DBS BANK (HONG KONG) LTD v. YOUNG & FORTUNE LTD AND OTHERS

HCMP 1838/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1838 OF 2014

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J U D G M E N T

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1.  This is an application by the plaintiff (“the Bank”) for possession of properties under various mortgages and money judgment.

2.  With regard to the defendants,

(a) An order for winding-up has been made against D1 (“Y&F”) on 24 June 2015 in HCCW 125 of 2015; the provisional liquidators do not oppose this application for possession of properties;

(b) A bankruptcy order has been made against D2 (“Shum”) in HCB 1536 of 2015;

(c) D3 (“Noel Wan”) acts in person;

(d) D4 has no solicitors on record and has not obtained leave from a Master to act by its director.

Background

3.  The following matters are supported by contemporaneous documents.  I find them to be true and rely on them for this judgment.

4.  Y&F was incorporated in Hong Kong in 2003.  Since 30 January 2011, Shum and Noel Wan have been its only shareholders and directors.

5.  The Bank is the mortgagee and lender under 3 mortgages:

(1) A 1^st Mortgage dated 13 July 2007 in respect of the property known as House No. 63 and 2 car parking spaces, Boulevard Du Palais, The Beverly Hills, No. 23 Sam Mun Tsai Road, Tai Po, New Territories (the “1^st Property”). Shum and Noel Wan are the mortgagors; and Y&F the borrower.

(2) A 2^nd Mortgage dated 8 February 2010 in respect of the property known as House No. 19 and 2 car parking spaces, in the same development (the “2^nd Property”). Y&F is the mortgagor and borrower.

(3) A 3^rd Mortgage dated 9 July 2010 in relation to the property at The Palazzo, Sha Tin.  Y&F was the mortgagor and borrower.  This property had been sold and the proceeds applied to reduce the indebtedness of Y&F to the Bank.

6.  Various agreements including 2 facilities letters (the “2012 and 2013 Facility Letters”) have been executed in favour of the Bank, pursuant to which the Bank advanced facilities to Y&F. 

7.  In addition, 5 guarantees and indemnities have been jointly and severally executed by Shum and Noel Wan between 1 March 2007 and 4 September 2012.  There was another guarantee by Shum alone on 4 September 2012. All of them were to secure the indebtedness of Y&F.

8.  In September 2012, Y&F purchased an insurance policy (“the Insurance Policy”) at a premium of US$350,000.  The insured was Shum.  The face amount was US$1,475,000.  Y&F was the beneficiary. 

9.  On 15 October 2012, Y&F assigned the insurance policy (“the Assignment”) to the Bank; and notice thereof was given to Sun Life Assurance Company of Canada, Bermuda Branch (“Sun Life”).

10.  The defendants defaulted in repayment despite demands.  As of 23 April 2015, the total outstanding under the 2012 and 2013 Facility Letters, taking into account all the part payments, was HK$57,686,236.30, with interests still accruing.  The Bank thus instituted these proceedings.

The defence

11.  Only one affirmation has been filed by Shum on 15 December 2014 (“Shum-1^st”).  The “2^nd affirmation” of Shum was in fact unsigned, undated, unsworn and filed out of time in breach of Master K Lo’s order dated 6 January 2015.  The “2^nd affirmation” is inadmissible and I wholly disregard it and the Bank’s affirmation in response to it.

12.  The defendants have raised only 2 defences in Shum-1^st, ie economic duress and breach of fiduciary duty.

Summary judgment under on originating summons

13.  The burden is on the plaintiff to justify its entitlement to summary judgment. Once this is prima facie demonstrated on the evidence, it is up to the defendant to show that he does have a defence to the claim. See Wing Hang Bank Ltd v Liu Kam Ying & ors (unrep. HCMP 2519/2001, 6 March 2002) at §§7 and 10, perMa J (as he then was).

Claim against Y&F and Shum

14.  The Bank’s case is well supported by documents.  The Bank makes clear that it only pursues against Y&F and Shum for recovery of possession and not money judgment.  These 2 defendants have indisputably defaulted in repayment.  As the Bank is a secured creditor, the 1^st and 2^nd Properties do not fall within the general estate of Y&F and Shum for distribution to unsecured creditors.  The Bank is rightfully entitled to recover possession.

15.  I therefore give judgment to the plaintiff for vacant possession of the 1^st and 2^nd Properties.  As these are residential properties, taking into account the intervening Chinese New Year, Y&F and Shum shall deliver vacant possession by 29 February 2016.

Claim against D4

16.  I am satisfied that D4 has had notice of this hearing and has been served with the hearing bundles and skeleton submissions for the Bank.  It is appropriate to hear the originating summons in his absence.

17.  As guarantor, D4 is indisputably liable to the Bank for the indebtedness of Y&F.  I give money judgment to the Bank as claimed.

