BANK OF CHINA (HONG KONG) LTD v. LEUNG WAI MAN AND ANOTHER

[English Translation – 英譯本]

HCMP 641/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL JURISDICTION

MISCELLANEOUS PROCEEDINGS NO. 641 OF 2006

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BETWEEN

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JUDGMENT

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1.  The dispute in the present case is about a legal charge executed by the first and second defendants. They both argued that the legal charge is legally invalid by reason that it was executed by them in circumstances where they had respectively been misled and subjected to undue influence, and that after their execution the bank had varied the terms and amount of the loan facility.

Factual Background of the Case

2.  The first and second defendants are husband and wife.  In 1990 they purchased a property situated at Flat F, 9^th Floor, Block 3, Jubilee Garden, Shatin (the “Jubilee Garden property”) in their joint names.  Part of the property price was financed by a mortgage loan from HSBC.  The property is a residential flat occupied by the two defendants and their family.

3.  The legal charge involved in the present case (the “Legal Charge”) was executed on 30^th January 1997, wherein the first and second defendants were the Mortgagor, Sin Hua Bank Limited was the Lender, and the Borrower was Shun To Industries Company Limited (“Shun To”).  At all the material times, the person in charge of Shun To was Sze Kim Hang (“Mr. Sze”) who was also the shareholder and director of Shun To.

4.  Under the Legal Charge, the first and second defendants had charged the Jubilee Garden property to Sin Hua Bank Limited as security for the loan and credit facility granted by the bank to Shun To.  In the first page of the Legal Charge, for the clause in relation to mortgage amount, the part relating to the maximum amount to be advanced was deleted, and both defendants and Shun To had signed in confirmation in the margin next to the deleted part.  In other words, the Legal Charge is an “all monies” legal charge to an unlimited extent. Further, under Clause 3 of the Legal Charge, the two defendants jointly and severally guaranteed and undertook that they would repay debts of Shun To to the bank.  This likewise is an “all-monies” undertaking to an unlimited extent.

5.  At the time of execution of the Legal Charge, Shun To and Sin Hua Bank Limited had already signed the following documents pertaining to loan facility arrangement:

(1)  A Customer’s Agreement dated 24^th December 1996;

(2)  An Undertaking for Repayment of Overdraft dated 24^th December 1996, wherein the overdraft limit granted to Shun To was HK$800,000.

6.  On the same day of the execution of the Legal Charge, i.e. 30^th January 1997, Shun To also signed a Facility Letter, whereby Sin Hua Bank Limited shall extend a loan in the sum of HK$1 million to Shun To on the security of a legal charge of the Jubilee Garden property, and Shun To shall repay the principal and interest by 180 instalments.

7.  Further, Mr. Sze and his wife also executed a legal charge with Sin Hua Bank Limited on 8^th April 1997, whereby they had charged their property situated in Villa Athena, Ma On Shan, Shatin, together with a car parking space (the “Villa Athena property) to Sin Hua Bank Limited as security for the loan and credit facility granted to Shun To.

8.  After the two defendants had executed the Legal Charge, Shun To further signed the following two loan and credit facility documents with Sin Hua Bank Limited:

(1)  A Facility Letter dated 15^th December 1998, whereby Sin Hua Bank Limited shall extend a loan in the sum of HK$1.6 million to Shun To on the security of a legal charge of the Jubilee Garden property and the Villa Athena property, and Shun To shall repay the principal and interest by 36 instalments;

(2)  An Undertaking for Repayment of Loan dated 18th May 1999, whereby Sin Hua Bank Limited shall extend a loan in the sum of HK$1.8 million to Shun To on the security of a legal charge of the Jubilee Garden property and the Villa Athena property, and Shun To shall repay the principal and interest by 160 instalments.

9.  In 2000, Shun To started to default repayments of the outstanding debts.  In June 2001, Mr. Sze delivered possession of the Villa Athena property to Sin Hua Bank Limited for sale in satisfaction of part of the outstanding debts.  On 30^th November 2001, the Villa Athena property was sold for HK$2.85 million.

10.  On the other hand, the two defendants wrote to Sin Hua Bank Limited on 18^th June 2001, offering to make a monthly repayment of about HK$8,000 to settle the mortgage loan in the sum of HK$1.8 million secured on the Jubilee Garden property.  They also requested to be discharged from any liability arising from other loans obtained by Shun To.  A copy of the second defendant’s tax return was also attached to the letter. According to the internal documents of Sin Hua Bank Limited, on 7^th September 2001 the bank agreed that provided that the defendants could first pay HK$100,000-, the remaining HK$1.7 million plus interest could be repaid by instalments over a period of 20 years.  However, in the end the two sides did not sign any agreement for this purpose.

11.  On 1^st October 2001, Sin Hua Bank Limited merged to become part of the Plaintiff under the Bank of China (Hong Kong) Limited (Merger) Ordinance, Cap 1167, Laws of Hong Kong.  The Plaintiff thus succeeded the interest of Sin Hua Bank Limited, and has become the mortgagee under the Legal Charge involved in the case, as well as the creditor of Shun To and the two defendants.

