THE HONGKONG CHINESE BANK LTD v. ONLINK INVESTMENTS LTD AND OTHERS

CACV 223/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 223 OF 2002

(ON APPEAL FROM HCMP NO. 1448 OF 1998)

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(By 3rd Defendant's Counterclaim)

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J U D G M E N T

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Hon Rogers VP:

1. This is an appeal from a judgment of Deputy High Court Judge Muttrie given on 8 March 2002. The deputy judge was hearing an originating summons which had been issued by the plaintiff against a number of defendants in respect of three properties. The 3rd defendant was the only party before the court on that occasion. The matter before the deputy judge related to Flat B on 28th floor of Fu Kar Court, Fortress Garden and the associated car park ("the property") and a claim in respect of monies owing under a mortgage dated 4 April 1997. The subject of the hearing was the claim made against the 3rd defendant for an order for possession of the property and for the payment of the amount owing and costs. The 3rd defendant had raised a counterclaim, wherein various orders were sought. The judge dismissed the plaintiff's claims against the 3rd defendant and gave judgment for the 3rd defendant on the counterclaim. A declaration was made that the deed of mortgage dated 4 April 1997 was null and void as against the 3rd defendant and that the registration of the mortgage against the property should be vacated. At the conclusion of this appeal this court reserved its judgment which we now give.

Background

2. The facts of the case are set out in the judgment below and it is unnecessary for the purposes of this judgment to set out the full facts. The 2nd defendant is the daughter of the 3rd defendant and is also the wife of the 6th defendant. The 2nd and 6th defendants were the subscribing shareholders of the 5th defendant, which, by all appearances, seems to have been their company. They were directors and shareholders of that company. The 6th defendant is also a shareholder of the 1st defendant. That company owned a flat in Braemar Hill Mansions which, at some stage, was occupied by the 2nd and 6th defendants as their residence.

3. The 3rd defendant had spent much of her life in the United Kingdom working in a take away establishment which she ran with her husband. In circumstances which it is unnecessary to go into, she wished to purchase a flat in Hong Kong. As the judge found, in August 1992 she executed a general power of attorney in favour of the 2nd defendant. That power of attorney complied with the form set out in the schedule of the Powers of Attorney Ordinance, Cap. 31 ("the Ordinance"). Section 7 of the Ordinance therefore applied to it. In March 1993, there was an assignment of the property to the 2nd and 3rd defendants as joint tenants. At the same time there was a mortgage of the property to the Hong Kong and Shanghai Banking Corporation to secure a home loan of $1,995,000 ("the 1993 mortgage"). Whilst the sale and purchase agreement had been signed by the 2nd defendant for the 3rd defendant using the power of attorney, the assignment and mortgage were executed by the 3rd defendant herself. The purchase price of the property was $2,950,000.

4. Although the judge accepted that the 3rd defendant had made remittances of money to the 6th defendant whilst the 3rd defendant was in the United Kingdom, there was no quantification of the amounts that were remitted. More importantly, the judge did not make any finding as to the provenance of the purchase monies for the property. In this regard, it may be noted that the judge had not accepted the 3rd defendant's evidence that the whole of the purchase monies had come from her and that there had been no need for the 1993 mortgage.

5. In March 1995, the 1993 mortgage was discharged. The property was mortgaged to the plaintiff along with two other properties, one of which was the Braemar Hill property which was the 2nd and 6th defendants' residence. That mortgage was to secure banking facilities for Woonli Limited. Little is known about this mortgage. Woonli Limited was shown to be indirectly connected to the 2nd and 6th defendants via a connection with the 4th defendant. There was no evidence that the 3rd defendant knew anything about this mortgage. The evidence before the judge was scanty, to say the least, in respect of this mortgage. There was no finding by the judge that the monies from this mortgage were used to discharge the amount owing on the 1993 mortgage. Indeed, that had not been pleaded.

6. The mortgage of the property which is the subject of this action was executed in favour of the plaintiff on 4 April 1997. The previous mortgage to the plaintiff was discharged. This mortgage, ("the 1997 mortgage"), included a mortgage of the two other properties. The 1997 mortgage was to secure banking facilities for the 5th defendant. The 1997 mortgage was executed on behalf of the 3rd defendant by the 2nd defendant using the power of attorney, which was by then some 4 1/2years old.

