BANK OF CHINA (HONG KONG) LTD v. LEUNG WAH AND ANOTHER

HCMP 1634/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 1634 OF 2009

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J U D G M E N T

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1.  This is an appeal against an order of a Master.  The Master ordered on 9 February 2010 that this matter should continue as if it had been begun by writ.  The Master also ordered the plaintiff to file a statement of claim within 28 days.  The plaintiff duly filed the statement of claim on 9 March 2010 and the defendants filed their defence and counterclaim on 30 March 2010.  The plaintiff now appeals against the Master’s order.

Background

2.  This is a mortgage action.  The defendants are husband and wife.  They together with their son Leung Chi-shing applied in about May 1998 for general banking facilities from the plaintiff for the son’s use.  The application was approved on 15 May 1998.  The facilities were an overdraft up to HK$1.8 million and an instalment loan of HK$380,000, to be repaid over 8 years. 

3.  The facilities were made available subject to the terms and conditions of two facility letters, both dated 20 May 1998.  The facility letter in respect of the HK$1.8 million overdraft facility required the defendants to execute a first legal charge on their flat in Heng Fa Chuen, Chai Wan, in favour of the plaintiff to secure the repayment of the overdraft.  The facility letter in respect of the instalment loan also required the defendants to execute an all moneys first legal charge on this flat in favour of the plaintiff as security.

4.  The defendants signed both facility letters.  They also signed to acknowledge receipt of an English warning letter dated 20 May 1998 addressed by the plaintiff to them.  The letter advised them that the plaintiff intended to grant general banking facilities to Leung Chi-shing against the security of a mortgage over their property.  It further advised them to obtain independent legal advice before entering into the deed as they would by the deed become liable for all the moneys that Leung Chi-shing may owe the plaintiff.  The letter also said that the liability was unlimited as to amount.

5.  The defendants then executed an all moneys first legal charge on their flat on 4 June 1998 at the office of the plaintiff’s solicitors.  The defendants were the mortgagors.  Their son, Leung Chi-shing, also executed the charge as the requesting party.  The defendants covenanted in the charge to pay the plaintiff on demand all sums of money as may be due from the requesting party, either alone or jointly with or as security for others. 

6.  The defendants have also signed two English letters, both dated 4 June 1998 and addressed to the plaintiff’s solicitors and the plaintiff respectively.  In the letter to the plaintiff’s solicitors, the defendants acknowledged that the plaintiff’s solicitors had explained the charge to them and invited them to seek independent legal advice on the transaction, but they did not see the need for such advice.  In the letter to the plaintiff, they confirmed that the plaintiff’s solicitors had explained the charge to them and they understood that their liabilities under the charge was unlimited.  They also confirmed that they had been advised by the plaintiff’s solicitors to seek independent legal advice, but they declined to do so.

7.  On 2 June 1999, the defendants and Chi-shing signed another facility letter to renew the overdraft of HK$1.8 million.  The letter again provided that the overdraft facilities were available upon the provision by the defendants of a first legal charge on their flat in favour of the plaintiff.  This charge is the charge that they had executed on 4 June 1998.  They also signed to acknowledge receipt of an English warning letter dated 2 June 1999 from the plaintiff to them.  The content of this warning letter is the warning letter dated 20 May 1998.

8.  On 21 June 2000, they signed a further facility letter.  This was for an instalment loan of HK$1.7 million and repayable in 240 instalments.  The loan was to be made in favour of Chi-shing.  The loan was available also subject to an all moneys first legal charge on the defendants’ flat as security.  This charge is also the charge executed by the defendants on 4 June 1998.  On the same day they signed to acknowledge receipt of another English warning letter, the content of which is the same as the previous ones.

9.  Chi-shing defaulted in repaying the instalment loan.  The plaintiff’s solicitors in this action then sent the defendants a letter on 15 June 2009 demanding them to pay the outstanding instalment loan and interest at HK$1,341,101.25 and a judgment debt against Leung Chi-shing with interest at HK$1,085,052.72.  The defendants did not accede to the demand.  The plaintiff then instituted these proceedings against them on 27 August 2009.  The defendants filed several affirmations to oppose the proceedings.  The Master then made the order in question on 9 February 2010.

10.  In this appeal, the plaintiff seeks to set aside the Master’s order.  They also want an order of possession of the property and a judgment for payment of the outstanding sum. 

