WA LEE FINANCE CO LTD v. STARYORK INVESTMENT LTD AND OTHERS

CACV 148/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 148 OF 2003

(ON APPEAL FROM HCMP NO. 2242 OF 2000)

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REASONS FOR JUDGMENT

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Hon Rogers VP:

1. This is an appeal from a judgment of Deputy High Court Judge To given on 13 May 2003. By the judgment the judge dismissed the plaintiff's claims against the 1st, 3rd and 4th defendants and he ordered the plaintiff to pay $1 nominal damages for duress. The judge also held that the mortgage made between the plaintiff and the 1st defendant, the rental assignment, the rental assignment notice and the guarantee made by Mr Kan Choi Ming ("Mr Kan") dated 22 March 1999 were void and of no legal effect and ordered the vacation of the registration of those documents. The 1st and 3rd defendants were awarded their costs on an indemnity basis.

2. By the time this appeal came to be heard the plaintiff had abandoned all grounds of appeal save that the plaintiff was entitled to be subrogated into the Hongkong and Shanghai Banking Corporation Limited's ("HSBC's") position as mortgagee of the premises which form part of the subject matter of the action to the extent of $9,050,000 and the payment of $9,050,000 together with interest accruing due to the plaintiff under the terms of the HSBC mortgage. The 1st defendant cross-appealed on the basis that it should be entitled to repayment of sums paid to the plaintiff both by itself and by the tenants of its properties that were the subject of these proceedings.

3. At the conclusion of the hearing of this appeal, this court dismissed both the appeal and the cross-appeal and made an order of costs to follow both events. In addition, paragraph 4 of the order of the judge below had provided that the registration of the mortgage and the assignment should not be vacated if a notice of appeal were to be filed within one month of the judgment. Mr Horace Wong SC, on behalf of the plaintiff, did not resist an order that the vacation of the registrations ordered under paragraph 4 should now take effect.

Background

4. In a detailed and careful judgment the judge set out the background to the case and made specific findings of fact. When the appeal was launched some of those findings were challenged but, as already mentioned, by the time this appeal came to be heard there was no longer any appeal as to the judge's findings of fact. It suffices, therefore, to give a summary of the facts found by the judge.

5. The 1st defendant is a company controlled by Mr Kan. Although Mr Kan was primarily concerned with the development of small village houses, referred to as "Ting houses", in December 1996, the 1st defendant purchased some shop units on the ground floor of Fortune Centre in Yuen Long for $48 million. Before completion of the purchase it was able to find purchasers for some of the units and, as a result of selling on those units as confirmor, it only had to pay $6.432 million, which, in effect, constituted the purchase price of the remaining units. Completion took place on 30 April 1997. The units which the 1st defendant acquired were referred to in the judgment as the "1st Set of Property".

6. Two matters may be noted in respect of the 1st Set of Property. The Commissioner of Inland Revenue valued it for stamp duty purposes as being worth $21 million as at 23 December 1996. In the second place Mr Kan spent a great deal of money in refurbishing the whole or at least part of the 1st Set of Property so that it could be used as a restaurant. That matter was important because the judge accepted Mr Kan's evidence that he did not wish to mortgage the 1st Set of Property because he did not wish to lose the refurbishment costs should the property ever have to be sold by a mortgagee.

7. In August 1997, no doubt buoyed by the success of the purchase in respect of the 1st Set of Property, the 1st defendant contracted to purchase the whole of the 1st floor and two shop units on the ground floor of Fortune Centre for $35 million. This was referred to as the 2nd Set of Property. Two deposits of $3.5 million each were paid and the completion was due to take place in November 1997. Since the 1st defendant did not have the funds to complete, an extension was obtained to 6 February1998 and then a second extension to 20 February 1998 subject to an additional part payment of a further $7 million. In addition, the 1st defendant obtained banking facilities of $10 million from the HSBC secured by a mortgage of what Mr Kan thought was the 2nd Set of Property only (the "HSBC Mortgage"); but in fact both the 1st and 2nd Sets of Property were mortgaged to the HSBC.

