HUA RONG FINANCE LTD. v. MEGA CAPITAL ENTERPRISES LTD. & ANOTHER

CACV 1086/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 1086 OF 2000

(ON APPEAL FROM HCMP NO. 1110 OF 1998)

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J U D G M E N T

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Hon Rogers VP:

1. This is an appeal from a judgment of Deputy High Court Judge Whaley given on 25 October 2000.

Background

2. The facts relating to this case have not been a matter of dispute in this court. The findings of fact by the judge below can therefore be adopted.

3. The 1st defendant is an investment vehicle owned by three persons, namely, the 2nd defendant, Madam Cecilia Yeung Lai Yin and Madam Lau Sau Kwan. The first directors of the 1st defendant were the 2nd defendant and Madam Yeung. The address for the 1st defendant was the same as the 2nd defendant's address. Furthermore, the 2nd defendant was entrusted with the seal of the 1st defendant.

4. In February 1997, Madam Yeung and the 2nd defendant came to know of an investment property, namely, Flat A, 11/F, Lising Court, Kowloon from Madam Lau Sau Kwan. It was arranged that the 1st defendant would purchase the property as an investment. Madam Lau also agreed to take an equal share in the 1st defendant along with the existing two directors. She thus came to be appointed a director. Each of the three directors was to contribute equally towards the investment. The initial purchase price of the flat was $1,700,000.

5. Madam Yeung and Madam Lau both gave evidence at the trial. They had had their shares of the purchase money for the flat available at the time of completion which was 8 April 1997. However, they were surprised to learn that the 2nd defendant had borrowed $1.5 million from a Mr Mak Hung, to be secured on the property. They went along with this arrangement. Shortly thereafter it was agreed between the 3 ladies that it did not make commercial sense to borrow money at high interest rates when the three directors had funds available. The loan from Mak Hung was therefore paid off in early May 1997 through equal contributions of $500,000 from each of the three directors.

6. Unbeknown to the other two directors of the 1st defendant, shortly thereafter on 7 May 1997, the 2nd defendant, purporting to act on behalf of the 1st defendant, applied to the plaintiff for a loan of $1.5 million on the security of the flat. The plaintiff instructed its own solicitors, Messrs Wong and Chan to act on its behalf. It seems that, thereafter, the 2nd defendant dealt with Mr Wong of that firm.

7. Mr Wong gave the 2nd defendant a draft of a resolution of the 1st defendant authorising the application for a loan from the plaintiff and authorising the use of the 1st defendant's company seal and the signing of the mortgage by the 2nd defendant. The 2nd defendant later produced that document with her name filled in as having chaired the meeting and signed by herself as chairman. When she produced the document it was undated. Mr Wong told the 2nd defendant that signatures of the other two directors were required. Subsequently, a further copy of that document, which as it happened was on fax paper, was later produced by the 2nd defendant. On this occasion it was dated 8 May 1997. It might be mentioned at this stage that there had been no such meeting and no such approval. The signatures on that document were not the signatures of the two other directors. Although the document was available for the judge, its whereabouts at present are unknown, although it is thought to be in the possession of the police.

8. The 2nd defendant was able to produce to Mr Wong two other items. The first was a photocopy of Madam Yeung's identity card. How she came by that photocopy apparently remains a mystery. In the second place, the 2nd defendant was also able to procure the title deeds for the flat to be sent to Messrs Wong and Chan. They came from a firm of solicitors, Messrs Phillip T F Wong and Co. which had apparently acted for Mr Mak Hung.

9. The plaintiff had required that there should be two guarantees in respect of the mortgage loan. The 2nd defendant requested Mr Wong to accept only her personal guarantee on the pretext that Madam Yeung was not in Hong Kong. A letter was then faxed to Mr Wong. It was purportedly signed by Madam Yeung confirming that she would sign a guarantee upon her return to Hong Kong. This, again, was a forgery. The subterfuge was successful. By this means the plaintiff was persuaded to proceed with the mortgage loan.

10. The mortgage deed was executed by the 2nd defendant purportedly on behalf of the 1st defendant at the solicitors' office on 15 May 1997. On that day a cheque from the plaintiff made payable to the 1st defendant for $1.5 million was handed to the 2nd defendant.

11. At about noon on the following day, the 2nd defendant and Madam Yeung went to the Kincheng Banking Corporation. They gave instructions that accounts should be opened which could be operated on the signature of one director. The specimen signature was that of the 2nd defendant. This was, perhaps, surprising. There is a board resolution signed by the 2nd defendant and Madam Yeung that the bank account should be operated by the signatures of two directors. At about 4 p.m., the instructions to the bank were amended and the new instructions were that the accounts were to be operated on the joint signatures of both the 2nd defendant and Madam Yeung.

