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

CACV 276/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 276 OF 2010

(ON APPEAL FROM HCMP NO. 438 of 2008)

____________

BETWEEN

____________

__________________________________

REASONS FOR JUDGMENT

__________________________________

Hon Lam J (giving the reasons for judgment of the Court):

1.  The Plaintiff as mortgagee sought in these proceedings to enforce several securities in respect of facilities granted to the 1^st Defendant. The securities included a Second Legal Charge in respect of a property at Flat F, 22^nd Floor, Ngan Tao Building, Whitfield Road, North Point [“the Property”]. The Property is held in the name of the 2^nd Defendant and it was given to her by her brother in 1977 when she first came to Hong Kong from the Mainland. The 2^nd Defendant is now 76 years old and the Property has over all these years been the residence of her and her family.

2.  The 2^nd Defendant is the mother of the two shareholders and directors of the 1^st Defendant.  She was requested by the two sons to provide assistance to their business by using the Property as security for banking facilities.  Before the Second Legal Charge, she had on two earlier occasions executed mortgages for the same purposes: once in 1994 in favour of Bank of Communications and once in 1997 in favour of the Plaintiff.  The Second Legal Charge was executed in 1999.

3.  Judgment was entered in favour of the Plaintiff by the Master on 18 January 2010 and her appeal against that decision was dismissed by Chung J on 23 November 2010.  She further appealed to this court.  After hearing submissions from her counsel, this court dismissed her appeal.  The following are the reasons for this court’s decision.

4.  The 2^nd Defendant resisted the claim of the Plaintiff by attempting to raise a case of undue influence.  Mr Yau accepted that the 2^nd Defendant cannot raise a case of non est factum.  However, counsel said her evidence had disclosed enough material for the court to infer a triable issue on undue influence.  Counsel also submitted that there was dispute of facts as to what had happened when the 2^nd Defendant attended before the solicitor for the Plaintiff for the execution of the Second Legal Charge.

5.  Counsel correctly accepted that even though the matter is litigated by way of Order 88 procedure, the court can give judgment summarily in favour of the Plaintiff if there is no triable issue on the evidence: see Bank of China (Hong Kong) Ltd v Keen Lloyd Resources Ltd, CACV 1787 of 2001, 26 Feb 2002.

6.  Counsel said in his skeleton submissions that, using the classification in Barclays Bank plc v O’Brien [1994] 1 AC 180, this is a Class 2B case.  However, in the light of the decision of the Court of Final Appeal in Li Sau Ying v Bank of China (2004) 7 HKCFAR 579, it is not helpful to examine cases other than Class 2A to refer to evidential presumption.  At para. 34, Lord Scott said,

“… in future cases, where undue influence has to be proved but where the relationship between the parties is not a relationship that falls within Slade LJ’s Class 2A category, the parties will concentrate on whether the evidence justifies the inference that, on a balance of probabilities, the impugned transaction was procured by undue influence, that is to say, by an abuse by the allegedly dominant party of the trust and confidence reposed in him by the allegedly subservient party. References in such cases to, and attempts to invoke the assistance of, an alleged evidential presumption of undue influence are, in my opinion, likely to be …. a source of confusion and an impediment to the evaluation of the available evidence.”

7.  At the hearing, after counsel’s attention was drawn to this authority, Mr Yau accepted that the crucial issue is whether the evidence shows that the 2^nd Defendant has an arguable case that the execution of the Second Legal Charge had been brought about by the abuse of trust and confidence reposed by her upon her sons.

8.  Although there were disputes as to what happened at the solicitor’s office, such disputes are only relevant to the manner of inquiry conducted by those representing the Plaintiff and have nothing to do with the abuse of trust and confidence by the sons.  As pointed out by the Vice‑president in the course of hearing, failure on the part of the Plaintiff to conduct due inquiry only fixed it with constructive notice.  However, there has to be some equitable wrong done to her before the 2^nd Defendant can rely on the constructive notice of the Plaintiff to extricate herself from the binding effect of the Second Legal Charge.  Thus, the primary question is whether the 2^nd Defendant has advanced enough evidence to support a triable issue as to abuse of trust and confidence by her sons.

9.  The evidence of the 2^nd Defendant was prepared before she got legal representation.  The relevant paragraphs are at paras. 7 to 12 of her affirmation.  She stated how in the 1990s the two sons asked her for assistance in terms of mortgaging the Property to support banking facilities to their business.  She said the sons told her when the business made money, the Property could be redeemed.

10.  Pausing here, she did not assert that the sons had misled her in making such representation.

11.  Then she referred to the execution of the first mortgage.  She said she just did what her sons told her to do.  She believed it was the reasonable thing to do as her sons would not do her harm.

12.  There is no evidence that her sons had meant her harm or that they did not believe that the banking facilities could be duly serviced.

13.  As regards the execution of the Second Legal Charge, she said the sons told her it was necessary to have further signature in respect of the charge documentation.  She went to the solicitor firm with her sons.  She did not have a clear understanding of the terms of the documents she signed.  After seeing that her sons had signed, she thought if she refused to sign her sons would regard her as troublesome.  She therefore had to sign.

14.  She further said in subsequent paragraphs in her affirmation that she did not know how much had been lent by the Plaintiff to the business until the Plaintiff sent her the Originating Summons.  It was only then that she knew the amount borrowed by them was more than the value of the Property.

