BANK OF CHINA (HONG KONG) LTD v. WONG KAM HO AND OTHERS

HCMP 3324/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 3324 OF 2002

_____________________________

REASONS FOR JUDGMENT

_____________________________

1. At the conclusion of the hearing on 15 October 2003 I gave leave to the 4th defendant to appeal against the order of Mr. Registrar C. Chan made on 5 December 2002 out of time and ordered that the notice of appeal be lodged within 3 days. I ordered a stay of execution of the Registrar's order insofar as the same affects the 4th defendant until the determination of the appeal. I also gave leave to the 4th defendant to adduce as evidence and to rely on her 1st affirmation at the hearing of the appeal. Leave was also given to the plaintiff to rely on the affirmation of Lau Tat Ming filed on 13 October 2003 at the hearing of the appeal and to file further affirmations to be relied on at the hearing of the appeal within 42 days. The 4th defendant was also given leave to file and serve evidence in reply within 14 days of service of the plaintiff's affirmations. I also reserved the question of costs of the application to be dealt with at the hearing of the appeal. The 4th defendant's own costs were ordered to be taxed in accordance with Legal Aid Regulations.

2. I indicated that I would give my reasons in writing later. This I now do.

3. Briefly, the background facts are that the plaintiff is a bank and the 5th defendant was a customer of the plaintiff who had been granted banking facilities. The 5th defendant was incorporated in 1997 with the 1st defendant and Mr. Chan Chi Fung as the only two shareholders and directors. On 12 December 1997 Mr. Chan Chi Fung resigned as a director of the 5th defendant. He also sold his shares to the 3rd defendant. The two directors and shareholders of the 5th defendant were then the 1st defendant and the 3rd defendant. The 2nd defendant is the wife of the 1st defendant and the 4th defendant is the widow of the 3rd defendant.

4. By a legal charge made on 4 August 1997 between the 1st and 2nd defendants as mortgagor, the 5th defendant as borrower and the plaintiff as lender, a legal charge was created over two properties that were owned and registered in the names of the 1st and 2nd defendants in favour of the plaintiff. The 1st and 2nd defendants also covenanted to repay to the plaintiff all sums of money that were due from the 5th defendant to the plaintiff and they agreed to furnish the two properties registered in their names as security for the due repayment to the plaintiff of all sums due from the 5th defendant to the plaintiff.

5. By another legal charge made on 19 March 1998 between the 3rd and 4th defendants as mortgagor, the 5th defendant as borrower, and the plaintiff as lender, a legal charge was created over two properties, namely, Flats 9 and 10 on the 3rd floor of Luen Tak Apartments, No. 45 Smithfield Road and No. 34 Forbes Street, Hong Kong ("Flats 9 and 10") in favour of the plaintiff. Pursuant to the legal charge the 3rd, 4th and 5th defendants jointly and severally covenanted to pay to the plaintiff "all sums of money now or hereafter owing to the [plaintiff] on account of banking facilities granted to the [5th defendant]." The 3rd and 4th defendants also agreed to furnish the said properties that were owned and registered in their names as security for the due repayment to the plaintiff of all sums of money that were due from the 5th defendant to the plaintiff.

6. The 5th defendant was granted banking facilities by the plaintiff. It was unable to repay a total sum of HK$2,799,531.21 plus interest. The plaintiff sent letters of demand dated 2 July 2002 to the defendants for repayment of the said sum plus interest but no repayment was made to the plaintiff.

7. On 21 August 2002 the plaintiff issued the originating summons in these proceedings against the defendants seeking repayment of all sums of money that were due from the 5th defendant to the plaintiff and vacant possession of the properties under the legal charges including Flats 9 and 10 against the 3rd and 4th defendants.

8. On 9 September 2002 Messrs Lau, Chan & Ko filed an acknowledgement of service of the originating summons on behalf of the 5th defendant and also filed another acknowledgment of service on the same day on behalf of the other defendants including the 4th defendant. In the said acknowledgements of service it was stated that the defendants intended to contest the proceedings.

9. At the first hearing of the originating summons before Mr. Registrar C. Chan on 5 December 2002, one Mr. A. Tam of Messrs. Lau, Chan & Ko appeared on behalf of the defendants including the 4th defendant. The Registrar was informed by Mr. Tam that he had no instructions to oppose the plaintiff's application. On that basis and on the evidence before the Registrar, he made an order ordering, inter alia, that the plaintiff do recover against the defendants, including the 4th defendant, the sum of HK$2,991,975.54 together with interest on the principal sum of HK$2,799,531.21 at the rate and for the period as set out in his order. He also made an order, inter alia, that the 3rd and 4th defendants do within 28 days of service of the order deliver to the plaintiff vacant possession of Flats 9 and 10. Costs were also ordered against the defendants.