7. The deputy judge accepted that the 3rd defendant knew nothing about this mortgage until the time came when the plaintiff sought to enforce it. The 3rd defendant had, however, signed a very short confirmation confirming that the power of attorney was still valid and subsisting. The judge did not make it clear as to whether it was the copy of that confirmation which was witnessed by the 6th defendant, but it matters not. The 3rd defendant accepted that she had signed such a document although she was unaware of its effect or its true purpose. That confirmation was dated 4 April 1997 as was a letter addressed to the plaintiff's then solicitors. That letter, which has been referred to as the declaration, was drafted by the solicitor acting on behalf of the plaintiff. The draft had been sent to the 6th defendant by fax on 5 April 1997. The material part of that declaration stated that the 3rd defendant was fully aware that the property would be charged to the plaintiff for the purpose of securing the general banking facilities of the 5th defendant of which her attorney, the 2nd defendant, was a shareholder and a director. The declaration confirmed that the 2nd defendant was entitled to use the power of attorney for that purpose.

8. The proceedings in this action were commenced on 3 April 1998 and an acknowledgment of service was entered on behalf of both the 2nd and 3rd defendants on the same form. The address for service was given as a property in Chinachem Leighton Plaza, which is the same address for service as the other defendants gave on separate forms. From the court records it would seem that the 2nd defendant did appear in court at the early stages of the proceedings. Indeed there was one affirmation from the 2nd defendant on the court file. That affirmation gave the address of the 2nd defendant as being 28B Fu Kar Court, 32 Fortress Hill Road, Hong Kong. Thereafter, however, the 2nd defendant has taken no part in the proceedings. It is thought that she is resident in the United Kingdom, whether at the address which was given for her in the company records of the 5th defendant or some other address is not known.

9. It would appear that on a joint application of the plaintiff and the 3rd defendant, the proceedings in this action against the 2nd and 3rd defendants were to be continued as if begun by writ and that a statement of claim was to be served. The statement of claim was served on behalf of the plaintiff and a defence and counterclaim served on behalf of the 3rd defendant, the counterclaim being against the plaintiff and the 2nd defendant. There is an affidavit of service dated 18 June 2001 indicating that the 3rd defendant's defence and counterclaim was served on the 2nd defendant on 3 March 1999 by posting the same to the address given for the 2nd and 3rd defendants at Chinachem Leighton Plaza. A summons for judgment in default of defence was issued by the 3rd defendant on 3 September 2001 and, again, an affidavit of service was filed showing that this was served by post on the 2nd defendant alone at the same Chinachem Leighton Plaza property. It is noteworthy that although the affidavits of service state that the documents had not been returned by the dead letter service they do not state that in the affiant's belief the documents would have reached the 2nd defendant. It is, of course, speculative as to whether they would. The 2nd defendant's only affirmation in the case gave her residential address as that of the property.

10. Despite any difficulties that there might, therefore, be in relation to service, the order which the judge made on 27 September 2001 was that there be a declaration that the 2nd defendant held her title to the property for and on behalf of the 3rd defendant, that the 3rd defendant was the true beneficial owner of the property and that the 2nd defendant should pay the 3rd defendant's costs. According to the court records that order was made on a 5-minute hearing seemingly without any argument. It should also be noted that there was no attempt to give notice of the application to either the plaintiff or any party to the action other than the 2nd defendant. This was despite the fact that the 2nd defendant had mortgaged the property to the plaintiff. It suffices to say that that judgment dated 27 September 2001 would appear to be wholly irregular. Declarations as to rights which would affect other parties should not be given without notice to all the parties to an action likely to be affected thereby. Moreover, declarations as to rights should not be given without evidence to support the making of the declaration. Without an examination of all the evidence declarations should not be made on uncontested applications. As far as the present proceedings are concerned, in my view, that order and the declarations therein can have no binding effect on the plaintiff in this case. Indeed, Mr Mak, on behalf of the 3rd defendant, did not seek to rely upon it.

11. At the trial of the action the judge found that the power of attorney had never been revoked and that as of 4 April 1997 it was valid and subsisting. Although the judge did not accept a significant part of the 3rd defendant's evidence, he was prepared to accept that the 3rd defendant had not signed the declaration dated 4 April 1997. Although the 3rd defendant had signed the confirmation, again, the judge was prepared to accept that the 3rd defendant did so in ignorance of its true contents. The judge summarised the 3rd defendant's case in paragraph 33 of his judgment as follows:

"The 3rd defendant's case is that the Plaintiff and its solicitor had failed to take reasonable steps to ascertain, or should have been put on enquiry as to whether the then retired 3rd defendant had revoked the 5 years old POA; or secondly, that the 1997 mortgage is voidable in equity for misrepresentation and/or undue influence by the 2nd and/or 6th defendant, or thirdly that it is in any event an unconscionable bargain."

