BANK OF CHINA (HONG KONG) LTD (Successor corporation to Sin Hua Bank Limited) v. HUI MAN SAI AND OTHERS

HCA 709/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 709 OF 2010

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D E C I S I O N

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1. This is an appeal by the 3rd defendant from a summary judgment given against him by Master Ho on 19 November 2010, ordering him to pay the plaintiff HK$1,912,286.18 with interest and costs.

2. The notice of appeal was lodged on 8 March 2012 well out of the time limit for appeal.  He therefore also asks for extension of time to appeal.  He also seeks to adduce new evidence on appeal to run the defence of undue influence and misrepresentation. 

Background

3. The plaintiff issued the writ on 15 May 2010 against the three defendants.  The claim against the 3rd defendant was grounded on a deed of guarantee executed by him on 27 January 2000, together with the 1st and 2nd defendants.  The 1st defendant is his elder brother and the 2nd defendant his mother.  The deed of guarantee was to secure the indebtedness due from a Peace Lake Limited (“Peace Lake”) to the plaintiff.  The shareholders and directors of the company are the three defendants.  Mr Lau, counsel for the 3rd defendant, confirmed that the 3rd defendant held one-third of the shares of and in Peace Lake. 

Defence before the Master

4. The 3rd defendant filed a defence in Chinese on 22 June 2010.  He was then unrepresented.  He said in the defence that, after the financial tsunami, the business of Peace Lake deteriorated.  It was indebted to the plaintiff.  The defendants then negotiated with the plaintiff and were told by a Mr Lee, the assistant general manager of the plaintiff, that the amount outstanding was comparatively small.  The indebtedness could be resolved once and for all by the defendants giving up their cash and property.  The defendants duly gave up their cash and property in early 2001.  The plaintiff did not contact them again until their receipt of a letter dated 16 February 2009 from the plaintiff’s solicitors.

5. The 3rd defendant further purportedly relied on a limitation period of six years.  However, the guarantee was made in a deed and the limitation period 12 years.

6. The plaintiff then issued the summons on 10 September 2010 for summary judgment.  The 3rd defendant filed a Chinese affirmation in opposition.  He repeated in the affirmation what he had said in the defence.  He also added the point that he had only been educated up to form 2 and could not understand the English deed of guarantee.  He also said that the plaintiff had not explained to him that the deed of guarantee was a guarantee and his legal liabilities thereunder.  There was also no Chinese translation of the document.  He signed the deed of guarantee without knowing what it was.  He also said that the deed, in order to be effective, should have been explained to him by lawyers before his signing of it.  For these reasons, he said the deed of guarantee had no effect on him.

7. The reasons he gave in his defence and affirmation were not valid grounds of defence and Master Ho gave judgment against him on 19 November 2010. 

New evidence on appeal

8. He filed his notice of appeal on 8 March 2012 through solicitors.  He also filed an affirmation in support of the appeal on the same day.

9. He said in the affirmation that Peace Lake was incorporated in 1987 and he started to work for it since then.  He was then 17 years old (he was 29 to 30 years old when he executed the deed of guarantee on 27 January 2000).  Despite being a shareholder and director, he said he did not own any beneficial interest in the company.  The 1st and 2nd defendants all along had the final say on any matter of the company.  He was a nominee shareholder and director, holding the shares for the 2nd defendant, his mother, and acting under her directions and arrangement.  He had never been given any dividend on the shares and was only paid a salary of HK$5,000 per month. 

10. He was asked by the 1st and 2nd defendants to sign the deed of guarantee on 27 January 2000.  They told him that it was for adjustment of the general banking facilities granted by the plaintiff to the company which was actually controlled by them.  He was further told that the limit of the facilities would be adjusted to HK$2.8 million.  By executing the deed of guarantee, he would be assuming liability for one-third of that amount.  They further assured him that given his earnings from the company, it would be impossible for the plaintiff to expect that he could guarantee an amount exceeding HK$1 million. 

11. Since his commencement of work, he had been guided by the advice of the 1st and 2nd defendants on all financial matters. They were not just his family members, but his bosses as well.  He reposed complete trust in them on all commercial and financial matters.  They also told him that if he did not agree to be a guarantor, Peace Lake might not continue its business and he would be dismissed.  He also did not want to infuriate them and did not challenge what they said.  He executed the deed of guarantee under these circumstances and his misbelief that his liability thereunder would not exceed HK$1 million.