8. It was at this stage that Mr Tam Ming Tat ("Mr Tam") appeared on the scene. Mr Tam was a consultant employed by the plaintiff. The judge described him as being a very sophisticated businessman, with lawyers and architects at his finger tips. Mr Kan met Mr Tam through a business friend, Chai Chai. Mr Tam got to know of Mr Kan's need for finance; he approached Mr Kan and offered the 1st defendant facilities of $10 million at 100% interest per annum for a term of one year, using what Mr Kan thought to be the 2nd Set of Property as security. The loan was to be provided by Snyder Holdings Limited ("Snyder") which was a British Virgin Islands company. The judge held Snyder to be no more than a front for the plaintiff. As the 2nd Set of Property had been mortgaged to HSBC, a sale and purchase agreement in respect of the property between Snyder and the 1st defendant for completion after one year was to be used as security. The agreement included a provision that the 1st defendant could avoid the sale by paying an additional $10 million, thus in effect amounting to the 100% annual interest. Mr Kan agreed and was paid $6 million on 14 February 1998, with which he completed the purchase of the 2nd Set of Property on 20 February 1998. On the following day, i.e. 21 February 1998, Mr Kan executed the formal sale and purchase agreement of both Sets of Property with Snyder ("the Snyder Agreement"). On 2 and 7 April 1998, the Plaintiff paid Kan two sums of $2 million, making up the $10 million loan.

9. Although the Snyder Agreement was expressed as a sale and purchase agreement, the judge had no difficulty in coming to the conclusion that the Snyder Agreement was no more than an agreement for a loan. What is perhaps equally important is the finding, referred to above, whereby the judge came to the conclusion that Snyder was, in effect, simply the plaintiff in disguise. At the trial Mr Tam produced an agreement between the plaintiff and Snyder which purported to be a loan which in turn was said to finance the loan from Snyder to the 1st defendant. The judge also held that the purported loan to Snyder and the documents and authorisations which were produced were sham documents which the plaintiff had "conveniently fabricated".

10. Mr Tam had given Mr Kan a cheque for $6 million on 14 February 1998, that had been drawn on the plaintiff's account. Towards the end of March 1998 Mr Tam suggested that Mr Kan should draw down another $2 million on the basis of the Snyder Agreement. In consequence on 2 April 1998 Mr Kan was given a cheque for $2 million, again drawn on the plaintiff's account. As part of the transaction Mr Kan gave Mr Tam a cheque for $100,000 which had been demanded as a handling fee. The same thing happened on 7 April 1998. The two cheques which Mr Kan had given Mr Kan were paid into bank accounts of Well Chest Trading Ltd and Chinko Ltd respectively. These companies apparently share the same address as the plaintiff in the Emperor Group Centre, Hennessy Road.

11. As the judge explained in his judgment, Mr Kan was content that the 1st defendant should borrow money at what appeared to be extravagant interest rates. He had previously made considerable profits on the Ting houses and the judge concluded from the evidence before him that Mr Kan was confident that his fortunes would be restored and he would again be able to make substantial profits. Matters did not, however, turn out in Mr Kan's favour. The property market did not revive. Instead, Mr Kan faced increasing difficulties. The judge found that Mr Kan was even driven to transferring his shares in the 1st defendant in order to avoid his creditors. During 1998 Mr Kan had to borrow money on other occasions but those are not significant as regards the issues in this appeal.

12. The judge held that from December 1998 Mr Tam had visited Mr Kan's office and had met him at the Emperor Seafood Restaurant in Yuen Long and had reminded Mr Kan of the necessity of repaying the $10 million loan. At that stage Mr Kan was still under the impression that only the 2nd Set of Property had been the subject of the Snyder Agreement. But when the documents were faxed to him he realised that both sets of properties had been included in that agreement. Mr Kan gave evidence that towards the end of December 1998 and early January 1999 he began to be harassed and threatened. On one occasion a group of men went to his mother's home which was in the same village as Mr Kan's home. They said that they were looking for Mr Kan and threatened his mother that if they did not find Mr Kan her family would be in trouble. On the following morning Mr Kan's secretary, a Miss Chow, found that glue had been put into the keyhole of the lock on the door of the 1st defendant's office. Whilst the judge did not accept the plaintiff's counsel's submission that those acts could have been done by dissatisfied buyers of Ting houses, he drew no adverse inference against the plaintiff and made no finding that the plaintiff or Mr Tam had been responsible for those acts.

