BANK OF CHINA (HONG KONG) LTD v. SENLAVEER (PACIFIC) CO LTD AND OTHERS

HCMP 4038/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 4038 OF 1998

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J U D G M E N T

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1. In these proceedings the Bank of China (Hong Kong) Limited (the bank) seeks to recover from the 4th defendant (Miss Cheung) sums due and owing under two mortgages. The amount now claimed exceeds $30 million. I am not concerned with issues of liability against the 1st, 2nd, 3rd or 5th defendants. Those issues have already been resolved.

Background

2. The 1st defendant (Senlaveer) is a trading company operated by the 2nd defendant (Mr Cheung) and the 3rd defendant (Mr Shen). Ms Cheung is a friend of Mr Cheung but is not at all involved in the business of Senlaveer.

3. For many years Senlaveer has been a customer of the bank under its former name of Kincheng Banking Corporation. In 1993 Senlaveer opened an account at the bank's Java Road Branch and obtained banking facilities comprising a letter of credit facility of $10 million and a trust receipt facility of $8 million. The facilities were secured by mortgages of two properties.

4. In January 1994 the facilities were extended to comprise $55 million for the letters of credit and $40.4 million for the trust receipts. Two further properties were offered to the bank for security, one at Pak Shek Wo and another at Chi Fi Fa Yuen. The Chi Fu Fa Yuen property (Chi Fu) is owned by Ms Cheung. On 28 January 1994 she executed a mortgage of the Chi Fu property which shows her as the mortgagor, Senlaveer as the "requesting party" and the bank as the lender.

5. In April 1994 Senlaveer applied to increase its facilities and two further properties were offered as security. A letter of credit facility was increased to $67 million and the trust receipt facility to $48.4 million. Ms Cheung mortgaged her property at City Garden as part of the security for the increased facilities. The mortgage describes her as the mortgagor, Senlaveer as the borrower and the bank as the lender.

6. In about 1997 or 1998 Senlaveer fell into arrears in respect of its obligations to the bank and in August 1998 the bank began these recovery proceedings.

The relationship between Mr Cheung and Ms Cheung

7. Ms Cheung was born in China in 1937 and came to Hong Kong with her husband in 1984. Each month he paid her a sum from his earnings for housekeeping. She was prudent with this money and saved what she did not use. In 1985 Ms Cheung's sister came from the mainland to live with her and her husband.

8. The City Garden property was purchased for the sister to live in but as that was not ready for occupation the Chi Fu flat was purchased. It seems that title to both these properties was taken in Ms Cheung's name.

9. Sadly, in 1987 Ms Cheung discovered that her husband was having an adulterous relationship with her sister and the marriage came to an end. She became extremely depressed. The City Garden and Chi Fu flats were rented and the rent initially applied to reduce the mortgages. By 1991 they were debt free and Ms Cheung lived off the rents.

The first mortgage

10. The case pleaded by Ms Cheung, and supported by an affidavit from her, was that in late 1993 she met Mr Cheung through her clan association, the Zhangzhou Fraternity Association. He was a successful businessman, respected in the association, not only for his success but also as a sincere, generous and kind person. She said that he recognised the emotional difficulty she was in and was of great support to her both on a personal and a financial level.

11. She said that in January 1994 Mr Cheung asked Ms Cheung if she would help him in developing his business by offering her property as security for Senlaveer's banking facility. Her pleaded case was that on his assurance that the assistance would not affect her interest in the properties, and when he offered her a financial reward for the assistance, she agreed. She said that he did not, at that time, give her any detail as to the nature of the reward. An important factor in her agreement to the proposal was the high regard in which she held Mr Cheung. In her affidavit she said that she placed great trust and confidence in him.

12. Shortly thereafter she attended at Mr Cheung's request, at a solicitor's office, with the title deeds to the Chi Fu property and signed the first mortgage. She said that the whole process took just a few minutes and that she was given no explanation as to the documents. About two weeks later she said that she received from Mr Cheung a document in Chinese entitled "guarantee". In that document Senlaveer guaranteed the advances that would be made, and agreed to pay to Ms Cheung, for the use of the property, the sum of $30,000 a month. Ms Cheung said that she had not expected such a reward and was pleasantly surprised at the sum. Payments duly began and continued.

