FINE TALENT FINANCE LTD v. THE ESTATE OF LEUNG PAK WAI, DECEASED AND ANOTHER

HCA 1975/2017

[2022] HKCFI 1482

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1975 OF 2017

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BETWEEN

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REASONS FOR JUDGMENT

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INTRODUCTION

1.  This is an action by the plaintiff (“P”), a licensed money lender, to recover a loan from a debtor and to seek vacant possession of the secured property against the debtor’s estate (“D1”) and the debtor’s wife (“D2”), the guarantor.

2.  The debtor was Mr Leung Pak Wai (“Mr Leung”). The writ herein was issued by P on 21 August 2017 against Mr Leung and D2. Mr Leung who had by then been declared to be a mentally incapacitated person (“MIP”) under the Mental Health Ordinance, Cap 136 (“MHO”) obtained legal aid through his committee the Official Solicitor (“OS”) to defend the proceedings. Mr Leung was thus legally represented throughout these proceedings until the discharge of his legal aid certificate upon his death on 20 May 2021. The discharge of the legal aid certificate was filed on 31 May 2021 since when there was no one to represent Mr Leung’s estate.

3.  On 2 December 2021, upon P’s application, this Court ordered that the proceedings be continued as between P and the estate of Mr Leung Pak Wai as D1 and that P was granted leave to carry on these proceedings in the absence of a person representing D1[1].

4.  As for D2, she had not filed any acknowledgment of service upon being served with the writ and had not participated in these proceedings throughout.

5.  The trial was fixed for 3 days commencing 28 March 2022 during the GAP period, and it was directed to take place by way of remote hearing through video conferencing facilities (“VCF”). No one appeared on behalf of D1 at the trial. D2 was absent. After hearing evidence from P’s witnesses and submissions from P’s Counsel Mr Jonathan Chang SC, this Court granted judgment to P as sought. I now set out the reasons.

P’S CASE AND WITNESSES

6.  On 24 December 2014, P entered into a loan agreement with P as the lender and Mr Leung as the borrower (“Loan Agreement”), pursuant to which P agreed to lend to Mr Leung a principal sum of HKD 6,600,000 (“Loan”) repayable by 144 monthly instalments of HKD 101,621 each over a period of 12 years. The interest rate was 18.60% pa or Wing Lung Bank (a licensed bank) prime rate (subject to fluctuation and at time of writ 5.25%) + 13.35% both before and after judgment subject to a proviso in the Loan Agreement, namely that if Mr Leung had complied with all the obligations under the Loan Agreement, the interest would be at the rate of 15.6% pa or the Wing Lung Bank prime rate + 10.35%. The Loan was secured by a second legal charge of the same date, ie 24 December 2014 (“Second Legal Charge”) against a property on MacDonnell Road, Hong Kong, registered in Mr Leung’s name (“Property”) and a personal guarantee executed by D2 in favour of P (“Guarantee”). It was P’s case that on 24 December 2014, Mr Leung signed a number of documents in connection with the transaction (“Loan Transaction”), including the Loan Agreement, the Second Legal Charge, and an assignment assigning all the rental to P (“Rental Assignment”) and all the documents signed by Mr Leung on 24 December 2014 will be set out later in this judgment (collectively “Loan Documents”).

7.  In breach of the Loan Agreement, Mr Leung failed to repay to P the Loan in full or any monthly instalments on their respective due dates since the 16^th instalment due on 24 April 2016.

8.  As mentioned, P issued the writ (endorsed with the statement of claim) on 21 August 2017 against Mr Leung and D2 to claim repayment of the Loan plus interests, and vacant possession of the Property[2].

9.  For the money judgement claim, Mr Chang had set out the calculations of the principal and interests in an appendix attached to P’s Opening, namely (i) the total outstanding principal as at date of the writ was HKD 5,851,439 and (ii) the outstanding interest as at that date was HKD 1,287,957.83. P sought the total of (i) and (ii) and contractual interest of 15.6% pa on the outstanding principal until payment.

10.  There were two factual witnesses called on behalf of P, namely P’s Managing Director Ms Yick Yin Yee Cecilia (“Ms Yick”) who was involved in the preparation, interpretation and execution of part of the Loan Documents at P’s office and Mr Lau Chiu Ting (“Mr Lau”), a conveyancing clerk at the solicitors firm KB Chau & Co (“Firm”) who was involved in the preparation, interpretation and execution of the legal documents at the Firm’s office. Both Ms Yick and Mr Lau had each filed a witness statement and a supplemental witness statement.

11.  P had called a psychiatric expert Dr Benjamin Lai (“Dr Lai”) who had assessed Mr Leung’s mental capacity as at 24 December 2014, ie the day on which Mr Leung executed all the Loan Documents. Dr Lai had submitted a medical report dated 22 January 2019[3] and later a joint psychiatric report with D1’s expert dated 25 June 2019 (“Joint Report”)[4].

12.  P’s above witnesses had attended trial and gave oral evidence through VCF.

13.  Ms Yick and Mr Lau both confirmed that they had no actual knowledge of Mr Leung’s mental capacity at the time when he signed the Loan Documents, nor was any mental incapacity of Mr Leung ostensible or apparent to them.

14.  As for P’s expert Dr Lai, he opined that Mr Leung had the mental abilities to understand information, to retain information, to make a decision and the ability to express his decision, and Mr Leung was likely to have the mental abilities required in mental capacity when he signed the Loan Documents on 24 December 2014[5].

D1’S CASE AND WITNESSES

15.  What was not disputed was that on 15 November 2015, the Director of Social Welfare(“Director”) was appointed under section 59O under Part IV of MHO to be Mr Leung’s legal guardian for one year (“Guardianship Order”)[6] and subsequently on 17 November 2016, Mr Leung was declared a MIP under Part II of MHO and the OS was appointed to be the committee for Mr Leung’s estate. As mentioned earlier, legal aid was granted to Mr Leung. Further, on 15 June 2020, the OS formally consented to be the guardian ad litem for Mr Leung in these proceedings[7].

16.  A defence was filed on behalf of Mr Leung by the OS on 19 December 2017, which was later amended on 7 August 2019 and re-amended on 15 June 2020 (collectively “Defence”)[8].

17.  Broadly, it was Mr Leung’s case in the Defence that although he executed the Loan Documents, there were vitiating factors which justified those documents signed by Mr Leung being set aside or rescinded and that as summarised by Mr Chang, the Defence was based mainly on:

(1) it was alleged that (i) Mr Leung was a MIP at the time he signed the Loan Documents; (ii) P had actual or constructive notice of Mr Leung’s mental incapacity at the time; and (iii) therefore the Loan Documents were rendered voidable and were avoided by Mr Leung;

(2) Mr Leung relied on the doctrine of non est factum and alleged that (i) as at 24 December 2014, he was unable to appreciate and understand the Loan Documents he was signing, which were fundamentally and/or radically different from whatever he believed he was signing; (ii) the Loan Documents were executed in the absence of his “genuine knowledge, understanding or approval of their contents” and were therefore rendered null and void.;

(3) it was alleged that (i) the execution of the Loan Documents was procured by D2’s undue influence over Mr Leung; (ii) P ought to have known that the execution of the Loan Documents was procured by D2’s undue influence; and (iii) therefore, those documents were rendered voidable and were avoided by Mr Leung.

