THE YIEN YIEH COMMERCIAL BANK LTD v. HUNG OI WAH AND OTHERS

HCMP 7149/1999

IN THE HIGH COURT OF THE

HUNG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 7149 OF 1999

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J U D G M E N T

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The proceedings:

1.  The Bank of China (the Bank) brings these proceedings to recover possession of a residential property in Prince Edward Road West Kowloon, known as Flat B, 8^th Floor, Hing Yip King’s Building, and Car Port 14, (the property).  The property, which is solely owned by Madam Hung, was mortgaged to the Yien Yieh Commercial Bank Ltd, and that bank has been taken over by the Bank.  Nothing turns on this change.

2.  There is no dispute that on 20 November 1995, Madam Hung, at the request of her eldest daughter and son-in-law, (Karin and Philip), signed an all-monies mortgage (the mortgage) over the property, and on 11 July 1996 and 28 February 1997, respectively, again at the request of Karin and Philip, two Deeds of Guarantee.  The security documents secured a total of $8 million borrowed by the 2^nd Defendant company, a company which was owned, controlled and operated by Karin and Philip.  Madam Hung was an authorised signatory of the 2^nd Defendant at the time of the mortgage.

3.  As may be seen from the title to these proceedings other advances were secured against other properties.  By the 1996 and 1997 guarantees, further advances were made, effectively to Karin and Philip through their companies.

4.  In due course the borrowers failed to repay the advances and demand letters were issued in September 1999.  There was no response to the demand letters and these proceedings were commenced on 17 November 1999.  On the same day separate proceedings were commenced against Karin and Philip.

5.  Judgment has been entered against the 2^nd 3^rd and 4^th Defendants, and against Karin and Philip in the separate proceedings.  Enforcement proceedings have been taken against the other properties secured, and after making allowance for the sums there recovered, there is no dispute that the principal and interest outstanding as at 24 August 2009, was $25,216,819.79.

6.  The Bank now seeks recovery of possession of the property, and judgment for the amount due.

7.  The Bank was unable to call the bank officer who witnessed Madam Hung’s signature on the 1997 guarantee.  Consequently there is no evidence at all that that document was explained to Madam Hung in any dialect of the Chinese language.  However, the mortgage that was entered into on 20 November 1995 was an all-monies mortgage.  Consequently, if that is a good security document and enforceable by the Bank, then it is not necessary for the Bank to rely upon either of the guarantees, both of which are limited in the extent of the liability Madam Hung has to the Bank.

The case for the bank:

8.  The case for the Bank was straightforward.  Madam Hung had, the Bank says, attended at the Bank’s solicitors, as she had on six previous occasions, where the documentation had been explained to her by a conveyancing clerk.  Following that explanation Madam Hung had signed the necessary documents, her signature being witnessed by a solicitor.  There was nothing in the circumstances, the Bank says, to put it on any inquiry, and that the explanation by the conveyancing clerk was all that was required to ensure that Madam Hung understood the nature and effect of the transactions into which she was entering.

9.  Consequently, the Bank says, there is no basis upon which Madam Hung ought not to be liable upon the terms of the mortgage documentation, and accordingly the orders sought for possession of the property must be made.

The defence:

10.  The only defence pleaded by Madam Hung is that she executed the security documents as a result of undue influence on the part of Karin and Philip.  I accept Ms Sit’s submission that the burden of proof, on the balance of probabilities, lies upon Madam Hung, to prove:

(i)  that the mortgage and the 1996, and 1997 guarantees were affected by the undue influence of Karin and Philip: see Royal Bank of Scotland plc v Etridge (No. 2) [2002] 2 AC 773 at §§13-14;

(ii) that Bank was put on inquiry:  see Etridge at §44;

(iii)    that Bank had not taken reasonable steps to satisfy itself that Madam Hung understood the nature and effect of the transactions she was entering into: see Etridge at §54, and Li Sau Ying v Bank of China (Hong Kong) Ltd [2005] 1 HKLRD 106 at §39.

11.  An amended defence and counterclaim (ADC), was filed on 17 August 2009, with leave which was granted on 29 July 2009.  Thus the ADC was filed a little more than a month before the trial.  That document continued to assert, as had the original defence, that a brief explanation of the schedule to the mortgage was made to Madam Hung prior to her signing the mortgage.  The only pleaded defence remains that of undue influence, the amendments primarily pleading evidence to be relied upon by Madam Hung in her defence.  The ADC continued to plead that the schedules to the mortgage were briefly explained to Madam Hung.

