BANK OF CHINA (HONG KONG) LTD v. MAJOR HARMONY LTD AND OTHERS

HCA 886/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 886 OF 2002

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J U D G M E N T

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I. Background

1. By a Facility Letter ("the Facility Letter") dated 8 March 1997 the Plaintiff ("the Bank")¹ lent $34 million to the 1st Defendant ("Major Harmony"). It was a term of the Facility Letter that Major Harmony execute a mortgage over the Property ("the Property") known as 16th Floor, Silver Fortune Plaza, Nos. 1-13 Wellington Street, Central. The 2nd Defendant ("Ms Yu") and Ms Wong Chim Chim ("Ms Wong") (who was the wife of the 5th Defendant ("Dr Wong")) signed the Facility Letter as directors of Major Harmony.

2. According to the Minutes ("the Minutes") of a meeting of Major Harmony's board held on 25 March 1997, the board (consisting of Ms Yu and Ms Wong) unanimously approved the execution of a mortgage over the Property in the Bank's favour. The Minutes also record that Ms Yu would be providing the Bank with a Deed of Guarantee in support of the financing afforded to Major Harmony under the Facility Letter. The Minutes were signed by Ms Yu and initialled by Ms Wong.

3. Pursuant to the Minutes, on about 1 April 1997 Major Harmony executed a Mortgage ("the Mortgage") over the Property in the Bank's favour. Ms Yu and Ms Wong signed the Mortgage as Major Harmony's directors.

4. At around the same time 5 persons executed a Deed of Guarantee ("the Guarantee") in favour of the Bank as security for the loan of $34 million. The 5 persons were Ms Yu, the 3rd Defendant ("Mr Wong"), the 4th Defendant ("Mr Hann"), Dr Wong and Mr Raymond Fu Ngai Man ("Mr Fu"). The Guarantee provided for the joint and several liability of the signatories.

5. The Mortgage and Guarantee were prepared by Messrs Liu, Chan & Lam ("LCL"). By letter dated 1 April 1997 LCL forwarded the Mortgage, Guarantee and Minutes to the Bank. That letter also included a specimen signature consisting of Major Harmony's chop with the signatures of Ms Yu and Ms Wong underneath.

6. Ms Yu, who is a director of many companies, is in the property investment business. Mr Wong is a certified public accountant. Mr Hann is a solicitor. Dr Wong is a medical practitioner. Mr Fu was a director and shareholder of Triplenic Realty Limited, a property agency. He became bankrupt on 4 November 2000.

7. Major Harmony was the corporate vehicle by which a Group ("the Group") of about 12 investors purchased the Property with the assistance of the Bank's $34 million loan. Major Harmony's registered shareholders are Senfer International Limited ("Senfer") (9,000 shares), Ms Yu (600 shares) and Dr Kwok (400 shares). Senfer's registered shareholders are Ms Yu (6,000 shares) and Dr Kwok (4,000 shares). But Major Harmony's registered shareholders hold their interests on trust for themselves and other members of the Group. Thus, for example, Ms Yu's beneficial interest in the venture was 20%. Mr Wong's interest was ostensibly 45%, but in fact Mr Wong was only beneficially entitled to 10% and held the remaining 35% interest on trust for others. Mr Hann's interest was ostensibly 15%, but of that 15% Mr Hann held 10% on trust for others and only 5% for himself beneficially. The beneficial interest of Dr Wong (or his wife) was 10%. It should be noted that the beneficial interests attributed to the various members of the Group were an internal arrangement among themselves and are not stated in Major Harmony's records filed in the Companies Registry.

8. Between 21 November 1996 and 16 January 1997 the Group had entered into 5 previous transactions whereby various companies (not including Major Harmony) were used to purchase and re-sell units in the Bank of America Tower. The Group as a whole made profits ranging between $665,600 and $6,619,600 on the 5 individual transactions.

9. The Group's idea was essentially that certain front individuals (for example, Mr Hann and Mr Wong) would collect monthly mortgage contributions from members of the pool (including themselves) for whose interests the front individuals were responsible. Any given member would contribute to the monthly mortgage repayment in proportion to his ultimate beneficial interest. The 5 persons who signed the Guarantee were front individuals who either held beneficial interests in Major Harmony for themselves solely (such as Ms Yu) or for themselves and others (such as Mr Hann and Mr Wong).