12. In respect of the first argument the judge rejected it on the basis that the power of attorney had never been revoked and hence any question as to whether the plaintiff had failed to take steps to ascertain whether it had been revoked was irrelevant. Although the judge made reference to undue influence and misrepresentation in the course of his judgment there was never any attempt to define what the undue influence was nor what misrepresentation there had been. Indeed there was no pleading of any misrepresentation or undue influence. The judge concluded his consideration of this part of the case in paragraph 55 of the judgment as follows:

"I do not mean to say that in any case where an attorney acts under a statutory general power of attorney to confer a benefit on himself, the third party to the transaction is necessarily put on inquiry, and liable to be fixed with constructive notice of the lack of authority if he does not make sufficient inquiry; that may well be so but it is not necessary to hold it for the purposes of this case. However, it seems to me that in this case the plaintiff was already put on inquiry and liable to be fixed with constructive notice of undue influence, misrepresentation or other legal wrong if it did not make sufficient inquiry. It, or its solicitor Mr Fu, did not make sufficient inquiry. He relied entirely on what the 6th defendant, who also benefited, told him and on Exhibit P5 which the 6th defendant was sent to have signed by the 3rd defendant. That could in no way be regarded as taking reasonable steps to ensure that the 3rd defendant knew what she was doing, or was independently advised. I do not see how the plaintiff can now rely on the POA to protect it from the consequences of that failure in circumstances where the 2nd defendant's authority to benefit herself under the POA was also in question."

This appeal

13. There was no challenge to the holding of fact by the judge that the power of attorney remained valid and subsisting. In those circumstances two questions arose on the pleadings. First, as to whether the use of the power of attorney to execute the 1997 mortgage was within the scope of the powers conferred by that instrument. Secondly, as to whether the use of the power of attorney to execute the 1997 mortgage was a breach of fiduciary duty of which the plaintiff was aware or should have been alert to at the time of the execution of the mortgage.

14. Although in the skeleton argument filed on behalf of the 3rd defendant for this appeal, reference is made to arguments in relation to undue influence and misrepresentation, these do not seem to me to arise. In the first place, the 3rd defendant's pleadings do not raise those issues. In the second place, there is no suggestion that the 3rd defendant was aware of the 1997 mortgage at the time nor that she had been influenced to execute the mortgage either by a misrepresentation or by the exercise of undue influence. The question is simply as to whether there was a breach of fiduciary duty on the part of the 2nd defendant in using the power of attorney to benefit herself to the detriment of the donor of the power.

Whether the execution of the 1997 mortgage fell within the powers conferred by the power of attorney

15. In my view the first question can be answered very simply. Section 7 of the Ordinance makes it quite clear that the donee of the power has the authority to do anything which the donor could lawfully do. It reads as follows:

"(1) Subject to subsection (2), a general power of attorney in the form set out in the Schedule, or in a form to the like effect but expressed to be made under this Ordinance, shall operate to confer-

(a) on the donee of the power; or

(b) if there is more than one donee, on the donees acting jointly or acting jointly or severally, as the case may be,

authority to do on behalf of the donor anything which he can lawfully do by an attorney.

(2) This section does not apply to functions which the donor has as a trustee or personal representative."

Although Mr Mak attempted to put some construction on the word "lawfully" which would exclude a donee of a power from making a gift of property to himself, as regards the construction of the terms of the power I do not consider that any such restriction can be made. Our attention was drawn to a number of cases including, for example, Reckitt v Barnett, Pembroke and Slater, Limited [1929] A.C. 176 in which the powers of attorney have been narrowly construed. Those cases, however, concerned special powers of attorney and not general powers. In my view, no limitation along the lines argued on behalf of the 3rd defendant can be implied.

Whether the plaintiff was put on notice of the breach of the fiduciary duty

16. There are a number of factors in relation to this that, in my view, make it clear that the plaintiff and its advisers would have been put on notice that the donee of the power of attorney in executing the 1997 mortgage was using the power of attorney for the donee's benefit in breach of fiduciary duty. It was at once apparent that the donee of the power, the 2nd defendant, was a shareholder and the director of the company whose borrowings were being secured by the mortgage. The property was only one of three which were the subject to the mortgage and the donor of the power, the 3rd defendant, had seemingly no interest in the 5th defendant or the other properties. The plaintiff would also have been aware that the original mortgage to the Hong Kong and Shanghai Bank, which was the only mortgaged executed by the 3rd defendant herself, had been a simple loan for the purchase of the property whereas the property was now being used as security for a business loan. Finally, it was apparent on the face of the power of attorney that the donee of the power was the daughter of the donor. That point is by no means as important as the others save that the plaintiff was clearly dealing with the 6th defendant who was the husband of the donee of the power.