12.  The ADC also asserted, as did a further witness statement from Madam Hung, filed on 25 August 2009, in the Statement of Truth, now required by the Rules of the High Court, that both had been translated from English to the Meixian Hakka dialect of the Chinese language by Karin for Madam Hung.

13.  In evidence Madam Hung asserted that no part of the mortgage at all as never explained to her, and she did not know what she was signing.  This was in fact a plea of non est factum,a defence which was not pleaded.

The evidence of Madam Hung:

14.  Madam Hung had made three witness statements and three affirmations in the course of the proceedings.  When called to give evidence she disowned entirely the three witness statements, and the material parts of the three affirmations made by her, as either wrong or untrue.  Her oral evidence was entirely inconsistent with the statements that she had made in both the witness statements and the affirmations.

15.  In those circumstances I accept the submission of Ms Sit that in the circumstances no real weight may be placed upon the assertions made by Madam Hung, either in her witness statements or the affirmations, or in the witness box. 

16.  I accept also the submission made by Ms Sit that, on the basis that the witness statements and affirmations are solemn legal documents, prepared by solicitors on instructions, which record that they had been interpreted to her and which Madam Hung signed and apparently understood at the time of signature, those witness statements and affirmations provide a benchmark to test the credibility of Madam Hung’s oral evidence.

17.  Madam Hung took two quite distinct positions in cross-examination.  When cross-examined as to the circumstances of the execution of the security documents, and whether explanations had been given to her, she invariably answered with a positive “No”.  But for all other questions concerning events that took place in the 1990’s her answers were invariably “I do not remember”.  She was unable to explain why she could assert positively that explanations had not been given to her in relation to the security documents, but that she did not remember any other events during that period.

18.  The most obvious example of this position was her positive denial that the conveyancing clerk attending her on the mortgage, had ever explained the schedules of the mortgage to her, despite having asserted in her second affirmation of, the original defence, and the amended defence, the latter having been filed as recently as 17 August 2009, that the schedules had been explained.

19.  Despite having admitted in the amended defence that she had received demand letters from the Bank’s solicitors, in cross-examination she denied ever having received or seen them.  When Karin was cross-examined on this proposition she asserted that whenever she saw solicitors letters addressed to her mother she would hide them.  She said that she did so because she was so distressed about the circumstances and was trying to hide from her mother the steps the Bank was taking to recover the property.  That assertion stood in stark contrast to Madam Hung’s second supplemental witness statement, (paragraph 7), which makes it plain that throughout the litigation Karin had been assisting her mother with the litigation.

20.  Madam Hung strongly denied that Karin had ever explained to her that Karin and Philip needed her to use the property as security for their business borrowings.  Her evidence was that she had been taken to the solicitors office and had signed the documents without any knowledge at all the reasons of documents or their contents or the purpose for the documents. 

21.  That evidence was in direct contrast to Madam Hung’s second affirmation in which she set out in clear detail, (paragraph 9), that Karin and Philip explained to her that they sought her assistance for Philip to set up his own diamond trading business following a breakdown in his relationship with his family.  In that affirmation Madam Hung explained how they asked her for assistance by putting up the property as an assurance to obtain credit from the Bank.

22.  Mr Lam argued that Madam Hung’s disowning of her affirmations and witness statements established that she was a person who would sign any document which Karin said she should sign, without first trying to ascertain what it actually said.  In other words, his submission was that her conduct in the witness box proved her case.  That simply cannot be right.  Her most recent witness statement was made only six weeks prior to trial.  It was entirely inconsistent with her position in the witness box.  It is difficult to envisage a situation where a witness could be able to take entirely contradictory positions and rely upon the contradictions as evidence establishing a case of undue influence.

23.  In the whole of the circumstances I am unable to place any weight on Madam Hung’s assertions either that the security documents were not explained to her and she did not understand them, or that she was subjected to undue influence by Karin and Philip in deciding to sign the security documents.

24.  Madam Hung and her late husband had a long association with the Bank, (in its former state as the Yien Yieh Commercial Bank Ltd), and the officers of the Bank, through Madam Hung’s husband’s business.  On six previous occasions Madam Hung, at the request of her husband, had signed mortgages over the property.  Each of those mortgages prepared by the firm of solicitors, Ford, Kwan & Co.  In addition two mortgages over a property known as 34/F Imperial Court, jointly owned by Madam Hung and Karin and Philip, were entered into.  These were prepared by the solicitors firm Lo & Lo.  It was Madam Hung’s evidence that not a single one of those mortgages had ever been explained or interpreted to her.