18.  Pausing here, of note, was that there was no counterclaim on behalf of Mr Leung/D1 against P, nor was there any claim on behalf of Mr Leung/D1 against D2. Further, as seen in the Defence, there had been other documents signed by Mr Leung during the Period (as defined later) including loan mortgage documents to HCBC and Yvonne Credit (as set out later). Notwithstanding the challenge on behalf of Mr Leung about his mental capacity at the time in signing all those documents, neither HSBC nor Yvonne Credit was made a party in these proceedings, nor was any claim made against them for avoiding the relevant agreements as between them respectively with Mr Leung.

19.  There was one factual witness who was to give evidence for Mr Leung, namely his younger brother Mr Leung Pak Keung (“LPK”) who had provided a witness statement and a supplemental witness statement. Mr Leung’s psychiatric expert was Dr Leung Wai Ching (“Dr Leung”) who had provided a psychiatric report for Mr Leung on 28 February 2018 and had jointly prepared with Dr Lai the Joint Report. However, upon the death of Mr Leung, OS was discharged as the committee and further upon the discharge of legal aid, there was no one to represent Mr Leung’s estate, Notwithstanding notice was given to LPK, no one had turned up at the trial, whether to represent the estate or to give evidence on behalf of the estate.

20.  Anyway, according to the evidence of LPK in his witness statements, Mr Leung was born in March 1946 in Hong Kong where he grew up and received his education. Mr Leung had two brothers, an elder brother Mr Leung Pak Kui who was a retired civil servant, and a younger brother, namely LPK, who is a radiographer.

21.  Mr Leung joined the Hong Kong Government civil service in about 1980 and later retired with a pension. Mr Leung was married to Madam Lin Chun Yu, Cecily (“Madam Lin”) for about 20 years from 14 February 1979 to 28 June 1999. They had no children.

22.  Mr Leung and Madam Lin purchased the Property as joint tenants on 20 February 1986. There was a notice of severance of joint tenancy dated 19 June 1997. On 21 June 1999, Mr Leung purchased Madam Lin’s half share in the Property and became the sole owner thereof[9]. According to LPK, Mr Leung was all along a reclusive and introvert person and had been living alone in the Property since his divorce with Madam Lin.

23.  Further, according to LPK, he first noticed Mr Leung’s health problems at about the end of the year of 2011 in that Mr Leung was becoming forgetful, and that Mr Leung had also had several occasions asked LKP to lend him money and that Mr Leung was heavily indebted with a number of credit card debts from 2006 to 2011 over purchases of female clothes, shoes, bags, accessories, watches and jewellery and luxurious goods from high-end designers stores. It was also LPK’s evidence that prior to the year 2012, on one occasion when he accompanied Mr Leung to withdraw his monthly pension from Mr Leung’s bank account at the Standard Chartered Bank, he found out that Mr Leung’s bank account was of low balance, and when LPK threatened to report the matter to the police, a female, who later transpired to be D2, turned up at the bank claiming to be Mr Leung’s girlfriend. According to LPK, that was the first occasion be met D2. It was LPK’s evidence in his witness statement that although LPK suspected that D2 was embezzling Mr Leung’s money, the police declined to intervene claiming it was a private matter.

24.  There was no admission on P’s part to LPK’s evidence and as LPK did not attend trial, there was no opportunity for P to challenge his evidence. Having said this, there was no evidence to show that P had any knowledge of the detailed personal and family background of Mr Leung and thus P was not really in a position to challenge this part of LPK’s evidence.

25.  What was not disputed was that Mr Leung had a fall at home on 24 April 2012 and suffered a stroke. Mr Leung was sent by ambulance to the Queen Mary Hospital the next day.

26.  According to D1’s expert Dr Leung’s medical report, there was evidence of memory deterioration, daily functions impairment and personality change at least 1-2 years prior to Mr Leung’s admission to hospital in April 2012[10]. Dr Leung pointed out that the MRI of Mr Leung’s brain in May 2012 showed moderate cerebral atrophy, which was very likely due to Alzheimer’s disease. It was the opinion of Dr Leung that the start of Mr Leung’s dementia must be well before Mr Leung’s admission to the Queen Mary Hospital and that his dementia was irreversible and would only go downhill, and that for the period from 28 June 2012 to 24 December 2014 (“Period”), Mr Leung must have at least moderate to severe degree of dementia and was very unlikely to be mentally sound to understand and to make decisions in relation to documents. His conclusion was that Mr Leung’s mental capacity in relation to the present litigation for the Period was that Mr Leung was a mentally incapacitated person as defined by Order 80[11]. He opined that Mr Leung was not mentally sound or fit to give instructions leading him to sign all those documents during the Period including the Loan Documents.

DOCUMENTS SIGNED BY MR LEUNG DURING THE PERIOD

27.  The evidence showed that Mr Leung had signed a number of documents during the Period, including those set out in the table below:-

Date	Document
28.06.12	Mr Leung made a will at solicitors’ firm John Ho & Tsui appointing LPK as sole executor and trustee, and sole beneficiary of his estate (“1st Will”)[12]
11.07.12	Mr Leung made another will at solicitors’ firm Karbhari & Co appointing D2 as his sole executrix and trustee of his will and bequeathed to her the Property free of mortgage and encumbrances (“2nd Will”)[13] Mr Leung alleged to have signed a Chinese memorandum stating that the new will was not to be altered without D2’s consent (“Chinese Memorandum”)
18.07.13	Mr Leung signed acceptance of mortgage loan facility letter from HSBC for a mortgage loan of HKD 4m[14]
01.08.13	Mr Leung executed a will in the solicitors’ firm Oliver CM Chan & Co appointing D2 as sole executrix of his will and bequeathed her the Property (“3rd Will”)[15]
01.08.13	Mr Leung executed a mortgage in favour of HSBC to secure an underlying loan of HKD 4 million (“HSBC Mortgage”)[16]
01.08.13	Mr Leung executed a general power of attorney appointing D2 as his attorney (“GPA”)[17]
15.05.14	Mr Leung signed a promissory note to Yvonne Credit Service Co Ltd (“Yvonne Credit”) pursuant to which he promised to repay the loan from Yvonne Credit[18]
15.05.14	Mr Leung executed a second mortgage in favour of Yvonne Credit to secure an underlying loan up to a maximum of HKD 8m at interest rate of 18% pa (“YC Second Mortgage”)[19]
24.12.14	Mr Leung signed an application form to apply for a loan from P (“Application Form”)[20]
24.12.14	Mr Leung signed as borrower/mortgagor an instalment repayment confirmation (“Instalment Payment Confirmation”)[21]
undated	Mr Leung signed “Declaration of Fees and Charges” to P as borrower/mortgagor[22] (“Declaration of Fees”)
24.12.14	Mr Leung signed letter to Yvonne Credit to redeem and discharge the mortgage loan from Yvonne Credit[23] (“Redemption Letter”)
24.12.14	Mr Leung signed a letter to the Firm to acknowledge advice from the Firm to seek independent legal advice (“Advice Letter”)[24]
24.12.14	Mr Leung signed the Loan Agreement[25]
24.12.14	Mr Leung signed the Rental Assignment[26]
24.12.14	Mr Leung signed the Second Legal Charge[27]
24.12.14	Mr Leung signed the completion statement of the Firm[28]

THE DISPUTED ISSUES

28.  In my view, the issues for the trial were:-

(1) whether Mr Leung had the requisite mental capacity at the time when he signed the Loan Documents on 24 December 2014 (“Issue (1)”)

(2) If answer to (i) is no, whether P had actual or constructive notice of Mr Leung’s mental incapacity (“Issue (2)”)

(3) whether Mr Leung could rely on the doctrine of non est factum (“Issue (3)”)

(4) whether the execution of the Loan Documents was procured by D2’s undue influence over Mr Leung, and if so, whether P ought to have known of the same (“Issue (4)”)

ISSUE (1) – WHETHER MR LEUNG HAD THE REQUISITE MENTAL CAPACITY AT THE TIME WHEN HE SIGNED THE LOAN DOCUMENTS ON 24 DECEMBER 2014

Legal principles

29.  As set out earlier, Dr Leung’s opinion was that Mr Leung was a mentally incapacitated person as defined by Order 80 during the Period.