12.  On 3^rd November 2004, the Plaintiff through its solicitors wrote to the two defendants separately, demanding them to repay the debts of Shun To pursuant to the Legal Charge.  On 23^rd November 2004, the two defendants replied by way of a letter wherein they denied liability for the debts of Shun To and also requested that copies of all documents signed by them as well as particulars and relevant documents regarding the loans granted by the Plaintiff to Shun To be provided to them.

13.  On 16 July 2005, the Plaintiff instituted civil proceedings by way of a writ of summons in the Court of First Instance of the High Court, case number 1362 of 2005 (“HCA1362/2005”), against Shun To, Mr. Sze, his wife, and the two defendants, claiming repayment for the debts of Shun To.  The two defendants each filed a defence on 14^th September 2005.  The Plaintiff also filed a Reply on 19^th October 2005.

14.  As the Plaintiff’s claim against the two defendants in HCA1362/2005 was based on a legal charge, the Plaintiff subsequently, pursuant to the stipulation of Order 88 of the Rules of High Court (Cap. 4A of the Laws of Hong Kong), discontinued the claim against the two defendants in HCA1362/2005.

15.  On 30^th March 2006, the Plaintiff instituted the present proceedings by way of an originating summons.

Claim of the Plaintiff

16.  The claim of the Plaintiff in the present case is based on the Legal Charge executed by the two defendants.  According to the Amended Originating Writ of Summons, the Plaintiff seeks the following orders of the Court:

(1)  Delivery by the first and second defendants to the Plaintiff vacant possession of the Jubilee Garden property;

(2)  Payment of all moneys and interest due and owing by the first and second defendants to the Plaintiff under the covenants contained in the Legal Charge;

(3)  Alternative to paragraph (2) above, payment of HK$1 million (or any other sum that the Court finds that the first and second defendants were led to believe to be, and agreed to be, the limit of their liabilities under the Legal Charge), with interest by the first and second defendants to the Plaintiff;

(4)  Alternative to paragraphs (2) and (3) above, payment of HK$192,312.91 (or any other sum that the Court finds represents the first and second defendants’ enrichment from executing the Legal Charge) with interest by the first and second defendants to the Plaintiff.

17.  At the commencement of the trial, the Plaintiff through Mr. Man indicated that in the event that the defence of “misrepresentation” or “undue influence” was accepted by the Court after trial, the Plaintiff would not in the present case ask the Court to give an order for partial rescission of the Legal Charge or an order that the defendants do pay HK$1 million with interest (i.e. item (3) of the above order).  Nonetheless, the Plaintiff expressly indicated that they would reserve the right to ask for such an order in other courts in future.

Grounds of Defence of the Defendants

18.  The two defendants asserted that they were not legally liable under the Legal Charge.  The grounds of defence advanced by them are as follows:

(1)  The Legal Charge is liable to be set aside by reason of the legal principle of “misrepresentation” (paragraph 18 of the affirmation of the first defendant).

(2)  The Legal Charge is liable to be set aside by reason of the legal principle of “undue influence” (paragraph 10 of the affidavit of the second defendant).

(3)  By virtue of the fact that Sin Hua Bank Limited varied the terms of the loan between the bank and Shun To without giving notice to and obtaining consent from the defendants after the execution of the Legal Charge, the first and second defendants therefore shall be discharged from the liability under the Legal Charge (paragraph 19 of the affirmation of the first defendant and paragraph 11 of the affidavit of the second defendant).

Issues at the Trial

19.  The main disputes in the present case are whether the Legal Charge is legally valid and whether it is entirely not required of the two defendants to repay any money to the Plaintiff.  These disputes involve the following four issues:

(1)  Is the Legal Charge invalid by reason of the legal principle of “misrepresentation”;

(2)  So far as the second defendant is concerned, is the Legal Charge invalid by reason of the legal principle of “undue influence”;

(3)  Is the Legal Charge invalid by reason of the fact that Sin Hua Bank Limited had varied its loan arrangement between the bank and Shun To;

(4)  If the Legal Charge is legally invalid, is it necessary for the two defendants to pay HK$192,312.91 or any other sum to the Plaintiff pursuant to the legal principle of “counter restitution”, as restitution of their enrichment from executing the Legal Charge.

Witnesses at the Trial

20.  The Plaintiff called three witnesses at the trial, namely, Mr. Ng Chi Wai, solicitor Mr. Ho Wai Pun Wilbur and solicitor Mr. Ng Kwok Wing.  Mr. Ng Chi Wai is a Collection Officer of the Plaintiff.  He did not directly participate in any dealing between Sin Hua Bank Limited and Shun To or the two defendants, or in the Legal Charge.  He only provided information pertaining to the execution of the Legal Charge, and the relevant documents and bank records, based on the records and documents kept by the Plaintiff.  At that time, the credit facility application by Shun To and the arrangement of the Legal Charge were handled by the Upper Kwai Chung sub-branch of Sin Hua Bank Limited.  The handling staff member was Mr. Fu Tai Hung.  Mr. Fu had already left the bank and could not be located by the Plaintiff.  Therefore, he did not give evidence in the present case.