The defendants’ evidence

11.  The 1st defendant gave the background of the family in his first affirmation.  He was born in 1931.  He had a primary education in the Mainland and came here in 1949.  He worked for a few years as a casual worker and then learned to become an air-conditioning worker.  He then worked as an air-conditioning installation contractor for many years until his 50s.  He then rested for a while and resumed working as a messenger.  He retired in 2002 at the age of 71 years old.  He does not understand English at all.

12.  The 2nd defendant was born in 1938.  She also had a primary education in the Mainland before coming here in 1958.  She then worked as a helper in the Tung Wah Group of Hospitals.  She married the 1st defendant in 1962 and stopped working when she was 30 years old and became a full-time housewife.  She resumed working for the Tung Wah Group of Hospitals in the mid-1980s when the children had grown up.  She retired in 1998 at the age of 60 years old.  She also cannot understand English.

13.  The couple have four children and Chi-shing is the second child and elder son.  Chi-shing received education up to Form 7 and then obtained a Diploma in Accounting.  He then worked in an accountant’s firm for many years.  He is now about 44 years old.  In 1997, when the economy was in a downturn, Chi-shing thought that that was a good time to go into business.  He believed that he could take over other people’s business at a low price.  The defendants all along thought that Chi-shing was an intelligent, independent and trustworthy young man.  He worked diligently when in the employ of the accountant’s firm.  He also knew how to handle his affairs.

14.  The 1st defendant then said in paragraphs 11 to 16 of his affirmation about the circumstances in which and why he and the second defendant had executed the charge.  He said:

「11.   當時志成向我的妻子提出他的投資計劃，並說他需要一些資金。他敦促我的妻子把我的妻子與我共同擁有的物業即香港柴灣杏花村29座506室的單位（“該物業”）抵押，借錢給他實現其生意計劃，一切的供款由他個人承擔，志成再三向我們承諾他會準時還款，不需要我們承擔任何債務。

12.   我和我的妻子現在回想起來，當時志成說他需要最多港幣80萬元，我和我的妻子認為那是我們可以承擔的金額，並可為港幣80萬元的款項作擔保。我們非常肯定當時志成並沒有提及我們為他負擔的責任可能超過該物業的價值或是無限的。

13.   如果抵押該物業下的法律責任是多於港幣80萬元或是無限的話，我和我的妻子決不會同意抵押該物業，因為我們根本無法承受失去該物業的後果。我和我的妻子當時都已經60多歲，雖然我仍有當信差以賺取微薄的收入，但我的妻子已退休，該物業是我和我的妻子擁有的最大資產，除此之外，我們只有非常有限的儲蓄作退休之用。

14.   我和我的妻子願意為志成抵押該物業以便他向原告人借港幣80萬元的款項，因為我們相信志成的借款是有限的，即港幣80萬元，及相信志成營運生意的能力，加上志成保證會顧及我們在該物業上的利益。此外我和我的妻子也相信銀行及律師等也不會欺騙或誤導我們，所以我們願意簽署有關文件。

15.   我在此確認我們在志成的借款及生意上沒有任何權益或利益。

16.   我和我的妻子沒有跟進或仔細閱讀志成依據1998年的文件借回的借款或1998年的文件的細節，當時我們相信志成不會讓我們承受超過上述所提及的港幣80萬元以外的任何損失，而且沒有想過我們要求及可以取得該些文件的副本。」

15.  A free translation of these paragraphs is:

“11.   At that time, Chi-shing told my wife his investment plan and said he needed some capital.  He had sincerely urged/pressed my wife to mortgage the flat owned by me and my wife, which is Flat 509 of Block 29, Heng Fa Chuen, Chai Wan, (‘the Property”) to borrow money for him to realise his business plan.  He himself would be responsible for paying all the instalments.  He repeatedly promised us that he would repay promptly and would not require us to shoulder any debt.

12.     In our retrospect, Chi-shing said at that time that he required at most HK$800,000.  My wife and I regarded that as a sum that we could afford and could guarantee the sum of HK$800,000.  We are very sure that Chi-shing at that time had not mentioned that our liabilities for guaranteeing him could exceed the value of the property or were unlimited.

13.     If the legal liability under the mortgage of the property should exceed HK$800,000 or is unlimited, my wife and I definitely would not have agreed to mortgage the property because we basically have no means to suffer the consequence of losing the property.  My wife and I were then over 60 years old.  Though I still worked as a messenger in order to earn the meagre income, my wife had already retired.  The property was the biggest asset owned by my wife and me.  Apart from this, we only had some very limited savings for use in our retirement.

