HONG KONG FINANCE CO LTD v. SO DAH WAI JOHN also known as JOHN SO AND ANOTHER

HCA 614/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 614 OF 2007

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J U D G M E N T

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Introduction

1.  The Plaintiff which is a registered moneylender is suing these two Defendants in the sum of $7,683,879.72 as it was calculated to be on 20 May 2009 being the first day of the trial.  This amount is made up of the principal sum of $4.5 million and the balance of $3,183,879.72, which is made up of interest at the agreed contractual rate of 19.2% per annum as well as default interest as provided in the agreement between the parties. 

2.  The loan is secured by a mortgage on a flat at Broadview Terrace, Cloudview Road, North Point (“the property”) which is in the joint names of the two Defendants.  In the usual way of such matters, the Plaintiff seeks a money judgment for the outstanding amount of principal and interest and for vacant possession of the property to enable it to sell it and realise the amount owing to it.

3.  The Defendants who were once married, although now long divorced, have approached their defences to the action in different ways.  The 1^st Defendant (“Mr So”) accepts that he is indebted to the Plaintiff, subject to a dispute as to the precise amount of the principal and, very late in the day, to the lawfulness of the interest rate, but denies that he is liable under the mortgage because its terms were not explained to him.  The 2^nd Defendant (“Miss Chow”) denies that she has any liability for the debt and certainly not under the mortgage which she says was not explained to her and that in any event when she signed the requisite documents which apparently made her liable as joint mortgagor of the property with Mr So, she had been subjected to the undue influence of Mr So who, despite their divorce, continues to exercise a dominance over her.

4.  These being the issues, I now propose to provide the background to the transaction, thereafter deal with the character of the two Defendants and the relationship between them and finally, relate the circumstances in which they signed the crucial documents which led to the handing over of the cheque to Mr So which had been made out to him representing the net amount of the loan, by Mr Frederick Fung who was the solicitor instructed by the Plaintiff to prepare and process the execution of the loan and mortgage documentation on its behalf.

Background

5.  I will describe Mr So in more detail when I deal with the character of the Defendants in a moment, but suffice it to say at present that he is an experienced businessman, of considerable accomplishment, who has engineering and accounting qualifications which he obtained in Canada.  He speaks flawless English in addition to Cantonese.  In late 2005, he was in urgent need of short-term capital to finance a magazine publishing venture that he wished to establish on the Mainland.  He says that he saw the name of the Plaintiff in a magazine and contacted its office at the Lippo Centre.  He was interviewed by its general manager, Mr Tse and by his subordinate, Mr Chan.  This was all arranged quickly.  He was interviewed by them on 24 November 2005 and filled in a short application form for the loan [213-214].  He told them that he wished to borrow $4.5 million and that he wished to repay it within about six months.  They wanted to know what security he could offer and whether the property was unencumbered.  He provided the address of the property and confirmed that it was free of mortgage or other charges.  They were able to get a reliable idea of its value from their database of recent sales transactions.  Surprisingly perhaps, for a mortgage transaction, they were not interested in Mr So’s earnings which would determine whether he would be able to afford the monthly interest payments.  Provided the value of the property offered sufficient security for the loan, I was told that Mr Tse would be able to approve it.  Following their discussions, Mr Tse and Mr Chan said they needed to view the property to confirm their assessment of its value.  A viewing was arranged for them by Mr So who met them at the property.  The décor was “messy”, to use Mr Tse’s and Mr Chan’s description, and on the first visit, Mr So had locked one of the rooms, which contained private contents, which he declined to allow them to see.  As a result, a second viewing was arranged on a subsequent day shortly afterwards in order to give Mr So time to move the contents of the locked room.  That took place but, in view of the “messy” décor, Mr So was told that a professional valuation was needed from a valuer which he agreed to.  He had to pay $4,000 for this.

6.  The co-owner of the property Miss Chow had as yet not appeared.  Mr So filled in her particulars as a joint applicant for the loan on the application form, but he had not informed her of what he was proposing to do.  At this time he was the only one living at the property.  She was now living at her parents’ home which is also in North Point.