30.  Under Order 80 of RHC, a “mentally incapacitated person” means “a mentally disordered person or a mentally handicapped person (within the meaning of the [MHO]), who by reason of mental disorder or mental handicap, as the case may be, is incapable of managing and administering her property and affairs”.

31.  Thus, for a person to fall within the definition of whether a MIP under Order 80 or a MIP under MHO, the courts have to be satisfied of two conditions, namely that (1) the person is suffering from a mental disorder or a mental handicap; and (2) the person is incapable by reason of his mental disorder or mental handicap, of managing and administering his property and affairs.

32.  For condition (1) above, under MHO, “mental disorder” is defined to mean (a) mental illness; (b) a state of arrested or incomplete development of mind which amounts to a significant impairment of intelligence and social functioning which is associated with abnormally aggressive or seriously irresponsible conduct on the part of the person concerned; (c) psychopathic disorder; or (d) any other disorder or disability of mind which does not amount to mental handicap. For the purpose of the present case, I need not set out the definition of “mental handicap”, as it was not D1’s case that Mr Leung was suffering from any “mental handicap” at the material time.

33.  As for condition (2), in In re NLS, [2021] HKCFI, HCMH 4/2020, 27.07.21, Lok J had summarised and explained in detail the relevant matters in considering whether a person is incapable of managing and administering his property and affairs[29].

34.  Suffice to say at this stage, that when considering a person’s capacity to manage and administer his property and affairs, it is necessary to have regard to the complexity and importance of that person’s property and affairs. Further, mental capacity in managing one’s affairs is a different concept from mental capacity to make isolated decisions, and that the general concept of managing affairs is an ongoing act and, therefore, quite unlike the specific act of making a will or making an enduring power of attorney, the management of affairs relates to a continuous state of affairs whose demands may be unpredictable and may occasionally be urgent[30].

35.  As recognized by Lok J, there may be different requirements of level of knowledge and memory, say when a person seeks to appoint a donee under an enduring power of attorney to manage his finances, his knowledge and memory at the time of execution of the said document may not be required to be that extensive and may only need to know who are his family members, their relationships and whom he trusts and may not be required to understand the details of all his assets and whether he should lease one of his properties at a certain rent. On the other hand, the requirement in one’s capacity to manage his property and affairs may be higher.

36.  It has in fact also pointed out by Coleman J in In the Estate of Lui Kwan Cheung, [2020] HKCFI 1243, HCAP 28/2019 that “there may be different standards – or a ‘hierarchy’ of levels – of capacity applied to different situations. For example, in the Park case, the contract of marriage was described as the essence of simplicity, not requiring a high degree of intelligence to comprehend. But there is a distinction between (a) the decisions a person makes regarding personal matters such as where or with whom to live and (b) decisions regarding financial matters. Financial matters require a higher level of understanding. Put another way, the capacity to marry is a lower threshold than the capacity to manage one’s own affairs, make a will, or instruct counsel.”[31]

37.  Thus, the relevant question in the present case should be whether Mr Leung had the relevant mental capacity in entering into the Loan Transaction and signing the Loan Documents to borrow the Loan from P at the stipulated interest rate and to agree for the Property to be mortgaged as security for the Loan.

38.  As pointed out by Mr Chang on behalf of P, the law prima facie, presumes that every adult has a capacity to contract and that where exemption from liability to fulfil an obligation is claimed by reason of want of capacity, this fact must be strictly established on the part of the person who claims the exemption[32]. Mr Chang further submitted as follows[33]:

“40. As to the nature of the understanding and mental capacity required to uphold the validity of a transaction:

(1) What is required is that the party in question should have the capacity to understand the general nature of what he is doing: Chitty §11-089.

(2) If the party possessed the requisite mental capacity when the contract was made, evidence of previous or subsequent mental incapacity is not material: Chitty §11-091.

(3) Even if there exists delusion in the mind of a person making a contract, that is not conclusive of his inability to understand it: Chitty §11-091.

(4) A deed executed by a person who lacks mental capacity for some purposes may still be valid if he can understand the effect of the deed at the time of its execution or if it was executed during a lucid interval: Chitty §11-101”.

39.  Mr Chang also referred the Court to the contractual capacity as explained in paragraph 11-001 of Chitty on Contracts (34^th) as follows:

“The incapacity of one or more of the contracting parties may defeat an otherwise valid contract. Prima facie, however, the law presumes that everyone has a capacity to contract; so that, where exemption from liability to fulfil an obligation is claimed by reason of want of capacity, this fact must be strictly established on the part of the person who claims the exemption. In English law, three classes of individuals are subject to some degree of personal contractual incapacity. These are minors, persons lacking the requisite mental capacity and drunken persons…”

(emphasis added)

40.  Paragraph 11-075 then sets out as follows:

“….. However, putting aside the special treatment of a mentally incapable person’s ability for necessaries, the modern general approach was set out fairly clearly in Molton v Camroux in 1848-1849, Pollock C.B stating that:

“….. unsoundness of mind (as also intoxication) would now be a good defence to an action upon a contract, if it could be shewn that the defendant was not of capacity to contract, and the plaintiff knew it.”[34]

41.  Paragraph 11-89 further sets out as follows:

“At common law, the understanding and competence required to uphold the validity of a transaction depend on the nature of the transaction. There is no fixed standard of mental capacity which is requisite for all transactions. What is required in relation to each particular matter or piece of business transacted, is that the party in question should have the capacity to understand the general nature of what he is doing. So, as was observed in Re Beany in the context of the capacity to make a will:

‘The degree or extent of understanding required in respect of any instrument is relative to the particular transaction which it is to effect. In the case of a will the degree required is always high. In the case of a contract, a deed made for consideration or a gift inter vivos, whether by deed or otherwise, the degree required varies with the circumstances of the transaction.’ ”

(emphasis added)

42.  The learned authors of Chitty on Contracts have also set out the relationship of common law and statutory tests of mental capacity provided by the Mental Capacity Act 2005, and that the statutory test does not apply on its terms to the question of capacity to contract (which is still determined by the common law), but the authors have pointed out that the Code of Practice under the 2005 Act has stated that the Act’s new definition of capacity is in line with the existing common law tests and when cases come before the court [involving the issue of contractual capacity], judges can adopt the new definition if they think it appropriate[35]. It is set out in the Code of Practice that there are several common law tests of capacity[36], namely capacity to make a will, capacity to make a gift, capacity to enter into a contract, capacity to litigate (take part in legal cases), and capacity to enter into marriage.

