Re Chit Lee Holdings Ltd.

HCCW114/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO.114 OF 2000

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R E A S O N S

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1. This is a creditor's petition. The underlying debt arises under a mortgage created by Chit Lee Holdings Limited ("the Company"). Under the terms of the mortgage, the Company is obliged to repay HSBC ("the Bank") which is the petitioner, sums due from its subsidiary Chit Lee Marble & Minerals Company Limited ("MM"), the borrower. As at 16 August 1999, the amount owing stood at $20.27 million. At the hearing, a winding-up order was made. The reasons appear below.

2. The Company opposed the petition. There is an affirmation of Wong Kong Ming ("Mr Wong") who described himself as "the Director" of the Company. It is common ground that Mr Wong is also a director of MM. In essence, the Company's case is that it is not liable to the Bank in respect of the MM's indebtedness beyond the value of the property mortgaged to the Bank notwithstanding the fact that the mortgage executed was an "all-monies" mortgage. The defences relied on are misrepresentation, mutual mistake and non est factum.

The evidence

3. The mortgage was executed by MM as borrower and the Company as mortgagor. Mr Wong signed on behalf of both MM and the Company. The mortgage itself was in conventional form and the property (described therein) was mortgaged by the Company to the Bank to secure repayment to the Bank of monies due under general banking facilities granted to MM. The mortgage also contained a covenant that, inter alia, the Company would, upon demand by notice in writing, pay, make good and discharge to the Bank all sums of money which at the date of the demand might be outstanding and, according to the books of the Bank, payable by MM to the Bank.

4. Order 88 proceedings were brought by the Bank on 3 November 1999 against Mr Wong, the Company and MM. On 21 January 2000, a week before the presentation of the petition, the Bank obtained a money judgment in the sum of over $21 million against the three defendants jointly and severally as well as possession orders, inter alia, in respect of the property. The Order 88 proceedings were defended although the defendants were not legally represented.

5. Mr Wong's affirmation dealt with the events leading up to the execution of the mortgage by him on behalf of the Company upon which the defences are grounded.

6. In early 1997, MM wanted to increase its credit facilities. Mr Wong had a telephone conversation with a Ms Jeanny Ip of the Bank who informed Mr Wong that "the Bank would require further security", namely, the property. Pausing here, presumably it was Mr Wong who informed the Bank what property was available as additional security. In late March 1997, the Bank sent MM a letter dated 20 March 1997 proposing revised facilities and asking for "a further 'all-monies' legal charge to be executed over the property". Neither the name of the Company nor its liability was mentioned in the letter. Mr Wong went on to say :

"The Property was owned by Chit Lee Holdings Limited, the respondent herein and through my limited English and the telephone conversation, the term as understood by me on behalf of the Respondent company was that it covered all monies over the Property only and the respondent company was not 'personally' liable and at most, the respondent company would lose the Property. Had it been known to me that under the document I executed on or about 26 May 1997 the liability of the respondent company was all monies without any ceiling/limitation, I would never have executed such document."

On or about 26 May 1997, Mr Wong attended the offices of the Bank's solicitors who were expecting him as the Bank had informed them that he would be executing a document to pledge a property in order to borrow from the Bank. He said that he was not given any explanation or advice in relation to the mortgage which he executed in his capacity as director of the Company and of MM.

7. I now turn to consider the defences raised.

Misrepresentation

8. The offer letter dated 20 March 1997 is an important document. Although it was addressed to MM, it was marked for Mr Wong's attention. It would appear that it was Mr Wong who, on behalf of MM, sought revised facilities. After describing the various existing and proposed revised facilities, the letter dealt with the question of security. It stated as follows :

"As security, we are holding :-

1) An 'all-monies' legal charge executed in our favour over the property at Flat J2, 32/F, Block J, Beverly Hill, 6 Broadwood Road, with car park no. 207, Kowloon with Mr Wong Kong Ming as the mortgagor (the 'Mortgagor'), and your company as the borrower (the 'Borrower'), that is to say a mortgage to secure 'all-monies' in respect of general banking facilities owing from time to time including future advances, with an unlimited joint and several covenant to pay on the part of the Mortgagor and Borrower.

