NANYANG COMMERCIAL BANK LTD v. CHAN HON KEUNG and CHAU CHUN HIN t/a TAYOPA DECORATION CO AND OTHERS

HCMP 1500/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 1500 OF 2001

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D E C I S I O N

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1. This is an appeal from an order of a master giving the 2nd defendant unconditional leave to defend. The plaintiff seeks summary judgment against the 2nd defendant.

Background

2. The claim is based on a mortgage dated 27 May 1995 and made by the 2nd defendant as mortgagor in favour of the plaintiff to secure the repayment by the 1st defendant of moneys owed to the plaintiff (“the first mortgage”).

3. By the first mortgage, the 2nd defendant provided his property (“the first property”) to the plaintiff as security for lending to the 1st defendant. 

4. There were two more mortgages dated 3 July 1997 and 13 October 1997 made by the 3rd defendant as mortgagor in favour of the plaintiff also to secure the debts due from the 1st defendant to the plaintiff.  The 3rd defendant provided two properties under the second and third mortgages respectively as security.

5. The plaintiff claims that the 1st defendant defaulted on the repayment obligation since 27 October 2000.  Demand letters dated 2 March 2001 were sent to the 1st, 2nd and 3rd defendants but to no avail.  The plaintiff then started these proceedings on 17 March 2001.

6. The three mortgaged properties were then sold off one by one with proceeds applied to reduce the indebtedness.  The net proceeds realised from the sale of the first property was at HK$920,000.  By July 2002 all properties had been sold off and the proceedings could not proceed further as a mortgage action.

7. However, the plaintiff continued to apply and obtained on 5 August 2003 an order to effect substituted service of these proceedings on the second named 1st defendant, Mr Chau.

8. On 17 May 2004 the plaintiff applied for an order that the proceedings to continue as if begun by writ.  Owing to problems of service, the summons was withdrawn.  The plaintiff then issued a notice of intention to proceed on 22 November 2007 to the 2nd defendant.  This led to a striking-out battle from which the plaintiff survived on 19 January 2010 when I allowed the plaintiff’s appeal from an order of striking-out.

9. The plaintiff then obtained an order on 26 February 2010 to continue the matter as if it was begun by writ.  It then filed the statement of claim on 11 March 2010.  Its claim against the 2nd defendant is based on the 2nd defendant’s covenant in the first mortgage to repay all moneys due from the 1st defendant to the plaintiff. 

10. The 2nd defendant filed his defence and counterclaim on 8 April 2010, which he amended and re-amended on 3 May and 21 July 2010 respectively.

11. The plaintiff also filed its reply and defence to counterclaim and its amended and re-amended versions on 20 May, 3 June and 6 September 2010 respectively. 

12. The plaintiff then issued a summons on 11 April 2011 for summary judgment against the 2nd defendant.  The summons was heard before a master on 13 February 2012 who gave the 2nd defendant unconditional leave to defend.  The plaintiff then appealed on 24 February 2012.

The amount claimed

13. The plaintiff now seeks judgment for HK$1,024,430.14 as outstanding principal of the debt, HK$1,068,903.08 as outstanding interest accrued to 21 January 2010 and further interest on the principal of HK$1,024,430.14 at the contractual rate of 13 percent per annum from 22 January 2010 to judgment.

The 2nd defendant’s affirmations

14. The 2nd defendant opposes the application on various grounds, including that he had been misled or defrauded into signing the first mortgage and the first mortgage is void.

15. After these proceedings were started on 17 March 2001, the 2nd defendant filed his first affirmation on 6 June 2001.  In relation to his own liability, he said in paragraph 4 of his affirmation:

“4. I was some time in 1995 being requested by the 1st Defendants to provide (the first property) as security for their seeking of banking facilities from the Plaintiff. I did not intend nor I had (sic) agreed that my liability would be in any way beyond the current value of my property. I had not given nor sign (sic) any Deed of Guarantee for any amount exceeding the value of my property.”

