HUA RONG FINANCE LTD. v. MEGA CAPITAL ENTERPRISES LTD.

HCMP1110/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 1110 OF 1998

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J U D G M E N T

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1. In broad outline, the plaintiff is claiming against the 1st defendant for :

(1) Repayment of the "First Principal Sum" of HK$1.5 million pursuant to the Mortgage Deed and/or the First Loan Agreement;

alternatively, payment of HK$1.5 million as money had and received by the 1st defendant pursuant to the First Loan Agreement;

(2) repayment of the "Second Principal Sum" of HK$454,500 pursuant to the Mortgage Deed and/or the Second Loan Agreement;

(3) delivery up of the vacant possession of the Property by the 1st defendant, and enforcement of the Mortgage Deed; and

(4) various ancillary relief.

2. The 1st defendant counterclaims against the plaintiff for :

(1) A declaration that the Mortgage Deed relating to the Property is null and void; and

(2) an order that the plaintiff do forthwith return all Title Deeds of the Property to the 1st defendant.

3. The 2nd defendant was at all material times a shareholder and director of the 1st defendant.

4. There is no dispute that the 1st defendant was set up in January 1997 by the 2nd defendant and Madam Yeung as an investment vehicle; and soon thereafter they invited Madam Lau to join in the venture on an equal basis, each of them having a one-third shareholding in the company.

5. In March 1997, the 1st defendant made its first investment by purchasing the Property in question for the price of HK$1,700,000, with the intention of selling it in due course at a profit. The intention was for each of them to have a one-third interest in the Property, and each of them contributed equally to the payment of the deposit and incidental expenses.

6. As far as the payment of the balance of the purchase price was concerned, in the sum of HK$1,530,000, Mesdames Yeung and Lau deposed that they both had their respective shares of such money ready to contribute prior to the completion date on 8 April 1997, however they were both surprised to discover that the 2nd defendant had borrowed a sum of HK$1,500,000 from one Mr Mak Hung, on the security of the Property. They both agreed to go along with this arrangement, and the borrowed money, together with a further $10,000 which each of them contributed, were utilized to pay the balance of the purchase price for the Property.

7. Mesdames Yeung and Lau could see no sense in incurring the high interest rates which were payable in terms of the loan agreement when they had the capital to hand, and shortly thereafter, in May 1997, the three of them paid off the loan.

The mortgage and first loan

8. Madam Lau deposed that later, in about August 1997, she found a buyer who was willing to pay $2.2 million for the Property; however Madam Yeung refused to sell, saying that the profit was insufficient. Madam Lau thereupon conducted a search at the Land Registry, and discovered that the Property had been re-mortgaged to a Finance Company as security for a loan of HK$1.5 million. When she confronted Madam Yeung with the matter, Madam Yeung in turn professed to have been totally ignorant of this development. According to their evidence, neither Mesdames Lau nor Yeung had ever consented to raising a further loan, or mortgaging the Property to that end, and had not even been approached by the 2nd defendant on the matter; it appeared to be a fait accompli which the 2nd defendant had somehow managed to arrange unilaterally.

9. Madam Lau subsequently discovered that a further sum of $454,000 had been advanced to the plaintiff under cover of the same Mortgage Deed, the total sums loaned to the 1st defendant amounting to $1,954,000.

10. When they confronted the 2nd defendant with these matters, she failed to give them any satisfactory explanation and simply asked for time to explain it to them. Later, in about September 1997, the 2nd defendant disappeared, and she has never re-appeared, and has taken no part in these proceedings. In January 1998, Mesdames Yeung and Lau reported the matter to the police.