13. There then followed a series of events which can be briefly summarised on the basis that Mr Tam was doing everything possible first to force Mr Kan to cause the 1st defendant to honour of the Snyder Agreement and finally, by threats and violence primarily against Mr Kan, to force the 1st defendant to take the loan which was the subject of this action. The judge held that the purpose and intent of Mr Tam had been to convert the illegal Snyder loan into a lawful mortgage. Part of Mr Tam's tactics had been to instruct solicitors, purportedly to act on behalf of the 1st defendant, but in reality to act on Mr Tam's own instructions.

14. The events started on 22 January 1999 when a firm instructed by Mr Tam, Y.T. Szeto & Co., wrote to the HSBC to inquire about the amount of the outstanding balance under the HSBC mortgage which would have to be paid to redeem both sets of properties and also requesting that the title deeds of the properties should be forwarded to them. By 2 February 1999, Mr Kan had instructed Chan & Tsu, who have remained the 1st defendant's solicitors, to write to Y.T. Szeto & Co. informing them that they had instructions to act on behalf of the 1st defendant and requesting that all title deeds and documents and relevant correspondence should be forwarded to them without any further delay. The importance of Chan & Tsu in the events which took place was that as early as 9 February 1999 they had written to Henry Fok & Co., who were solicitors instructed on behalf of Snyder, explaining, for reasons which the judge held to be correct, that the Snyder loan was illegal.

15. On 20 February 1999 a writ was issued on behalf of Snyder against the 1st defendant seeking specific performance of the Snyder agreement. A copy of that writ was faxed to the plaintiff, a matter the significance of which was not lost on the judge by any manner of means. It would appear that neither the 1st defendant nor Mr Kan were cowed by the writ. As the judge held, they were ably advised by Chan & Tsu who returned the title deeds to HSBC's solicitors, Johnson, Stokes & Master. As the judge held, the parties were then in deadlock. Around 4 and 5 March 1999, Mr Tam faxed a draft of the plaintiff's loan agreement to various firms of solicitors for advice. On 8 March 1999, Mr Tam faxed the final version of the draft agreement to the 1st defendant. Mr Kan in turn faxed it to Chan & Tsu for their advice. Two days later Johnson, Stokes & Master informed the solicitors that had been instructed on behalf of the plaintiff that the 1st defendant did not agree to dispose of any of the properties or to obtain refinancing.

16. It was on 12 March 1999 that what, in my view, are the crucial events started. In brief, as the judge held, Mr Kan was kidnapped by Mr Tam and three other men one of whom was a known triad. They took him to an office of a finance company that was owned by a Mr Cheung, who was one of the people behind the plaintiff, and there he was forced to sign a loan agreement for $29 million with the plaintiff. He was told that he would not be allowed to leave unless he did sign it. Since Mr Kan did not have the 1st defendant's company chop with him, one of the men took the documents back to Mr Kan's office to have the company chop affixed to it. Before Mr Kan was released, Mr Tam told him that he and a codirector would have to attend a solicitors' office to sign other documents and that two men would be stationed in Mr Kan's office "to keep an eye on him".

17. The judge considered the evidence both from the plaintiff and the defendants in this respect very carefully. He came to the conclusion that Mr Kan's version was to be believed. Indeed, not only were two men stationed in Mr Kan's office between 9:30 am and 6 pm every day between 13 March and 22 March 1999, but the office staff became afraid. Quite significantly Miss Chow asked to resign after about a week.