Evidence on delay in lodging the appeal

12. Regarding the delay in lodging the appeal, he said he did not understand the nature and consequence of the judgment.  He was not aware that he could appeal and did not know the time limit for appeal.  He was only aware of the consequence of the judgment after his elder brother, the 1st defendant, was adjudged a bankrupt in November 2011.  He also said that the plaintiff had not enforced the judgment against him.  He was told by his mother and elder brother that they would settle the matter with the plaintiff direct. This led him to believe that there was no need to deal with the judgment.  He therefore took no step about the judgment until the 1st defendant was adjudged a bankrupt.  He was then also able to raise some loans from friends to engage lawyers.  He gave instructions to his lawyers at the end of January 2011 for the appeal. 

The plaintiff’s reply affirmation

13. The plaintiff, in reply, filed an affirmation by a manager, Mr Wong, who produced some correspondence showing that the 3rd defendant and the plaintiff were in negotiation over the judgment from November 2010 to November 2011.  The affirmation also shows that the plaintiff had started bankruptcy proceedings against the 3rd defendant. 

The 3rd defendant’s submissions

14. Mr Lau, counsel for the 3rd defendant, submitted that the 3rd defendant had been misled by the 1st and 2nd defendants that his liability was only one-third of HK$2.8 million. The 3rd defendant was effectively an employee of Peace Lake.  He had little education and had reposed complete trust in the 1st and 2nd defendants.  There was also a mother and son relationship between the 2nd and 3rd defendants. Therefore, there arose a presumption of undue influence. 

15. Counsel relied on Royal Bank of Scotland plc v Etridge (No. 2) [2002] 2 AC 773 at paragraphs 10 to 11 and 49, Bank of China (Hong Kong) Limited v Wong King Sing [2002] 1 HKLRD 358 at paragraphs 65 to 68 and Dao Heng Bank v Ho Yuk Yin [2003] 1 HKLRD 28 at paragraphs 69 and 88.

16. However, one important feature in the present case is that the 3rd defendant was a shareholder and director of Peace Lake, the company which he guaranteed.  Although the 2nd and 3rd defendants are in a mother and son relationship, they were also doing business together in Peace Lake. 

The plaintiff’s submissions

17. Mr Man, counsel for the plaintiff, first referred to Li Sau Ying v Bank of China (Hong Kong) Limited (2004) 7 HKCFAR 579, where Lord Scott of Foscote said in paragraph 41:

“In Royal Bank of Scotland Plc v Etridge (No.2) [2001] UKHL 44, Lord Nicholls said that a bank would be “put on inquiry” not only in a case where a wife was becoming a surety for her husband, or his company, but in every case in which the relationship between the surety/mortgagor and the principal debtor was “non-commercial” (see paras. 49 and 87). It must be borne in mind, however, that the relationship between the surety and the principal debtor must be looked at with the eyes of the bank.”

18. Counsel further referred to Ho Yuk Yin at paragraph 88 and submitted that one cannot just look at the personal relationship if there existed at the material time another relationship between the two persons which was pertinent.  Here, despite the mother and son relationship between the 2nd and 3rd defendants (Etridge (No.2), paragraph 10), it was the business relationship between them that was pertinent.  As Recorder Ma pointed out in Wong King Sing paragraph 47:

“47. In Class 2(B) cases, the complainant needs to do more before the presumption arises. Here, the complainant has first to show that:-

(a) he placed trust and confidence in the influencer or that the influencer had acquired an ascendancy or domination over him; and

(b) the transaction cannot be readily explicable by the relationship of the parties.

(See Royal Bank of Scotland Plc v Etridge (No. 2) [2001] 3 WLR 1021 at p. 1030 para. 14, p. 1032 para. 21) ”

19. In that case, the transaction in question was not readily explicable.  Recorder Ma said, in paragraph 85:

“85. I am satisfied that the Bank knew or must have known that WKF and WKS were brothers. I am also of the view that the nature of the transaction was such that it was apparently disadvantageous to WKF. After all, WKF was guaranteeing the indebtedness of his brother and his business without apparently being interested in that business. In these circumstances, had it been relevant, I would have been satisfied that the Bank should have been put on inquiry.”

20. In the present case, the 3rd defendant was a shareholder and director of Peace Lake and he was in a business relationship with the 1st and 2nd defendants.  His executing the deed of guarantee in favour of Peace Lake was therefore readily explicable by such relationship and the circumstances.  The bank was therefore not put on inquiry. 