10. The plaintiff then took steps to enforce the order of the Registrar. The plaintiff obtained a writ of possession and fieri facias against, inter alia, the 3rd and 4th defendants.

11. On 15 April 2003 bailiffs attended Flats 9 and 10 with a view to execute the said order and to obtain vacant possession of Flats 9 and 10. The 4th defendant has said in her affirmation that this was the first time that she knew of these proceedings against her. The 3rd defendant told her that he had been deceived by the 1st defendant. This was the first time that the 4th defendant was told that she had signed a document to promise to repay the debt of the 5th defendant to the plaintiff. She was very concerned about the matter and her husband told her not to worry as he would take care of the matter. So on 16 April 2003 they both went to the Legal Aid Department and the 3rd defendant applied for legal aid to defend the proceedings. She did not apply at that time as she relied on her husband on all matters and trusted him to take care of the defence of the proceedings.

12. Unfortunately and most tragically, the 3rd defendant committed suicide on 22nd April 2003. He was no doubt extremely troubled by the present proceedings and the execution of the order by the plaintiff. He left a note stating that he had been deceived by the 1st defendant and his brothers.

13. Subsequently on 30 April 2003 the 4th defendant went to the Legal Aid Department and applied for legal aid to set aside the said order. This was refused on 28 May 2003. The 4th defendant appealed against the refusal and the appeal was fixed for hearing on 2 July 2003. At the hearing on 2 July 2002 the master asked the Director of Legal Aid to consider the merits of the 4th defendant's case and adjourned the hearing to 25 July 2003. On 23 July 2003 the 4th defendant was advised to make a second application for legal aid to appeal against the order of the Registrar and it was indicated to her that it would be granted. She did so and she was granted legal aid on 24 July 2003. Thereafter solicitors and counsel were assigned and were engaged on the matter. The summons was eventually issued on 3 October 2003.

14. By the summons issued on 3 October 2003 the 4th defendant sought leave to appeal against the order of the Registrar out of time. The appeal had to be lodged within 14 days of the order of the Registrar, namely by 19 December 2002. The 4th defendant also sought leave to adduce as evidence and to rely on her affirmation at the hearing of the appeal and for a stay of execution of the order of the Registrar insofar as the same affected her until the determination of the appeal.

15. Although there has been delay in bringing this application for leave to appeal out of time, the plaintiff accepts that the delay was not unreasonable. The 4th defendant only knew about these proceedings on 15 April 2003 and in the light of what occurred after that time it cannot be said that the delay in taking out this application is unreasonable. In my judgment the delay was wholly excusable and has sufficiently been explained. This is not disputed by the plaintiff.

16. The guiding principles which govern how the court should exercise its discretion to extend time were re-affirmed by Le Pichon J.A. in Secretary for Justice v. Hong Kong & Yaumati Ferry Co. Ltd. and another [2001] 1 HKC 125 where she said at page 127 :

“ A convenient summary of the guiding principles which govern how the court should exercise its discretion to extend time may be found in the judgment of Keith J (as he then was) in Chiu Sin Chung v. Yu Yan Yan Angela [1993] 1 HKLR 225 at 227 line 37 to 228 line 29 :

