WING HANG BANK LTD. v. CRYSTAL JET INTERNATIONAL LTD. AND OTHERS

HCMP 5014/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 5014 OF 1999

____________

____________

_______________

J U D G M E N T

_______________

Introduction:

1. In these proceedings the plaintiff, the Wing Hang Bank Ltd. (the Bank) seeks to recover sums advanced from the defendants, which, with accumulated interest now exceed $175 million. Except where relevant I have rounded figures for convenience.

2. The first defendant, Crystal Jet International Limited (Crystal Jet) is a private limited liability company incorporated in Hong Kong. Its shareholders and directors are Mr Ko Chi Hung (Mr Ko) and his wife, Ms Mabel Straube Maxwell (Ms Maxwell). The company holds property for Mr Ko and Ms Maxwell. The second defendant, Mazlo Trading Company Limited (Mazlo) is a private limited liability company incorporated in Hong Kong. Mazlo has as its shareholders and directors, Ms Ko Mee Wah Winnie (Winnie Ko), and Ms Ko Mi Lun (M L Ko). The third defendant, Multi-Best Company Limited (Multi-Best) is a private limited liability company incorporated in Hong Kong. Its directors and shareholders are the 1st named 4th defendant, Wong Cheung Sum (Mr Wong), the 2nd named 4th defendant, Winnie Ko and the 3rd named 4th defendant. M L Ko. Both companies have been engaged in the business of import and distribution of frozen meat. It seems that Mazlo was incorporated to take over the business of Multi-Best but nothing turns on that. Both operated from the same premises, and Multi-Best appears to have continued to trade after the establishment of Mazlo.

3. Mr Wong is Winnie Ko's husband. Mr Ko, Winnie Ko and M L Ko are brother and sisters.

The banking facility letters:

(i) The 1st facility:

4. In October 1995 the Bank granted banking facilities to up to $44 million to Mazlo. The facility letter was signed by Mazlo as borrower, and Multi-Best, Mr Wong, Winnie Ko and M L Ko as guarantors. The facility made available to Mazlo $20 million for letters of credit, $20 million to discount post dated cheques, $3 million for a Bankers guarantee to Dah Hong Chong, and $1 million for payment against uncleared cheques. The facility, was secured by a time deposit by Mr Wong of $1,800,000, and by M L Ko of $20,100,000. In addition Multi-Best, Mr Wong, Winnie Ko and M L Ko gave unlimited guarantees for the sums borrowed (the 1st guarantee).

(ii) The 2nd facility:

5. On 19 May 1997 the facility was revised upwards to a total sum of $117 million. The 2nd facility letter was signed by Mazlo as borrower, and Crystal Jet, Multi-Best, Mr Wong, Winnie Ko and M L Ko as guarantors. The facility made available to following credit line: first a letter of credit facility of $50 million, second, for advance payments against LC documents, a further $10 million, third $30 million for discounting post dated cheques, fourth, a $20 million instalment loan, fifth, $3 million for the Dah Hong Chong guarantee, sixth, $3 million $3 million for payment against uncollected cheques and an overdraft of $1 million.

6. As security for the facility Crystal Jet gave an all-monies legal charge (the mortgage) secured on a property at Town House L, Kellett View Town houses, Mount Kellett Road, The Peak (Kellett View). Although the facility letter required guarantees from Multi-Best, Mr Wong, Winnie Ko and M L Ko, no new guarantees were then signed by them. The 1st guarantee, signed by them in 1995, contained the usual provisions recording that any increase in the credit, or time or indulgence granted to Mazlo would not affect the guarantees, and that the Bank could release, modify or abstain from enforcing any securities without discharging the guarantee. M L Ko's time deposit of $20 million was released from the security and the time deposit of Mr Wong increased to a little over $2 million.

The involvement of Crystal Jet:

7. At the center of the defence of both Crystal Jet and Winnie Ko is the circumstances in which the instalment loan of $20 million was made as part of the 2nd facility letter and the security given by Crystal Jet. Although Mr Ko was employed in the family companies neither he nor his wife nor their property owning company had previously been asked to guarantee Mazlo's borrowing.

