SUN HUNG KAI INVESTMENT SERVICES LTD v. QUALITY PRINCE LTD AND OTHERS

HCA1995/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1995 OF 2008

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BETWEEN

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J U D G M E N T

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1.  This is an appeal by the 4^th and 5^th defendants from the decision of Master C. Chan given on 25 May 2009 when the Master gave, inter alia, summary judgment to the plaintiff against the 4^th and 5^th defendants in the sum of $36,030,376.64 with interest thereon.

2.  By this appeal, the 4^th and 5^th defendants seek to set aside the order of the Master and for unconditional leave to defend the plaintiff’s claim against them.

Background

3.  The 1^st and 2^nd defendants are both BVI companies effectively owned and controlled by Lam Sai Wing, deceased, (“the Deceased”) before his death on 26 September 2008.

4.  Before his death, the Deceased was also the Chairman of a public listed company, Hang Fung Gold Technology Limited (“Hang Fung Gold”).

5.  The 3^rd defendant is the estate of the Deceased.

6.  The 4^th defendant was at all material times the wife of the Deceased.

7.  The 5^th defendant was at all material times the Chief Executive Officer of Hang Fung Gold working under the Deceased who was the Chairman thereof.

8.  On 21 March 2005 and 5 September 2007, the 1^st and 2^nd defendants had opened Margin Securities Trading Accounts with the plaintiff whereby the plaintiff granted credit facilities to them to trade in securities listed on the Hong Kong Stock Exchange. The documentations for opening such Margin Securities Trading Accounts with the plaintiff were signed by the Deceased on behalf of both the 1^st and 2^nd defendants. The credit facilities thereby granted to the 1^st and2^nd defendants by the plaintiff was limited to $50 million.

9.  It was however a requirement that the securities put up by the 1^st and 2^nd defendants for the granting of such credit facilities from the plaintiff be maintained at a level of not less than 500% of the amount of the liabilities.

10.  The 1^st and 2^nd defendants deposited shares of Hang Fung Gold with the plaintiff as securities for such credit facilities granted to them by the plaintiff.

11.  Quite apart from the shares of Hang Fung Gold being deposited with the plaintiff as securities, on 22 March 2005, i.e. one day after the 1^st defendant had opened the Securities Trading Account with the plaintiff, both the 4^th and 5^th defendants each signed a Deed of Guarantee and Indemnity in consideration of the plaintiff granting and/or continuing to make available the advances, loans, credit facilities or financial accommodation to the 1^st defendant.

12.  It was expressly stated in both the Deeds given by the 4^th and5^th defendants that each of them, as primary obligor and not merely as surety, irrevocably and unconditionally guaranteed the due and punctual discharge by the 1^st defendant to the plaintiff of all of the 1^st defendant’s obligations which might at any time thereafter become due or owing to the plaintiff.

13.  In September 2008, the price of Hang Fung Gold shares dropped from $1.96 to $1.65 per share.

14.  On 18 September 2008, the plaintiff requested the 1^st and 2^nd defendants to meet the margin requirement in respect of their Securities Trading Account or to repay the outstanding sum owing to the plaintiff.

15.  On 26 September 2008, the Deceased died. The 1^st and 2^nd defendants did not come up with further securities, did not meet the margin call and did not reduce or repay the outstanding sum to the plaintiff.

16.  On 15 October 2008, the plaintiff exercised its power of sale and disposed of the Hang Fung Gold shares held by it as securities at the price of $0.10 per share. The net proceeds of the securities thus realized were used to set off part of the debt leaving an outstanding sum of $36,030,376.64.

17.  The plaintiff then looked to the guarantors for payment but the outstanding amount was not paid by any of the defendants.

18.  The Writ herein was issued on 14 October 2008.

19.  The Statement of Claim was served on 24 October 2008.

Defence raised by the 4^th and5^th defendants

20.  On 8 December 2008, both the 4^th and 5^th defendants filed their respective Defence.

21.  In their pleaded defence, both the 4^th and5^th defendants pleaded that they were induced to sign their respective Deed of Guarantee and Indemnity whilst acting under the influence of the plaintiff’s solicitors.

22.  Shortly before the hearing before the Master, the 4^th and 5^th defendants sought to introduce the defence of “undue influence” of the Deceased in the 4^th Affirmation of the 4^th defendant and the 2^nd Affirmation of the 5^th defendant respectively. Both those affirmations were allowed by the Master in the hearing before him.