(i)	'The rules of court must prima facie be obeyed, and in order to justify a court in extending the time during which some steps in procedure were required to be taken there must be some material upon which the court can exercise its discretion. If the law were otherwise, a party in breach would have an unqualified right to an extension of time which would defeat the purpose of the rules, which is to provide a time table for the conduct of litigation' : Thamboo Ratnam v. Thamboo Cumarasamy & Cumarasamy Ariamany [1965] 1 WLR 8 at p. 12A-B, applied in Revici v. Prentice Hall Inc. [1969] 1 WLR 157 and in Re Adhiguna Meranti [1988] 1 HKLR 410.
(ii)	Accordingly, the prerequisite of an application to extend time is a clear statement as to the reasons for the time limits not having been observed and for any delay in then applying for an extension.
(iii)	'Once the time for appealing has elapsed, the respondent who was successful in the court below is entitled to regard the judgment in his favour as being final. If he is to be deprived of this entitlement, it can only be on the basis of a discretionary balancing exercise, however blameless may be the delay on the part of the would-be appellant' : Norwich & Peterborough Building Society v. Steed [1991] 1 WLR 449 at p. 454G.
(iv)	The factors which are normally to be taken into account in that balancing exercise are (a) the length of the delay, (b) the reasons for the delay, (c) the chances of the appeal succeeding if an extension of time for appealing is granted, and (d) the degree of prejudice to the would-be respondent if the application for an extension is granted : Steed, p. 454H.
(v)	As for the reasons for the delay, 'the fact that the omission to appeal in due time was due to a mistake on the part of the legal adviser, may be a sufficient cause to justify the court in exercising its discretion' : Gatti v. Shoosmith [1939] 3 All ER 916 at p. 919G. Indeed, in that case, the Court of Appeal extended the time without consideration of the merits at all : the period involved was only a matter of a few days, the appellant's solicitors had informed the respondent's solicitors within time of the appellant's intention to appeal, and the mistake was one 'which, to anyone who was reading the rule without having the authorities in mind, might very well have arisen'.
(vi)	Although the existence of prejudice to a would-be respondent is a ground for refusing an extension of time, the absence of prejudice to a would-be respondent is not a ground for extending the time : Re Adhiguna Meranti, p. 411H.
(vii)	As for the merits, they will play little part in the balancing exercise if the delay is short and is wholly excusable, but where the delay is substantial and is not wholly excusable, much more merit is required to overcome it : Steed, p. 455G-H, distinguishing Palata Investments Ltd. v. Burt & Sinfield Ltd. [1985] 1 WLR 942 from Rawasdeh v. Lane (Court of Appeal (Civil Division) Transcript No. 327 of 1988)."

 

17. Mr. Lam, for the 4th defendant, submitted that three matters were relevant in the exercise of the court's discretion :

(1) the non-appearance of the 4th defendant at the hearing on 5 December 2002;

(2) the reason for the delay in lodging the appeal; and

(3) the merits of the 4th defendant's defence to the plaintiff's claim.

18. On first matter of the non-appearance of the 4th defendant at the hearing it is abundantly clear on the evidence that the 4th defendant was not aware of the proceedings until 15 April 2003. She did not instruct Messrs Lau, Chan & Ko to lodge an acknowledgment of service on her behalf and she did not instruct them to appear before the Registrar on 5 December 2002 or to say that the plaintiff's application was not being opposed. Messrs Lau, Chan & Ko have confirmed in a letter to the 4th defendant's solicitors dated 22 August 2003 that they have never met the 4th defendant and that they did not take any instructions from her directly either in conference or over the telephone. They said that they received their instructions from the 1st and 3rd defendants who instructed them to act also for the 2nd and 4th defendants. I agree with Mr. Lam that it was wholly unacceptable for Messrs Lau, Chan & Ko to claim that they were representing the 4th defendant in such circumstances and to state to the Registrar that they had no instructions from her to oppose the plaintiff's application. The 4th defendant surely had a right to be heard before the Registrar made his order. The evidence shows that she was not heard as she was wholly unaware of the proceedings. This factor, in my view, weighs heavily in favour of the 4th defendant in the exercise of the court's discretion.

19. On the second matter of delay, I have already dealt with this. The 4th defendant has sufficiently explained the delay in the application for leave to appeal out of time which was wholly excusable.

20. On the merits of the defence, Mr. Lai, for the plaintiff, submitted that the 4th defendant must satisfy the court that there is a fair or reasonable probability of her having a real or bona fide defence. He also said that the court should consider the chances of the appeal succeeding.

21. I need only deal with one of the defences relied on namely, undue influence.

22. As mentioned by her in her first affirmation, the 4th defendant has ever since her marriage to the 3rd defendant been a housewife. She has only had one year of education in Chinese in the Mainland. She does not know English. She is 60 years old and was married to the 3rd defendant over 30 years ago. She has three children. Flats 9 and 10 have been and are used as the family's matrimonial home.