12. The evidence as to the opening of the account was not entirely satisfactory because Madam Yeung could only recollect one visit to the bank. Nevertheless, the judge was satisfied, primarily on the evidence emanating from the bank, that there had been the comparatively short period when the 1st defendant's accounts could be operated by the signature of the 2nd defendant alone. It was in that period that apparently the 2nd defendant was able both to deposit the cheque for $1.5 million and to withdraw that money from the account within eight minutes. The record does not explain how the proceeds of the cheque could be obtained quite so quickly. It is possible that the cheque had been marked good for payment. The fact that the plaintiff's account was with the same bank may also have assisted.

13. In July 1997, the 2nd defendant, again purporting to act on behalf of the 1st defendant, applied to the plaintiff for a second loan of $454,500. The advance was to be made by a letter of credit. It was to be secured on the flat which had already been mortgaged to the plaintiff. The plaintiff duly opened a letter of credit in favour of Steady Advance Investment Limited as requested by the 2nd defendant. Later in August, the 2nd defendant signed a loan agreement purportedly on behalf of the 1st defendant and other documentation associated with that second loan. Madam Yeung's signature as a surety was, again, forged.

14. Madam Yeung and Madam Lau only came to know of the existence of the mortgage in August 1997. A land search had been conducted which revealed the same. When the 2nd defendant was asked about the mortgage she was unable to give any satisfactory explanation. Very soon after she was asked for an explanation she disappeared.

The articles of the company

15. The plaintiff, through its solicitors, were fully aware of the articles of the 1st defendant. Two articles are specifically relevant as regards this case. The first is article 95. That relates to the borrowing powers of the company. Under that article it is provided that the directors may exercise all the powers of the company to borrow money for the purposes of the company. In relation to mortgages, of course, the company seal is required to be used. The provision in the articles in relation to the company seal is contained in article 131. That reads as follows:

"The Seal

131. The directors shall provide for the safe custody of the seal, which shall not be affixed to any instrument except by the authority of the directors or of a committee of the directors authorised by the directors in that behalf and in the presence of one director or of the secretary or such other person or persons as the directors or the committee of directors may appoint for that purpose; and such director, the secretary or other person or persons shall sign every instrument to which the seal is so affixed in his or their presence."

16. Three things of importance emerged from this. In the first place, the company requires the consent of the directors to borrow money. In the second place, the seal of the company can only be used on the authority of the directors or of a committee of directors who have been specifically authorised by the directors to give permission for the use; thirdly, that the seal must be used in the presence of a director who must sign the instrument on which it is used.

17. There is no doubt that the relevant documents produced by the 2nd defendant to the solicitors were forgeries. The first copy of the board resolution, that which the 2nd defendant had signed, was clearly on its face not a copy of a valid resolution. Apart from anything else there was no date or other indication as to when or where a resolution had been passed. More importantly, there never had been such a resolution. Any document signed by the 2nd defendant purporting to indicate that there had been such a board resolution was clearly only an instrument of fraud. The version of the resolution which was produced with the forged signatures of the two other directors was obviously also a forgery.

18. Turning to the requests which the 2nd defendant had purportedly made on behalf of the 1st defendant for loans, these were also false. The 2nd defendant had no power to borrow or request a loan on behalf of the 1st defendant without the authority of the other directors. The mortgage deed was a forgery in the terms explained by Lord Davey in Ruben v Great Fingall Consolidated [1906] AC 439 at 445. It was a document which bore a genuine impression of the company's seal, but that had been placed there without any authority and with intent to defraud.

19. Mr Merry, on behalf of the plaintiff, argued that the mortgage deed should only be regarded as a falsified document in an unauthorised transaction. Even if that be so, the plaintiff had been aware of the restrictions on borrowing and use of the company seal which were contained in the articles. The plaintiff had not relied upon the mortgage deed as being complete in itself. It had not relied upon any supposed authority of the 2nd defendant to execute the deed and borrow money on behalf of the company. Instead, it had insisted on a board resolution signed by the other directors. In those circumstances, in the court below it disavowed any ability to rely on the rule in Turquand's case. In the light of the difficulties, the plaintiff put its case on the basis of apparent or ostensible authority.

The arguments on the appeal

20. On the appeal the plaintiff did not resile from the position it took in the court below that it could not rely upon the "internal management rule". Instead, it relied on a combination of factors which it is said combined to show that the 2nd defendant had apparent authority to arrange the borrowing on behalf of the 1st defendant and to execute the necessary documents on its behalf.

