DBS BANK (HONG KONG) LTD v. YUE LI (H.K.) ENGINEERING LTD AND OTHERS

HCMP 165/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 165 OF 2014

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D E C I S I O N

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1. The plaintiff brings these proceedings by Originating Summons under Order 88 to enforce a mortgage over a property being the Portion marked “D” of 12^th floor of No. 230 Prince Edward Road, Kowloon, Hong Kong (“the Property”).

2. The plaintiff is a registered bank.

3. The 2^nd defendant is the mortgagor.

4. The plaintiff seeks against the 2^nd defendant money judgment as well as an order for vacant possession of the Property.

5. The proceedings were originally commenced against the 1^st defendant as the borrower, the 2^nd defendant as mortgagor, and the 3^rd and 4^th defendants both as guarantors.  Judgment has been obtained against the 1^st, 3^rd and 4^th defendants.

6. The present hearing concerns only the plaintiff’s claim against the 2^nd defendant.

Background

7. Mr. Kwan Hin Kee (“Kwan”) and Madam Xian Huachun (“Xian”) are husband and wife at all material times.

8. At the material time, Xian was the sole shareholder of the 2^nd defendant. Kwan was the sole director of the 2^nd defendant.

9. On 9 August 2007, the plaintiff granted banking facilities to the 1^st defendant and on 13 August 2007, the plaintiff and the 1^st defendant entered into a General Commercial Agreement.

10. A mortgage dated 3 September 2007 (“the Mortgage”) was entered into between the plaintiff as lender and mortgagee on the one hand, and the 1^st defendant as borrower, the 2^nd defendant as mortgagor, and the 3^rd and 4^th defendants as guarantors.

11. Xian had signed a resolution as sole shareholder of the 2^nd defendant and Kwan had signed a resolution as sole director of the 2^nd defendant authorizing the 2^nd defendant to enter into the Mortgage.

12. By 8 facility letters dated between 9 August 2007 to 22 October 2012 the plaintiff granted overdraft banking facilities to the 1^st defendant.

13. The 1^st defendant defaulted in repaying the outstanding loans to the plaintiff.

The defences raised by the 2^nd defendant

14. Firstly, the defence of undue influence was relied upon. In this respect, it was said that Xian reposed trust and confidence in Kwan, her husband, and would do whatever Kwan asked her to do and she left it to Kwan to take care of everything concerning his business and the matrimonial assets. The Property was their matrimonial home. It was in those circumstances that Kwan asked Xian to sign what turned out to be the resolution by her as the sole shareholder of the 2^nd defendant.

15. Secondly, the 2^nd defendant says that there was alteration to the mortgage in that the 2^nd defendant was not kept up to date of the facilities granted by the plaintiff to the 1^st defendant.

16. The 2^nd defendant says that it was the 2^nd defendant’s understanding that the mortgage loan granted to the 1^st defendant was in the sum of HK$3,500,000 and that the liability of the 2^nd defendant under the Mortgage would not exceed that amount.

17. The original overdraft limit at the time the Mortgage was executed was at HK$600,000. At that time, the market value of the Property was about HK$6,000,000.00.

18. The 2^nd defendant says that the subsequent increase of the overdraft facilities to some HK$7,000,000 was made without the prior knowledge or consent of the 2^nd defendant and/or Kwan. As of 9^th June 2013, the total outstanding debts owed by the 1^st defendant to the plaintiff was HK$10,390,949.16. As at 21 January 2014, the overdraft of the 1^st defendant stood at HK$8,769,277.58.  It is the case of the 2^nd defendant that such debts incurred by the 1^st defendant were made without its prior knowledge, consent or agreement.

19. Thirdly, the 2^nd defendant also relies on the defence that the resolution of Kwan as the sole director of the 2^nd defendant authorizing the 2^nd defendant to enter into the Mortgage was inquorate.

20. In this respect, the 2^nd defendant seeks to rely on the Articles of Association of the 2^nd defendant which stipulates that the quorum of director’s meeting shall not be less than 2.

