WING LUNG FINANCE LTD v. CHENG HO YIN AND OTHERS

HCA1494/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1494 OF 2008

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BETWEEN

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J U D G M E N T

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1.  This is the plaintiff’s application for summary judgment against the 1^st defendant for the sum of HK$1,217,377.68 together with interest pursuant to a hire purchase guarantee and indemnity agreement.  The defence raised is that the 1^st defendant entered into the agreement as a result of undue influence of the 2^nd defendant and the plaintiff was put on inquiry, but failed to take reasonable steps to satisfy itself that the agreement was properly obtained.

Background

2.  At the material time, the 2^nd and 3^rd defendants were the directors of a company called Billion Nice Industries Limited (“the Company”).  The 2^nd defendant was a shareholder of the Company and had a controlling interest in it.

3.  The 1^st defendant is the son of the 2^nd defendant.  He is a university graduate in computer studies.  He emigrated to Canada 1995 and worked as a programmer.  In March 2001, he returned to Hong Kong and began working in the Company as the Information Technology Manager. In 2006 when he entered into the agreement in question, he was paid a monthly salary of some HK$30,000.

4.  On 1 June 2006, the Company entered into a hire purchase agreement (“H-P Agreement”) with the plaintiff in respect of 26 sets of machinery for the production of printed circuit boards.  The duration of the H-P Agreement was for 36 months and the monthly payment was HK$97,334.

5.  Also on 1 June 2006, each of the three defendants entered into a guarantee and indemnity agreement to guarantee the Company’s liabilities under the H-P Agreement. The agreements entered into by the defendants are in both Chinese and English languages.

6.  Before the 1^st defendant signed the guarantee and indemnity agreement (“the Guarantee”), he was given a document entitled “Important Notice [to Guarantor(s)]” (“the Notice”), which is in both Chinese and English languages. The top part of the document advised the 1^st defendant of, inter alia, the extent of the liabilities under the Guarantee.  Point 6 of it stated: “this Notice is for clarification only. You are hereby advised to seek independent legal advice before providing the Guarantee.”   The 1^st defendant had signed below the advice to confirm and acknowledge he was aware of the advice contained in the Notice and that the plaintiff did not act as his legal adviser in relation to the explanations of the Notice and the Guarantee. 

7.  Prior to the execution of the H-P Agreement and the several guarantee and indemnity agreements on 1 June 2006, the Company had put in a hire purchase application form dated by 12 May 2006, in which all the defendants were proposed to act as the guarantors to the hire purchase loan.  Subsequently on 24 May 2006, copies of the 1^st defendant’s identity card, employer’s tax return and bank statement of his home mortgage were provided to the plaintiff.  On 27 May 2006, the credit committee of the plaintiff approved the hire purchase loan.

8.  The Company defaulted in the payment of the 24^th instalment, which fell due on 1 June 2008.  On 20 June 2008, the Company went into creditors’ voluntary liquidation.  The plaintiff was notified of the liquidation by the provisional liquidators.  By letters dated 2 July 2008 to the Company and each of the defendants, the plaintiff terminated the H-P Agreement.  By letters dated 11 July 2008, the plaintiff demanded payment of the unpaid balance from the Company and each of the defendants.

The plaintiff’s claim

9.  On 11 August 2008, the plaintiff issued the writ herein claiming against the defendants for the amount due under the H-P Agreement, pursuant to their respective guarantee and indemnity agreements. 

10.  The 2^nd and 3^rd defendants did not give notice of intention to defend.  Judgment was entered against them on 29 September 2008.

11.  As for the 1^st defendant, he filed an Acknowledgment of Service on 26 August 2008.  By summons filed on 10 September 2008, the plaintiff applied for summary judgment against him.  On 22 September 2008, the 1^st defendant filed a Defence.  The parties had since filed three rounds of evidence.  By the order of Master de Souza made on 10 March 2009, the application was transferred to be heard by a judge.

The defence

12.  Briefly stated, the defence of the 1^st defendant is that he entered into D1’s Guarantee as a result of undue influence of his father.  Although the pleading did not make it clear, Mr Poon indicated in his submissions that reliance is placed on both actual and presumed undue influence. 