14.     My wife and I agreed to mortgage the property for Chi-shing in order that he could borrow from the plaintiff HK$800,000.  The reason being our belief that the loan for Chi-shing was limited, that was HK$800,000, and our belief in Chi-shing’s ability to manage business.  Furthermore, Chi-shing warranted that he would take care of our interest in the property.  Besides, my wife and I also believed that the bank and the solicitors would not cheat or mislead us.  Therefore, we agreed to sign the relevant documents.

15.     I confirm here that we have no right or interest whatsoever in Chi-shing’s loan and business.

16.     My wife and I had not followed or read in detail the loan Chi-shing borrowed in accordance with the 1998 documents or the details of the 1998 documents.  At that time we believed that Chi-shing would not let us assume any loss in excess of the above-mentioned HK$800,000.  We also had not thought of asking for and being able to obtain copies of those documents.”

16.  The 1st defendant also denied that the plaintiff’s solicitors had explained to them the charge and, in particular, the unlimited guarantee.  Regarding the facility letters, the warning letters and the letters addressed by the defendants to the plaintiff and the plaintiff’s solicitors which were all in English and were signed by them in 1998, the 1st defendant denied that any person had given him and his wife any explanation about them whatsoever.

17.  The 2nd defendant adopted the 1st defendant’s first affirmation. 

18.  The plaintiff then filed a second affirmation by its Asset Recovery Manager, who pointed out that the defendants had on the earlier date of 24 April 1996 executed an all moneys mortgage in favour of another bank.

19.  The 1st defendant then filed a second affirmation to explain that.  He said the earlier mortgage was made to borrow HK$500,000 to assist Chi-shing to purchase a flat for Chi-shing’s family.

20.  Regarding the facility letters, warning letters and confirmation letters as produced by the plaintiff in the second affirmation of the Asset Recovery Manager which all bear the defendants’ signatures, both defendants said that nobody had given them any explanation or any copy thereof and they just signed these documents as told by the plaintiff’s staff or the staff of the plaintiff’s solicitors.

21.  The 2nd defendant also filed a second affirmation.  She said in paragraphs 7 and 9 as follows:

「7.  志成升讀中學後，他向我提出想到澳洲留學，想我支持他，由於當時家境不是十分好，故此我拒絕了他。幸而志成沒有放棄他的學業及繼續升學、進修及工作。後來靠其一己之力取得關於會計的文憑，並擔任會計的工作。他還會主動為全家提供經濟及稅務意見，甚至替全家庭寫報稅表，所以在處理經濟問題上我向來想信志成有能力、有承擔、也有責任感。

1998年的按揭

9.   約在1998年，當時志成向我提出他的投資計劃，並說他需要一些資金。他敦促我把該物業抵押，借錢給他實現其生意計劃，一切的供款由他個人承擔，志成再三向我承諾他會準時還款，不需要我承擔任何債務。由於過去志成從沒有令我失望過，他接受的教育遠遠多於我和我的丈夫，令我們安心也相信他的能力及承擔的心。有見及志成一直以來十分誠實可靠，我再次遊說我的丈夫抵押該物業，幫助志成進行他的投資大計。由於1996年時志成安排向第一太平銀行申請的按揭過程順利，因此，我也認為這次借款和上次一樣。整個財務申請及過程一概是由志成負責，而我倆只是聽從他的說話行事。本人不明白按揭人和貸款人的分別，也不知道按揭可以「無上限」或可能要個人承擔債務）。」

22.  The free translation of the two paragraphs is:

“7.     After Chi-shing was promoted to secondary education, he told me that he wished to pursue his study in Australia.  He wished I could support him.  Since the household economy at that time was not very good, I therefore declined him.  Fortunately, Chi-shing did not give up and continued with his education and work.  He later obtained a Diploma in Accounting through his own efforts.  He also assumed accounting work.  He also provided financial and taxation advice intuitively to the whole family.  He went to the extent of filling out the tax returns for the whole family.  Therefore, on the management of financial problems, I always believed that Chi-shing had the ability, the willingness to undertake and the sense of responsibility.