25.  I accept Ms Sit’s submission that that evidence was simply incredible.

26.  Madam Hung asserted that she did not know that she was a one third owner of the property at 34/F Imperial Court.  That again was simply incredible.  That is particularly so in the light of the fact that the estate agent involved in the transaction whereby that property was acquired brought proceedings against Madam Hung, Karin and Philip, for unpaid commission.  Having obtained judgment the estate agent proceeded then to obtain a charging over the property which was duly registered.  I accept the submission that it is inconceivable that Madam Hung would not have known about those circumstances.

Karin’s evidence:

27.  The first witness statement filed by Karin was consistent with Madam Hung’s witness statement in that it recorded that the purpose of using the property as a security with the Bank to provide capital for Karin and Philip’s new business was explained to Madam Hung (see paragraph 86).  In evidence Karin was quite unable to explain why her mother should deny that she was told of that purpose.

28.  In both her witness statements and Karin had asserted that the affirmations made by Madam Hung were true.  Those affirmations included the assertion that the schedules to be mortgage had been explained to Madam Hung.  Instead she now asserted, for the first time, that she had played no part at all, nor had had any involvement in, the preparation of Madam Hung’s affirmations or witness statements, notwithstanding the fact that they had lived in the same house since the year 2000.  That was in direct contradiction with Madam Hung who, in cross-examination, said that all along it was Karin who handled the affirmations and witness statements for her.

The language issue:

29.  As I have noted in paragraph 11 above, the ADC, filed a month before trial, contained a statement of truth that it had been translated from English to the Meixian Hakka dialect of the Chinese language by Karin for Madam Hung.  Each of the affirmations made by Madam Hung contained a statement that they had been interpreted to her in the Cantonese dialect of the Chinese language.  Madam Hung’s first witness statement, made on 15 May 2008, contained a note that it had been interpreted to her, but the note does not say which dialect or language was used to the interpretation.  I note however that the interpreter was the same interpreter who had interpreted both of the affirmations in Cantonese, and I draw the inference that the interpretation was in Cantonese.

30.  In her second witness statement, made on 6 May 2009, Madam Hung asserts that Karin had now explained the contents of the affirmations and the first witness statement to her in the Meixian Hakka dialect and that she “had come to realise that some of the contents therein actually do require some clarifications”.  She asserted also, for the first time that she did not speak good Cantonese and the mistakes which required clarification were caused by the fact that documents were drafted in a hurry, and possibly also caused by communication problems between herself and her solicitors.

31.  I reject entirely the proposition that Madam Hung did not understand sufficient Cantonese to understand either an explanation given by a conveyancing clerk of the mortgage or the affirmations and witness statements prepared for her.  I have not the slightest doubt that the solicitors attending upon Madam Hung would have immediately become aware of any language difficulty in the course of taking instructions and that if there was such a language difficulty it would have formed part of the defence from the very start.

32.  Equally, I have no doubt at all that had Karin been aware of any language difficulty her mother might have had, she would have raised it with the solicitors in the course of the nearly 10 years in which these proceedings have been in existence.

33.  In particular, I note not only was there no suggestion in any of the witness statements or affirmations from Madam Hung or Karin that Madam Hung did not understand Cantonese, (there is only the late assertion in Madam Hung’s second witness statements on 6 May 2009 that her “Cantonese is not so good”), the proposition that Mr Lo would have appreciated in the course of meeting with Madam Hung that she did not understand Cantonese or what he was saying was simply never put to him.  Finally, in evidence Madam Hung accepted that she understood Cantonese and accepted that when the solicitor’s clerk at her former solicitors explained her affirmations and witness statements to her in Cantonese, she understood their content.

34.  I have listened carefully to the evidence of Mr Lo, the conveyancing clerk who explained the mortgage documents to Madam Hung.  I am satisfied from his evidence that he would have been aware had Madam Hung not been able to speak adequate Cantonese, and added that he had been so aware he would have ensured that a dialect speaker would be available to explain the documents.

35.  It is right that Mr Lo had no direct recollection of attending Madam Hung on the signature to the mortgage.  But I am satisfied from his evidence that he adopts a standard procedure on every occasion upon which he is required to explain the mortgage.  Consequently although he has no direct recollection of the events, I accept his evidence that he would have explained the mortgage as he explained it to me in evidence.  I cannot fault his explanation.

Trust and confidence:

36.  A great deal of emphasis was placed by counsel for Madam Hung on the relationship of trust between Madam Hung and Karin and Philip.  I have no doubt at all that, particularly following the death of her husband, Madam Hung has looked to Karin particularly amongst her children, and has reposed trust and confidence in her.  But she also reposed trust and confidence in her third and fourth daughters, both of whom had been educated overseas, and who lived at home with her.  She did not depend solely upon Karin as may be seen from the fact that shortly following her late husband’s death in January 1989, Madam Hung made her second daughter, then aged 25, a signatory to the business account.