43.  As pointed out by Lok J in In re NLS, there are substantial differences between the statutory regime in the United Kingdom and that in Hong Kong[37]. Although there is no equivalent section as sections 2 and 3 of the Mental Capacity Act 2005 in Hong Kong, nor were they relied on by P, in light of it being said that the “new definition” of capacity is in line with existing common law tests, sections 2 and 3 of the 2005 Act may also be of reference and assistance in considering the requisite capacity of a person in relation to a particular matter. In particular:

(1) A person lacks capacity in relation to a matter if at the material time he is unable to make a decision for himself in relation to the matter because of an impairment of, or a disturbance in the functioning of, the mind or brain (s 2(1));

(2) It does not matter whether the impairment or disturbance is permanent or temporary (s 2(2));

(3) A person is unable to make a decision for himself if he is unable (a) to understand the information relevant to the decision, (b) to retain that information, (c) to use or weigh that information as part of the process of making the decision, or (d) to communicate his decision (whether by talking, using sign language or any other means (s 3(1));

(4) A person is not to be regarded as unable to understand the information relevant to a decision if he is able to understand an explanation of it given to him in a way that is appropriate to his circumstances (using simple language, visual aids or any other means) (s 3(2));

(5) The fact that a person is liable to retain the information relevant to a decision for a short period only does not prevent him from being regarded as able to make the decision (s 3(3));

(6) the information relevant to a decision includes information about the reasonably foreseeable consequences of – (a) deciding one way or another; or (b) failing to make the decision (s 3(4)),

44.  With all above said in mind, I turn to the present case.

The available medical information on Mr Leung from 24 April 2012 and during the Period

45.  It was common ground in the pleadings that Mr Leung had a fall on 24 April 2012, and he was diagnosed to have suffered a stroke and cognitive impairment after admission. The medical information extracted from records/notes of hospitals/doctors/nurses (“Medical Notes”) are set out in Appendix 1 of the Joint Report. The information started from 25 April 2012 with the Medical Notes from the A&E[38] of Queen Mary Hospital (“QMH”) and there was no earlier medical information.

46.  According to the Medical Notes on admission, Mr Leung was diagnosed with, amongst other things, with dementia. His MMSE test score ranged between 18 to 22 out of 30 between 25 April 2012 and 8 May 2012. He was started on “Aricept”[39]. It was recorded that his brother[40] was helping him out with finances and that Mr Leung had difficulty taking care of himself/finances recently. Mr Leung was transferred to the Tung Wah Hospital (“TWH”) on 8 May 2012 for follow up treatment. His MMSE test score was 21 out of 30 on about 10 May 2012.

47.  The Medical Notes from the Clinical Psychology Department of TWH between 14 to 18 May 2012 showed that Mr Leung was able to recall how he slipped and fell at home although he failed to explain why he did not call for ambulance but waited until the other day so and was found by the watchman of his building. Mr Leung was able to report year and month and day of the week. Although his brother reported problems in “anterograde and retrograde episodic memory” (eg how many bank account, or did not recall that he had been in debt with the bank since 2011), Mr Leung himself denied (or did not recall) any cognitive deterioration before his stroke. The conclusions recorded by TWH were amongst other things that (i) overall intellectual functioning in terms of IQ was average to high average (ii) specific cognitive deficits involve executive dysfunctions that seem to affect simultaneously his performance in verbal memoral retrieval and discrimination, problem solving and visual spatial executive planning; (iii) lacked awareness of his cognitive problems; (iv) it was unclear if significant cognitive deterioration had existed half a year before stroke, given the report between Mr Leung and his brother was inconsistent and that his then memory and cognitive performance reflected more of a picture of a person having specific cognitive deficits.

48.  The Medical Notes from TWH between 8 May 2012 to 31 May 2012 showed that Mr Leung was physically independent and his then MMSE score was 20/30. His activities of daily living were independent and he was fit for living alone. He was stable for discharge. The medicines prescribed to him included “Donepezil” 5 mg at bedtime and he had to have Cyanobalamin (vitamin B12) injection every 3 months.

49.  Thereafter, Mr Leung attended follow-ups at TWH. Medical Notes from TWH on 3 April 2013 indicated poor compliance to medications and that he had not taken any medicines for past few months.

50.  On 27 to 29 April 2013, Mr Leung had a fall with loss of consciousness and was admitted into the Kwong Wah Hospital. On 27 April 2013 his mental condition was “orientated”. His Glasgow Conscious Scale (GCS) on 28 April 2013 was 15/15. He was then discharged.

51.  Thereafter, he again attended follow ups at TWH. On 24 May 2013, it was noted that there was good drug compliance and he was given same drugs and injections.

52.  On 6 September 2013, it was noted that according to Mr Leung’s brother, Mr Leung was unable to recall month/year and the then Chief Executive of Hong Kong and events the previous day, but this was denied by Mr Leung himself who claimed to be doing just fine. He agreed to be referred to psychiatric assessment. His medicines were as before.

53.  He was accompanied by D2 on 27 December 2013 when he went to TWH. He was given same medicines as before.

54.  Mr Leung was admitted to TWH on 14-15 April 2014 for increased blood pressure and poor drug compliance was recorded. It was recorded that he was asymptomatic and that he insisted on early discharge. Same medicines were prescribed.

55.  The Medical Notes from TWH on 11 June 2014 showed that Mr Leung had dementia and MMSE 15/30.

56.  On 1 August 2014, Mr Leung was referred to the Western Psychiatric Centre, QMH for the first time and his MMSE was 20/30 and he was diagnosed to have mixed dementia. The dosage of Donepezil was increased to 10 mg. The Medical Notes showed that long-term memory relatively preserved although his short term memory appeared to have worsened in the last half year. His mood was described as stable, and remained independent in his activities of daily living and could handle finances himself.

57.  On 14-15 September 2014, Mr Leung was admitted to Q&E of QMH with generalised malaise, weakness and dizziness and blood pressure was elevated but his symptoms were subsequently resolved. His GCS was 15/15 on admission but had poor memory and forgot time at admission.

58.  On the follow up on 20 October 2014, it was recorded that Mr Leung had very poor recent recall but no loss on street, and no taps nor gas left on. On 14 November 2014, he was reported as mood stable, no disturbing behaviour, memory similar, independent in activities of daily living, able to go out to buy things himself. He was noted to be calm, settled, social smiles, and speech coherent and relevant, and slightly talkative. This was about 6 weeks before he signed the Loan Documents.

The Joint Report

59.  As seen in the Joint Report, the experts had agreed amongst other things that:

(i) on 15 April 2014, Mr Leung was observed to have a MMSE score of 15/30 during his hospital treatment for high blood pressure but he had a MMSE score of 20/30 in August 2014;

(ii) Mr Leung’s MMSE score of 15/30 on 15 April 2014 was not indicative of an irreversible change in cognitive impairment;

(iii) On 14 November 2014, Mr Leung was considered to have similar memory condition as in August 2014;

(iv) On 2 April 2015, Mr Leung had coherent and relevant speech and was observed by the nurse in the old aged home to have a MMSE score of 17/30.

(v) In May 2016, Mr Leung had increased agitation behavioural problems in the old aged home

(vi) In February 2018, Mr Leung had a MMSE score of 13/30, and that he was suffering from dementia and the degree was of a moderate degree of severity.

60.  Dr Leung opined that the Medical Notes on 14-15 September 2014 only indicated the presence or absence of symptoms and did not clearly show the level of understanding or how Mr Leung expressed the answers and was brief and was not suitable for use as reference for cognitive level and mental competence. As mentioned earlier, Dr Leung considered that Mr Leung was a MIP during for the Period and at the material time on 24 December 2014.

61.  On the other hand, as said earlier, Dr Lai opined that Mr Leung’s mental abilities on 24 December 2014 should be largely similar to his mental abilities in August, September, October and November 2014 as recorded in the Medical Notes and that he had the mental abilities to understand information, to retain information, to make a decision and the ability to express his decision and that he had the mental abilities required in mental capacity[41].