9.  In about 1998, Chi-shing told me about his investment plan and said that he needed some capital.  He sincerely urged/pressed me to mortgage the property to borrow money for him to realise his business plan.  He himself would be responsible for paying all the instalments.  He repeatedly promised us that he would repay promptly and would not require us to shoulder any debt.  Since Chi-shing had never disappointed us before, he had far more education than my husband and I, that assured us and we also believed in his ability and his willingness to undertake.  Since Chi-shing was all along very honest and reliable, I persuaded my husband again to mortgage the property to assist Chi-shing to carry out his investment plan.  Since in 1996 the process of applying for mortgage from the First Pacific Bank as arranged by Chi-shing was smooth, I therefore thought that the lending this time would be the same as the last time.  Chi-shing took charge of the entire financial application and process.  My husband and I only did as he told us.  I myself do not understand the difference between a mortgagor and a borrower or that a mortgage could be ‘without upper limit’ or could require the individual to shoulder the indebtedness.”

23.  Regarding the letters and documents as produced by the plaintiff which had been signed by her and the 1st defendant, she also said that nobody had given them any explanation thereof.

The applicable law

24.  I would start with Royal Bank of Scotland Plc v Etridge (No. 2)  [2002] 2 AC 773, where Lord Nicholls of Birkenhead discussed the burden of proof and the presumption of undue influence in paragraphs 13, 14 and 21:

“13.   Whether a transaction was brought about the by the exercise of undue influence is a question of fact.  Here, as elsewhere, the general principle is that he who asserts a wrong has been committed must prove it.  The burden of proving an allegation of undue influence rests upon the person who claims to have been wronged.  This is the general rule.  The evidence required to discharge the burden of proof depends on the nature of the alleged undue influence, the personality of the parties, their relationship, the extent to which the transaction cannot readily be accounted for by the ordinary motives of ordinary persons in that relationship, and all the circumstances of the case. 

14.     Proof that the complainant placed trust and confidence in the other party in relation to the management of the complainant’s financial affairs, coupled with a transaction which calls for explanation, will normally be sufficient, failing satisfactory evidence to the contrary, to discharge the burden of proof.  On proof of these two matters the stage is set for the court to infer that, in the absence of a satisfactory explanation, the transaction can only have been procured by undue influence.  In other words, proof of these two facts is prima facie evidence that the defendant abused the influence he acquired in the parties’ relationship.  He preferred his own interests.  He did not behave fairly to the other.  So the evidential burden then shifts to him.  It is for him to produce evidence to counter the inference which otherwise should be drawn.

…

21. As already noted, there are two prerequisites to the evidential shift in the burden of proof from the complainant to the other party.  First, that the complainant reposed trust and confidence in the other party, or the other party acquired ascendancy over the complainant.  Second, that the transaction is not readily explicable by the relationship of the parties.”

25.  Since the relationship between the defendants and Chi-shing is not one which the law irrefutably presumes to be a relationship of influence, counsel for the plaintiff therefore reminded me not to invoke any evidential presumption of undue influence.  I am also referred to the judgment of Lord Scott of Foscote NPJ, in Li Sau Ying v Bank of China (Hong Kong) Ltd (2004) 7 HKCFAR 579 at paragraph 34:

“34.   I do not wish to leave this issue without expressing the hope that in future cases, where undue influence has to be proved but where the relationship between the parties is not a relationship that falls within Slade LJ’s Class 2A category, the parties will concentrate on whether the evidence justifies the inference that, on a balance of probabilities, the impugned transaction was procured by undue influence, that is to say, by an abuse by the allegedly dominant party of the trust and confidence reposed in him by the allegedly subservient party.  References in such cases to, and attempts to invoke the assistance of, an alleged evidential presumption of undue influence are, in my opinion, likely to be, as they have been in this case, a source of confusion and an impediment to the evaluation of the available evidence.”

Finding on relationship of influence

26.  Counsel for the plaintiff submits that there was no relationship of trust and confidence between the defendants and Chi-shing and that Chi-shing had no ascendancy over the defendants.  The trust and confidence in an ordinary loving relationship of parents and son as existed between the defendants and Chi-shing is insufficient. 

27.  The evidence of the 1st defendant does not show that Chi-shing had dominance over the defendants.  They believed that Chi-shing had the ability to do business successfully.  They thought that Chi-shing was intelligent, diligent and trustworthy.  They trusted Chi-shing’s assurance that he would protect their interest in the property.  They also believed that Chi-shing would not expose them to a liability in excess of HK$800,000 which they could not afford.  The 1st defendant also said that if he should have been told that their liabilities under the mortgage were in excess of HK$800,000 or unlimited, they would not have signed the charge.