21.  Solicitor Mr. Ho is the attesting solicitor who witnessed the execution of the Legal Charge by the two defendants.  Solicitor Mr. Ng is a partner of the solicitors’ firm.  He did not participate in the handling of the Legal Charge.  His testimony is mainly related to the usual practice adopted by solicitors of his firm in handling this type of mortgage transaction in 1997.  The handling clerk of the law firm, Mr. Kong, who interviewed the two defendants at that time, could not be located as he had already left the firm.  Therefore, the Plaintiff did not call Mr. Kong to give evidence.

22.  Both defendants have filed an affirmation or affidavit and have been cross-examined by the counsel for the Plaintiff.  They did not call any other witness.

Defence of “Misrepresentation”

23.  Both defendants claimed that they had been misled into signing the Legal Charge.

24.  According to the first defendant’s affirmation and his testimony given at the trial, he worked in a manufacturer of plastic semi-finished products in the 1980s. During the late 1980s, his position was project manager.  At that time, Shun To provided post-production and processing services to the company where the first defendant was working.  He came to know Mr. Sze for business reasons.  In or about 1995, Mr. Sze began to represent to the first defendant about expanding the business of Shun To and its development plan.  The first defendant was given the impression that Shun To had a very wide business network and a bright prospect.  Later, in or about October 1996, Mr. Sze told the first defendant that his partner wished to retire and Mr. Sze planned to buy out his shares. Mr. Sze asked the first defendant to lend him HK$1 million for the purpose of acquiring those shares.  The first defendant said he had no money.  But Mr. Sze suggested to him that he could get the cash by re-mortgaging the Jubilee Garden property.  Mr. Sze offered the following terms to the first defendant:

(1)  Mr. Sze would be responsible for repaying the outstanding mortgage loan of the Jubilee Garden property, which was about HK$200,000.00;

(2)  Subsequently the defendants were to re-mortgage the Jubilee Garden property for a loan of HK$1 million, for which Mr. Sze would be responsible for making repayment, and the first and second defendants would not be required to make any repayment;

(3)  The first defendant may join Shun To as an employee or as a partner, but details of the plan were not discussed.

25.  The first defendant frankly stated that these terms were very attractive.  At the same time, since he also trusted Mr. Sze and believed that Shun To had stable business and a good prospect, he thus accepted Mr. Sze’s suggestion and agreed to re-mortgage the Jubilee Garden property.

26.  The first defendant’s testimony further shows that in or about December 1996, he and Mr. Sze had a dinner meeting with Mr. Fu of Sin Hua Bank Limited.  During the meeting, Mr. Fu told them the procedure for mortgage loan.  The first defendant said he had expressly told Mr. Fu that his financial capacity was not good and the liability he could afford at most would be HK$1 million.  The first defendant stated in his affirmation that the response of Mr. Fu at that time was that he smiled and nodded his head.  In the opinion of the first defendant, the conduct of Mr. Fu amounted to an implied representation by him on behalf of Sin Hua Bank Limited that the limit of the first defendant’s liability was HK$1 million.

27.  When asked by Mr. Man at the trial as to whether Mr. Fu had ever said that the limit of the defendants’ liability was HK$1 million, the first defendant said it was he himself who raised and requested for the (limit of) HK$1 million, and he had clear recollection that he did tell Mr. Fu that even if Shun To’s business failed in future, he personally would only be held liable to the extent of HK$1 million, and that  “even if there was a total loss”, he would only be held liable to the extent of HK$1 million.  The first defendant said he forgot what response Mr. Fu had given at that moment, but to the understanding of the first defendant, Mr. Fu had already got his message and would handle it (“would deal with it”).

28.  The documents produced by the Plaintiff show that the total limit of credit facility that Shun To was applying for from Sin Hua Bank Limited in December 1996 was HK$1.8 million, out of which HK$800,000 was for overdraft credit facility while HK$1 million was for an instalment loan, and that the overdraft credit facility in the sum of HK$800,000 had already been approved on 24^th December 1996.  The first defendant said that when he executed the Legal Charge in December 1996 and January 1997 he did not know that the total credit facility limit granted to Shun To was HK$1.8 million, nor did he know about the arrangement for overdraft credit facility arrangement in the sum of HK$800,000.

29.  As regards the circumstances in which the Legal Charge was executed at the solicitors’ firm on 30^th January 1997, it is agreed by all parties that in addition to the two defendants, at the scene there were also Mr. Sze and a Madam Wong, as well as a conveyancing clerk of the solicitors’ firm, Mr. Kong, who first interviewed them.

30.  According to the affirmation of the first defendant, Mr. Kong explained to the four of them Clause 5(a) and (b) of the Facility Letter dated 30^th January 1997.  At that time Mr. Kong was informed that the defendants were husband and wife.  Then a solicitor, Mr. Ho, came into the meeting room and produced the legal charge document, asking them to first sign on those pages with amendments or deletions, and then to formally sign the Legal Charge.  The entire meeting lasted for about 10 minutes to 15 minutes during which nobody explained the contents of the document except that it was mentioned that the document was a legal charge and the description of the property concerned.  But Mr. Kong had mentioned that the extent of liability to be borne by the two defendants was HK$1 million.