62.  Dr Lai had attended trial to give evidence and confirmed his above opinion and conclusions.

The application for guardianship and the application for appointment of committee

63.  The Guardianship Board (“Board”) had given reasons for making the Guardianship Order (“Reasons”)[42]. As seen in the Reasons, Mr Leung was admitted to an elderly care home on 29 January 2015. The application for a guardianship order for Mr Leung was made by LPK on 11 March 2015 and LPK was proposing that he himself be appointed the guardian. Later, LPK further applied for an emergency guardianship order on 17 April 2015. The evidence showed that Mr Leung was 69 years old at the time and that he was unable to handle finances and was incapable of consenting to treatment. At the direction of the Guardianship Board, D2 being Mr Leung’s wife, was then added as a party.

64.  Both LPK and D2 had given evidence at a hearing before the Board. It transpired that D2 had never lived with Mr Leung at the Property despite having married him in October 2012, and D2’s explanation was that her mother was old and so every day after taking care of Mr Leung at the Property, she would go and give care to her own mother at night. It was D2’s evidence that she had given Mr Leung health supplements and hoped that he could get better by December 2014 and was hoping to check out his progress with a doctor but there was no chance of her to do so as Mr Leung was then admitted to a care home. D2 denied LPK’s allegations of her neglect of care towards Mr Leung.

65.  When asked by the Board as to why Mr Leung needed to execute the HSBC Mortgage and the YC Second Mortgage, D2 had said that the loan from the HSBC Mortgage was for her to start her jewellery business so that she could generate future income, and that the loan from the YC Second Mortgage was for decorating the Property. As for the reason for the Second Legal Charge, D2 had explained that she used it to pay off the YC Second Mortgage and to pay for HSBC Mortgage instalments and the Second Legal Mortgage instalments, living expenses and some goods for her business. Further, there was HKD 850,000 for the finance company’s charges and another HKD 220,000 to Yvonne Credit as penalty. It was further D2’s evidence before the Board when finally asked by the Board she had used up all the money and there was nothing to pay back to Mr Leung.

66.  D2 had instructed a solicitor Ms Rowena Ng Siu-ling, of solicitors’ firm Patrick Mak & Tse for the hearing before the Board. Ms Ng had pointed out that (i) Mr Leung was observed to be of sound mind by D2 and that according to the notes of the interview conducted by the Chairperson of the Board with Mr Leung, Mr Leung had expressed wishes to have his legal rights respected; (ii) it was not an abuse case; (iii) Mr Leung was conscious and could express his views[43].

67.  The Board decided to receive Mr Leung into guardianship and to appoint the Director as the legal guardian. The Board had given a number of grounds in the Reasons for making the Guardianship Order including the following:

(i) the Board concluded that Mr Leung did suffer from mental incapacity since his stroke on 25 April 2012 and he was on a downward trend ever since;

(ii) Due to the mental incapacity of Mr Leung since 25 April 2012, the Board had serious doubts and reservation on the validity of his marriage with D2 and the documents signed by him including the GPA, the HSBC Mortgage, the YC Second Mortgage and the Second Legal Charge and that there was a strong case to say the least that Mr Leung had entered into all those transactions under undue influence of D2, and that at the time of the application[44], Mr Leung could hardly remember those mortgages or transactions at all except that he still remembered that he had a wife or girlfriend;

(iii) Although some part of the loan amounts were used to pay for finance charges, penalty and legal fees, the Board believed that D2 had broadly embezzled and deprived Mr Leung of the entire amount of the HSBC Mortgage, the entire amount of the YC Second Mortgage and the Second Legal Charge, but noted that D2 had paid a total of HKD 2,680,931 to those financial institutions, and that there had been various debt collectors sending letters to Mr Leung in February and March 2015.

68.  In the Part II proceedings issued by the Director under MHO, there were two medical certificates filed, one dated 20 June 2016 from Dr Ian Ling who opined that that Mr Leung was suffering from severe dementia with limited insight and that the mental incapacity lasted since 2012, and one dated 2 August 2016 from Dr Hui Kin Ming who opined that Mr Leung suffered from dementia with progressive deterioration and that the mental incapacity had lasted for 4 years[45].

Discussion

69.  From the Medicate Notes and the Joint Report, I find Mr Leung was suffering from a mental disorder at the material time. The question was essentially whether on 24 December 2014 he had the requisite mental capacity to enter into the Loan Transaction for the Loan and to sign all the Loan Documents.

70.  The information in the Medical Notes showed that Mr Leung had poor drug compliance. As set out earlier, after his stroke on 25 April 2012, he was admitted into QMH and after discharge, he had attended follow ups at TWH, apart from one occasion between 27 to 29 April 2013 when he was admitted into the Kwong Wah Hospital when he had a fall. He had been seen by a clinical psychologist at the TWH, during the period between 12 March 2012 to about 11 June 2014, but it was only on 1 August 2014 when he was referred to and attended the Western Psychiatric Centre QMH for the first time.

71.  The Medical Notes from the Psychiatric Clinic of QMH on 1 August 2014 showed that although Mr Leung admitted he often forgot what others said, it was noted that his long-term memory was relatively preserved and there were no dangerous acts from loss of memory. It was noted that he remained independent for activities of daily living and “can handle finances himself”[46]. On that day, his MMSE score was in fact 20/30, which was about the same as around May 2012 even though between April 2012 and August 2014, his MMSE score had fluctuated.

72.  As further seen in the Medical Notes, on 1 August 2014, Mr Leung was able to interpret proverbs like killing one bird with 2 stones, able to tell similarity between banana and apple, table and chair.

73.  Mr Leung was further seen at the Psychiatric Clinic at QMH on 14 November 2014 about 6 weeks before he signed all the Loan Documents. As mentioned earlier, the Medical Notes showed “mood stable, no disturbing behaviour, memory similar” and he was recorded as independent in activities of daily living and able to go out to buy things himself. His mental state examination was recorded to be “calm, settled, social smiles, speech coherent and relevant slightly talkative”[47].

74.  Mr Leung was arranged to be admitted to an elderly care home on 27 January 2015. It was recorded in the Medical Notes on 26 January 2015 that “query new home, query hostel, address unknown”.

75.  There was no evidence of any significant change between 1 August 2014 and 24 December 2014.

76.  After his admission into the elderly care home, his medicines were given by a nurse and his blood pressure was better controlled. According to the “nurse progress note” on 2 April 2015, Mr Leung was met in the old aged home and it was recorded that “Loud spoken, speech coherent and relevant and denied psychotic S/S. Not depressed ”. His MMSE score was on that day 17/30.

77.  The Medical Notes showed that there had been ups and downs, although on the whole there was gradual decline in Mr Leung’s mental condition, resulting in him being prescribed double the dosage of Donepezil on 1 August 2014. However, there was no sufficient evidence of any significant deterioration thereafter.

78.  The guardianship proceedings took some 11 months from LPK’s first application. The medical reports and the social enquiry report in the guardianship proceedings had not been disclosed or produced on behalf of Mr Leung/D1. Anyway, there was no dispute that by the time the Guardianship Order was made on 15 November 2015, some 11 months after the 24^th December 2014, Mr Leung was a MIP under the MHO.

