BANK OF CHINA (HONG KONG) LTD v. LEUNG NGAI HANG t/a MASTERPIECE INTERIOR DESIGN AND ANOTHER

CACV250/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL 250 OF 2005

(ON APPEAL FROM HCA 3394/2003)

------------------------

-----------------------------------

CACV 251/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 251 OF 2005

(ON APPEAL FROM HCSD5/2005)

----------------------------------------

Re:     CHOI YIN YEE, TAMMY, a Debtor 

Ex Parte: BANK OF CHINA (HONG KONG) LIMITED, a Petitioner

BETWEEN:

-------------------------------------

REASONS FOR JUDGMENT

-------------------------------------

Hon Yuen JA:

1.  On 5 January 2006, this court heard Tammy Choi Yin Yee’s appeals from two orders given by Barma J on 25 July 2005.  At the conclusion of the hearing, we dismissed the appeals with costs and said that we would hand down our reasons in due course.

Proceedings

2.  On 27 November 2003, default judgment was entered in favour of the Bank of China (Hong Kong) Ltd ("the Bank") against Miss Choi, the 2^nd Defendant in HCA 3394/2003, for sums outstanding under an all-monies mortgage which she had executed on 22 March 1995.  On the basis of that judgment, a statutory demand was served on her. 

3.  Miss Choi’s application to set aside the default judgment in the High Court action and her application to set aside the statutory demand in HCSD 5/2005 were heard by Barma J who dismissed both applications.  He held that the service of the writ by substituted service and the service of the statutory demand were both valid, and he also held that no defence of substance had been put forward on the merits such as would justify setting aside the default judgment or the statutory demand.

4.  On appeal, the only ground advanced on behalf of Miss Choi is that the judge was wrong in holding that the Bank had not been put on inquiry that her execution of the all-moneys mortgage might have been procured by undue influence and misrepresentation.

Background

5.  The relevant facts briefly are as follows. Miss Choi and Leung Ngai Hang (the 1^st Defendant in the High Court action) had been close friends and apparently at one time partners.  According to the Business Registration Registry particulars ("THL-2"), between March 1986 and March 1990, Miss Choi and Miss Leung were partners in a business known as Masterpiece Interior Design ("Masterpiece").  Thereafter Miss Leung traded as sole proprietor of Masterpiece. 

6.  Miss Leung was interested in acquiring properties.  According to Miss Choi, because Miss Leung was unable to provide proof of a stable income whereas she had a stable income, Miss Leung invited her to be registered as co-owner of the properties, so that bank loans for the acquisition of the properties could be obtained (Choi Yin Yee Tammy, 5/3/2005, para.8).

7.  On 9 May 1990, a flat in Redland Garden ("the property") was acquired by Miss Choi and Miss Leung as joint tenants.  According to the Land Registry particulars, the property was acquired for $1,325,000 with an all-monies mortgage from HSBC ("CYYT-2"). 

8.  As at March 1995, the sum outstanding to HSBC was $1,398,700.27 (Tsang Hung Ling, 10/6/2005, para.8). 

9.  On 22 March 1995, Miss Choi and Miss Leung entered into two mortgages with the Bank, the first, to secure banking facilities for them to the extent of $880,000, and the second, an all-moneys mortgage to secure banking facilities for Miss Leung trading as Masterpiece.  A sum of $880,000 was drawn-down by way of a 10-year fixed loan ("THL-3") and a further sum of $543,679.27 was drawn-down under the facilities offered to Miss Leung, in order to redeem the HSBC mortgage over the property ("THL-4").

10.  Miss Leung was subsequently unable to repay her debts to the Bank.  The Bank sold the property but a balance remained outstanding.  The Bank sued Miss Leung as 1^st Defendant and Miss Choi as 2^nd Defendant for payment of the balance.  This led to the default judgment against Miss Choi and the statutory demand against her.

Allegation of undue influence

11.  Miss Choi’s case is that she had entered into the all-moneys mortgage with the Bank at Miss Leung’s request as a result of certain things Miss Leung said, and she had reposed trust and confidence in Miss Leung (Choi Yin Yee Tammy, 18/3/2005, paras. 15-18).

12.  The issue before this court does not depend on the truth or otherwise of what Miss Leung is alleged to have told Miss Choi, or on whether Miss Leung exercised undue influence over Miss Choi.  The issue between Miss Choi and the Bank is whether at the time the all-moneys mortgage was executed, the Bank had actual or constructive notice of Miss Leung’s alleged improprieties.

The Law

13.  The law on undue influence has been settled by the Court of Final Appeal in Li Sau Ying v Bank of China (Hong Kong) Ltd [2005] 1 HKLRD 106. 

14.  Applying the law as stated in that case, the relationship between Miss Leung and Miss Choi (close friends) is not one of the established relationships where undue influence is presumed unless there was evidence to the contrary (Li Sau Ying, §28).  Therefore, the question is whether the evidence justified the inference that the impugned transaction was procured by undue influence (Li Sau Ying, §34) and whether the Bank should have been put on inquiry such that it could not safely rely on Miss Choi’s apparent consent to the transaction (Li Sau Ying, §35).