10. Unfortunately, in contrast to the Group's 5 previous ventures, the investment in the Property turned sour. Major Harmony defaulted on the repayment of the loan. By 6 letters dated 10 May 2001 the Bank's solicitors demanded that the Defendants and Mr Fu pay the outstanding indebtedness within 7 days pursuant to the terms of the Mortgage and Guarantee.

11. On 12 December 2001 the Bank exercised its power of sale under the Mortgage to sell the Property for $14 million. The resulting net proceeds were insufficient to cover the indebtedness due to the Bank on the $34 million facility.

12. As of 31 December 2003 the amount outstanding on the $34 million facility was as follows:-

Principal	$17,201,799.31
Accrued Interest	$ 1,491,645.96
TOTAL	$18,693,445.27
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The amount due takes into account rental of $373,527.44 which the Bank received from a former tenant of the Property on 22 October 2003. The tenant (Gemini Personnel Limited) had fallen into arrears before the sale of the Property but did not discharge its liability until after the sale.

13. The Bank obtained judgment on 14 May 2002 against Major Harmony in default of notice of intention to defend. The Bank obtained judgment in default of a defence against Mr Hann on 13 June 2002.

14. At the trial before me, Ms Yu and Mr Wong appeared in person, although they had initially been represented by the same firm of solicitors. Dr Wong, who was initially (but now no longer) represented by another firm of solicitors, did not turn up at Court. At the start of the trial, my clerk telephoned Dr Wong in his office. He told my clerk that he would contact the Bank later.

II. Discussion

15. Ms Yu and Mr Wong raised identical defences which can be summarised as follows:-

(1) They denied signing the Guarantee.

(2) Even if they signed the Guarantee, they did not realise what its legal implications were. In particular, Mr Hann (who (they contend) was their de facto legal adviser and in whom they reposed "trust and confidence") did not explain to them that they were undertaking joint and several liability for the $34 million loan. Had they known what liability the Guarantee entailed, they would at least have insisted that all other members of the Group signed.

16. In his Defence Dr Wong alleges that, when he signed the Guarantee, a Bank representative (whom Dr Wong is only vaguely able to identify as a "Mr Wong" ("the Representative")) told him the following:-

(1) There was no time to seek legal advice if the deadline for completing the sale of the Property was to be met.

(2) If the deadline for completion was not met, Dr Wong would have to pay compensation and thereby lose money.

(3) It was not necessary to read the Guarantee and Dr Wong could trust the Representative.

(4) The Guarantee was a "standardized document" which the Bank's customers routinely signed and in any event, since Mr Hann the solicitor had already signed the same, Dr Wong should not have to worry about signing.

(5) At worst Dr Wong's liability on the guarantee would be confined to 10% (the extent of his beneficial interest in Major Harmony) of any outstanding amount.

Dr Wong pleads that, relying on the Representative's advice, he signed the Guarantee without first obtaining independent legal advice.

17. Dr Wong was obviously aware of the proceedings before me but did not show up. His allegations have thus not been tested through his cross-examination. I am therefore unable to find the facts and matters raised by him in his Defence as established. Dr Wong's Defence is accordingly dismissed.

18. As for Ms Yu and Mr Wong, I do not think that it can seriously be denied that they signed the Guarantee. Indeed in cross-examination both of them accepted their signatures on the Guarantee. Their principal complaint is that they signed the Guarantee not realising the extent of the liability which they were thereby undertaking. They have a sense of grievance and unfairness in that, although only front persons, they are effectively being held responsible not just for their proportionate share of the loan but also for the shares of others who did not sign the Guarantee and who now, the investment in the Property having failed, do not wish to pay up.

19. While I have every sympathy with the difficulties facing Ms Yu and Mr Wong, I am constrained by the law and I am afraid that the law on the matter is clear. Ms Yu and Mr Wong are bound by their respective signatures. Ms Yu is a businesswoman, Mr Wong a professional accountant. Neither of them are innocents in the commercial world. If they did not understand what a document meant, it was their responsibility to seek explanation before committing themselves by signature. If they failed to ask for an explanation, the Bank cannot be blamed for their omission. The Bank was under no legal duty to provide them with any explanation of the Guarantee or advise them on the consequences of its signature. See Barclays Bank plc. v. Khaira [1992] 1 WLR 623 (Deputy Judge Morison QC), at 637D-F.