13.  It is also the 1^st defendant’s pleaded case that the plaintiff had knowledge of the undue influence through its agent, and it had failed to remind or allow the 1^st defendant to seek independent legal advice such that the transaction should be set aside as an unconscionable bargain. It was argued in submissions that the plaintiff was put on inquiry and it had failed to take reasonable steps to satisfy itself that the Guarantee was properly obtained.

Order14 principles

14.  Counsel have no disagreement on the principles governing Order 14 application. It is only necessary to mention one point.  I accept that, generally speaking, a plea of undue influence is fact sensitive. It is also trite that Order 14 application is not an occasion for minute examination and comparison of the evidence adduced on affidavit, and that the court should not embark upon a mini-trial on affidavit evidence.  That said, however, it does not mean that the Court is bound to give unconditional leave to defend in all cases raising undue influence as a defence.  In my view, the Court is entitled to consider the case advanced by a defendant, assess the evidence adduced in support of the plea of undue influence and to see whether the factual allegations are capable of belief and whether the plea is capable of arising as a matter of law.        

15.  It is with these principles in mind that I turn to consider whether the 1^st defendant has raised triable issues on his defence.

Undue influence

16.  In considering the defence raised by the 1^st defendant, it is useful to bear in mind that the plea of undue influence is ultimately about whether the transaction in question was the result of independent and informed judgement.  As Mr Recorder Ma (as he then was) pointed out in Bank of China (Hong Kong) Ltd v. Wong King Sing & Others [2002] 1 HKLRD 358 at 34, “… the defence of undue influence is ultimately a simple concept. It has all to do with informed consent. Once a court forms the view that consent was freely given with full knowledge of the consequences of entering into the relevant transaction, that is the end of the matter, however improvident the transaction may objectively appear.”   

(1) The evidence 

17.  The thrust of the 1^st defendant’s evidence on how he came to give the Guarantee is contained in paragraphs 11 to 18 of his first affirmation as follows:

“11.   On 1^st June 2006 in the early morning, I was called by my father into his office. He said to me that the Hirer needed to apply for a corporate loan from a finance company called Wing Lung (the Plaintiff herein). My father said the Plaintiff specifically requested me to be the additional guarantor in the loan application, he and his partner (the 3^rd Defendant herein) already agreed to be the guarantors.

12. Initially I was surprised and confused that why I had to be involved in any loan application for the Hirer as I was not one of the directors or shareholders of the Hirer. My father convinced me that the loan amount was only $3,000,000 and the repayment period was only 3 years. In addition, the Hirer was going to be a listed company in 1-2 years. My father stressed that being a guarantor of this loan application will be absolutely no problem as the Hirer was a very stable company.

13. Although my father stressed the above few points, I initially still refused to be a guarantor as I never have any experience and knowledge about being other’s guarantor. However, during the 20-30 minutes discussion in his office, my father’s attitude became stronger and stronger as he said he needed to close the deal by that day.  I was threatened by him that if I refused to be a guarantor, I would lose my job in his company and he would not support my sister’s study in Canada anymore.

14. I was feared not only because of my mother and sister’s living in Canada but also because my apartment, my car park and my car were all being mortgaged to bank and I needed to pay for the instalments every month. I could not lose my job at that time.

15. Perhaps I should discuss with my mother and sister in Canada first. But I did not want them to be worried. I had to make the decision all by myself. Based on my limited knowledge on loan and mortgage, my assumption was that, if a loan involves more than one guarantor, each guarantor should only be responsible for a portion of the loan amount, but not full amount. Eventually, I conceded to my father’s request.

16. At about 10:00 a.m. on the same day, i.e. 1^st June 2006, after the aforesaid discussion, my father bought me to the conference room where a gentleman was waiting there. I was introduced to that gentleman who was, as my father said, the person arranging the loan application. I did not remember the name of this gentleman because he did not give me any name card.

17. Before and after signing the [Guarantee], no one explained to me any terms or conditions as it seemed quite urgent. My father just pointed out to me where to sign but did not further described any detail to me. Although I was a university graduate, the terms of the [Guarantee]were quite hard to fully understand. The English used in the [Guarantee] was not as plain as our daily speaking English. When I was trying to read it through, no one ever advised nor allowed me to seek independent legal advice before signing the [Guarantee].

