ABN AMRO BANK N V v. MANHARLAL TRIKAMAS MODY

HCMP 4724/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 4724 OF 2001

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J U D G M E N T

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1. This is an application by the 2nd Defendant to appeal out of time the order made by Master Au-yeung on 16 November 2001 in this mortgage action, whereby she ordered payment of the outstanding indebtedness by the two Defendants to the Plaintiff bank, as well as delivery of vacant possession of the mortgaged property.

2. Ever since the commencement of the present action on 30 August 2001, the two Defendants were represented by solicitors until 31 August 2002, when the Defendants began to act in person.

3. After the commencement of proceedings, the solicitors acting on behalf of the two Defendants did not contest the claim, and in those circumstances, the above order of Master Au-yeung was made.

4. Instead, after the making of the order for possession and payment of money, the solicitors on behalf of the two Defendants through negotiations and applications to the court sought extensions of time and a stay of execution of the writ of possession, pending an intended refinancing of the outstanding mortgage loan, which, however, never materialised. There were applications and appeals regarding the stay of execution, and I need not go into details.

5. In short, by mid-September 2002, the efforts to obtain a stay of execution of the writ of possession all failed.

6. On 30 September 2002, the two Defendants filed a notice of appeal seeking to appeal out of time Master Au-yeung's order. I need not go into details about the 1st Defendant's intended appeal out of time. It has not been pursued since. I need only say that so far as I can see, it had no merits at all.

7. As regards the 2nd Defendant's intended appeal out of time, who is and was at all material times the wife of the 1st Defendant, her intended grounds of appeal were first set out in an affirmation filed on her behalf by her daughter, Ms Mody, who has been representing both Defendants since they started acting in person in late August 2002. In the daughter's affirmation made on 2 October 2002, the 2nd Defendant through her daughter for the first time raised the defence of undue influence, saying, in a nutshell, that she was at all material times a housewife, and had no involvement in the business transactions relating to which the present legal charge was made. In her daughter's affirmation as well as two affirmations subsequently made and filed by her personally, she basically claimed that she reposed trust and confidence in her husband relating to their financial affairs, and she allowed her husband to mortgage the property in question, which is in their joint names, for banking facilities relating to the 1st Defendant's foreign exchange trading activities maintained with the Plaintiff bank.

8. The 2nd Defendant also claimed that she had no detailed knowledge or involvement in the litigation process, and she left everything to her husband to handle. She was not aware of the entry of judgment by the bank against her husband and her jointly. She did not realise the serious implications of the present proceedings, namely, that she would lose her home in Hong Kong, and she did not find out the true position until sometime in late September 2002, and thus her late application for leave to appeal out of time against Master Au-yeung's order.

9. The 2nd Defendant also claimed that she was not aware of the serious consequences of the legal charge in question, and she never realised that she would risk losing her home by entering into the legal charge, under which she derived no real benefit, although the banking facilitates were offered by the Plaintiff bank to the couple jointly. Relying on cases like Barclays Bank plc v. O' Brien [1994] 1 AC 108, the 2nd Defendant therefore argued (through her daughter) at the present hearing that she has a meritorious defence to the bank's claim and a good explanation for her failure to defend the proceedings earlier, she should be given leave to appeal out of time, and indeed she should be successful in the appeal and be given leave to defend.

10. I agree with Ms Lan, counsel for the Plaintiff, that in situations like the present one, I should, in considering how my discretion should be exercised regarding whether to grant leave to appeal out of time, consider a number of matters as well as the general circumstances of the case. The specific matters that I should pay attention to are the length of delay, the reason for the delay, the merits of the intended appeal, and the degree of prejudice to the judgment creditor if the application is granted. See Birkenhead Properties & Investment Limited v Leung Yiu [1998] 1 HKLRD 527; Chiu Sin Chung v Yu Yan Yan Angela [1993] 1 HKLR 225; Secretary for Justice v Hong Kong & Yaumati Ferry Co Ltd [2001] 1 HKC 125; Zide Technologies Ltd v Tiga Technologies Ltd [2001] 3 HKLRD 698.

11. The delay involved in the present case is 10 months. It is a lengthy and substantial period, the time for appealing a master's decision being 14 days only.

