LI SAU YING v. KINCHENG BANKING CORPORATION AND ANOTHER

HCA 18515/99

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.18515 OF 1999

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JUDGMENT

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Introduction

1. In this action the Plaintiff, Catherine Li Sau Ying, makes claims against Li Hung Hon ("Mr Li") and Kincheng Banking Corporation ("the Bank").

2. Mr Li has acted in person throughout, but he did not attend the trial. It appears that he was not notified of the start date of the trial. However, using a mobile telephone number that Mr Li had provided to the Court, the Court clerk managed to speak with him on the morning of the start of the trial. The Court clerk informed me (and I so stated in open court) that Mr Li made it clear that he had no wish to take part in the trial and did not wish me to adjourn the trial to enable him to do so. In these circumstances the trial proceeded in his absence. I should add that (unlike the other parties) Mr Li has not filed any witness statement.

3. In outline, the Plaintiff's claims against Mr Li are for repayment of a loan and for damages for his misrepresentations inducing the Plaintiff to grant to the Bank a mortgage of a flat she owned ("the 1996 Mortgage" and "the Property"). The claims against the Bank are for relief in respect of the 1996 Mortgage.

4. The specific claims as they have emerged during the course of the trial are as follows:

(1) As against Mr Li:

(a) A claim for the repayment of a loan of $3,301,960.27 advanced by the Plaintiff to Mr Li on 23rd December 1994 as to $2m and 28th December 1994 as to the balance.

(b) Damages for deceit alternatively damages under section 3(1) of the Misrepresentation Ordinance in respect of representations Mr Li made to the Plaintiff as to the terms and effect of the 1996 Mortgage.

(2) As against the Bank, a claim for financial relief in respect of the 1996 Mortgage on the ground that the Bank had constructive notice that the Plaintiff's granting of the mortgage had been procured by Mr Li's above-mentioned misrepresentations and/or by undue influence exercised by Mr Li over the Plaintiff.

5. The above position was reached after a number of changes to the Plaintiff's pleaded case during the trial, as follows:

(1) As against Mr Li:

(a) The Plaintiff's originally pleaded claims in relation to the 1996 Mortgage included a claim for damages for negligent misstatement (Hedley Byrne liability). However, by re-amendments made during the trial this claim was dropped.

(b) The Plaintiff pleaded claims for damages for deceit or for misrepresentation under s.3(1) or for negligent misstatement in relation to a further mortgage of the Property which the Plaintiff granted to the Bank in 1998 ("the 1998 Mortgage"). However, late in final submissions Leading Counsel for the Plaintiff conceded that the 1998 Mortgage did not make the Plaintiff's financial position any worse as compared with her position under the 1996 Mortgage and that consequently there would be no point in my deciding the Plaintiff's pleaded claim in respect of the 1998 Mortgage.

(2) As against the Bank:

(a) As stated above, one of the two limbs of the Plaintiff's case that the Bank had constructive notice of Mr Li's wrongdoing in relation to the 1996 Mortgage was that it had notice of Mr Li's misrepresentations which allegedly induced the Plaintiff to enter into that mortgage. Such a claim was not pleaded. However, during final submissions, Counsel for the Bank elected not to take this pleading point.

(b) The Plaintiff's originally pleaded claim against the Bank was for rescission of both the 1996 and the 1998 Mortgages. However, having regard to the fact that the Property was sold by the Bank pursuant to its power of sale in May 2000 to a bona fide purchaser without notice of the claims, the Plaintiff claimed financial relief in lieu of rescission.

(c) Since financial relief was claimed instead of rescission, there was no point pursuing the claim in respect of the 1998 Mortgage, for the same reason as in the case of the claim against Mr Li.

6. I should also mention that in final submissions the Plaintiff made an application to re-re-amend the Statement of Claim to expand the allegations of misrepresentation in respect of the 1998 Mortgage as against the Bank. I reserved my ruling. However, the application became academic when the Plaintiff elected not to pursue the claim in respect of the 1998 Mortgage. In case it might become relevant, I refuse the application, which was made far too late and, if granted, would inevitably have resulted in an adjournment of the trial to enable the Bank to prepare its defence to the new allegations. In these circumstances, I do not think it would be fair to the Bank to allow the application.

The Plaintiff's evidence

The Plaintiff

7. The Plaintiff was educated at a school where Chinese was the medium of instruction, and where she reached Form 5. Although the Plaintiff learned English at school, she is not proficient in the language. She can, however, read straightforward letters and the like (for example, she was able to read the Bank's letter of acknowledgment dated 3rd September 1996).

8. The Plaintiff and her husband and sister have run a building materials supply business called Chung Ying Building Materials Co Ltd ("Chung Ying") since 1974. She has a 25% shareholding in Chung Ying. By 1994 the company had an annual turnover of about $10m. The Plaintiff appears to have played a general administrative role in the business.

9. The Plaintiff wholly owns an investment company called Perfect Target Investment Company Ltd ("Perfect Target") which was the Plaintiff's vehicle for property investments including the Property. The Plaintiff had had five or six property dealings by 1994. She acknowledges that, by 1994, she was not unfamiliar with the procedures for executing conveyancing documents.

The relationship between the Plaintiff and Mr Li: 1992-end 1994

10. The Plaintiff's account of her relations with Mr Li in this period can be summarised as follows.

11. The Plaintiff came to know Mr Li in about 1992 through his wife, whom she had known since 1990. They were introduced at a social club in Tak Hing Street, Kowloon, which Mr Li owned and operated. They became friends. They met about once a month at social gatherings, at dinners and at the club. In 1994 the Plaintiff joined a party of about 30 on a trip to Zhuhai which Mr Li paid for. It appears likely that it was on this trip that she met Mr Ip Man On ("Mr Ip"), whom Mr Li introduced as his business partner.

12. The Plaintiff says by the end of 1994 her relationship with Mr Li remained that of good friends. They addressed each other as elder sister and younger brother, because they shared the same family name, they were good friends and he did not have a sister. From what Mr Li and his wife told the Plaintiff, she believed he had large investments in Zhuhai in hotels, restaurants, fashion outlets and land. The Plaintiff says that at one point he said he had turned down an offer of $200m to purchase his investments in Zhuhai. The Plaintiff thought he was wealthy, generous, kind, dutiful to his mother and resourceful in business. She trusted him as a friend, having no doubts about his integrity.

Mr Li's purchase of building materials: 1994

13. The Plaintiff's account of dealings with Mr Li over building materials can be summarised as follows.

14. In 1994 Mr Li started to order building materials from Perfect Target for delivery to Zhuhai. The Plaintiff says that Perfect Target was used as supplier rather than Chung Ying because Mr Li suggested that he should order from a company wholly owned by her (though the reasoning was not explained).

15. The materials were supplied on one month's credit. At first, Mr Li paid punctually. However, by about mid-1994 he had fallen into substantial arrears. By December 1994 he owed over $1m to Perfect Target. The Plaintiff chased him over the outstanding account, but without success. He said he could not pay because, although he had plenty of assets, he was short of cash. It appeared to the Plaintiff that he was genuinely unable to pay.

16. This outstanding account was a significant receivable for Perfect Target and created a cashflow problem for the company. The Plaintiff produced a contemporaneous summary of outstanding invoices on Perfect Target notepaper as at 9th December 1994 addressed to Open Centre Co Ltd for the attention of Mr Li. The address given was the same as that of Mr Li's club. This summary shows $1,275,498.00 to be outstanding, together with a Perfect Target invoice of the same date for $17,600.

17. The Plaintiff says Mr Li stopped ordering building materials from Perfect Target in December 1994.

The investment: 1994-1995

18. The Plaintiff's account of how she came to make an investment in a property venture with Mr Li can be summarised as follows.

19. About a month after the trip to Zhuhai in 1994, Mr Li invited to dinner at his club all those who had gone on the trip and announced a venture he had in mind involving purchasing two ground floor shops in a building in Hillwood Road, Kowloon, and running there a restaurant the income from which would service the mortgage loan to be taken out to part finance the acquisition. He was bullish about the property market, and his idea was to sell off the shops at a profit after the market rose. The Plaintiff shared his bullish view and thought the venture would produce a handsome profit.