21. The 2^nd defendant also relies on the fact that the sister of Kwan, Ms. Kwan Shuk Kuen (“Ms. Kwan”) became a director of the 2^nd defendant since 11 December 1997.

22. Thereafter, Kwan and Ms. Kwan, both as directors of the 2^nd defendant, have executed 2 legal charges on 12 February 1998 and 11 March 2001 respectively.

23. It is said that Ms. Kwan has never tendered any resignation or cessation as a director of the 2^nd defendant and no general meeting has been held to reduce the number of directors of the 2^nd defendant to less than 2.

24. Accordingly, Ms. Kwan has remained a director of the 2^nd defendant at the time of execution of the Mortgage.

25. The argument therefore is that since Ms. Kwan did not sign the resolution authorizing the 2^nd defendant to enter into the Mortgage, that resolution was inquorate, irregular and invalid.

26. It follows therefrom that the Mortgage was a nullity as far as the 2^nd defendant was concerned.

Decision

27. By way of further background, the reason given by Kwan as to how the 2^nd defendant got involved in the Mortgage was that in about 2007, Kwan was approached by a business friend of his, one Fung Shu Sum.  Fung told Kwan that he was about to set up a joint venture business with the 1^st defendant  because the 1^st defendant had secured building maintenance works as a building contractor of Link Real Estate Investment Trust which would involve millions of dollars since the maintenance works contracts were profitable.

28. Fung also told Kwan that as the 1^st, 3^rd and 4^th defendants lacked sufficient capital funds, he proposed to Kwan that if the 2^nd defendant would agree to join in the business venture and applied for a loan by mortgaging the Property with the plaintiff in favour of the 1^st defendant, Fung would agree to pay 50% of his profit from the joint venture with the1st defendant to the 2^nd defendant.

29. Upon the agreement of Kwan to that proposal by Fung, the application for the Mortgage was then handled by all the four defendants herein.

30. As for the signing of the resolution of the sole member, the evidence from Kwan was that he was given the resolution of the sole member by the clerk of the plaintiff’s solicitors and asked to get that document signed by his wife, being the sole member of the 2^nd defendant.

31. Kwan then returned home and asked Xian to sign on that resolution by sole member without giving any explanation to Xian. Xian did not ask any question of Kwan either but simply signed on that document as asked by Kwan. Thereafter, Kwan returned the signed resolution of sole member to the plaintiff’s solicitors.

32. On that evidence above, there is no actual evidence of undue influence by Kwan over Xian.

33. The next question to ask is whether on such evidence, there can arise a presumption of undue influence.

34. I think not. For that presumption to arise, the two prerequisites that need to be shown are firstly, the complainant reposed trust and confidence in the other party; and secondly, that the transactions in question are manifestly disadvantageous to the complainant.

35. In the present case, there it cannot be said that the transaction (mortgaging the matrimonial home to fund a business venture) was itself manifestly disadvantageous to Xian. No doubt, that was a business venture which Kwan had decided of his own volition to join in with a view to profit. If that business venture had blossomed it would have benefitted Xian as much as Kwan. It turned out badly for them only because the business venture failed.

36. It is true that in the present case, there is evidence that Xian reposed trust and confidence in Kwan when it came to business dealings. However, the fact that Xian reposed trust and confidence in Kwan, cannot per se, give rise to a presumption of undue influence.

37. As was stated by Lord Scott of Foscote in Royal Bank of Scotland plc v Etridge (No.2) (HL(E)) [2002] AC 773 at 842 where his Lordship said at paragraph 159 of his judgment:

“159.  Second, the passage cited appears to regard a relationship of trust and confidence between a wife and husband as something special rather than as the norm. For my part, I would assume in every case in which a wife and husband are living together that there is a reciprocal trust and confidence between them. In the fairly common circumstance that the financial and business decisions of the family are primarily taken by the husband, I would assume that the wife would have trust and confidence in his ability to do so and would support his decisions. I would not expect evidence to be necessary to establish the existence of that trust and confidence. I would expect evidence to be necessary to demonstrate its absence. In cases where experience, probably bitter, had led a wife to doubt the wisdom of her husband’s financial or business decisions, I still would not regard her willingness to support those decisions with her own assets as an indication that he had exerted undue influence over her to persuade her to do so. Rather I would regard her support as a natural and admirable consequence of the relationship of a mutually loyal married couple. The proposition that if a wife, who generally reposes trust and confidence in her husband, agrees to become surety to support his debts or his business enterprises a presumption of undue influence arises is one that I am unable to accept. To regard the husband in such a case as a presumed “wrongdoer” does not seem to me consistent with the relationship of trust and confidence that is part of every healthy marriage.”