79.  The Medical Notes of 14 November 2014 showed that Mr Leung was still able to carry out daily living activities independently and he was able to go out to buy things himself. There was no evidence as to what things he was buying, but at least the Medical Notes would indicate that he was still able to handle some money transactions, at least of small amounts. What was clear was that even towards the end of January 2015 when he was being sent to the elderly home, his condition was stable, and in fact in April 2015, his psychiatric follow up was discontinued. He was able to recognise staff of the elderly home and family members and had no behavioural and psychological symptoms of dementia.

80.  Having said the above, and having considered the experts’ respective reports and the Joint Report, with his very poor recent recall or memory, Mr Leung would probably have been handicapped in administering his property of any substantial amount and/or complicated affairs by December 2014. However, there was evidence that Mr Leung had always had poor management of his finances, in that he had outstanding credit card bills from as early as 2006, up to 2011. Credit Card companies charged high interest rates. Further, he had borrowed loans as early as 2011 and there were debt collectors pursuing him in early 2015. There was no sufficient evidence that he was not able to understand what a loan meant or that some loans would carry high interest rates.

81.  Although as part of the Loan Documents, there were many documents including legal documents which Mr Leung had to sign, the general nature of the Loan Transaction was simply it was for a loan to be secured by a mortgage of his property and the relevant information relevant to the decision whether to borrow the Loan would be that he had to repay and there was a high interest rate and that the consequence of failing to repay would mean that he would lose his property and would have to move out. The Loan was guaranteed by his wife. The evidence from P’s witnesses as set out later would show that they had interpreted the Loan Documents to P and there was no sufficient evidence that he had not understood.

82.  Although I accept that the evidence showed that more probable than not Mr Leung would probably not be able to manage the funds obtained by the Loan, this would not necessarily mean that Mr Leung lacked the requisite mental capacity to understand the general nature of the Loan Transaction or he lacked contractual capacity in relation to entering into the Loan Transaction or to sign all the Loan Documents. There was no sufficient evidence that he lacked the mental abilities to understand information relevant to the decision to borrow the Loan and to mortgage the Property, to retain information, or to use that information to make a decision or to communicate his decision.

83.  The burden was on D1 to demonstrate Mr Leung lacked the requisite capacity at the material time. Without Dr Leung giving evidence at the trial on behalf of D1 to challenge Dr Lai’s evidence, and having considered the Medical Notes and all the relevant information, I am unable to conclude that Mr Leung lacked the requisite mental capacity to enter into the Loan Transaction and/or to sign the Loan Documents on 24 December 2014.

ISSUE (2) - WHETHER P HAD ACTUAL OR CONSTRUCTIVE NOTICE OF MR LEUNG’S MENTAL INCAPACITY

The legal principles

84.  Mr Chang had referred this Court to Dynamic Asset Management Limited v Choi Chau Chung by Choi Lam Hung, his Guardian ad Litem [2021] HKCFI where DHCJ Maurellet SC had discussed the confusion in the case authorities in relation as to what should be the appropriate test in relation to a counter-party’s knowledge of a person’s mental incapacity.

85.  The confusion arose from a remark (by obiter) of Baroness Hale in Dunhill v Burgin [2014] 1 WLR 933 that a contract made by a person who lacks capacity may be avoided if the other party to the contract “knew or ought to have known” that he lacks capacity, and the phrase “ought to have known” somehow suggested a new test based on constructive knowledge, which had been criticized in legal commentaries. In Dynamic Asset, DHCJ Maurellet SC had rationalized Dunhill v Burgin and observed that in practice (barring a rare case) that there was probably not much of a difference between the approach of Baroness Hale and the traditional approach, and the “ought to have known” limb could be treated as a short form for saying that a party ought to have known of the mental incapacity because it was apparent or ostensible, but insofar as necessary the traditional position would be adopted[48].

86.  Mr Chang had further referred to paragraph 11-094 of Chitty on Contracts, namely that where a mentally incapable person concludes a contract and the other party knows of this incapacity, the contract is voidable at his or her option rather than being void. It has been said that a mentally incapacitated person’s right of rescission is subject to the usual bars (lapse of time, affirmation, third party rights and restitution in integrum being impossible) familiar from the context of rescission for misrepresentation. However, where a person is entitled to and does rescind a contract on the ground of mental incapacity, then it would appear that any property or money transferred under it is recoverable without the need for any total failure of consideration.

87.  The burden is on the person who seeks to avoid the transaction on mental incapacity to demonstrate to the court that the counter-party has actual knowledge or constructive notice of the mental incapacity, in that such mental incapacity was actually known to or was ostensible or apparent to the counter-party.

88.  With the above principles in mind, I turn to consider the evidence in the present case.

P’s evidence

89.  As said earlier, P called two witnesses, Mr Yick and Mr Lau who both gave evidence through VCF. They had each filed two witness statements.

90.  Ms Yick in her witness statement had stated that P received an email from a Mr Yutaka Lee on 22 December 2014 who informed P that Mr Leung intended to apply for a loan of HKD 6,500,000 and the loan was to be secured by a property. Subsequently, Mr Yutaka Lee telephoned Mr Philip Chan, the executive director of P and P was informed by telephone that Mr Leung in fact wanted to borrow HKD 6,600,000. Ms Yick had produced the email from Mr Yutaka Lee which had attached various bank statements of Mr Leung and D2 for the support of Mr Leung’s application. Mr Yutaka Lee was said to be a financial consultant with Y & S Consultant Company (“Y&S”) and that he had in the past introduced mortgage loan business to P.

91.  Upon checking the documents sent by Mr Yutaka Lee, P agreed to advance the requested loan. On 23 December 2014, Mr Philip Chan had sent instructions by email to their solicitors ie the Firm for the preparation of the Second Legal Mortgage and the Guarantee.

92.  On 24 December 2014, Mr Leung and D2 attended P’s office and that they had provided various documents to P for record. It was Ms Yick’s evidence that 24 December 2014 was the first time she met Mr Leung, and that he had walked in unaided with D2. According to Ms Yick, she witnessed the signing by Mr Leung and/or D2 of (i) the Application Form; (ii) the Instalment Payment Confirmation; (iii) the Declaration of Fees and Charges; (iv) a letter to Yvonne Credit to redeem and discharge the YS Mortgage.

93.  It was Ms Yick’s evidence that the Loan Agreement had been pre-signed by Mr Philip Chan on behalf of P, and that Ms Yick then explained to Mr Leung and D2 the purpose and important terms of the Loan Agreement including the amount of the Loan, the interest rate, the repayment date and the repayment instalments and also there was be a mortgage of the Property and that they would be attending the solicitors’ office to sign the Loan Agreement and the relevant legal documents.

94.  Ms Yick’s evidence was further that during the time when Mr Leung was at P’s office, he was behaving normally and was conscious and had demonstrated no symptoms of any mental disorder or of any mental incapacity. He appeared to have understood completely all the documents before signing. Thereafter, the same day, Ms Yick accompanied Mr Leung and D2 to the Firm’s office to meet the Firm’s conveyancing clerk Mr Lau. Ms Yick said she had further explained the terms of the Loan Agreement in particular the contents of the annexure thereof, and that after Mr Leung and D2 had signed the Loan Agreement, she asked the solicitors firm to make a copy for Mr Leung and D2 for record. According to Ms Yick, she then left the solicitors firm with the original of the Loan Agreement and left Mr Lau to explain to Mr Leung and D2 the legal documents prepared by the solicitors. According to Ms Yick, during the time at the solicitors’ office, Mr Leung was normal in his behaviour and he was conscious and had demonstrated no symptoms of any mental disorder or of any mental incapacity.