20. By this time the Plaintiff's brother-in-law, Lau Wai Leung ("Mr Lau"), had become friendly with Mr Li and his wife. Mr Li persuaded Mr Lau to look at the Hillwood Road shops, which apparently he did, and sought to persuade Mr Lau to invest in the venture. Mr Lau formed the view that the proposed investment would be a good one, and suggested to the Plaintiff that they should invest in the project together. Mr Li's wife also expressed bullish views and sought to persuade the Plaintiff to invest. The Plaintiff also spoke to Mr Li on a number of occasions when he expressed the view that the prospects of the venture were good. She shared his view.

21. The information Mr Li gave the Plaintiff (and, presumably, Mr Lau) about the proposed investment was as follows. Mr Li was still looking for further investors. The value of the shops was about $32m. A deposit of about $12m would be necessary. The investments would take the form of shares in two limited companies, Fairsheen Ltd ("Fairsheen") and Bright Wick Ltd ("Bright Wick") which would own the shops. The investments would be the subject of formal documentation executed at a firm of solicitors.

22. She was under the impression that her and Mr Lau's share in the venture would amount in total to one twelfth, on the basis that the deposit would be $12m and her and Mr Lau's investment would amount to $1m.

23. The Plaintiff deliberated on the matter, taking time to work out how much money was available to her and how much to put up. Eventually, she agreed to invest $750,000 and Mr Lau agreed to invest $250,000. She decided to make the investment because she thought the venture would be profitable and would be within her means.

24. In her witness statement the Plaintiff says she gave Mr Li two cheques, each for $500,000, the payee's name left blank, covering both her contribution and Mr Lau's (because he did not then have the money). However, there was no supporting evidence of the drawing or payment of such cheques. On the last day of the trial, the Plaintiff was recalled to give further evidence. She stated that her and Mr Lau's investments were paid for by four cheques, which she produced, as follows:

	Date	Drawer	Drawee	Amount($)
1.	20.4.94	Plaintiff	Blank	200,000
2.	20.6.94	Lau	"	200,000
3.	3.6.94	Plaintiff	Open Centre Co. Ltd	300,000
4.	12.7.94	Plaintiff	"	300,000

25. As to the first cheque, the Plaintiff says she cashed it and handed the cash to Mr Li. As to the second cheque, she says she was with Mr Lau when he cashed the cheque and paid the cash to Mr Li. She says she gave the last two cheques to Mr Li and she drew them in favour of Open Centre Co Ltd at his request. This is the company to which Perfect Target's summary of outstanding invoices and the invoice mentioned in paragraph 16 above were addressed.

26. In November 1994 the restaurant was opened, and the investors (including the Plaintiff and Mr Lau) went to the opening ceremony. She recognized some of the investors there, including Mr Patrick Chung.

27. The Plaintiff said in her oral evidence that she thought it was some time after the restaurant was opened, and probably at Mr Li's club, that she was given a handwritten document headed "The following details should be registered in each of Fairsheen Ltd and Bright Wick Ltd". This document was annexed to the Plaintiff's witness statement without any explanation except that it was a "schedule of investors". The first column lists 12 names, which, according to the Plaintiff's description of the document in her statement, must be the names of the investors. Against each name is a number or a cross. The Plaintiff's name appears twice, once with 75 and once with a cross. Against Mr Lau's name is 25. The Plaintiff interprets these numbers as referring to her investment of $750,000 and Mr Lau's of $250,000. As to the entry of the Plaintiff's name with a cross, which the Plaintiff interprets this as representing a budgeted or hoped for further investment she might make. The rest of the document, consisting of three further columns of figures has not been explained.

28. The Plaintiff says it was not until April or May the following year, 1995, that Mr Li made arrangements for the Plaintiff to attend the offices of a firm of solicitors (John F.W. Lau & Co) to execute documents as to her share in the Hillwood Road venture. There she met Mr Li and signed various documents. Mr Lau was there, as were other co-investors. They all signed similar documents. The documents she signed were all undated save for the year, which was 1994. The documents were as follows:

(1) There was agreement between the Plaintiff and Bright Wick signed on Bright Wick's behalf by Mr Ip. By the terms of this agreement the Plaintiff agreed to lend Bright Wick $1,011,690 to pay for an issue of an unspecified number of shares in Bright Wick to her. However, she says that in fact she never agreed to make a loan to Bright Wick, a name which means nothing to her. She says she signed the document without having read it or having had it interpreted or explained. She just signed it as asked because it was a "usual sort of document", she trusted Mr Li and the solicitors and anyway Mr Li told her it was only a temporary document.

(2) There were instruments of transfer and bought and sold notes for the transfer by Mr Ip to the Plaintiff of a total of 1605 Fairsheen shares. Again, the Plaintiff says she did not read the documents and no one explained them to her.

The Plaintiff's loan to Mr Li and the 1994 Mortgages

29. On the Plaintiff's evidence, by December 1994 she had allowed Mr Li to run up an account of over $1m for building materials, which he was unable to pay for and she had paid for her investment but had not yet received any shares. It was against this background that the Plaintiff says Mr Li asked her for a loan.

30. The Plaintiff says Mr Li explained he was short of cash, having spent a lot of money to open the restaurant and on his Zhuhai investments, and not having collected from all the investors. He expressed confidence that his investments would yield big profits. He said a lot of money would be coming in. He said he would be able to repay her in six months or at most a year. He promised security. At first the Plaintiff refused him, telling him she did not have the money. He continued to press her, but she continued to resist and to chase him for payment of the outstanding account for building materials. He asked her if she had any property which could be mortgaged to raise a loan to him. Having ascertained from her that she owned the Property, and that it was mortgaged to the Nanyang Commercial Bank ("NCB") for about $3.2m, Mr Li proposed that he should use his contacts to find a lender prepared to refinance the Property for a larger loan.

31. The Plaintiff says Mr Li told her he had found lenders who would advance a loan of $6.5m on the security of the Property to be repaid within 12 months. In re-examination the Plaintiff said Mr Li told her that the loan would be repayable by instalments.

32. Eventually the Plaintiff agreed to help Mr Li out of his financial difficulties by refinancing the Property to raise $3.2m which she would lend him. The Plaintiff left it to Mr Li to chose a lender. In evidence she stated that she lent Mr Li the money because she trusted him not to cheat her and she did not realise the risks she was running. She also said that, because she was under the impression she was the borrower under the mortgage, the Property was safe (i.e., presumably, it would not be mortgaged for a higher amount without her consent). According to the Plaintiff (to summarise various parts of her evidence) the following terms were agreed:

(1) The outstanding amount due to Perfect Target would be paid out of the loan money.

(2) The loan would be repayable in six months.

(3) The loan would be secured by additional shares in the Hillwood Road venture.

(4) The Plaintiff would be named the borrower under the mortgage.

(5) Mr Li would pay the principal and interest due to the lenders, but the amount representing what the Plaintiff would have paid NCB under the redeemed mortgage would be deducted from the Plaintiff's loan to him.

33. The payment of the outstanding amount due to Perfect Target had a positive effect on the Plaintiff's cashflow, and in chief she acknowledged her need of working capital, though she says that in 1994 she had no borrowing requirement.

34. In relation to the agreed security for the loan, the Plaintiff's evidence is that Mr Li told her that the security should put her mind at ease, that she thought the security was acceptable and that it did in fact give her comfort in lending to him.

35. Mr Li asked the Plaintiff to attend the offices of the mortgagee's solicitors (Ho & Wong) to execute the necessary documents. This she did on 23rd December 1994. Mr Ip joined them. Two mortgages were executed ("the 1994 Mortgages"), one in favour of Yu Tai Hing Co Ltd ("Yu Tai"), the other in favour of Sinohill Holdings Ltd ("Sinohill"). The Yu Tai mortgage was a first charge securing a facility of $5m to Fairwealth Industries Ltd ("Fairwealth", later renamed Keeland Ltd), for which the Plaintiff was jointly liable, the whole repayable in 12 months (without instalments of principal), with interest at 1.5% per month and default interest at 1.8% per month. In fact, Fairwealth was substantially owned by Mr Ip, and the 2nd Defendant was a director and nominee shareholder, though there is no evidence the Plaintiff was aware of this. The Sinohill mortgage was a second charge securing general credit facilities to Fairwealth to an unlimited extent repayable on demand, for which the Plaintiff was jointly liable.

36. Although the Plaintiff maintains Mr Li told her that under mortgage(s) the $6.5m loan was repayable within 12 months, she also maintains that he promised to repay the loan within six months.

37. The Plaintiff's witness statement contains no account or criticism of the way the mortgages were executed. However, she gave a good deal of oral evidence as to this which can be summarised as follows. (I should add that it appears from her evidence that the Plaintiff did not distinguish between the two mortgages.)

