WING HANG BANK LTD v. KWOK LAI SIM AND OTHERS

HCMP4362/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO.4362 OF 2003

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J U D G M E N T

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1. “Roses by another name will smell as sweet,” said William Shakespeare.  On the other hand, it must be the case that “dung by the name of roses will smell as foul.”  The problem is : if you call dung by the name of roses and before one can smell its real substance, will one be misled?  Thus the question is still : what is in a name?

2. This case involved a solemn deed of covenants called only as a “Legal Charge” on a property owned by two sisters.  It turned out that it is, in effect, a charge and a personal guarantee of them for their brother’s company—the borrower.  Would it be enforceable against them?  Before I conduct a detail analysis on the facts of the case, I shall give a broad outline of the background thereto first.

Macro background

3. Kwok “Wing Chiu” was in the business of toys manufacturing.  His company is “Forkids” Toys Limited.  In the year 2003, i.e. the SARS period in Hong Kong he, liked many businessmen, was in financial difficulties. 

4. He had a friend Andy Wong who, also happened to be his creditor, advised him to borrow money from the bank.  Accordingly he introduced him to Wing Hang Bank (“the Bank”). 

5. Eventually the Bank granted him overdraft general banking facilities on the strength of a mortgage and the personal guarantee of Wing Chiu himself and his wife.  

6. The property mortgaged belonged to his two sisters : the elder sister Yuen Ping (D2) and the younger one Lai Sim (D1) (“the sisters”).  He approached them and told them that at the most, worst came to worst, they only would have lost their property.

7. However even with the banking facilities granted to him, his company eventually was liquidated and the Bank was owed millions of dollar.  In fact, part of the loan had been applied to repay Andy Wong or his company.

8. Consequently shortly after the Legal Charge was executed, the bank, on 29 August 2003, demanded the sisters to personally pay $2,340,405.21 and US$30,971.74 together with all accrued interests thereon.

9. In this action the Bank tried to enforcethe mortgage against the sisters.  This mortgage was named as a “Legal Charge” on the Property for All Monies.  It included, in effect, a personal guarantee by the sisters for all monies due and owing to the Bank by the borrower Forkids.  The sisters defended the action originally on the ground of undue influence but eventually on misrepresentation and failure of the Bank and their joint solicitors acting for both parties in explaining the true meanings and effects of the mortgage deed to them.  They joined the solicitors firm as a third party as well. 

10. The issue before this court is whether the sisters could avoid their liabilities on the deed of mortgage.  In deciding this central issue it is necessary to consider the facts as I found herein below in much more detail. 

Microanalysis

(1)     The Kwoks

11. The sisters are joint tenants of the mortgaged property.  They lived there with their mother.  Their brother Wing Chiu was instrumental in buying the property at the outset and the sisters themselves had been paying the outstanding loan to a bank.  Halfway through the trial it was discovered that the original mortgage was also in fact a legal charge for all monies on the property.  They had given their personal guarantee as well.  However the sisters were the debtors themselves.  This previous mortgage was dated 10 March 1999. 

12. In 2003 Wing Chiu’s company Forkids (the 3^rd defendant herein) was in financial difficulties.  His friend Andy Wong, who was also his creditor, introduced Wing Chiu to Wang Hang Bank for a loan.  Originally Wing Chiu wanted general banking facility on the strength of a sum of cash deposit with the Bank.  Eventually he offered to have the property mortgaged by his sisters for general banking facilities to be granted to his company Forkids to the total sum of $2.7 million together with the personal guarantee of he himself and his wife.  The then value of the mortgage property as assessed by the internal appraisal department of the Bank was $1.85 million.  

(2)     Forkids application for banking facilities

13. The Bank, during the course of negotiation, asked for the accounts of Forkids in order to assess its application.  Wing Chiu submitted the reports and financial statements of Forkids for the year ending March 2001 and 2002.  There was a further capital inspection report prepared by a PRC accountant for Forkids and the same was also presented to the Bank on 5 May 2003.  There was a further report and financial statement of Forkids for the period from 15 September 1999 to 31 March 2001.  

14. In the submission of application to the Bank, Wing Chiu actually signed a declaration in respect of his statement of personal assets/net worth dated 26 March 2003.  He stated that he got a property in Calgary with an estimated value of Canadian $330,000 and another Canadian property in Richmond of Vancouver with an estimated value of Canadian $680,000.  Both properties were not charged at all.  He also stated that he had a deposit of US$130,000 as his life saving in Hong Kong Bank.  It turned out that at least at the time of entering into the loan agreement with the Bank on the date of signing the legal charge for all monies on the property of the sisters, these statements were not true.  The property in Vancouver had been sold and the property in Calgary might have been sold as well by then. 

15. During the internal assessment of Forkids’ application one Kong Chi Kin, being the superior of Cliff Chu of the Bank who had negotiated with Wing Chiu, raised a number of queries as follows :

“Liquidity

Q1.    Why did the related company—Forkids Marketing Limited advance from the subject continuously in past 3 periods? 

Q2     What is the nature of the ‘loans’ occurred in HK$3.5 MM at 31/1/2003?  What is the recoverability of it? 

Net worth

Q1.    How could the company assume the future profitability to recover the capital deficiency, as the performance was unstable in past 3 periods?”

16. In answer to these queries, basically Wing Chiu then indicated that the loans from a related company Forkids Marketing Ltd would be capitalized.  Eventually Cliff Chu’s proposal of the grant of general banking facilities was approved by his superior Eric Ho. 

(3)     The Grant of GBF

17. Accordingly a letter dated the same day, i.e. 13 June 2003 was sent to Forkids to the effect that the Bank was prepared to extend general banking facilities to the extent of $2.7 million.  The security was stated as “first legal charge executed in our favour for general banking facilities for all monies on the property… by” Lai Sim and Yuen Ping.  The sisters were also required to sign that letter.  But it was not so signed until 20 June 2003 as will be explained herein below. 

18. In stark contrast, in the next section under “Guarantee”, the Bank required Wing Chiu and his wife to execute a personal guarantee jointly and severally in favour of the Bank for all monies together with accrued interest.  There was no mention that the sisters would also be required to execute any personal guarantee in favour of the Bank for all monies due and owing by Forkids. 

19. Earlier on/about 11 and 12 June 2003, it was Andy Wong who had assisted the sisters to instruct their previous bank and the Bank to deal with the property.  The sisters signed the necessary documents and Lai Sim had used the fax machine of her working place, the Housing Department, and sent them to the solicitors through Andy Wong.

(4)     The Solicitors

20. By a letter dated 18 June 2003, the Third Party herein, Messrs Tony Kan & Co. was instructed by the Bank to act for it, the borrower Forkids and the sisters.

21. Together with the instructions letter of the Bank,the aforesaid document signed by Wing Chiu was enclosed in which the Bank was providing “Financial information of the borrower for the purpose of advising the mortgagor(s)/guarantor(s)”.  It was stated therein that :

(i)      The current amount of the borrower’s indebtedness was :“no”. 

(ii)      The amount of the borrower’s current overdraft facilities was : “no”. 

(iii)     The amount and terms of any new facility was : only facility for HK$500,000 and bills line for $2.2 million making a total of $2.7 million.

(iv)     Any belief of suspicion that the surety has been misled by the borrower or is not entering into the transaction of his own free will : “no”.

(v)     The market value of the mortgage property : $1.85 million. 

In fact, when Wing Chiu asked the sisters to help him to tie over his liquidity problem by mortgaging the property to the Bank, he represented to them that all they would stand to lose would be the property and nothing more.  In other words Wing Chiu did not say and in fact, according to him, he did not even know that the deed of mortgage also provided a personal guarantee of the sisters for all monies due and owing by Forkids to the Bank. 