8. Mr Ko and Ms Maxwell live in Plantation Road on The Peak. There was no evidence as to which legal entity owns that home. In April 1997 they sought to purchase the property at Kellett View. In late April 1997 Crystal Jet entered into an agreement with the vendor, Barclay's Bank plc for the sale, with completion due on 21 May 1997. Mr Ko and Ms Maxwell apparently had some cash available and it appears that they had cash invested somehow in Mazlo because they asked M L Ko to let them have $20 million. With that and their own funds they were still $20 million short of the total purchase price of $68 million. They still had to borrow $20 million.

9. At the same time M L Ko was in the process of negotiating increased banking facilities with the Bank. The evidence was that M L Ko told Mr Ko that she could get a very good rate for a loan from the Bank and suggested that he borrow that way. Previously he had borrowed, for his property purposes, from the Hongkong and Shanghai Bank or Overseas Trust Bank. M L Ko dealt with the Bank. It was agreed between M L Ko and the Bank that the Bank would release the time deposit of $20 million, which had previously been a part of the Bank's security, and advance a further $20 million by way of an instalment loan. As part of the security for the 2nd facility an all-monies legal charge was to be given by Crystal Jet, as the proprietor of Kellett View, of the property.

10. The 2nd facility letter was prepared, collected from the Bank by M L Ko and she obtained the relevant signatures to it, and returned it to the Bank.

11. The Bank instructed Crystal Jet's solicitors, Siao, Wen & Leung to prepare the necessary documents. The letter of instructions, dated 20 May 1997 did not set out the terms of the 2nd facility letter dated 19 May 1997, but described the amount and type of loan in the following terms:

"General Banking Facilities for all monies (You may collect your professional charge based on HK$68,800,000)"

That sum was the purchase price of Kellett View. The instructions showed that the borrower was Mazlo and the mortgagor Crystal Jet.

12. Mr Ko, Ms Maxwell, Mr Wong, Winnie Ko and M L Ko attended the offices of Siao, Wen & Leung on 21 May 1997 and all the necessary documents were signed. The funds were advanced and the purchase of the property completed.

The meeting at Plantation Rd:

13. For a time all was well and payments were duly made on the instalment loan and the Bank were apparently content with the way in which Mazlo utilized the facility. There was no evidence as to precisely who paid the instalments on the $20 million loan, but it matters not whether it was Mazlo or Crystal Jet. The payments fell into arrears. On 26 November 1998 the Bank prepared written demands of the parties for the amount then outstanding. But these were not immediately served. Instead a meeting was arranged at Mr Ko's home at Plantation Road.

14. There was a considerable variation between the respective sides as to this meeting. Kelvin Tin, the Bank officer concerned with the Mazlo account said that the meeting was arranged to discuss the outstanding liability and how it was to be settled. He said that it was only at that meeting that the Bank discovered that Crystal Jet had sublet Kellett View, and that as the consent of the Bank had not been obtained to a subletting, Crystal Jet was thereby in breach of the mortgage.

15. Mr Ko, Winnie Ko and M L Ko painted a completely different picture. In evidence they all said that a friend of the Bank's manager was interested in purchasing a property on the Peak and that the purpose of the meeting was to consider such a purchase.

16. There is no dispute that all present went to Kellett View to inspect the property but there is no suggestion that there was any prospective purchaser present. On 30 November 1998 the demand letters that had been prepared were personally delivered to all defendants for the total sum then outstanding of $124 million. No complaint was made by any of the defendants to the Bank upon receipt of the letters of demand, nor was any suggestion then made that the sums claimed were not due, or in excess of that which the recipient believed were then due.

The 2nd guarantee is signed:

17. On 21 December 1998, in the face of strong demands by the Bank for repayment and threats of legal action, Mr Wong, Winnie Ko and M L Ko attended Kelvin Tin at the Bank's offices and signed a new guarantee of Mazlo's liabilities (the 2nd guarantee).

18. Notwithstanding this, the Bank pressed for a reduction of the amount outstanding, but payment was not made, and in August 1999 the Bank commenced these proceedings. No steps were taken by Mazlo and Multi-Best and judgment has been entered against them.

19. M L Ko subsequently pleaded guilty to 30 counts of deception of the Bank, relating to a series of letter of credit frauds, and frauds in relation to the post-dated cheques facility. These frauds were perpetrated using Mazlo's banking facility with the Bank. She is presently serving a term of imprisonment of 7 years. She has been declared bankrupt. Mr Wong has been declared bankrupt and the proceedings against him have been stayed.

