Re: LAI YIN SHAN and EX PARTE: THE HONG KONG AND SHANGHAI BANKING CORPORATION LTD.

HCB 992/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS NO. 992 OF 2000

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J U D G M E N T

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1. This is a bankruptcy petition by which the petitioner bank is seeking a bankruptcy order against the respondent, Madam Lai Yin Shan in respect of a debt of some $20,000,000.00 being the balance of banking facilities provided by the petitioner to a company called Chit Lee Marble & Minerals Co. Ltd, pursuant to two guarantees signed by her under seal in 1997. The debt owed by the company is not in dispute, but the respondent contends that the guarantees were executed by her as a result of the misrepresentation and/or undue influence of her husband, the major shareholder in the company.

2. In support of her contention, the respondent has filed an affidavit in which she states that she was one of two directors and shareholders of the company, the other being her husband, but that it's business was conducted solely by him and she was a full time housewife. She says that she was a merely nominal director and shareholder. In 1996 she says that she went with her daughter to live in Canada, where she was visited by her husband, and, in particular in 1997 when he asked her to sign printed forms which he explained were bank credit rearranging documents which had to be signed by the directors, but that everything would be secured by a mortgage of property and the liabilities would be borne by the company. She said that she signed as she trusted her husband who did not tell her that she was signing a personal guarantee. In late 1999 the bank called in the debt and shortly thereafter the company was wound up.

3. By an affidavit filed only four days before this hearing, Mr Wong Kong Ming confirmed what the respondent had said and added that he was the only person that had dealings with the bank.

4. Mr Tollan for the petitioner points out that the factual situation is not quite as straightforward as stated by the respondent and her husband. He says that this is not a matter of a $2.00 company with the wife holding a share as nominee, and being a director merely to comply with the law. The documentary evidence shows that she has been involved in this company to a substantial degree. In 1992, before she was a shareholder, she was one of three directors and the secretary of the company. In 1995, the shares of two other shareholders were transferred to her, making her a 30% shareholder, with her husband holding the rest of the 600,000 issued shares of $1.00. They also were then the only two directors, and she was still secretary, as she remained. In 1997, the issued shares were increased to 5,000,000 of which she became holder of 30% or 1,500,000 and a third director was appointed, a Mr Wang Wei. It was during this year that the guarantees were signed. From 1996 at least, she has also been a signatory of the company's bank account.

5. Mr Tollan says that this shows her to be, on the face of it, far from a nominal shareholder and director. She held more than a nominal amount of the shares, and continued as a director when there were two others and her directorship was not required by the law, and she was also the company secretary throughout. He submits that this is far from being a situation as in Barclays Bank Plc v. O'Brien & anor [1994] 1 AC 180, where the wife had no interest in the company, the overdraft facilities of which were secured by the matrimonial home.

6. I have to consider two questions here: whether there is evidence of undue influence or misrepresentation on the part of the respondent's husband, and if so, whether the effect of that is binding on the bank. As to the first, an allegation of undue influence or misrepresentation is very easy to make, and almost impossible for the bank to refute. The only evidence comes from the parties who stand to gain by such a finding, and it must accordingly be treated with circumspection. Having said that, in the light of the respondent's affidavit and her account of her family situation, it is difficult to say that the evidence does not support that contention. I accept that the relationship of the parties as husband and wife does not of itself give rise to a presumption of undue influence, but I have evidence here that there was a relationship in which the respondent reposed trust and confidence in her husband and that in turn presumes that undue influence occurred, and the burden shifts to the other party to show that the transaction was entered into freely. Apart from showing her involvement in the company apparent from the records, the bank are unable to do this, and the presumed wrongdoer, her husband supports her contention. I have to find therefore that undue influence at least was used to induce her to enter into these guarantees.

7. While this finding would enable the respondent to set aside the transaction as against her husband, the principal question here is whether that is also binding on the bank. In order for it to be, the respondent has to show that either her husband was acting as agent for the bank, or that the bank had actual or constructive notice of the facts giving rise to her right.