Apparent authority

21. It is said that in the first place the 2nd defendant was a director of the 1st defendant. In this context, the fact that she was a one third shareholder of the 1st defendant is also relied upon as showing that she had a substantial interest and, hence, probably, control as a result. The second factor is that the articles permitted the directors to borrow and to delegate one director to sign on the seal of the company. The third factor is that she had possession of the seal and chop of the company. Given the provisions of article 131 requiring that it be kept in safe custody, this was an indication that the other directors trusted the 2nd defendant. The next fact relied upon was that the 2nd defendant was able to procure the deeds to the flat. Finally, it is said that the 1st defendant had used the 2nd defendant's address.

22. In argument other matters were relied upon by Mr Merry, on behalf of the plaintiff, as being factors which showed that the 2nd defendant had ostensible authority to request the loan on behalf of the 1st defendant and to execute the mortgage. These included the fact that the 2nd defendant had produced purported minutes and that the $1.5 million had been paid into the company's account. These factors are, in my view, in any event, irrelevant for the purposes of considering ostensible authority: they are not matters which were known to or acceded to by the 1st defendant or any of the other directors.

23. In my view, none of these factors whether taken alone or in combination amount to a representation by the 1st defendant that the 2nd defendant had authority to enter into the mortgage on behalf of the 1st defendant or to obtain the loans which are now sought to be enforced. This would be a vital part if any argument of ostensible authority were to succeed. Indeed, in respect of this aspect our attention was drawn to the judgment of Diplock LJ, as he then was, in the case of Freeman and Lockyer v Buckhurst Park Properties (Mangal) Limited [1964] 2 QB 480 at 506. The passage sets out the requirements for such a case to succeed.

24. Moreover, the judge held at page 14 of the judgment that:

"It was in reliance upon the Board Minutes produced by the 2nd defendant that the plaintiff allowed her to execute the Mortgage Deed and affix the 1st defendant's seal."

This, it seems to me, is a further answer to the argument that the plaintiff could rely upon the ostensible authority of the 2nd defendant. It is also an answer to the further argument, which was put less strenuously, that the 1st defendant was estopped by its conduct. Quite simply, the plaintiff relied upon the alleged Board Minutes. In particular, Mr Wong insisted upon the signatures of the other directors being put on the copy of the alleged Board Resolution.

25. Criticism was made of the comments made by the judge that the signatures of Madam Yeung and Madam Lau on the minutes were so obviously suspicious in themselves that they should have put the solicitors on enquiry. This court has not been in a position to examine the document which the judge below had and can therefore not come to any firm conclusion as to whether that comment was justified. But even if it were not justified and demanded too high a standard from the solicitor, it did not affect the validity of the judge's conclusion as to ostensible authority.

Estoppel

26. The plaintiff's case based on estoppel rests upon the same facts as the case on ostensible authority. In argument, Mr Merry described the case as one of being estoppel by imprudence. This was not a phrase to be gleaned from the Notice of Appeal and it can only be assumed that this form of estoppel is a species of estoppel by conduct.

27. Quite apart from the fact that I find it difficult to conceive how a case on estoppel could succeed if the case on ostensible authority fails, the plaintiff is faced with the fact that it did not rely upon the facts said to give rise to estoppel but, as mentioned above, relied upon the forged copy of the alleged board resolution. In those circumstances, I consider that the case for estoppel must fail.

Unjust enrichment

28. In respect of this aspect of the case it is important to bear in mind four facts:

(a) Although HK$1.5 million was paid into the 1st defendant's bank account, the 1st defendant had never requested or sought that money. The 2nd defendant had been acting entirely on her own and without authority.

(b) The HK$1.5 million was not used to pay any debts or liabilities of the 1st defendant. In this respect Mr Merry vaguely argued that the money had been used to pay the 2nd defendant. Nevertheless, there is nothing to suggest that there was any liability on the part of the 1st defendant to the 2nd defendant.

(c) The payment out of the HK$1.5 million was made without the knowledge of the 1st defendant.

(d) The 1st defendant has not retained any benefit from the HK$1.5 million.

29. As was pointed out by Lord Goff in Lipkin Gorman v Karpnale Limited [1991] 2 AC 548 at 578 the recovery of money in restitution is not a matter of discretion. A claim for recovery of money at Common Law is a matter of right based on the underlying principle of unjust enrichment. It is governed by legal principle. Clauson LJ in In re Cleadon Trust [1939] 1 Ch 286 at 324 put the matter in this way:

"As Lord Sumner pointed out in Sinclair v Brougham, at p 456, 'There is now no ground left for suggesting as a recognisable 'equity' the right to recover money in personam merely because it would be the right and fair thing that it should be refunded to the payer.'"