95.  In response to LPK’s supplemental witness statement, Ms Yick had explained that due to the length of time, she was not able to recall each question and answer with Mr Leung on 24 December 2014. She had said that during the time when Mr Leung was in P’s office, he did not display any symptoms of “not recalling or repeating time, date or numbers”, and that he had told Ms Yick that he was retired, although she did mention he felt a bit warm, and had asked her to turn down the temperature of the air conditioning of the room. Ms Yick emphasised that P would not have agreed to advance the Loan had P had any knowledge of anything improper, as there was no reason for P to take such a risk.

96.  Ms Yick save her evidence through VCF. She had confirmed the contents of her witness statements during trial save for one minor error as to the amounts.

97.  The Court had asked Ms Yick about the Application Form dated 24 December 2014 for the application of the Loan, she had said Mr Leung signed that document voluntarily and she had confirmed that the words on the Application Form were written by Mr Leung himself, and not by her, or P’s staff or D2. For the mobile telephone number of the applicant on the Application Form, there was one number written. However, D2’s telephone numbers were then written in on the main part of the Application Form as the telephone numbers of the contact person with the word “Liu” thereon. When asked why, Ms Yick’s explanation was that P would usually like to have as many contact telephone numbers as possible. When pointed out that LPK had in his witness statement mentioned that Mr Leung had two mobile phones, Ms Yick said she did not ask him as she did not know.

98.  Ms Yick had confirmed that Mr Leung, as well as D2, had signed each page of the Instalment Payment Confirmation in her presence, where P’s company chop was also applied thereon and that she had explained that document to Mr Leung and D2. Ms Yick confirmed that Mr Leung appeared to her to have understood the contents of the document. She had also confirmed that Mr Leung signed the Declaration of Fees and Charges, the letter to Yvonne Credit for the discharge of the YC Mortgage.

99.  Although on the Loan Agreement, it was stated that it was Mr Lau who interpreted the contents of the Loan Agreement, Ms Yick clarified during the trial that it was she who had explained the contents of the Loan Agreement to Mr Leung and D2 and that Mr Leung confirmed he had understood the contents.

100.  Ms Yick confirmed that she had not detected anything unusual about Mr Leung who appeared to be a normal person who understood the contents of the documents signed by him.

101.  Ms Yick’s evidence was that following the execution of the Loan Documents on 24 December 2014, the sum of HKD 6.6m was advanced by P to Mr Leung as follows:

	Amount (HK$)	Date	Reference
(i)	200,000	24.12.2014	Wing Lung cheque payable to Mr Leung
(ii)	800,000	29.12.2014	Wing Lung cheque payable to Mr Leung
(iii)	390,000	29.12.2014	Wing Lung cheque payable to Y&S
(iv)	5,196,550	30.12.2014	Wing Lung cheque payable to Yvonne Credit for redemption and discharge of YC Second Mortgage
(v)	10,000	--	KB Chau & Co’s fee note, in respect of its legal costs and disbursements
(vi)	3,000	30.12.2014	Wing Lung cheque payable to Mike So, Joseph Lau & Co, solicitors for Yvonne Credit
(vii)	450	30.12.2014	Wing Lung cheque payable to the Land Registry
	Total: HK$6,600,000

102.  According to Ms Yick, after the Loan was advanced to Mr Leung, a total sum of HKD 1,536,087 was repaid to P and no further repayments had been made since 24 April 2016 (when the 16^th instalment of monthly repayment became due).

103.  As for Mr Lau, he had also given evidence by VCF.  His evidence was that Mr Leung and D2 were brought to his office on the day in question, ie 24 December 2012, and that they were brought into a conference room where Ms Yick explained the contents of the Loan Agreement to Mr Leung, and then Mr Lau was only asked to enter the room to witness the signing of the Loan Agreement by Mr Leung and D2.

104.  As for the Second Legal Charge, Mr Lau confirmed that he was the one who had explained to Mr Leung, and that his usual practice after explaining to the borrower was to ask whether the borrower had any questions.  Mr Lau said he could not recall how Mr Leung had responded, but normally if no questions, then the borrower would sign.  He could not recall his then impression of Mr Leung but maintained that normally, he would ask the borrower whether he had understood and if no problems then he would sign.  He did not recall that there was anything abnormal about Mr Leung, or there was any reluctance on his part in signing or that he was under pressure of any one.

105.  As for the Rental Assignment, Mr Lau confirmed he was the one who interpreted to Mr Leung who had understood.  Mr Lau could not be sure whether the Property was actually rented out at the time and said he needed to check the file again, but as a normal practice, his firm would ask a client to sign that document and that it was also P’s instruction to his firm. 

106.  Mr Lau confirmed that he had asked Mr Leung to sign the Advice, to acknowledge that he had been advised to seek independent legal advice.  A separate letter of advice was required to be signed by D2 in relation to her being the guarantor.  Mr Lau could not actually recall what Mr Leung’s response was when advised to seek independent legal advice but confirmed that had Mr Leung indicated such a wish, Mr Lau would ask him to seek legal opinion first before signing.

107.  In his supplemental witness statement, LPK had responded to the evidence of Ms Yick and Mr Liu.  He had disagreed with their evidence that Mr Leung had behaved normally and consciously, without any signs of mental disorder or cognitive deficiency.  According to LPK, amongst other things, (i) Mr Leung’s mental incapacity at the material time was or should have been easily discernible and obvious to P’s staff and the staff of KB Chau & Co, eg whenever Mr Leung was addressed with concepts of time, dates and numbers, he could not have been able to remember, recall and/or repeat the same when being asked to do so; (ii) further, Mr Leung had a poor concept of numbers as he could not comprehend simple mathematics and that he could not have been able to communicate, comprehend, understand and respond properly to any complicated concepts and/or questions and/or numerical figures such as details of the purported mortgage loan arrangements; (iii) Mr Leung was or should have been peculiarly guarded, vigilant and ill-tempered when communicating or dealing with P’s staff or staff of the Firm, and he would have lost his temper; (iv) when Mr Leung was asked any questions which he did not know how to answer, he would have remained silent; (v) he would not have been able to raise any questions. 

108.  However, Mr Leung was not undergoing a MMSE test at P’s office or the solicitors’ office.  The fact that he might not able to understand the details of the instalment repayment amounts or dates, or had remained silent when he was asked questions he did not know how to answer or that he became impatient asking P’s staff or the solicitors’ staff no need to say or repeat anything when he was explained the Loan Documents would not necessarily alert P or the solicitors that he was suffering from any mental disorder or mental incapacity.

109.  In his 1^st witness statement, LPK had mentioned that October 2014 was during the period of “Occupy Central” and that he had asked Mr Leung whether D2 had continued to bring him meals every day before that period, and Mr Leung had responded that D2 had never brought him any meals and that each time when she visited him, she would leave him with a little amount of money for Mr Leung to eat out and often D2 would bring bread and soft drinks for Mr Leung.  Although it was LPK’s evidence that D2 was neglecting the health and welfare of Mr Leung, his evidence also showed that Mr Leung was able to eat out in fast food shops.

110.  Further, the objective evidence was that as mentioned earlier, the last Medical Notes, before Mr Leung signed all the Loan Documents on 24 December 2014, were of 14 November 2014, and Mr Leung’s mood was reported to be stable and there was no disturbing behaviour and he was calm, settled, had social smiles and speech was coherent and relevant.