8. All that the respondent can put forward in support of agency is that her husband was asked by the bank to take the forms to the other director or directors to sign. This falls far short in my view of creating an agency. As Lord Browne-Wilkinson said in Barclays Bank Plc v. O'Brien supra:

"Although there may be cases where, without artificiality, it can properly be held that the husband was acting as the agent of the creditor in procuring the wife to stand as surety, such cases will be of very rare occurrence."

This does not in my view come within those rare cases.

9. Which leaves the respondent having to rely on notice. There is no suggestion that the bank had actual notice, and Miss Fung, for the respondent here relies on constructive notice. The principles enunciated in Barclays Bank Plc v. O'Brien, and followed in a number of cases since, are that the third party will be put on inquiry if they are aware of the relationship of husband and wife, that the transaction is on its face not to the financial advantage of the wife, and there is a substantial risk in transactions of that kind that 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.

10. It is not in dispute here that the bank knew of the relationship of husband and wife. So was the transaction on its face not to her financial advantage? Mr Tollan says it was rather the opposite. There is no suggestion that the company was in any difficulty, or anything other than moderately successful, and it needed the banking facilities to carry on its business. The respondent was a 30% shareholder in that business, and a director, and stood to gain financially from the increased business by way of a share in the profits. The bank may well have only dealt with the husband as he claims, and not the respondent, but that does not help her. It cannot be unusual for the managing director of a company to be the one to negotiate matters such as this. I am sure that banks do not want every director trooping in each time banking facilities are discussed. On the face of the records of this company the respondent was a substantial shareholder and active director, the loan was therefore at least partly to her own benefit. In addition to this she was a signatory of the company's bank account. There was nothing here in my view to put the bank on inquiry, dealing as they had every right to believe with a company, one of whose directors was the wife of another, but who herself had a not insignificant interest in the business, and who appeared on the face of it to be an active participant.

11. In the circumstances the respondent has failed to put forward a defence to the petitioner's claim and I am satisfied that they are entitled to the order they seek. There will accordingly be a bankruptcy order in the usual terms with costs to the petitioner.

Representation:

Mr R M Tollan, of Messrs Johnson, Stokes & Master, for the Petitioner

Miss Flavia S C Fung, instructed by Messrs Paul Cheng & Co, for the Respondent

Remarks:
Appeal by Lai Yin Shan to Court of Appeal. Appeal allowed. Please refer to Appeal Judgment of CACV002024/2001.

HCB 992 /2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

IN BANKRUPTCY NO. B 992 OF 2000

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D E C I S I O N

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1. In March 2001, in the course of the hearing held in open court of a contested bankruptcy petition before Deputy Judge S. Kwan (as she then was), the learned judge raised the question with the solicitor representing the Petitioner whether he had the right of audience in those proceedings. This issue was then transferred for hearing before me as the judge responsible for the Companies and Bankruptcy List.

Representation at the hearing

2. At the hearing before me, submissions were made on behalf of the Petitioner, the Bar Council and the Law Society.

3. The Official Receiver has also been served with the Notice of Hearing. He has adopted a neutral stance and has not attended the hearing.

4. The debtor did not attend. The Court was informed by the solicitors for the Petitioner that whilst the debtor was aware that the issue had been raised by Deputy Judge Kwan, the debtor had not been notified of this hearing. In my view, the debtor should have been notified, but in order not to waste the time reserved by the Court for the hearing and the costs of attendance of legal representatives, the hearing proceeded upon the undertaking of the Petitioner's solicitors to inform the debtor of the hearing by close of business on 3 July 2001 and to ask if she had any submissions on the issue.

5. The Court was subsequently informed that the debtor has indicated that she had no submissions on the issue.

History of position in England

6. It may be helpful to first consider the historical position, first in England to understand the relevant background, and then in Hong Kong.

7. The position in England was that a Court of Bankruptcy was first established by the Bankruptcy Act 1831. This Act was enacted to appoint a Chief Judge, Judges and Commissioners of the Court of Bankruptcy, to avoid the delays that ensued hitherto when bankruptcy suits were heard only by the Lord Chancellor personally.

