DAH SING BANK LTD v. SING FAI HANDBAGS MANUFACTORY LTD AND OTHERS

HCMP1250/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO.1250 OF 2003

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J U D G M E N T

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1. D4 is the mother of D5 and D6.  D6 is the wife of D3.  D1 and D2 were companies, in which D3 was a director and shareholder, and controlled by D3. 

2. In this action, the plaintiff, Dah Sing Bank, Ltd sued D4 to D6 (collectively referred to as “these defendants”) in respect of four mortgages over three properties.  The three properties were :

(i)                Flat F, 5/F and Roof, Gar Fook Court, Nos.44-46 Grampian Road, Kowloon, together with Car Parking Space No.8, G/F (“the 1^st Property).

(ii)              Rear Portion, 2/F including the Flat Roof, Yik Kwong Building, No.32 Junction Road, Kowloon (“the 2^nd Property”).

(iii)            Shop No.25, G/F, Block A, King Moon Heights, Nos.25-39 Tit Shu Street, Kowloon (“the 3^rd Property”).

The mortgages were :

(i)                A mortgage dated 18 February 1998 made by D1 as principal and D6 as mortgagor (“the 1^st Mortgage”) over the 1^st Property.

(ii)              A 2^nd mortgage dated 10 May 2000 made between D2 as principal and D6 as mortgagor (“the 2^nd Mortgage”) over the 1^st Property.

(iii)            A mortgage dated 10 May 2000 made by D1 and D2 as principals and D4 as mortgagor in respect of the 3^rd Property (“the 3^rd Mortgage”).

(iv)            A mortgage dated 19 January 2001 made by D1 and D2 as principals and D4 and D5 as mortgagors in respect of the 2^nd Property (“the 4^th Mortgage”).

3. The 1^st Mortgage was executed by D3 as attorney for D6.  The power of attorney was dated 23 August 1997.

4. This is the plaintiff’s appeal against Master S. Cheung’s refusal to enter judgment against these defendants summarily. 

5. In relation to the 2^nd, 3^rd and 4^th Mortgages, the only defence which I have to consider is undue influence.  It is alleged that these defendants executed the mortgages under the undue influence of D3.  Mr Rimsky Yuen, SC who appeared for the plaintiff has submitted that the affirmations filed on behalf of these defendants failed to raise a triable issue of undue influence. 

6. Undue influence can arise in a multitude of situations as explained by Lord Nicholls of Birkenhead in Royal Bank of Scotland plc v. Etridge (No.2) [2002] 2 AC 773  (“Etridge (No.2)”) :

“      11.   Even this test is not comprehensive.  The principle is not confined to cases of abuse of trust and confidence.  It also includes, for instance, cases where a vulnerable person has been exploited.  Indeed, there is no single touchstone for determining whether the principle is applicable.  Several expressions have been used in an endeavour to encapsulate the essence: trust and confidence, reliance, dependence or vulnerability on the one hand and ascendancy, domination or control on the other.  None of these descriptions is perfect.  None is all embracing.  Each has its proper place.”

7. In order to succeed at trial, these defendants must prove :

(a)      that the transaction was affected by undue influence;

(b)     the plaintiff was put on inquiry; and

(c)     the plaintiff had not taken reasonable steps to satisfy himself that there was no undue influence.

On this application, I have considered whether there is a triable issue in relation to each of these matters.

8. I turn to consider each of these defendants separately.

9. D4 is illiterate.  She signed her name with a cross.  She was 72 years of age at the material time.  Her daughter was married to D3.  Her son, D5, worked for D3’s companies.  D3 was good to her and she said in her Affirmation :

“13.  …. 本人對王亦非常之信任。…

….

16.        基於對王的信任，本人並無追問下去。於是本人便將金滿閣物業之契約及有關文件交予王處理。

….

35．本人簽署有關按揭文件只是受到王對本人之不當影響或因為王向本人之失實陳述。”

10. Mr Yuen criticised D4’s statement as being lacking in particulars.  Whether undue influence can be established would require a consideration of all the circumstances including, very often, an assessment by the trial judge of the personality of the person who relies on the defence.  Here, we are dealing with an elderly lady who is illiterate, whose daughter is married to D3, whose son depended on D3 for his livelihood and it seems the 2^nd and 3^rd Properties constituted a very substantial part of her assets.  In such circumstances, I am of the view that the defence of undue influence is seriously arguable.

