BANK OF CHINA (HONG KONG) LTD v. LAM SHUK WAI AND ANOTHER

HCA4118/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.4118 OF 2003

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D E C I S I O N

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1. The 1^st and 2^nd defendants are appealing against the decision of the master entering summary judgment in the sum of $13,081.614.73.

2. The plaintiff is suing the 1^st and 2^nd defendants as guarantors of a consolidated loan of $14,080,000 granted to Chief Channel Investment Limited (“Chief Channel”).  The 1^st defendant was a 42% shareholder and director of Chief Channel since its operation.  The 2^nd defendant became a director on 1 July 1997.

3. Separate banking facilities were originally granted to Chief Channel in 1996.  They were secured by diverse mortgages given by Chief Channel, companies where the 1st defendant had an interest, and one Andy Lam, then director of Chief Channel.

4. On 30 July 1997, the subject guarantee was executed by the 1^st and 2^nd defendants.

5. In defence to the application for summary judgment, the 1^st and 2^nd defendants alleged that they were not aware of the nature and effect of the subject guarantee.  Their signatures were obtained by alleged undue influence and/or misrepresentation upon them by Andy Lam as to which the plaintiff was affixed with constructive notice.

6. Miss Hui for the defendants conceded that no presumption of undue influence arises in the present case and the 1^st and 2^nd defendants are relying on actual undue influence.

7. The particulars of undue influence and/or misrepresentation are :

(1)    Andy Lam is a brother of the 1^st defendant and a cousin of the 2^nd defendant.

(2)    Any Lam is the whiz kid of the family while the 1^st and 2^nd defendants were not well-educated and knew not much English.  They reposed trust and confidence in Andy Lam and relied on him for advice in signing commercial documents.

(3)    The 1^st defendant was a mere trustee for Andy Lam of the shares she held in Chief Channel.

(4)    The 2^nd defendant had no shareholding in Chief Channel.  She was only promised the reward of 5% in a property owned by Andy Lam.  Such reward was totally out of proportion of potential liability in excess of $14 million and the bargain was unconscionable.

(5)    Both the 1^st and 2^nd defendants were told by Andy Lam that they would only be discharging the function as a director but would not be personally liable in signing documents on behalf of Chief Channel.

(6)    They were told by Andy Lam to sign various documents for Chief Channel from time to time as a matter of mere formalities.

(7)    The subject guarantee was taken to the 1^st and 2^nd defendants for signature by Andy Lam and they were never told that they were signing the subject guarantee as such.

(8)    The 1^st and 2^nd defendants did not receive any benefit from the transaction personally. 

8. The particulars of misrepresentation were exactly the same.

9. It is conceded by Miss Hui that the plaintiff was never told of any of the alleged special circumstances above.  Miss Hui submitted that the bank was put on enquiry by reason that :

(1)    In 1996, the plaintiff as mortgagee of the charged properties were represented by the firm Messrs Wong & Lam Solicitors (“Wong & Lam”) and Andy Lam was a partner of the firm.

(2)    In 1997 when the 1^st and 2^nd defendants executed the subject guarantee, Andy Lam was the solicitor witnessing their signatures.

(3)    Andy Lam was the mortgagor of two of the properties charged to the plaintiff.

(4)    Andy Lam was released as a guarantor as a result of the signing of the subject guarantee in 1997.

(5)    The 2^nd defendant is not a shareholder of Chief Channel.

(6)    There was no additional lending in 1997 when the 1^st and 2^nd defendants executed the subject guarantee.

10. Miss Hui submitted that as the plaintiff was on notice, they failed to meet and explain to the 1^st and 2^nd defendants the effect of the subject guarantee and advise them to seek independent legal advice apart from Andy Lam.  Hence, the guarantee is not enforceable.

11. The law as to undue influence affecting mortgagee bank is laid down in Royal Bank of Scotland v. Estridge (No. 2) [2001] 4 All ER 449 which has been succinctly set out in Bank of China (Hong Kong) Limited v. Wong King Sang [2001] 1 HKC 83 per Recorder Ma SC (as the Chief Judge then was), at 100B to 101C :

“The crucial question here is : in what circumstances will a third party be affected by the undue influence (actual or presumed) exerted on a complainant by the debtor in transactions entered into between the complainant and the third party?

The position of third parties was summarised in the speech of Lord Browne-Wilkinson in Barclays Bank Plc v. O'Brien at 191, where he said :

‘Undue influence, misrepresentation and third parties

Up to this point I have been considering the right of a claimant wife to set aside a transaction as against the wrongdoing husband when the transaction has been procured by his undue influence.  But in surety cases the decisive question is whether the claimant wife can set aside the transaction, not against the wrongdoing husband, but against the creditor bank.  Of course, if the wrongdoing husband is acting as agent for the creditor bank in obtaining the surety from the wife, the creditor will be fixed with the wrongdoing of its own agent and the surety contract can be set aside as against the creditor.  Apart from this, if the creditor bank has notice, actual or constructive, of the undue influence exercised by the husband (and consequentially of the wife’s equity to set aside the transaction) the creditor will take subject to that equity and the wife can set aside the transaction against the creditor (albeit a purchaser for value) as well as against the husband : see Bainbrigge v. Browne (1881) 18 Ch.D.188 and Bank of Credit and Commerce International S.A. v. Aboody [1990] 1 Q.B. 923, 973.  Similarly, in cases such as the present where the wife has been induced to enter into the transaction by the husband's misrepresentation, her equity to set aside the transaction will be enforceable against the creditor if either the husband was acting as the creditor’s agent or the creditor had actual or constructive notice.’

