HANG SENG BANK LTD v. CHAN FONG CHIU AND OTHERS

1984, No. 3615

IN THE HIGH COURT OF HONG KONG

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HEADNOTE

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A bank requested its customer to provide it with the protection of a charge on property from a third party. The bank instructed its solicitors to prepare the charge and procure its execution by the third party. Neither the bank nor its solicitors advised the third party to take separate and independent legal advice. The third party executed the charge at the offices of the bank's solicitors, after receiving an explanation of it from the solicitors. The third party made it clear that the charge was given only on a condition as to the application of the principal sum of $140,000 secured, that only $40,000 should be utilised on overdraft account, the remaining $100,000 to be utilised on a bills account, carrying a lower rate of interest. The bank's solicitors gave the third party inadequate advice about the condition. The third party did not seek to repudiate the charge altogether, but claimed that liability for interest should be limited, as to the interest on $100,000, to interest at the lower rate, despite the bank's purported consolidation of the bills account with the overdraft account.

HELD : upholding the third party's claim, that interest on $100,000 should be limited to interest at the lower rate. (Per curiam :Where a lendor desires the protection of a charge on property from a third party, but, instead of advising the third party to take separate and independent legal advice, allows its own solicitors to explain the transaction to the third party, it takes the risk that the security may be repudiated if the explanation given is inadequate and the third party's queries not properly considered,)

1984, No. 3615

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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JUDGMENT

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1. This is a mortgagee's action for payment and possession. The Plaintiff mortgagee is Hang Seng Bank Ltd. ("the bank"). The action is brought by the bank against three Defendants. The first two of these are Chan Fong Chiu and Leung Woon Lan; they are husband and wife. They are wrongly described together in the title to the action as "the 1st Defendants". They ought to have been described as the 1st Defendant and the 2nd Defendant respectively, and I shall so refer to them. The 3rd Defendant, wrongly described in the title to the action as "the 2nd Defendant", is Art Trading Company ("ATC").

2. ATC was a partnership, one member of which was the son of the 1st Defendant and the 2nd Defendant. In 1979, the son, with two other partners, being minded to commence a business under the name of ATC, applied to the bank for banking facilities for the purposes of that business.

3. ATC required, among other things, facilities for commercial credits. In that connection, on 20th June 1979 the manager of ATC signed a general memorandum relating to commercial credits to regulate the relationship of banker and customer between ATC and the bank. But the bank was anxious to have some security for its lending to ATC. Two properties were offered to the bank by way of security. One of these properties was 23, Ngan Took Street, 4/F., Hong Kong. That property was owned by the 1st and 2nd Defendants. It is that property which is the subject of this action.

4. An internal memorandum of the bank dated 20th June 1980 refers to the transaction. It is in Chinese, but I have been afforded with an agreed translation. In this internal memorandum, the 1st and 2nd Defendants are referred to as "the mortgagors" and ATC is referred to as "the principal". It appears that what was proposed was a mortgage overdraft facility of $40,000.00 and a bills facility of $100,000.00. The bills facility was a facility which attracted interest at a lover rate than that charged by the bank on the overdraft facility. The memorandum refers to the approved facility limits as "O/D $40,000.00; GBF $100,000.00". (I take the reference "GBF" to be a reference to the familiar term "General Banking Facilities".) Finally, the memorandum indicates that a letter is to be sent to solicitors to prepare the mortgage and that the appropriate branch of the bank would arrange with the customers to sign the facility letter.

5. On 23rd June 1980, ATC did sign the facility letter. It was headed in the matter of the property at 23, Ngan Mok Street and it reads, so far as is material, as follows :

"We refer to our recent discussions and confirm that we are prepared to extend to you general banking facilities up to the extent of $140,000.00 to be made available by way of facilities to cover your bills transactions $100,000.00, overdraft facility $40,000.00."

The facility letter went on to prescribe a number of terms and conditions, the first of which provided as follows:

"As security, we require a first legal mortgage to be executed in our favour on the above property for general banking facilities to the extent of $140,000.00 within 30 days from the date hereof, subject to the approval of the title thereto by a solicitor to be designated by us."

6. So far as the relationship between banker and customer is concerned, that is the documentation. But I should make mention also of the form of trust receipt issued in relation to the facilities made available by the bank to the customer on the bills account. The position was that when the customer wished to take delivery of the goods for which the bank were providing the payment, it would be required to sign a form of simple trust receipt acknowledging receipt by the customer of the documents of title, enabling the customer to take delivery of the goods. The form of trust receipt contained a terra as follows :-

"If the credit term arranged with you on this Trust Receipt expires, you are hereby authorised to debit our current account in full/partial repayment of the I/B Loan and/or retirement of the relevant bill without reference to us."