...

In view of the above adjustments, we shall additionally require:-

(a) An 'all-monies' legal charge to be satisfactorily executed in our favour over the property at Flat B, 16/F, CNT-Jialing Commercial Building, 338 Hennessy Road, Wanchai, Hong Kong.

..."

9. It would appear that Mr Wong had already executed an "all-monies" legal charge over a residential property as mortgagor with MM as the borrower. The letter was explicit as to what that security meant. This earlier mortgage is referred to in paragraph 1 of the order of 21 January 2000 from which it appears that it was executed on 19 March 1996. It is a little disingenuous for Mr Wong to assert that he did not understand what an "all-monies" legal charge meant when 14 months earlier he had executed a similar mortgage over a residential property that he owned. Although professing not to know much English, there is no evidence that sought any assistance with this closely written 4-page facility letter. The mortgage was not executed until some two months later. If Mr Wong did not seek any legal advice, it has to be presumed that either he understood the legal effect of the letter or he simply could not be bothered.

10. Counsel for the Company submitted that the description "an 'all-monies' legal charge ... over the property" was misleading particularly when coupled with the earlier telephone conversation with the Bank's officer. I am unable to understand how that phrase is misleading : there is simply nothing there to suggest that the mortgagor's exposure would be capped at or limited to the value of the property mortgaged. An "all-monies" legal charge is sufficiently commonplace and experienced businessmen such as Mr Wong, seeking to obtain credit from financial institutions hardly need an explanation as to what it means. It is also of significance that only fourteen months earlier, Mr Wong had executed a similar legal charge over a different property.

11. The Company sought to suggest that the Bank was under a duty to explain to the Company what an all-monies legal charge meant. In that regard, the Code of Banking Practice 1997 does not assist the Company's case. First, it is a voluntary code with no force of law. Second, it postdated the mortgage by some two months. Third, it only applies to personal customers and not, as here, a corporate customer. Nor can the Company derive any comfort from Lloyds Bank PLC v. Waterhouse [1993] 2 FLR 97. The facts in that case were very different. There the court found that a misrepresentation had been made to the borrower. The party sought to be made liable had had protracted interviews with the bank in which a large number of questions were asked and he was given the wrong answers. In the present case, Mr Wong simply forbore to make any enquiries. There is nothing to suggest that the Company was in any way pressurized or coerced into executing the mortgage without the opportunity of taking advice. It simply did not avail itself of the opportunity. In those circumstances, it is difficult to see in what way the Bank could have been under an obligation to advise Mr Wong that the mortgage contained a covenant to repay. Given that Mr Wong had a year or so earlier executed a similar mortgage, and there is not the slightest suggestion in the present proceedings that he was under any misapprehension then, the Company's defence based on misrepresentation must be rejected.

Mutual mistake

12. In order to raise this defence, it has to be demonstrated that the mistake on the part of the Company was shared by the Bank. The evidence does not reveal that the Bank was under any illusion that the liability of the Company was limited to the value of the property. There is no merit in the point raised.

Non est factum

13. This defence is not available where the person relying on it has been guilty of negligence in appending his signature. See Saunders (Executrix of the Will of Rose Maud Gallie, Deceased) v. Anglia Building Society [1971] AC 1004, 1019E-G and 1038F. The burden is upon the Company to prove that it took reasonable care before executing the mortgage containing the covenant to repay which it now seeks to disavow. There is no evidence before this court that the Company took any steps to ascertain what its liability would be under the proposed mortgage. The Company was not at any time under any pressure to accept the Bank's offer of revised facilities. The only possible inferences are that Mr Wong understood the facility letter or that he could not be bothered to ascertain the Company's exposure thereunder. Either is fatal to its plea of non est factum. In my judgment, that plea does not even get off the ground.

Conclusion

14. The Company has failed to demonstrate that its indebtedness to the petitioner is substantially disputed on bona fide grounds. As there was no evidence that it is able to pay what is due and owing to the petitioner, the Company was ordered to be wound up.