He did not allege any agreement between him and the plaintiff which would impinge on the terms of the first mortgage. 

16. When he arranged for the sale of the first property in April and May 2001, he was represented by solicitors in effecting the sale and paying the proceeds to the plaintiff.  He also changed solicitors in the course of the sale.  But none of his solicitors made any allegation about the force and effect of the first mortgage.

17. The plaintiff’s solicitors by a letter dated 2 May 2001 expressly advised his first firm of solicitors that the first mortgage was to secure debts to an unlimited extent and the release of the first property for sale was without prejudice to the plaintiff’s right to recover money from him and the other defendants.

18. He then changed solicitors.  His second firm of solicitors did propose some amendments to the release to be executed by the plaintiff for the first property.  The effect of the amendments was to release him from any further obligation to pay the plaintiff the 1st defendant’s debt. The proposed amendments, however, were rejected by the plaintiff’s solicitors and the transaction was completed without further argument.

19. The 2nd Defendant filed a supplemental affirmation on 3 July 2001 seeking an adjournment of the hearing of the originating summons pending negotiations for the sale of the third mortgaged property.

20. He said in relation to his own liability to the plaintiff:

“3. Sometime in 1995, I was being requested by the 1st Defendants to provide (the first property) as security for their seeking of banking facilities from the Plaintiff. It was understood and agreed amongst the parties that I should only to (sic) furnish security for the said banking facility. I did not intend nor I had (sic) agreed to extend my liability to cover any amount exceeding the value of my property.

4. I crave leave of this Honourable Court to refer to the first paragraph of Exhibit LYM-1 (the first mortgage) annexed to the affirmation of Lam Yuet Mui filed herein on 17th May 2001 (hereinafter referred to as “the said exhibit”). It was clearly stated, inter alia, that ‘… the Mortgagee hath agreed to grant such general banking facilities or (as the case may be) such further general banking facilities on condition that the Mortgagor shall furnish security for the due payment to the Mortgagee of all moneys now owing or which may from time to time be owing to the Mortgagee in respect of any account …’.

5. Under paragraph 2(a) on page 2 of (the first mortgage) it stated that: ‘In further pursuance of the agreement and as security for (i) a payment to … and (ii) the discharge and satisfaction of … AND SUBJECT further to the proviso for redemption hereinafter contained’.

6. On or about 25th March 2001, an oral agreement has been reached between the Plaintiff and I that my property was to be sold at the price of $920,000 provided that all the sale proceeds be paid to the Plaintiff. It was further agreed by the Plaintiff that the Plaintiff should release all title documents in respect of my property and discharge the mortgage upon payment of the said sum of $920,000. The sale of my property was completed on 22 May 2001 and the said sum of $920,000 was paid to the Plaintiff on even date. The Plaintiff duly executed a Release on 22nd May 2001 to release or discharge of the subject Mortgage. Such Release as I understand was not sent to the solicitors for the purchaser until sometime after the last hearing of these proceedings on 11 June 2001.

7. As far as I further understand that the original of the Mortgage had also been released to the purchaser in the middle of June 2001.

8. It was stipulated in paragraph 3 in page 3 of (the first mortgage) that: ‘Upon full payment of all sums payable by the Mortgagor and the Principal hereunder and the full performance discharge or satisfaction of all covenants obligations and/or liabilities absolute or contingent of the Mortgagor and the Principal hereunder, the Mortgagee shall within a reasonable time thereafter at the request and cost of the Mortgagor (…) execute a receipt in such form as the Mortgagee shall think fit or otherwise discharge the security and release the Property unto the Mortgagor or as the Mortgagor shall direct’.

9.   By virtue of the oral agreement made on or about 25th March 2001 aforesaid and the discharge of the security and the release of the property to the purchaser as directed by me as the Mortgagor. In the circumstance, the Plaintiff is estopped from making any further claim against me under the subject Mortgage.”

