BANK OF CHINA (HONG KONG) LTD v. WELL LOK PRINTING LTD AND OTHERS

HCMP 3925/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 3925 OF 2002

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J U D G M E N T

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1. These proceedings began by way of originating summons under O. 88 of the Rules of High Court in which the plaintiff (the bank) sought orders in relation to three different mortgages against the three defendants.

2. First, the bank sought monies due under a legal charge, (the first charge), dated 1 July 1992 given by Well Lok Printing Limited (Well Lok). Next, the bank sought payment of money due to the bank by the second defendant Ko Ping Hong (Mr Ko) and Choi Lai Lar (Madam Choi) pursuant to a legal charge given by them dated 31 July 1996, secured over a residential flat at On Chak Mansion (the first On Chak charge). Mr Ko and Madam Choi are husband and wife and were the joint owners of the On Chak Mansion Property, which was their matrimonial home. Third, orders were sought for the payment of monies due by Mr Ko and Madam Choi, and secured by a second charge over the On Chak Mansion Property, (the second On Chak charge). In respect of each, possession of the two charged properties was sought. Mr Ko owns 80% of the shares in Well Lok.

3. In the absence of appearance, judgment was entered against Well Lok, Mr Ko and Madam Choi on 3 January 2003. The bank entered into the possession of both properties and has sold both properties. Despite the sale there is still a deficit owing to the bank.

4. On 25 August 2003, Madam Choi sought orders pursuant to O. 28 r. 4(1) that the order of the Master made on the 3 January 2003 in her absence be varied, absolving her from liability in the cause. That matter came before the Master on 26 January 2004 and an order was made that the judgment against Madam Choi for the payment of money should be set aside, that the plaintiff should serve upon Madam Choi a statement of claim and a statement of defence should be thereafter served. By that time, the bank had sold the two properties. The bank now appeals against that order.

5. The position now is that the bank only seeks to enforce against Madam Choi the first On Chak charge, and that, only insofar as it relates to the mortgage loan used to purchase the On Chak matrimonial home, and no other indebtedness.

6. The first charge was in relation to a property owned by Well Lok, consequent upon a mortgage given by Well Lok, and sought only to recover monies due by Well Lok. It may, for practical purposes now be ignored, as between the bank and Madam Choi.

7. The basis upon which Madam Choi seeks to avoid liability is the familiar one of an allegation that she entered into the first On Chak charge by reason of undue influence of her husband Mr Ko in whom she placed the trust and confidence. She contends that the transaction in question was one that called for an explanation. She relies, as may be expected, on Royal Bank of Scotland Plc v Etridge (No. 2) [2002] 2 AC 773. It is well established that a transaction entered into by a person, as a result of the undue influence of a third party, may be set aside as against the other party to the transaction, (in this case the bank), where it can be established that that other party, (the bank), had actual or constructive notice of the undue influence: see Bank Of Credit and Commerce International Sa, The Aboody [1990] 1QB 923, Barclays Bank Plc the O'Brien [1994] 1AC 180.

8. The evidence establishes beyond any question whatsoever that by the first On Chak charge, on 31 July 1996, a sum of $2,730,000 was advanced to Mr Ko and Madam Choi, and that sum was applied for the purchase of the On Chak Mansion flat. That is plain because the bank paid that sum directly to the vendor of the property, upon the acquisition of the property by Mr Ko and Madam Choi.

9. However, the legal charge is, in the light of this undisputed factual scenario, somewhat peculiar. Notwithstanding that the bank now argues that the advance was solely for the joint purposes of the husband and wife, it describes Mr Ko and Madam Choi as the mortgagors, but described Mr Ko as the borrower. Great weight is placed by Miss Yeung on clause 2 of the recitals to the charge which read as follows:

"The borrower has through the mortgagor applied to the lender to grant to the borrower facilities (as hereinafter defined) or to forbear to sue the borrower for the recovery of sums due and owing under facilities already granted by the lender to the borrower for so long as the lender in its absolute discretion may think fit or to grant indulgence or other accommodation to the borrower and the lender has agreed to grant or continue to grant such facilities forbearance indulgence or accommodation to the borrower to such extent as the lender may in its absolute description from time to time deem fit upon the mortgagor and the borrower entering into the covenants and obligations hereinafter contained and upon the mortgagor charging the property to the lender as security for the due payment of all money payable or, which made at any time hereafter or from time to time become payable by the mortgagor and/or borrower to the lender hereunder and interest thereon in manner hereinafter more particularly described."