38. I therefore come to the conclusion that the defence of undue influence is not one which is even arguable by the 2^nd defendant in the present case.

39. Having said the above, I also accept the submission by counsel for the plaintiff that the resolution by the sole member was strictly speaking, not a document which was necessary to give authority to the 2^nd defendant to enter into the Mortgage, but was something done out of an abundance of caution. The relevant authority for the 2^nd defendant to enter into the Mortgage came from the resolution of Kwan as the sole director of the 2^nd defendant.

40. I turn now to deal with the second defence raised by the 2^nd defendant, namely, alteration.

41. By clause 3.2 of the Mortgage, it is stipulated that the Property is charged to the extent of providing security for the amount (if any) shown in the Schedule II of the Mortgage, as well as in respect of all interest, costs, charges and expenses mentioned in the Mortgage.

42. Schedule II of the Mortgage is reproduced as follows:

“SCHEDULE II
Limit (referred to in clause 3.2, if applicable)
HK$_________________ (in words____________________________)
(Please complete. If this part of this Schedule is not complete, then this Mortgage shall secure all monies owned (sic) by Borrower to the Lender).”

43. The Schedule II in the Mortgage was not completed when the Mortgage was executed. Therefore, as provided by clause 3.2 in conjunction with Schedule II thereof, the charge under the Mortgage was to secure all monies owed by the Borrower to the Lender.

44. By clause 18 (b) it was also stipulated in the Mortgage that the security and the rights of the Lender (i.e. the plaintiff bank) shall not be discharged or in any way affected by any amendment to any of the Security Document or to any other security, guarantee or indemnity.

45. The short answer therefore to the contention of the 2^nd defendant as to alteration is simply that the Mortgage secured ‘all monies’ owed by the 1^st defendant as borrower to the plaintiff as the lender, that by clause 18 of the Mortgage, the plaintiff was under no obligation to notify or to obtain the consent or agreement of the 2^nd defendant in granting the increased overdraft facilities to the 1^st defendant, and that such increased overdraft facilities granted by the plaintiff to the 1^st defendant cannot and will not result in the discharge of the Mortgage as against the 2^nd defendant.

46. It would also appear that there is a further complaint by the 2^nd defendant that understanding of the 2^nd defendant and/or Kwan was that the mortgage loan granted to the 1^st defendant under the Mortgage would not exceed HK$3,500,000.00 and that therefore the liability of the 2^nd defendant as mortgagor would not exceed that amount.

47. The evidence from Kwan in this respect was that the plaintiff had agreed to grant a mortgage loan in the sum of HK$3,500,000.00 instalment loan over the Property in favour of the 1^st defendant (para. 18 Affirmation of Kwan Hin Kee).

48. The understanding/belief of the 2^nd defendant and/or Kwan that the liabilities of the 2^nd defendant under the Mortgage would never exceed the amount of HK$3,500,000.00  (para. 28 Affirmation of Kwan Hin Kee).

49. Before execution of the Mortgage no warning had been given to Kwan and/or the 2^nd defendant as to the risk or effect concerning the “all monies” clause in the Mortgage. No one had explained to Kwan the legal effect of the “all monies” clause such that the 2^nd defendant will in fact incur unlimited liabilities under the Mortgage (para. 29 Affirmation of Kwan Hin Kee).

50. No one had given any warning to Kwan and/or the 2^nd defendant that after execution of the Mortgage, the plaintiff was entitled to grant further loans/ banking facilities to the 1^st defendant without prior notice or consent of the 2^nd defendant and that the 2^nd defendant would be bound under the Mortgage to repay all the outstanding debts including further loans granted by the plaintiff to the 1^st defendant should the 1^st defendant default such repayments. (para. 30 Affirmation of Kwan Hin Kee).