(1) She said the attending solicitors' clerk presented the documents to her in a stack (so presumably there were, in addition to the two mortgages, other, related, documents to sign).

(2) She says the solicitors' clerk gave her a partial explanation of the documents. According to the Plaintiff, the clerk told her:

(a) the mortgage loan was $6.5m (which was true so far as it went, but there was no limit to the amount secured by the Sinohill mortgage);

(b) the repayment period was one year (which was true as to the Yu Tai mortgage but untrue as to the Sinohill mortgage);

(c) what the repayment instalments were (there were none);

(d) what the rate of interest was.

(3) She claims the clerk did not tell her the borrower was Fairwealth. She gave differing accounts as to whether the clerk explained she was the borrower under the mortgages. At one stage she appeared to be saying this was a matter of assumption on her part. However, later in the evidence she positively stated that the clerk had misrepresented that she was the borrower.

(4) She says there was neither signature nor seal of Fairwealth (which i.e. they were added later).

(5) She maintains that, had she realised Fairwealth was the borrower under the mortgages, she would not have executed them since she knew nothing of Fairwealth.

The distribution of the mortgage loan

38. $6.5m was advanced under the 1994 Mortgages. The NCB mortgage was redeemed on the same date at a total cost of $3,225,173.60. There was therefore a surplus of $3,274,826.40. The cost of redemption included $27,133.87 for penalty interest which Mr Li had agreed to be responsible for and be included in his loan, so the agreed loan amount was $3,301,960.27. This is the amount claimed. However, this was not the net sum actually realised from the mortgages, because there were deductions for the Plaintiff to settle in respect of what Mr Li told her were commission payments and solicitors' fees (and presumably stamp duty). The net amount paid to her was $3,092,313.94.

39. At Mr Li's suggestion, on the same date, the Plaintiff opened a savings account with the Bank of East Asia. The passbook is in evidence and it shows that on the same date there was a deposit of $3,092,313.94 and a withdrawal of $2m in cash. (There is no evidence as to the manner in which the $3,092,313.94 came into the Plaintiff's hands.) The Plaintiff says that on the same date she handed over the $2m cash to Mr Li. The passbook also shows that on 28th December 1994 she withdrew $1,092,025, leaving a very small balance. She says the $1,092,025 was used to settle the outstanding amount due to Perfect Target for building materials, pursuant to the agreement she had reached with Mr Li.

The 1995 Mortgage

40. The Plaintiff's witness statement does not deal with the mortgage she executed in favour of Luk Fai Investment Ltd ("Luk Fai") on 4th August 1995 ("the 1995 Mortgage"). This mortgage was entered into while the Fairwealth mortgage still had over four months to run. It secured a six-month loan of $6.5m to the Plaintiff, the named borrower, the whole loan being repayable on 4th February 1996 (i.e. without instalments of principal) with interest at 21.6% per annum payable in equal monthly amounts of $117,000 and with default interest at 4% per month. This interest was of course very much higher than under the Yu Tai mortgage. The $6.5m paid off the 1994 Mortgages.

41. The Plaintiff's evidence of this mortgage can be summarised as follows.

42. As stated above, it was the Plaintiff's evidence that Mr Li promised he would repay the mortgage loan in 6 months and the 1994 Mortgages were executed on 23rd December 1994 on that basis. After a while, when Mr Li had not repaid the loan, the Plaintiff started to chase him. However, Mr Li repaid nothing, making excuses to the effect that his investments were not yielding cash.

43. The Plaintiff's account in chief of how she came to execute the 1995 Mortgage is in summary as follows. Mr Li told her that the interest rate under the Yu Tai mortgage was too high and he was not on good terms with Yu Tai. He suggested that the mortgage be "changed to" Luk Fai, which would charge less interest. The Plaintiff's reaction was that she wanted to be repaid and to put an end to the matter, but Mr Li maintained that he had no money to repay her.

44. As stated above, it was the Plaintiff's evidence that it had been agreed between her and Mr Li that Mr Li would pay the mortgage instalments (though under the 1994 Mortgages there were no instalments of principal). She maintained that, even though Mr Li had made only partial payments to Yu Tai and Sinohill, she was not interested in finding out what the outstanding mortgage debt was because she trusted Mr Li to make payment.

45. She claims to have given no thought to whether the fact that both the 1994 and 1995 mortgage loans were $6.5m indicated that Mr Li had not paid any instalments of principal.

46. The Plaintiff said the reason she agreed to enter into this mortgage was that she thought there had to be a "transfer" of the 1994 Mortgages because Mr Li had been unable to make payment under the 1994 Mortgages and the only way out was to approach someone else for a loan. However, she was unable to say when she understood the 1994 Mortgages expired, because she never asked Mr Li. She says she trusted him and did not care about it.

47. The Plaintiff's account of the execution of the mortgage was in summary as follows. Mr Li took her to the offices of the mortgagee's solicitors (Amelia Cheung & Co), where she was attended by a solicitor's clerk. She could not recall how many documents there were, but she read none of them. She claims the clerk's only explanation of the documents that she can recall was that the loan was $6.5m and she would be the borrower, and she thought the clerk also stated the repayment period, but she could not recall what it was. She says that no one in the firm explained the interest provisions. Evidently she did not enquire about them. She claims she just signed as requested, trusting Mr Li and the solicitors to draw to her attention whatever needed to be drawn to her attention. The Plaintiff also claims that Mr Li told her she would be the borrower under the mortgage (which on this occasion was true).

48. When asked whether she would have entered into the mortgage if she had known that the interest payments would be $117,000 per month, and the whole loan had to be repaid in six months, she said she would have, because she trusted Mr Li to make arrangements to have the loan repaid.

The period between the 1995 and 1996 Mortgages

49. Although the Plaintiff and Mr Li had agreed that the loan would be secured by further shares in the Hillwood Road venture, and this had given her comfort, no such security was ever given. Further, the Plaintiff never pressed for it, she says because she did not want more shares in that investment.

50. The Plaintiff maintains that her view of Mr Li at the time of the 1995 Mortgage was no different from the view she had formed of him in 1994. The fact that he had failed to carry out his promise to repay within six months had not changed her impression of him because he had explained that he had been unable to get cash from his investments. In any event, she explains, since she was the owner of the property and the borrower under the mortgage, he was not able to "do anything" to the property.

51. However, the Plaintiff also says that after the 1995 Mortgage she seldom saw Mr Li, meeting only once every two or three months, it seems when they met by chance at Mr Li's club. She maintained, however, that she was in frequent telephone contact with him, partly social and partly to press for repayment of the loan. As before, he maintained he had large investments, and was merely suffering cashflow problems. A number of faxed chasing messages were produced, the last of which was dated 7th October 1998 and refers to frequent chases in 1996.

52. The Plaintiff maintains, nevertheless, that she and Mr Li remained on friendly terms and she still trusted him.

The 1996 Mortgage and the relationship between the Plaintiff and Mr Li when this mortgage was executed

53. It is not in dispute that, although the 1996 Mortgage is dated 4th September 1996, in fact it and the related documents were executed on 29th August 1996. The mortgage secured general banking facilities repayable on demand to Sunny Tech Ltd ("Sunny") without limit, for which the Plaintiff was jointly liable, with interest at the Bank's current rate or such other rate as the Bank in its discretion decided to charge. The mortgage was executed by Mr Ip on behalf of Sunny.

54. It is clear from one of the related documents the Plaintiff signed on 29th August 1996, i.e. the Bank's commitment letter dated 3rd September 1996, that the facility secured by the mortgage was at that time divided into two parts: first, a $4.5m loan repayable on demand but otherwise repayable by instalments over 20 years with interest at 9.5% subject to fluctuation; secondly, general banking facilities of $2m. This was superseded by the Bank's letter dated 5th September 1996 the effect of which is not entirely clear, and it is not clear whether this document was among the documents executed on 29th August 1996 or whether it was signed later. Both documents were signed on behalf of Sunny by Mr Ip.

55. The Plaintiff maintains that she still trusted Mr Li at this time. Her account of how she came to execute the 1996 Mortgage is as follows.