11. Further investigations revealed that all the dealings on behalf of the 1st defendant in relation to both transactions had been conducted by the 2nd defendant. On 7 May, she sent a letter, signed by her purportedly on behalf of the 1st defendant, applying to the plaintiff for short-term finance in the sum of $1,500,000 for a period of six months, agreeing to provide the property in question as security. On the following day, the 2nd defendant personally delivered to the plaintiff's solicitors a document purporting to be Minutes of a meeting of the 1st defendant's Board of Directors held on 8 May 1997, embodying a resolution that the Company do apply to the plaintiff for a loan of $1,500,000 on the security of a mortgage of the property in question, further approving a draft Mortgage Deed which was allegedly tabled before the meeting, and further directing that the Common Seal of the Company be affixed onto the said Deed, and authorizing the 2nd defendant to sign the Deed on behalf of the Company.

12. Since the Minutes were undated and signed only by the 2nd defendant as chairman of the purported meeting, the plaintiff's handling solicitor, Mr Remus Wong, returned them to the 2nd defendant and asked her to procure the signatures of the remaining directors as well. Later that day, the 2nd defendant returned to the offices of the plaintiff's solicitors with the Minutes dated and apparently duly signed by the other directors of the 1st defendant, namely Mesdames Yeung and Lau, and she specifically represented to Mr Remus Wong that the Minutes had been duly signed by all the directors.

13. Both Mesdames Lau and Yeung deposed that the signatures against their names on this document were not affixed by them but were forged, and further that they had never seen any such Minutes and nor had the alleged meeting ever taken place.

14. The 2nd defendant also supplied to the plaintiff's solicitors copies of her own and Madam Yeung's identity cards to enable them to prepare guarantee agreements; Madam Yeung testified that she had no idea how the 2nd defendant had got hold of a copy of her identity card for that purpose.

15. A few days later, the 2nd defendant contacted the plaintiff's solicitors and requested that they accept only her own personal guarantee as sufficient since Madam Yeung was not in Hong Kong at that time, and the drawdown of the loan was urgently required. They agreed to her request on condition that Madam Yeung wrote to confirm that she would eventually be willing to execute a personal guarantee in favour of the plaintiff. Later that day, the 2nd defendant faxed to the plaintiff's solicitors a letter which purported to have been signed by Madam Yeung, agreeing to execute a personal guarantee for the repayment of the loan upon her return to Hong Kong.

16. Madam Yeung testified that she had never written such a letter, and that her purported signature on it had been forged.

17. On 15 May 1997, the 2nd defendant attended at the offices of the plaintiff's solicitors and executed the Mortgage Deed, purportedly on behalf of the 1st defendant, and the Common Seal of the Company was affixed and her signature appended, purportedly in compliance with the resolution of the Company which she had earlier delivered to the plaintiff. On the same day, she executed a personal guarantee in favour of the plaintiff, guaranteeing the due repayment of the loan.

18. The plaintiff's cheque in favour of the 1st defendant in the sum of $1,500,000 was thereupon handed to the 2nd defendant, and she signed an acknowledgment of receipt of the money, purportedly on behalf of the 1st defendant.

19. On 16 May, a current account and a savings account were opened for the 1st defendant with the Kincheng Banking Corporation by the 2nd defendant and Madam Yeung. On the same day, the cheque for $1,500,000 was deposited into the 1st defendant's savings account, and eight minutes later was withdrawn on the instruction and sole signature of the 2nd defendant, purportedly acting on behalf of the 1st defendant.

20. Madam Yeung was clear in her evidence that the intention had always been for the 1st defendant's bank accounts to be operated on the joint signatures of herself and the 2nd defendant. The Minutes of a meeting of the directors of the 1st defendant dated 14 May 1997 embodied a resolution to the same effect.

21. The bank's version, as reflected in the correspondence, is that on 16 May, Madam Yeung and the 2nd defendant attended at the bank to open the said accounts and gave instructions that the 2nd defendant was to be the sole signatory for the operation of the accounts. Four hours later, they returned to the bank and gave amended instructions to the effect that the accounts were to be operated on the joint signatures of both of them.