18. In addition to that, Mr Kan arranged for another solicitor, a Mr Clive Chan of Ng, Tam, Ko & Chan, to act for the 1st defendant in the action which had been commenced on behalf of Snyder. The judge described Clive Chan graphically as a puppet dancing to the tune of Mr Tam. This is an aspect which the Law Society may need to enquire into. A notice of change of solicitors was filed on 17 March 1999. On 22 March 1999 Mr Kan, as the judge held, instructed by Mr Tam, attended the office of the solicitors acting on behalf of the plaintiff with the 1st defendant's chop and seal. When he arrived he was told by Mr Tam that the loan had to be increased to $29.5 million to allow for solicitors' fees and that the surplus would be paid to him. Mr Kan and the fellow director of the 1st defendant executed the loan agreement provided by the plaintiff, a deed of mortgage in respect of both sets of properties, a rental assignment, a rental assignment notice and a personal guarantee for the loan. Mr Kan also signed a Cancellation Agreement in respect of the action which had been brought on behalf of Snyder. Clive Chan arrived afterwards and signed the Cancellation Agreement and the Consent Summons terminating the action brought by Snyder. Mr Kan was given a cheque for the balance of $371,650.

19. The judge had no difficulty in coming to the conclusion that Mr Kan had signed the 1st defendant's loan agreement with the plaintiff and signed the various documents on 22 March 1999 as a result of the threats which Mr Tam had made against him on 12 March 1999 and renewed every day by having the two men stationed in his office. To describe this as duress is, in my view, a euphemism. It was thuggery with menaces. No physical harm appears to have been occasioned to Mr Kan, but then he complied with all demands that were made. One of the documents which was signed on 22 March 1999 was a letter addressed to the plaintiff and signed by Mr Kan on behalf of the 1st defendant and that reads as follows:

"To : WA LEE FINANCE COMPANY LIMITED

Re:

Shops Nos. 3-10, 62-71, 74 and A1 on the Ground Floor and the whole of the First Floor, Fortune Centre, Yuen Long, New Territories

We, the undersigned, hereby authorize and direct you to release the mortgage loan for HK$29,500,000.00 in respect of the above property by issuing cheques in the following manner:-

		HK$
1.	Snyder Holdings Limited	20,000,000.00
2.	Messrs. William W.L. Fan & Co.	25,000.00
3.	Messrs. Ng, Tam, Ko & Chan	10,000.00
4.	The Hongkong & Shanghai Banking Corporation Limited for the a/c of Staryork Investment Limited	9,050,000.00
5.	Messrs. Johnson Stokes & Master	3,350.00
6.	Messrs. Laurence Pang & Co.	40,000.00
7.	Staryork Investment Limited	371,650.00
	TOTAL:	29,500,000.00

We further agree that we shall not hold you responsible for any damages, losses and claims that we may suffer as a result of the aforesaid authorization under our direction and request.

Dated this 22nd day of March 1999.

	For and on behalf of
	星仁投資有限公司
	STARYORK INVESTMENT LIMITED
	(signed)
	.....................
	Authorised Signature(s)
	STARYORK INVESTMENT LIMITED"

20. The judge not only held that the Snyder loan had been illegal but also held that loan agreement with the plaintiff was void. He then went on to consider the question of whether the plaintiff was entitled to be subrogated to the rights of HSBC in respect of the mortgage. After disposing of other arguments he said:

"118. However, in exercising my discretion to grant or to withhold this remedy from the Plaintiff, I cannot turn a blind eye to the illegality surrounding the Wa Lee Loan Agreement. In seeking this equitable remedy, the Plaintiff must come with clean hands. If a person invests clean money in an illegal enterprise, the money is mixed with his illegal investments and becomes tainted with the illegality. The Plaintiff's hands have been badly soiled. The $9.05 million paid to discharge the Hong Kong Bank Mortgage was part of the illegal design to convert the security under the illegal and unenforceable Snyder Agreement into an enforceable mortgage. That payment was badly tainted with illegality. If as a matter of law, because of illegality the Plaintiff may not enforce a security, how can he call upon equity to save him as regards part of that security from the consequence of what he did as part of his illegal design? Even though the 1st Defendant has been enriched and unjustly so if subrogation is withheld from the Plaintiff, public policy is strongly against granting the relief. The maxim ex turpi causa non oritur actio applies. It is better that a loan shark be harshly deterred than to be assured that if the court finds against it, it may still recover part of its investment in its illegal enterprise. As between harshness to the Plaintiff and unjust enrichment to the 1st Defendant, the latter choice is certainly the lesser of the two evils.