12. As regards the reason for delay, the 2nd Defendant has put forward a story. Whilst the truthfulness of this story can only be ultimately determined, using the civil standard of proof, by means of a trial, I must say I have grave reservations and doubts regarding the story put forward by the 2nd Defendant. She is claiming that not only was she quite ignorant about the business activities and transactions relating to which the present legal charge was entered into, she was quite ignorant about the present litigation as well, which she allegedly left entirely to the hands of her husband to handle.

13. All these allegations are now made despite the fact that for a period of one year, she and her husband were represented by a reputable firm of solicitors, and one application after another was made relating to the stay of execution of the writ of possession, in order to enable the couple to have more time to arrange for the refinancing of the mortgage in question. The 2nd Defendant claimed in evidence that she never met the solicitors. But as Ms Lan persuasively argued during the hearing, in this type of mortgage actions involving a husband and wife situation, one of the first possible defences that lawyers acting for the defendants would nowadays think of would be undue influence, particularly bearing in mind the recent development of the law in this area which is very much in favour of mortgagors and sureties. Yet the 2nd Defendant claimed that she had never been contacted by the solicitors to see if there was any possible defence along the lines of undue influence, notwithstanding the obviously desperate attempts by the Defendants to keep the mortgaged property. No evidence has been filed by the former solicitors to back up the claim of the 2nd Defendant.

14. Moreover, in the evidence there are documents prepared by the solicitors acting for the intending refinancing bank, and amongst those papers, one finds a declaration made by the 2nd Defendant in favour of the intending refinancing bank's solicitors that in applying for the refinancing facilities, she was not under the undue influence of her husband or daughter (who was intended to be one of the joint borrowers under the refinancing arrangement). The matter of undue influence cannot have been new to her.

15. The 2nd Defendant claimed that she only became aware of the seriousness of the situation when she received a final notice to move out from the bailiffs in late September this year. Yet the daughter, who is not being accused of guilty of any undue influence, had been making affirmations on behalf of the 2nd Defendant since mid August this year relating to the stay application and the resulting appeals. One would have thought that the 2nd Defendant must have learnt of the details of the litigation from her daughter because of all this, yet she claimed that she was not aware of the seriousness of the situation until late September.

16. As I said, I have grave doubts on the truthfulness of the 2nd Defendant's present story about her ignorance of the details of the present litigation. As I have also said, this of course cannot be resolved on paper, as I am not prepared to go so far as Ms Lan did at the hearing to conclude that the 2nd Defendant's story is wholly incredible.

17. But in my judgment, I am quite entitled to bear all this in mind, and form a provisional view on the matter where necessary, in considering how my discretion should be exercised.

18. At the risk of stating the obvious, if this present story of the 2nd Defendant about her ignorance of the details of the litigation was untrue, it must mean that there was no acceptable or excusable reason for the long and substantial delay. Moreover, in that event, what has been done on behalf of the 2nd Defendant in the present litigation must be taken as her conscious decision not to contest the proceedings of the Plaintiff bank despite the presence of the alleged defence of undue influence; rather she had deliberately chosen to concede judgment and to apply for a stay of execution. This would be a very important factor against her.

19. I now move on to consider the chances of the appeal being successful if I gave leave to appeal out of time. But apart from that, I must bear in mind the merits of the 2nd Defendant's claimed defence generally. The 2nd Defendant has now put forward material to say that she was under the undue influence of her husband when she executed the present legal charge. In fact she said that she was in a similar condition when she agreed to execute a previous legal charge together with the 1st Defendant to secure general banking facilities granted by Standard Chartered Bank to a family company in Singapore in which she was at all material times a director and shareholder. Part of the facilities obtained from the Plaintiff bank under the present legal charge was in fact used to pay off the previous mortgage in favour of Standard Chartered Bank.

20. In the present case, unlike many other undue influence cases, the facilities under the legal charge were offered by the Plaintiff bank to the 1st and 2nd Defendants jointly. This is not a case where a wife stands as surety for bank loans borrowed by her husband.