7.  At the meeting of 24 November, Mr So agreed to pay what one might describe as earnest money of $40,000 which was part of the Plaintiff’s administration fee for processing the loan.  There is a dispute as to whether the administration fee was $60,000 or just $40,000 which Mr So paid by cheque which he had delivered to the Plaintiff by a friend as he had to travel overseas on that day.  He also paid the $4,000 valuation fee in cash.  He says that Mr Tse and Mr Chan promised to let him have a copy of the valuer’s report which they have not done, and so he should not be liable for this amount.  There is also another dispute as to whether he had attended the Plaintiff’s offices on 23 November in addition to the 24 November.  In my judgment, none of this matters very much.  The fact is that Mr Tse was able to approve the loan of $4.5 million after he received the valuer’s report which must have confirmed for him that the property afforded the Plaintiff sufficient security for the loan.

8.  I will leave over to the end whether the Plaintiff is correct to have deducted from the loan an administrative fee of $60,000 as opposed to $40,000 which Mr So says was agreed by them and whether he should also get back the $4,000 that he paid for the valuation because no report has been produced and therefore there is no proof that a professional valuation was in fact obtained.

9.  After these comings and goings in the latter part of November 2005, it was arranged that Mr So and Miss Chow should go to Mr Fung’s offices to execute the loan agreement and the mortgage and to receive the cheque in respect of the amount loaned.

10.  This they did on 5 December 2005.  But before I deal with these events, and given the defences which they have raised, I ought to deal with the respective characters of the two Defendants and their relationship with each other.

The character of the Defendants

11.  Mr So is 53.  He has a Bachelor of Applied Science degree from the University of Ottawa and is a licensed engineer, a qualification from the Province of Alberta, Canada.  He is also a Fellow of the Institute of Chartered Management Accountants of Canada.  He married Miss Chow in Hong Kong in 1988.  Miss Chow is 50.  She has a degree in Music from Rutgers University which is in Newark, New Jersey.  When they met Miss Chow was working as a bookkeeper.  They purchased the property to be their matrimonial home subject to a mortgage with the Standard Chartered Bank.  The marriage was rather short-lived and they separated in October 1993.  Mr So petitioned for divorce on the ground that they had lived apart for at least two years to which Miss Chow gave her consent.  The decree nisi was pronounced on 16 February 1996 and made absolute on 10 April the same year.  And so by December 2005, they had been separated for over 12 years and over 9½ years had passed since the dissolution of their marriage.

12.  There was no application for ancillary relief.  This is because, she says, Mr So had persuaded her not to apply for any.  The property has remained in their joint names and he has maintained her voluntarily at the rate of $20,000 a month, certainly until 2006 after which he has not been able to afford to.  Whilst he may not have paid her $20,000 each month in timely fashion, the amounts that he has paid have averaged out to this monthly equivalent.

13.  Both of them have represented themselves at the trial.  Originally, they had solicitors who prepared the pleadings and dealt with discovery and obtained witness statements from them, but shortly before the trial, the solicitors applied, unopposed, to cease acting for them.  Mr So has impressed me as a person of high intelligence who is able to express himself with great fluency in both Cantonese and English.  He gave his evidence in Cantonese, but has largely preferred to address me in English.  He has a very good command of the documents in the case and has been able to make his points clearly and, if required, forcefully.  His cross-examination of the witnesses has been very clear and he has shown himself to be a persistent cross-examiner of three obviously intelligent persons in Mr Tse, Mr Chan and Mr Fung, the Plaintiff’s solicitor.

14.  I should observe that he is no stranger to litigation.  He and Miss Chow were guarantors of one of Mr So’s associates’.  When the associate defaulted on his loan, the finance company sued both Mr So and Miss Chow who on that occasion as well had offered the property as security.  This litigation went all the way to the Court of Final Appeal.  The case is called Celestial Finance Ltd v Yu Man Hu, John So and Elaine Chow FACV 2/2004.  Mr So and Miss Chow lost that case, and he had to pay out several million dollars to the finance company to save the property from being taken by it.  Judgment was handed down in October 2004 and so that experience was still fresh in their minds in December 2005.  In that case, similar documents had been signed by them as they had in March 1988, when they gave a mortgage on the property to the Standard Chartered Bank.  I will need to return to these transactions presently.  The documents are in the trial bundle and I have heard quite a lot of evidence about them.