22. The next day on 19 June 2003 Ms Bess Seatwo, a solicitor of Messrs Tony Kan & Co., faxed a letter addressed to the sisters to a fax number which actually belonged to Forkids.  In other words this fax letter was received by Wing Chiu and was never shown by him to the sisters at all.  The caption was stated as “‘All-Monies’ Legal Charge to be executed by [the sisters] and Forkids ... in favour of [the Bank] in respect of [the property]”.  They were asked to attend the solicitors’ office in Central at 6:30 p.m. and the solicitors would be attending to Wing Chiu and his wife at 6:45 p.m.  The letter was in Chinese and it further stated as follows :

“因兩位將以按揭人的身份簽署上述「無限額」按揭担保Forkids Toys Limited於永亨銀行的債務，所以應全面理解作為「第三者保証人」的責任及風險。現附上下列文件供閣下考慮：

1.    2張Warning Notice;

2.    永亨銀行發給Forkids Toys Limited的Facility Letter(日期：13/6/03)(共6頁)

3.    永亨銀行發給我行的指示信(日期：18/6/03)(附Forkids Toys Limited現時債務情況等資料)(共3頁)；及

4.    1張我行發給閣下的「尋求獨立法律意見建議書」。

我行敦促兩位詳細閱讀及考慮上述文件。兩位將被要求於6 月20 日簽署上述文件(或部份)，若有任何疑問，請儘早與我行商討。”

23. The warning notice was in English and Chinese.  The document titled “尋求獨立法律意見建議書” was in fact accompanied by another document titled “確認書”.  I shall consider the contents of these documents when I consider the circumstances at the signing of the documents the next day.  But of course, it made a mockery of informing the sisters all these and pressing them to read these documents in detail when Ms Seatwo knowingly sent these documents to Forkids without even requesting Wing Chiu to show them to his sisters.

24. The sisters both stated that Wing Chiu approached them in or about May or June 2003.  He asked them to mortgage the property as a security to the Bank for a loan and their responsibilities would only be mortgagors, i.e. at the most they would have lost the property and there would be no other responsibilities.  Wing Chiu had given them an impression all along as a successful businessman as he was living in a big flat in Yau Yat Tsuen and was driving a Mercedes-Benz.  They further considered that if they refused him, their mother would be very unhappy and it would eventually affect her health.  Their mother, as most Chinese mothers of that generation, favours her only son more than the daughters. 

25. No one from the Bank or the solicitors’ office had contacted them at all.  It was Wing Chiu who phoned them on 19 June 2003 in the evening.  Wing Chiu had arranged to pick them up at their property in San Po Kong and take them to Central for the purpose of signing documents the next day. 

(5)     The Meeting on 20 June 2003

26. Accordingly the four of them went to the solicitors’ office and the three women arrived first since Wing Chiu had to park his car.  It was already passed 7:00 p.m. when they arrived.  They waited for Ms Seatwo and after Wing Chiu arrived, the four of them saw Ms Seatwo at a conference room.  The whole operation took about 20 minutes only.  Ms Seatwo also confirmed that the time spent was about 20 to 30 minutes. 

27. According to the sisters, Ms Seatwo had never explained to them that the mortgage would include a personal guarantee for all monies due and owing to the Bank by Forkids.  Ms Seatwo said otherwise and gave evidence to the effect that she had explained the gist of each and every document to the four of them together including that the sisters would be personally responsible for all debts of Forkids in addition to charging the property for the purpose of repaying Forkids’ debts.  The guarantee by the sisters would be to an unlimited amount. 

28. Before I decide which version is to take, I think it is better to examine all documents executed by the four of them in particular the sisters in detail first. 

29. The first document explained to the sisters was the banking facilities letter of 13 June 2003.  Under the column of security, the security was said to be “First legal charge executed in our favour for general banking facilities for all monies on the property… by” the sisters.  As aforesaid, this is distinguished from the next paragraph under the column “Guarantee” whereby only Wing Chiu and his wife would be required to execute a personal guarantee.  The distinction between the security given by the sisters and a guarantee given by the brother and his wife would be misleading in that apparently the sisters would not be required to give their personal guarantee. 

30. To this effect the letter of instructions given by the Bank to their solicitors also distinguished between mortgagors of the property being the sisters and the two guarantors, being Wing Chiu and his wife who should execute personal guarantee for all monies.  The amount and type of loan were described as GBF for all monies and solicitors were advised to collect their professional charge based on HK$1.85 million, being the estimated market value of the property.  There is no mention that the mortgagors would also be personal guarantors.

31. As aforesaid, the financial information of the borrower was described as no current amount of indebtedness.  It was not stated that this was restricted to its indebtedness to the Bank.  It actually had given a reader the apparent information that the borrower had had no indebtedness to any other person.  This document was also explained in full by Ms Seatwo to the sisters in the presence of Wing Chiu.

32. As aforesaid, earlier the solicitors faxed the documents to Mr Andy Wong on 11 June 2003.  He then arranged the sisters to sign a letter instructing the previous mortgagor bank that they had instructed Ms Seatwo of Tony Kan & Co. to deal with the property in that the former should forward all documents of title in relation to the property to the latter for her handling.  The sisters signed the documents on 12 June 2003.  A similar letter was signed and addressed to Ms Seatwo.  Lai Sim used the fax machine of her working place, the Housing Department to send the signed documents through Andy Wong to Ms Seatwo.  Thus it would have been very easy for Ms Seatwo to find out the direct contact with Lai Sim through Andy Wong or even Wing Chiu by fax or otherwise.  But she had not done so.  In the end there was no contact either from the Bank or the solicitors with the sisters directly.

33. Both the Bank and the solicitors were supposed to contact the sisters in order to dispel any likelihood of undue inference exerted by the brother (this will be explained later).  The bank entrusted the solicitors to do the job by their instructions letter to the solicitors.  The solicitors were supposed to contact the sisters for that purpose at least one day earlier and submitto them all the documents to be signed.  Instead the solicitors sent their letter to the sisters to the fax number of Forkids on 19 June 2003 knowing that it was the fax number of the borrower instead of the sisters.  The brother upon receiving this fax with a number of documents did not show the same to his sisters.  In fact the solicitor had not even requested him to do so.  Instead he phoned them up one day before the execution of documents and just asked them to attend the solicitors’ office together with him and his wife at the solicitors’ office some time after 6:30 p.m.  All these made a mockery of the directions of the Hong Kong Association of Banks and the Law Society guidelines in this respect which I shall explain later. 

34. Consequently as it turned out, Ms Seatwo, instead of interviewing the sisters alone and in the absence of the brother and his wife, met all four of them together and explained the documents to all of them together.  She said in evidence that there was nothing to stop her from having a separate conference with the sisters first and the brother and his wife later separately.  She just found it unnecessary at that time. 

35. The letter supposed to be addressed to the sisters began with the following Chinese words :

“請兩位郭小姐於2003 年6 月20 日下午6:30到中環總行，屆時，請找司徒律師，並帶備各下的身份證。我行將請Forkids Toys Limited的郭先生及歐小姐於6:45到我行。

因兩位將以按揭人的身份簽署上述「無限額」按揭担保Forkids Toys Limited於永亨銀行的債務，所以應全面理解作為「第三者保証人」的責任及風險。現附上下列文件供各下考慮。”

It can be seen that the letter was addressed to the sisters.  They were described as mortgagors for unlimited amount mortgage guaranteeing Forkids’ debts owing to the Bank.  However, this would give a reader an impression that the unlimited guarantee was the mortgage of the property itself.  Further just one line before that, Mr and Mrs Kwok of Forkids were also mentioned.  It is a bit confusing as to whether “無限額按揭擔保” and “第三者保證人” were related to Mr and Mrs Kwok(i.e. Ms Au) only.  A careful reading of the letter should not have such meaning.  However it is a bit confusing once Mr and Mrs Kwok were mentioned just before “兩位” which actually meant the sisters. 

