THE HONGKONG AND SHANGHAI BANKING CORPORATION LTD v. FULLY RICHEST INTERNATIONAL LTD

HCMP 2210/2020

[2022] HKCFI 365

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 2210 OF 2020

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REASONS FOR JUDGMENT

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Introduction

1.  The Plaintiff commenced this mortgage action under Order 88 of the Rules of the High Court by an originating summons filed on 27 November 2020 seeking, inter alia, (1) payment of all monies due and owing under a mortgage deed of 5 May 2010 (“the Mortgage”); (2) vacant possession of certain premises at Arran Court (“the Property”); and (3) costs. 

2.  By summons dated 9 September 2021 Fully Richest International Limited (“the Defendant”) seeks an order converting the originating summons into a writ action (“the conversion summons”).

3.  This is the adjourned hearing of the originating summons and the conversion summons.

4.  At the conclusion of the hearing, I dismissed the conversion summons and made an order in terms of the originating summons. My reasons appear below.

Background facts

5.  The Plaintiff provided loan facilities to Double Chemicals & Dyestuffs Company Limited and Dunkong Investments Limited (formerly known as Double Dyestuffs Company Limited), (respectively, “the 1^st Borrower” and “the 2^nd Borrower” and collectively, “the Borrowers”) by a facility letter dated 15 January 2010 (“the 1^st Facility Letter”).

6.  The banking facilities so granted were renewed by 2 facility letters dated 17 February 2016 (“the 2^nd Facility Letter”) and 22 August 2016 (“the 3^rd Facility Letter”) (together with the 1^st Facility Letter, “Loan Facilities”).

7.  The Loan Facilities are secured, inter alia, by the Mortgage granted by the Defendant over the Property. The 1^st Borrower defaulted under the Loan Facilities in August 2019 triggering demand letters dated 16 August 2019 and 19 August 2019 to the 1^st Borrower and the Defendant respectively.

8.  As at 10 January 2022, the amounts outstanding are HKD 86,607,251.12 and USD 3,768,940.19.

The Plaintiff’s case

9.  As at the date of the Mortgage, the Defendant, a Hong Kong company, had a sole director, namely, Nominees and Secretaries Limited (Corporation) (“Nominees Limited”) whose authorised signatory was one Gordon Chan.

10.  Its shareholders at that date were Chan Chun Chun (“Ms Chan”) holding one share and Nominees Limited, holding the balance of 9999 shares.

11.  The material provisions in the Defendant’s Articles of Association are the following:

“12. If the Company shall have only one director, such sole director shall have full power to represent and act for the Company in all matters as are not by the Companies Ordinance (Chapter 32) or the Memorandum or these Articles required to be exercised by the members of the Company and in lieu of minutes of a meeting shall record in writing and sign a note or memorandum of all matters requiring a resolution of directors and provide such note or memorandum to the Company within 7 days. Such a note or memorandum shall constitute sufficient evidence of such resolution for all purposes.

19. Without prejudice to the general powers conferred by the preceding Article and the other powers conferred by these Articles, it is hereby expressly declared that the Directors shall have the following powers, that is to say, power:-

…

(7) To invest, lend or otherwise deal with any of the monies or property of the Company in such manner as they think fit, having regard to the Company’s Memorandum of Association and from time to time to vary or realise any such investment.

(8) To borrow money on behalf of the Company, and to pledge, mortgage or hypothecate any of the property of the Company. …

21.  The Directors shall provide for the safe custody of the seal, which shall only be used by the authority of the Directors … and every instrument to which the seal shall be affixed shall be signed by a Director or by some other person or persons appointed by the Directors for the purpose.”

12.  On 3 May 2010, the sole director of the Defendant signed a memorandum in writing pursuant to Article 12 (“the Memorandum”). An unsigned copy of the Mortgage (which had been considered prior to the signing of the Memorandum) was attached.

13.  The Memorandum recorded, inter alia, the following:

“Commercial Benefit

The sole director reviewed the financial position of the [Defendant] and noted the benefits which the [Defendant] would derive from the availability of the said facilities having regard to the close business relationship between the [Defendant and the Borrowers]. The sole director was of the opinion that the entering into the Mortgage in favour of the [Plaintiff] would be in the commercial interests of the [Defendant].”

14.  That was followed by the resolutions to the effect that (1) in view of the close business relationship between the Defendant and the Borrowers, “there was commercial benefit” in the Defendant entering into the Mortgage which was thereby approved; (2) pursuant to the shareholders’ resolutions, the Defendant proceed to enter into the Mortgage and execute the same under its common seal in the presence of and to be signed by inter alia, Law, Yun Fu (“YF Law”) or Law, Ka Man (“KM Law”); (3) YF Law or KM Law be authorised to sign and to affix the common seal on behalf of the Defendant as YF Law or KM Law shall deem necessary and proper.