15.  Of the two Defendants, Mr So is undoubtedly the more assertive.  He is a talkative engaged individual whereas Miss Chow is much more quiet.  At all events, this is the impression that I got from seeing them in court over the course of the six days of the trial.  This difference in their characters is a matter which I will need to attend to in considering Miss Chow’s case on undue influence in relation to which she received much support from Mr So whose evidence, as was hers, is that he has always been the decision-maker and that she has been content to follow his lead.  Despite their divorce having been finalised some 13 years ago now, she still looks to him for guidance and for assistance even to the extent of having her light bulbs changed by him.  Although following their separation in 1993, which was at Mr So’s instigation, he has had a number of relationships with other women since then, they have remained in touch and would meet up for meals and she continues to visit members of his family.  After the separation, she initially stayed on at the property before moving to her present address after which Mr So returned to live at the property.

16.  A fair summary is that he is much more assertive and that she is a reserved, placid individual.  He has been a successful businessman in the corporate finance field when at the height of his success he was worth US$50 million.  For her part, she was a quiet bookkeeper who had to give up her job because of the stress that she felt at the end of each month when she had to meet a deadline to balance the accounts.  This having been said, I am satisfied that she is a person of intelligence and talent without which she could not have entered such a fine school as Rutgers University and graduated in a demanding discipline such as music.

17.  I will need to refer back to these assessments of the two Defendants when I consider their defences on their merits.

The execution of the mortgage

18.  This part is fundamental to the outcome of the case.  The Plaintiff’s case is perfectly straightforward and the account of it comes from Mr Frederick Fung, who is an experienced solicitor in this type of work.  He acts for most of Hong Kong’s leading banks and for many finance companies, such as this Plaintiff.  He interviewed the Defendants by appointment at his office on the 5 December 2005.  The mortgage had been prepared [219-237] as had the facility letter [215-219] and the Memorandum of Agreement [239-241], as had an acknowledgment signed by the Defendants that they had been invited to seek independent legal advice in respect of all the documents that they were required to sign and that they confirmed that they did not wish to seek such advice [247].  There was also a declaration and undertaking signed by both of them that they occupied the property, that they would not let it out and that they would give up vacant possession in the event that the Plaintiff became entitled to such possession [247.1].

19.  Mr Fung told me that after the usual exchange of pleasantries he went through the individual documents with the Defendants.  Both of them were seated side by side opposite him at his desk.  As to the mortgage, he explained that they were to sign a mortgage and what the consequences would be if they were to default on the payments.  He was careful to explain the power to take vacant possession and to sell the property in order to obtain repayment of the outstanding loan which was to be secured by the mortgage.  He explained to them that they could, if they wished, take independent legal advice before executing the mortgage.  Both of them appeared to understand what he had told them.  He passed the documents over to them for them to read if they wished to.  Mr So took hold of the documents and went through the pages and he appeared to read them.  Miss Chow who was seated next to him remained quiet.  When he came to the Memorandum of Agreement [239], he noticed that the pre-payment option was only exercisable after 8 months.  He said that he had agreed with Mr Tse that this could be effected after 6 months plus one month’s notice.  A telephone call to Mr Tse followed and Mr Tse agreed to the term being reduced to reflect Mr So’s wishes.  As a result, the term at paragraph 7 [239] and the facility letter paragraph 5 [216] had to be altered.  This was done by a member of Mr Fung’s staff and then the Defendants said that they were ready to sign at the various places indicated, including initialling the alterations to the term, at pages 216, 239 and 268.  Their signatures appear at pages 218, 237, 241, 246, 247, 247.1 and 267-268.  At pages 218, 237, 241, they have signed by the words describing them as “Borrower” and/or “Mortgagor”.  This will be important when I come to consider Miss Chow’s case, who says that she did not know what and in what capacity she was signing.