The second mortgage

13. In her affidavit she said that in April 1994 Mr Cheung told her that things were going very well with his business and that he needed additional facilities. He asked her to provide the City Garden flat as further security. Again she agreed, no doubt encouraged by the regular payments of $30,000 a month that were being made. Again she said that she relied upon Mr Cheung's assurance that it was all right for her to sign the documents. Again she was taken to a firm of solicitors where the documents were signed and the title deeds handed over. She says that she was given no explanation of the documents but simply asked to sign them which she did.

14. Again, about two weeks after signing the documents she received another "guarantee" in Chinese from Mr Cheung, this time providing for a monthly payment of $100,000, this document again being signed by Senlaveer.

15. The payments were properly made to her pursuant to the two guarantees for about a year. The payments then became irregular and she has not kept proper track of them. She said that the payments stopped in late 1997. It was her evidence that she had received about $3 million by way of the guarantee payments.

16. It was Ms Cheung's case that both guarantees were received by her after the mortgage was signed. That is plainly the case in respect of the second mortgage for the guarantee, witnessed by a solicitor, is dated 27 May 1994, and the mortgage was signed on 21 April 1994.

17. The first mortgage was signed on 24 January 1994 and the first guarantee is dated 14 January 1994. It makes a promise to pay the reward of $30,000 a month "after the bank has approved the LC and TR amount", a statement that plainly anticipates the bank's agreement, and one which would not be made had the bank already agreed to the arrangement. This was the first transaction that Ms Cheung had been involved in with Mr Cheung and I am satisfied that she wanted assurance that her actions would be safe. She had every reason to wish to see the terms of the guarantee before the signing of the mortgage.

18. I find on the balance of probabilities that Ms Cheung received the first guarantee before she signed the first mortgage.

Mr Cheung falls into default with the bank

19. There is no evidence as to precisely when Senlaveer and Mr Cheung defaulted with the bank. But in June 1998 formal demand was made by the bank. The total amount of the facility had not been exceeded but the repayment terms were not being met. The evidence is that at 14 August 1998 the total indebtedness, including outstanding interest, was in excess of $34 million.

20. Interest was accruing on the trust receipt account at the rate of 14.25 per cent or $12,682 a day, and on an overdraft at the rate of 17.75 per cent or $157 a day by January 1999. The bank has realised some of the properties that had been pledged as security. As at 8 January 2001 the total debt stood at $33,737,841, with interest accumulating at the rate of $8,147 a day. Included in that sum are costs, commissions, fees and rates in excess of $300,000. All these sums the bank now seeks to recover from Ms Cheung.

Ms Cheung's defences

21. Although not represented at the trial Ms Cheung has had the assistance of solicitors in the interlocutory stages, and the defences were set out in the pleadings.

22. First she said that when she was taken to the solicitor's officers to sign the documents she was under the undue influence of Mr Cheung and that she was not told that she was entitled to seek independent legal advice. In this respect she relies upon Barclay's Bank plc v O'Brien [1993] 4 All ER 417, as explained by Royal Bank of Scotland v Etridge (No. 2) [2001] 4 All ER 49. It is her case that the relationship between herself and Mr Cheung was such that the bank ought to have been put on inquiry.

23. Second, she says that the documents that she signed were not explained to her and she did not read them. She says that it was not until these proceedings began and she took advice that she realised that she had signed a mortgage or a legal charge over her properties. The plea in essence is one of non est factum.

The undue influence defence

24. The evidence given by Ms Cheung to support her case was quite contrary to her affidavit. It now transpired that she had not known Mr Cheung at all prior the signing of the first mortgage and that the whole arrangement had been made at the behest of a mutual friend, Huang Je-li. She explained the difference by saying that in her pleaded case and in her affidavit she sought to protect Mr Huang from his involvement.

25. What was abundantly clear from her evidence was that she was not subject to the slightest influence from Mr Cheung at all. It was plain that she had entered into the arrangement purely because she saw a financial advantage for herself. I am satisfied that in respect of the first mortgage Ms Cheung knew that she was to get a reward of $30,000 a month for the provision of the flat as a security for Mr Cheung and that was a significant fact in her decision. Whether she knew of the precise terms of the reward before signing the second mortgage is not established, but she knew at least, based on the existing arrangement, that she would, in all probability, get a reward.

26. By May 1994 she was receiving rents from the two properties totally some $30,000 a month and the rewards, a total income of $160,000 a month. She accepts that in all she received some $3 million from Mr Cheung before he began to default on payments.

27. It is thus simply not necessary for me to examine the principles in Barclay's Bank plc v O'Brien or Royal Bank of Scotland v Etridge (No. 2) because whether or not the situation was one where the bank was put on inquiry, it was clear that first this was a commercial transaction by Ms Cheung, for a substantial reward and, second, that she has been subjected to no undue influence whatsoever. The first pleaded defence must fail.