18. I was given no time to think about the pros and cons of being involved in the said loan. In addition, I was the first time being asked to be a guarantor (in fact it was the only one guarantee that I ever signed), I did not understand it very much.”                 

18.  In this second affirmation, the 1^st defendant further added that (at para.7):

“ I was clearly hesitating before and at the time of signing the [Guarantee] and the Notice.  The Plaintiff’s representative who was witnessing my signature must be aware of my hesitation and the fact that my father urged me to sign the document.  It was because before signing I asked the Plaintiff’s representative for the reason of I being a guarantor as I was not a director of the Hirer and he simply said “ 程序上架啫，無咩問題嘅…” (which may be translated as “it is merely a procedural, there is no problem”). My father added “ 係啦，只係三百萬，公司絶對有能力還清條數，唔使擔心，而且三年好短時間，簽啦 …” (which may be translated as “yes, it is only three million, the company is absolutely able to repay it, don’t worry, and it is only three years which is quite a short time, please just sign it …”).” 

19.  It is trite that in an Order 14 application, a defendant is under a duty to demonstrate that the defence and the evidence in support of it is capable of belief.   In this connection, it is necessary to make some observations on the general credibility and reliability of the 1^st defendant’s evidence.

20.  The first relates to the 1^st defendant’s account of the events in the morning of 1 June 2006.  The effect of the 1^st defendant’s affirmation evidence is that the morning of 1 June 2006 is the first occasion he was asked to act as a guarantor for the Company.  It is also an important part of his case that he was surprised and confused by the request and he did not have time to properly deliberate on the matter or to seek independent legal advice.  However, as early as May 2006 when the Company submitted the hire purchase application form to the plaintiff, the 1^st defendant was already proposed to be one of the guarantors to the loan.  More importantly, on 24 May 2006, about one week before the signing of the Guarantee, copies of the 1^st defendant’s personal documents were supplied to the plaintiff for consideration.

21.  Mr Poon argued that as the 1^st defendant was its employee, the Company could readily have access to his ID card and tax return.  That may be so.  But that does not explain how the Company was able to supply the plaintiff with the 1^st defendant’s bank statement on his mortgage loan account, if the 1^st defendant did not provide it. The statement was sent to the 1^st defendant’s residential address. It is not the type of document that an employer will have in relation to its employees.  It is also noteworthy that the 1^st defendant in his affirmations, neither denied supplying these documents to the Company nor explained the circumstances in which the Company came to have them. 

22.  The documentary evidence suggests that well before 1^st June 2006, the 1^st defendant was aware of the loan application and the proposal to include him as a guarantor.  It further suggests that the 1^st defendant had facilitated the loan application by providing copies of his personal documents to the Company.  It is therefore improbable that it was in the early morning of 1 June 2006 that he was first asked to act as a guarantor.  This in turn calls into question the 1^st defendant’s complaint that he was surprised and confused by the request and there was no time for him to consider the pros and cons of acting as a guarantor.  On the contrary, between at least 24 May and 1 June 2006, he should have adequate opportunity to reflect on the matter and to seek independent advice, if so wished.  In short, the credibility and reliability of the 1^st defendant’s account of what happened on 1 June 2006, which forms the factual foundation of his case, is highly doubtful.

23.  The second point to note about the 1^st defendant’s evidence is that in his first affirmation, he made no mention of the Notice and the signing of it while he complained of not being advised or allowed to seek independent legal advice.  When the plaintiff adduced the Notice in the affirmation in reply, the 1^st defendant responded by saying (para.6 of his second affirmation) he had not read the Notice at all as he thought it was “merely one of the necessary documents to be signed” with the Guarantee.  He said he was not even aware of the existence of the Notice, let alone the contents of it.  He explained he did not remember signing this, which was why he made no mention of it in the first affirmation.  What is, however, peculiar is that he complained at the same time that the plaintiff’s solicitors did not reply to his solicitors’ request for copies of confirmation (if any) that he had elected to waive the right to seek independent legal advice before executing the Guarantee. The request was made before the first affirmation and defence were filed.  Apart from the fact that the request seems to suggest that the 1^st defendant was not sure about his complaint that he was not given the opportunity to seek independent legal advice, it is difficult to understand the reason for the 1^st defendant’s complaint against the plaintiff’s solicitors unless he is saying had he been provided with a copy of the Notice, he would have run a different case.