20. Ms Yu and Mr Wong suggest that they signed the Guarantee as a result of the "trust and confidence" which they placed on Mr Hann. However, Mr Hann was adamant that his involvement with the Group was only as an investor like everyone else and as the solicitor who handled the assignment of the Property. While accepting that from time to time he would respond to telephone calls from members of the Group about sundry legal matters, Mr Hann denies that he was the Group's general legal adviser.

21. Mr Fung (appearing for the Bank) cross-examined Ms Yu and Mr Wong closely on what they meant by saying that they placed "trust and confidence" in Mr Hann. The answers given to Mr Fung indicate that by "trust and confidence" all that Ms Yu and Mr Wong meant was that they had regarded Mr Hann as a professional and a friend. There is no evidence that Mr Hann enjoyed any actual or presumed ascendancy or domination over Ms Yu and Mr Wong. There is no evidence of actual or presumed undue influence. See Bank of China (Hong Kong) Ltd v. Wong King Sing [2002] 1 HKLRD 358, at 367D-368C.

22. Even if it were assumed that Mr Hann somehow exercised a degree of ascendancy or domination over Ms Yu and Mr Wong, there is no evidence that the Bank had any knowledge of such relationship. It is hard to see how it can be said that the Bank had actual or constructive knowledge of any undue influence allegedly exerted by Mr Hann. Nor is there any basis for regarding Mr Hann as the Bank's agent and attributing his actions to the Bank. Accordingly, I do not think that the Bank was in any way put on inquiry that Ms Yu and Mr Wong were signing the Guarantee otherwise than of their own accord. As far as the Bank was concerned, the front individuals were signing because through their interests in Major Harmony, they would be benefitting materially from the grant of the $34 million facility and the purchase of the Property. See Wing Hang Bank Ltd v. Liu Kam Ying [2002] 2 HKC 57, at 61H-62A.

23. Mr Hann gave evidence on behalf of the Bank as to the circumstances in which the Guarantee was signed and as to the events following Major Harmony's default. Ms Yu and Mr Wong have speculated that this was because of some understanding or deal between Mr Hann and the Bank to the effect that, in return for Mr Hann's cooperation as a witness, the Bank would not enforce all or part of its judgment against Mr Hann. There is no evidentiary foundation at all for such suggestion on the part of Ms Yu and Mr Wong. Mr Hann denied any arrangement with the Bank.

24. Mr Hann gave particular evidence as to the negotiation of a "haircut" of 55% with the Bank in about April or May 2002. On a without prejudice basis, the Bank's officers (Mr Sit Sai Hung and Mr Ian Wong) indicated that the Bank might be amenable to a one-off payment of 45% of the outstanding loan in full and final settlement of the Defendants' obligations. Mr Hann reported this to the Group. But, according to Mr Hann, the negotiations fell through because, although Mr Wong was agreeable to the deal, apparently Ms Yu could not be reached. Ms Yu says on the contrary that she could have been contacted easily. Both she and Mr Wong argue that in any case it was unlikely that they would have turned down the chance to pay only 45% of the outstanding loan when previously they had been talking to the Bank about paying some 70% of the debt due. Both Ms Yu and Mr Wong allege that it was actually Mr Hann who could not be contacted.

25. Insofar as relevant, I prefer Mr Hann's account of negotiations with the Bank. That account is supported by letters to the Bank dated 22 March and 4 June 2002, the latter informing the Bank with regret that no settlement could be reached among the front persons of the Group. Nonetheless, I stress that the negotiations between the Bank and the Group following Major Harmony's default are strictly not relevant to the determination of liability under the Guarantee. There is no evidence that the Bank accepted any proposal from the Defendants to the effect that their individual liability under the Guarantee would either be waived or confined to several liability up to their respective actual beneficial interests in Major Harmony.

III. Conclusion

26. For the above reasons, the Bank succeeds in its claim against Ms Yu, Mr Wong and Dr Wong. There will be judgment for the Bank against each of them for the amount of $18,693,445.27, together with interest on the principal amount of $17,201,799.31 at Hong Kong prime rate from 29 January 2004 (the date when the Statement of Claim was amended) to date of judgment. There will be interest on the judgment sum at the judgment rate from date of judgment until payment. The Counterclaims of Ms Yu and Mr Wong, both of which sought to set aside the Guarantee, are dismissed.

27. I shall now hear the parties on costs.