22. Although Madam Yeung insisted that she had only gone to the bank on one occasion with the 2nd defendant, and given instructions that the accounts were to be operated on their joint signatures, the account opening documents themselves do reflect that initially the 2nd defendant was to be the sole authorized signatory for the operation of the accounts, and that subsequently those instructions were amended to the effect that the accounts were to be operated on the joint signatures of the 2nd defendant and Madam Yeung.

23. One way or another, it seems clear that it was during the window of opportunity which was presented by the short-lived instruction that the 2nd defendant was to be the sole authorized signatory on the accounts, that the 2nd defendant effected the transfer and withdrawal of the $1.5 million from the 1st defendant's account.

The second loan

24. In relation to the second loan, the plaintiff received a letter dated 25 July 1997 written by the 2nd defendant purportedly on behalf of the 1st defendant, requesting a further loan in the sum of $454,500. The letter requested the plaintiff to advance the money by opening a Letter of Credit in that sum, agreeing that the 1st defendant's Property which had already been mortgaged in favour of the plaintiff, should be the security for this second loan as well, and undertaking that the directors of the 1st defendant would give personal guarantees to the plaintiff for the due repayment of the loan.

25. On 28 July, the plaintiff duly applied for the opening of a letter of credit in favour of Steady Advance Investment Limited, as requested by the 1st defendant.

26. On 12 August, the 2nd defendant signed a loan agreement, purportedly on behalf of the 1st defendant, and in addition signed a promissory note, again purportedly on behalf of the 1st defendant, undertaking that the 1st defendant would pay to the plaintiff the sum of $454,500 within 90 days of the opening of the Letter of Credit by the plaintiff. She also signed a Memorandum to a loan agreement, again purportedly on behalf of the 1st defendant, confirming the terms of the loan. (Madam Yeung's name and signature also appeared on this document as a surety : Madam Yeung testified that this signature also had been forged.) Finally, the 2nd defendant also executed a personal guarantee, guaranteeing the due repayment to the plaintiff of the second loan.

Forgeries/fraud

27. Mesdames Yeung and Lau gave truthful evidence, in my view. I am satisfied on the basis of all the evidence, both oral and documentary, that they did not sign any of the disputed signatures, and that these were all forged by the 2nd defendant. Nor did they ever consent that the 1st defendant should apply for either the first or the second loan. It is clear that the whole exercise was an elaborate fraud perpetrated upon the 1st defendant by the 2nd defendant, who created bogus documents in order to induce the plaintiff to lend the money, forged the signatures of Madam Yeung in the various documents and of Mesdames Yeung and Lau in the purported Board Minutes, and affixed the Seal of the 1st defendant to the Mortgage Deed without authority, thus rendering the Seal a forgery. Indeed, the plaintiff did not challenge the 1st defendant's case, nor the evidence of its witnesses, that the various documents had been forged by the 2nd defendant.

Did the 2nd defendant have ostensible authority?

28. Mr Shum for the plaintiff concedes that the rule in Turquand's case does not assist the plaintiff in circumstances such as the present where it has been established that the Mortgage Deed was a forged document and therefore a nullity.

29. See Ruben v. Great Fingall Consolidated and Others [1906] AC 439, Kredibank Cassel GmbH v. Schenkers Limited [1927] 1 KB 827, and South London Greyhound Racecourses Limited v. Wake [1931] Ch 496.

30. He submits, however, that the 1st defendant is nevertheless liable to the plaintiff on the basis that the 2nd defendant, in perpetrating the forgeries and other fraudulent acts, purportedly on behalf of the 1st defendant, was at all material times acting within the scope of her usual or apparent authority. The aforesaid cases can be distinguished, he submitted, since in none of them did the agent have the apparent or ostensible authority to do the acts in question.