The non est factum defence

28. Ms Cheung's pleaded case was that she did not know that she had signed a mortgage until these proceedings were commenced. Her evidence however was that she knew the Chi Fu property was mortgaged when she was contacted by Choi Shui-qun, an officer of Kincheng Bank, shortly after the document was signed when he arranged to call to see her to try to persuade her to open an account at Kincheng Bank. That was between January and April 1994. Notwithstanding that knowledge, she agreed to enter into the second mortgage.

29. The evidence from the bank's solicitors was that the documents were fully explained to Ms Cheung. A conveyancing clerk who explained the first mortgage to her was called. She said that it took her some 40 minutes to an hour to explain the documents. She proceeded then to tell me what she had said in explanation. She needed no prompting from counsel and it is not without significance that her explanation of the terms of the document took some 40 minutes in evidence. Her explanation was impeccable. She omitted nothing that ought to be drawn to the mortgagor's attention. She said that she asked Ms Cheung if she wished to seek independent advice on the matter but was told that that was not necessary.

30. After the explanation was given a solicitor was called into the room to witness the formal signing of the documents. Ms Cheung suggested to her that no explanation was given, which was denied.

31. The evidence of the explanation of the second mortgage came first by way of a statutory declaration from the conveyancing clerk, who has now emigrated. Again the solicitor who witnessed the formal signing of the document was called. It was her evidence that she specifically asked Ms Cheung if she understood the documents and if she wished to seek independent advice. She said that Ms Cheung did not require any further explanation and did not wish to seek independent advice. The evidence was not challenged by Ms Cheung, except insofar as she denied that any explanation was given to her, or that her signature was in fact witnessed by the solicitor.

32. The case was simply that she did not know what it was that she had signed. That is a plea of non est factum. The defence is not available to anyone who has signed a document without taking the trouble to find out at least the general effect of the document, neither can it be available to a person whose mistake was really a mistake as to the legal effect of the document (see Gallie v Lee [1971] AC 1004). In simple terms, a person who elects to sign a document without reading it or having it explained cannot thereafter be heard to complain about the terms of the document and will be taken to have agreed to its terms.

33. Ms Cheung relied especially on a witness statement, admitted by consent, from Ms Wong Yik-fun who said that some time in 1997 or 1998 she was asked by Choi Shui-qun to get from Ms Cheung the tenancy agreement of the City Garden property from Ms Cheung. She contacted Ms Cheung who gave her the agreement, which was faxed to the bank. I have no doubt that this was true.

34. The terms of the tenancy agreement are set out in the mortgage signed on 28 January 1994. Ms Cheung could offer no explanation as to how the solicitors could have included those details unless they had either seen the tenancy agreement then, or been given the details by her. I accept the evidence of the solicitor's clerk that the title documents, including the tenancy agreement, were supplied to them by Ms Cheung in April 1994 to enable them to prepare the mortgage. The subsequent action of Ms Wong does not assist me in determining the matter.

35. Ms Cheung made no suggestion that she was prevented from seeking independent advice. She does not say that she asked to have an explanation of the documents from the solicitors before she signed them and they refused. On her own case, it was open to her at all times to ask to have an explanation of the documents. Certainly, having understood, following Choi Shui-qun's visit to her after the first mortgage was signed, that it was a mortgage that she had signed, she must have known, when signing the second mortgage, that it was a mortgage she was signing. Yet, on her evidence, she chose not to ask for any explanation as to the contents of the document.

36. In any event, I am satisfied from the evidence of the solicitors and the conveyancing clerks that all proper explanations were made to her of the documents. There is no reason for me to disbelieve the evidence of the solicitors and the conveyancing clerks.

37. The second pleaded defence must fail.

38. Both pleaded defences have failed. There was nothing else in the evidence of Ms Cheung, or any of her witnesses, that raised any matter that could be relied upon to provide Ms Cheung with any defence to the bank's claims.

39. There will be judgment for the bank in terms of the prayers for relief 1 and 2 in the statement of claim. Leave is reserved to apply in respect of the quantum of the judgment, in case any issue should arise as to how interest is to be calculated having regard to the recovery made by the realisation of other security.

Costs

40. I am satisfied that there are provisions in the documents which make provision for contractual costs on an 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 for costs to be taxed if not agreed on an indemnity basis. Disbursements to follow in the usual way.