20.  The cheque representing the loan of $4.5 million in the amount of $4,460,050 (being net of various charges) was, at the request of both Mr So and Miss Chow [see 246], made payable to Mr So.  Mr So also made out 19 cheques which were post-dated.  Eighteen were for the monthly interest payment of $72,000 and a final one to repay the loan was for $4.5 million [255] dated the 5 June 2007.

The Defendants’ evidence on the execution of the mortgage

21.  Mr So says that he only asked Miss Chow to come to the solicitors’ offices to sign what was required on 4 December and that he arranged to meet her at about 2.15 pm at the Landmark building, so that they could walk over together.  He never gave her a precise reason as to why they were going there other than to say that she was needed because her name was on the title deeds to the property.  She thought that he was about to sell the property which pleased her because she would then be receiving her share of the proceeds of sale.  When they got there, they were made to wait after the appointed time of 2:30 pm.  Eventually, Mr Fung appeared and apologised for his lateness and took them to his room which had several horse-racing photographs on the walls.  The two men then got onto the subject of horse-racing, which according to both Defendants became the main subject of the proceedings.  Mr So says that they had a detailed discussion about the horse-racing.  Miss Chow is not a horse-racing fan so she remained quiet.  It was only after some time had elapsed that Mr Fung asked if they were ready to sign.  There was no explanation from him as to the terms of the mortgage and Miss Chow was eventually able to gather that Mr So was going to borrow money and she thought that she was there to witness his signature.  Mr Fung had told her that her signature was required as a formality.  Mr So had spotted the mistake about the 8 months instead of 7 months for the early repayment option which caused a delay due to the telephone call to Mr Tse and the need to make the alterations.  Mr So had also told Mr Fung about his misfortune in the Celestial Finance litigation and there was some discussion as to which solicitor had represented him in the matter.  And so, without any explanation to speak of from Mr Fung, they both signed.  She signed after Mr So where he told her to place her signature.

22.  Both have been challenged by Mr Ho, who appears on behalf of the Plaintiff, as to their versions.  When it was pointed out to them that they had twice previously entered similar transactions, one with the Standard Chartered Bank and the other with Celestial Finance, both have said that on those two occasions they had been fully briefed by the solicitor acting for the lender/mortgagee as to what they were signing and that as a result, they were in no doubt as to their obligations.  Here Mr Fung, who had been very pleased to engage in chat about horse-racing with Mr So, had left them ignorant as to the effect of these documents and had never told them that they could seek independent legal advice before they signed.

23.  This was put to Mr Fung in cross-examination, and he denied it.  Mr So put it to him that he had been untruthful in his denial and that he now wanted to impress his client’s management, Mr Tse and Mr Chan, who had already given evidence and who were in court listening to his evidence.  Mr Fung insisted that he had done his duty correctly by having given them both a proper explanation of what the documents were and that they could have been in no doubt as to what they were about to sign, although he accepted that he and Mr So had briefly, at first, discussed horse-racing and that Miss Chow had mostly remained silent.

24.  He said that the meeting had lasted over an hour, which is what it had taken to get through the documentation and the work at hand.  Mr So wanted to make a point about this.  He said this had all taken far less time and that he could prove it by showing me that he had paid-in the cheque well before 4 pm so that there could not have been time for the talk of race-horses and a for proper explanation of the documents that Mr Fung was suggesting had happened.

25.  As this seemed important for him, I signed a subpoena for the cheque and the paying-in slip to be produced and this resulted in the case going to a sixth day to allow the bank time to produce these two documents.  These were produced and the paying-in slip shows that the cheque was paid in at 4:30 pm and not well before 4 pm as Mr So had told me.

Conclusions on the evidence

26.  Before I deal with the relevant law, I propose to indicate what my findings of fact are on the evidence.

27.  In any witness action the court starts with the hope that all of the witnesses before it will do themselves justice by giving truthful evidence to the best of their ability.  Even if some witnesses are mistaken in their recollection, it is to be hoped that such mistakes are honest mistakes based on faulty recollection due to the passage of time or simply honest confusion.  In many cases, this is so.  In many other cases witnesses go into the witness box with the avowed intention of deliberately misleading the court by simply not telling the truth.  Regrettably, this is what has happened in this case.

