DBS BANK (HONG KONG) LTD v. HUI SO YUK AND OTHERS

HCMP1383/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 1383 OF 2008

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J U D G M E N T

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1.  This is an appeal by the 3^rd defendant from the order of the Master given on 9 March 2009 whereby judgment was entered against the 3^rd defendant for moneys due and payable to the plaintiff under a bank guarantee in the sum of HK$1,747,731.30 and US$293,467.84 (or its Hong Kong dollars equivalent at the time of payment) together with interest thereon at the rates stated in his order.  This appeal does not involve any other defendant apart from the 3^rd defendant.

2.  In giving the above order now appealed from the Master had heard and disposed of the Originating Summons herein summarily under Order 58 of the RHC deciding that there was no defence by the 3^rd defendant to the claim by the plaintiff against her.

3.  The defence sought to be raised by the 3^rd defendant was one of undue influence from her two elder brothers, the 2^nd and 4^th defendants herein, which had caused her to sign the bank guarantee and that the plaintiff bank was put on inquiry but had failed to take reasonable steps to satisfy itself that there was no undue influence.

Background

4.  The 2^nd and 4^th defendants herein are the elder brothers of the 3^rd defendant.  The 1^st defendant is the mother of all of them.

5.  At all material times from 2000 onwards, the 2^nd and 3^rd defendants each held 50% of the shares in Sunwell Metals Limited (“the Company”).

6.  The 2^nd, 3^rd and 4^th defendants were, at various stages, directors of the Company.

7.  In the case specifically of the 3^rd defendant, she became a 50% shareholder of the Company on 1 March 2000 and was also appointed as a director and also the secretary of the Company on the same day.  It was only on 23 March 2005 that the 3^rd defendant transferred her 50% shareholding in the Company and resigned as director and secretary.

8.  On 19 June 2002, at which time the 3^rd defendant was already a shareholder, director and secretary of the Company, loans and credit facilities were granted to the Company by the plaintiff bank.  In respect thereto, securities were provided by the 1^st defendant by way of a mortgage and personal guarantees were given by the 2^nd, 3^rd and 4^th defendants being the directors of the Company.  The credit facilities granted were revised from time to time with the last revision in September 2007.

9.  The Company went into liquidation in May 2008.

10.  There is no dispute that the Company was and still is indebted to the plaintiff bank in respect of the loans and credit facilities granted to it in those amounts for which judgment was given against the 3^rd defendant.

11.  The plaintiff looked to the sureties for repayment and the Originating Summons was issued on 23 July 2008.

12.  Judgment had been entered against the 2^nd and 4^th defendants on 30 September 2008 for the same amounts.

13.  The plaintiff’s claim against the 3^rd defendant was heard by the Master on 9 March 2009 from which this appeal springs.

Defence raised by 3^rd defendant

14.  The defence raised by the 3^rd defendant is that of undue influence by her two brothers, the 2^nd and 4^th defendants.

15.  In this respect, the 3^rd defendant’s evidence was that she was raised in a male dominated family and had always used to be ordered around by her elder brothers.  She therefore felt that she had to follow their instructions in family affairs since her childhood.  Nor was she allowed to raise queries or objections.

16.  The reason why she became a director of the Company in June 2000 was that the capital of the Company was provided by her father before his passing in 1998, and her brothers did not want to leave her out so suggested to include her name on the board of directors.

17.  However, she had never taken part in the running of the Company which was left to her two elder brothers, the 2^nd and 4^th defendants.  She had always had other full time jobs of telephone operator, secretary, insurance agent and flight attendant.

18.  When told by her brothers to append her signatures to documents generally relating to the Company, she would do so as she trusted them.

19.  As for the personal guarantee given by her in favour of the plaintiff bank, the subject matter of the plaintiff’s claim herein, the 3^rd defendant says that in 2002, she was asked by her brothers to attend the plaintiff’s office with them.  At the plaintiff’s office, the staff of the plaintiff only spoke to her brothers.  She was then asked to sign some papers which she vaguely knew were documents relating to a guarantee of a loan to the Company.  She did not understand the contents of the document she was asked to sign and those contents were not explained to her nor was she told she could seek independent legal advice.  Her brothers told her to sign and she did so because she trusted them.

20.  She resigned as a director of the Company on 23 May 2005 because she was working as a flight attendant at the time and was not always in Hong Kong.

21.  In her second affirmation, the 3^rd defendant further explained that she became a 50% shareholder in the Company only as a nominee for the 4^th defendant because the 4^th defendant was, at the time, heavily in debt in his other business and she trusted the 4^th defendant.

The law

22.  The principles of undue influence was extensively reviewed by the House of Lords in Royal Bank of Scotland v Etridge (No. 2) [2001] 3 WLR 1021.

23.  Those principles were summarized by Ma J (as he then was) in Bank of China (Hong Kong) Ltd v Wong King Sing [2002] 1 HKC 83 and also in Wing Hang Bank Ltd v Liu Kam Ying [2002] 2 HKC 57.

24.  Applying those principles to the present case, three matters need to be considered by the court when a defence of undue influence is relied upon, namely:

(1) was the transaction affected by undue influence;

(2) was the plaintiff bank put on inquiry; and

(3) if it was put on inquiry, did it take reasonable steps to satisfy itself that there was no undue influence.

25.  It is only if all three questions above are answered in favour of the party being sued, would the defence of undue influence succeed.

26.  The onus is on the party alleging undue influence to prove it on balance.

27.  However, since the matter was decided by the Master summarily, and this appeal from the Master being by way of a rehearing, what I have to decide is whether a prima facie case has been made out by the 3^rd defendant as to her defence of undue influence.  If a prima facie case of undue influence has been made, out the matter ought to go to trial for the facts to be determined.  But if the 3^rd defendant cannot even show a prima facie case of undue influence that it would be correct to give summary judgment to the plaintiff without the need for a trial.