36. The letter ended as follows :

“我行敦促兩位詳細閱讀及考慮上述文件，兩位將被要求於6 月20 日簽署上述文件(或部份)，若有任何疑問，請儘早與我行商討。”

This, as I have said, is a mockery of informing the sisters the contents of the documents one day before the execution.  The documents did not reach the sisters at all.  Ms Seatwo did not even inform the brother to pass on these documents to the sisters at least 24 hours beforehand for them to read.

37. All the aforesaid procedures fall short of the request of the Bank from the solicitors to “provide the necessary information and advise the sisters and follow the relevant procedures and to ensure that the security provided by the sisters is not liable to be set aside on grounds of undue inference” when they were requested to act for the potentially undue inference party in addition to acting for the Bank and the borrower.

38. The next document the sisters were required to sign separately was a Warning Notice.  Ms Seatwo requested them to sign the English version although a Chinese version was also put before them for them to read.  Yuen Ping does not know English at all.  She had been a garment factory worker in the past for all her past working life.  Lai Sim finished her secondary education and is now a clerk of the Housing Department.  However her English is not good enough to read and understand all these documents and in particular the warning notice and thedeed of legal charge which are in lawyer’s language.  

39. The 1^st paragraph of the warning notice stated that :

“The Mortgagor/the Borrower have applied to the Lender for banking facilities/mortgage loan to an extent of HK$2,700,000.00 to be granted to the Mortgagor/and the Borrower on the security of a mortgage to be taken out on the Property.”

The Chinese version stated that :

“按揭人[及借款人]同貸款人申請了以[       ]港元為限的銀行融通/按揭貸款，該銀行融通/按揭貸款須以物業按揭[及由擔保人簽署的擔保契據(「擔保書」)]作為保證。”

40. It would be immediately apparent from the reading of paragraph 1 that one of the Mortgagor/the Borrower was meant to be deleted if applicable as stated at the end of the notice but nothing was deleted in the English version and nothing was filled in the blank nor deleted in the Chinese version.  In the Chinese version “以物業按揭[及由擔保人簽署的擔保契據(「擔保書」)]作為保證” one of the two descriptions should wheneverappropriate, be deleted.  It is not clear from the Chinese or English version whether the banking facilities granted to the borrower was on a security of the mortgage to be taken out on the property only.  It was stated at the very beginning that the mortgagors were the sisters whereas the guarantors were the brother and his wife only.  The mortgagors were never stated to be the guarantors at all.  All these would have the same and therefore additional effect as the facility letter and the letter of instructions to the solicitors from the Bank. 

41. Paragraph 6 therein also stated as follows :

“Your liability under the Mortgage will be unlimited if you decide to go on with the transaction by signing and executing the Mortgage.”

It is not clear even from this provision whether the unlimited liability will be on the property only. 

42. Further, when one reads the Chinese version, it is even more misleading as follows :

“閣下如決定繼續進行交易及簽署按揭書及擔保書*，閣下在按揭書及擔保書*下的責任將會無限/以[       ]港元為限。”

It is therefore meant to be crossed out either “按揭書” or “及擔保書” and also the liability of “無限” (unlimited)/(or) to be filled in under “以[       ]港元為限” (up to Hong Kong Dollar _______ limit).  But nothing was crossed out and nothing was filled in the blank.

43. If the sisters read the Chinese version, they would have an impression that the mortgage to be executed by both of them would be for the unlimited amount of the debts due and owing by Forkids to the Bank on the property only or to a limited amount but the same was not or not yet filled in.

44. The next document is the確認書[由按揭人簽署].

45. Paragraph 1 therein stated that :

“本人/我們Kwok Lai Sim & Kwok Yuen Ping，茲同意將上述物業以法庭押記/按揭抵押給  貴銀行，作為  貴銀行向上述借款人所提供或將提供的一般銀行授信的所有款項及債務的擔保。”

It is not clear whether it was a legal charge or a mortgage as one of them was not deleted.  It was further stated that the legal charge or mortgage meant mortgage of the captioned property which would be charged to guarantee all monies due and owing by the borrower Forkids to the Bank.  It was not stated that they themselves were also personal guarantors of all debts due and owing by Forkids to the Bank.  It would be quite easy to set aside another paragraph saying that “they also understand that they themselves were also acting as personal guarantors for the said debts”.  That was not done.

46. The next Chinese document signed by the sisters was called (尋求獨立法律意見)書.  The whole letter reads as follows :

“致簡松年律師行：

關於： Flat A, 25^th Floor, Tower 1 (Sau Ming Court),

Yue Xiu Plaza No.9 Ning Yuen Street, Kowloon.

本人Kwok Lai Sim & Kwok Yuen Ping現簽字確認  貴行已知會本人  貴行亦同時是按揭銀行之代表律師。

貴行已將按揭合同/及擔保書*內容(包括本人作為按揭人/及擔保人*的法律責任)向本人解釋清楚，雖然  貴行已積極勸籲本人對於有關之按揭合同/及擔保書*之內容及作為按揭人/及擔保人*之法律責任應尋求獨立法律意見以保障本人作為按揭人/及擔保人*的權益，及已給予本人在簽署按揭合同/及擔保書*前充足機會尋求獨立法律意見，本人仍認為沒有此必要，決定簽署上述文件。

 

	按揭人/擔保人*   ：	郭苑萍      郭麗嬋
		(signed)
	日期：	20 June 2003

*如不適合請刪去”

47. Strangely enough, in this letter the mortgage was described as “按揭合同” and the words “及擔保書” meaning “and the letter of guarantee” was crossed out.  They were described as “按揭人” and the words “及擔保人” meaning “and guarantor” were crossed out.  Thus it would certainly give the sisters an impression that they were only mortgagors and not guarantors at all. 

(6)     The Legal Charge

48. The last document signed by the sisters was of course the Legal Charge.  It was described as a “legal charge” at the outset and in the back sheet.  The sisters were described as the mortgagor and Forkids the borrower and the Bank of course was the lender being the second part to the deed. 

49. The recital had stated to the effect of the facilities letter in that the borrower through the mortgagor has applied to the lender for GBF upon the mortgagor and the borrower entering into the covenants and obligations thereinafter contained and upon the mortgagor charging the property as security for the due payment of all monies payable to the lender by the mortgagor or the borrower under any of the covenants contained therein. 

50. In the covenants (clause 2.01) it was stated that the mortgagor and the borrower jointly and severally covenant with the lender that they would on demand pay the lender all sums of money which might be outstanding to the lender.  Ms Seatwo honestly said she had not interpreted the whole deed word for word to the sisters.  (In fact how could she have done so if the whole operation only took 30 minutes at the meeting?)  She said she had explained the gist of this clause 2.01 to the sisters.

51. Be that as it may, this is a personal guarantee by each of the mortgagors in addition to the two separate personal guarantee executed by the brother and his wife.  However, the title to this deed does not state the true purports and effects of this deed of documents.  This description has been judicially criticized in the case of The China State Bank Limited v. Fung Chin Kan and Others, 4 July 2001, CACV178/2000 (Hon Rogers VP, Keith and Le Pichon JJA).

52. In that case, similarly the two persons signing the legal charge as mortgagors “… was far from being a simple charge on their property.  It was a guarantee in respect of all sums which SMC [being the borrower] might owe the plaintiff”, per Rogers VP, paragraph 18. 