23.  The defence of being induced to sign the Deeds whilst acting under the influence of the plaintiff’s solicitors was premised on the basis that both Deeds of Guarantee and Indemnity were signed by the 4^th and5^th defendants at the office of the plaintiff’s solicitors. That was the evidence of both the 4^th and 5^th defendants.

24.  The plaintiff’s solicitor, Ms Ho Kit Hung Josephine, being the solicitor in charge at the time has categorically refuted that the two Deeds were signed at the office of the plaintiff’s solicitors. This was supported by the evidence of Francis Leung, the credit manager of the plaintiff, that the two Deeds were handed over to the 5^th defendant on 21 March 2005, after the Deceased had signed the documents opening the security trading account. Those two Deeds were later returned to the plaintiff duly signed by the 4^th and 5^th defendants.

25.  When the two Deeds are looked at, not only is there nothing on the face of them which would indicate that they were signed or executed in a solicitor’s office, but the fact that on both the Deeds, the 4^th and 5^th defendants witnessed each other’s signatures is a strong indication to show that they were not executed in a solicitor’s office.

26.  The Master took the view that in the light of all the evidence, in particular the contemporaneous documents in the form of the two Deeds, the story given by the 4^th and 5^th defendants that the two Deeds were signed in the office of the plaintiff’s solicitor was unbelievable.

27.  Indeed at the hearing of this appeal, counsel for the 4^th and 5^th defendants did not seek to make any submission on this defence of being induced by the plaintiff’s solicitors to sign the Deeds.

28.  For all intents and purposes then, I can safely assume that this defence is no longer relied upon, at least for the purpose of seeking leave to defend the plaintiff’s claim.

29.  The submission made at the hearing by counsel for the 4^th and 5^th defendants relate only to the defence of undue influence of the Deceased.

30.  In so far as the defence of undue influence goes, it merit different consideration in so far as it relates to the 4^th and the5^th defendants due to the fact that both of them stand in very different relationship to the Deceased as well as to the 1^st defendant.

31.  The only common feature to both the 4^th and 5^th defendants in relation to the defence of undue influence is the fact that that defence was raised very late in the day in their 4^th Affirmation and 2^nd Affirmation respectively.

32.  In that respect, since the Master has seen fit to accept their late affirmations (in which that defence were raised) prior to the hearing before the Master, I am of the view that I am bound to consider that defence so raised by them.

33.  The fact that it was raised late in the day is only one factor which may show that it may not be a bona fide defence. That it was not pleaded in the pleadings is, in my view, not fatal to the present application since, if the matter goes to trial, there is still time to amend the pleadings to properly plead that defence of undue influence.

34.  I shall therefore deal with the defence of undue influence as it relates to the 4^th and the 5^th defendants separately in this judgment.

Undue influence relating to the 4^th defendant

35.  The basis upon which the defence of undue influence of the Deceased over the 4^th defendant is as follows :

(a) the Deceased was the sole shareholder of the 1^st defendant and the only person who was authorized to operate the margin account for his own benefit;

(b) the 4^th defendant was the wife of the Deceased but had no interest in the 1^st defendant, nor did she have any authority or right to operate the margin accounts;

(c) the 4^th defendant signed the Deed of Guarantee and Indemnity because she knew that the Deceased had signed similar document;

(d) the contents of that Deed was not explained to the 4^th defendant nor the risk of signing it. She was not told of her right to seek independent legal advice; and

(e) the 4^th defendant received little formal education, only up to Form 2 level in China with very limited ability to communicate or understand English. She was a submissive wife and throughout her marriage, the Deceased made all the decisions relating to the Hang Fung Group.

Undue influence relating to the 5^th defendant

36.   (a) The 5^th defendant was neither a director nor shareholder of the 1^st defendant and had no connection or interest in the 1^st defendant;

(b) the 5^th defendant was an employee of Hang Fung Group and worked under and upon the instructions of the Deceased;

(c) although the 5^th defendant was given the title as a director of the Hang Fung Group, all decisions of the Hang Fung Group were made by the Deceased;

(d) the 5^th defendant signed the Deed of Guarantee and Indemnity because the Deceased had asked her to sign it, as he had done with other similar documents; and

(e) the contents of the Deed of Guarantee and Indemnity was never explained to her.

Decision

37.  The law as to undue influence as a defence was extensively considered by Lord Browne-Wilkinson in Barclays Bank Plc. v O’Brien [1994] 1 AC 180.

