Re: LAI YIN SHAN and EX PARTE: THE HONG KONG AND SHANGHAI BANKING CORPORATION LTD.

HCB 992/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS NO. 992 OF 2000

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J U D G M E N T

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1. This is a bankruptcy petition by which the petitioner bank is seeking a bankruptcy order against the respondent, Madam Lai Yin Shan in respect of a debt of some $20,000,000.00 being the balance of banking facilities provided by the petitioner to a company called Chit Lee Marble & Minerals Co. Ltd, pursuant to two guarantees signed by her under seal in 1997. The debt owed by the company is not in dispute, but the respondent contends that the guarantees were executed by her as a result of the misrepresentation and/or undue influence of her husband, the major shareholder in the company.

2. In support of her contention, the respondent has filed an affidavit in which she states that she was one of two directors and shareholders of the company, the other being her husband, but that it's business was conducted solely by him and she was a full time housewife. She says that she was a merely nominal director and shareholder. In 1996 she says that she went with her daughter to live in Canada, where she was visited by her husband, and, in particular in 1997 when he asked her to sign printed forms which he explained were bank credit rearranging documents which had to be signed by the directors, but that everything would be secured by a mortgage of property and the liabilities would be borne by the company. She said that she signed as she trusted her husband who did not tell her that she was signing a personal guarantee. In late 1999 the bank called in the debt and shortly thereafter the company was wound up.

3. By an affidavit filed only four days before this hearing, Mr Wong Kong Ming confirmed what the respondent had said and added that he was the only person that had dealings with the bank.

4. Mr Tollan for the petitioner points out that the factual situation is not quite as straightforward as stated by the respondent and her husband. He says that this is not a matter of a $2.00 company with the wife holding a share as nominee, and being a director merely to comply with the law. The documentary evidence shows that she has been involved in this company to a substantial degree. In 1992, before she was a shareholder, she was one of three directors and the secretary of the company. In 1995, the shares of two other shareholders were transferred to her, making her a 30% shareholder, with her husband holding the rest of the 600,000 issued shares of $1.00. They also were then the only two directors, and she was still secretary, as she remained. In 1997, the issued shares were increased to 5,000,000 of which she became holder of 30% or 1,500,000 and a third director was appointed, a Mr Wang Wei. It was during this year that the guarantees were signed. From 1996 at least, she has also been a signatory of the company's bank account.

5. Mr Tollan says that this shows her to be, on the face of it, far from a nominal shareholder and director. She held more than a nominal amount of the shares, and continued as a director when there were two others and her directorship was not required by the law, and she was also the company secretary throughout. He submits that this is far from being a situation as in Barclays Bank Plc v. O'Brien & anor [1994] 1 AC 180, where the wife had no interest in the company, the overdraft facilities of which were secured by the matrimonial home.

6. I have to consider two questions here: whether there is evidence of undue influence or misrepresentation on the part of the respondent's husband, and if so, whether the effect of that is binding on the bank. As to the first, an allegation of undue influence or misrepresentation is very easy to make, and almost impossible for the bank to refute. The only evidence comes from the parties who stand to gain by such a finding, and it must accordingly be treated with circumspection. Having said that, in the light of the respondent's affidavit and her account of her family situation, it is difficult to say that the evidence does not support that contention. I accept that the relationship of the parties as husband and wife does not of itself give rise to a presumption of undue influence, but I have evidence here that there was a relationship in which the respondent reposed trust and confidence in her husband and that in turn presumes that undue influence occurred, and the burden shifts to the other party to show that the transaction was entered into freely. Apart from showing her involvement in the company apparent from the records, the bank are unable to do this, and the presumed wrongdoer, her husband supports her contention. I have to find therefore that undue influence at least was used to induce her to enter into these guarantees.

7. While this finding would enable the respondent to set aside the transaction as against her husband, the principal question here is whether that is also binding on the bank. In order for it to be, the respondent has to show that either her husband was acting as agent for the bank, or that the bank had actual or constructive notice of the facts giving rise to her right.

8. All that the respondent can put forward in support of agency is that her husband was asked by the bank to take the forms to the other director or directors to sign. This falls far short in my view of creating an agency. As Lord Browne-Wilkinson said in Barclays Bank Plc v. O'Brien supra:

"Although there may be cases where, without artificiality, it can properly be held that the husband was acting as the agent of the creditor in procuring the wife to stand as surety, such cases will be of very rare occurrence."

This does not in my view come within those rare cases.

9. Which leaves the respondent having to rely on notice. There is no suggestion that the bank had actual notice, and Miss Fung, for the respondent here relies on constructive notice. The principles enunciated in Barclays Bank Plc v. O'Brien, and followed in a number of cases since, are that the third party will be put on inquiry if they are aware of the relationship of husband and wife, that the transaction is on its face not to the financial advantage of the wife, and there is a substantial risk in transactions of that kind that that, in procuring the wife to act as surety, the husband has committed a legal or equitable wrong that entitles the wife to set aside the transaction.

10. It is not in dispute here that the bank knew of the relationship of husband and wife. So was the transaction on its face not to her financial advantage? Mr Tollan says it was rather the opposite. There is no suggestion that the company was in any difficulty, or anything other than moderately successful, and it needed the banking facilities to carry on its business. The respondent was a 30% shareholder in that business, and a director, and stood to gain financially from the increased business by way of a share in the profits. The bank may well have only dealt with the husband as he claims, and not the respondent, but that does not help her. It cannot be unusual for the managing director of a company to be the one to negotiate matters such as this. I am sure that banks do not want every director trooping in each time banking facilities are discussed. On the face of the records of this company the respondent was a substantial shareholder and active director, the loan was therefore at least partly to her own benefit. In addition to this she was a signatory of the company's bank account. There was nothing here in my view to put the bank on inquiry, dealing as they had every right to believe with a company, one of whose directors was the wife of another, but who herself had a not insignificant interest in the business, and who appeared on the face of it to be an active participant.

11. In the circumstances the respondent has failed to put forward a defence to the petitioner's claim and I am satisfied that they are entitled to the order they seek. There will accordingly be a bankruptcy order in the usual terms with costs to the petitioner.