20. The Bank now seeks judgment against Crystal Jet and Winnie Ko. With interest accruing at the rate of $38,900 a day the amount now claimed by the Bank exceeds $175 million.

21. On the face of the papers the claim is unanswerable for all of the documentation upon which the Bank relies appears, on its face, to be in order. But Crystal Jet and Winnie Ko say that they ought not to be held liable.

Credibility:

22. I did not find Mr Ko, Winnie Ko or M L Ko to be believable witnesses. Where there has been a difference between the witnesses I prefer the evidence of the plaintiff. All three defence witnesses were inconsistent in their evidence with their witness statements. When faced with these inconsistencies in cross examination they were quite unable to explain them. Both Mr Ko and Winnie Ko collapsed in confusion when asked to explain why, if as they alleged during evidence, they did not know that the second facility was for $117 million, they took no steps at all nor raised any complaint with the Bank when they received demands for a sum in excess of $124 million in November 1998.

23. The convicted fraudster, M L Ko was not a believable witness. It was plain that she sought to take all responsibility onto her self and thereby relieve her family members of responsibility. Her evidence lent no weight or support at all to the assertions of Mr Ko or Winnie Ko.

24. Although she gave evidence of being present at the meeting in Plantation Road, Winnie Ko said in submission that the meeting simply never took place. To suggest that Bank officers would attend the defaulting borrowers of a sum in excess of $124 million, and not raise the debt and the fact that it was overdue, is wholly unbelievable. I accept the evidence of Kelvin Tin that the meeting took place at Plantation Road for the reasons he described.

25. For these reasons, where there are differences between the witnesses I prefer the evidence of the Bank's witness to that of the defendants witnesses.

The defences:

26. A number of defences were pleaded and in the usual way some have fallen by the wayside and need not be considered. I refer, for example, to the assertion by the defendants that no meetings of Mazlo or Multi-Best or Crystal Jet were held to pass resolutions and those occasions when resolutions were signed they were not at the registered office of the company as the minute purports to record. Plainly, in the face of s. 116B Companies Ordinance Cap. 32, such an argument was bound to fail and was not pursued. I propose to deal only with the defences pursued.

(i) Crystal Jet's defences:

27. Although not pleaded as such, at the end of the day the primary defence of Crystal Jet, as advanced through Mr Ko was one of non est factum. First, as to the 2nd facility letter Mr Ko said that M L Ko did not show him the whole of the letter but merely gave him the last page to sign, which he did, without reading the letter. He said in evidence that the legal charge over Kellett View was not explained to him or his wife when they went to sign the documents. He said that he and his wife believed that they were simply borrowing $20 million from the Bank and that had they known that they were liable for all monies borrowed by Mazlo they would not have entered into the arrangement.

28. He said that he was unaware that his solicitors were acting for the Bank as well as Crystal Jet, and that he was not advised to seek independent legal advice. Even if he had been so advised, the advice would have been so late, being on the very day the transaction was due to be completed, that it would have been impossible to get such advice in the time available.

29. He said further that M L Ko was, throughout, acting as an agent for the Bank and that she had mislead him and that he had consequently been mislead by the Bank as to the true effect of the transaction.

(ii) Winnie Ko's defences:

30. Winnie Ko aligned herself with the contention that M L Ko was acting throughout as an agent of the Bank and that she was mislead by her, and consequently by the Bank. As to the 1st guarantee she said that she was told by M L Ko that a Bank officer, Kelvin Tin, had said that it was only a formality, and that M L Ko told her that there was no risk as the facility was secured by the time deposit and the post-dated cheques lodged with the Bank.

31. As to the increase in the advance by way of the 2nd facility she said that she too was given only the last pages of the 2nd facility letter to sign and that she did not know the facility had been increased to $117 million. She said that had she known she would not have signed the letter.

32. As to the 2nd guarantee, she said first that she signed it only under duress, and second, that she did not know it was for an unlimited sum. She said that there was no proper consideration for the guarantee as the advances had already been made. She said that on the signing of the 2nd guarantee, the 1st guarantee became void and that if the 2nd guarantee failed, the Bank could not rely on the 1st guarantee.