23. The 4th defendant has been shown the legal charge dated 19 March 1998 by her solicitors. She recognizes her signature on it. She recalled that sometime in 1998 the 3rd defendant brought her to the office of a solicitors' firm telling her that she was required to sign a document. He did not tell her what the document was or why she had to sign it. He simply told her to follow him and to sign the document as directed by him. She did not ask him any question in that regard because throughout the marriage she always did what her husband had told her to do. She had relied on him throughout the marriage to make decisions on all important matters. On money matters she wholly relied on him. She always had full trust in him in taking care of the family matters and all matters relating to money. She simply followed his instructions on all occasions and did not ask him any questions when he asked her to sign a document.

24. She said that at the solicitors' office her husband told her to sign her name on a document which she did. After she did that the 3rd defendant told her to leave the office and to go home which she did. She only stayed in the solicitors office for no more than a few minutes. Before she signed on the document, which I infer was the legal charge dated 19 March 1998, nobody introduced himself to her as a solicitor or a staff of the firm. Nobody ever read or explained the contents of the document to her. Nobody ever explained to her the consequences of signing on the document. Nobody told her that she could ask for the advice of a solicitor before signing. She signed on the document because her husband had told her to do so and she had full trust in him. She also said that she had no idea what the document was. She did not know that it related to the debts of the 5th defendant. She was never told by anybody about her liability to the plaintiff under the legal charge.

25. It must also be remembered that the 4th defendant herself had no financial interest in the 5th defendant, the borrower under the legal charge.

26. Mr. Lam submitted that on the above facts as disclosed in the evidence the legal charge is liable to be set aside.

27. In Barclay's Bank Plc. v. O'Brien and Another [1994] 1 AC 180 it was held, inter alia, that when a wife offered to stand surety for her husband's debt in a transaction which was not to her financial advantage and which carried a substantial risk of the husband committing a legal or equitable wrong entitling the wife to set aside the transaction, the creditor was put on inquiry and would have constructive notice of the wife' rights unless he took reasonable steps to ensure that her agreement to stand surety had been properly obtained. On the facts of that case it was held that the bank was fixed with constructive notice of the wrongful misrepresentation made by the husband to the wife; and that the wife was entitled as against the bank to set aside the legal charge on the matrimonial home securing the husband's liability to the bank.

28. Lord Browne-Wilkinson set out the classifications of undue influence in his speech at page 189. Actual undue influence was classified as Class 1. Class 2 concerned presumed undue influence. Lord Browne-Wilkinson said :

“ Class 2 : Presumed undue influence

In these cases the complainant only has to show, in the first instance, that there was a relationship of trust and confidence between the complainant and the wrongdoer or such a nature that it is fair to presume that the wrongdoer abused that relationship in procuring the complainant to enter into the impugned transaction. In Class 2 cases therefore there is no need to produce evidence that actual undue influence was exerted in relation to the particular transaction impugned : once a confidential relationship has been proved, the burden then shifts to the wrongdoer to prove that the complainant entered into the impugned transaction freely, for example by showing that the complainant had independent advice. Such a confidential relationship can be established in two ways, viz.,

Class 2(A)

Certain relationships (for example solicitor and client, medical advisor and patient) as a matter of law raise the presumption that undue influence has been exercised.

Class 2(B)

Even if there is no relationship falling within Class 2 (A), if the complainant proves the de facto existence of a relationship under which the complainant generally reposed trust and confidence in the wrongdoer, the existence of such relationship raised the presumption of undue influence. In a Class 2 (B) case therefore, in the absence of evidence disproving undue influence, the complainant will succeed in setting aside the impugned transaction merely by proof that the complainant reposed trust and confidence in the wrongdoer without having to prove that the wrongdoer exerted actual undue influence or otherwise abused such trust and confidence in relation to the particular transaction impugned."

He also said at page 190 that :

“ Although there is no Class 2 (A) presumption of undue influence as between husband and wife, it should be emphasized that in any particular case a wife may well be able to demonstrate that de facto she did leave decisions on financial affairs to her husband thereby bringing herself within Class 2 (B) i.e. that the relationship between husband and wife in the particular case was such that the wife reposed confidence and trust in her husband in relation to their financial affairs and therefore undue influence is to be presumed. Thus, in those cases which still occur where the wife relies on all financial matters in her husband and simply does what he suggests, a presumption of undue influence within Class 2 (B) can be established solely from the proof of such trust and confidence without proof of actual undue influence."