24.  The third point to note about the 1^st defendant’s evidence is that although the Defence pleaded that the plaintiff through its representative or agent had knowledge of the undue influence, no particulars were pleaded and nothing was said about this in the first affirmation. It was after the plaintiff pointed this out that the 1^st defendant stated in the second affirmation that the plaintiff’s representative must be aware of his hesitation and of the undue influence because of the conversations exchanged at the time of signing of the Guarantee.  However, the 1^st defendant never explained why he did not refer to the conversations in the first affirmation.  Evidently, this is an important aspect of the 1^st defendant’s case. As he could remember them and was able to repeat them verbatim in the second affirmation, it is unlikely that he had forgotten about them when he made the first affirmation.  There is simply no apparent reason for the omission in the first affirmation.

25.  All these suggest that the 1^st defendant might not have been totally forthcoming and candid about the circumstances leading to the signing of the Guarantee. 

26.  Additionally, Mr Shum pointed out that the allegation of undue influence is suspicious having regard to the fact that it was only raised more than two years after the Guarantee was signed.  As early as June 2008, the 1^st defendant was aware of the Company’s default. He had also gone with his father to the meeting with the plaintiff’s staff on 30 June 2008, admittedly to discuss the repayment problem.  It is also the plaintiff’s evidence that when the 1^st defendant was contacted on 25 June 2008, he replied that arrangement for repayment was being made.  The 1^st defendant had said nothing about this telephone conversation in his affirmation. I agree with Mr Shum that it is inexplicable that in these contacts with the plaintiff’s staff, the 1^st defendant never indicated he gave the Guarantee unwillingly or as a result of his father’s influence.  Indeed, even after the plaintiff issued the notice of termination and the letter of demand, the 1^st defendant still did not dispute his liability under the Guarantee until he made the first affirmation.   

(2)     Actual undue influence

27.  I turn now to the defence raised.  So far as the 1^st defendant relies on actual or express undue influence (i.e. Class 1 undue influence of the classification in Barclays Bank Plc v. O’Brien [1994] 1 AC 180, 189-190), it has to be established affirmatively that undue influence was exerted on him to enter into the Guarantee.  As said by Slade LJ in Bank of Credit and Commerce International SA v. Aboody [1990] 1QB 923, 967, it must be shown that: “(a) the other party to the transaction … had the capacity to influence the complainant; (b) the influence was exercised; (c) its exercise was undue; (d) that its exercise brought about the transaction.”

28.  By reason of the father and son relationship, the 2^nd defendant was, objectively speaking, in a position to influence the 1^st defendant. As to whether any undue influence was in fact exercised by the 2^nd defendant, this is a matter of fact.  As indicated in the preceding part of this Judgment, I have considerable doubts about the veracity of the 1^st defendant’s account of the circumstances under which he came to sign the Guarantee on 1 June 2006, including whether any undue influence had in fact been exerted by the 2^nd defendant.

29.  In addition, for reasons that I will elaborate on when dealing with presumed undue influence below, the 1^st defendant’s evidence, viewed as a whole, does not support a case of lacked of free will or informed judgment.

(3)     Presumed undue influence

30.  I turn next to presumed undue influence.  Counsel are in agreement that by reason of the father and son relationship between the 1^st and 2^nd defendants, the law presumes that the 2^nd defendant had influence over the 1^st defendant. Class 2A undue influence of the classification in Barclays Bank Plc v. O’Brien therefore falls to be considered.  Under Class 2A, the party asserting undue influence has to prove that the transaction is not readily explicable by the relationship or ordinary motives, in which case a separate presumption will arise to the effect that the transaction is the result of the abuse of the influence, unless the presumption is rebutted.  The effect of the presumption is that the evidential burden then shifts to the other party to show that the transaction was entered into with an independent mind and free of any undue influence: see Barclays Bank Plc v. O’Brien, supra, 189, Bank of Credit and Commerce International SA v. Aboody, supra, 953.                                              