31. This very issue was argued and adjudicated upon at an earlier stage of the proceedings in this case when the plaintiff proceeded by way of originating summons before a Master, and subsequently Cheung J heard the plaintiff's appeal from the decision of the Master, refusing to order judgment for the plaintiff. In his judgment delivered on 11 November 1998, Cheung J rejected the same argument which Mr Shum now advances on behalf of the plaintiff, emphasizing that under Article 131 of the 1st defendant's Articles of Association, the 1st defendant's Seal could only be affixed by a person under the authority of the directors or a committee of directors of the Company. The 2nd defendant, as a single director of the 1st defendant, did not have any authority, "actual or otherwise", to affix the 1st defendant's Seal to the Mortgage Deed, since there was no dispute that she had never been approved by the directors in that regard. The learned judge cited with approval the judgment of Clauson J in the South London Greyhound Racecourses' case at p.509, to the effect that the affixing of a company's seal to a document is not a matter in which normally a single director would have power to act for the company : on the contrary, "it is within common experience that the affixing of the seal is a matter with which the board deals and not a director, and it is commonly so understood."

32. The plaintiff would normally be estopped by the doctrine of issue estoppel from raising the same point again before me for a fresh adjudication thereon. Mr Shum, however, submits that the plaintiff is not thus estopped on the facts of this case, since the matter had been dealt with before the Master by way of originating summons on the basis of certain affirmation evidence only, whereas before me the matter is proceeding as if it had been begun by writ, and not only has further affirmation evidence been filed, but in addition I have heard the oral evidence of Mr Remus Wong for the plaintiff, and Mesdames Yeung and Lau for the 1st defendant.

33. Furthermore, Mr Shum informs me that this issue was argued before Cheung J on the basis that as a matter of law, a director of a company does have apparent authority to attach the company seal and execute a mortgage document on behalf of the company; whereas before me material additional facts have been established which entitle the plaintiff to have this issue decided in its favour on the particular facts, and in the light of further authorities cited by Mr Shum which were not referred to Cheung J.

34. In these circumstances, in my view, the plaintiff is entitled to raise the matter again for a fresh consideration of it by me upon all the material which has been put in, including the additional evidence, and the further authorities cited.

35. The additional authorities cited include Gore-Browne on Companies, Vol.1 (44th ed.) at para.5.7 :

"On the other hand, if an organ or official of the company with the authority to bind the company held out the person who committed the forgery as having authority to execute the document in question, the company may be estopped from denying the validity of the forgery."

See also Lloyd v. Grace, Smith & Co. [1912] AC 716 at 725 :

"If the agent commits the fraud purporting to act in the course of business such as he was authorized, or held out as authorized, to transact on account of his principal, then the latter may be held liable for it."

See further Halsbury's Laws of England, 44th ed., Vol 1(2) at para.134 and Vol. 7(1) at para.582.

36. On the facts, Mesdames Yeung and Lau testified that they were happy to leave the Company Seal and rubber chop in the custody of the 2nd defendant, since they had no reason to suspect that she might ever misuse them for her own ends.

37. Mr Remus Wong, the plaintiff's handling solicitor for these transactions, gave detailed testimony as to the factors which led him to believe that the 2nd defendant, as a director of the 1st defendant, had the authority to attach the Common Seal and execute the Mortgage Deed on behalf of the 1st defendant : she produced to him the Minutes of the Board meeting which were regular on their face; she assured him that Mesdames Yeung and Lau had duly signed the Minutes, as appeared to be the case from the face of the document; and, importantly, she was able to and did produce the Company Seal and chop for that purpose.

38. Mr Shum submitted that these facts would reasonably entitle any person outside of the Company, dealing with the 2nd defendant as a director thereof, to conclude that she did have the necessary authority to attach the Seal and execute the Mortgage Deed; in other words, that on the facts as they have now been more fully presented to the court, the 2nd defendant was at all material times acting within the scope of her apparent or ostensible authority to bind the 1st defendant.