56. Mr Li told her that the interest rate under the 1995 Mortgage was too high and that he would be able to arrange a mortgage with the Bank which would charge a lower rate. Mr Li encouraged her to go to the Bank to take advantage of its much lower interest rate, pointing out that the borrower and the owner would remain the same. She says he asked her to agree to the "transfer" of the 1995 Mortgage to the Bank. Her reaction was to ask Mr Li if he really would be able to repay her, making it clear she did not want the matter to drag on any longer. Mr Li told her he would be getting some money from his investments in six months, or a year at most, and there was no need to worry, since the Property was still in her name and he would soon repay her. She said she needed to think it over and this time he would have to promise in writing when the Property would be released to her.

57. The Plaintiff says Mr Li explained that the arrangement he had made with the Bank was for a $4.5m instalment loan and a $2m overdraft facility. This would pay off the 1995 Mortgage. The Plaintiff says Mr Li said nothing to indicate that the arrangement would be any different from the terms which had been agreed for the original loan in 1994.

58. On 29th August 1996, when the mortgage documents were executed, the Plaintiff met up with Mr Li and together they went to the offices of the Bank's solicitors (Tsang, Chau & Wong). She reckons they were there for about 30 minutes.

59. The Plaintiff says that a few days previously Mr Li had acceded to the Plaintiff's demand for a written promise to repay, and he had promised to pay off the $2m overdraft within six months. The first thing that was done at the solicitors' offices was that Mr Li wrote, signed and gave the Plaintiff a note dated 29th August 1996 recording this promise. The note was produced. The Plaintiff gave a number of reasons why she did not ask for a similar promise for the $4.5m instalment loan. She thought Mr Li was paying the instalments and thereby reducing the outstanding principal. She pointed out that $3.2m of the outstanding principal of $4.5m was attributable to the NCB mortgage. She said she would chase Mr Li for the balance once the $2m overdraft had been repaid, and she did not go further at that stage because Mr Li had made lots of excuses for not paying and she and Mr Li were still on friendly terms. She says she still trusted Mr Li.

60. The Plaintiff said it took Mr Li about 10 minutes to prepare the note, after which the two of them were taken to a conference room, where, in addition to the mortgage itself, there were other related documents for execution. The Plaintiff's account in chief of the execution of the mortgage and these four other documents was in summary as follows:

(1) In her witness statement the Plaintiff said that the attending staff of the firm (in fact a conveyancing clerk named Winnie Chan Yuk Chau) gave no explanation of any of the documents.

(2) In oral evidence she said

(a) the only explanation given was to indicate references (it seems in the commitment letter dated 3rd September) to an instalment loan of $4.5m and an overdraft of $2m;

(b) her attention was not drawn to any other documents, nor was their nature explained to her;

(c) she was not given any opportunity to read the documents;

(d) she just signed in the places the attending clerk pointed to;

(e) when she signed the documents, there was no seal or signature of Sunny (which must have been added later);

(f) she was given no opportunity to speak with a solicitor in the firm.

(2) She also said in oral evidence that she was not advised she could consult her own lawyer, and there is no evidence that she was.

61. The Plaintiff maintains she was unaware that Sunny was the borrower under the mortgage and was under the impression that she was the borrower. She gave a number of reasons. She was the owner. Mr Li had told her she would be the borrower. The solicitor's clerk attending the execution did not tell her she was not the borrower. She says that, had she known that Sunny was the borrower, she would have refused to sign the mortgage documents, since she knew nothing of Sunny.

62. The Plaintiff also maintains that she was under the impression that the amount secured by the mortgage was limited to $6.5m, and, had she known it was not, she would not have executed the mortgage. There was a limit, she said, to her trust in Mr Li.

63. In cross-examination as to the Bank's commitment letter dated 3rd September 1996 (in English) she said that if she read it she would have understood it but nevertheless she did not read it. She claims that all she took in was the address of the property and the amount $6.5m. The other documents (which are clearly more complex documents) she could not read.

64. In cross-examination as to the execution of the documents:

(1) As to the commitment letter dated 3rd September 1996, the Plaintiff said variously: it was a document she was able to read; she did not read it; she thought the words "Sunny Tech Limited" had not yet been inserted in it; she did read it; she only read the address of the property and the amount.

(2) As to the Bank's facility letter of 5th September 1996, the Plaintiff said she was certain this was one of the documents she executed on 29th August 1996. She says she did not read it (she had said in chief it was not explained to her). She says she did not notice the guarantee at the end of the letter.

(3) Generally: she read none of the documents executed on 29th August 1996 and she did not ask for any of the documents to be explained to her.

65. In cross-examination on the note which Mr Li gave her, she accepted she specifically asked for it because Mr Li had previously broken his oral promises. However, when it was put to her that this showed she no longer trusted his words, she gave a somewhat different explanation: it was to remind Mr Li of the length of the agreed period for repayment. In re-examination, she said it was to remind Mr Li when the agreed period of six months would start to run.

66. In chief the Plaintiff gave evidence that in 1996 she considered whether she should sell the Property, as its value had increased. Further, she said, this would enable her to put an end to her relationship with Mr Li in the matter, and in cross-examination she admitted she was anxious to make a clean break from him. However, she denied this indicated she no longer trusted him. In re-examination, she said she wanted a clean break so far as the mortgage was concerned, not at a personal level, as he still respected her and they were still friendly. In the end she decided against selling the Property because the Bank agreed to give a mortgage loan and she was relying on Mr Li repaying the $2m facility within six months, as promised.

The period between the 1996 and 1998 Mortgages

67. After the 1996 Mortgage, the Plaintiff continued to chase Mr Li but to no avail. She produced six faxes she sent Mr Li between December 1996 and October 1998 in which she entreats Mr Li to start paying her back and in which she explains her acute financial predicament, including threatened legal proceedings by her bankers. According to the Plaintiff, Mr Li repeatedly told her he did not then have the money but expected to receive funds, and she believed him, thinking that he was a rich man and had valuable investments in the PRC but had to wait for the profits to come in. She agreed that Mr Li failed to deliver again and again, but maintains she never doubted his ability to repay her. She maintains she still trusted Mr Li.

68. The Plaintiff maintains that on a number of occasions Mr Li confirmed he was paying the mortgage instalments, as (she says) he had agreed to do.

The 1998 Mortgage

69. As stated above, Leading Counsel for the Plaintiff in closing submissions indicated he would not seek any relief in respect of the 1998 Mortgage, since the Plaintiff was no worse off under the 1998 Mortgage than she had been under the 1996 Mortgage. However, the Plaintiff's evidence as to the 1998 Mortgage is potentially relevant in assessing the Plaintiff's credibility as to the 1996 Mortgage. I shall, however, be selective in summarising the evidence as to this mortgage, concentrating on the evidence as to the execution of the mortgage.

70. The 1998 Mortgage was executed on 31st December 1998. It was a second mortgage, ranking behind the 1996 Mortgage, and it secured general banking facilities repayable on demand granted by the Bank to Fairwealth under its new name Keeland Ltd ("Keeland"). It appears to have been accepted that there was a $9.35m limit under this mortgage. The Plaintiff's maximum liability was limited to the amount of the proceeds of sale of the property, provided certain safeguards were met.

71. There was a dispute whether, as the Plaintiff alleged, the manager Mr Wong Lau Ping ("Mr Wong") represented to the Plaintiff that the new mortgage would "replace" the 1996 Mortgage, so that the 1996 Mortgage would cease to have effect upon execution of the new mortgage. It appears from Mr Wong's evidence that in fact the effect of the proposed restructuring was that the principal debt secured by the 1996 Mortgage would be paid off but the accrued interest of about $1.25m would not be, and to that extent the 1996 Mortgage would not be "replaced". However, this is now not a live issue in the case and I do not propose to deal with it further.

72. The Plaintiff's account of the 1998 Mortgage in her witness statement can be summarised as follows.

73. In early December 1998 Mr Li told the Plaintiff that the outstanding amount secured by the 1996 Mortgage was $9.3m and he was seeking to restructure his debts to the Bank. She was shocked at the amount and asked for an explanation. According to her, Mr Li's explanation was that he had not been paying the monthly instalments under the 1996 Mortgage. The Plaintiff admitted in her oral evidence that she found Mr Li's lies about having paid the mortgage instalments unacceptable and she admitted she felt betrayed in the trust she had reposed in him.

74. The Plaintiff's evidence was that, as a result of what Mr Li told her she panicked in agreeing to execute a further mortgage. However, nothing further occurred until 31st December 1998, when Mr Li told the Plaintiff she had to execute the new mortgage that day. She went to the offices of the Bank's solicitors (again Tsang, Chau & Wong) with Mr Li and Mr Patrick Chung, arriving very late in the afternoon. She claims that the attending solicitor's clerk (again Winnie Chan) did not explain any of the documents to her, and told her that, Mr Li having explained the documents to her, she had better sign to protect her interests.