He still did not impinge on the terms of the first mortgage. 

21. The plaintiff then filed on 18 July 2001 an affirmation by a Mr Tse, a senior officer of the plaintiff, to respond to the various matters raised by the 2nd defendant in his affirmations.  Regarding the 2nd defendant’s liability, Mr Tse said in paragraph 5 of his affirmation that the first mortgage was a security in respect of all moneys due from the 1st defendant to the plaintiff.  If there should be any private agreement between the 1st and 2nd defendants it would not affect the plaintiff’s rights under the first mortgage.

22. Mr Tse further said in paragraph 7(b) that the 2nd defendant’s liability to the plaintiff was not limited to the net proceeds of sale of the first property at HK$920,000.  The first mortgage was to secure all debts due from the 1st defendant to the plaintiff to an unlimited extent, and the 2nd defendant remained liable to the plaintiff for the outstanding debt.

23. The 2nd defendant then filed his further supplemental affirmation on 11 October 2001 to answer Mr Tse’s affirmation. This time he did appear to impinge on the terms of the first mortgage.  He said in paragraphs 6 to 8:

“6. I am advised that for surety agreements, I had to be fully disclosed and informed of the extent of my liability without any reservation or concealment by the beneficiary, otherwise I could avoid any liability to such surety agreement. It is clearly shown in the relevant Mortgage Deed that it had not truly reflected the intention of and what had been agreed between the Plaintiff and me.

7. At the time when the relevant Mortgage Deed was made, the property market was in its upward trend; it was neither the Plaintiff’s nor my intention or expectation to extend my liability to cover any amount exceeding the value of my property. If that were not the case, I could have simply signed a deed of personal guarantee for all debt due or to be due like both of the 1st Defendants did rather than to provide my property for Mortgage. I do not repeat what I have already said in my previous affirmations.

8. The other example amongst others shows that the relevant Mortgage Deed did not reflect the true intention of the parties when it was made is as follows. In paragraph 12 of the Relevant Mortgage Deed …, it was provided that ‘The Mortgage (sic) and the Principal further declare and acknowledge that either or both of them may from time to time be indebted to Nanyang Credit Card Company Limited (“NCC”) which is the subsidiary company of the Mortgagee, … to pay all debit notices which may be issued by NCC …”. NCC was not a privy to the Mortgage Deed; clearly, no one including me as a surety would have agreed to such a term to protect the interest of the whole family of the Mortgagee without first knowing the nature of the possible debt.”

The grounds in the defence and counterclaim

24. In his defence and counterclaim filed on 20 May 2010, with re-amended version filed on 6 September 2010, he raised a number of new grounds of defence.  He pleaded that the first mortgage was made to secure banking facilities at HK$500,000 for letter of credit and $250,000 for trust receipts.  He further pleaded that the first mortgage was procured from him by the fraud of one Leung Wing-hong of the plaintiff.

25. Leung fraudulently persuaded or misled the first named defendant, Chan, to assist Leung to meet business target/quota by applying for the abovementioned banking facilities.  Further or alternatively, the 2nd defendant pleaded that Leung on behalf of the plaintiff had colluded with Chan to induce him to lend the first property to the 1st defendants to secure the facilities.

26. Further or alternatively, he pleaded that the first mortgage was made under misrepresentation of Leung on behalf of the plaintiff solely and/or in concert with Chan.  This was so because Leung had through telephone conversation in the presence of Chan told him that the first mortgage was a vehicle to secure the said facilities only and in any event would not exceed the approved amount and/or the maximum prevailing value of the first property.  The facilities were used by the 1st defendants as a reserve or for convenience only.

27. Further or in the alternative, the 2nd defendant pleaded that the first mortgage did not reflect his true intentions as the document included terms not intended by him and beyond the parameters as agreed between him and Leung.  These terms are:

(1)   Loans and/or bank overdrafts were to be granted by the plaintiff to the 1st defendants.