The arrangement was that a debit would be made to the bills facility; but that that debit would be transferred to the ordinary overdraft facility, carrying a higher rate of interest, if payment was not made before the credit term arranged on the trust receipt expired. That is consistent with usual banking and commercial practice.

7. I turn now to the mortgage. Pursuant to the provisions of the internal memorandum of 20th June 1980, instructions were given to solicitors to prepare a form of mortgage.

8. The solicitors to whom those instructions were given were a firm called Gallant Y.T. Ho & Co. Those solicitors prepared the appropriate form of mortgage. The 1st Defendant and 2nd Defendant were asked to call at the offices of the banks solicitors on 11th August 1980 in order to execute the mortgage. They did not have and were not invited to take the benefit of separate and independent legal advice. That is not uncommon in n Hong Kong and it does not appear yet to have got through to the legal profession or to the banks in Hong Kong that considerable dangers await lenders who place themselves in this position. Where a lender desires the protection of a charge on property from a third party, it is under a duty, if it assumes (or its solicitors assume) the burden of explaining the transaction to the chargor, to take care to give him proper advice : see Cornish v. Midland Bank [1985] 3 All ER 513. Here, once the solicitors got the 1st and 2nd Defendants into the office, they assumed the burden of explaining the contents of the mortgage to the 1st and 2nd Defendants; and although I suspect they did not realise it, they thus assumed the duty, not only of explaining the mortgage but explaining it fully and fairly and of protecting the interests of the 1st and 2nd Defendants. The solicitors, if they had had the knowledge and the wisdom, could have sent the 1st and 2nd Defendants off to other solicitors if any difficulty arose. They did not do so, and unfortunately, a difficulty did arise.

9. The bank had decided or had been advised to take a mortgage from the 1st and 2nd Defendants to secure the payment of $140,000.00 by the 1st and 2nd Defendants. (Had the bank been better advised, the bank would had invited the 1st and 2nd Defendants to guarantee the indebtedness of ATC, up to a certain limit, and would have taken a mortgage from the 1st and 2nd Defendants to secure the performance by the 1st and 2nd Defendants of the guarantee.)

10. In the long, wordy and old-fashioned instrument tendered by the bank's solicitors to the 1st Defendant and 2nd Defendant, it was recited among other things, that "the principal", (that is, ATC) might from time to time be indebted to the bank in respect of general facilities granted by the bank to ATC "to the extent set out in Part II of the First Schedule hereto". Reference to Part II of the First Schedule discloses that the extent of the facilities mentioned was $140,000.00.

11. After the date of the mortgage, the bank appears wholly to have lost eight of the limitation contained in its own document. It is apparent, on reading the document as a whole, that on its true construction, the charge is limited to secure payment of a principal sum not exceeding $140,000.00. The oral evidence for the bank was consistent with this conclusion and inconsistent with the bank's claim before me that it was entitled to come down on the 1st and 2nd Defendants for the whole indebtedness of ATC to the bank, which considerably exceeds $140,000.00.

12. When the mortgage was tendered to the 1st Defendant and the 2nd Defendant for execution, the 1st Defendant raised an immediate objection. He pointed out that he was prepared to charge his property only on the basis that the bank would make available no more than $40,000.00 to ATC on its overdraft facility; and that, although he was prepared to charge the property with payment of the full principal sum of $140,000.00, that was on the footing that the remaining $100,000.00 would be applied only on the bills facility and not on the general overdraft facility. This seems to have stumped Miss Lee, who was the person dealing with the matter in the office of the banlk's solicitors. After some hurried consultation with the bank, (and, I suspect, not really understanding what was happening) she prevailed on the 1st Defendant and the 2nd Defendant to sign the mortgage anyway, on the footing that, if there was any difficulty, it was one to be resolved between the 1st and 2nd Defendants and the bank and that this could be done by the writing of a letter from the 1st and 2nd Defendants to the bank.

13. Having assumed the burden of advising the 1st and 2nd Defendants properly, I am satisfied that this advice from Miss Lee did not appropriately discharge it.

14. Nevertheless, the 1st Defendant and the 2nd Defendant were well aware that they were charging the property up to the limit of $140,000.00. As I have said, the events to which I have referred took place on 11th August 1980. On that same day, the solicitors sent their bill to ATC. That bill (after referring to the property) reads as follows:

"To our professional services rendered in preparing drafting engrossing and completing a mortgage in respect of the above premises in favour of Hang Seng Bank Ltd. to secure general banking facilities to the extent of $140,000.00."