15.  It is not suggested that she had asked about the extent of her liabilities and her sons had lied about the same.

16.  Mr Yau submitted that a defendant did not have to show misrepresentation before he or she could make out a case of undue influence.  That is correct.  However, there must still be some underlying impropriety to warrant a finding that the trust and confidence had been abused. As Recorder Ma SC (as he then was) said in Bank of China v Wong King Sing [2002] 1 HKLRD 358 at para. 34,

“…it has 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 victimization of the complainant. It is there to protect people from being forced, tricked or misled in any way by others into entering into a disadvantageous transaction …”

17.  As explained, we do not find any evidence of improper conducts on the part of the sons in procuring the execution of the Second Legal Charge by the 2^nd Defendant.

18.  Mr Yau invited this court to infer abuse of trust and confidence by the sons based on their relationship with the 2^nd Defendant and the disadvantageous nature of the transaction (the 2^nd Defendant risked the loss of her residence by putting it forward for mortgage).  Counsel referred us to the judgment of Lord Nicholls in Royal Bank of Scotland v Etridge (No. 2) [2002] 2 AC 773 paras. 13, 14, 21, 22 and 24 and Credit Lyonnais Bank Nederland NV v Burch [1997] 1 All ER 144.

19.  In Etridge (No. 2) Lord Nicholls said the following at para. 13,

“Whether a transaction was brought about by the exercise of undue influence is a question of fact. … The evidence required to discharge the burden of proof depends on the nature of the alleged undue influence, the personality of the parties, their relationship, the extent to which the transaction cannot readily be accounted for by the ordinary motives of ordinary persons in that relationship, and all the circumstances of the case.”

20.  After distinguishing between the situations where the law presumes irrebuttably one party had influence over the other(what is known as Class 2A cases) and where there is an evidential presumption of undue influence (what is known as Class 2B cases), His Lordship explained the pre-requisites to the latter situation at para. 21,

“… there are two prerequisites to the evidential shift in the burden of proof from the complainant to the other party. First, that the complainant reposed trust and confidence in the other party, or the other party acquired ascendancy over the complainant. Second, that the transaction is not readily explicable by the relationship of the parties.”

21.  At para. 24, Lord Nicholls explained that the second pre‑requisite is a necessary limitation upon the width of the first.  Without it, many unexceptionable transactions would be caught.  Further down, at paras. 28 to 29, His Lordship set out the correct approach in the assessment as to whether a transaction is not readily explicable.  The example of a husband and wife relationship is given at paras. 27 and 28,

“In a narrow sense, such a transaction plainly (“manifestly”) is disadvantageous to the wife.  She undertakes a serious financial obligation, and in return she personally receives nothing.  But that would be to take an unrealistically blinkered view of such a transaction.”

22.  Lord Nicholls regarded the right approach as that adopted by Lord Scarman in National Westminster Bank plc v Morgan [1985] AC 686 at p. 704,

“the Court of Appeal erred in law in holding that the presumption of undue influence can arise from the evidence of the relationship of the parties without also evidence that the transaction itself was wrongful in that it constituted an advantage taken of the person subjected to the influence which, failing proof to the contrary, was explicable only on the basis that undue influence had been exercised to procure it.”

23.  The caution by Lord Nicholls at para. 32 is also pertinent,

“Undue influence has a connotation of impropriety. In the eye of the law, undue influence means that influence has been misused. Statements or conduct by a husband which do not pass beyond the bounds of what may be expected of a reasonable husband in the circumstances should not, without more, be castigated as undue influence. Similarly, when a husband is forecasting the future of his business, and expressing his hopes or fears, a degree of hyperbole may be only natural. Courts should not too readily treat such exaggerations as misstatements.”

24.  Credit Lyonnais Bank Nederland NV v Burch [1997] 1 All ER 144 was a case very different from the present one.  In that case, a junior employee earning a meagre salary entered into an all-money charge for the liability for her employer in respect of her flat.  As Simon Brown LJ summarized it in the subsequent case of Portman Building Society v Dusangh [2000] 2 All ER (Comm) 221 at p. 225,

“In short, she risked personal bankruptcy and the loss of her home for a £20,000 increase in the overdraft facility of a company in which she had no direct financial interest.”

The court held that the transaction was so manifestly disadvantageous to Miss Burch that the presumption of undue influence was irresistible.

25.  Mr Yau cited this case as authority for the proposition that the court can infer undue influence when the nature of a transaction is manifestly disadvantageous to the mortgagee.  In our judgment, that is too sweeping a statement to be drawn from the exceptional facts of that case.  As explained by Lord Nicholls, the better approach is to ask whether the transaction was only explicable by undue influence being exercised.  In Hong Kong, bearing in mind the close-knit setting in a Chinese family, we regard much of what had been said in the context of husband and wife can be applied to a mother using her property to finance the business of her sons, although we recognize that there might be difference in degree.

26.  In this connection, Portman Building Society v Dusangh [2000] 2 All ER (Comm) 221 is relevant.  In that case, the Court of Appeal held that it was not manifestly disadvantageous to a father that he should raise money by way of re-mortgage so as to provide financial assistance to his son to start a new business.  As observed by Simon Brown LJ at p. 229, the law does not require the bank to police transactions of this nature to ensure that parents (even poor and ignorant ones) are wise in seeking to assist their children.

27.  If one were to examine the evidence in the present case, the 2^nd Defendant’s case boils down to the manifest disadvantage of the Second Legal Charge to herself because she did not suggest any impropriety on the part of her two sons in procuring her to execute it.  We are afraid we do not find this to be the kind of transaction where the court finds inexplicable other than being procured by some form of undue influence by the sons.

28.  We therefore agree with the learned judge that the 2^nd Defendant had not provided the necessary evidential foundation to run a triable issue on undue influence.  We dismiss the appeal with costs accordingly.