Claim against D3(Noel Wan)

18.  The 2 defences in fact apply to all defendants.

Economic duress

19.  The court must be careful in distinguishing aggressive (yet legitimate) commercial activities from “illegitimate pressure” involving unconscionable or unlawful conduct.  It is the illegitimacy of the suggested pressure that would amount to economic duress.  See Esquire (Electronics) Ltd v HSBC [2007] 3 HKLRD 439 at §§154-155:

“154. Much commercial activity necessarily involves pressure, often considerable and sometimes overwhelming, exercised by parties who find themselves in powerful bargaining positions. But that of itself is not illegitimate. …

‘Pressure will be illegitimate if it consists of unlawful threats or amounts to unconscionable conduct. But the categories are not closed. Even overwhelming pressure, not amounting to unconscionable or unlawful conduct, however, would not necessarily constitute economic duress.’

155. The reference there to ‘unconscionable conduct’ itself needs explanation. It has been explained in the Australian courts by reference to a special disadvantage suffered by the weaker party of which the stronger party takes advantage …:

‘I qualify the word ‘disadvantage’ by the adjective ‘special’ in order to disavow any suggestion that the principle applies whenever there is some difference in the bargaining power of the parties and in order to emphasize that the disabling condition or circumstance is one which seriously affects the ability of the innocent party to make a judgment as to his own best interests, when the other party knows or ought to know of the existence of that condition or circumstance and of its effect on the innocent party.’ ”

Application of the legal principles on economic duress

20.  Shum claims that he had cooperated with Dick Lee (Account Manager of the Bank) for years, reposed trust in him and viewed him as a “financial advisor”.  Whilst the defendants were in financial strain, Shum believed that Dick Lee would provide appropriate relief proposals to the defendants. Instead, Dick Lee persuaded him to purchase the Insurance Policy (which Shum describes as “the Keyman Insurance”), (i) by threatening to demand immediate repayment of Y&F’s outstanding liabilities to the Bank; and (ii) at a time when the defendants were in financial constraints.  No new facilities were granted when what Y&F/Shum needed was cash.  Proceeds of sale of a property were applied to reduce the debts instead of given back to Y&F/Shum for cash flow.  Allegedly all these had led to the defendants’ financial ruin.

21.  The Bank denies exerting pressure of any sort.  There is a dispute as to the title and capacity of Mr Dick Lee which is irrelevant.  I shall adopt Shum’s version.

22.  In my view, there was nothing illegitimate in the Bank demanding for immediate repayment of outstanding liabilities, even to the extent of threatening litigation.  Even if the Bank had made it a condition for Y&F to take out the Keyman Insurance before granting or continuing facilities, it was aggressive but not illegitimate conduct.  Shum does not deny that the Bank had the power to apply proceeds of sale of a property to reduce the debts either.

23.  The Bank disputes that the defendants were financially constrained.  It refers to the “Information Disclosure and Authorization” signed by Shum on 14 March 2012.  It showed his net worth to be about US$25.55 million, 73 times the premium for the Keyman Insurance. 

24.  With respect, Shum’s stated assets were largely in the form of landed properties and businesses.  His problem was insufficient cash flow to settle the millions of debt.  I am prepared to find that the defendants were then in financial constraints.  They needed time and credit facilities from the Bank to continue their business and the Bank knew about it.

25.  However, it was not shown that the circumstances were such that the ability of Y&F/Shum to make a judgment as to their/his own best interests was seriously affected.

26.  Furthermore, I have taken into account the following matters:

27.  Firstly, the Bank was not a party to the Insurance Policy.  It was Sun Life which was the ultimate carrier.  The Bank was merely a conduit between Charles Monat (the broker) and Y&F/Shum as the intended purchaser(s).  In the referral form signed by them, Shum and Noel Wan acknowledged that:

(a) Charles Monat alonewould “advise and represent [them] in relation to Insurance Services”. The Bank was “the referral party” and acted as “introducer”.  For this, the Bank might receive a referral fee.

(b) When considering whether to purchase insurance services, Shum and Noel Wan would rely on the advice given by Charles Monat, which would be “solely responsible for such representations and/or advice”.

(c) At no time should Shum and Noel Wan rely on the Bank “to advise on, arrange or sell any Insurance Services to [them]”;

(d) Shum and Wan shall not rely on either the Bank or Charles Monat for tax or legal advice relating to any insurance services; they shall consult with their own tax and legal advisors to the extent they consider necessary.

28.  Secondly, even if the Bank was a party to persuading Shum to purchase the Keyman Insurance and, as suggested by Shum, obtained  benefit in terms of commission, that would at best only give rise to the setting aside of the Keyman Insurance or disgorging of the Bank’s commission.  The setting aside would not undermine the fact that the defendants had defaulted in repayment of loans to the Bank before the purchase.  There had been no promise by the Bank to waive any part of the debts.  Any refunded premium would have been caught by the Bank’s charge on cash deposit dated 30 March 2010 executed by Y&F.  It may make a difference to the amount of debt owed but not liability to repay.