Whether transaction affected by undue influence

28.  It is clear from the evidence of the 3^rd defendant that there is no actual evidence of undue influence upon her from the 2^nd and 4^th defendants.  Neither is there any allegation of misrepresentation by either of them to her when she was asked to sign the guarantee.

29.  That however is not the end of the matter since in law quite apart from actual undue influence, the law also recognizes presumption of undue influence. 

30.  In this respect, it is also clear from the evidence that Class 2(A) presumption (as set out in Back of Credit and Commerce International SA v Aboody [1989] 1 QB 923 adopted in Barclays Bank Plc v O’Brien [1994] 1 AC 180) has no application in the present case since the relationship between the 3^rd defendant and the influencers (being the 2^nd and 4^th defendants) was one of siblings.

31.  In so far as Class 2(B) presumption goes, for that presumption to arise it is incumbent for the 3^rd defendant to show that (a) she placed trust and confidence in the influencers, or that the influencers acquired an ascendancy or domination over her; and (b) the transaction could not be readily explicable by the relationship (see Royal Bank of Scotland Plc v Etridge (No. 2)).

32.  In the present case, while there is some evidence from the 3^rd defendant, that she reposed trust and confidence in her brothers, the 2^nd and 4^th defendants, there is not any evidence of any ascendancy or domination by them over her.

33.  More importantly, there is nothing to show that the transaction could not be readily explicable by the relationship of the parties.  When she executed the guarantee, she was a 50% shareholder, a director and the secretary of the Company.  She was guaranteeing a loan and credit facilities made to the Company.  There is nothing inexplicable about such a transaction.

34.  On such evidence, the evidence from the 3^rd defendant, taken at its highest, may well show that the 2^nd and 4^th defendants had some influence over her.  But, as acknowledged by Lord Nicholls in Etridge’s case, the mere existence of the influence is not enough (see paragraph 22 of Lord Nicholl’s judgment).  What has to be shown and proved is undue influence.

35.  In the present case, even granted there may have been some influence from the 2^nd and 4^th defendants over the 3^rd defendant, nothing in the evidence even begin to show such influence to be undue when the 3^rd defendant signed the guarantee.

Was the plaintiff bank put on inquiry

36.  Nothing in the evidence put forward by the 3^rd defendant when taken at its face value, even remotely suggest that the plaintiff bank would be put on inquiry, whether actual or constructive, that undue influence was or might have been exerted upon the 3^rd defendant at the time when the personal guarantee was executed by her.

37.  In this respect, the allegation by the 3^rd defendant that she was brought up in a male dominated family and had always had to obey her brothers without question, even if true, there is no evidence that such was or could have been known to the plaintiff.

38.  Likewise, the reason or basis behind which the 3^rd defendant became a shareholder, director and secretary of the Company was not something which was made known to the plaintiff or that the plaintiff would have knowledge of.

39.  Thirdly, there is no evidence that the plaintiff knew or could have known that the 3^rd defendant did not take part in the actual running of the Company and which was left only to the 2^nd and 4^th defendants to do.

40.  At the time the guarantee was signed by the 3^rd defendant, the plaintiff would know that she was a director of the Company since the plaintiff was asking for personal guarantees from the directors.

41.  Even if the plaintiff knew that the 3^rd defendant was the sister of the 2^nd and 4^th defendants, this knowledge, without more, cannot put the plaintiff on inquiry that undue influence may have been exerted upon her.  It does not raise any presumption of such either.

42.  In this respect, when Mr Tsui counsel for the 3^rd defendant made his submission, far too much emphasis was put on the fact that the 2^nd and 4^th defendants are the elder brothers of the 3^rd defendant.  One must not lose sight that the relevant relationship to consider is that between the surety and the debtor.  As was said by Lord Nicholls in Royal Bank of Scotland Plc v Etridge (No. 2) at page 814 (paragraph 87 of his judgment):

“    Further, if a bank is not to be required to evaluate the extent to which its customer has influence over a proposed guarantor, the only practical way forward is to regard banks as ‘put on inquiry’ in every case where the relationship between the surety and the debtor is non-commercial.”

In the present case the surety is the 3^rd defendant.  The debtor is the Company.  The relationship between the 3^rd defendant and the Company is one of director and shareholder of the Company.  It simply cannot be a non-commercial relationship for which the plaintiff bank would be put on inquiry.

43.  The 3^rd defendant is a literate person and educated.  In her affirmation she stated that she knew at the time when she signed the personal guarantee at the plaintiff’s office with her two brothers that the documents she was asked to sign she vaguely knew to be documents relating to a guarantee of a loan to the Company.

44.  If she then agreed to sign such document by simply trusting her brother, then the blame for that cannot be laid at the plaintiff’s door.

45.  As a director of the Company, a matter known to the plaintiff, her executing a personal guarantee to guarantee a loan or credit facilities to the Company can only be the most normal and ordinary commercial transaction imaginable.

46.  Once that premise is reached that the plaintiff bank was not put on inquiry, it becomes unnecessary to go further to look at whether any reasonable steps were taken by the plaintiff bank.  Indeed it is the position of the plaintiff that they were not put on inquiry by the circumstances of this case and no such steps had to be taken by them.

Decision

47.  For the reasons given above, the Master was entirely correct to have found as he did.  On the evidence put forward by the 3^rd defendant, the defence of undue influence is bound to fail.

48.  Accordingly, the appeal by the 3^rd defendant is dismissed.

49.  All the orders made by the Master below is to stand in their entirety.

Costs

50.  Costs of the appeal is to be paid by the 3^rd defendant to the plaintiff on a full indemnity basis to be taxed if not agreed.