39. In my view none of the aforesaid additional facts or authorities assist the plaintiff on all the facts of this case. I do not agree that the entrustment of the Company's Seal and chop to the 2nd defendant by the other directors constituted a holding out that the 2nd defendant did have the authority to affix the Seal and execute the document on behalf of the 1st defendant.

40. The plaintiff and its solicitors were aware of the provisions of Articles 95 and 131 of the 1st defendant's Articles of Association :

"Borrowing Powers

95. The directors may exercise all the powers of the Company to borrow money for the purposes of the Company, without limit and upon such terms as they may think fit, and to mortgage or charge its undertaking, property (both present and future) ... .

...

The Seal

131. The directors shall provide for the safe custody of the seal, which shall not be affixed to any instrument except by the authority of the directors or of a committee of the directors authorised by the directors in that behalf and in the presence of one director or of the secretary or such other person or persons as the directors or the committee of directors may appoint for that purpose; and such director, the secretary or other person or persons shall sign every instrument to which the seal is so affixed in his or their presence."

41. Indeed, it was in view of the aforesaid provisions of the Articles of Association that the plaintiff's solicitors asked for the 1st defendant's Board Minutes as proof that the 1st defendant had appointed a competent person to execute the Mortgage Agreement on its behalf. It was in reliance upon the Board Minutes produced by the 2nd defendant that the plaintiff allowed her to execute the Mortgage Deed and affix the 1st defendant's seal.

42. Mr Remus Wong testified that in his approximately 20 years of conveyancing practice he had accepted such Board Minutes and would never, unless there were suspicious circumstances, check on the authenticity of the signatures therein. In my view, however, although no expert handwriting evidence was called, the signatures against Mesdames Yeung's and Lau's names on the Minutes of the Board meeting are so obviously suspicious in themselves that they should have put the plaintiff's solicitors upon their enquiry as to the genuineness thereof. This is especially so bearing in mind that the first copy of the Minutes presented by the 2nd defendant were undated and signed only by herself; and that the only person with whom the plaintiff and its solicitors had had any dealings with on behalf of the 1st defendant was the 2nd defendant : they had received no instructions from any other person, nor had they liaised with, nor contacted, any of the other directors or officers of the 1st defendant. The plaintiff thereby left itself particularly vulnerable to the misrepresentations and fraudulent conduct perpetrated by the 2nd defendant.

43. In all the circumstances, in my view there was no representation by Mesdames Yeung and/or Lau to the effect that the 2nd defendant had been duly authorized to apply for the loans and execute the Mortgage Deed on behalf of the 1st defendant, nor any holding-out by the 1st defendant to that effect. The plaintiff was not entitled to rely upon the 2nd defendant's representation that she was thus duly authorized.

44. The Mortgage Deed and the First and Second Loan Agreements were null and void ab initio, and are of no force or effect. Nor is the 1st defendant estopped from denying the validity of the Mortgage Deed or the loans.

Equitable mortgage?

45. Mr Shum submits that this is not the end of the matter, since the act of the 1st defendant of depositing the title deeds of the Property with the plaintiff gave rise to an equitable mortgage, quite apart from the validity or otherwise of the Mortgage Deed.

46. The very formulation of the matter by Sarah Nield in Hong Kong Land Law, 2nd ed. at 447, para.17.2.2.3, which was cited by Mr Shum, puts paid to his submission : "Equity will readily recognise the deposit of the borrower's title deeds with the lender as an equitable mortgage, provided the deposit is made with the intention that the deeds are to be held by the lender as security for the repayment of the loan. The act of deposit is construed as a sufficient act or part performance of the agreement to create a mortgage."

47. It will be recalled that Article 95 of the 1st defendant's Articles of Association, the terms of which were known to the plaintiff, provides that it is the Board of Directors which has the power to borrow money for the purposes of the Company and to mortgage or charge its Property. A single director such as the 2nd defendant has no such power. Since it was never the intention of the 1st defendant, through its Board of Directors, to mortgage the Property, the deposit of the title deeds by the 2nd defendant with the plaintiff, purportedly on its behalf, could not give rise to an equitable mortgage.