53. Rogers VP further said (which I quote in full to show the serious judicial criticism of a solicitor in handling a similar deed back in 2001) :

“26.   In my view, the instructions from the plaintiff to Mr Lo and his firm were clear.  They were that a first legal charge should be prepared over the Greenland Garden flat owned by Mr Fung and Madam Lee.  The charge was to be in respect of all monies within the general banking facilities.  Those facilities included facilities granted against trust receipts.  For the time being the amount agreed was HK$3,300,000.00.  There were no instructions to prepare a guarantee of an unlimited amount in respect of SMC’s liability to the plaintiff.  Indeed, in contrast, in point 14 under remarks, it is stated that Mr Lau and Mr Ngan had entered guarantee(s) for HK$16,500,000.00 which would be delivered to them for execution by them later.

27.     In my view, any person reading that letter of instructions from the plaintiff to the solicitor would conclude two things, first that it was to be a charge on the property and second that it was to be limited to HK$3,300,000.

28.     There would have been no difficulty in making a minor addition to the standard form ‘guarantee—legal charge’ either to delete clause 1 entirely or to limit the guarantee and the legal charge to HK$3,300,000.00.  Mr Lo said in evidence that it was not his experience as a solicitor, of all of 8 years standing at the time, except in a few cases, that there should be a limitation as to the extent of the liability.  I find my sentiments in this regard to be akin to those of Millett L.J. (as he then was) in Credit Lyonnais Bank Nederland NV v Burch [1997] 1 All ER 144.  It would have been a simple matter to include such a limit.  It is no answer, in my view, as Mr Lo tried to say in evidence, that because the legal charge was in respect of all monies on general banking facilities there had to be an unlimited guarantee.  Even, as has been seen, the guarantees which the Bank was preparing for Mr Lau and Mr Ngan to sign were to be limited in amount.

29.     Mr Tse who was Mr Lo’s conveyancing clerk, also suggested that it was natural that there would be a guarantee from the chargor to cover the shortfall between what was realised on the sale of the property and the amount owing, in case of default by the lender.  In a normal situation when a borrower is providing security for a loan or loans which he has borrowed, that, of course, would be the case.  But where a third party is providing security for somebody else’s liabilities there is no reason why that should be the case.  The most that he might do is warrant that the security which he provided was worth a specified amount.

30.     It appears that the acting master accepted Mr Lo’s evidence that the reference in the instruction letter to $3,300,000 was inserted by the plaintiff to indicate to the solicitors the level of charges which they should make.  Had I been the judge at first instance I would have had no hesitation in saying that that suggestion was fanciful, in view of the terms of the letter of instructions.  For present purposes, I would content myself with saying that this is not a meaning that the normal reader would attach to this letter of instructions and clearly was not a meaning that Mr Fung and Madam Lee attached to that reference in the letter of instructions.

31.     Hence on the facts of this case it is clear that the plaintiff informed Mr Fung through SMC that its instructions to the solicitor were to prepare a charge, not a guarantee, limited to $3,300,000.00.  In my view, a representation had been made by the plaintiff as to the effect of the documents which Mr Fung and Madam Lee would be signing.  That representation had been made by faxing the instructions which related to Mr Fung and Madam Lee to SMC.

…

37.     Very similar considerations apply in respect of the fact that Mr Fung and Madam Lee signed a guarantee as well as a charge on their Greenland Garden flat.  Their Greenland Garden flat was worth approximately $4 million.  If they had simply signed a charge without a guarantee their liability would have been limited to the value of that property.  That is what would have been understood from the letter of instructions.

…

42.     Clearly anybody hearing that explanation would consider that their liability was limited to the legal charge on the property.

…

45.     At the end of his explanation of what he told Mr Fung at the time that Mr Fung came to sign the ‘guarantee—legal charge’ Mr Tse said:

          ‘And there are several points to take note that unless you had the consent of the China State Bank the property cannot be leased to any other party.  Also, the Bank has the right to demand the full payment of the loan any time, and if the value of the property should fall below the mortgage loan, it has the right to demand for other pledges.’

46.     Even that explanation, in my view, would only be confusing to a person who considered that he was mortgaging his property to the extent of $3.3 million.”

The court decided that “Madam Lee is clearly, independently of Mr Fung, entitled to have the transaction set aside.  The court further allowed the appeal of Mr Fung, i.e. the 1^st defendant therein, and set aside the judgment against him, who appeared as the appellant in person.

54. The aforesaid decision of the Court of Appeal was reversed by the Court of Final Appeal on 4 December 2002 on another ground.  However the documents in question have attracted the same criticism by the Court of Final Appeal as Litton NPJ said at paragraph 35 :

“35.   The Court of Appeal described the legal charge as a ‘complicated 33—page document’ : That was no exaggeration.  The solicitor Mr Lo called it an ‘all-monies legal charge’ : He did not use the label ‘mortgage guarantee’ which might have described the instrument more accurately in terms of the effect for which he ultimately contended (see Commercial Bank of Australia Ltd v. Amadio 151 CLR 447 for an instrument with similar effect, described throughout Mason J’s judgment as a ‘mortgage guarantee’).  Although prepared by Mr Lo’s firm, there was evidence to the effect that it was in fact in a standard form used by the Bank.”

55. The Court of Final Appeal reversed the decision of the Court of Appeal by the following reasons :

“62.   What the Court of Appeal did, as earlier mentioned, was to discharge the Master’s judgment, thus leaving the Bank empty-handed.  The bank was also saddled with liability for all the costs.  In the Bank’s printed case before this Court, and for the first time, counsel argued thus : Even if the Court of Appeal were right ‘in finding misrepresentation against [the respondents] and undue influence against Mrs Fung, it erred in setting aside the legal charge without requiring [the respondents] to make restitutio in integrum by repayment of $4 million to the Bank’, since the Bank had, by the transaction, relieved the respondents of their liability under the Wing Hang Bank mortgage.

63.     In the way I would resolve the appeal—a way wholly different from that of the Court of Appeal—this point largely falls away.  But not entirely.  On the respondents’ own case they are liable to the Bank for $3.3 million.  Had the Bank, in commencing proceedings in July 1998, limited its claim against them for $3.3 million, they would have had no defence.  The mere fact that the Bank had, in its originating summons, claimed considerably more than $3.3 million does not mean that, at the end of the day, it should go away empty-handed.  On the other hand, it would be unjust to treat the position as if the Bank had confined its claim to $3.3 million at the beginning, and to order interest on that sum to run from 31 July 1998, as the Master had done : If the Bank had so confined its claim then, as counsel argued, the respondents might well have satisfied that claim by selling the flat which was worth then much more than it is worth now.

64.     Mindful of the fact that this Court’s paramount function is to administer practical justice in accordance with legal principles, the proper orders to make in the circumstances of this case are, in my view, as follows :

(1)   The judgments in the two lower courts be discharged : With this would go not only the judgment for $16,211,786.34 plus interest but also the order for possession of the flat.

(2)   Judgment be entered for the Bank in the sum of $3.3 million : This would, of course, carry interest at the published judgment rate as provided for in s.49(1)(b) of the High Court Ordinance, Cap.4, from the date of this judgment.

(3)   A declaration that the flat stands charged with the above judgment debt, until the debt is discharged.”

56. The court further made no order as to costs, leaving each party to pay its own costs.[1]  It is apparent that the Court of Final Appeal has not criticised the Court of Appeal in their decision, especially in the way the solicitor in question was handling the so-called “all-monies legal charge”.

57. In short, both courts considered that the document should at least be called “Mortgage/Legal Charge and Guarantee”.

(7)     The solicitors’ Duties

58. In the aforesaid account of the meeting between Ms Seatwo of the third party herein and the sisters and the brother and his wife as her clients in two different capacities, can it be said that Ms Seatwo had properly explained the true meaning and effect of those documents signed by the sisters?  In particular would the sisters understand that in addition to mortgaging the property as a security for the debts of their brother’s company, they were also standing as personal guarantors for the same debts which would turn out to be an enormous amount without any limit when the bank was granting banking facilities to the company to the stated extent of $2.7 million when the market value of the property was only $1.85 million?  