11. But was the bank put on inquiry?  I believe so.  Her age, her relationship with D3, the nature of the properties (they appeared to be of modest value) and the fact that she signed the mortgages with a cross (“x”) were matters which arguably should have put the plaintiff on inquiry. 

12. The next question then is whether the plaintiff had taken reasonable steps to satisfy itself that there was no undue influence.  Here, the mortgages were executed after Barclays Bank plc v. O’Brien [1994] 1 AC 180 (“O’Brien”) was decided but before the judgment of the House of Lords in Etridge (No.2).  For such transactions, according to Etridge (No.2), “The steps reasonably to be expected of a lender in relation to past transactions were to bring home to the wife the risk she was running by standing surety, either at a private meeting with her or by requiring her to take independent advice from a solicitor on whose confirmation the lender might rely that she had understood the nature and effect of the transaction” (see headnotes at p.773).  These steps are not confined to wives, the same approach might well be required “in every case where the relationship between the surety and the debtor is non-commercial” per Lord Nicholls at para.87. 

13. What were the steps taken by the plaintiff in this case?  The plaintiff relied on two letters, one for each of the two mortgages made by D4.  According to the plaintiff, the letters with enclosures were “given prior to signing and at the office of Messrs Gallant Y.T. Ho & Co.”  But as Recorder Ma SC (as he then was) said in Bank of China (Hong Kong) Ltd v. Wong King Sing & Others [2002] 1 HKLRD 358 (“Bank of China (Hong Kong) Ltd”) at 382 :

“92.        It is important for banks or other third parties to ensure that a surety’s agreement has been properly obtained.  Adequate time must therefore in my view be allowed for the requisite explanation and advice to be given.  In the majority of cases, this should not be done on the very day when the relevant documents must be signed or the relevant transaction carried out.”

14. The two letters to the D4 were, where relevant, identical in terms :

“      We act for Dah Sing Bank, Limited and are instructed that you have agreed to execute a mortgage in favour of our client to secure the repayment of indebtedness and performance of liabilities of the captioned Principal.

       We are instructed to send you herewith a copy of the Mortgage evidencing the obligations to be secured by your proposed mortgage.  Furthermore, we are instructed to and do hereby draw your attention to the Important Notice to the Mortgagor printed on the enclosed Mortgage.

       If you have any query on this letter or the draft documents enclosed, please seek independent legal advice from other solicitors.  Nothing contained herein shall oblige our client to advance any moneys to you or any party.”

15. The notices in the mortgages were :

“             IMPORTANT NOTICE TO THE MORTGAGOR

                               致按揭人的重要通知

         This Mortgage will create legal obligation and liabilities on the part of the Mortgagor.  The Mortgagor is strongly advised to seek independent legal advice before executing this Mortgage.

         Without prejudice to the provisions of the Mortgage, the Mortgagor’s attention is drawn to matters set out in the Third Schedule of this Mortgage.

         鑑於本按揭會對閣下產生法律責任及債務，閣下於簽署本按揭前應諮詢獨立之法律意見。

         在不影響本按揭任何條文之基礎上，請按揭人注意在本按揭之第三附錄內列出之事項。”

and

“             THE THIRD SCHEDULE ABOVE REFERRED TO

                                        第三附錄

               Important Matters for the attention of the Mortgagor

                            按揭人須知之重要事項

1.            By executing this Mortgage, the Mortgagor might become liable instead of or as well as the Principal and other co-guarantor(s) (if any) and other person(s) (if any); and if the Mortgagor consists of two or more persons, each of them shall be jointly and severally liable.

按揭人簽署本按揭後，即承擔與借款人及其他共同擔保人(如有)及其他人仕(如有)有共同性或取代性質之償還責任。倘若按揭人由兩人或以上數組成，則按揭人將承擔各自獨立及共同之責任。

2.            This Mortgage includes an All Monies Clauses or is unlimited as to amount and the Mortgagor would be liable for all actual and contingent liabilities of the Principal, whether now or in future.

本按揭包括一項概括所有欠款之條文或為一無限額之承擔，按揭人將負責履行所有借款人現時或將來之已生效及有可能產生之責任。

3.            The liabilities of the Mortgagor under this Mortgage are payable on demand.

         如貸款人提出要求還款，按揭人必須履行根據本按揭而承擔之償還責任。

4.      The circumstances under which the Mortgagor would be called upon to honour her obligations under this Mortgage are :

Without prejudice to the provisions of the Mortgage, upon demand by the Mortgagee if any money is owed by the Principal to the Mortgagee and/or if any liabilities and/or obligations of the Principal is outstanding.