37.  But it is not sufficient simply to establish that there was a relationship of trust.  Madam Hung must also establish that the transaction was one which calls for an explanation.  A transaction that calls for an explanation is one that is not readily explicable by the relationship of the parties or the ordinary motives upon which ordinary people act: see Etridge §21.

38.  It is right that the Bank were aware of the parent-child relationship between Madam Hung and Karin.  But there was nothing else which might cause the Bank to question the transaction.  That is particularly so in the light of the fact that on a number of occasions Madam Hung had mortgaged her property to the benefit of her husband’s business.

39.  The transaction was one which was readily explicable by the relationship of the parties.  It is perfectly normal for a parent to confer a benefit upon the child.  That has been recognised as long as since the decision in Re Coomber [1911] 1 Ch 723, subsequently reaffirmed in Portman Building Society v Dunsangh [2002] 2 All ER (Comm) 221.  In that latter decision the court made it clear that a bank is not required to ensure whether parents are wise in seeking to assist their children.

40.  Mr Lam relied upon Green King plc v Stanley [2001] EWCA Civ 1966, in which a husband and wife, both over the age of 70 years executed a charge of their home to secure a loan of £80,000 to a son to be used to purchase and lease the public house.  The court held that the transaction was not readily explicable upon the ground of relationship on loan as it was in their home and their only significant asset.

41.  Although the property was Madam Hung’s home, it was not her only asset.  At the time of the mortgage Madam Hung had substantial cash and stocks, in contrast to the parents in Green King plc.  Further, Karin and Philip extended an advantage to Madam Hung by taking her in as a one third partner in the acquisition of the 34/F Imperial Court.  It is right that ultimately, because of the fall in the property market, that property was sold at a loss.  But that is simply a consequence of the exigencies of the market which might just as well have gone the other way. 

42.  It is significant too in this respect that Madam Hung had prepared a will making only her second, fourth and fifth daughters beneficiaries in her estate.  She did this because she had already transferred other properties to Karin and her third daughter.

No evidence from Bank officers:

43.  No evidence was called by the Bank from any staff member who had dealt with Madam Hung in the course of the challenged transactions.  Mr Lam submitted that an adverse inference should be drawn against the Bank in relation to what he described as a “failure to call witnesses”.  It is right a court may draw an adverse inference against a party who fails to call a witness to deal with certain evidence: see Phipson on Evidence, 16th Edn para 11-15, and Li Sau Keung v Maxcredit Engineering Ltd & Anor [2004] 1 HKC 434.

44.  I am satisfied that principle is not applicable in this case.  The reasons set out above I am satisfied that there was nothing to put the Bank on inquiry.  Neither is there any evidence from Madam Hung or Karin in relation to the steps taken by the Bank prior to the signing of the security documents that required any answer from the Bank officers who had dealt with them.  It is not without significance that although raising the principal, Mr Lam, in his submissions, did not say just what an adverse inference should be drawn against the Bank.

45.  That said, in the absence of any evidence from the Bank officers who witnessed the 1996 and 1997 guarantees, there is no evidence that those documents were properly explained to Madam Hung.  However for the reasons set out in paragraph 7 above, for the Bank to succeed it is not necessary for them to rely upon those guarantees, if the mortgage is a good security, as I have found it to be.

Conclusion:

46.  I am satisfied that the was nothing in the transactions between the Bank and Madam Hung to put the Bank on inquiry.  I reject the proposition that Karin and Philip entered into a conspiracy to persuade Madam Hung sign the mortgage without any knowledge of the purpose for which the funds were being borrowed, concealing from her true circumstances of the transaction and the liability faced by her.  The evidence does not establish that Madam Hung was subjected to undue influence by Karin and Philip.

47.  I am satisfied that Madam Hung, having signed six prior mortgages over the property, well knew the consequences and effect of the mortgage, and further that Mr Lo explained the consequences and effect of the documents to her in a language and a dialect that she understood.

48.  There is accordingly no basis upon which the mortgage may be set aside.  There must be an order for the possession of the property in favour of the Bank against Madam Hung.

Costs:

49.  The plaintiff has succeeded in all respects.  In the usual way, the security documents contain a provision for costs on a full indemnity basis.  Costs are a matter which is in the discretion of the court, but the usual rule is that where there is a contractual entitlement for costs, the discretion should be exercised according to the contractual arrangement.  There is nothing in the circumstances of this case to persuade me to depart from that usual rule.  There will accordingly be an order nisi for costs to be taxed if not agreed on an indemnity basis.