8. Section 10 of that Act specifically provided that solicitors may be admitted and have their names enrolled in the Court of Bankruptcy and "may appear and plead in any proceedings in the said Court without being required to employ Counsel". It may be that in accordance with the stated purpose of the Act , this was to enable the rights of creditors and bankrupts to be "enforced with little expense, delay and uncertainty".

9. This right of audience was expressly preserved in the Bankruptcy Act 1847 and in subsequent revisions of the statutes.

10. By the Bankruptcy Act 1883, the Bankruptcy Court was united and consolidated with and formed part of the Supreme Court of Judicature.

11. Section 151 of that Act provided that nothing in that act or in any transfer of jurisdiction effected thereby would take away or affect any right of audience that any person might have had at the commencement of the Act and "all solicitors or other persons who had the right of audience before the Chief Judge in Bankruptcy shall have the like right of audience in Bankruptcy matters in the High Court".

12. This right of audience does not include a right to appear in the Court of Appeal in bankruptcy matters (In re Elderton ex p Russell (1887) 4 Morr 36).

13. The current position in England is provided for in the Insolvency Rules, which at rule 7.52, preserves the right of audience in insolvency proceedings as that which obtained before the coming into force of those Rules.

14. It is clear from the above that the right of solicitors in England to appear in open court in the High Court in contested bankruptcy proceedings was founded in statute.

History of position in Hong Kong

15. As for the position in Hong Kong, it is likely that, at least before the enactment of the Application of English Laws Ordinance (since repealed), the Bankruptcy Act 1831 would have applied in Hong Kong. This is by reason of the principle enunciated by the Chief Justice in Re Tse Lai-chiu, deceased [1969] HKLR 202 (a judgment given in 1893) that generally the law in England would be immediately brought into force in a new colony unless it is excluded by the law itself being meant for England alone or by the circumstances of the acquisition of the colony or its subsequent history being such as to afford strong proof that the law could never have been in actual operation there.

16. This principle was pronounced by statute in Ordinance VI of 1845 which provided that "the law of England shall be in full force in the colony of Hong Kong except when the same shall be inapplicable to the local circumstances of the colony or its inhabitants". By s. 3 of Ordinance II of 1846, the English law thus adopted was limited to "such of the laws of England only as existed when the Colony obtained a local legislature, that is to say, on the 5th April, 1843".

17. As the colonization of Hong Kong was (at least in part) for the benefit of British commerce, it would have been highly improbable that the bankruptcy law as at 5 April 1843 would have been excluded. Accordingly, it is likely that the Bankruptcy Act 1831 applied in Hong Kong from the commencement of the court system here.

18. The practice of the courts in England was applied to Hong Kong by s.17 Supreme Court Ordinance and its predecessors, the earliest of which was in 1845. This provision stipulated that subject to rules of court, the practice of the Supreme Court of Judicature in England for the time being in force there shall be in force in the Supreme Court here. (This section was repealed in 1987).

19. Hong Kong passed its first Bankruptcy Ordinance in 1864. No separate Court of Bankruptcy was established; hence, the jurisdiction is exercisable by all judges of the High Court (although the practice has been, since the 1980's at the latest, that one judge would take charge of all bankruptcy matters). There was and is no legislation similar to the English bankruptcy statutes expressly granting solicitors the right of audience.

20. However it is clear from reported cases that solicitors have for many years appeared in open court as advocates in contested bankruptcy matters. The earliest reported case appears to be one in 1908 (Re Wei Long Shan ex p Yuen Hing [1909] 4 HKLR 144). Thereafter, successive judges dealing with bankruptcy matters have heard solicitors in contested cases in open court. Mr Brock, appearing for the Law Society, has referred me to 13 reported cases from 1908 to 1997, in which 7 different judges have heard submissions from solicitors in open court.

Hong Kong Reunification Ordinance

21. The year 1997 is important because s.12 of the Hong Kong Reunification Ordinance provides :-

"Every person who immediately before 1 July 1997 enjoyed a right of audience before any court, magistrate, statutory tribunal or statutory board shall on and after that date continue to enjoy such right before the corresponding court, magistrate, tribunal or board of the HKSAR".