33. Although not pleaded, she contended that she had been unduly influenced by M L Ko and that the relationship between her and M L Ko was such that the Bank ought to have been "put on enquiry" as that expression was used in Royal Bank of Scotland v Etridge (No 2) [2001] 4 All ER 449, [2001] 3 WLR 1021 HL.

Was M L Ko an agent of the Bank?:

34. It is clear from the decision of Recorder Geoffrey Ma QC (as he then was) in Bank of China (Hong Kong) Ltd. v Wong King Sheng & Ors. [2002] 1 HKC 83 that a debtor may be an agent of the bank when he approaches a surety: see p 101D, but, as noted by the judge, it is a question of fact and will not be a common occurrence.

35. Here, both Mr Ko and Winnie Ko say that they were deceived by M L Ko and that she did not explain events to them properly. If, as they say, M L Ko was the agent of the Bank, then the deception and failure to explain may be acts of the Bank.

36. As to the 1st guarantee, the only facts upon which Winnie Ko relies to contend that an agency existed are that the documents were uplifted from the Bank by M L Ko, at the Bank's request, to obtain the signatures of the guarantors. This falls precisely within the circumstances in Barclays Bank plc v O'Brien [1994] 1 AC 180 at 193G-194B. To suggest that because M L Ko took the papers to the other guarantors to sign, at the request of the Bank, she is an agent of the Bank, is wholly artificial. She was plainly at all times acting for herself, Mazlo and Winnie Ko, both in their capacity as directors of Mazlo as borrower, and their personal capacity as guarantors.

37. As to Mr Ko, he says that M L Ko, in arranging the 2nd facility with its instalment loan of $20 million that would be used for the purchase of Kellett View, was the agent of the Bank. The contention is equally artificial. Mr Ko is M L Ko's brother. He was employed in the family business. They work in the same office suite, and although, technically, for different companies, they were often together. It was his evidence that she often brought him pages of documents to sign. The businesses of the two companies were plainly closely allied. He took advantage of the terms that were negotiated by M L Ko on his behalf, with the Bank lending in conjunction with the Mazlo re-financing. Even if he knew nothing of the Mazlo refinancing, and in the circumstances that is simply not believable, there is simply no sufficient basis to say that in the circumstances, his sister and employer, M L Ko was acting as an agent for the Bank in arranging the loan.

38. The contention that M L Ko was the agent of the Bank must wholly fail.

The non est factum defence:

39. This defence has been taken first by Crystal Jet in relation to the mortgage and second by Winnie Ko in relation to both the 1st and 2nd guarantees. Both say that the documents were not explained to them, either by M L Ko in relation to the 1st guarantee, by the solicitors in relation to the mortgage, and by the Bank in relation to the 2nd guarantee. They say that they did not know the true content of the documents, and that had they known they would not have signed.

40. The law is clear. There is no general obligation on a creditor to explain security documents or to disclose material facts to a surety in any particular circumstances which would make the surety's position more hazardous. It is the surety who has the obligation to make all necessary enquiries: see Bank of China (Hong Kong) Ltd. v Wong King Sheng & Ors. at 90F. In so far as the argument is one that M L Ko or the Bank ought to have explained the 1st guarantee to Winnie Ko the argument must fail. I have already held that M L Ko was not the agent of the Bank, and so any failure on her part to tell her sister what she was signing, or deception as to the circumstances, does not assist the sister against the Bank. As to enquiry, it was for Winnie Ko herself to satisfy herself as to Mazlo's circumstances before signing the document. She was, it must be remembered, a director of Mazlo, the borrower from the Bank.

41. In so far as the argument is one of non est factum the defence must fail. The plea of non est factum is not available to anyone who has signed a document without taking the trouble to find out, at least, the general effect of the document, neither can it be available to a person whose mistake was really a mistake as to the legal effect of the document: Gallie v Lee [1971] AC 1004. In simple terms a person who elects to sign a document without reading it cannot thereafter be heard to complain about the terms of the document and will be taken to have agreed to its terms. To hold otherwise would create commercial mayhem.

42. The evidence of both Winnie Ko and Mr Ko was that they were given no explanation of the documents when they attended the solicitors office. This assertion was in sharp contrast to the witness statements when they said that the documents were "briefly explained" to them. But Charles Yeung the solicitors clerk who attended Mr Ko on the signing of the mortgage and other documents, and who, on that occasion, was acting for the Bank as well as Mr Ko, said that he fully explained the documents, and Kelvin Tin, the Bank officer who attended Winnie Ko on the signing of the 2nd guarantee said that he explained the document to her.