31.  At the initial stage of cross-examination conducted by Mr. Man, the first defendant said he was sure both Mr. Sze and Mr. Fu had misled him into thinking that the limit of his liability was HK$1 million, but he dared not say whether Mr. Kong had done such misleading acts to him.  As regards the solicitor Mr. Ho, the first defendant said Mr. Ho did not say anything, nor did he explain any document to them, and he was there only to attest their signatures.  However, at the later stage of cross-examination, the first defendant conceded that on that day Mr. Kong and Mr. Ho in fact had never said that the limit of liability of the defendants was HK$1 million.  He also conceded that the two of them did not mislead the defendants.  The first defendant also admitted that Mr. Ho had asked them if they had any question regarding the explanation given by Mr. Kong and that they said they had no question.  When further questioned by Mr. Man, the first defendant confirmed that what he said in his testimony in court was correct, while his allegation in the affirmation to the effect that Mr. Kong and Mr. Ho had misled the defendants was incorrect.

32.  The second defendant stated in her affidavit that Mr. Kong spent about 10 minutes in explaining the loan arrangement to them.  She said Mr. Kong told them Sin Hua Bank Limited would lend HK$1 million to Shun To, and the number of instalments, and also mentioned that she and the first defendant were chargers of the property and the extent of the loan was HK$1 million.  The second defendant could not remember whether Mr. Ho had repeated some of the particulars of the loan arrangement aforesaid.  However, it was clear to her that the defendants’ liability was limited to HK$1 million only.

33.  During cross-examination, the second defendant asserted that Mr. Kong and solicitor Mr. Ho had said that the mortgage amount of the Jubilee Garden property was HK$1 million, and that the limit of the defendants’ liability was HK$1 million.  The second defendant also denied that Mr. Ho had ever asked them if they had any question regarding the explanation given by Mr. Kong.  She alleged that Mr. Ho only repeated what Mr. Kong had explained to them earlier on.

34.  Obviously, there are discrepancies between the second defendant’s testimony given in court and the account she gave in her affidavit, and there are also inherent inconsistencies between her testimony and the first defendant’s testimony.  In fact, in all the documents previously filed by her in the present case, there has never been any allegation that Mr. Kong and solicitor Mr. Ho had said those words or had done anything to mislead the defendants.  In particular, it should be noted that while the first defendant was giving evidence, the second defendant was inside the court, and there was only a short break of about 20 minutes between the two defendants giving evidence in the witness box.  When Mr. Man pointed out the above discrepancies and inconsistencies to the second defendant, she paused for a long while, and then said she had no money to retain lawyers, and at the time of writing the affidavit, she only stated the facts and did not know that she had to mention that the solicitor had said the limit of their liability was HK$1 million.  Nevertheless, she did not explain why, on the one hand, in her affidavit she forgot to mention what Mr. Ho had said, while on the other, when giving evidence she was able to recall clearly that Mr. Ho and Mr. Kong did say that the limit of the defendants’ liability was HK$1 million.  As regards the inconsistencies between her account and that of the first defendant, the second defendant only said that the first defendant had his own way of thinking, but as far as she was concerned, the course of event was not like that.

35.  In my judgment, the testimony given by the second defendant to the effect that at the time of the meeting Mr. Kong and solicitor Mr. Ho had said the mortgage amount was HK$1 million and the limit of the two defendants’ liability was HK$1 million is unreliable and cannot be satisfactorily accepted.  First, on the point as to whether the liability of her and the first defendant under the Legal Charge was unlimited or merely limited to HK$1 million, it is the core question in the dispute between them and the Plaintiff.  The defence which has all along been put forward by the defendants is that their liability is not unlimited, but limited to HK$1 million.  It is common sense that if Mr. Kong and solicitor Mr. Ho had expressly said at the meeting that the mortgage amount was HK$1 million and that the defendants’ liability under the Legal Charge was HK$1 million, the second defendant would not have failed to mention even a single word about it in her defence and affidavit, instead of stating in her affidavit, which was drafted by solicitors on her behalf, that she could not recall whether solicitor Mr. Ho had repeated the details of the loan arrangement.  Secondly, if the second defendant had forgotten that Mr. Kong and solicitor Mr. Ho had said those words when she made out her defence and affidavit in 2005 and 2006 respectively, what has made her able to have her memory back and to recall clearly and correctly, 4 years later, that they had said those words?   Further, the explanation given by the second defendant on these matters is not reasonable.