17. In reaching the conclusion that the plaintiff would have been put on notice that the 2nd defendant was acting in breach of fiduciary duty, I take some comfort from the fact that the plaintiff's solicitor saw fit to request that the declaration, which has been referred to above, be signed by the 3rd defendant. The purpose of the declaration could only have been to demonstrate that the 3rd defendant approved of the use of her interest in the property as security for the 5th defendant's indebtedness. It has already been noted, however, that the draft of this declaration was only sent out by the solicitor acting for the plaintiff on the day after the 1997 mortgage had been executed. Furthermore, no proper effort appears to have been made to ensure that the contents of the declaration were translated or explained to the 3rd defendant by somebody competent to do so, nor were any steps taken to ensure that the 3rd defendant's signature was witnessed by somebody such as a solicitor or notary on whom reliance could be placed. As the judge accepted that the 3rd defendant had not signed it, it would seem that the document was a forgery.

18. As noted in paragraph 16 above, the plaintiff would also have been aware that the nature of the transaction involving the 1997 mortgage was very different from the 1993 mortgage. Whereas the 1993 mortgage was a home loan for less than HK$2 million, the 1997 mortgage was to secure general banking facilities of an unlimited amount with legal fees charged at HK$17,700,000 covering what was a trading account with an initial credit of approximately $14 million.

19. There was no dispute that if the plaintiff had been put on notice that the donee of the power of attorney had been acting in breach of fiduciary duty and had not taken sufficient steps to satisfy itself that the fiduciary was not acting in breach of duty, then the mortgage which had been executed by the fiduciary in purported exercise of the power would not be enforceable by the plaintiff. For the reasons which I have given I consider that those circumstances prevail in this case. The plaintiff was put on notice that the 2nd defendant in executing the mortgage was misusing her power and doing so for her own benefit and not for the benefit of the 3rd defendant, the donor of the power. The steps taken by the plaintiff were all taken by its solicitor. The various steps taken by the solicitor were inadequate. In the circumstances the plaintiff is not entitled to rely upon the mortgage as against the 3rd defendant.

Vacation of the registration of the 1997 mortgage

20. The judge went on to order the vacation of the registration of the 1997 mortgage against the property. That could only be done on the basis that the 3rd defendant was the sole beneficial owner of the property. If the property were held by the 2nd and 3rd defendants as joint tenants, then the plaintiff would be entitled to enforce the mortgage against the interest of the 2nd defendant in the property as Mr Mak has not challenged the submission that the charging of a property by one joint tenant severs the joint tenancy (First National Securities v Hegerty [1985] QB 850, 854). As already noted a declaration had been made in September 2001 on an application for judgment in default. As already outlined, in my view, the declaration made on that judgment in default of defence would not bind the plaintiff. There are a number of reasons:

(a) The application for judgment in default of defence was not served on the plaintiff and the plaintiff was given no notice that the application was being made. As a party to the action and counterclaim the plaintiff was entitled to be served with notice of any application in respect of which an order was to be sought that was intended to bind the plaintiff.

(b) A court cannot make a declaration as to rights which would affect third parties in the absence of being fully satisfied that it is appropriate to make such a declaration. In normal circumstances this would require evidence. In this case the declaration was made simply on the basis that a defence had not been filed.

(c) The judge had held that the 1993 assignment and mortgage had been validly executed by the 3rd defendant. There has been no finding as to the provenance of the balance of the purchase money in 1993 over and above the mortgage money obtained on the home loan. Even if some or all of that balance of the purchase money had come from the 3rd defendant, because the 2nd defendant was the 3rd defendant's daughter any person dealing with the property thereafter would be entitled to rely upon the documentation, which was valid, as bestowing an interest in the property on the 2nd defendant because of the presumption of advancement.

21. In those circumstances there can be no bar to prevent the plaintiff enforcing the mortgage against the 2nd defendant's interest in the property. The order to vacate the registration of the mortgage against the property must therefore be rescinded.

Conclusion

22. In my view, therefore, this appeal should be dismissed save to the extent that the order requiring vacation of the registration of the mortgage should be set aside. Whilst the result of this appeal has been that the 3rd defendant has succeeded in retaining the judgment on the basis that the 1997 mortgage was not binding on her, the effect of this court's order is markedly different from the effect of the order in the court below in that the 3rd defendant is not entitled to retain the benefit, as against the plaintiff, of the judgment she obtained in default against the 2nd defendant. The plaintiff has thus succeeded to a substantial extent in this court and I would make an order nisi that the costs in the court below remain unaltered but that the plaintiff should have half its costs in this court.

Hon Le Pichon JA:

23. I agree.

Hon Yuen JA:

24. I agree.