31.  For the purpose of raising the rebuttable presumption that undue influence was used, since the House of Lords’ decision in Royal Bank of Scotland Plc v. Etridge (No. 2) [2002] 2 AC 773 at paras.29, 156 & 220, the fact that a transaction is clearly disadvantageous to the complainant may not call for explanation.  What the party asserting undue influence has to show is that the transaction cannot be explained by ordinary motives or, in the words of Lindley LJ, is “not reasonably to be accounted for on the grounds of friendship, relationship, charity or other ordinary motives on which ordinary men act”: Allcard v. Skinner (1887) LR 36 Ch D 145, 185.   This involves looking at the transaction in the context to see what its general nature and what it was that it set out to achieve for the parties.  In the context of surety cases, it was considered in Bank of Credit and Commerce International SA v. Aboody, supra, 965 that two factors are relevant, namely, the seriousness of the risk of enforcement to the giver, in practical terms, and the benefits gained by the giver in accepting the risk.

32.  In the present case, the following matters are relevant in considering whether the Guarantee is readily explicable.  The Company was in the nature of a family company, with the 2^nd defendant having a controlling interest in it.  Being the 2^nd defendant’s son and the Company’s information technology manager earning a good income, the1^st defendant would at least arguably have a personal interest to keep the Company going and thriving.  Mr Poon was at pain to suggest that the 1^st defendant occupied a minor position in the Company. There is no evidence of the scale of operation of the Company.  But objectively speaking, the 1^st defendant was the information technology manager of the Company, which engaged in computer related business, and was paid an annual salary of $390,000 in 2005-06.  It does not readily support the suggestion that the 1^st defendant was a junior employee or occupied a minor position. 

33.  It is also the 1^st defendant’s own evidence that he was concerned to keep the employment because of the mortgage commitments for his apartment, car park and car.  He therefore had his own reason and motive to agree to be a guarantor to the hire purchase loan. 

34.  In terms of analysing the risks and benefits involved, on the 1^st defendant’s evidence, the 2^nd defendant had assured him that the Company was a very stable company and had the prospect of being listed in one to two years’ time and there was absolutely no problem for him to act as a guarantor.  The 2^nd defendant also described the loan as being only $3,000,000 in amount and the duration was just three years. It is the 1^st defendant’s evidence that he did not believe in his father’s assurance.  His initial refusal or hesitation was because he “never [had] any experience and knowledge about being other’s guarantor”.  It is also not the 1^st defendant’s case that the 2^nd defendant was guilty of misrepresentation. And there is no evidence to indicate that the 2^nd defendant’s assurances were ill-founded.  The evidence does not show there was serious risk involved in entering into the Guarantor.  On the other hand, it would be to the 1^st defendant’s benefit that the Company could develop and expand its business and thrive.

35.  Having regard to the above considerations and even accepting the 1^st defendant’s evidence, it must be highly doubtful whether a case has been made out that the Guarantee was not readily explicable by the relationship between the 1^st defendant and his father and the Company or by ordinary motives.  Mr Poon argued that there was no valid commercial reason for the 1^st defendant to enter into the Guarantee.  But the absence of commercial reasons does not lead to the conclusion that the transaction can only be explained on the ground of undue influence.  

36.  That aside, the thrust of the evidence before the court tends to show that the 1^st defendant had exercised free and independent judgment in agreeing to be the guarantor.        

37.  The 1^st defendant is a university graduate with considerable working experience.  By the time he signed the Guarantee, he was in his thirties, having worked six years in Canada and five years in the Company. He was thus an educated and mature man.  He also had experience of entering into financial arrangements with financial institutions in that he had entered into two mortgages in 2002 to finance the purchase of his residence.  On the affirmation evidence, plainly he knew the document he was signing was a personal guarantee and that it carried important consequences for him.  On the objective evidence, he should have known about the transaction well before 1 June 2006.  He therefore would have the time and opportunity to consider the risks and implications of the transaction.  In fact, it can be seen from the 1^st defendant’s evidence that he had actually weighed up the pros and cons of giving the Guarantee.  Significantly, he had in the course of deliberation had regard to his potential liability as a co-guarantor.  Although he was mistaken about the extent of a co-guarantor’s liability, the fact demonstrates that the 1^st defendant had independently assessed the risks and/or benefits involved in the transaction.

