9. He said in his witness statement that the plaintiff's Senior Manager, Mr Chan Hon Ting, and the 2nd defendant visited his clinic in July 1996 and confirmed to him that the 2nd defendant had bought US$20 million worth of property through the plaintiff. This probably resulted in the plaintiff calling Mr Chan Hon Ting to give evidence about the visit to his factory in July 1996. Mr Chan Hon Ting was a retired Senior Manager. That was the only occasion he met the 3rd defendant. He also denied having been to the birthday party of the 3rd defendant's mother. When cross examined about what he said about Mr Chan Hon Ting's visit, the 3rd defendant said the name of the Senior Manager was Chan Wai Ting and that he had given his name card to his solicitors. No such name card was produced and Ms Connie Tsiang denied there was a Senior Manager in the plaintiff bank by that name. Of course, if there were such a Senior Manager in Sheung Wan Branch who was so acquainted with the 2nd defendant and so personally associated with the 3rd defendant as to attend his mother's birthday dinner, there was no reason why the 2nd defendant would have opened accounts for the 1st defendant and for his companies with the Jordan Sub-Branch. The Jordan Sub-Branch is nowhere near either the 1st defendant's factory or the 3rd defendant's home or clinic in Kwai Chung or the 2nd defendant's office in Sheung Wan and its manager Ms Tsiang was not personally known to the 2nd defendant. His bold assertion that he had given the name card of Mr Chan Wai Ting to his solicitors also shows that he was an exaggerating witness. His account of this person by the name of Chan Wai Ting, like his account about signing of the deed of guarantee taken to him by the 2nd defendant's amah are all fictitious. I find the 3rd defendant a dishonest and incredible witness. I reject his evidence.

Non est factum:

10. I accept the evidence of Mr Lam that he had personally explained the content of the deed of guarantee and the facility letter to the 3rd defendant and witnessed the 3rd defendant signing on those documents. Not only that the 3rd defendant knew the nature of the documents he signed, but he also knew their content. I find that he was a willing party to the deed of guarantee and signed it with full knowledge of what the document was. There was no radical difference between what the 3rd defendant signed and what he thought he was signing and there was no mistake as to the general character of the documents. His plea of non est factum must fail.

Misrepresentation:

11. Miss Lam on behalf of the 3rd defendant submitted that by giving the documents to the 2nd defendant to procure the signature of the 3rd defendant, the 2nd defendant acted as the agent of the plaintiff for the purpose of making representations to the 3rd defendant or for the purpose of procuring the contract. My rejection of the 3rd defendant's evidence and my finding of fact that Mr Lam had personally taken the documents to the 3rd defendant and explained the content and nature of the document to him precluded him from raising the defence of misrepresentation.

12. Miss Lam submits in the alternative that the relationship between the 2nd and 3rd defendants was one in which the 3rd defendant reposed trust and confidence in the 2nd defendant in relation to all the financial management of the 1st defendant's affairs and that the plaintiff had notice of this relationship. Hence she submits that the plaintiff has constructive notice of the misrepresentation as it would have been put on inquiry as to the circumstances in which the 3rd defendant had agreed to act as a guarantor and should have taken steps to warn the 3rd defendant against the risk involved and the need to obtain independent legal advice.

13. While the evidence shows that the 2nd defendant was the one to liaise with the plaintiff in relation to opening of the account and request for banking facilities, there is no evidence whatever that the plaintiff through any of its servants has notice, actual or constructive, that the 3rd defendant reposed trust and confidence in the 2nd defendant. The present case is also to be distinguished from the cases of unfair dealing where a third party, especially the old mother guaranteeing the debt of his son, or the wife guaranteeing the debt of her husband. The 3rd defendant was one of the two directors of the 1st defendant company, the debtor. Being one of its only two directors, the 3rd defendant cannot be treated as if he were a third party to the transaction. He together with the 2nd defendant were in the driving seat of the 1st defendant. They were its controlling mind. The plaintiff's visit to the 1st defendant's factory shows that the 3rd defendant played an active role in the management of the 1st defendant company. As one of its only two directors in the driving seat of the company, he cannot be regarded as a third party to the agreement for banking facilities. In fact, it is a common practice to require directors to guarantee the debt of their company. Even though it was the 1st defendant who opened the account and arranged for the banking facilities, that could not impose on the plaintiff constructive notice that the 3rd defendant reposed trust and confidence in the 2nd defendant, a co-director. His defence of misrepresentation must fail.

Undue influence:

14. Miss Lam also relied on the same evidence in support of the 3rd defendant's defence of undue influence. Even though the 3rd defendant testified that the 2nd defendant represented to him as a wealthy businessman, offered to have his factory listed on the stock exchange, offered to have his medicine marketed world wide and promised to take care of all the financial liability of the 1st defendant, there is no evidence that the plaintiff ever knew of his reliance or the undue influence, whether actually or constructively. His attempt to bring in Mr Chan Wai Ting as a Senior Manager of the plaintiff who had knowledge of the relationship between him and the 2nd defendant also failed on three counts. Firstly, he failed to satisfy me of the existence of this member of staff of the plaintiff. Secondly, he failed to establish that Mr Chan Wai Ting was involved in or had knowledge of the processing of the banking facilities so that Mr Chan's knowledge could be attributed to the plaintiff. It could not be the law that if one out of a thousand employees of a bank had some personal knowledge obtained from his social contacts, then his knowledge would be attributed to the bank. In order to fix the bank with such knowledge, it must be shown that the person receiving the information must know that information is relevant and in relation to the bank's affairs or business, so that the information could reasonably be brought to the attention of some appropriate officers of the bank. Thirdly, his evidence relating to Mr Chan Wai Ting, apart from being suspect, went no further than that Mr Chan visited his clinic a number of times with the 2nd defendant and attended his mother's birthday dinner and heard about the 2nd defendant's assurance of seeking global agency for the 3rd defendant's medicine.

15. I do not think it necessary for me to go into detail analysis of the law in this area. The 3rd defendant is seeking protection in equity to have the deed of guarantee set aside for misrepresentation or undue influence, not by the plaintiff but by a third party, namely the 2nd defendant. The doctrine of notice lies at the heart of equity. There is simply no evidence that the plaintiff, through any member of its staff, has actual or constructive notice of misrepresentation or undue influence nor were the circumstances such as to put the plaintiff on inquiry as to the circumstances in which the 3rd defendant agreed to stand surety. His defence of undue influence must fail.

Conclusion:

16. There is no dispute as to the amount owing by the 1st defendant. Under the facility agreement, the 3rd defendant is also liable for interest at a contractual rate and for costs on an indemnity basis. Accordingly, I enter judgment in favour of the plaintiff against the 3rd defendant jointly and severally with the 2nd defendant for the amount of $800,000 plus interest on the sum of $398,000 from 27 October 1997 at prime lending rate for Hong Kong Dollars quoted from time to time by the plaintiff plus 6.7% per annum until payment and payment of further interest on the sum of $402,000 from 22 August 1997 at prime lending rate for Hong Kong Dollars quoted from time to time by the plaintiff plus 6% per annum until payment. The 3rd defendant shall also pay the plaintiff costs of this action on a full indemnity basis.