51. It is not disputed that the 2^nd defendant had executed the Mortgage through Kwan.  Non est factum is not relied upon as a defence by the 2^nd defendant.

52. From the evidence of Kwan as stated above, there is no allegation of misrepresentation by the plaintiff or its agent which resulted in the understanding of Kwan and/or the 2^nd defendant.

53. All that is said is that no one had warned or explained to Kwan the effect of the wording of the Mortgage which he had signed on behalf of the 2^nd defendant.

54. It is trite law that a person of full age and understanding is bound by what he has signed. It does not avail him to say that he did not understand or did not bother to find out the effect of the wording contained in the document, or had a subjective understanding of the contents which turns out to be incorrect. (Ming Shiu Chung & ors v Ming Shiu Sum & ors (2006) 9 HKCFAR 334 at para. 84 per Ribeiro PJ).

55. Lastly, I deal with the inquorate defence raised by the 2^nd defendant.

56. In relation to this defence, an affirmation was filed on behalf of the 2^nd defendant being the Affirmation of Kwan Shuk Kuen. In that affirmation, Ms. Kwan says she has always been a director of the 2^nd defendant.

57. However, that statement by Ms. Kwan is contradicted by the public documents, being the Annual Returns of the 2^nd defendant registered in the Companies Registry which showed that Ms. Kwan was no longer a director of the 2^nd defendant since 2001.

58. Ms. Kwan does not dispute that, but only says that she does not know why the public documents did not show her as a director of the 2^nd defendant.

59. Furthermore, the Annual Returns of the 2^nd defendant for the years 2001 and 2002 showed the directors of the 2^nd defendant to be Fineness Ltd. and Kinvast Ltd.  Ms. Kwan had signed both those returns on behalf of Kinvast Ltd. and in both those returns, Ms Kwan was not named as a director of the 2^nd defendant.

60. From this, I can only conclude that Ms. Kwan had got it completely wrong what was stated by her in her affirmation and that she knew or ought to have known that she was no longer a director of the 2^nd defendant since 2001.

61. There is also a complaint by the 2^nd defendant that the sole director’s resolution was invalid because clause 11 of the Articles of Association of the 2^nd defendant provided that “until otherwise determined, two Directors shall constitute a quorum”

62. However, at the material time, the Annual Return filed by the 2^nd defendant with the Companies Registry showed with no uncertainty that Kwan was the sole director of the 2^nd defendant. That Annual Return was filed by the 2^nd defendant. Therefore the representation by the 2^nd defendant to the world was that Kwan was its sole director.

63. A sole director clearly has ostensible authority to bind the 2^nd defendant (see Aspial Investment Ltd. v Mayer Corp Development International Ltd. [2013] 3 HKLRD 276 at 297 para. 55(2) (e) of the judgment of Barma JA).

64. There is nothing to put the plaintiff on notice that the sole director’s resolution was irregular. The Annual Return which undoubtedly the plaintiff was entitled to rely on had held out Kwan to be the sole director. Moreover, section 5C of the Companies Ordinance Cap 32 makes it clear that persons dealing with a company are not deemed to have knowledge of the contents of the Articles by virtue of its registration.

65. The plaintiff was also entitled to rely on the “indoor management rule” since the quorum of board meeting is a matter of indoor management, thus the plaintiff would be entitled to assume that the proper quorum had been properly summoned by the 2^nd defendant when the resolution of the sole director was passed.

66. For the above reasons I am not persuaded that the contention by the 2^nd defendant as to the inquorate defence avails the 2^nd defendant of any arguable defence either.

67. Accordingly, I hold that there is plainly no defence by the 2^nd defendant to the plaintiff’s claim and there will be judgment for the plaintiff against the 2^nd defendant as claimed.

Costs

68. There will be a cost order nisi that the 2^nd defendant pays the costs of the plaintiff in this action on party and party basis to be taxed if not agreed.