28.  All these show that the defendants were not subject to the dominance or ascendancy of Chi-shing.  They just thought that their liability under the charge would not exceed HK$800,000.  They at the urge of Chi-shing made a conscious decision to enter into the charge to borrow money to help Chi-shing realise his business plan.

29.  The evidence of the 2nd defendant does not make this part of the defendants’ case any better.  Chi-shing had been trained in accounting and worked in that field too.  He had provided financial and accounting advice to and filled out tax returns for the family, but there is no evidence of the subject matters that he had advised on and the advice he gave.  Insofar as the defendants are concerned, there does not appear to be much that Chi-shing had to advise them on. 

30.  The 2nd defendant did say that they had followed the words of Chi-shing, but that was on the application and the process of the charge only. 

31.  On the defendants’ evidence, there was no doubt a loving relationship between them and Chi-shing, but I do not think it was a relationship where they had placed trust and confidence in Chi-shing in relation to the management of their financial affairs.  There was no ascendancy by Chi-shing over them.

Finding on undue influence

32.  Counsel for the plaintiff further argues that there was also no evidence of undue influence by Chi-shing over the defendants on their execution of the charge.  There is no evidence of any misrepresentation by Chi-shing to the defendants.  Chi-shing had only sincerely urged/pressed them to mortgage the property to help him.  There is no evidence of excessive pressure, emotional blackmail, bullying or any other kind of wrongdoing (see Etridge (No. 2), paragraph 160).  Chi-shing had only expressed optimism in his business plan and thought that he needed no more than HK$800,000, which he could repay.  Such optimism was taken on board by the defendants but turned out to be misplaced, but that is still not undue influence.

33.  Counsel also referred to paragraph 244 of Etridge (No. 2) where Lord Scott said:

“Was this a case in which, on Mrs Harris’ pleading, there was an arguable case of undue influence?  The relationship of trust or confidence was certainly present.  Mr Harris conducted the business from which the family income was derived.  It was he who negotiated the financial arrangements with Barclays Bank.  He did not explain the arrangements to his wife.  He simply asked her to sign the legal documentation.  But there is no pleaded allegation of misrepresentation.  His statement, express or implied, that he would be able to trade his way out of his financial difficulties may have been an expression of over optimism but cannot be, and has not been, suggested to be a misrepresentation.  There was no allegation of any bullying of Mrs Harris or of any pressure on her to sign that could be characterised as excessive.  She signed, without knowing what she was signing, because she trusted him.  This pleaded story does not, in my opinion, raise any presumption of undue influence.  It does not, in the absence of any other evidence, justify an inference that Mr Harris brought undue influence to bear in order to persuade her to sign.  Her agreement to do so is consistent with a normal, trusting, relationship between a married couple.”

34.  The same applies to the situation between the defendants and Chi-shing here.  The defendants just executed the charge thinking that it was limited to HK$800,000 when in fact it was not.  Even if I were wrong on the finding of the lack of a relationship of influence, I also find that there was no undue influence by Chi-shing on the defendants on the execution of the charge.

35.  On this finding, even if there were a relationship of influence or an irrebutable presumption of a relationship of influence, the defendants will still not succeed in setting aside the charge (see paragraphs 8-09 and 8-15 of Snell’s Equity (31st edition)).

Should judgment be given?

36.  Counsel for the defendants also submitted that the court can direct originating summons proceedings to proceed as if they had been begun by writ even without deciding whether there is any triable issue.  I am referred to Wing Hang Bank v Crystal Jet International Ltd and Others, CACV140/2000. 

37.  I do not agree.  If there is no triable issue, it would be a waste of time and resources to allow the matter to proceed as if it had been begun by writ.  The Wing Hang Bank case is different.  There were 19 affidavits exchanged between the parties and over 600 pages of documents produced.  It was really not necessary to spend time and resources to distil each and every dispute between the parties therein.

38.  Counsel also submitted that even if I should set aside the Master’s order, I should not give judgment, but should allow the originating summons to take its usual course.  I think that is also a waste of time and resources.

Judgment

39.  I therefore set aside the Master’s order, give the plaintiff an order for possession of the flat, and order the defendants to pay the plaintiff the sum and interest as set out in paragraph 12(ii), (iii) and (iv) of the affirmation of Wong Wing-hong filed by the plaintiff on 30 September 2009.

40.  I also make an order nisi that the defendants do pay the plaintiff the costs of these proceedings, which I now assess on a nisi basis.