59. Ms Seatwo agreed that the explanation together with the execution was no more than 30 minutes altogether.  She explained all the documents in one go to the sisters and the brother and his wife together.  She even followed a list made by herself as in pages 906 and 907 of Bundle 5.  

60. The sisters said the explanation and the execution together was about 20 to 30 minutes, there was nothing mentioned by Ms Seatwo which would cause their concern.  Ms Seatwo also said that she had not explained the whole deed of legal charge word by word to the sisters, although she emphasised that she had explained the effect of clause 2.01 as stated above which incorporated the guarantee of all monies due and owing to the Bank by Forkids.  In her list she described the sisters as mortgagor and the brother and his wife as guarantor and directors of the borrower Forkids.  The security was described as first legal charge.  Thus she circled this description in paragraph 1.  All the other descriptions were, by necessary implication, not applicable including the description of “Personal Guarantee”.  Matters covered and explained to the surety during the meeting included that the amount would be unlimited and surety’s liability under the security would be unlimited and the consequence of bankruptcy of surety and/or borrower and the security would not be discharged until full payment of indebtedness made.  

61. However it was not described at the outset who would be the surety although the attendance notes stated that it was a meeting with “third party sureties”.  She actually met all four persons in one meeting.  The sisters had been described as mortgagor and the brother and his wife as guarantors.  Nowhere it was stated that the sisters were mortgagors/sureties although that probably was her meaning.  She even mentioned that financial information of the borrower was provided by the lender and the surety was to independently verify the financial information of the borrower. 

62. In this case I find all witnesses did not deliberately lie to this court.  However each one made his/her own emphasis on his/her own evidence. 

63. Eventually I find this confusing descriptions and statements in a number of documents, in spite of the explanation of Ms Seatwo even if she had done so, the sisters probably would not understand the true meanings and effects of the legal charge they were asked to sign to the effect that they were also personally guaranteeing all the outstanding debts of Forkids on top of the proceeds of sale of the property they mortgaged to the Bank. 

64. Further I should mention that Ms Seatwo had caused searches to be made on the financial information of Forkids through Target Search.  It was presented to her that Forkids actually had 2 writs of summons issued in the High Court against it.  There were also 4 District Court actions and 3 Small Claims Tribunal actions against it as defendant.  Ms Seatwo agreed that if she explored further and caused more searches to be made she would easily have discovered that one High Court action was in respect of goods sold and delivered to Forkids.  The other one would be more telling in that Forkids had been sued by its landlord for a number of outstanding rentals since about February 2003.  She considered that she had no duty to relate those pieces of information to her clients, be it the Bank or the sisters, nor to get the same information from her other client Forkids and its directors. 

65. The Bank also gave evidence and said that it was not their practice in those days to investigate all litigations of their new clients even when they were defendants with contingent liabilities.  Although it would be easy for the Bank to do so, they only started to do so about two years later.  

The law

66. I shall now proceed to consider the legal decisions leading to the directions of the Hong Kong Association of Bankers and the Law Society Guidelines as a result thereof. 

67. The case of Royal Bank of Scotland plc v. Etridge (No. 2) [2002] 2 AC 773 was decided by the House of Lords in October 2001.  It actually comprised eight cases of wives, each charging the interest in her home to secure liability of her husband or his business to a lender.  The House of Lords explore the risk of undue influence and circumstances in which a lender should be on notice of such risk together with steps to be taken to protect both the wife and the lender.

68. The following points were decided by the House of Lords which I shall adapt from the headnote with paragraphing supplied as follows :

(1)     If a wife was able on the facts of the particular case to establish that she had placed trust and confidence in her husband in the management of her financial affairs and that the impugned transaction was not explicable in the ordinary way she could rely on a presumption which, as an evidential forensic tool, shifted the burden of proof to her opponent and could be rebutted on appropriate evidence by that party.

(2)     Since the fortunes of husband and wife were ordinarily bound up together, a guarantee given by the wife with a charge on her interest in the matrimonial home to secure her husband’s debts was not plainly to her disadvantage so as to explicable only on the basis that the transaction had been procured by his undue influence.

          [If that could be said of the relationship between wife and husband whose fortunes are bound together, a fortiori, much more could be said between sisters and brother as in this case where their fortunes were not bound together and the charge on their interest in their only landed property being their home to secure their brother’s debts was plainly to their disadvantage.  Their relationship is clearly a non-commercial one and as such it is explicable only on the basis that the transaction had been procured by his undue influence or if the Sisters knew clearly the true meanings and effects of the transaction, on their love and affection for their brother.]

(3)     Whenever a wife offered to stand surety for the indebtedness of her husband or his business, or a company in which they both had some shareholding, the lender was put on inquiry and was obliged to take reasonable steps to satisfy itself that she had understood and freely entered into the transaction.

(4)     The steps reasonably to be expected of a lender in relation to past transactions were to bring home to the wife the risk she was running by standing surety, either at a private meeting with her or by requiring her to take independent advice from a solicitor on whose confirmation the lender might rely that she had understood the nature and effect of the transaction.

(5)     In respect of future transactions the lender should contact the wife directly, checking the name of the solicitor she wished to act for her and explaining that for its protection it would require his confirmation as to her understanding of the documentation to prevent her from subsequently disputing the transaction.  The lender should not proceed until it had received an appropriate response from the wife and should in every case receive the written confirmation from the nominated solicitor.

(6)     Subject to the husband’s consent to disclosure, without which the transaction could not in any event proceed, the lender should routinely furnish to the nominated solicitor financial information relating to the facility and the husband’s existing indebtedness to enable a proper explanation to be given to the wife.

(7)     The nominated solicitor should require confirmation that the wife wished him to act for her, and he might, so long as no conflict of duty or interest arose and he was satisfied that it was in her best interests to do so, also act for the husband or the lender.

(8)     His advice should be given at a face-to-face meeting in the absence of the husband, and its contents need not be directed to the commercial wisdom of the transaction but should include, as a core minimum, an explanation of the documentation, its practical consequences and inherent risks based on the financial information provided by the lender; he should also state that the choice whether to proceed was to be exercised by her and should check that she wished to continue and, if so, he should obtain her consent to his giving the confirmation required by the lender.

(9)     Since in so advising her the solicitor assumed professional responsibilities to the wife he did not act as agent for the lender, who was entitled to assume that he had acted properly, and, in consequence, knowledge of the contents of advice given to the wife, whether negligently or otherwise, was not to be imputed to the lender.

69. I shall return to some of the speeches of the Law Lords in so far as they are applicable to the case before me.  The aforesaid case of Fung Chi Kan was decided by our CFA in December 2002.  It followed closely with the House of Lords’ decision in Etridge (No. 2).  In fact there is also a more recent case concerning undue influence and taking “reasonable steps” when one was “put on inquiry”.  It is the case of Li Sau Ying v. Bank of China (HK) Ltd (2004) HKCFAR 579 in which Lord Scott of Foscote NPJ delivered the leading judgment.  His Lordship was also a member in Etridge (No. 2).

(8)     The HKAB and the Law Society

70. As a result of the decision in Etridge (No. 2), the Hong Kong Association of Banks by its circular dated 28 April 2003 informed all its member banks of this decision and the fact that this case has now been followed in a number of Hong Kong cases. 