75. The Plaintiff claims that, had she known that Keeland was the borrower and that the limit of the facilities secured by the mortgage would be as much as $9.35m, she would not have signed the documents, since she knew nothing of Keeland. She says she signed the documents because she was "induced and threatened" by the representations of Mr Wong and Mr Li.

76. The Plaintiff's oral evidence as to execution of the 1998 Mortgage, adds the following to her witness statement on that subject:

(1) Mr Lau was present, as well as Mr Li and Mr Patrick Chung.

(2) They were there for about 1 1/2 hours, and half an hour was spent by the Plaintiff, Mr Li, Mr Lau and Mr Patrick Chung alone with the documents.

(3) Again, Winnie Chan simply pointed to where on each of the documents the Plaintiff was to apply her signature.

(4) While the Plaintiff was signing, Patrick Chung remained in the room, waiting for his turn, some distance away.

(5) Neither the mortgage nor any of the related documents was explained to her on this occasion, nor was she given the opportunity to read them.

(6) A little later she said that Winnie Chan explained the limit of liability.

(7) When she signed the documents, there was no seal or signature of Keeland (which must have been added later).

77. The Bank's two-page explanatory document was in both an English and a Chinese version and the Plaintiff signed both. This advises the would-be parties to seek independent legal advice before entering into the transaction, and sets out an explanation of the transaction in simple terms. Under cross-examination the Plaintiff accepted she had no difficulty understanding the Chinese version, but claimed she did not read it because she was in a bad mood, she was more interested in the amount, it was late and she had been told to sign the document right away, she had spoken to Mr Wong and anyway it was the responsibility of the solicitors to draw her attention to it. The Plaintiff claims she never asked the solicitors' staff to explain the documents.

What happened to the "investment"

78. According to the Plaintiff's witness statement and a letter from a firm of solicitors (Kwan & Kwan) retained by the Plaintiff and other "investors", Mr Li took large sums of money for the Hillwood Road "venture" from at least another four "investors" and that the other investors, like the Plaintiff, signed agreements and transfer documents for shares in Fairsheen and Bright Wick, but no Fairsheen or Bright Wick shares were registered in the name of any "investor". Consequently, the shares in those companies could be, and in fact were in 1998, transferred to a third party. At some stage Fairsheen and Bright Wick sold the shops without accounting to the investors for the proceeds of sale. In the result the "investments" were worthless.

What happened to the Property

79. On 31st May 2000 the Bank, exercising its power of sale in the 1998 Mortgage, sold the Property for HK$7.5m.

Findings as to the investment

80. The Plaintiff's account of her "investment" in the Hillwood Road venture of $750,000 in 1994 is credible and I see no good reason to doubt it. I do not regard the rather unusual way her evidence emerged as reflecting on her credibility. Moreover, her account is corroborated by: the four paid cheques in 1994; the "schedule of investors" in which she appears to be listed as an investor; the documents signed at the solicitors' offices in 1995; and her fax to Mr Li of 7th October 1998 in which she specifically refers to her $1m investment.

Findings as to the loan

81. The Plaintiff's account of advancing a loan of $3,301,960.27 to Mr Li 23rd December 1994 is credible and I see no good reason to doubt it. Nor do I find there is good reason to doubt the precise calculation of the loan amount as set out in paragraph 38 above. Moreover, the existence of the loan is corroborated by Mr Li's written promise dated 29th August 1996 to pay off the $2m overdraft in six months and the Plaintiff's chasing letters sent to him. The calculation of the amount of the loan is substantially corroborated by the passbook for the Plaintiff's savings account.

82. I find that no part of the loan has been repaid and accordingly Mr Li remains indebted to the Plaintiff for $3,301,960.27.

Findings on the Plaintiff's claims based on misrepresentation

83. As stated above, the Plaintiff makes claims against Mr Li in deceit and under section 3(1) of the Misrepresentation Ordinance in respect of alleged misrepresentations he made inducing her to enter into the 1996 Mortgage. If (but only if) her claim against Mr Li succeeds, she also claims against the Bank that the Bank had constructive notice of the misrepresentations when the 1996 Mortgage was granted and on this basis she seeks financial relief in lieu of rescission (a complete rescission being unavailable in view of the sale of the Property to an innocent purchaser).

The claim against Mr Li

84. The Plaintiff's pleading relies on section 3(2) of the Misrepresentation Ordinance. This appears to be a slip for section 3(1). I do not see how the Plaintiff could rely on section 3(1) which reads:

"Where a person has entered into a contract after a misrepresentation has been made to him by another party thereto and as a result thereof he has suffered loss, then, if the person making the misrepresentation would be liable to damages in respect thereof had the misrepresentation been made fraudulently, that person shall be so liable notwithstanding that the misrepresentation was not made fraudulently, unless he proves that he had reasonable grounds to believe and did believe up to the time the contract was made that the facts represented were true."

In this case "the contract" is the mortgage to which Mr Li is not a party. Since the sub-section requires the representor to be a party, it cannot apply to this case.

85. The Plaintiff is therefore left with her claim in deceit. The basic elements of this tort are:

(1) A representation of fact.

(2) The representor's knowledge that the representation is false, or at least an absence of a genuine belief it is true.

(3) The representor's intention that it should be acted on by the plaintiff.

(4) The representee's acting on it and suffering damage by doing so.

See Bradford v Borders B.S. [1941] 2 All ER 205 at 211 per Viscount Maugham.

86. Because the claim is in fraud, the Plaintiff requires more compelling evidence to prove it. See Aktieselskabet Dansk Skibsfinansiering v Brothers [2000] 3 HKCFAR 70 at 77J-79D.

87. The pleaded representations are as follows:

"In about August 1996, the 2nd Defendant ... represented to the Plaintiff, inter alia, that:-

a. The 1st Defendant would charge lower interest rate if the Plaintiff transferred the existing mortgage loan to the 1st Defendant;

b. The loan would be divided into an instalment loan of HK$4,500,000.00 and in overdraft facility of HK$2,000,000.00;

c. The total liability under the said mortgage loan was HK$6,500,000.00."

88. The pleaded particulars of falsity are as follows:

"In fact the said representation was false in that (a) the Plaintiff was required to guarantee the repayment of all sums of money owed by a Sunny Tech Limited ("Sunny Tech", whose registered address was Room A, 5th Floor, Success Commercial Building, Nos. 245-251 Hennessy Road, Wanchai, Hong Kong) to the 1st Defendant; and (b) the Plaintiff's total liability under the 1st Mortgage was for an unlimited amount."

89. It should be noted that the Plaintiff's pleading does not rely on an express representation by Mr Li that the Plaintiff would be the borrower. The Plaintiff gave evidence to that effect, which I disbelieved (see paragraph 132 below). Nor is there evidence that Mr Li expressly represented that the total liability was $6.5m.

90. The gist of the representation, as outlined by the Plaintiff's Leading Counsel in final submissions, was that Mr Li represented that the only difference between the existing mortgage and the proposed mortgage to the Bank would be the interest payable, and this was false because, as Mr Li well knew, the borrower would be Sunny instead of the Plaintiff and the secured borrowings would be unlimited instead of being limited to $6.5m.

91. Considerable reliance was placed on Mr Li's alleged reference to the mortgage being "transferred" as implying that, aside from the matters mentioned, the proposed new mortgage would be the same as the existing one. However:

(1) I am not prepared to find that Mr Li used the word "transferred" or similar expression. I find it hard to believe, without corroboration, on a claimed memory of the precise language used by Mr Li on an occasion many years ago. I take into account my adverse findings below as to the Plaintiff's general credibility.

(2) It will be recalled that the Plaintiff's evidence as to why she granted the 1995 mortgage was that she thought the existing one (the 1994 Mortgages) had to be transferred. So clearly on this occasion she herself was referring to a transfer of a mortgage in a much looser way than she attributes to Mr Li in her case of misrepresentation against him.

(3) As a matter of ordinary language I do not think that reference to transfer gives rise to the suggested implication. It could simply mean that there is to be a new mortgage.

(4) In the context of Mr Li saying (if he did) that the Bank would charge less interest, the emphasis is on finding a new mortgagee, not the terms (other than interest) on which a new mortgage could be obtained.