36.  Furthermore, as pointed out by Mr. Man in his submission, the defendants’ allegation that Mr. Kong and solicitor Mr. Ho had misled them by telling them the limit of their liability under the Legal Charge was HK$1 million is inherently improbable.  According to the evidence of solicitor Mr. Ng, after he had received the Instruction Letter from the bank, he then assigned Mr. Kong to handle the instruction.  Mr. Kong at that time was responsible for handling businesses of Sin Hua Bank Limited.  He would adopt the standard mortgage form used by Sin Hua Bank Limited and would make appropriate amendments pursuant to the contents of the Instruction Letter, and would prepare a bill for legal fee.  In 1997, the legal fee for deed of mortgage was calculated on the basis of the amount stated in Instruction Letter.  From the Instruction Letter from Sin Hua Bank Limited to the solicitors’ firm, it can be seen that the instruction was to prepare an unlimited legal charge, and the part pertaining to the limit of liability in the legal charge had been deleted.  This, together with the fact that legal fee was to be calculated on the basis of the amount stated in the Instruction Letter, means Mr. Kong would not be unaware of the fact that the transaction was an unlimited legal charge.  Further, the two defendants repeatedly said that Mr. Kong had explained to them the Facility Letter dated 30^th January 1997, a document with its title and first paragraph expressly stating that the Legal Charge in question was an All Moneys Legal Charge to an unlimited extent.  This further shows that Mr. Kong would not be unaware of the defendants’ liability under the Legal Charge.  Therefore, the possibility that Mr. Kong would have made any mistake in relation to the nature of the Legal Charge and the mortgagor’s liability is extremely low.

37.  There is no reason for Mr. Kong, as a staff member of the solicitors’ firm, to hide the true nature of the Legal Charge from the defendants, nor is it necessary for him to mislead them in order to make them believe that the limit of liability was HK$1 million.  Further, the Facility Letter dated 30^th January 1997 has expressly specified that the extent of the Legal Charge was unlimited, why would Mr. Kong take the risk of making incorrect representations to the defendants?

38.  As regards solicitor Mr. Ho, he was asked with short notice to relieve another solicitor to witness this transaction on the day in question.  He thus did not have time to peruse all the terms and conditions of the Legal Charge. According to his testimony, however, he was aware that it was an unlimited legal charge and he had asked the defendants whether they had any queries about Mr. Kong’s explanation, to which the defendants said no. With this the first defendant also agreed.  Mr. Ho also said he probably did explain to them that the document they signed was an all monies legal charge to an unlimited extent. In my opinion, if Mr. Ho did not have an understanding of the nature of the mortgage first, he would not, in the absence of any obvious reasons, tell the defendants that their liability was limited to HK$1 million; and if he had a basic understanding of the Legal Charge, he certainly would know full well that it was an unlimited legal charge.  As in the case of Mr. Kong, there is no reason for solicitor Mr. Ho to hide the truth from the defendants or to mislead them by telling them that their liability under the Legal Charge was limited to HK$1 million.  This not only would not be beneficial to him, but also would expose him to the risk of being discovered at any time and to the serious consequences incidental thereto.

39.  I rule that the second defendant’s allegations against Mr. Kong and solicitor Mr. Ho for misleading them or making misrepresentations to the defendants are unbelievable.  I reject those allegations.

40.  The first defendant’s account is that Mr. Sze and Mr. Fu had misled him and had made misrepresentations to him.  As Mr. Sze was neither a staff member of Sin Hua Bank Limited nor its agent, therefore even if Mr. Sze

had committed any misconduct or had misled the first defendant, Sin Hua Bank Limited would not have any vicarious liability arising out of his wrongful behaviour.

41.  Further, in the circumstances of the present case, even if Mr. Sze had misled (the defendants) or made misrepresentations (to them), Sin Hua Bank Limited would not have any responsibility to make inquiry either, because there is no evidence in the present case to show that Sin Hua Bank Limited had actual or constructive knowledge of the so-called misconduct of Mr. Sze.  See Bank of China (Hong Kong) Ltd v Leung Ngai Hang (unreported) CACV250/2005, paragraphs 15 to 16.

42.  According to the testimony of the first defendant, he agreed to provide the Jubilee Garden property as security to Sin Hua Bank Limited in return for repayment of the outstanding mortgage loan to HSBC by Mr. Sze on behalf of the defendants, and repayment of the mortgage loan under the Legal Charge to Sin Hua Bank Limited by Mr. Sze as well.  Solicitor Mr. Ng confirmed in his evidence that repayment of the then outstanding mortgage loan being owed by the defendants to HSBC was paid by Shun To.  Obviously, the arrangement in respect of the re-mortgage of the Jubilee Garden property between the defendants and Mr. Sze was a transaction based on their respective independent interests, and the relationship between them was merely a commercial one. According to the first defendant, Mr. Fu was also aware of the above arrangement between the defendants and Mr. Sze.  In other words, through Mr. Fu, Sin Hua Bank Limited was aware of the fact that there was a typical commercial relationship between the defendants and Mr. Sze or Shun To. Therefore, the bank had no actual or constructive knowledge of the so-called misrepresentation or misconduct as alleged by the defendants against Mr. Sze. So far as the legal principle is concerned, Sin Hua Bank Limited therefore did not have any responsibility to make inquiry.