在貸款人提出要求之時，按揭人須履行根據本按揭而承擔之償還責任之情況為 ：

在不影響本按揭任何條文之基礎上，當借款人欠下貸款人任何款項及／或借款人仍有未履行的義務或責任，按揭人須即履行其償還責任。

5.            The circumstances under which and the timing within which it would be possible for the Mortgagor to extinguish her liability to the Mortgagee are :

          The Mortgagor’s obligations are and will remain in full force and effect by way of continuing security until all indebtedness of the Principal had been fully repaid and all liabilities, actual or contingent of the Principal had been fully satisfied.

         按揭人可以終止對貸款人責任之情況及時間為 :

         按揭人之償還責任將以持續性抵押之形式繼續有效直至所有借款人虧欠貸款人之債務已經完全清還及所有由借款人承諾之已生效及有可能產生之責任均已完全履行為止。”

There is force in the plaintiff’s argument that the warnings in the mortgages, if they were understood, show that D4 had been told the extent of her liabilities.  However, they might not be sufficient to show that she executed the mortgages of her free will.  On undue influence, it is insufficient to show that the surety or mortgagor knew what she was executing.  It is important to show that she did so of her own volition.  It is at least arguable that the warning in the mortgages had not addressed the question of undue influence adequately.  

16. As Lord Hobhouse of Woodborough said at para.111 in Etridge (No.2) :

“…. The need to guard against lack of comprehension is important and applies in any event to a non-business surety.  But it is not the same as guarding against undue influence.  It may be a first step but it is a fallacy to confuse the two.  Comprehension is essential for any legal documents of this complexity and obscurity.  But for the purpose of negativing undue influence it is necessary to be satisfied that the agreement was, also, given freely in knowledge of the true facts. ….”

17. Nor, it seems, was there a private meeting with D4.  Again quoting from Bank of China (Hong Kong) Ltd :

“89.        The need for a private meeting is in my view obvious.  If the suspicion is that an influencer has or may have exerted undue influence or the complainant, any advice or warnings given to the complainant at a meeting at which the influencer is preset, simply fails to achieve its purpose.”

18. I think it is at least arguable that reasonable steps had not been taken.  The claims against D4 must go to trial.

19. I turn to consider D5.  He was educated up to primary 6.  He worked for D3’s companies, and this is what he said in his Affirmation :

“11.   本人於昇輝只是從事貨倉管理，對其出口業務及財務狀況可說是完全不了解，亦不知道。基於本人對王的信任，及本人仍為昇輝之員工，所以本人很難拒絕王之要求。最後本人同意了王的要求，但本人向王說魏亦是億光樓物業業主之一，必須獲她同意才可按揭。王向本人表示他會處理及向魏解釋。

….

23.    本人必須指出，本人簽署有關按揭文件只是受到王對本人之不當影響或因為王向本人之失實陳述。

24.    本人於整個按揭交易中並無得益。本人亦非昇輝之股東及/或董事，整個交易均對本人產生不利影響。本人確信原訴人及/或其代表律師何耀棣律師事務所是知道有關情形的，亦得悉本人處於不利之位置及與王之關係。但是原訴人及/或該律師事務所之負責職員並無採取有效行動保障本人權益，例如建議本人應於簽署該2001年按揭前可尋求第三者法律意見。原訴人及/或該律師事務所之負責職員亦無將該2001年按揭向本人解釋清楚。本人知識水平不高，根本無可能明白該2001年按揭之內容及其法律後果。

25.    整個交易中魏及本人處於不利位置，魏及本人均是被王誘騙簽署2001年按揭。整個交易之得益人只是王及其控制之公司，即昇輝及Sing Fai Handicraft。”

20. I believe there is an arguable case of undue influence.  I also believe that the plaintiff was put on inquiry and that the steps taken by the plaintiff were insufficient.  Here, the plaintiff relied on one of the two letters referred to in para.14 above.