(5) I should bear in mind that since this is an allegation of fraud, there should be compelling evidence that the representation was made, and was known to have been made without belief in its truth. I reject the argument based on Mr Li's alleged reference to transfer.

92. Once the argument based on transfer is rejected, I do not think there is any real basis for the alleged misrepresentation.

93. Nor is there evidence of reliance in so far as the identity of the borrower is concerned. In any event, I have found that the Plaintiff was aware that the borrower was Sunny (see paragraph 132 below), and on this basis there could have been no reliance.

94. Nor is there evidence of reliance in so far as the absence of limit is concerned. The Plaintiff claims she thought there would be a $6.5m limit, but she does not attribute this to a representation made by Mr Li.

95. I reject the misrepresentation claim against Mr Li.

The claim against the Bank

96. Since the claim against Mr Li fails, so must the claim against the Bank.

Findings on the Plaintiff's claim in undue influence

Issues as between the Plaintiff and the Bank

97. The first issue. This is whether in fact the 1996 Mortgage was procured by Mr Li's undue influence. The Plaintiff has to establish that her relationship with Mr Li developed to a point where he acquired a measure of influence over her of which he took unfair advantage, and this was the reason, or the predominant reason or at least a significant reason, why she granted the 1996 Mortgage (see Royal Bank of Scotland v Etridge [2001] 3 WLR 1021 per Lord Nicholls of Birkenhead at 1029 para 8; Bank of China (Hong Kong) Ltd v Wong King Sing [2002] 1 HKLRD 358 at 368E per Mr Recorder Ma SC).

98. The Plaintiff says that she reposed trust and confidence in Mr Li and it is submitted on her behalf that the 1996 Mortgage is not readily explicable by the relationship between them. If on those two sub-issues I were to make findings in the Plaintiff's favour, then a rebuttable evidential presumption would arise that the 1996 Mortgage was procured by undue influence (see Etridge at 1030 para 14 and 1032 para 21).

99. The second issue. If I should find that the presumption has not been rebutted, and therefore the 1996 Mortgage was procured by undue influence, the next issue would be whether the Bank was put on enquiry (see Etridge at 1036 para 40, 1037 para 44 to 1039 para 49).

100. The third issue. If I find the Bank was put on enquiry, the next issue would be whether the Bank did all that it should have done to reduce the risk of the proposed transaction being entered into under undue influence (Etridge at 1037 para 41 and 1038 para 50 to 1040 para 57).

101. The fourth issue. If I were to find against the Bank on the third issue, the next issue would be whether in principle the Plaintiff can claim compensation having regard to the sale of the Property to an innocent purchaser.

102. The fifth issue. If in principle a claim for compensation can be made, the fifth issue is the amount of compensation.

Findings on the first issue

103. The Plaintiff and Mr Li were friends, and no other form of relationship has been suggested.

104. Whether 1996 Mortgage is readily explicable by relationship. In my judgment the 1996 Mortgage is not a transaction readily explicable by a relationship of friendship. It was entered into at the instigation of Mr Li and is manifestly disadvantageous to the Plaintiff. Under the 1995 Mortgage the Plaintiff was the borrower, having therefore control over the maximum amount secured by the mortgage. Under the 1996 Mortgage, which replaced the 1995 Mortgage, the borrower was a company over which the Plaintiff had no control and in which she had no interest or even knowledge, and there was no limit to the amount secured by the mortgage. Consequently, whereas under the 1995 Mortgage the Plaintiff could be certain that no further advances would be secured by the mortgage without her knowledge and consent, under the 1996 Mortgage secured advances could be made without her consent even to the point of extinguishing the value of her equity of redemption. That is in fact what eventually happened. The 1996 Mortgage was a transaction which was far from being readily explicable by friendship alone.

105. Factual background to 1996 Mortgage. The Plaintiff says she reposed trust and confidence in Mr Li right up to the time she granted the 1996 Mortgage. I accept the Plaintiff's evidence as to the background to the 1996 Mortgage which is highly relevant and which I propose to deal with chronologically.

106. When the Plaintiff met Mr Li in 1992 he must have been a person of some social accomplishment, running a no doubt successful social club. The Plaintiff obviously liked him and enjoyed his company. Though their relationship was that of friends, their calling each other brother and sister indicates a special friendship. It is clear that the Plaintiff was very considerably impressed by what she believed to be Mr Li's great wealth. She evidently believed him when he claimed to have turned down an offer of $200m for his Zhuhai investments. She was also considerably impressed by what she believed to be his fine qualities. He was a very rich friend whom she could trust implicitly. This set the stage for what was to follow.

107. I have already accepted the Plaintiff's account of her "investment" in the Hillwood Road project, which was done at the instigation of Mr Li. There are several features of her "investment" which indicate that she reposed trust and confidence in him. She decided to invest on the basis of his no doubt impressive presentation. She does not appear to have sought any advice. There was never any proper documentation. She paid for the investment by one blank cheque (or two if one counts Mr Lau's) and two cheques in favour of a company linked with Mr Li, and there is no evidence she got anything in return. She left it to Mr Li to appropriately apply her money to her "investment". As to the "schedule of investors" she was given in late 1994 (some months after she had given Mr Li the last of the three cheques), the Plaintiff came across this document by chance. She does not appear to have called on Mr Li for an explanation of the document, for she was unable to explain the first two columns except on the basis of inference or guess work. (There is no explanation of the remaining columns.) The Plaintiff was unable to explain the documentation signed in April/May 1995, the terms of which did not reflect what had taken place between her and Mr Li. Yet the Plaintiff was content to sign it. It seems to me quite plausible that, as she says, she signed the documentation without reading it or having had it explained to her. That would explain why she called for no explanation of the strangeness of the documentation. She made no real effort to ascertain the basic details of the investment, still less to have it committed to writing. In my judgment, the objectively most plausible explanation for her acting as she did in relation to the "investment" was that she reposed trust and confidence in Mr Li, specifically to see to it that her interests in relation to the investment were looked after.

108. During the second half of 1994 the Plaintiff allowed Mr Li's credit for building materials with her company to mount, reaching about $1m by the end of the year. The Plaintiff evidently believed Mr Li when he told her, in effect, he was still very rich but had encountered short-term cash problems.

109. The mortgage loan advanced in late 1994 was done at the instigation of Mr Li. It had three major features. The first is that the Plaintiff agreed to lend Mr Li over $3m unsecured. It is true that her company would get payment of the outstanding credit for building materials, but still in cash terms the Plaintiff was putting about $2m of her money at risk. It is also true that the Plaintiff had the benefit of Mr Li's promise to repay in six months, his vague promise to provide an unspecified number of extra shares in the Hillwood Road project as security and his promise to pay the mortgage instalments. No doubt each of these promises played its part in inducing the Plaintiff to make this loan to Mr Li, but they were each worthless unless underpinned by the Plaintiff's trust and confidence in Mr Li.

110. The second major feature of the mortgage loan is that although the purpose of the refinancing of the Property was just to provide funds to lend to Mr Li, under each of the 1994 Mortgages Fairwealth was the borrower and in the case of the Sinohill mortgage there was no limit to the amount secured by the mortgage. Consequently, as in the case of the 1996 Mortgage, the Plaintiff was potentially at the mercy of the borrower. The Plaintiff therefore did not just put her cash of about $2m at risk in the loan transaction. She also risked reducing or even losing the value of her equity of redemption. In so far as she understood that this was the effect of the 1994 Mortgages, the most plausible explanation of her entering into the transaction with such knowledge is that she reposed trust and confidence in Mr Li. Equally, if she did not understand that this was the effect of the mortgages - either because no-one explained that to her or, if they did, she did not follow the explanation - again the most plausible explanation of her executing the documents in ignorance of their terms is that she reposed trust and confidence in Mr Li.

111. The third major feature of this mortgage loan is that the Plaintiff did not benefit from it at all, except to the very limited extent that she (through her company) got a purely cash benefit in the form of settlement of the outstanding debt for building materials. Otherwise all the benefit (in the shape of the loan and the ability to raise further funds on the security of the Sinohill mortgage) went to Fairwealth, with which the Plaintiff had no connexion but Mr Li did. The absence of any real quid pro quo for the loan is, in my judgment indicative of a desire on the Plaintiff's part to accommodate and please Mr Li, which went hand in hand with her trust and confidence in him.