(2)   The 2nd defendant personally guaranteeing or securing the 1st defendants’ indebtedness, including future and contingent indebtedness and whether due from the 1st defendant alone or with others to the plaintiff other than and/or exceeding the limit of the said banking facilities and/or the value of the first property.

(3)   Indebtedness due from the 1st defendant to Nanyang Credit Card Company Limited was also covered.

28. Further or in the alternative, the 2nd defendant pleaded that before executing the first mortgage, he was not given any chance to preview the document and had not been advised to seek separate and independent legal advice on the terms of the document.

29. Further or in the alternative, he pleaded that he was given no chance to withdraw from the first mortgage by payment or satisfaction of part of the money or obligation secured. 

30. Further or in the alternative, he pleaded that the first mortgage had not been affixed with any seal when he signed it.  Hence the first mortgage, in fact, was merely a simple contract and the claim had been barred at the time of service of the statement of claim on him. 

31. Further or in the alternative, he pleaded that the second and third mortgages were made by the plaintiff alone or in conspiracy with the 1st defendants to defraud him by putting on him additional risks of indebtedness which he would not have assumed under the first mortgage.  Neither the plaintiff nor the 1st defendants had given him any notice that the plaintiff was granting the 1st defendants additional loans and/or facilities under the further security in the second and third mortgages.  He therefore denied any liability under the first mortgage or any additional liability by reason of the second and third mortgages. 

Affirmation in opposition

32. He elaborated on the facts in support of these grounds in his affirmation in opposition to summary judgment.  He said before making the first mortgage, the first property was mortgaged to the plaintiff to finance its purchase in 1991.  By 1995 the sum outstanding to the plaintiff was about HK$300,000. 

33. The first named 1st defendant, Chan, then approached him in about early May 1995.  Chan told him that Chan was advised by his friend, Leung, who was working for the plaintiff, that the 1st defendant could set up a bills account with the plaintiff to issue letters of credit to do international trade.  The procedure was simple and the 1st defendant could provide a landed property as security to the plaintiff for HK$500,000 letter of credit facilities, and HK$250,000 trust receipt facilities.

34. Chan then suggested to the 2nd defendant that the 2nd defendant could assist the 1st defendants by providing the first property as security.  The 1st defendants would pay off the then outstanding sum owed by the 2nd defendant to the plaintiff for purchasing the first property and secured by the first property.  The 2nd defendant could then repay the payment to the 1st defendants according to the schedule of repayment then in force between the 2nd defendant and the plaintiff.

35. In mid May 1995, Chan put the 2nd defendant through the telephone to Leung of the plaintiff who told the 2nd defendant the same arrangement as Chan had told him.  Leung also assured him that his maximum exposure or risk was limited to the value of the property.  The plaintiff would not dare to give more credit to the 1st defendant exceeding the value of the first property as that would expose the plaintiff.  The 2nd defendant therefore agreed to enter into the first mortgage in reliance of Leung’s representation. 

36. Chan also nominated Woo, Kwan, Lee & Lo (“WKLL”) to be the solicitors to prepare the first mortgage. 

37. The 2nd defendant further said that he had no intention to use the first property as security for any amount exceeding HK$500,000 other than interest and bank charges.  He also had no intention to lend the first property as security for any liability of the 1st defendants other than in their bills account with the plaintiff and he did not intend to provide security for liability incurred by the 1st defendant to any entity other than the plaintiff.  In particular he had no intention to use the first property as security to Nanyang Credit Card Company Limited as provided for in paragraph 12 of the first mortgage.  If he should have been allowed to read through the first mortgage before signing, he would have deleted these terms. Therefore the first mortgage did not reflect his intentions.  Moreover, the first mortgage was in a standard form that the plaintiff would not have allowed any alteration.

38. He also prayed in aid of the Basic Law and said that all residents in Hong Kong should be equal.  He also said there is a common law principle that all parties to a contract are equal. 