30. One of the early cases on unjust enrichment was the decision of the Court of Appeal in Falcke v Scottish Imperial Insurance Company (1887) 34 Ch. D. 234. The decision of Cotton, Bowen and Fry LJJ. in that case was referred to by Clauson LJ in his judgment In re Cleadon at p. 322 where he said that following the Falcke case it was not open to the court to hold that a person who by paying money, confers an unsought benefit on another thereby entitles himself to an equitable right of recoupment as against that other. Quoting Bowen LJ in the Falcke case he went on to say that:

"The general principle is beyond all question that work and labour done or money expended by one man to preserve or benefit the property of another do not, according to English law, create any lien upon the property saved or benefited, nor even, if standing alone, create any obligation to repay the expenditure. Liabilities are not to be forced upon people behind their backs, any more than you can confer a benefit upon a man against his will."

31. Clauson LJ then went on to consider the situation where a person who he identified as A has been requested by B to advance money to a third person C. He said that in such a situation, even if A were not an authorised agent of C or C was in some other way disentitled from borrowing the money, if C, or one of C's authorised agents, used the money to pay its debts then B would be entitled to recoupment. At the foot of the page 323 he went on to say:

"It is to be observed that the equity cannot operate against C (the company or the principal) merely because C has in fact received a benefit from B's action in providing the money. That fact alone, as Falcke's case has settled (so far as this court is concerned), will not set up an equity against C. The equity must, it would seem, arise from the fact that C, by himself or by a person authorised to act, in the matter of payment of C's debts, for C, has used the money so as to obtain a benefit for C. The benefit has not been an unsought benefit conferred on C behind his back. It is a benefit which C has obtained for himself by using (either himself or by his agent) A's money as his own. It is his conduct in so using A's money which makes it unconscientious that he should retain the benefit while refusing recognition of A's just claim to recoupment."

32. It should be noted that in the Cleadon case Scott and Clauson LJJ disagreed with Sir Wilfrid Greene M.R.. That disagreement was not on a matter of law but resulted from a difference of view as to whether there had been any use of the money in question by the company from which it was sought to make recovery.

33. The second passage from Clauson LJ's judgment which I have cited above was cited with approval by the Court of Appeal, Pill and May LJJ, in the case of Crantrave Limited (in liquidation) v Lloyds Bank Plc [2000] QB 917. Clauson LJ's statement as to the law was also referred to with approval by Kennedy, Swinton Thomas and Schiemann LJJ in the unreported decision of Barclays Bank Plc v Mohammed Arif, 29 February 1996.

34. In my view the judge below was correct in dismissing the plaintiff's claim in respect of unjust enrichment. As noted above the 1st defendant neither sought nor used the plaintiff's money in any way nor did it retain or seek to retain the benefit of that money. The money remained only in the 1st defendant's bank account for a very short period as part of the 2nd defendant's personal actions which amounted to fraud. The 1st defendant's bank account was used, to the ignorance of the 1st defendant, as a conduit in the 2nd defendant's scheme.

35. In my view this appeal should be dismissed. There should be an order nisi for costs in favour of the 1st defendant.

Hon Le Pichon JA:

36. I agree with the judgment of the Vice-President.

Hon Sakhrani J:

37. For the reasons given by the Vice-President I agree that the appeal should be dismissed. I would only add this. As the judge said, the solicitor who gave evidence testified that in his approximately 20 years of conveyancing practice he had accepted Board minutes and would never, unless there were suspicious circumstances, check on the authenticity of the signatures therein. The judge went on to say that :

"In my view, however, although no expert handwriting evidence was called, the signatures against Mesdames Yeung's and Lau's names on the Minutes of the Board meeting are so obviously suspicious in themselves that they should have put the plaintiff's solicitors upon their enquiry as to the genuineness thereof."

38. For my part I am unable to agree with the judge's finding. This was not warranted on the evidence. In my view the signatures of the two ladies were not so obviously suspicious in themselves as to put the plaintiff's solicitors on enquiry as to the genuineness thereof. The criticism of the plaintiff's solicitors was in my view unjustified. Be that as it may, this does not, however, assist the plaintiff. The signatures of Mesdames Yeung and Lau on the Board minutes were undoubtedly forged and the plaintiff cannot rely on the Board minutes as amounting to any representation by the 1st defendant. The validity of the judge's conclusion as to ostensible authority is not affected.

Hon Rogers VP:

39. There will accordingly be an order dismissing this appeal with a nisi order for costs in favour of the 1st defendant.