71. Similarly the Law Society by its circular dated 19 May 2003 had provided a document called “Property Law Society Guideline Notes—Solicitors’ Duties in Relation to Security Transaction with Potentially Unduly Influenced Party”.  This is a revised circular which superseded its previous circular dated 22 October 2001 with specific mention of, inter alia, the case of Etridge and the CFA decision in Fung Chin Kan. 

72. The HKAB circular emphasised on the fact that the relationship between the party providing the guarantee or security and the borrower is usually non-commercial.  In that case the bank should be put on enquiry and should take reasonable steps to ensure that there was no undue influence :

“... Basically these steps require the provision of information and advice to the potentially unduly influenced party prior to the execution of the guarantee and security...

This information, advice and recommendation can be given by the bank or the bank’s solicitor and in providing the information, advice and recommendation, the bank or the bank’s solicitor should be careful to follow the guidelines as set out in the Etridge case.”

73. Apparently as in Case 2 therein stated, Wing Hang Bank herein followed closely with the wordings in their instructions letter to the solicitors as aforesaid.  They have requested the solicitor to provide the necessary information and advice to the potentially unduly influenced party and follow the relevant procedures to ensure that the security provided by the potentially unduly influence party is not liable to be set aside on grounds of undue influence.  However, the necessary financial information was totally misleading as aforesaid since the information given by the Bank to the solicitors stated that the current amount of the borrower’s indebtedness was “nil”.  This, in my view, is misleading because the Bank did not state that this piece of information was restricted to the borrower’s indebtedness to the Bank only and the borrower there and then was a new customer.  It would give the reader as I have said before, that this paragraph meant to be the borrower’s indebtedness to any person including the Bank. 

74. Ms Seatwo has categorically said that she had dutifully explained each and every bullet point as stated in this document in discharging her duty and also her duty for the Bank to provide information to the sisters.  She did not know either that it was only restricted to the borrower’s indebtedness to the Bank.  Thus she could not relate the Bank’s undisclosed intention in this paragraph.  On this score Ms Seatwo just lightly said that it was her invariable practice to make searches through her agent as to the borrower’s litigation and as such revealed that Forkids was sued in two High Court actions, four District Court actions and three Small Claims Tribunal cases.  She could have discovered that Forkids had serious troubles with its contractor on one hand and its landlord on the other hand leaving months of rentals in arrears.

75. Under the aforesaid Law Society Guidelines, paragraph 25 it was provided that :

“Where a solicitor receives instructions from the lender to act for the surety, the solicitor should :

...

· obtain financial information from the lender...”

Paragraph 28 stated that :

“28.   The lender must provide the solicitor with the financial information he needs for this purpose.  What is a required must depend on the facts of the case.  Ordinarily this will include :

· the purpose of the proposed new facility,

· the current amount of the borrower’s indebtedness,

· the amount of the borrower’s current overdraft facility,

· the amount and terms of any new facility,

· a copy of the written application (if any) by the borrower for a facility,

· any belief or suspicion that the surety has been misled by the borrower or is not entering into the transaction of his own free will (Etridge at paragraph 79).

· the market value of any mortgaged property.

29. The solicitor must be satisfied that he has the expertise to interpret or advise on the detailed financial information to the surety.

30. If the lender fails for any reason to provide information requested by the solicitor, the solicitor must decline to provide the confirmation sought by the lender (Etridge at paragraph 67).”

76. In paragraphs 32 to 35 of the said Guidelines in the said circular the Law Society emphasised on the need of the solicitor to advise the surety in a face-to-face meeting with the surety alone and in the absence of the borrower.  It also emphasised that the solicitor should advise the surety and provide him or her with the information by pointing out the seriousness of the risk involved by reference to a number of things including the amount of the surety’s liability under the security transaction and discuss with the surety as to his financial means including his understanding of the value of the security being involved and whether there are any other assets out of which repayment could be made if the borrower’s business should fail.

77. By reason of the aforesaid Directions and Guidelines to all the practising bankers and solicitors I am of the view that both the Bank and the solicitor herein had fallen short of the Directions and Guidelines as provided in the aforesaid circulars.  In particular, Ms Seatwo was just paying lips service to the Law Society Guidelines and had not provided the two sureties with the necessary documents 24 hours before the meeting which in any event was not a face-to-face meeting with the sureties alone in the absence of the borrower.  The warning notice and other documents had not been provided to the sureties at least one working day prior to the date of execution of the documents and all these fell short of the guidelines as in the Law Society circular paragraphs 25 and 26.

78. The advice and information to be given by solicitor to the surety followed closely the “core minimum” advice that should be given as outline by Lord Nicholls in paragraphs 64 and 65 of his speech in Etridge.  Instead Ms Seatwo just rushed through the meeting in which there was just a gist explanation of all documents in one go and, as I have said, the documents themselves have words with conflicting and confusing meanings even to lawyers not to say, with respect, to the two sisters of their educational level, together with execution of all the documents by four persons.  That took only 20 and at the most 30 minutes.

79. In the end I am satisfied that the sisters would probably not understand the true meanings and effects of those documents signed by them. 

80. Further the two documents signed by the two guarantors, being Wing Chiu and his wife, at page 816 which were executed right in front of the sisters, and another Chinese document also called “尋求獨立法律意見書” (advice to seek for independent legal advice) in which it was clearly crossed out the words “按揭合同” (mortgage contract) and “按揭人” (mortgagor) for the document stated as “擔保書” (letter of guarantee) and the person signing “擔保人” (guarantor).  As aforesaid a similar one was signed by the sisters as mortgagor for the mortgage where the other words “擔保書” and “擔保人” were crossed out.  This would give the sisters an additional impression that they were not the personal guarantors.

the defence

81. Mr Simon Lam, counsel for the sisters, had abandoned the defence of undue influence and had just relied on :

(1)     misrepresentation made by the Bank and the third party solicitors; and

(2)     the sisters actually did not understand the true meanings and effects of the legal charge executed by them.

82. In terms of undue influence the sisters said they were, apart from love and affection they have for their brother, they were afraid that in not signing the legal charge, their mother upon knowing this would be very unhappy and this would influence her health, although they honestly said that their brother had never mentioned this to them.  In any event undue influence has been abandoned and I would not say anything more on this point.

83. In terms of misrepresentation I have mentioned previously all points of misleading information provided by the Bank to their solicitors and subsequently by the solicitors to the sisters in particular their failure to disclose the full financial information of Forkids.  On misrepresentation of the nature of the transaction, I found that there was no deliberate intention and of course fraudulent misrepresentation of the transaction.  However the confusing stage of the documents and the contents therein, together with both the Bank and the solicitor failing to observe the guidelines and directions given by the Hong Kong Association of Bank and the Law Society had the effect of misleading the sureties.

84. On misrepresentation one further point submitted by counsel for the sisters is that it is immaterial what the document is called or what might cover as perceived or understood by the whole profession of solicitors, i.e. the meaning of “all monies legal charge on a property”.

85. The case of Edward Wong Finance v. JSM [1984] AC 296 was cited by Mr Lam.  I think he meant a similar effect was decided by the Privy Council that a conveyancing practice adopted by the whole legal profession cannot be said to be a standard of care of a solicitor’s professional standard if the risk of embezzlement was a foreseeable risk and thus the solicitor was still negligent and liable. 

86. Similarly in this case both witnesses from the Bank and Ms Seatwo said that they had never known or encountered a legal charge on a property without the additional covenant by the charger to guarantee to repay the borrower’s all-monies debt on top of the charge on the property.

87. Apart from the aforesaid criticism of the Court of Appeal and Court of Final Appeal judgments of Rogers VP and Litton NPJ in the Fung Chin Kan’s case, this is at least legally incorrect :

(1)     First of all “a legal mortgage is a mortgage which confers a legal interest on the mortgagee… (see Modern Legal Studies on Mortgages, p.11) and nothing more.”