111.  In any event, as said, no one had appeared for D1 or D2, and LPK did not attend the trial to give evidence and/or be cross examined notwithstanding that notice of the trial had been sent to him.  LPK’s evidence in his witness statements should thus not be admitted, but even if the Court were to have regard to his evidence, on the face of it, there was no sufficient evidence to show that Mr Leung’s mental disorder and incapacity was apparent or ostensible and that Ms Yick and/or Mr Lau should have constructive knowledge that Mr Leung did not have the requisite mental capacity to enter into the Loan Transaction and to sign the Loan Documents.  There was no sufficient evidence in LPK’s witness statements to contradict the evidence of Ms Yick and/or Mr Lau that they had not detected anything unusual or abnormal about Mr Leung on 24 December 2014.

112.  To summarise, having considered all the evidence, I am not satisfied that P had actual notice or constructive notice of Mr Leung’s mental disorder/incapacity.

ISSUE (3) – WHETHER MR LEUNG COULD RELY ON THE DOCTRINE OF NON EST FACTUM

Legal principles

113.  The legal principles are clear.  It was held amongst other things in Ming Shiu Chung v Ming Shiu Sum (2006) 9 HKCFAR 334, that the vitiating factors at common law included fraud, mistake, misrepresentation, non est factum, duress, undue influence and lack of mental capacity, and to disown a legal document, facts constituting the particular vitiating factors relied on must be pleaded and established by the evidence[49].

114.  As set out in paragraph 5.049 of Chitty on Contracts, the “key elements” for a successful plea of non est factum have been summarized thus:

(a) the belief of the signer that the person is signing a document of one character or effect whereas its character and effect were quite different;

(b) the need for some sort of disability that gives rise to that state of mind;

(c) the plea cannot be invoked by someone who does not take the trouble to find out at least the general effect of the document.

115.  Mr Chang further referred to Wing Hang Credit Limited v Hui Chun Kit Benjamin & Anor, HCMP 732/2009, 3.11.2011, where it was held by DHCJ G Lam SC, as he then was, that the plea of non est factum requires positive evidence that the defendant’s consent to the documents in question was “truly lacking”[50].

The evidence

116.  There was no direct or any evidence to prove any of the necessary elements for a non est factum defence.  There was no sufficient evidence that Mr Leung did not understand broadly the nature of the Loan Transaction and all the Loan Documents that he was signing.  Nor was there any evidence that Mr Leung believed he was signing documents of a different character or effect from the Loan Documents.  This defence must in my view therefore fail.

ISSUE (4) – WHETHER THE EXECUTION OF THE LOAN DOCUMENTS WAS PROCURED BY D2’S UNDUE INFLUENCE OVER MR LEUNG, AND IF SO WHETHER P OUGHT TO HAVE KNOWN OF THE SAME

117.  It was held amongst other things by Ma J, as he then was, in Wing Hang Bank v Liu Kam Ying [2002] 2 HKC 57, where third parties such as banks were involved and it was alleged that the relevant contract came about as a result of undue influence being exerted on the party sued thereunder, the court must consider ( a) whether it had been proved that the transaction was affected by undue influence; (b) whether the third party was put on inquiry; and (c) if the third party was put on inquiry, whether he took reasonable steps to satisfy himself that there was no undue influence[51].  The defence would succeed only if all three questions were answered in favour of the party being sued.

118.  As also held by Recorder Ma SC, as he then was, in Bank of China (Hong Kong) Ltd v Wong King Sing [2002] 1 HKLRD 358, amongst other things, that there are two types of undue influence[52]: actual (class 1) and presumed (class 2) and that class 2 is further divided into class 2(A), that where undue influence is presumed, as a matter of law by reason of the relationship between the complainant and the influencer and class 2(B) (where the relationship is one in which the complainant reposed such a degree of trust and confidence on the influencer that undue influence could be presumed).

119.  As set out in paragraph 46 of the above case, it is not every confidential relationship that gives rise to the presumption, and that it is noteworthy that the relationship of husband and wife does not come within this category, namely class 2(A).  As for class 2(B) cases, the complainant needs to show that: (i) he placed trust and confidence in the influencer or that the influencer had acquired an ascendancy or domination over him; and (ii) the transaction cannot be readily explicable by the relationship of the parties[53].

120.  Mr Chang further submitted that, it is not enough merely to prove that the relevant transaction has been affected by undue influence.  The creditor/lender needs to be “put on inquiry”, referring to section 24-001 in Duress, Undue Influence and Unconscionable Dealing (3rd ed).

121.  Mr Chang also pointed out that  the doctrine of constructive notice in undue influence applies only to surety transactions[54] where the wrongdoer (usually the borrower) has improperly procured the complainant to act as surety/guarantor, not the other way around.  This is because where the guarantor normally enters into the transaction at the request of the debtor/borrower, it is “one-sided” insofar as the guarantor is concerned, since they usually receive no benefit in return for the obligation which they assume under the guarantee. In such circumstances, the creditor is put on notice because “the fact that the guarantor receives no benefit is apparent on the face of the transaction”: Duress, Undue Influence and Unconscionable Dealing at 23-014.  Thus, it has been stated that as a matter of principle, the creditor should not be put on inquiry by the wrongdoing of a third party other than the debtor: Duress, Undue Influence and Unconscionable Dealing at 24-018.

The present case

122.  As pointed out by Mr Chang, there was no sufficient evidence to substantiate the plea, which appeared to be premised on class 2(B) the requirements were set out above, and there was no basis for putting P on inquiry of any potential undue influence by D2 on Mr Leung.  P could not be put on inquiry of any alleged wrongdoing other than by the borrower/debtor (here, Mr Leung) on the surety/guarantor (here, D2), not the other way round.

123.  More importantly, as submitted by Mr Chang, it was also not open to Mr Leung to rescind the transactions based on any undue influence on him, as he was not willing to and did not make counter-restitution of the Loan to P.  If the complainant has received a benefit and rescinds a transaction, he must make restitution, since his right to rescission is “conditional on [him] making counter-restitution”[55].  In the context of loan transactions, the court cannot simply set aside the transaction and leave the borrower with the money received under the agreement.  That would result in the borrower being unjustly enriched to the extent of the amounts already advanced by the lender.  To avoid such unjust enrichment, where a loan transaction is set aside the borrower will be required to repay the moneys received with interest at a rate fixed by the court[56].

124.  I accept Mr Chang’s above submissions.  It is not D1’s case that he is prepared to make restitution to P.  There was no sufficient evidence that P should have been put on inquiry of any potential influence by D2 on Mr Leung.  The defence based on undue influence would also fail.

D2’S CASE 

125.  As for D2, she had not raised any defence to P’s case, and thus there were no live issues between P and D2.  P was thus entitled to enforce the terms of the Guarantee against D2 in respect of all moneys, obligations and liabilities owing by D1 to P under the terms of the Second Legal Charge.  

CONCLUSION

126.  The above are the reasons for granting P both the money judgment and vacant possession of the Property as sought by P against D1 and D2, plus contractual interests from 21 August 2017 until full payment. Costs were ordered against D1 and D2 jointly and severally on indemnity basis.

127.  At the trial, P’s claim had been adjusted to a principal sum of HKD 6.2m only to reflect the deductions of (1) HKD 10,000 for legal costs and disbursements to KB Chau & Co; and (2) HKD 390,000 paid as mortgage loans fees to Y&S, which were not recoverable under section 27 of the Money Lenders Ordinance, Cap 163.

128.  Lastly, I wish to thank Counsel for their assistance to the Court.