21. As for D6, D3’s wife, this is what she said :

“22.  根據本人之記憶，大約於2000 年4 月，王向本人提及因手袋業務擴張的關係，須要向原訴人借款。因為原訴人要求王須以物業作抵押，所以王要求本人將嘉林邊道物業及嘉林邊道車位按揭予原訴人作為貸款予他的公司的保障。但是王並無向本人提及貸款的詳情，本人亦弄不清楚是昇輝還是Handicraft借錢。王更表示需要魏的物業作按揭以方便原訴人貸款予昇輝。

23.    當本人向王詢問有關按揭的責任及風險時，王笑著對本人說貸款金額只是約港幣100萬元左右，並說手續非常簡單，本人亦不必負上任何法律責任，只須到律師行簽個名便可以。

24.    本人對此仍有少許擔心，於是向王追問法律責任及風險問題。此時王顯得有點不耐煩，但王仍安慰本人說自己有多年經商的經驗他懂得如何處理責任及風險問題，着本人不要擔心。王更表示待廠房擴張後，很快便可賺更多錢回來，著本人要信任他。基於本人對王多年來的信任及不希望因此事影響夫妻關係，本人不再追問下去。

….

35.    本人必須強調，如果本人知道簽署2000 年第二按揭會令本人負上無限法律責任，及須為昇輝及/或Handicraft欠原訴人的所有貸款負責，則本人絕對不會簽署有關文件。

….

45.    本人必須強調，本人簽署2000 年第二按揭只是本人基於對王多年夫妻的信任。本人相信本人的丈夫不會做一些對本人不利的事情。同時王亦利用了本人對他多年的信任，誘騙本人簽署了1997年授權書及2000年第二按揭。本人在毫不知情下，王以本人名義簽署了1998年按揭。如果本人知道有關按揭的貸款遠超於王所說的港幣100 萬元，本人是絕對不會簽署2000年第二按揭。王更錯誤引導本人不需為昇輝或Handicraft的債項負上任何責任，導致本人將嘉林邊道物業及嘉林邊道車位按揭予原訴人。直至現在本人才知道當時原訴人向昇輝及Handicraft的貸款遠超於港幣100 萬元。附件十一為原訴人向昇輝及Handicraft多年來發生的融資信(Facilities Letter)副本。

46.    本人簽署1997年授權書及2000年第二按揭是受到王對本人之不當影響及/或因為王向本人之失實陳述所造成。”

22. In her case there was a letter dated 8 May 2000 :

“      We act for Dah Sing Bank, Limited and are instructed that you have agreed to execute a Second Mortgage in favour of our client to secure the repayment of indebtedness and performance of liabilities of the captioned Principal.

       We are instructed to send you herewith a copy of the Second Mortgageevidencing the obligations to be secured by your proposed Second Mortgage.  Furthermore, we are instructed to and do hereby draw your attention to the attached Notice given to you by us on behalf of our client in compliance with Paragraph 20.2 of the Code of Banking Practice.  A copy of this Notice will be attached to the proposed Second Mortgage.

       If you have any query on this letter or the draft documents enclosed, please seek independent legal advice from other solicitors.  Nothing contained herein shall oblige our client to advance any moneys to you or any party.”

The warning notice and the warnings in the 2^nd Mortgages are in all material respect the same as those set out in paragraph 14 above.  It is not clear when this letter was given to D6.

23. So far as D6 was concerned, Etridge (No.2) is directly on point   The headnotes suffice for the present purpose : 

“      Whenever a wife offered to stand surety for the indebtedness of her husband or his business, or a company in which they both had some shareholding, the lender was put on inquiry and was obliged to take reasonable steps to satisfy itself that she had understood and freely entered into the transaction.  The steps reasonably to be expected of a lender in relation to past transactions were to bring home to the wife the risk she was running by standing surety, either at a private meeting with her or by requiring her to take independent advice from a solicitor on whose confirmation the lender might rely that she had understood the nature and effect of the transaction.  In respect of future transactions the lender should contact the wife directly, checking the name of the solicitor she wished to act for her and explaining that for its protection it would require his confirmation as to her understanding of the documentation to prevent her from subsequently disputing the transaction.  The lender should not proceed until it had received an appropriate response from the wife and should in every case receive the written confirmation from the nominated solicitor.  Subject to the husband’s consent to disclosure, without which the transaction could not in any event proceed, the lender should routinely furnish to the nominated solicitor financial information relating to the facility and the husband’s existing indebtedness to enable a proper explanation to be given to the wife.  The nominated solicitor should require confirmation that the wife wished him to act for her, and he might, so long as no conflict of duty or interest arose and he was satisfied that it was in her best interests to do so, also act for the husband or the lender.  His advice should be given at a face-to-face meeting in the absence of the husband, and its contents need not be directed to the commercial wisdom of the transaction but should include, as a core minimum, an explanation of the documentation, its practical consequences and inherent risks based on the financial information provided by the lender; he should also state that the choice whether to proceed was to be exercised by her and should check that she wished to continue and, if so, he should obtain her consent to his giving the confirmation required by the lender.  Since in so advising her the solicitor assumed professional responsibilities to the wife he did not act as agent for the lender, who was entitled to assume that he had acted properly, and, in consequence, knowledge of the contents of advice given to the wife, whether negligently or otherwise, was not to be imputed to the lender.”