(2)     Section 2 of the Conveyancing and Property Ordinance, Cap. 219 provides that “legal charge” (法定押記) means a mortgage expressed to be a legal charge and nothing more.

(3)     On the contrary a contract of suretyship is in essence a contract by which “one person (the surety) agrees to answer some liability of another (the principal debtor) to a third person (the creditor).  The contract may be constituted by a personal engagement on the part of the surety, or by a charge on property without any personal liability, or both.”  (See paragraph 44–001 Treaty on Contract, 29^th Edition.)

88. More importantly it is not true to say that legally a legal charge would invariably incorporate a personal guarantee of a charger for the debt of a borrower as suggested by the 2 bankers and Ms Seatwo who gave evidence before this court.  In fact that they would invariably incorporate a personal guarantee therein and had never seen one without it, is neither here nor there.  In the Encyclopedia of Forms and Presidents, 5^th Edition, 2006 Reissue, Vol. 28(1), it was provided in Forms 10 and 11 at pp. 212 to 265, two different forms, namely :

(i) Form 10—Charge by way of legal mortgage of freehold interest by one borrower to one lender, with a surety joining to charge his own property but without covenanting for payments : loan or fixed amount to be repaid on fixed dates; the provision of Charge by the Surety was drafted as :

“The Surety, with [full (or as appropriate) limited] title guarantee, charges the Second Property to the Lender by way of [first (or as the case may be)] legal mortgage with payment or discharge of all money and other obligations and liabilities in this deed covenanted to be paid or discharged by the Borrower or the Surety or otherwise secured by this deed.”

and

(ii) Form 11—Charge by way of Legal Charges : Borrower or Surety to covenant for payment and Surety to charge threehold interest : loan or fixed amount to be repaid on fixed dates : wherein the surety also covenanted for payment, the provision of charge by the surety is as follows :

“3  PAYMENT OF PRINCIPAL, INTEREST AND COSTS

In consideration of the Principal now paid by the Lender to the Borrower at the request of the Surety (receipt of which the Borrower and payment of which the Surety respectively acknowledge) the Borrower and the Surety covenant with the Lender as set out in this clause 3 PAYMENT OF PRINCIPAL, INTEREST AND COSTS.

3.1     Payment of principal

The Borrower and the Surety covenant with the Lender to pay the Principal to the Lender (free from any legal or equitable right of set-off) on the Redemption Date or, if earlier, immediately [on demand] if:…

4  LEGAL CHARGE

The Surety, with [full (or as appropriate) limited] title guarantee, charges the Property to the Lender by way of [first (or as the case may be)] legal mortgage with payment or discharge of all money and other obligations and liabilities in this deed covenanted to be paid or discharged by the Borrower or the Surety or otherwise secured by this deed.”

89. It is therefore clear from this legal charge with a personal guarantee that the surety is personally liable for all debts of the borrower with or without limit as provided differently in different kinds of deed.

90. Thus, even if nearly all banks in Hong Kong require a legal charge by a surety also to give a personal guarantee for all monies outstanding, and solicitors acting for their clients banks invariably include that hidden provision of personal guarantee inside a deed of covenants titled only as a legal charge, it is encumbent on the bank and in turn the solicitor to :

(1)     rename the document properly as a legal charge and a personal guarantee as suggested by the Court of Appeal and the Court of Final Appeal in the Fung Chin Kan’s case; and

(2)     explain clearly to the surety the extent of the liability is not restricted to his property only but a personal guarantee which he would have to assume when the property is not sufficient to cover the all-monies debt due and owing by the borrower.  In other words, the true meaning effect of this kind of deed of covenant must be brought home to the surety as decided in the case of Etridge (No. 2).

91. Thus unlimited liability or unlimited amount could be restricted on the property only which is different from unlimited personal guarantee or liability.  In such circumstances the mentioning of the consequence of bankruptcy might not bring home to the sisters as in the first place the explanation was made to all four of them in one go instead of separately as aforesaid.  In effect the sisters would find it confusing and might misunderstand that it would refer to the couples only since they were giving an unlimited personal guarantee, or bankruptcy might refer to the borrower according to the wordings of “bankruptcy of surety and/or borrower”.  Further still, in these confusing circumstances and irregular procedures adopted by Ms Seatwo, the sisters might even understand that the word “bankruptcy” means they would have lost their only valuable asset of their lives, i.e. the property.  To them, they would be bankrupt if they have lost their home property.

92. In the end I find that Ms Seatwo have not sufficiently explained that on top of the property, the sisters had to take up unlimited personal liability, or otherwise had not brought home to the sisters the true nature of the transaction.  The fact of the misrepresentation of the facilities letter and the documents before the sisters and the misrepresentation made by the brother beforehand were all still operating on the minds of the sisters. 

93. Ms Seatwo had testified that she had explained the unlimited personal liability of the debts of Forkids to the sisters.  This however was not supported by any documentary evidence and the oral explanation is contradicted by all the other Chinese documents the sisters were asked to sign.  It is in breach of the Law Society guidelines in the circular that the agenda’s note in note form as drafted by Ms Seatwo did not clearly state the actual explanation made to the sisters as suggested in the case of Etridge (No. 2). 

94. The role of a solicitor in advising a surety has been considered very thoroughly in Etridge (No. 2).  In the case before me, the solicitor who had acted for all 3 parties had not acted up to the serious requirements as stipulated by the Law Lords.  In this respect when I compare what she had done with the requirements which Lord Hobhouse of Woodborough said in his speech in the House of Lords in the case of Etridge (No. 2), I must say the solicitor before me had fallen far short of the view of Lord Hobhouse.  His Lordship said (again I quote in full) :

“112  A further point of relevance which has been commented on in the past and should be commented upon again has been the use by banks of forms under which the surety gives an unlimited guarantee or charge.  This was what banks ordinarily asked for.  Indeed, the guarantees obtained in the cases from which these appeals are, are unlimited.  Banks have acknowledged that such guarantees are likely to be unnecessary and unjustifiable where private sureties are sought.  They should be subject to a stated monetary limit on the surety’s liability and any legal adviser should so advise a private client.  Where a bank has neverthelessobtained an unlimited guarantee from a wife, it should ask itself how that can be if the wife has in truth been independently advised.  Would anyone who had a proper regard to the wife’s interests ask her to sign an unlimited guarantee or charge?

113    Lord Browne-Wilkinson stressed the need for the wife to be seen and communicated with separately from her husband.  This was clearly appropriate since, if the purpose is to satisfy oneself that the wife is acting freely in knowledge of the true facts, an interview in the presence of the husband is unlikely to achieve this objective if she has been improperly influenced by him.  Lord Browne-Wilkinson concluded that the requirement of a personal interview did not impose such an additional administrative burden as to make the bank’s position unworkable.  What the banks appear to find difficult is entrusting the conduct of such an interview to one of their own officers as opposed to entrusting it to an outside agent.  This is sad but probably derives from a wish to avoid getting directly involved in imparting information and maybe opinions to an individual whose interests are likely to conflict with their own and with whom they may subsequently be in dispute.  Lord Browne-Wilkinson contemplated that the banks might use a representative to do what they considered necessary and this would imply that they would be responsible for their representative.  The banks have not done this.  They have used solicitors.  They have denied any responsibility even for a complete failure of the solicitor whom they have instructed to carry out their instructions and have nevertheless sought to hold the wife to her signature so obtained.  I doubt that this is what Lord Browne-Wilkinson had in mind.