21. In this type of joint loan or facilities situation, regardless of the allegations of undue influence as between the husband and wife, the third party bank is not affected by the undue influence unless the bank was aware that the loan or facilities were being made for the husband's purposes, as distinct from their joint purposes: see Royal Bank of Scotland plc v. Etridge (No. 2) [2001] 3 WLR 1021; CIBC Mortgages plc v. Pitt [1994] 1 AC 200. As Lord Nicholls said in Etridge (paragraph 48, p. 1038 E-F):

"As to the type of transactions where a bank is put on inquiry, the case where a wife becomes surety for her husband's debts is, in this context, a straightforward case. The bank is put on inquiry. On the other side of the line is the case where money is being advanced, or has been advanced, to husband and wife jointly. In such a case the bank is not put on inquiry, unless the bank is aware the loan is being made for the husband's purposes, as distinct from their joint purposes. That was decided in CIBC Mortgages plc v Pitt [1994] 1 AC 200."

22. In my judgment, there is nothing in evidence before me to suggest that the Plaintiff bank was aware, or that there was anything to indicate to the Plaintiff bank, that the banking facilities secured by the present legal charge were not for the joint benefit of the couple, but only for the benefit of the husband.

23. As I said, the present legal charge was in fact the product of a refinancing exercise, to replace the earlier mortgage executed by the couple in favour of Standard Chartered Bank to secure banking facilities in favour of a family company. According to the relevant company search, the 2nd Defendant was a director and substantial shareholder in that company. At least on the face of the records, the husband was not even a shareholder.

24. It is true that in the recent Court of Appeal decision in Re Lai Yin Shan CACV 2024/2001 (25 September 2002), a case involving facilities offered by the mortgagee bank to a company of which the wife was a director and shareholder, the Court went beyond the company records in order to see whether the wife really had any beneficial involvement in the bank loan or facilities in question.

25. However, the present case is one step removed from Re Lai Yin Shan. Unlike that case, one has here a joint loan/facility situation, and all that one is concerned with is whether on the face of the material available to the Plaintiff bank, there was anything to indicate to the bank that the facilities were not to be enjoyed by the wife jointly with her husband, but was in reality only for the benefit of the husband, there being no allegation by the 2nd Defendant that the Plaintiff bank had any direct knowledge about the alleged true position. All that I am trying to say here is that on the records and registration documents, there really was nothing to indicate to the Plaintiff bank that the 2nd Defendant did not enjoy anything out of the facilities that were being offered by the Plaintiff bank.

26. Moreover, in a letter dated 15 June 2000 written by the solicitors acting for the family company in Singapore to the Plaintiff bank's solicitors, the family company's solicitors clearly wrote that the facilities to be obtained by the couple from the Plaintiff bank under the subject legal charge would be used (partly) for "the disbursement of the loan to the 2nd Defendant", as well as to pay off the indebtedness of the family company to Standard Chartered bank. No doubt, the 2nd Defendant in her affirmation as well as through her daughter during the hearing sought hard to argue that the so-called loan to her in question was merely a reference to the outstanding rent due and payable by an unincorporated company in Hong Kong of which she was nominally the sole proprietress on behalf of her husband to the landlord relating to the office premises used by her husband. That may or may not have been the case, but it is not the crux of the matter.

27. The crux of the matter is whether the Plaintiff bank, at the time of the legal charge or prior to that time, knew or had anything to indicate to it that the banking facilities that were being offered on the strength of the legal charge would not be enjoyed beneficially by the couple, but would only be enjoyed by the husband alone. The letter from the family company's solicitors, on any objective reading, would clearly suggest to the Plaintiff bank that the facilities that were being obtained by the couple by mortgaging their joint property to the Plaintiff bank, were at least partly obtained to pay off "the loan of the 2nd Defendant", as well as, of course, the indebtedness of the family company, of which, according to the records, the 2nd Defendant was a director and substantial shareholder. In other words, even if one were to regard the paying off of the family company's indebtedness as being to the benefit of the husband only, there was still "the loan of the 2nd Defendant", the discharge of which by utilizing the banking facilities offered by the Plaintiff bank would be to the benefit of the 2nd Defendant.

28. Moreover, the actual execution of the legal charge by the couple was done in the office of the solicitors of the family company in Singapore. According to an affirmation filed by a solicitor acting for the Plaintiff bank who specifically flew to Singapore to witness the execution, the couple clearly told her, in the presence of the family company's lawyers, that the content of the legal charge had been explained to them by those lawyers, and that they were fully aware of its nature and legal effect. Again, in those circumstances, there really was nothing to put the Plaintiff bank on alert.