43. If a bank, or its solicitors, elect to give an explanation of documents then it has a duty to explain them accurately: Barclay's Bank v Khaira & Anor [1992] 1 WLR 623. Mr Ko and Winnie Ko, having adopted the position in evidence that no explanation was given to them, cannot be heard to say in submission that, if an explanation was given, then it was inadequate. Having said in evidence that no explanation was given, and being thereby quite unable to say just how it was that the explanation given was inadequate, there was no evidential basis to say that a proper explanation was not given.

44. In any event I am satisfied from the evidence that all that was required to be explained was explained. When Mr Ko and Winnie Ko received the demand from the Bank in November 1998, neither then contended that the sums included in the demand were sums for which they did not believe they had any liability. If, as Mr Ko now contends, he believed that Crystal Jet's liability to the Bank was for $20 million only, he would certainly then, upon receipt of the demand for a sum in excess of $124 million, have taken the matter up with the Bank. That he did not demonstrates clearly that he knew and understood the extent of the liability. Equally, Winnie Ko, upon receipt of the demand, took no exception to the amount claimed.

45. There is an exception to the general statement as to the absence of obligation of a lender to explain matters to a surety as stated in Bank of China (Hong Kong) Ltd v Wong King Sing. That is set out by the judge at 90G in the following terms:

"Where there exists facts (in this context usually arrangements between the creditor and the principal debtor of which the surety is unaware and which he could not in the circumstances be expected to know but which materially affect his liability or potential liability), it is then incumbent on the creditor to disclose such facts to the surety. A failure to disclose would result in the creditor being unable to enforce the contract signed by the surety."

46. Mr Mayne, for Crystal Jet, placed primary reliance upon this passage and contended that Mr Ko did not know of the extent of the 2nd facility, that is loans totalling $117 million, and that both the Bank and M L Ko had an obligation to explain that to him. To this submission Mr Yuen provided a number of answers.

47. First, as M L Ko was not an agent of the Bank any failure by her to explain the circumstances cannot be sheeted home to the Bank.

48. Second, it was Mr Ko's evidence, supported by M L Ko, that when he signed the 2nd facility letter he was given only the last page to sign and did not read the letter. It was plainly in his power to ask for and read the whole of the letter. Had he done so the extent of his company's liability would have been plain. Having elected to sign the document without reading it he cannot now say that he did not know what he was signing. That he could have asked for it and read it demonstrates that he does not fall within the exception to the general rule for he would, in the circumstances, be expected by the Bank to know the content of the 2nd facility letter which he had signed.

49. Third, as to Winnie Ko, as a director of Mazlo, she too could have looked at the whole of any document she signed and would, in the circumstances, be expected by the Bank to know the extent of the loan and her liability.

50. There was plainly no obligation in the circumstances on the Bank to offer any further explanation to either Mr Ko, Crystal Jet or Winnie Ko.

The lack of independent advice:

51. Crystal Jet had instructed Siao Wen & Leung to act for it in the purchase of Kellett View. Notwithstanding admonitions from the courts for a number of years, and the plain conflict of interest that arises, the solicitors accepted instructions from the Bank to act for the Bank in the preparation of the security documents at the same time as they acted for Crystal jet on the purchase.

52. It was pleaded by Crystal Jet that they were not advised of those circumstances and that they did not know that the solicitors also acted for the Bank. But by cl. 21 of the mortgage both Crystal Jet and Mazlo acknowledged that they had been advised of the circumstances and had elected not to take independent advice. I accept the evidence of Charles Yeung that he specifically drew this to the attention of Mr Ko and Winnie Ko.

53. When faced with this provision Mr Mayne sought to argue, although it was not pleaded, that the advice came so late as to be meaningless. In this he relied upon the following statement from Bank of China (Hong Kong) Ltd v Wong King Sing at 107C:

"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 transactions carried out."

54. The mortgage and other documents were signed on the very day that the purchase of Kellett View was to be completed. The argument was that had they not been signed, there would have been no time to raise other finance and the transaction would have failed at great expense to Crystal Jet. They were, in effect, left with no choice but to sign the documents, thus any exhortation to seek independent advice was meaningless.