28.  I take the case of Mr So first.  He, of course, was fully aware of what he was doing.  He needed a short-term loan for his magazine venture and he sought out the Plaintiff.  At his meeting with Mr Tse and Mr Chan, it had immediately become clear that they would only lend against the security of a property owned by him.  Hence the need for him to fill in the application form for himself and for the co-owner, Miss Chow [213].  The Plaintiff wanted to value the property to ensure that it would be sufficiently covered in case there was a default on the loan.  And therefore by the time that he went to see Mr Fung on the 5 December, Mr So could not have been under any misapprehension as to the nature of the documents that he was to sign which were to provide the Plaintiff with security, as he had done with Celestial Finance when he and Miss Chow had provided guarantees for his associate Mr Yu’s line of credit.  Once he saw Mr Fung I am completely satisfied that Mr Fung had provided him and Miss Chow with very clear explanations of the nature of their transactions.  A loan that would be  made payable at their request to Mr So, secured by a mortgage on their property.  Providing these explanations is what Mr Fung does for much of his professional time.  He knows what he has to say and how to say it.  There would have been no reason for him not to follow his usual procedure.  Both of them knew from Mr Fung’s explanation what would happen in the event of default and they had both been told that they could get independent legal advice if they wished to.  They declined that opportunity and signed to confirm this [247].

29.  Mr So has engaged in an unworthy attempt to blacken Mr Fung in his professional capacity by suggesting that he failed to give them any sort of meaningful explanation and that he was content to be in dereliction of his duty to his client (the Plaintiff) by preferring to discuss horse-racing instead of concentrating on the work at hand.  I am satisfied that Mr Fung has provided a truthful account and that the version put up by Mr So is a calculated lie designed to avoid his lawful obligations under the mortgage.  When Mr Fung and his staff had gone to all the trouble of preparing the necessary documentation, there would have been no reason for Mr Fung not to have then embarked on his usual course of providing an explanation of these documents, interrupted as he was on this occasion by having to telephone Mr Tse to seek approval to change the early payment term from 8 to 7 months.  Evidentially Mr So’s case does not begin to get off the ground.  This is a highly intelligent, sophisticated and educated businessman, well-versed in commercial documents as one who had been involved in substantial corporate finance transactions, let alone personal transactions of this type with the Standard Chartered Bank and more recently with Celestial Finance.  He knew precisely what he was signing and the effect of these documents.

30.  I now turn to Miss Chow who I have also found to be an untruthful witness.  In coming to this very strong conclusion, I have made every allowance for the fact that Mr So is capable of imposing himself on her.  Although they had long ceased being married or living together, I can quite conceive, given their particular relationship, that he might be able to persuade her to do things which may not necessarily be to her liking.  Nevertheless, there is no doubt in my mind that Mr Fung had given her a full explanation of the documentation and told her that she could seek independent advice. She has lied to me in saying that at the point of signing she did not know the capacity in which she had signed the mortgage and the attendant loan agreements in which she was described as Mortgagor and/or Borrower.  It beggars belief to imagine that she thought that she was there merely as a witness to Mr So’s signature as a matter of formality.  Even if Mr So had been less than forthcoming with her, the fact is that once she entered Mr Fung’s office, she had been fully put in the picture as to what she was signing and why, which was to provide a mortgage to secure a loan of $4.5 million which she agreed could be given and used by Mr So.  She would have heard from Mr Fung that she could have sought independent legal advice, but indicated as one who required none.  And so, the law must be applied to her case as one who knew precisely what she was signing and thereby letting herself in for and as one who had been offered the chance of obtaining her own legal advice but declined to do so.  I am satisfied that she realised that what she was doing, in terms of the mortgage, was what she had done with the Standard Chartered Bank and Celestial Finance in the more recent past.  She is someone of full age, an obviously intelligent and articulate person who, even if retiring by nature, well knew what she had let herself in for.