15.  It was submitted on behalf of Miss Choi that the Bank was aware of certain facts which justified an inference that her consent to enter into the all-moneys mortgage might have been procured by undue influence and misrepresentation:

(i)	the business registration in 1990 (presumably, meaning after 31 March 1990) showed that Miss Choi had retired from Miss Leung’s business;
(ii)	at the time the all-moneys mortgage was executed, Miss Choi did not have any financial interest in Miss Leung’s business and in this sense, their relationship was apparently non-commercial;
(iii)	Miss Choi could derive no benefit from the banking facilities to be advanced to Miss Leung’s business Masterpiece, but was exposed to a liability of an unlimited extent;
(iv)	the mortgage transaction was therefore manifestly to Miss Choi’s disadvantage;
(v)	consequently, what Miss Choi did for Miss Leung was inexplicable by their relationship and there was a substantial risk that Miss Choi’s consent to execute the all-moneys mortgage might have been procured by an impropriety such as undue influence or misrepresentation

(Amended Notice of Appeal, para. 2).

16.  Put briefly, Miss Choi’s case was that the Bank was aware that the relationship between Miss Choi and Miss Leung was "non-commercial" because she was no longer a partner of Masterpiece, and as the all-moneys mortgage was manifestly to Miss Choi’s disadvantage, the Bank should have been aware that the transaction was inexplicable unless it had been procured by improprieties such as undue influence or misrepresentation.

17.  I cannot agree.  Although in Royal Bank of Scotland v Etridge plc [2002] 2 AC 773, Lord Nicholls referred to an obligation of banks to be put on inquiry in what he called "non-commercial cases" (§89), in Li Sau Ying Lord Scott held (§41):

" ... the concept of a ‘non-commercial’ relationship is inherently imprecise.  It is certainly not necessary for a proposed mortgagee to make inquiries about the relationship between its principal debtor and the proposed surety/mortgagor before deciding on the steps it should take to satisfy itself that the surety understands the transaction he or she is entering into.  Nothing Lord Nicholls said in Etridge suggests the contrary.  And for a bank/mortgagee to make inquiries of that character would in most cases be an unwarrantable impertinence".  (Emphasis added) 

Since the Bank was not actually or constructively aware of any relationship between Miss Choi and Miss Leung that indicated any risk of abuse, the mere fact that the transaction might have been, or even was, manifestly disadvantageous to Miss Choi was not sufficient to give rise to a presumption that it had been obtained by undue influence and to put the Bank on inquiry.  In Credit Lyonnais Bank Nederland NV v Burch [1997] 1 All ER 144, Millett LJ said (p.154j):

"I repeat that the mere fact that a transaction is improvident or manifestly disadvantageous to one party is not sufficient by itself to give rise to a presumption that it has been obtained by the exercise of undue influence; but where it is obtained by a party between whom and the complainant there is a relationship like that of employer and junior employee which is easily capable of developing into a relationship of trust and confidence, the nature of the transaction may be sufficient to justify the inference that such a development has taken place; and where the transaction is so extravagantly improvident that it is virtually inexplicable on any other basis, the inference will be readily drawn".  (Emphasis added).

18.  In any event, I do not accept in the present case that the all-moneys  mortgage was a transaction that was manifestly to Miss Choi’s disadvantage.  She was the registered joint tenant of the property,  a property which was mortgaged to HSBC.  At the time she executed the two mortgages with the Bank, the sum owed to HSBC was nearly $1.4m.  That debt was discharged and the property redeemed for the benefit of the owners, not only with the sum drawn-down from the Bank under the $880,000 fixed-loan to Miss Choi and Miss Leung, but also using the banking facilities given to Miss Leung’s business Masterpiece which were secured under the all-moneys mortgage. 

19.  Counsel for Miss Choi submitted that as Miss Choi only had a half-interest in the property, her unlimited exposure under the all-moneys mortgage was disproportionate and therefore the transaction was manifestly to her disadvantage.  With respect, that is not correct.  First, Miss Choi’s interest in the property was as a joint tenant, not a tenant-in-common.  Therefore Miss Choi’s interest in the property was not a "half-interest".  There were also advantages in the use of general banking facilities such as overdrafts to repay debts secured by an all-moneys mortgage.  Although the rate of interest may be higher, it enabled outstanding sums to be repaid at any time without penalty for early repayment e.g. in the present case, if the mortgagors were to redeem the fixed loan within 1 year of execution of the mortgage, an additional charge of 3% on the fixed loan amount was payable to the Bank, and if redemption took place within 3 years, an additional charge of 1% was payable ("THL-3").  It could not therefore be said in any event, that the all-moneys mortgage was a transaction that was manifestly to the disadvantage of Miss Choi.

20.  For these reasons, I agree with the learned judge that there was nothing to put the Bank on inquiry.  If there is any truth in Miss Choi’s allegations against Miss Leung, that is a matter that she will have to pursue against Miss Leung only.  I therefore dismissed the appeals with costs.

Hon. Waung, J:

21.  I agree.