15.  It is not disputed that the Mortgage was duly executed and quantum is not in issue. 

16.  The Plaintiff’s case is simple: Mr Terrence Tai, counsel for the Plaintiff, submitted that in the circumstances outlined above, the security is valid, there is an outstanding debt which is not disputed and there is no reason why the Plaintiff should not be entitled to the relief that it seeks.

The defence: undue influence

17.  YF Law is the founder and director of the Borrowers and considered by Ms Chan to be a successful businessman owning a dyestuffs business in Mainland China.

18.  Ms Chan was YF Law’s de facto spouse/partner with whom she has a son. YF Law has 2 other children but Ms Chan is not their mother. According to Ms Chan, she had never participated or taken part in YF Law’s businesses although since the late 1990s, YF Law “caused [the 1^st Borrower] to employ [Ms Chan] as a personal assistant in order to pay [her] regularly as maintenance” for her family. Despite the employment, Ms Chan did not in fact have to work for the 1^st Borrower. What Ms Chan was paid and when those payments ceased were not stated.

19.  Her evidence is that at all material times, she was and is the 100% beneficial owner of the Defendant which is the corporate vehicle she used to hold the Property. The Defendant has no other assets and no other business activities.

20.  Ms Chan acquired the Defendant as a shell company in March 2008. She claims that Nominees Ltd held its shares on trust for her. Conspicuously absent is any evidence from Gordon Chan (the authorised signatory of Nominees Ltd) whose evidence as to the identity of the beneficial owner of the shares held by Nominees Ltd must be crucial.

21.  On 27 February 2012, Nominees Ltd transferred 5099 shares in the Defendant to Ms Chan and on 18 February 2013, it further transferred the remaining 4900 shares to her. What that establishes is that Ms Chan became a majority shareholder of the Defendant in February 2012 and became its sole beneficial owner in February 2013. It does not establish that Ms Chan was the sole beneficial owner of the Defendant as at 5 May 2010. 

22.  Be that as it may, it is Ms Chan’s case that she purchased the Property for $13.8 million in 2008, that she paid an initial deposit of $0.5 million to the vendor and the balance of the “deposit” and “the down payment”. However, no actual figures were given for those payments.

23.  The balance was financed by a legal charge/mortgage obtained on 18 November 2008 from the Standard Chartered Bank (Hong Kong) Limited (“SCB”).

24.  While Ms Chan thought fit to substantiate the payment of $0.5 million to the vendor, it is somewhat inexplicable that no specifics were given of the amount she borrowed from SCB, the monthly repayment amounts and how those were financed.

25.  She refers to the sale of another property she owned (“the Spring Seaview property”) in July 2009, the proceeds of which she apparently applied to discharge the SCB mortgage on 5 May 2010.  

26.  The land search reveals that the sale price of the Spring Seaview property was $7.7 million. What Ms Chan failed to disclose to the court (but is readily apparent from the land search exhibited) is that the Spring Seaview property was subject to an all-monies mortgage in favour of DBS Bank which was released when the Spring Seaview property was sold. What is also not said is the amount paid to DBS Bank for the release of the mortgage which would necessarily affect the amount of sale proceeds that would be available to discharge the Mortgage over the Property.

27.  As an aside, the land search further reveals that the Spring Seaview property was purchased by the 2^nd Borrower in 1998 for $8.3 million and sold to Ms Chan in 2002 for $3.7 million. At the time Ms Chan acquired the Spring Seaview property, YF Law was the 2^nd Borrower’s director.

28.  Ms Chan professes to be a simple housewife, educated only up to Form 5 with no experience or knowledge in business and commercial dealings. Yet, in 2008, she knew enough to acquire a shell company to hold the Property and to vest 99.99% of the shareholding in the Defendant in a nominee company when, in 2002, she had purchased the Spring Seaview property in her own name. There is no explanation to account for the change.

29.  Further, there is not a word about who Gordon Chan was nor why the nominee was a limited company which would have entailed a certain expense as distinct from the nominee being a friend doing it as a favour.

30.  When, upon her solicitors’ request, the Plaintiff provided various documents in relation to the Mortgage which contained her signature, (namely, a resolution of all shareholders of the defendant dated 3 May 2010, approving the Mortgage as well as the 2^nd Facility Letter), Ms Chan sought to explain her signatures on the basis that it was only because YF Law had exerted undue influence on her, and without explaining their nature or advising her to seek separate legal advice.