The plaintiff's claim for restitution of the $1,500,000

48. In relation to the first sum of money advanced, namely $1,500,000, the plaintiff alleges that irrespective of the invalidity of the Mortgage Deed and the First Loan Agreement, it is entitled to repayment of that sum from the 1st defendant on the basis that the plaintiff did pay such sum to the 1st defendant, and the 1st defendant was thereby unjustly enriched at the plaintiff's expense, and is obliged to restore to the plaintiff the benefit thus conferred.

49. The principles of unjust enrichment as a cause of action are discussed in The Law of Restitution, 5th Ed., by Goff and Jones. In particular, at page 586, the learned authors discuss a situation which Mr Shum submits precisely fits the facts of the present case, namely where a contract is void for want of authority on the part of an agent, if a third party (the plaintiff) has acted to its detriment on the faith of the agent's false representation that she had the necessary authority, and the third party has conferred some benefit on the agent's principle (the 1st defendant) under the supposed contract, the third party may be entitled to restitution from the principle in respect of the benefit so conferred.

50. The relevant facts are as follows :

(i) following the conclusion of the supposed Loan Agreement and signing of the Mortgage Deed, the plaintiff issued a cheque in favour of the 1st defendant in the sum of $1,500,000, which was handed to the 2nd defendant;

(ii) the 2nd defendant, falsely representing that she acted for the 1st defendant, issued to the plaintiff an Acknowledgement of Receipt of the $1,500,000;

(iii) unbeknown to Mesdames Yeung and Lau, the 2nd defendant then proceeded to deposit the cheque into the 1st defendant's bank account, and within eight minutes of having made the said deposit she fraudulently withdrew the whole sum from the said account, and she has subsequently disappeared and has never accounted for the said funds.

51. In order to succeed in obtaining restitution on the basis of unjust enrichment, the plaintiff must establish that the 1st defendant has been unjustly enriched at the plaintiff's expense, such that it would be unjust to allow the 1st defendant to retain the benefit conferred upon it.

52. While it is true that the plaintiff did pay the sum in question to the 1st defendant, and has been prejudiced to that extent, the money was in the 1st defendant's bank account for only some eight minutes before it was fraudulently withdrawn by the 2nd defendant and converted to her own use : in these circumstances, the 1st defendant has not "retained" any part of the benefit which was conferred, nor can it be said to have been unjustly enriched by its short-lived receipt of that benefit.

53. The point can also be put in another way. The 1st defendant has raised as a defence to the plaintiff's claim for restitution of this sum, that the position of the 1st defendant since its receipt of the "benefit" has changed such that it is inequitable and unjust to require the 1st defendant to make restitution. Such a change of position was recognized as a defence to a restitutionary claim by the House of Lords in Lipkin Gorman v. Karpnale Ltd [1991] 2 AC 548. At page 579, Lord Goff noted :

"... where an innocent defendant's position is so changed that he will suffer an injustice if called upon to repay or to repay in full, the injustice of requiring him so to repay outweighs the injustice of denying the plaintiff restitution."

54. Bearing in mind that the 1st defendant was, more or less simultaneously with the conferring of the "benefit" upon it, defrauded of it by the 2nd defendant, that it has never had any use of the money, that it was completely unaware of the 2nd defendant's actions and has since done nothing to ratify or adopt them, it would, in my view, be inequitable to require it to make restitution. (See Lipkin Gorman at 580.) The plaintiff's claim for restitution fails on the facts of this case.

55. In the event I dismiss all of the plaintiff's claims. The 1st defendant has succeeded on its counterclaims : I declare the Mortgage Deed relating to the property to be null and void, and order that the plaintiff forthwith return the title deeds of the property to the 1st defendant.

56. I make an order nisi that the plaintiff pay the 1st defendant's costs of these proceedings.