38.  Mr Poon argued that there was no informed consent because the 2^nd defendant’s assurances about the Company had given the 1^st defendant a false sense of security.  It was said that the 1^st defendant had no reason to doubt his father or to be on the alert and was thus led into signing the Guarantee causally.  However, there is nothing on the evidence to show that the 2^nd defendant’s statements about the Company were misleading or untrue. It is certainly not the 1^st defendant’s case that his father had misrepresented the financial ability of the Company in 2006 and the risks associated with the Guarantee.  There is no basis for arguing that the 1^st defendant was not in a position to make an informed decision.        

39.  On the above analysis, the 1^st defendant’s contention that he signed the Guarantee under undue influence of the 2^nd defendant must be on shadowy grounds.

The plaintiff’s knowledge or notice of undue influence

40.    As to the knowledge or notice of undue influence, the 1^st defendant has to show that the plaintiff had knowledge of the relationship between him and the 2^nd defendant, and that the nature of the transaction is such as to be apparently disadvantageous to him: Royal Bank of Scotland Plc v. Etridge (No. 2), supra, paras. 46-49, 145-147, followed in Bank of China (Hong Kong) Ltd v. Wong King Sing & Others, supra, para.67.

41.  There is no dispute that the plaintiff knew of the father-and-son relationship between the 1^st and 2^nd defendants.  In addition, the 1^st defendant also seeks to rely on the fact that when he signed the Guarantee, he was clearly hesitant and his father had urged him to sign by assuring that there would be no problem.  As mentioned above, the reliability of the 1^st defendant’s evidence on this is in doubt.

42.  As to whether the Guarantee is apparently disadvantageous to the 1^st defendant, it is relevant to consider what was known to the plaintiff at the time. Apart from the father-and-son relationship, the plaintiff was also aware that the 1^st defendant was the information technology manager of the Company, earning a substantial income. From the plaintiff’s internal documents (the loan proposal form), it appears that the plaintiff was given to understand that the 1^st defendant was well educated and had considerable working experience.  The plaintiff was also given to understand that the 2^nd defendant had a controlling interest in the Company and that his interest would eventually be passed to the 1^st defendant.  Further, the plaintiff had conducted a detailed and careful analysis of the financial position of the Company and was satisfied with it. Looking at the overall picture, it cannot be readily concluded that the transaction would appear to the plaintiff to be obviously disadvantageous to the 1^st defendant.  Neither was there anything untoward as to put the plaintiff on notice that the 2^nd defendant had exerted undue influence on the 1^st defendant.   

43.  If the 1^st defendant could make out a case of undue influence and that the plaintiff had knowledge of it or was put on inquiry, I would incline to agree that it is arguable whether the plaintiff had taken reasonable steps to satisfy itself that the Guarantee was properly given, having regard to the requirements laid down in Barclays Bank Plc v. O’Brien, supra, 196.  Notably, the circumstances in which the Notice was given to the 1^st defendant would require to be examined more closely.

Conditional leave to defend

44.  Having regard to the above analysis and reasons, I am of the view that the defence advanced by the 1^st defendant is shadowy. Leave to defend should only be granted on terms.   

45.  Mr Poon submitted that the 1^st defendant had limited resources, that his property is currently a negative asset and he would have difficulties if he is required to bring into court the whole amount claimed.  However, there is not evidence on the 1^st defendant’s means available before the court.  Mr Poon asked that the 1^st defendant be allowed to file evidence as to his means before the court decides on the condition to be imposed.  Mr Shum opposed, contending that this would create delay.

46.  In the interest of justice and having regard to the judgments of the Court of Appeal in Muhammad Ibrahim v Asmat A.M. Khan [1986] HKLR 580, 585J, Bruce Hutchison v. Ho Pui Tsun Peter (unreported) CACV 203/2003at paras.6-8 and Kwong Key Construction & Engineering Ltd v. Sunlink Ltd (unreported) CAVC 457/2002, para.16, I will grant the 1^st defendant a short time to file evidence on his means.

47.  Accordingly, there is leave to the 1^st defendant to file and serve evidence on his means within seven days after the handing down of this Judgment.  The plaintiff may file and serve evidence in reply (if so required) within seven days thereafter.  The matter will be listed for hearing arguments on the conditions to be imposed and for consequential directions, on a date to be fixed in consultation with counsel’s dairies with one hour reserved.

48.  The costs of this application will be reserved to be dealt with at the next hearing.