43.  As regards Mr. Fu, the basis on which the first defendant’s allegation of misleading (acts) or misrepresentations lies is that during a dinner gathering in December 1996, when the first defendant said he had limited financial capacity and could only afford liability limited to HK$1 million, Mr. Fu smiled and nodded his head.  The first defendant also said he interpreted that to mean Mr. Fu had received his message and “would deal with it”.  But the first defendant said he could not remember what Mr. Fu’s reaction was when he told Mr. Fu that he could only afford HK$1 million.

44.  In my opinion, even if the first defendant’s testimony in respect of Mr. Fu is accepted completely, it is not sufficient to support his allegation that Mr. Fu had made misrepresentations to him.  The unequivocal legal principle is that mere silence or inaction does not constitute a “representation”, unless the party concerned has a duty for disclosure in law, or he knowingly conceals the important part of a representation.  See Halsbury’s Laws of England (4^th Edition, 2003 Reprint) Volume 31, paragraphs 748-751.  The first defendant’s testimony does not show that Mr. Fu had made any representation to him.  The Court cannot infer the mere smiling and nodding by Mr. Fu to mean that he was agreeable to what the first defendant had said, nor can the court regard it as an implied representation.

45.  Furthermore, judging from the perspective of inherent probability, it is improbable that Mr. Fu would tell the first defendant that his liability under the Legal Charge was limited to HK$1 million.  The undisputed documentary evidence shows that since Shun To had submitted the loan application to Sin Hua Bank Limited, the total credit facility limit granted to Shun To had all along been HK$1.8 million.  It is improbable for Mr. Fu, as a banking manager responsible for handling matters relating to the loans to Shun To, to be unaware of the fact that the total credit facility limit granted to Shun To had far exceeded HK$1 million, or to misunderstand or agree that the legal charge as security for the credit facility granted to Shun To was only limited to HK$1 million.  Also, there is no evidence in the present case to show that there was any reason or motive for Mr. Fu to mislead or hide the truth from the first defendant.  On the contrary, as a matter of common sense, Mr. Fu should know that when the defendants signed the Legal Charge at the solicitors’ firm, there would be opportunities for them to read the contents of the document or to come to know the real situation through the staff of the solicitors’ firm.  It is improbable for Mr. Fu to assume or anticipate that the defendants would not be informed of the contents of the documents and of their liability at the time of signing the document.  It can be inferred from this that Mr. Fu should know that if he misled the first defendant, it was very likely that it would be discovered.  That would mean the entire deal would fail.  Moreover, as Shun To had already signed “An Undertaking for Repayment of Overdraft”, should there be any problem with the mortgage arrangement, it would get Mr. Fu himself into trouble.  In my opinion, the allegation against Mr. Fu for misleading the first defendant, inadvertently or deliberately, that the limit of liability under the Legal Charge was HK$1 million is inherently incredible.

46.  By analyzing other objective facts of the present case, it can be seen that the two defendants’ allegation that they executed the Legal Charge after having been misled into thinking that the limit of their liability was HK$1 million is incredible.

47.  First, the first defendant admitted that in 1996 he regarded the terms offered by Mr. Sze to be very attractive and he also believed that Shun To had a good prospect and he also entirely believed in Mr. Sze. It was against such background that he agreed to re-mortgage the Jubilee Garden property as security for the loan granted to Shun To by Sin Hua Bank Limited. In such circumstances, it is not probable that the first defendant would be so minded about or would emphasize about that he could only afford a mortgage to the limit of HK$1 million, and the possibility that he agreed to execute the Legal Charge because Mr. Sze and Mr. Fu had told him the limit of liability was HK$1 million is also extremely low.

48.  Secondly, if the first defendant agreed to execute the Legal Charge only because the limit of the defendants’ liability was HK$1 million, then why would he, after having known the financial difficulty faced by Shun To in March 2000, further agree to act as the guarantor for another company of Mr. Sze, namely, Sunfine Industries Limited, in exchange for undisrupted supply of goods to Mr. Sze’s company by Draco King Industries Limited?  The first defendant’s account that he did so for the sake of “securing his job” is incredible.

49.  Further, in the defendants’ letter dated 18^th June 2001 to the Plaintiff wherein they offered to redeem the Jubilee Garden property and to substitute the Legal Charge by a personal loan of HK$1.8 million, they did not mention the point that the liability was limited to HK$1 million.  More importantly, the defendants’ version in the present case is that when the second defendant called Mr. Fu sometime in May 2001, she mentioned that when they executed the Legal Charge, the solicitor did say the limit of their liability was HK$1 million.  If that was the case, it is even stranger that not even a single word was mentioned about it in the defendants’ subsequent letter dated 18^th June 2001.