After that, it must have been impossible for anybody seriously to have thought, had they thought about it at all, that the security offered by the 1st Defendant and the 2nd Defendant to the bank was good for anything more than $140,000.00.

15. Following the half-baked advice given to him by Miss Lee, the 1st Defendant wrote on 13th August 1980 (two days later) to the solicitors in the following terms :

"

With reference to my mortgage with Hang Seng Bank Ltd, through your goodselves against my flat - No. 23, Ngan Mok Street, 4th Floor, Causeway Bay, Hong Kong for the banking facilities of $140,000.00 in favour of Messrs. Art Trading Co., No. 1043, Tung Chau West Street, 6/F., Flat C, Tung Lee Industrial Building, Cheung Sha Wan, Kowloon, please note that this amount is to be utilized by Messrs. Art Trading Company as below Overdraft $40,000.00, Trust Receipt against Letter of Credit $100,000.00, total $140,000.00. Kindly advise Hang Seng Bank Ltd. to this effect accordingly. I shall be much thankful if you will let me have your confirmation by return mail. Kindly acknowledge receipt of this letter by signing and returning to me the copy of this letter."

Neither the solicitors nor the bank had the sense or the courtesy to acknowledge the letter, although a copy of it was sent to the bank. Accordingly, as it seems to me, the 1st Defendant could easily be forgiven for assuming that the point he had raised, when expressing his reservations to Miss Lee on 11th August 1980, was at all times thereafter accepted by the bank.

16. The ATC continued to trade after obtaining these facilities but, unfortunately, without any success. It ran up a considerable indebtedness to the bank, greatly exceeding the principal sum of $140,000.00 for which the property stood charged as security. But, as I understand the evidence, the bank did in fact male available at least $100,000.00 worth of credit to ATC on the bill facility account. It did make available at least $40,000.00 worth of credit to ATC on the overdraft account. In these circumstances, I cannot see that the 1st and 2nd Defendants have suffered any prejudice whatever from the ineptitude displayed by the bank and by it solicitors in the conduct of this transaction. In due course, the bank consolidated, or purported to consolidate, the two accounts. On 12th November 1983, it wrote to the then solicitors for the 1st Defendant and said so. Those solicitors, C.Y. Kwan & Co. wrote:

"

In relation to your clients' enquiry raised in your letter dated 3rd October 1983 under reply, we are instructed by our client to inform you which we hereby do that there is now no outstanding indebtedness due and owing by Art Trading Company to our client for the time being under its Trust Receipt account with our client since our client has combined and consolidated the same with the overdraft account of Art Trading Company with our client. In this connection, we write to nut on record that there is no agreement whatsoever and whatsoever as between your clients and our client as to the apportionment of general banking facilities granted or to be granted under and pursuant to the mortgage in question by our client to Art Trading Company."

17. The solicitors for the 1st Defendant protested about this in their reply of 17th November 1983, arguing that in all these circumstances the bank could not combine and consolidate the two accounts.

18. It does not appear that ATC ever complained about this consolidation. If it had, it might have been on very strong ground, because the rates of interest charged on the two accounts were different, and this might have been a circumstance which would have justified it in complaining about the purported consolidation. But I do not have to decide that question. Counsel for the bank has told me that his clients, if I decide this case otherwise in their favour, are content to accept interest on $100,000.00 at the lower rate which would be applicable on the bills account rather than at the higher rate which would be applicable on the overdraft account.

19. On 9th March 1984, the bank demanded the money it said was due to it from the 1st and 2nd Defendants. It demanded much too much, because it failed to appreciate the limitation on the extent of the liability of the 1st Defendant and the 2nd Defendant under the mortgage.

                On 29th May 1984, the bank issued its writ in these proceedings, again for much too much. But ever since, at any rate, the date of the issue of the writ, the 1st and 2nd Defendants have had the use of the principal sum of $140,000.00 which the mortgage secured and they have not repaid that sum. In my judgment, the bank is entitled to repayment of the $140,000.00 with the interest thereon from 29th May 1984, the date of the issue of the writ, at the rate of interest properly chargeable, so far as $100,000.00 is concerned, to the bills account; and it is entitled to repayment of the $40,000.00 with interest thereon from the same date at the rate applicable to the overdraft account. That does justice between the parties, having regard to the way in which this transaction was commenced and continued. I will give judgment for those sums accordingly (the parties will work out the details) and I will provide in the order for possession of the property to be delivered up to the bank, if payment is not made in accordance with my judgment.