29.  Thirdly, Y&F/Shum actually obtained some “benefits” from the Keyman Insurance. 

(a) The Bank had extended further facility to Y&F on 23 August 2012 without additional security even before Y&F purchased the Keyman Insurance in September 2012. 

(b) Y&F’s Reports and Financial Statements for the period from 1 April  to 31 December 2012 (“the 2012 Financial Statements”) indicated that Y&F’s financial positionimproved after purchase of the Keyman Insurance, reporting a net profit of $8.4 million in that year.

30.  Fourthly, Y&F had effectively affirmed the validity of the Keyman Insurance and the Assignment:

(a) The 2013 Facility Letter provided that the Bank would continue to make available the facilities on condition, amongst others, that the Bank received the Assignment, which the Bank did.

(b) In the 2012 Financial Statements, the Keyman Insurance was described as “other investments” and “purchases of other investments”.

(c) When the Bank gave Shum notice of exercise of its rights to terminate the Keyman Insurance Policy and retrieve the cash value for partial settlement of the outstanding liabilities to the Bank, the defendant’s former solicitors did not dispute the validity of the Keyman Insurance.  Instead, they asked for time extension to repay the loans.

31.  There was no illegitimate pressure shown, no evidence of Y&F or Shum’s ability to make a judgment in their best interest being affected, and yet some benefits of the Keyman Insurance to Y&F.  Y&F had even affirmed the Keyman Insurance. The Bank was not a party to the Keyman Insurance and setting aside of the Insurance Policy would not have affected the liability of Y&F to repay the indebtedness.  The defence of economic duress is not established.

Breach of fiduciary duty

32.  Dick Lee’s failure to provide any relief proposals is alleged to be in breach of fiduciary duty.  After Shum had purchased the Keyman Insurance with what was left of his capital, the Bank refused to grant loans or second mortgage of his properties.  So Shum had to turn to other financial institutions for 2^nd mortgage at very high interest. 

33.  Further Shum had made arrangements with a potential investor (represented by one Ms Yip) to hold meetings with the Bank to talk about repayment arrangement. The potential investor provided $500,000 to repay part of the defendants’ debts.  However, the Bank had not terminated the litigation and the investor stopped the repayment arrangement. 

34.  As a matter of law, the bank does not owe any blanket fiduciary duty to advise or warn a customer that there are risks attendant upon something which the customer wishes to do.  Such a duty is not required in order to give efficacy to the contractual relationship between the parties: Redmond v Allied Irish Bank plc [1987] FLR 307, at 311 (ln 5-20) perSaville J.

35.  The express terms in the mandate (signed by Y&F) to the Bank and the referral form made no reference to a duty to provide financial advice or proposals for relief.

36.  The meeting of Ms Yip and the Bank was, as shown by the meeting notes of the Bank, on a without prejudice basis (Exhibit CMYB‑1).  Even Shum himself had not asserted any compromise reached or any promise to withhold litigation.  It was inconceivable that the Bank would have agreed to defer or waive its rights over millions of debts merely on receipt of $500,000 from a potential investor of Y&F/Shum.

37.  Neither of the defences are established.  Noel Wan and other defendants are indisputably indebted to the Bank for the outstanding amount.  I give monetary judgment accordingly with interest.  I also order her to deliver vacant possession of the 1^st Property to the Bank by 29 February 2016. 

Conclusion

38.  I order as follows:

(1) That Shum and Noel Wan do deliver vacant possession of the 1^st Property to the Bank by 29 February 2016;

(2) That Y&F do deliver vacant possession of the 2^nd Property to the Bank by 29 February 2016;

(3) There be money judgment against D3 with interest as claimed;

(4) There be money judgment against D4 with interest as claimed;

(5) There be stay of proceedings in respect of the claim for payment of money and costs against D1 and D2.

39.  As for costs, clause 21 of the Mortgage Deeds and proviso to clause 1 of the Guarantees permit the Bank to seek indemnity costs arising out of or in connection with the recovery of any liability.  I see no reason why these contractual provisions should not be applied.

40.  However, the Bank’s affirmations have been made unnecessarily prolix by the quotation of a lot of provisions in the mortgage deeds which have nothing to do with its claims.  By way of example, these include the recitals, provision on some events of default, provision on the circumstances for appointment and powers of receivers.  This case has no complexity.

41.  Accordingly, I order, on a nisi basis, that D3 and D4 do pay costs to the Bank on indemnity basis, summarily assessed at $300,000.

42.  I thank Ms Lam for her assistance.