22. Therefore the answer to the question posed at this hearing lies in whether solicitors enjoyed the right of audience in open court in contested bankruptcy matters before 1 July 1997. I should add that although evidence has been submitted on behalf of the Petitioner on its preference regarding representation, that does not have a bearing on the above question which is the issue to be determined at this hearing.

Submissions against finding of right of audience

23. It has been submitted on behalf of the Bar Council that whilst reported cases do show that solicitors have argued contested bankruptcy matters in open court for nearly a century, that could, prior to 1987, be explained by the operation of s.17 Supreme Court Ordinance. However after the repeal of that provision in 1987, there was no ground for the establishment of a practice, as that would have required a collective decision.

24. The need for practice and procedure to be modified collectively was affirmed by the Court of Appeal in Abse v Smith [1986] 1 QB 536, which held (p.554G-H):-

"the public interest requires that there shall be known general practices and procedures in the High Court and these shall not be changed or departed from piecemeal by individual judges on the basis of their personal view of what those practices and procedures should be".

As for the question of how established practices and procedures of the High Court and of the Court of Appeal could be modified if the public interest so required, it held (p555 A-C):-

"... the well established proposition that every court has inherent power to regulate its own practices, unless fettered by statute, or possibly, by ancient usage, applies to the judges of that court collectively as well as individually and it is for the judges collectively - as a collegiate body - to decide whether or not to modify established general practices and to promulgate such modifications by practice directions".

(emphasis added)

25. It was submitted on behalf of the Bar Council that in the absence of any indication that the judges of the High Court (there being no separate Court of Bankruptcy here) had as a collegiate body decided to grant solicitors the right of audience after 1987, the practice should be the same as in other civil proceedings as s.99(1) Bankruptcy Ordinance cap. 6 provides:-

"the rules and practice of the High Court for the time being for regulating the ordinary civil procedure of the court shall, so far as the same may be applicable and not inconsistent with the provisions of the Bankruptcy Ordinance be applied to bankruptcy proceedings".

Right of audience

26. I find that solicitors did enjoy a right of audience in contested bankruptcy matters in open court before 1 July 1997. The fact that before 1987, the judges may have been legally bound by s.17 Supreme Court Ordinance to follow the English practice does not detract from the fact that that was the practice in Hong Kong as well for at least 80 years before 1987. The repeal of s.17 meant that it was no longer necessary as a matter of law to follow the English practice, and judges in Hong Kong could now as a collegiate body regulate the practice differently. However, the repeal of s.17 did not obliterate overnight the practice that had obtained here probably since the commencement of the court system. That being the case, it would have taken a collective decision of the judges to modify that established practice. There is no indication that such a decision had been taken.

27. Put another way, it was not necessary for the judge hearing the first bankruptcy petition after the repeal of s.17 to break new ground and establish a new practice of granting solicitors a right of audience. His position was not that of a judge hearing the first bankruptcy matter in 1843 had he not been required to apply the English practice. The judge in 1987 would simply have been following a practice that had obtained in Hong Kong for well over 80 years and which had not been modified by a collective decision of the judges who now had power to do so.

28. Section 99 Bankruptcy Ordinance applies the rules and practice of the High Court only "so far as the same may be applicable ... to bankruptcy proceedings". Given this practice unique to bankruptcy proceedings of giving solicitors right of audience in open court, the ordinary rules and practice of the High Court as to representation do not apply. It is not disputed on behalf of the Bar Council that unlike the situation in Langdale v Danby [1982] 1 WLR 1123, where it was held that a longstanding practice must yield to a clearly governing rule, the language of s.99 can accommodate a different practice from that governing ordinary civil procedure.

Order

29. In the circumstances, I would direct that these proceedings do continue with the Petitioner being represented by its solicitors in open court should it so wish. I would make an order nisi that there be no order as to costs. At the request of the parties, this Decision is to be handed down in open court.

Representation:

Mr R Tollan of Johnson Stokes & Master, for Petitioner

Mr B Yu SC and Mr G Lam, instructed by Poon Yeung & Li, for the Bar Council

Mr D Brock of Clifford Chance for the Law Society of Hong Kong