And at page 196 Lord Browne-Wilkinson said :

“ Therefore in my judgment a creditor is put on inquiry when a wife offers to stand surety for her husband's debts by the combination of two factors : (a) the transaction is on its face not to the financial advantage of the wife; and (b) there is a substantial risk in transactions of that kind that, in procuring the wife to act as surety, the husband has committed a legal or equitable wrong that entitles the wife to set aside the transaction. It follows that unless the creditor who is put on inquiry takes reasonable steps to satisfy himself that the wife's agreement to stand surety has been properly obtained, the creditor will have constructive notice of the wife's rights."

29. In the later case of Royal Bank of Scotland Plc. v. Etridge (No. 2) and others [2002] 2 AC 773 the House of Lords followed O'Brien although there was some criticism that the labelling of 'presumed undue influence' can be confusing (see Lord Nicholls at para. 17, Lord Clyde at para. 92, Lord Hobhouse at para. 98, Lord Scott at paras. 158, 161). But it is clear from the speeches in Etridge that the essential structure of O'Brien was endorsed by the House of Lords.

30. In Etridge, Lord Nicholls when dealing with when the lender is put on inquiry put the matter succinctly when he said at page 803 :

“ The threshold: when the bank is put on inquiry

44 In O'Brien the House considered the circumstances in which a bank, or other creditor, is "put on inquiry". Strictly this is a misnomer. As already noted, a bank is not required to make inquiries. But it will be convenient to use the terminology which has now become accepted in this context. The House set a low level for the threshold which must be crossed before a bank is put on inquiry. For practical reasons the level is set much lower than is required to satisfy a court that, failing contrary evidence, the court may infer that the transaction was procured by undue influence. Lord Browne-Wilkinson said [1994] 1 AC 180, 196 :

“ Therefore in my judgment a creditor is put on inquiry when a wife offers to stand surety for her husband's debts by the combination of two factors : (a) the transaction is on its face not to the financial advantage of the wife; and (b) there is a substantial risk in transactions of that kind that, in procuring the wife to act as surety, the husband has committed a legal or equitable wrong that entitles the wife to set aside the transaction."

In my view, this passage, read in context, is to be taken to mean, quite simply, that a bank is put on inquiry whenever a wife offers to stand surety for her husband's debts."

31. Here, the legal charge was on its face not to the financial advantage of the wife. This must have been known to the plaintiff as the 4th defendant was neither a shareholder nor director of the 5th defendant, the borrower under the legal charge. There is a substantial risk that in procuring the wife to act as surety the husband has committed a legal or equitable wrong that entitles her to set aside the transaction. Therefore, unless the plaintiff as creditor who is put on inquiry takes reasonable steps to satisfy himself that the 4th defendant's agreement to stand surety has been properly obtained, the plaintiff will have constructive notice of the wife's rights. Of course, it depends on the facts of each case whether reasonable steps have been taken by the creditor to avoid being fixed with constructive notice. The plaintiff, however, at this stage has not filed any satisfactory evidence as to what steps it did take in this case. The affirmation of Lau Tat Ming of 13 October 2003 detailing what steps the plaintiff would usually take is not of assistance when considering what actually happened in this particular case before the legal charge was executed. At the present time the plaintiff has not filed any satisfactory evidence as to that. For this reason the plaintiff sought leave to file further evidence on the hearing of the appeal.

32. Mr. Lai accepted that in the light of the trust and confidence relationship between a husband and wife a presumption of undue influence might have arisen in this case. However, he submitted that this was not conclusive and the court would still have to look at the overall circumstances of the case.

33. I accept the submissions of Mr. Lam. On the material presently before the court, the 4th defendant has, in my view, shown that she has a fair or reasonable probability of a real of bona fide defence and that the chances of her succeeding on the appeal are more than reasonable.

34. I accept that there would inevitably be some prejudice to the plaintiff in the sense that it would be delayed in enforcing its judgment if the 4th defendant were given leave to appeal out of time. However, in my view, the other factors that I have mentioned in the discretionary balancing exercise weigh heavily in the 4th defendant's favour and the prejudice to the plaintiff is insufficient to deprive the 4th defendant of an order for leave to appeal out of time.

35. For the above reasons I gave leave to the 4th defendant to appeal the order of the Registrar out of time and made the order and directions that I did at the conclusion of the hearing. I also ordered a stay of execution of the order. As Mr. Lam pointed out, the plaintiff was seeking to enforce the order for vacant possession with a view to a sale of Flats 9 and 10. The 4th defendant has nowhere else to live with her children and if the appeal should succeed then irreversible damage would have been done if the order were enforced. In the circumstances it seemed to me to be right and just to order a stay.