39. He then referred to his execution of the first mortgage at the office of WKLL.  He said he attended one Chau Hung-sang of WKLL and was asked by Chau to sign the first mortgage but not in the presence of the attesting solicitor, Miss Dora Chan.  He also did not see the red wafer seals on the first mortgage when he signed it.

The plaintiff’s affirmations

40. Mr Leung of the plaintiff made an affirmation to rebut the 2nd defendant’s allegations.  He said the 2nd defendant was well educated, fluent in English and had experience of working in a law firm.  There is in fact no dispute that the 2nd defendant had worked in various magistracies and the Labour Tribunal from March 1974 as a Clerical Officer 2 and then as a law clerk in the Legal Aid Department from mid 1978 to the end of 1991.  He then joined WKLL as a litigation clerk from January 1982 to 2 September 1995.  He was also the general manager of the 3rd defendant and the group of companies associated with the 3rd defendant. 

41. Leung denied in his affirmation that he had asked Chan of the 1st defendants to assist him in meeting targets/quota.  Chan was just a customer of the plaintiff and Leung had no personal dealing with him.  Leung also denied any telephone conversation with the 2nd defendant in which he had confirmed the limit of the first mortgage at HK$500,000.

42. As at May 1995, Leung had been with the plaintiff for 11 years and he said he knew that a prudent bank officer should not make oral representations to a client over the telephone.  He said the alleged limit of the first mortgage was contrary to the terms of the first mortgage.

43. Mr Chau Hung-sang of WKLL also made an affirmation for the plaintiff.  He commenced working for WKLL as a conveyancing clerk since 1975.  By May 1995 he had known the 2nd defendant for about 13 years.  He denied of having disallowed the 2nd defendant to read the first mortgage before signing.  It was his standard practice to complete all documents before arranging the parties to sign them.  He confirmed that he had explained the contents of the documents to the 1st and 2nd defendants and affixed the red wafer seals to the document before asking the 1st and 2nd defendants to sign them.  He also remembered that the 2nd defendant wanted certain amendments to be made.  But upon being told by him that the 2nd defendant had to discuss the same with the plaintiff, the 2nd defendant then opted to execute the document without amendment.

44. Chau Hung-sang also said that he had never suggested to the 2nd defendant that the liability under the first mortgage would be limited to HK$500,000 or the value of the property.  He also said that if the 2nd defendant did not agree with the contents of the first mortgage, he would not have signed it.  Chau also confirmed that the first mortgage was executed by the 1st defendant in the presence of the solicitor, Miss Dora Chan. 

45. Miss Dora Chan of WKLL also made an affirmation for the plaintiff.  She also confirmed that the red wafer seals were on the first mortgage when it was executed by the 2nd defendant and that she witnessed the 2nd defendant’s execution of the same.  She said she would not sign a document as a witness if it was not signed by the signatory before her. 

The plaintiff’s submissions

46. Mr Wong, solicitors for the plaintiff, in this application submitted that the present allegations by the 2nd defendant are matters of afterthought.  He referred to the three affirmations of the 2nd defendant all made in 2001 when he did not make the allegations as now featured in his re-amended defence and counterclaim and affirmation in opposition.  In particular there was no suggestion of a limit of liability of HK$500,000.

47. I would also note that the 2nd defendant’s two firms of solicitors who represented him in the disposal of the first property in April and May 2001 also did not suggest that the prevailing market value of the first property was his limit of liability.  Some amendments had been proposed to the release document to attain this effect, but the amendments were not insisted on and this argument of limit of liability was not raised. 

48. Mr Wong also referred to the 2nd defendant’s working experience and the position he held in the 3rd defendant’s group of companies.  In the light of the 2nd defendant’s working experience and knowledge of the law, Mr Wong submitted that the 2nd defendant would not have executed the first mortgage if he did not accept the liability.