It should be made clear that the questions of agency and constructive notice only arise where it has been shown that the relevant transaction (say, a guarantee) has been affected by undue influence (whether actual or presumed).  It is pointless to go into the question of the extent to which a third party is affected by undue influence unless the alleged undue influence has been shown to exist in the first place.  In this regard, I respectfully refer to the speech of Lord Hobhouse of Woodborough in Royal Bank of Scotland v. Etridge at 1054 paragraph 101 :

‘It can be expressed by answering three questions : (1) Has the wife proved what is necessary for the court to be satisfied that the transaction was affected by the undue influence of the husband?  (2) Was the lender put on inquiry?  (3) If so, did the lender take reasonable steps to satisfy itself that there was no undue influence?’

From the foregoing it will also be obvious it is not enough merely to prove that the relevant transaction has been affected by undue influence before a third party is affected.  Something more has to be shown; hence the further questions of agency and constructive notice.  As Lord Hobhouse of Woodborough said in Royal Bank of Scotland v. Etridge, ‘there has to be some additional factor before the lender's conscience is affected and he is to be restrained from enforcing his legal rights’.”

And further at 101I to 102A :

“Inherent in this formulation in my view are two requirements which have to be shown :-

(a)  Knowledge by the bank of the relationship between the creditor and the surety;

(b)  That the nature of the transaction is such as to be apparently disadvantageous to the surety (such as where the surety guarantees the indebtedness of the debtor, no part having been played by the surety in the negotiations : see Royal Bank of Scotland v. Etridge at 1038 paragraphs 46-49, 1072-3 paragraphs 145-147).”

12. In reply, Mr Au for the plaintiff submitted that :

(1)    The evidence does not support undue influence and/or misrepresentation.  Respect and admiration for a person is not to be equated with that degree of reliance or dominance that is required for actual undue influence.

(2)    The 1^st and 2^nd defendants well knew that they were guarantors to the plaintiff bank before any action was taken on the guarantee :

(i)    On 21 July 1998, the 1^st and 2^nd defendants signed on the rolled over facilities letter as mortgagors on behalf of Chief Channel and as guarantors on behalf of themselves, and the term “mortgagors” and “guarantors” were respectively described in Chinese at the relevant places for their signatures.

(ii)    On 8 July 1999, the 1^st and 2^nd defendants signed on the consolidated facilities letter as guarantors and “guarantors” was described in Chinese at the relevant places for their signatures.

(3)    It is accepted banking practice in Hong Kong for loan to limited companies to be secured by personal guarantees by the directors for the time being (see Bank of Communications v. Yenwin Investments Limited & Ors., HCA6014/99, judgment dated 3 May 2000 per Cheung J (as he then was)).

(4)    Release of outgoing directors from personal guarantees and re-execution by incoming directors is in accordance with general banking practice.

(5)    The company search revealed that the 1^st and 2^nd defendants were duly appointed directors of Chief Channel.

(6)    The loan was supported by board resolution in English dated 30 July 1997 signed by the 1^st and 2^nd defendants with English signatures and the guarantee was also signed by them with signatures in English, giving the assumed appearance that they were conversant with English.

(7)    It is wrong to say that the 1^st and 2^nd defendants derived no benefit from the loan in the eyes of the plaintiff, as they were both directors of Chief Channel, it must be in their benefit or interest that the loan was granted to Chief Channel for it to remain financially viable.

(8)    Notwithstanding that Wong & Lam acted for the plaintiff in the mortgages in 1996, Andy Lam did not act for the plaintiff in the execution of the subject guarantee in 1997, as he was only acting as witness for the 1^st and 2^nd defendants.

(9)    The facilities letter stated that the loan was secured by the mortgages as well as the guarantee from the 1^st and 2^nd defendants.  The mortgage properties in which Wong & Lam acted for the plaintiff were never released.  There was no conflict against the plaintiff or indeed any circumstances putting them on any trail of enquiries.

13. I find that the 1^st and 2^nd defendants’ claim that they were unaware of the nature of the guarantee is simply unbelievable.  The evidence of their silence upon the signing on the facilities letters as guarantors with description in Chinese as such exposed the lie in their claim.

14. Whatever the position as between Andy Lam and the 1^st and 2^nd defendants, the 1^st and 2^nd defendants consented to their appointment as directors of Chief Channel.  Further, there is no trust document to the effect of the beneficial interest of the 42% shares held by the 1^st defendant.  They have armed Andy Lam with such appointments and duly executed board resolution in English for the continuation of the loan by the plaintiff.  I can see no reason why the plaintiff should be affixed with constructive notice of equitable fraud, if any, and be required to follow the trail of enquiry as to the relationship between Chief Channel, the 1^st and 2^nd defendants and Andy Lam.

15. There is no merit in the defence of the 1^st and 2^nd defendants.  The appeal is dismissed and the summary judgment entered by the master is affirmed.