50.  It can be seen from the Contact Summary prepared by the Plaintiff for the account of Shun To that there had been numerous communications between the defendants and staff of Sin Hua Bank Limited during the period between April and September 2001, during which, however, the defendants had never mentioned that they had been misled into executing the Legal Charge, or that the limit of their liability was only HK$1 million.  On the contrary, when the defendants submitted the Credit Facility Application on 9^th August 2001, they were willing to be responsible for the liability of Shun To in the sum of HK$1.8 million, not HK$1 million.  The defendants explained that this was because Mr. Fu had told them that the bank would not accept any lesser amount.  Nevertheless, if Mr. Fu had a previous record of having misled them, why would the defendants still deeply believe in his instructions, without any suspicion, when they applied for a loan from the bank in August 2001?  In their reply on 23^rd November 2004 to the Plaintiff’s letter of claim dated 3^rd November, the defendants also did not allege that they executed the Legal Charge after having been misled or in the belief that the limit of their liability was HK$1 million.  In the defence filed by them in the case of HCA1362/2005, they also did not plead the ground of misleading behaviour or misrepresentation.  They only mentioned that when the solicitor made arrangement for the legal charge he did not tell them the serious consequences that they would be required to repay the debts on behalf of Shun To.  What they complained about was that the solicitor did not explain to them their liability under the Legal Charge.  It was only in their affirmations in the present case, which were drafted by their lawyers on their behalf, that they mentioned for the first time about the allegation of misrepresentation or misleading behaviour.  The defendants stated that such defects arose because of their lack of legal knowledge and that the matter was not dealt with through legal professionals.  In my opinion, such (reasons) do not constitute a good or reasonable explanation.  The question as to whether they had been misled by others who told them that the limit of the liability was HK$1 million is a matter of fact.  It is common sense that if this had really happened and it had been the reason causing the defendants to execute the Legal Charge, the defendants would certainly have revealed the whole picture of the incident without any hesitation when pressed by the bank for repayment.  It is not a complicated or difficult legal argument and the defendants could give a full account of it without the assistance of lawyers, instead of saying not even a single word of it over such a long period of time.

51.  Based on the above analysis, I am of the view that there is no factual or legal basis for the defence of “misrepresentation”, and thus it fails.

Defence of “Undue Influence”

52.  The defence of “undue influence” is only applicable to the second defendant.

53.  The legal principle relating to “undue influence” can be found in Royal Bank of Scotland Plc v Etridge (No.2) [2002] 2 AC 773; Li Sau Ying v Bank of China (Hong Kong) [2004] 7 HKCFAR 579; and Bank of China (Hong Kong) Ltd v Leung Ngai Hang (unreported), CACV250/2005, etc.     If a party to a contract agreed to execute the agreement as a result of having been subjected to “undue influence”, then all parties to the contract may be discharged from their liabilities under the contract.

54.  In cases where a wife alleges that she had been under “undue influence” by her husband whereby the transaction between her and a third party (such as a bank) shall become null and void, it is necessary for the court to consider three points:

(a)  Can the wife satisfy the court that she really was subjected to “undue influence” by the husband;

(b)  If so, was the other party to the transaction aware of the “undue influence” and therefore had the responsibility to make inquiry; and

(c)  If the other party to the transaction had the responsibility to make inquiry, did he take reasonable steps to satisfy himself that the transaction was not procured by “undue influence”: see Royal Bank of Scotland Plc v Etridge (No.2), paragraph 101.

55.  The second defendant’s evidence in this regard is that in late 1996, the first defendant told her that Mr. Sze suggested them to re-mortgage the Jubilee Garden property to the bank as security for a loan to be granted to Shun To for the purpose of its business expansion, and that it was one of the conditions offered by Mr. Sze.  The first defendant told her the loan amount was HK$1 million, the prospect of Shun To was good, and he also wanted to become a partner in Mr. Sze’s company.  The second defendant said she agreed to sign the Legal Charge because the first defendant was the breadwinner of their family and she believed that he would look after the interest of the family. Moreover, as the first defendant was the only person that she placed trust upon, it would not be beneficial to the family for her to query the first defendant’s judgment although she was unwilling to take the risk.  The second defendant also thought that this kind of important matter should be left for her husband to decide, and that she should be concentrated on the education of her two daughters.

56.  In my judgment, the second defendant’s evidence does not show that the first defendant had exerted any undue influence on her.  Her testimony only shows that there was a reciprocal trust between her and the first defendant.  The fact that she let her husband handle and decide on financial matters of the family, at its highest, can only show that the first defendant was influential to her, but it cannot prove that that the first defendant had exercised undue influence on her.  There is no evidence in the present case to prove that the first defendant had ever abused the trust and confidence placed on him by the second defendant, or that he had ever misled the second defendant by improper means or had ever oppressed her in order to make her accede and agree to sign the Legal Charge.

57.  In fact, according to the case of the second defendant, between her and the first defendant there existed a normal relationship of reciprocal trust and confidence between a wife and husband.  As suggested in Royal Bank of Scotland Plc v Etridge (No.2) by the House of Lords in England, in every normal, healthy marriage, it is only natural that there is a reciprocal trust and confidence between a wife and husband and that the wife would support her husband’s business to the best of her ability. Therefore, the court cannot presume that merely because a wife, who generally reposes trust and confidence in her husband, agrees to become surety or mortgagor to support his business enterprises or his debts, there must be “undue influence”.  See paragraphs 159, 160, 162 and 164 of the judgment.