Decision

49. Having reviewed the contents of the various affirmations by the plaintiff and the 2nd defendant, I take the view that the assertions by the 2nd defendant that he only intended to assume liability under the bills account up to HK$500,000 for letters of credit, and HK$250,000 for trust receipt, or up to the prevailing market value of the first property unbelievable.  If that was the case, there was no reason for him not to have said so in his first three affirmations and the letters from his solicitors to the plaintiff’s solicitors in April and May 2001.  This is particularly so bearing in mind his long experience in litigation.

50. I also do not accept his assertions that he had not been given any chance to read the first mortgage before execution and it contained terms not intended by him.  I repeat that he is a person with ample experience in litigation.  Mr Chau Hung-sang of WKLL was also a longstanding friend and colleague of his though they worked in different departments.  I see no reason for Mr Chau Hung-sang not to have explained the first mortgage to him, or to allow him the chance to read it himself if he wanted.  I accept Mr Chau Hung-sang’s evidence. 

51. I also accept that the 2nd defendant had indeed suggested certain amendments but preferred not to pursue them, knowing that he would have to take them up with the plaintiff direct.  This drives me to conclude that he was fully aware of the terms of the first mortgage and had accepted them when he signed the document. 

52. This conclusion logically dispels any suggestion of fraud by Mr Leung on behalf of the plaintiff solely or in conjunction with the 1st defendants.  Any fraud or misrepresentation by these persons could only have been perpetrated with the assistance and connivance of Chau Hung-sang of WKLL, who was in charge of the task of explaining the first mortgage to the 2nd defendant.

53. I also disagree that the first mortgage did not allow the 2nd defendant to withdraw from it.  Upon full payment of the liability secured, the 2nd defendant could always withdraw from the first mortgage. 

54. I also do not think the 2nd defendant can pray in aid of the Basic Law.  The signing of the first mortgage was a matter of choice for him.  He could have chosen not to enter into it.

55. Regarding the question of the seal of the deed, I accept the evidence of Mr Chau Hung-sang and Miss Dora Chan and reject the assertion by the 2nd defendant.  In any case, section 19 of the Conveyancing and Property Ordinance, Cap. 219, provides that a document shall be presumed to have been sealed by an individual if the document signed by him describes itself as a deed, or states that it has been sealed or bears any mark intended to represent a seal.  For the first mortgage, the second and third features are present and this document is presumed to have been sealed by the 1st and 2nd defendants.  I also accept the evidence of Mr Chau Hung-sang and Miss Chan that the 2nd defendant executed the first mortgage before Miss Chan. 

56. Regarding the attacks on the making of the second and third mortgages, clauses 5(c) and 9(b) of the first mortgage allowed the plaintiff to vary the credit limit to the 1st defendants without notice to the 2nd defendant.  I have already accepted that Chau Hung-sang had explained the terms of the first mortgage to the 2nd defendant and the 2nd defendant was aware of and had accepted the terms.  These terms include clauses 5(c) and 9(b).  The plaintiff was therefore at liberty to accept the second and third mortgages from the 3rd defendant without notice to the 2nd defendant.

57. In the premises, I allow the plaintiff’s appeal and give it summary judgment on the claim.  But the action has indeed taken too long to reach judgment.  I would reduce the period for accrual of interest.  I think a two and half year period from July 2002 should be long enough for this action to be concluded as against the 2nd defendant.  The case against the 2nd defendant could have proceeded independent of that as against the 1st and the 3rd defendants.  I would therefore allow interest on the principal only up to January 2005.

58. I therefore give judgment for the plaintiff for the balance of principal at HK$1,024,430.14 and interest accrued to 31 January 2005 at HK$327,859.74, less partial payment at HK$5,204.90 paid on 29 June 2005. 

59. I also order the 2nd defendant to pay the plaintiff the costs of the proceedings as against the 2nd defendant, to be taxed if not agreed.