119. The same conclusion can be reached as follows. Subrogation is an equitable remedy. The equitable charge created by the Plaintiff discharging the Hong Kong Bank Mortgage has momentary existence only because the intention of the Plaintiff and the 1st Defendant was to create a legal charge over the two Sets of Property. Indeed, as soon as the equitable charge was created, it merged into the legal charge which was unenforceable. Accordingly, the Plaintiff's claim for subrogation must fail."

21. Whilst not in any way detracting from the conclusion to which the judge arrived and his basis for doing so, I would go further. The discharge of the HSBC mortgage was part and parcel of an agreement which had been forced upon the 1st defendant by threats of physical harm against Mr Kan. To my mind, it is unthinkable that a court would give an equitable remedy in circumstances where any rights which had been acquired as a result of violence or even threats of it. The plaintiff paid the $9,050,000 to the HSBC in purported reliance on a document signed because of threats of serious violence. If a party uses threats of violence, not only does that negative consent on the part of the other party, but a court cannot countenance giving any rights, let alone equitable rights, alleged to arise out of it.

22. I would add that the judge did take into account the fact that the 1st defendant benefited from the payment of $9,050,000 to the HSBC when awarding Mr Kan only $1 damages in respect of duress. Of course, there is a distinction between Mr Kan and the 1st defendant and, furthermore, one does not know the amount of damages that the judge would have awarded Mr Kan on the basis of the duress if there were no benefit which he derived indirectly through the 1st defendant.

The cross-appeal

23. At the trial the 1st defendant raised a number of matters by way of counterclaim, in addition to the claim by Mr Kan in respect of duress. The 1st defendant claimed recovery of the two payments of $100,000 which have been referred to in paragraph 10 above. In addition the 1st defendant claimed recovery of the amounts which have been paid in both December 1998 by Mr Kan to Mr Tam when Mr Tam was pressing him in respect of the Snyder loan. Those payments totalled approximately $300,000. There was then also a claim for $2,275,000 which was rent which had been paid by one of the tenants to the plaintiff pursuant to the rental assignment and the notice of rental assignment which formed part of the agreement signed in March 1999.

24. The judge disposed of these claims quite shortly. In respect of the claims in respect of the two sums of $100,000 which had been paid by the plaintiff as handling fees under the Snyder Agreement, the judge said that Mr Kan had knowingly and willingly caused the 1st defendant to take the illegal loan and enter into the void loan agreement and since that agreement was unenforceable by either party, the claim for the return of the two sums had to be dismissed. Mr Mumford SC, on behalf of the 1st defendant, sought to argue that the parties were not "in pari delicto". However, I consider that the judge was quite correct in his approach. The Snyder loan had been accepted by Mr Kan on behalf of the 1st defendant without any pressure being put on him, because Mr Kan considered that he would soon be in a position to pay off that loan and was happy for the 1st defendant to take the loan at exorbitant interest rates. As regards the payments totalling some $300,000 which Mr Kan paid to Mr Tam, again those were in respect of the Snyder loan and they would be irrecoverable.

25. As the judge pointed out, the rental period was from 15 July 1999 to 14 August 2000 when the rents of $2,275,000 were paid to the plaintiff. But, again as the judge pointed out, Mr Kan was well aware from 9 February 1999 that the Snyder loan had been illegal and unenforceable. He had been so advised by the solicitors who still act on behalf of the 1st defendant. In my view, the judge was quite correct in his approach and the 1st defendant's cross appeal fell to be dismissed.

Hon Le Pichon JA:

26. I agree.

Hon Sakhrani J:

27. I agree with the reasons given by Rogers VP.