58.  Further, according to her case, Mr. Sze’s suggestion was not overwhelmingly to their disadvantage.  On the contrary, the suggestion was very attractive because Mr. Sze would repay the then outstanding mortgage debt owing to HSBC and Shun To would repay the mortgage debt to Sin Hua Bank Limited, while the first defendant would also have a chance to become a partner of the company.  This further demonstrates that the second defendant agreed to sign the Legal Charge not because of undue influence.

59.  On the other hand, it is impossible for Sin Hua Bank Limited to have knowledge that there was the so-called undue influence between the defendants.  There is no evidence in the present case to show that the bank had suspected that the first defendant had exerted undue influence on the second defendant.  In such circumstances, the bank did not have any responsibility to make inquiry.

60.  Based on the above analysis, I take the view that the second defendant has failed to prove that she signed the Legal Charge after having been subjected to “undue influence”, and has also failed to proved the relevant legal elements relating to “undue influence”.  This ground of defence fails.

Ground of defence that the loan arrangements had been varied

61.  Another ground of defence of the defendants is that after the execution of the Legal Charge, Sin Hua Bank Limited and Shun To executed other loan and credit facility documents, thereby varying the loan amount and repayment schedule between them.  They claimed that it all took place without their knowledge or consent, and thus they should be discharged from the liability under the Legal Charge.

62.  Clause 18.6 of the Legal Charge reads:

“the Lender shall be at liberty without thereby affecting or prejudicing its rights hereunder and without any notice to the Mortgagor or the Borrower at any time to determine enlarge increase extend or vary any Facilities credit or accommodation or the terms conditions and duration under or for which the same may be granted in any way whatsoever, to vary exchange abstain from perfecting or release any other security at any time held or to be held by the Lender for or on account of the Secured Sum or any part thereof in any manner and to compound with give time indulge or forebear to enforce payment to accept compositions from and make any other arrangements with the Borrower or any obligations on bills notes or other security at any time held or to be held by the Lender;”

63.  According to Clause 18.6, Sin Hua Bank Limited may terminate, increase or vary any loan and credit facility arrangement provided to Shun To, including repayment schedule and security arrangement, without any notice to the defendants, and without affecting or prejudicing the rights of Sin Hua Bank Limited under the Legal Charge.

64.  In view of the stipulation in Clause 18.6, the defence advanced by the defendants under this heading also fails.

The Issue of “Counter Restitution”

65.  It is not necessary for the court to give any ruling on the issue of “counter restitution” as the defence that the Legal Charge is null and void has failed.  The court only needs to point out that even if the defence were to stand, it is still necessary for them to pay interest of HK$192,312.91 to the Plaintiff.  For the relevant legal principles, see Chitty on Contracts (30^th edition, 2008), paragraph 7-098; Dunbar Bank v Nadeem [1998] 3 All ER 876.

Other Arguments

66.  The defendants mentioned in their submissions that as early as in August 2001, they had already proposed that they would be willing to redeem the property with HK$1.8 million and to make repayment on their own.  The internal documents of Sin Hua Bank Limited also show that its Credit Management Department had given approval in September. However, Sin Hua Bank or the Plaintiff that subsequently took it over had never given a formal reply to the defendants.  The negotiation on repayment thus came to an end with nothing definite, thereby causing the prolonged delay. According to the evidence of witness Mr. Ng, there was no record in the internal documents of the bank to show whether the bank had given any reply to the defendants or follow up the matter with them.

67.  I agree that it is not a desirable situation for Sin Hua Bank Limited not to inform the defendants if the bank had approved the defendant’s repayment proposal.  I have also considered that if an agreement as to the liability under the Legal Charge had been reached between the defendants and the bank in September 2001, their outstanding debts would not have continued to accumulate interest. Nevertheless, I also accept the Plaintiff’s submission in relation to the calculation of interest.  First of all, calculation of interest prior to the judgment must be based on the stipulation of the Legal Charge, and the court does not have any discretionary power in this regard: see Hong Kong Civil Procedure 2001, Vol. 1, para. 6/L/9.  Further, the defendants have been using the Jubilee Garden property without making any monthly mortgage payment since 2001.  By ordinary principle, an interest is to compensate the lending party for being unable to use the money which has been lent to the borrower.

68.  Therefore, despite the fact that the defendants had took the initiative to make a repayment proposal and that there was a chance that their liability under the Legal Charge might have been resolved through an agreement in 2001, I do not think that the court has the discretion to mitigate the interest payable by the defendants.  Of course, when the Plaintiff enforces this judgment in future, the Plaintiff may, in view of the above situation, consider mitigating part of the interest at its own discretion.

Conclusion

69.  Based on the above analysis and reasons, I rule in favour of the Plaintiff and make the following orders:

(1)  Delivery by thefirst and second defendants to the Plaintiff vacant possession of the Jubilee Garden property; there be stay of execution of this order within 35 days of the handing down of this judgment;

(2)  Payment of all moneys and interest (calculated according to the Legal Charge until full payment) due and owing by thefirst and second defendants under the Legal Charge;

(3)  Costs of the present case to the Plaintiff, to be taxed if not agreed.

Translated by the Judgment Translation Unit of the Judiciary and approved by Mr. P. Y. Lo, Barrister-at-law.