38.  In his judgment in that case, Lord Browne-Wilkinson adopted the classification used by the Court of Appeal in Bank of Credit and Commerce International S.A. v Aboody [1990] 1 QB 923.

39.  By that classification Class 1 refers to where it is necessary for a claimant to prove actual undue influence.

40.  Class 2, where undue influence is presumed, is sub-divided into Class 2(A) where as a matter of law, undue influence is presumed, and Class 2(B) is where there is no relationship falling within Class 2(A) but the complainant proves the de facto existence of a relationship under which the complainant generally reposed trust and confidence in the wrongdoer, the existence of that relationship raises the presumption of undue influence.

41.  A relationship of husband and wife as well as that of an employer and employee would fall within Class 2(B) of that classification.

42.  It follows therefore that in the present case, the case of the 4^th defendant (being the wife of the Deceased) and the 5^th defendant (being an employee of the Deceased) would come within the Class 2(B) classification.

43.  In the case of Barclays Bank Plc v O’Brien, Lord Browne-Wilkinson said at page 189 :

“In a Class 2(B) case therefore, in the absence of evidence disproving undue influence, the complainant will succeed in setting aside the impugned transaction merely by proof that the complainant reposed trust and confidence in the wrongdoer without having to prove that the wrongdoer exerted actual undue influence or otherwise abused such trust and confidence in relation to the particular transaction impugned.”

44.  Applying the words cited above, seemingly it would be sufficient for the 4^th and5^th defendants in this case to raise the presumption of undue influence of the Deceased, by showing that they reposed trust and confidence in the Deceased which led to their signing the Deeds. That necessarily arise from the relationship of being the wife (in the case of the 4^th defendant) and being the employee (in the case of the 5^th defendant) of the Deceased.

45.  Lord Browne-Wilkinson then went on to consider how undue influence of the wrongdoer would impact on third parties such as the creditor bank and says at page 191 of his judgment :

“But in surety cases the decisive question is whether the claimant wife can set aside the transaction, not against the wrongdoing husband, but against the creditor bank. Of course, if the wrongdoing husband is acting as agent for the creditor bank in obtaining the surety from the wife, the creditor will be fixed with the wrongdoing of its own agent and the surety contract can be set aside as against the creditor. Apart from this, if the creditor bank has notice, actual or constructive, of the undue influence exercised by the husband (and consequentially the wife’s equity to set aside the transaction) the creditor will take subject to that equity and the wife can set aside the transaction against the creditor (albeit a purchaser for value) as well as against the husband.”

46.  In the present case, nothing suggests that the Deceased acted as the agent of the plaintiff.

47.  Applying those words cited above to the present case, whether or not the plaintiff bank has actual or constructive notice of undue influence presumed upon the 4^th and/or5^th defendants by the Deceased will be a question of fact. That can only be resolved after hearing the evidence including cross-examination.

48.  When the Master decided this matter, he reached the conclusion that he did for the reason given in paragraphs 39 and 40 of his written judgment in which it was stated :

“39. I ask myself the question: ‘Is there any evidence that justifies the conclusion that the two Deeds of Guarantee and Indemnity executed by the two Defendants were procured by undue influence of the Deceased?’

40. I find none whatsoever. I dismiss their defence of undue influence.”

49.  It is not easy to comprehend fully what the Master meant by that.

50.  If the Master was saying that the evidence as it stands at present cannot raise the presumption of undue influence by the Deceased, he must be wrong.

51.  If he was not saying that the presumption of undue influence cannot arise from the evidence, then it is for the plaintiff to rebut that presumption and it must be wrong of the Master to make a finding of fact on affidavit that the presumption had been rebutted, if that was what he meant.

52.  Clearly there is here a triable issue of fact which can only be determined after trial.

53.  Whether or not each of the 4^th and 5^th defendants will ultimately succeed on the defence of undue influence of the Deceased enabling them or either of them to set aside the Deed is quite another matter, but that there should not be a mini trial on affidavit at this stage.

54.  For these reasons the appeal is allowed and the order of Master C. Chan set aside.

55.  In place thereof, there will be unconditional leave to the 4^th and5^th defendants to defend the claim subject to the 4^th and 5^th defendants making an application to amend their respective Defence within 21 days to include the defence of undue influence in their pleadings.

Costs

56.  The costs order made by the Master below is also set aside.

57.  There will be a costs order nisi that the costs of this appeal and the costs of the application and the hearing before the Master be paid by the plaintiff to the 4^th and 5^th defendants in any event.

58.  There will be certificate for only one counsel both for this appeal and the hearing below.