The Law

31.  It is against this factual background that I propose to apply the relevant law.

32.  In Mr So’s case – his position is a hopeless one.  I am satisfied that he knew precisely what the score was.  It was he who had applied for the loan and had put up the property as security.  There is simply no basis whatsoever for suggesting that he should not be bound by his signatures and the legal consequences of those signatures.

33.  In respect of the arithmetic of the monetary claim, I am satisfied that he had agreed to a $60,000 administration fee and that he is to be held to this.  The only matter that I am troubled by is the $4,000 valuation fee.  Although I am satisfied that a valuation had been obtained – it was obtained because of the “messy” state of the décor of the property, the fact is that I have no proof of the amount of $4,000.  The Plaintiff should have produced an invoice for it.  It has not done so.  If there was a valuer’s report, that should also have been produced, but I can well imagine that for this sort of case, there could well have only been an oral valuation but whichever it was the fee note should have been disclosed.  Accordingly, this must be left out of account.  I will in these circumstances enter judgment to the Plaintiff following Mr So’s default on the payment of the instalments on the basis that is claimed less the $4,000.  This I expect will affect, albeit slightly, both the capital and interest element.  I will ask the Plaintiff’s solicitors to prepare the money judgment on this basis for my approval.  The judgment will also provide for an order of vacant possession forthwith after which the Plaintiff will be at liberty to deal with the property in accordance with the terms of the mortgage.  Accordingly, the orders will be as in paragraphs 17(a)-(d) of the statement of claim and (f) being the costs of the action on an indemnity basis as provided for in the mortgage. Because I am handing down this judgment the costs order will be an order nisi.  If Mr So wishes to argue otherwise let him do so on notice within 28 days of the handing down of the judgment.

34.  For the sake of completeness, let me say that there is nothing in Mr So’s point that the default interest has caused the interest rate to exceed the allowable 60% maximum provided by the Moneylenders Ordinance.  This was a point that he took for the first time on 11 June just as I was about to rise at the conclusion of the trial.  It has never been pleaded as an objection but more importantly I am satisfied that there is nothing to the point.

35.  I now turn to Miss Chow’s case.  The question here is whether a defence of undue influence is available to her given my findings of fact that she knew precisely what she was doing and that she had turned down the opportunity to get independent advice and that, despite what would have been a transaction which gave her no conceivable benefit, she consented to enter into these transactions.  The answer to her case has been provided in the judgment of Mr Recorder Ma, SC (as he then was) in Bank of China (Hong Kong) Limited v Wong King Sing & Others [2002] 1 HKLRD 358, who in reviewing the authorities on this subject said the following at paragraph 34 of the judgment:

“34.  I should preface the discussion of this defence with the observation that, as with all aspects of the law, one has to apply a large degree of common sense to the matter.  The proliferation of cases in this area, particularly in recent times, creates a tendency to have principles mechanically set out as almost formulas to be applied.  While this is convenient and provides a logical basis for the application of at times not uncomplicated principles, it is to be borne in mind that the defence of undue influence is ultimately a simple concept.  It has all to do with informed consent.  Once a court forms the view that consent was freely given with full knowledge of the consequences of entering into the relevant transaction, that is the end of the matter, however improvident the transaction may objectively appear.  The rationale for the defence of undue influence is to prevent the victimisation of the complainant.  It is there to protect people from being forced, tricked or misled in any way by others into entering a disadvantageous transaction…”  (my emphasis supplied)

Whether a transaction was brought about by undue influence is after all a question of fact to be determined by a proper and objective examination and assessment of all the circumstances of the case.” (my emphasis supplied)

36.  And so where I have no doubt that Miss Chow has freely given a fully informed consent in signing these documents, any suggestion of undue influence has been eliminated from the case.  She too is bound by the consequences of her signatures and judgment will therefore be entered against her as well, in terms identical to those entered against Mr So.  The order nisi on costs will also equally apply to her.

37.  The court’s order, which the Plaintiff’s solicitors will now draw up for my approval, must be served on both Defendants for their comment, if any, before it is entered into the record.