24. In my opinion, D6 has an arguable case on undue influence.  The bank was put on inquiry.  I believe it is arguable that they had not taken reasonable steps to satisfy themselves that there was no undue influence.  This is not to say that D6 would succeed at trial but that judgment should not be entered against her summarily. 

25. I turn to consider the 1^st Mortgage.  This was executed by D3 as attorney for D6.  Clause 16(a) of the Power of Attorney conferred power on the attorney :

“      To mortgage charge or pledge the said property or any part thereof to secure loans advances or facilities to be granted to any party including the Attorney for any purpose and in any manner, so that no mortgage shall be concerned to see whether the money is wanted or whether more than is wanted is raised or as to the application thereof.”

It is not D6’s case that the power of attorney was procured by undue influence.  It is her case that the use of the power to execute the 1^st Mortgage was in breach of fiduciary duties.

26. Ms Lan who appeared for these defendants argued on the authority of Hong Kong Chinese Bank & Anor v. Onlink Investments Limited & Others [2003] 3 HKLRD 491 that the plaintiff had to satisfy me, first, whether the use of the power of attorney to execute the 1^st Mortgage was within the scope of the powers conferred by the power of attorney.  Secondly, whether the use of the power of attorney to execute the 1^st Mortgage was a breach of fiduciary duty of which the plaintiff was aware or should have been alerted to at the time of the execution of the 1^st Mortgage.  

27. I think Mr Yuen was right when he submitted that the 1^st Mortgage was clearly within the power of the power of attorney.  I do not believe the fact that Clause 16 did not in terms refer to the loans etc to attorney’s companies as opposed to the attorney detracted from the width of Clause 16. 

28. However, on the question whether the plaintiff was put on inquiry, the answer is not straightforward.

29. Suppose Clause 16 expressly empowered the plaintiff to execute the 1^st Mortgage, would the plaintiff nevertheless have to inquire of D6 whether the mortgage was made in breach of fiduciary duties?  I am inclined to think not.  But I do not believe that that is sufficient to enable me to enter judgment in favour of the plaintiff.

30. On undue influence, I think, there is perhaps little difference between a wife executing the mortgage and a wife giving a power of attorney to her husband so that he could do so.  No matter how clear or specific the power the question of undue influence might arise.  I do not believe the requirement of Etridge (No.2) could be circumscribed by the use of a power of attorney.

31. Of course, as the wife was not aware of the 1^st Mortgage, there could be no question of undue influence so far as the execution of the mortgage was concerned.  But surely, the bank would be but on enquiry whether the power of attorney was itself the result of undue influence.  On enquiry, the bank might well be told that the power of attorney was given freely and without any undue influence, but that the purported use by the donee was in breach of fiduciary duties.  Such knowledge would prevent the bank from relying on the power of attorney.

32. I believe it is at least arguable that the bank had constructive notice of all that which the bank might reasonably be expected to discover had inquiry been made of the wife.  In other words, I believe it is arguable that if the plaintiff had enquired into undue influence regarding the power of attorney D6 would have told the plaintiff that the purported use of the power was in breach of fiduciary duties. 

33. Mr Yuen has argued that D6’s case on breach of fiduciary duties is not credible.  I accept that her case is weak.  Indeed, it borders on incredible.  But this transaction did not stand alone and in all the circumstances this should also go to trial.

34. Mr Yuen also made the point that the defence of undue influence should not be turned into a debt dodger’s charter.  Credit is the lifeblood of commerce and the court must be careful not to discourage the provision of credit.  The court must respect and enforce bargains.  I believe that is why the House of Lords in O’Brien and Etridge (No.2) saw fit to provide guidance to lenders.  I believe the guidance should be followed in Hong Kong.  The Bank of China (Hong Kong) Ltd supports this view.

35. For the above reasons, the plaintiff’s appeal is dismissed.  I make an order nisi that D4, D5 and D6 are to have the costs of this appeal, to be taxed if not agreed.  The order to be made final in 21 days from the date of this judgment unless an application is filed earlier seeking a different order.