10. In other words, it is a usual all monies mortgage, with the unusual distinction that, although the monies immediately borrowed were applied to the joint benefit of both Mr Ko and Madame Choi, only Mr Ko was described as the borrower. The consequence of the manner in which the charge has been drawn is that it has the effect of entitling the bank to pursue Madam Choi for any outstanding separate debts of her husband, and securing those against the property.

11. There is, on the evidence, no particular explanation for this form being adopted. It is clear though, from the evidence, that Mr Ko had a long standing relationship with the bank, not only on a personal level, but also through Well Lok, and it may be expected that it was intended that the charge should not only secure the sum advanced for the purchase of the property, but also other liabilities incurred by Mr Ko in relation to the Well Lok business.

12. Mr Chan acknowledged that, were he seeking to enforce against Madam Choi not only the amount due and advanced for the acquisition of the property, but also other liabilities of Mr Ko arising from his separate business ventures, he would be obliged to concede that it would be open to Madam Choi to raise the arguments of undue influence for, insofar as the transaction related to that other borrowing, the arguments in Barclays Bank and Etridge are open to Madam Choi. But, Mr Chan submitted, the bank wished to confine itself simply to the sum advanced for the purchase of the property, and claim nothing more.

13. The claim made by the bank began with a letter dated 26 August 2002 addressed to Madam Choi seeking a sum outstanding under the charge for the purchase of the property of $2,350,520.41 and outstanding interest, and also an overdraft of $302,491.87 an interest thereon. As I understand the bank position does not now seek to pursue Madam Choi in respect of that overdraft. As I have previously set out, the property has been sold. The sale price was not sufficient to repay the full amount of the indebtedness owing under the mortgage and there is outstanding a balance of $859,252.72 as at 4 February 2004. That sum does not include the overdraft claimed in the letter of 22 August 2002 of $302,491.87.

14. Where the sole purpose of the loan is for the benefit of both the husband and the wife, it is immaterial, and not a ground upon which a wife can have the transaction set aside, that she may have been persuaded against her will and by undue influence to enter into the transaction. Madam Choi has gone to some extent in her affidavit to point out that she was a reluctant purchaser of the On Chak Mansion Property. Putting aside for the moment any liability that she may have been incurred for her husband's business debts, that is immaterial. It is absolutely plain that the bank knew that the purpose of the mortgage advance was to enable the husband and wife to purchase for themselves a new matrimonial home. Were the loan document in usual form, naming both husband and wife as borrowers and being confined to an advance for the purchase of the property, not securing other indebtedness, there is nothing in the circumstances of that transaction that would put the bank on notice of undue influence.

15. It is right that on a face of the document it appears that it is for the sole benefit of the husband and that he is described that the borrower, and the extent of a liability secured by the transaction is one which extends beyond the purchase of the property concerned. However, it is clear that the wife cannot take advantage of the stated purpose being of a type which, on its face, appears to be for the sole benefit of the husband, if in reality the loan was used to her benefit as well. See Hedworth v Scotlife Home Loan (2) Limited [1995] MPC 91, discussed in Andrew and Millett Law of Guarantee, page 141.

16. Miss Yeung sought to argue that what was significant was the transaction, and that once the transaction involved the external liabilities of the husband for his business purposes, the inference of potential undue influence arose and the bank should be put on notice. The decision in Hedworth must be read now in the light of Royal Bank of Scotland v Etridge. What is clear from the form of charge used by the bank is that, as well as securing the mortgage advance, it had the effect of securing private past and future indebtedness of the husband in relation to any other business affairs that he might have. The court held in Royal Bank of Scotland v Etridge as follows:

"Whenever a wife offered to stand surety for the indebtedness of her husband or his business or a company in which they both had some shareholding the lender was put on enquiry and was obliged to take reasonable steps to satisfy itself that she had understood and freely entered into the transaction."

The court goes on to set out the nature of the steps reasonably to be expected of the lender both in relation to past transactions, and future transactions.

17. In my view the bank cannot now ignore the form of the document it has used by saying that the reality of the transaction was that only a mortgage advance in relation to the jointly purchase property was made. The reality of the transaction is that it secured not only the advance made to acquire the property but also other private advances to the husband. It is no answer for the bank to say now, "well, we will not sue you now for those other advances". Those advances may have been instrumental in the creation of the situation whereby the parties were unable to pay anything at all.

18. It is arguable by Madam Choi that had she been fully and properly informed of the extent of her liability, over and above that of the mortgage, she would not have been prepared to enter into the mortgage at all. In those circumstances, I am satisfied that an arguable defence arises and that the decision of the Master must stand. There will be an order nisi that costs both here and before the Master will be in the cause, the order to be absolute in 7 days.