112. The 1995 Mortgage was entered into at the instigation of Mr Li. Under this mortgage Fairwealth dropped out of the picture and the Plaintiff was the named borrower. The outstanding principal debt remained $6.5m. The Plaintiff was therefore in a much safer position than she had been under the 1994 Mortgages. However, there appears to be no explanation of how this came about, not even whether this form of the mortgage was adopted at the initiative of the lender, the Plaintiff or Mr Li.

113. By this time Mr Li had completely failed to honour his promise to repay the loan within six months. He had completely failed to implement his promise to provide security for the loan. It is clear from the Plaintiff's evidence on the matter, which I accept, that she concluded that Mr Li had given her untruthful reasons for looking for a new lender (falling out with the 1994 lenders and the interest was too high). Indeed, if (contrary to her evidence) she was aware of the interest provisions of the mortgage as compared with the 1994 Mortgages she would have realised that the interest under this mortgage was higher than under the 1994 Mortgages.

114. These were all sound reasons why the Plaintiff if acting sensibly might have broken off with Mr Li entirely and sought to recover what she could from him, no doubt with the advice and assistance of solicitors. Instead, she carried on her friendship with Mr Li, and at his instigation she granted the 1995 Mortgage despite the fact that Mr Li had by then failed to comply with any of his promises. Her attitude towards Mr Li is shown by her chasing faxes to Mr Li which, while written in a later period (16th December 1996 - 7th October 1998) cast light on her attitude when she granted the 1995 Mortgage. Despite the dire straits she was in and despite Mr Li's reneging on his promises, she remains, throughout, friendly, even apologetic, and understanding of his financial problems. She writes almost as if she is asking him for a favour.

115. I do not think it would be realistic to treat the continuance of the special friendship as being separate and distinct from the Plaintiff's trust and confidence in Mr Li. They went hand-in-hand as two, related, aspects of the Plaintiff's side of the relationship.

116. I have already found that the Plaintiff reposed trust and confidence in Mr Li from the time of the investment up to the 1994 Mortgages and in my judgment that trust and confidence did not cease by the time of the 1995 Mortgage, but continued.

117. I accept the Plaintiff's evidence that after the 1995 Mortgage Mr Li continued to represent himself as asset-rich but short of cash, and she believed him.

118. The 1996 Mortgage. I have already referred to the salient features of the 1996 Mortgage and the seriously disadvantageous terms of the mortgage so far as the Plaintiff was concerned. Insofar as the Plaintiff understood these reasons, the most plausible explanation for her granting the mortgage is that she continued to repose trust and confidence in Mr Li. Equally if she did not understand this was the effect of the mortgage, again, the most plausible explanation of her granting the mortgage in ignorance of its terms is that she continued to repose trust and confidence in Mr Li.

119. I find that when the 1996 Mortgage was executed, the Plaintiff reposed trust and confidence in Mr Li. Having already found that the mortgage is not readily explicable by the relationship between them, I ask myself whether the presumption of undue influence is rebutted. Before answering that question I deal with further salient aspects of the evidence.

120. The note. As to the Plaintiff's insistence on Mr Li giving the Plaintiff a written promise to repay the $2m overdraft within six months, no doubt she asked for the document because Mr Li had broken his oral promises. I reject her other explanations for requiring it. However, I do not see it as necessarily precluding trust and confidence in Mr Li or undue influence, though it is a factor to be taken into account. It seems to me that the most likely explanation is that the Plaintiff wanted to impress on Mr Li the great importance to her of being substantially repaid at an early date. This is consistent with the chasing letters starting 16th December 1996 which refer to the pressing demands made of the Plaintiff by her own bankers. If the document had been intended as one to facilitate enforcement of Mr Li's promise (being made necessary by a lack of trust) one would have expected to find the Plaintiff relying on the document after the six months period had expired, yet there is no evidence of that.

121. Whether the Plaintiff understood the mortgages. Considerable time was spent during the trial on the question whether the Plaintiff understood the terms of the mortgages she granted, and in particular what if any explanation she was given of the documents by the solicitors for the mortgagee banks.

122. Each of the mortgages contained an interpretation clause stating that the mortgage had been interpreted to the Plaintiff in Cantonese. This reflects a standard practice in Hong Kong where solicitors for a mortgagee know that the mortgagor does not have a thorough command of the English language. However, the quality of the explanation given does of course depend on the specific circumstances and the reliability and expertise of the interpreter.

123. As to the 1994 Mortgages, I am unable to accept the Plaintiff's evidence. It is inherently unlikely that the solicitor's clerk would have "explained" the instalment provisions of the mortgages when in fact there were none, and inherently unlikely that he would have misnamed the borrower. I find it hard to believe that the Plaintiff would have been able to recall the gist of what the clerk said seven years previously. The complaints she makes are serious ones and it is difficult to see how they could accidentally have been omitted from the Plaintiff's witness statement. The absence of complaint in the witness statement has not been explained. I did not have a favourable impression of her evidence on this subject.

124. In the absence of any other evidence as to the circumstances of the execution of the 1994 Mortgages, I do not think I can make any positive findings as to what explanation was given to the Plaintiff, or as to what extent she understood it, beyond finding it more likely than not that the Plaintiff did not think she was the borrower under the mortgages.

125. As for the 1995 Mortgage, the Plaintiff's only real complaint against the solicitors as appears to be that the interest provisions of the mortgage were not explained to her. For reasons similar to those given in relation to the 1994 Mortgages, I found her evidence unconvincing. However, apart from affecting her overall credibility, this appears to be unimportant since the Plaintiff acknowledges that she did not believe Mr Li's statements about relative interest rates as between the 1994 and 1995 Mortgages.

126. As for the 1996 Mortgage, the Bank called Winnie Chan, the conveyancing clerk responsible for the execution of both the 1995 and the 1998 Mortgages. I will deal with salient feature of the evidence as to both mortgages, since although the 1998 Mortgage is no longer in issue, Miss Chan's evidence as to that mortgage is relevant to her credibility as to the 1996 Mortgage. In relation to the 1996 Mortgage she had no independent recollection of the execution and relied on her usual practice. In relation to the 1998 Mortgage she said she recalled the execution to some extent, particularly because on this occasion, after Miss Chan had explained the documents, the Plaintiff asked for time to consider them, which she did for about half an hour.

127. Miss Chan's witness statement sets out the explanations which she says she would have given the Plaintiff in accordance with her usual practice, and without going into details in my judgment, so far as the 1996 Mortgage is concerned, these explanations, if given, would have been sufficient to explain the salient features of the mortgages to the Plaintiff.

128. I also had the benefit of hearing the evidence of Mr Patrick Chung as to the execution of the 1998 Mortgage. Mr Chung's witness statement alleges that Winnie Chan gave no general explanation of the mortgage and only responded to his specific queries. However, according to his evidence about the two-page explanatory document which the Plaintiff signed, he said Winnie Chan took him and the Plaintiff through the document (thereby contradicting not only his own witness statement but also the Plaintiff's evidence). He later retracted this evidence, reverting to his first version that he merely "glanced" at the document for the 10-20 minutes he was given to read it himself (as was the Plaintiff). He gave unconvincing evidence as to how it was that the Plaintiff did not hear Mr Li explain why Keeland was named the borrower. I was unimpressed by his evidence that Winnie Chan misrepresented to him that the 1996 Mortgage would be cancelled and replaced by the 1998 Mortgage. That seems inherently unlikely and believable only if Mr Chung had been unaware that this was a second mortgage, which was clearly stated in the explanatory document. Overall, I found Mr Patrick Chung an unreliable witness.

129. I had the benefit of Miss Chan having been taken through her evidence in chief, and having been cross-examined at some length. I was favourably impressed by Winnie Chan's evidence, and I prefer it to the evidence on the matter given by the Plaintiff. She gave her evidence well and straightforwardly. She said, and I have no reason to disbelieve her, that she had worked as a solicitors' clerk since 1980 and she had been specifically trained to explain conveyancing documents. She made the valid point that the purpose was to prevent those executing the documents from later asserting they did not understand them. She admitted that her witness statement went too far in positively asserting in relation to the 1996 Mortgage that both Mr Ip and his sister were present when she gave her explanations. That I regard as a minor matter not adversely affecting her credibility.

130. In my judgment the Bank proved that the salient terms of the 1996 Mortgage were explained to the Plaintiff by the Bank's solicitors.