31.  However, her signature on those documents is irrelevant. As submitted by Mr Tai:

 (1)     it is for the sole director (rather than the members) of the Defendant to manage the Defendant’s affairs. It was thus entirely within the power of the Defendant’s then sole director to enter into the Mortgage on behalf of the Defendant and/or to appoint signatories to execute the Mortgage on the Defendant’s behalf: Articles 12, 19 (7) and (8); and see Re Hsin Kuang Restaurant (Holdings) Ltd [2020] HKCFI 1314 at §63

 (2)     the Mortgage was duly executed by the 2 authorised signatories;

 (3)     the Defendant is therefore bound irrespective of whether Ms Chan was subject to any form of undue influence;

 (4)     although Ms Chan contends that she is the ultimate beneficial owner[1] of the Property, she has not adduced any evidence to displace the presumption that the beneficial and legal interest in the Property is meant to vest in the Defendant alone: Lo Man Yau v Chiu Sung Fai [2018] 6 HKC 221 at §12;

 (5)     contrary to the Defendant’s submission[2], the Plaintiff is not under any obligation to obtain the Defendant’s confirmatory signatures before issuing any other facility letters subsequent to the Mortgage since that would be inconsistent with the terms of the Mortgage:

(a) as the Mortgage is an all-monies mortgage, the Defendant’s obligation is to repay any indebtedness owing at the time of the execution of the Mortgage or at any time thereafter: see Standard Chartered Bank (Hong Kong) Limited v Pak Kwan Ho (unrep.), HCMP 1637/2015, 13 March 2018 at §10; and

(b) clause 19.02 (b) of the Mortgage is a standard clause which prevents its discharge due to any modification of the terms relating to the general banking facilities granted to the Borrowers or any other matter or thing whereby the Defendant’s liability would but for the said clause have been discharged; and

 (6)     clause 20.02 of the Mortgage authorises the Plaintiff to “make other arrangements with ... the [Borrowers] without prejudicing or affecting the [Plaintiff’s] rights and remedies against ... the Defendant.”

32.  Mr Raymond Lau, counsel for the Defendant, brushing aside the Plaintiff’s submissions, persevered in his contention that there is evidence before the court that undue influence was exerted on Ms Chan which (as it were) cannot be ignored. The evidence relied on is Ms Chan’s allegation that her signatures to the documents referred to in §30 above were procured as a result of YF Law’s undue influence exerted on her.

33.  The court was referred to Lord Nicholls’ speech in Royal Bank of Scotland plc v Etridge (No 2) [2002] 2 AC 773 at §87:

“… if a bank is not to be required to evaluate the extent to which its customer has influence over a proposed guarantor, the only practical way forward is to regard banks as “put on enquiry” in every case where the relationship between the surety and the debtor is non-commercial.”

34.  It was submitted that the relationship between the Plaintiff and the Defendant was “non-commercial” and therefore the Plaintiff must take reasonable steps to bring home to the Defendant the risks it is running by the Mortgage which it failed to do.

35.  The Defendant’s submission as to the Mortgage being “non-commercial” is untenable given the clear terms of the Memorandum of the sole director made pursuant to Article 12 that it would be in the Defendant’s commercial interests to enter into the Mortgage. There is no evidence to gainsay what is clearly stated in the Memorandum and it has never been suggested that undue influence was exerted over Gordon Chan, the authorised signatory of Nominees Ltd.

36.  Moreover, given Ms Chan’s own evidence (that she was paid by the 1^st Borrower regularly in respect of an employment relationship although she was never required to work for the 1^st Borrower), plainly there was a relationship between Ms Chan and the 1^st Borrower.

37.  The Defendant sought to place reliance on Lam JA’s observations in Wing Hang Bank Ltd v Crystal Jet International Limited & Others [2005] 2 HKLRD 795 at §43 setting out what he considered to be issues that needed to be further explored before any conclusion could be reached on undue influence.

38.  Those observations were made in the context of insufficient/inadequate pleadings by a party advancing a defence such as undue influence. In that case, D1’s attempted reliance on improperly raised defences of undue influence and misrepresentation was impermissible. It is not apparent how that authority can advance the Defendant’s case.

39.  As to Ms Chan’s allegations of undue influence, her evidence is unsatisfactory and leaves much to be desired: see §§20-29 above. But all that is beside the point as undue influence has no relevance: see §31(3) above.

40.  It is clear that the Defendant’s approach was to treat Ms Chan as the Defendant. That is tantamount to piercing the corporate veil which is impermissible.

41.  Parties should be disabused of the notion that the mere incantation of undue influence is sufficient to avoid summary judgment and for a trial to be ordered. That approach is wholly misconceived and must be rejected, being entirely contrary to the underlying objectives stated in RHC Order 1A, rule 1.