114    The use of solicitors has given rise to further practical (and, to a limited extent, legal) problems.  The first is ensuring that the solicitor is in possession of the relevant facts as known to the bank.  The advantage of an officer of the bank conducting the interview with the wife is that he has the file and access to the relevant facts.  The solicitor on the other hand may have nothing except the documents which are to be signed.  It is within the control of the bank what it sends to the solicitor.  … A further point is that contracts of suretyship are not contracts of the utmost good faith.  There is no general duty of disclosure: see the authorities cited by my noble and learned friends in their speeches, to which I would add the speech of Lord Clyde in Smith v Bank of Scotland 1997 SLT 1061.  Seeing that the solicitor is adequately informed is not the performance of a duty owed by the bank to the wife.  It is simply a necessary step to be taken by the bank so that it may be satisfied that the wife entered into the obligation freely and in knowledge of the true facts.

…

116    Lord Browne-Wilkinson contemplated a two-stage exercise, the first stage being an interview between the lender and the wife (for which the lender would be responsible) and the second being the wife taking independent advice from a solicitor (for which the lender would not be responsible).  The practice of banks has been to run these two stages together thus creating confusion about the role of the solicitor.  I accept that the best solution is that adopted by Lord Nicholls in his speech.  The solicitor in communicating with and advising the wife should be doing so solely as her solicitor.  The solicitor’s certificate which the bank asks for is something which the bank is asking the wife to procure and which the solicitor is providing as her solicitor.  I am satisfied that, provided that the guidance which Lord Nicholls gives (in the paragraphs which I have identified at the outset of this speech) is complied with, the wife will have a reasonable chance of receiving the protection she may need.  But it will be appreciated that an essential feature of the scheme is that the wife has to be aware of what is going on, that the bank is asking for the certificate and why, that she is being asked to instruct a solicitor to advise her and that she is being asked to authorise the solicitor to provide the certificate.  This is a far cry from the situation which has been tolerated in the past where the wife has not appreciated that she had any solicitor or was being advised and did not know of the existence of the certificate or its significance; indeed it has been that type of situation which has given rise to the most scandalous cases.

117    Illuminating evidence was given at the trial of the Gill action relevant to what was practical from the bank’s point of view.  The bank there was the National Westminster Bank.  The bank manager gave evidence.  In answer to direct questions he accepted without qualification that he foresaw the potential for undue influence by a husband where his wife is being asked to stand surety for the debts of her husband’s business.  His solution was to procure that the wife received separate legal advice.  In saying this he was following the practice of his bank as set out in a document (which he produced during his evidence in chief) with which he said he was already familiar in December 1988 (that is to say well before O’Brien in the House of Lords) headed ‘Charged Security—Separate Legal Advice—Action Sheet’.  It includes the following passages:

…

‘Where there is any suspicion of undue influence, the Manager must ensure that all guarantors/third-party chargors take separate legal advice from a firm of solicitors nominated by the guarantor/chargor.

‘Send the charge form directly to the solicitor concerned... To avoid a conflict of interest, ensure that the witnessing solicitor is not also acting for the borrower.  In such circumstances another solicitor, who may be a partner in the same firm, must be used.’ (emphasis as in the original) [emphasis added]

95. In discussing the difficulty of a solicitor, it was pointed out that he, in advising the bank and the borrower, also has to advise the surety.  In my view, it all boils down to this : in some cases, as in the case before me, it is extremely difficult if not impossible for a solicitor to act for all three or even two parties, i.e. the bank on one hand and the surety on the other hand.  It is difficult to advise the surety as to the risk involved and at the same time discuss with the surety the financial information or situation of the borrower who is at that time in need of money or banking facilities. 

96. In this case the solicitor was already in possession of the Target Search which revealed that Forkids was being sued in two High Court actions and four District Court actions not to mention three further Small Claims Tribunal cases.  She should have advised the surety according to the decision in Etridge (No. 2) and the guidelines in the circulars of both the Hong Kong Association of Banks and the Law Society that she was aware of these actions against Forkids.  She should at least enquire from the sisters whether they would like to know what actually was going on in all these cases which would reveal the precarious financial situation of Forkids much more in detail.  In discharging her duties fully she should obtain searches for these cases and inform the sisters that Forkids was there and then being sued by the landlord for outstanding rentals.  Thus the risk of losing their property together with attracting personal liabilities to an enormous amount of money up to $2.7 million with interests would be very high.

97. The solicitor might say that she had already advised them to seek independent legal advice but they considered it was not necessary.  But as the sisters put it : “How could we obtain independent legal advice after 7 p.m on Friday evening, 20 June 2003 when our brother was pressing Ms Seatwo to expedite the matter, whereupon Ms Seatwo had kindly promised to discharge her duty vis-à-vis the borrower by promising to do her best to enable the borrower to obtain the draw-down on the overdraft the next Monday or latest, Tuesday?!”  All these made a mockery of the advice to the sisters that they could and should seek independent legal advice themselves. 

98. In the end I also find that the Bank had misrepresented to the sisters by way of the banking facilities letter, the financial information of the borrower, and the Chinese and English documents.  They would give the sisters the impression that their liability would be on the property only, and these misrepresentations were still operating on the minds of the sisters when they executed the legal charge.

Conclusion

99. (i)      Both the Bank and the solicitor had misrepresented to the sisters and had given them the wrong impression that their liability would only be limited to the property only.

(ii) Those misrepresentations were made in the documents presented to the sisters just before their execution thereon and they included :

(a) the Facility Letter of the Bank to the borrower;

(b) the instructions letter of the Bank to the solicitors together with the document purporting to furnish information to the solicitors for the purpose of advising and discussing the same with the sureties;

(c) the warning notice;

(d) the “Advice to seek independent legal advice by the surety”;

(e) the 2 confirmation letters “確認信” signed by the surety to the Bank and the solicitors respectively;

(f) the confirmation letter signed by the guarantors to the solicitors respectively; and

(g) the title of the deed “Legal Charge”.

(iii)     (a) The Bank had not followed the directions given by the Hong Kong Association of Banks, and

(b) the solicitor had not followed the guidelines given by the Law Society,

          in bringing home to the sisters the true meanings and effects of the Legal Charge that they would be personally guaranteeing all the debts of the borrower.  In the end the sisters probably would not know the true meanings and effects of the Legal Charge.

100. Accordingly :

(i) the plaintiff’s claim against the 1^st and 2^nd defendants is dismissed;

(ii) judgment for the 1^st and 2^nd defendants against the plaintiff on the counterclaim and a declaration is granted that the said legal charge executed by the 1^st and 2^nd defendants on 20 June 2003 but dated 24 June 2003 be set aside against them;

(iii) judgment for the 1^st and 2^nd defendants against the third party in the third party proceedings (since judgment is given for the 1^st and 2^nd defendants in the plaintiff’s claim, there is no need to grant the declaration sought by them against the third party);

(iv) costs of the action, the counterclaim, and the third party proceedings shall be to the 1^st and 2^nd defendants against the plaintiff and the third party respectively, to be taxed if not agreed; and

(v) the 1^st and 2^nd defendants’ own costs shall be taxed according to the Legal Aid Regulations.

Certificate of complexity

101. Mr Simon Lam for the sisters applied for a certificate of complexity under the Legal Aid Regulations just before the court adjourned at the end of the hearing.  This court did not hear any particular submission in this respect.  It would be fair that Mr Lam should be given a chance to file and serve a written submission in this respect to the court within seven days hereof together with a copy to the Legal Aid officer responsible for this case in addition to the plaintiff and the third party herein.  Any party who would like to reply to his submission should do so within seven days thereafter whereupon a decision shall be made thereon.

[1]   Mr Simon Lam of counsel who appeared with Mr Warren Chan, SC for the 2^nd named respondent therein, who is also counsel before me for the sisters, told me that the Court of Final Appeal disposed of the case by applying the principle of collateral contract.  This point of collateral contract was neither pleaded nor argued in all courts below.