21. The same reasoning also applies to the alleged misrepresentation by the 1st and 2nd defendants to the 3rd defendant on the extent of liability in the deed of guarantee.  There is also no allegation that the plaintiff was aware of this alleged misrepresentation.

Decision on the appeal

22. For the above reasons, I hold that the 3rd defendant has no defence to the claim even on the new evidence sought to be introduced on appeal.  I therefore dismiss his appeal on this ground.

Decision on the application for extension of time for appeal

23. In deference to counsel’s submissions, I would also deal with the 3rd defendant’s application for extension of time to appeal and his attempt to introduce new evidence.  The notice of appeal was lodged some 15 months after the judgment was given.  I have already referred to the explanation of the 3rd defendant for the delay. 

24. Mr Lau submitted that the primary question is justice.  The judgment was entered against the 3rd defendant when he was unable to raise the defence on undue influence and misrepresentation.  He should now be given the chance to put forward this defence for the court’s examination and investigation.  The delay has not caused much prejudice to the plaintiff as the bankruptcy proceedings are still at the early stage.  The 3rd defendant was also unable to raise funds to pursue the appeal until quite recently. 

25. Mr Man, for the plaintiff, however submitted that the 3rd defendant’s explanation for the delay is wholly unsatisfactory and unbelievable.  There is evidence of active negotiation between the parties since November 2010.  It is not a case where the plaintiff did nothing to enforce the judgment as alleged by the 3rd defendant.  Hence the 3rd defendant’s allegation that there was no enforcement is false. 

26. The possibility of appeal is also a matter of common knowledge and the 3rd defendant’s assertion that he was unaware of this is unbelievable.  He should have at least attempted to find out if an appeal could be lodged.  If he should have done so, he would have obtained the answer easily.  Furthermore, the 3rd defendant’s assertion that he did not understand the nature and consequence of the judgment until the bankruptcy of the 1st defendant is also unbelievable. 

27. I agree with Mr Man’s submissions.  I hold that the 3rd defendant has not provided a proper explanation for the delay and I see no merit in his application for extension of time to appeal. 

Decision on application to adduce new evidence

28. Finally, on the application to adduce new evidence on undue influence and misrepresentation, Mr Man refers to Order 58 rule 1(5) of the Rules of the High Court.  It provides:

“No further evidence (other than evidence as to matters which have occurred after the date on which the judgment, order or decision was given or made) may be received on the hearing of an appeal under this rule except on special grounds.”

29. The special grounds require the 3rd defendant to satisfy the Ladd v Marshall conditions (see para. 58/1/3 fo HK Civil Procedure 2012).  The first condition requires that the evidence could not have been made available to the hearing below despite reasonable diligence.  The 3rd defendant has clearly failed to satisfy this condition as all his allegations of undue influence and misrepresentation were available to him well before the hearing before Master Ho on 19 November 2010. 

30. Furthermore, the 3rd defendant’s new evidence also contradicts the defence that he ran before Master Ho.  His defence before the master was made on the basis that he was a shareholder and one of the owners of Peace Lake.  There was no suggestion that he was holding the shares as a mere nominee of his mother. 

31. His affirmation before Master Ho also alleged that the deed of guarantee and the legal liabilities thereunder had not been explained to him by the plaintiff and he signed it without knowing what it was.  He now, however, says that he was told by the 1st and 2nd defendant that this was a guarantee, but his liability thereunder would not exceed HK$1 million.  His new evidence is thus in contradiction with his case before Master Ho and not worthy of belief.  He therefore fails to satisfy the third condition of Ladd v Marshall. 

32. Finally, Mr Man submits that since the new evidence does not disclose an arguable defence.  It therefore will not have an important influence on the result of the case.  Hence, the 3rd defendant also fails to satisfy the second condition of Ladd v Marshall.  I agree with Mr Man’s submissions. 

Costs order nisi

33. This appeal plainly has no merit.  In addition to dismissing it, I also make a costs order nisi that the 3rd defendant do pay the plaintiff the costs of the appeal to be summarily assessed, if not agreed.  For the summary assessment, the solicitors for the plaintiff shall serve on the solicitors for the defendant a bill of costs within the next 21 days.  The solicitors for the defendant shall serve their objections to the bill, if any, on the solicitors for the plaintiff within 7 days thereafter.  A 9.30 am hearing shall then be fixed for the summary assessment. 

(Submission on summons to adduce evidence of the affirmation of 3rd defendant)

34. I will dismiss that summons with costs as well.