55. In my view the evidential basis for the submission fell far short of that required for it to succeed. The decision to purchase Kellett View was made in April 1997. Mr Ko does not say precisely when. But even if it was right at the end of April he had 21 days in which to arrange his funds and take any appropriate advice. He did not say that the banks that he had patronised in the past would not lend to him, indeed the transaction occurred at a time when banks were only too willing to lend.

56. He chose to use the Wing Hang Bank as they offered to him what he thought were the best terms. If in the course of seeking the best terms he leaves the matter so late as to be signing documents on the day on which he is due to complete then I do not think that he can then say that he was not given enough time by the Bank to get independent advice. He had signed the 2nd facility letter 2 days earlier on 19 May 1997, and, had he read it, would have had time to approach his past lenders to obtain a loan that was not linked with the Mazlo transaction.

57. While I do not in way depart from the statement of principle cited above, the evidential basis to found the submission must be much more extensive than it is here. If there is no reason to expect that, even after the explanation, the borrower would reject the terms and seek his funds elsewhere, then the late opportunity will not avail him. There was nothing in Mr Ko's evidence which persuaded me that, had he acknowledged that he had been offered the opportunity to seek independent advice, and upon learning of the full extent of his liability, he would have taken any course other than that which he did.

The duress and lack of consideration defence:

58. There is no doubt that on 21 December 1998, when the 2nd guarantee was signed, the Ko family were under a great deal of pressure from the Bank to regularise the situation. On 30 November each of the defendants had personally received a formal letter of demand for the amount then outstanding, in excess of $124 million. It is clear that a plain threat had been made by the Bank that unless a new guarantee document was signed legal proceedings would be commenced. The 2nd guarantees were signed in the face of that threat.

59. The law in this respect is clear. It is conveniently set out in Chiity on Contracts (28 ed) para 7-035:

"Threat to issue civil proceedings. Since recourse to law is the remedy for redress provided by the law itself, it is obvious that prima facie a threat to enforce one's legal rights by instituting civil proceedings cannot be an unlawful or wrongful threat. Consequently a contract which is obtained by means of such a threat must prima facie be valid, and cannot be impeached on the grounds of duress: Powell v Hyland (1851) 6 Exch. 67; Ex p. Hall (1882) 19 Ch.D. 580."

60. Winnie Ko said that she signed the document only because of the threat and that "there was nothing she could do." But that is plainly not right. It cannot be disputed that the Bank had advanced the sums claimed and that they were then due. She could have repaid the amount due. She could have ignored the threat and allowed the Bank to issue proceedings, and challenge the validity of the securities.

61. The actions of the Bank in threatening to exercise its rights under the security documents unless a new guarantee was signed were perfectly lawful. That must be so whether or not it was intended at the time that the 2nd facility letter was issued that the be a new guarantee, which, by oversight, was not then obtained. The defence must fail.

62. So must Winnie Ko's contention that the consideration for the guarantee is past consideration. A forbearance to sue is plainly sufficient consideration to support the guarantee: Miles v New Zealand Alford Estate Co [1866] 32 Ch.D. 266. Even if it was the original intention to take new guarantees, an intention that was not then acted upon, the right of the Bank to enforce its securities on 21 December 1998 was such that sufficient consideration exists for the 2nd guarantee. The making of further advances, whether with or without the knowledge and approval of the guarantors, the release of part of the security, or modification of the security was specifically contemplated and approved by the guarantors under clause 2(a) and (d) of the 1st guarantee. Thus, with Mazlo in default, the Bank was then entitled to take action against the guarantors under the terms of the 1st guarantee. That the 2nd guarantee did nothing to improve the Bank's legal position against the guarantors is simply beside the point.

The undue influence defence:

63. It was argued by both Mr Ko and Winnie Ko that M L Ko put undue influence on them to sign the documents and that accordingly both Crystal Jet and Winnie Ko ought not to be liable.

64. As I understand the argument from Winnie Ko it is contended that the relationship between herself and M L Ko was such that a rebuttable presumption arises that M L Ko has placed Winnie Ko under undue influence. Royal Bank of Scotland v Etridge (No 2) deals with a situation of advances to a husband, for business purpose, those advances being guaranteed by the wife. The court notes that on its face such a transaction is not to the financial advantage of the wife and there is a substantial risk that, in procuring the wife to act as surety the husband has committed a legal or equitable wrong that entitles the wife to set aside the transaction. Thus the lender will, by virtue of the relationship alone be put on enquiry.