131. This conclusion does not mean that the Plaintiff did not repose trust and confidence in Mr Li or that she was not under his undue influence. Although the Bank, through its solicitors, adequately explained the mortgage, that does not necessarily mean that the Plaintiff took it all in, still less that she appreciated the implications of the transaction. But even if she understood the transaction and its implications, as Lord Nichols said in Etridge at 1032D "a person may understand fully the implications of a proposed transaction, for instance a substantial gift, and yet still be acting under the influence of another". As I have already found above, in my judgment the Plaintiff reposed trust and confidence in Mr Li, whether or not she fully understood the transactions.

132. The borrower. I was unimpressed by the Plaintiff's evidence that she thought she was the borrower under the 1996 Mortgage. I reject her explanations. I think it likely that she realised that the borrower under a mortgage might not be the owner. As I have found, Winnie Chan did inform her that Sunny was the borrower. As to Mr Li's alleged representation that the Plaintiff was the borrower, I find this unlikely. There appears to have been no particular reason why Mr Li should have stuck his neck out on such an obvious untruth, and if such a misrepresentation been made, and relied on as the Plaintiff asserts, one would have expected it to have been pleaded as part of the Plaintiff's case in misrepresentation. The Plaintiff was cross-examined to show that if she had been the borrower she would have received the statements of account which her witness statement complains she never received. She claims she thought that the banks would not send statements, provided there was no default. However, she admitted that she had had previous experience of mortgage loans and had always received bank statements. I found her evidence unconvincing.

133. Credibility. There are also a number of other instances where the Plaintiff's credibility was adversely affected by shifts of position and significant differences between her witness statement and her oral evidence. However, I do not regard the Plaintiff's general lack of credibility as being fatal to her case as to reposing trust and confidence in Mr Li. Her evidence that she did repose such trust and confidence in him is underpinned by the nature of the transactions as I have explained above. On all the evidence, the most plausible reason for the Plaintiff granting the 1996 Mortgage was that she continued to repose trust and confidence in Mr Li.

134. Conclusion. For the reasons I have given, in my judgment the prerequisites for the presumption are met and the presumption has not been rebutted. I find that when the Plaintiff granted the 1996 Mortgage she was under the undue influence of Mr Li and this was the reason or the predominant reason why she granted the mortgage.

Findings as to the second issue

135. The Bank was of course aware of the disadvantageous terms of the proposed mortgage. It was also aware (from a letter from the existing mortgagee's solicitors) that under the existing mortgage the borrower was the Plaintiff and that there was a $6.5m limit, so it knew of the greatly increased risk the Plaintiff would be running from replacing the existing mortgage by the proposed mortgage. It was Winnie Chan's evidence that, before taking the mortgage, the Bank had conducted a search of Sunny which had shown that the Plaintiff was neither a shareholder nor a director of Sunny. The Bank had no reason to think that there had been commercial dealings between the Plaintiff and Sunny. In the course of the trial the Bank never suggested that it was under the impression that the Plaintiff had a commercial relationship with Sunny.

136. In these circumstances the Bank must have realised that there was no commercial relationship between the Plaintiff and Sunny, or at least had no good reason to think there was such a relationship. It was therefore put on enquiry. See Etridge at 1048 para 87.

Findings as to the third issue

137. The burden is on the Bank to establish that it brought home to the Plaintiff the risks she would be running if she granted the proposed mortgage. See Etridge at 1039 para 50, 1042 para 64, 1047 para 84 and 1048 para 87 (I do not read 1040 para 54 or 1048 para 85 as saying anything different). As to the kind of steps which should be taken, I follow Bank of China v Wong King Sing [2002] 1 HKLRD 358 (Mr Recorder Ma SC, as he then was) at 377 para 69.

138. The only steps taken by the Bank to bring home to the Plaintiff the risks she was running were to have the salient terms of the mortgage explained to the Plaintiff. I have already found that the salient terms were explained by Winnie Chan. But in my judgment, that was not enough to bring home to the Plaintiff the risks she was running.

139. First, the explanation was given in the presence of Mr Li. As Mr Recorder Ma explained in the Wong King Sing case at 381 para 89

"The need for a private meeting is, in my view, obvious. If the suspicion is that an influencer has or may have exerted undue influence on the complainant, any advice or warnings given to the complainant, at a meeting at which the influencer is present, simply fails to achieve its purpose."

140. Secondly, the explanation was not given until very shortly before the mortgage was executed. A similar thing happened in the Wong King Sing case where Mr Recorder Ma said at 381 para 91

"In these circumstances, I am of the view that the value of any explanation or advice provided to the complainant surety, loses much of its effect when he is subjected to additional pressure in terms of time. How realistic, one might ask, is the prospect of the surety seeking independent legal advice when he is faced with the pressure of having to sign documents within a tight time schedule? In the present case, this prospect would have been unrealistic."

and at para 92

"It is important for banks or other third parties to ensure that a surety's agreement has been properly obtained. Adequate time must, therefore, in my view, be allowed for the requisite explanation and advice to be given. In the majority of cases, this should not be done on the very day when the relevant documents must be signed or the relevant transaction carried out."

I agree.

141. Thirdly, in the present case I do not think that merely explaining the salient terms of the mortgage was enough to bring home to the Plaintiff the risks she was running. The risk was that the people behind Sunny would make additional borrowings behind her back for which she would be liable and for which her property would be charged. A mere explanation of the terms does not necessarily bring home the risks which flow from those terms. The Plaintiff was not advised to obtain independent legal advice. By the time of the 1998 Mortgage, the Bank had adopted a policy of advising prospective mortgagors to obtain independent legal advice. The new policy presupposes that a mere explanation of the terms is not enough, as an explanation of terms does not require independent legal advice. As in this case, an explanation can be given by a conveyancing clerk.

142. In these circumstances the Bank is deemed to have had notice of the Plaintiff's claim that the 1996 Mortgage was procured by undue influence, a claim I have found proved. See Etridge at 1048 para 87. In case it may be necessary, I find that, had the Bank or its solicitors brought home to the Plaintiff the risks she was running, it is quite likely that she would not have granted the mortgage.

Findings on the fourth issue

143. The mere fact that the parties cannot be restored precisely to their original positions does not prevent the Court from giving appropriate relief. In undue influence cases the court has the power to achieve practical justice between the parties by obliging the defendant to give up profits and compensate for losses. See O'Sullivan v Management Agency [1985] 3 All ER 351, Mahoney v Parnell [1996] 3 All ER 61.

Findings on the fifth issue

144. The Plaintiff asks for equitable compensation of $7.5m being the proceeds of sale. I do not see any basis for this.

145. Alternatively, the Plaintiff asks for equitable compensation of $3.5m being the difference between the value of the Property in 1996 ($10m) and the cost of redemption of the 1995 Mortgage ($6.5m).

146. In my judgment, this alternative claim should succeed, on the basis that:

(1) The wrong was done when the mortgage was granted on 29th August 1996 and prima facie at any rate the appropriate starting point is to see what was the value of the Property on that date.

(2) Moreover, the Plaintiff's case on the facts is that, had the 1995 Mortgage continued, the Property would have to have been sold to meet the claims of Luk Fai. In view of the evidence of the Plaintiff's poor financial position in 1996 (in the shape of her faxes to Mr Li) and Mr Li's inability or unwillingness to repay the Plaintiff, a sale seems likely.

(3) As to the value of the Property at these times, the Plaintiff relies on the Bank's own internal valuation of $10m as at June 1996. In the absence of any other evidence of value, I should accept this valuation. There is no evidence of any diminution in value in the months following June 1996.

(4) What therefore the Plaintiff has lost is the $10m value of the Property less the costs of redeeming the 1995 Mortgage.

(5) It is common ground that the cost of redeeming the 1995 Mortgage was $6.5m.

Pleaded claim against the 2nd Defendant

147. The Plaintiff's pleading advances against the 2nd Defendant for damages for undue influence. I had understood that in final submissions Leading Counsel for the Plaintiff indicated that he did not pursue this claim. However, having since read the transcript of the final submissions, I am not certain that this was as clear as I had thought. I will therefore hear counsel further as to whether this claim is pursued and if so what submissions support it.

Disposition

148. I give judgment for the Plaintiff against the 1st Defendant for $3.5m. I will hear counsel on questions of interest and costs.

149. The Plaintiff is entitled to judgment against the 2nd Defendant for $3,301,960.27 in respect of the loan. I will hear counsel and, if he chooses to attend, the 2nd Defendant on questions of interest and costs. However, having regard to the present uncertainty as regards the claim against the 2nd Defendant for compensation for undue influence, I will defer giving judgment against the 2nd Defendant until that matter is cleared up.