29. In her latest affirmation, all that the 2nd Defendant claimed was that during that meeting at the office of the family company's lawyers, the Plaintiff bank's solicitor knew that she was the wife of the 2nd Defendant, and that it was "obvious" (no elaboration was offered) that she was a "homemaker" and that the banking facilities being offered by the Plaintiff bank were only going to be handled by her husband. In my judgment, this is quite insufficient to alert the bank that the facilities were not going to be enjoyed jointly by the couple.

30. The facilities in question comprised an overdraft in multi-currencies as well as multi-currency fixed short-term loans (on a roll-over basis). Admittedly, the facilities were obtained for the purpose of foreign exchange trading activities. I can see no reason why a housewife should not be engaged in such activities. In fact, from common experience, many housewives do engage, to varying extents, in such activities. Moreover, again, one is not really concerned with the true position as between the husband and wife, but only whether the bank had anything to indicate to it that the facilities being offered were only for the purposes of the husband, as distinct from the couple's joint purposes. Having the appearance of a homemaker, in my judgment, was quite insufficient to put the Plaintiff bank on enquiry, particularly bearing in mind the other circumstances known to the Plaintiff bank that I have already alluded to above.

31. The 2nd Defendant's daughter also argued at the hearing that all the foreign exchange trading activities were handled by the 1st Defendant. This is neither here nor there, even if true, because all these activities, admittedly, were carried out after the execution of the legal charge. In any event, I do not think, in my judgment, that this fact, in the circumstances of the present case, would take the 2nd Defendant's case of undue influence as against the Plaintiff bank very far.

32. In those circumstances, I am of the view that the 2nd Defendant's case on undue influence against the Plaintiff bank is very weak, if not totally unarguable, on the evidence before me. I note, in this regard, that in Leung Yiu, supra, the Court of Appeal recognised that the appellants there had a very strong case and that it was "highly probable" (p. 533) that they would succeed on the appeal if the application for leave to appeal out of time was granted. Yet, after considering all the relevant factors, the Court of Appeal concluded that leave to appeal out of time ought not be granted.

33. The present case of the 2nd Defendant is nowhere near the case of the appellants in Leung Yiu.

34. As regards prejudice, once the time for appealing has lapsed, the Plaintiff bank is entitled to regard the judgment in its favour as being final. To allow the present application to appeal out of time would, almost by definition, deprive the Plaintiff of the fruit of a valid judgment it has obtained for almost one year. This must be a prejudice in itself.

35. Moreover, there is evidence before me that the estimated value of the mortgaged property has dropped from $6 million in July 2001 to $5.3 million in July 2002. Although there is no specific evidence relating to the estimated value of the property now, it is common knowledge that the economic conditions recently are far from being satisfactory. Moreover, the principal indebtedness in the present case is almost $4.5 million, and interest is accruing on a daily basis. Furthermore, substantial costs have been expended since last November when judgment was entered in favour of the Plaintiff, as a result of the many applications made by the Defendants. If the matter were allowed to be re-opened, the above factors combined would constitute another prejudice to the Plaintiff.

36. Needless to say, if the 2nd Defendant were allowed to contest the proceedings now, much of what had been done in the past year would be wasted together with the time and costs that had been expended on it.

37. I am entitled to take all this into account.

38. On the other hand, of course I have not lost sight of the fact that if the 2nd Defendant really had a defence in terms of undue inference, her being shut out of the judgment seat would in itself be a serious matter to be taken into account. I do seriously take that into account. But to some extent, that hardship or prejudice would be alleviated by her most probably having, as per her story, a claim against her former solicitors who had, again as per her story, conceded judgment in this case on her behalf without her instructions or informed instructions.

39. Moreover, as regards the 2nd Defendant's claim that her home is at stake, I would note that according to what her daughter has told the Court, the 2nd Defendant only stays in Hong Kong part of the time, and she does have a home in Singapore as well.

40. Having taken into account the above specific matters, as well as the general circumstances of the present case, in the exercise of my discretion, I refuse the 2nd Defendant's application for leave to appeal out of time, which is therefore dismissed. The 2nd Defendant must pay the costs of the Plaintiff, to be taxed if not agreed.