65. Here the situation is quite different. It is right that M L Ko and Winnie Ko are sisters. But both were directors and shareholders of Mazlo. As such it was plainly in both their interests that the banking facilities were secured. In these circumstances it cannot be said that, on its face, the transaction was not to her financial advantage. There was nothing in the relationship of sisters, who are both working directors of a company, to put the Bank on enquiry that one director of the company might have exercised any particular influence over the other.

66. The prerequisite to the principles in Royal Bank of Scotland v Etridge (No 2) being applied is that there be a relationship between borrower and guarantor that will put the bank on enquiry. No such relationship exists here. The argument must fail.

67. In so far as this argument is made by Crystal Jet it relies upon M L Ko being an agent of the Bank. Accordingly, it must fail as I have found that M L Ko was not an agent of the Bank. Mr Mayne did not argue that the relationship of brother and sister between M L Ko and Mr Ko was such as to put the Bank on enquiry. In any event, the transaction was plainly to the advantage of Crystal Jet as it secured finance it needed to complete the Kellett View purchase.

Does the 2nd guarantee release the 1st guarantee?:

68. I have already said that the 2nd guarantee did nothing to improve the Bank's position against the guarantors. I suspect its prime purpose was to satisfy the Bank's head office that something was being done by the Bank staff in relation to a large account that had fallen into arrears. But that is irrelevant to the legal issue that arises.

69. It is plain from the terms of the guarantee that it was not intended that it should release the earlier guarantee. By clause 9 it is provided:

"9. This guarantee shall be in addition to any other guarantees or securities for the Customer which the Bank may now or hereafter hold whether from me/us or any of us or otherwise and on discharge by payment or otherwise shall remain the Bank's property.'

70. Thus, whether or not 2nd guarantee is impeached, the 1st guarantee remains valid and enforceable by the Bank. There are no relevant differences on the terms of the two documents.

The leasing of Kellett View:

71. Although the leasing of Kellett View and the subsequent exercise by the Bank of its rights to enter into possession of the property under the mortgage was dealt with extensively in the pleadings, by the time of the trial it appeared that the parties accepted that any issue as to the entry by the Bank into Kellett View would simply turn on the challenges made to the validity of the security documents. Accordingly the issue was not the subject of evidence or argument.

72. On 27 February 1999 Crystal Jet assigned its rights under the lease to the Bank. It apparently did so without complaint. I am satisfied that the Bank was lawfully entitled to exercise its rights to enter into possession of the property pursuant to its powers under the mortgage, as it did on 8 July 1999.

Conclusion:

73. For the foregoing reasons I am satisfied that the security documents upon which the Bank relies are proper and valid documents and that both Crystal Jet and Winnie Ko are liable to the Bank in the sums claimed. Mr Yuen for the Bank helpfully put in a draft order to which Mr Mayne did not take exception.

74. There will be judgment for the Bank against Crystal Jet and Winnie Ko in terms of the draft order submitted. In case some issue still remains as to the form of the order leave is reserved to apply in that respect.

Costs:

75. By cl. 17.01(ii) of the mortgage it is agreed that the mortgagor, Crystal Jet, and the borrower, Mazlo, will pay costs on a solicitors own client basis. The Bank seeks an order for costs in these terms.

76. Costs on litigation are a matter in the discretion of the court. The clearest statement of principle in relation to the exercise of the discretion where there is a contractual right to costs is that by Scott LJ in Gomba Holdings Ltd. v Minories Finance [1993] Ch 171 at 194. There the court held that where there is a contractual right to the costs, the discretion should ordinarily be exercised so as to reflect that right. There is nothing in the evidence in this matter upon which it could be said that there should be a departure from the usual rule.

77. There is no similar provision in the guarantee, but it is a guarantee for all sums due by Crystal Jet and Mazlo, which must include any costs awarded in recovery proceedings. There is therefore no distinction to be made between Crystal Jet and Winnie Ko in respect of costs.

78. There will accordingly be an order that the Plaintiff's costs and disbursements of the proceedings, including any costs previously reserved, shall be paid by the 1st Defendant and the 2nd named 4th Defendant on solicitors own client basis, to be taxed accordingly if not agreed.