SUN HUNG KAI INVESTMENT SERVICES LTD v. QUALITY PRINCE LTD AND OTHERS

HCA1995/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1995 OF 2008

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J U D G M E N T

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1.  This is an action by the plaintiff to recover a debt (with interest) from one of the guarantors of the debt (“Debt”), the 4^th defendant (“Chan”). This trial only concerns Chan. The key issue in this trial is whether the guarantee which Chan had executed in favour of the plaintiff came into existence under the undue influence of her late husband, Lam Sai Wing (“Lam”).

Background

2.  The background facts are quite simple, much of which are not in dispute and they can be simply stated (and I find them to be proved save where indicated otherwise) as follows.  The plaintiff is a licensed corporation under the Securities and Futures Ordinance, Cap 571.  Its core business includes share-broking, underwriting initial public offer and margin financing.

3.  Lam was the founder and Chairman of a Hong Kong listed company called 3D-GOLD Jewellery Holdings Ltd (formerly known as Hang Fung Gold Technology Ltd) (“HFG”).  Lam held a substantial portion of the shares in HFG (over 178 million shares) either directly or through corporate vehicles.  HFG was de-listed from the Main Board of The Stock Exchange of Hong Kong Ltd on 9 July 2012.

4.  The 1^st and 2^nd defendants (“D1” and “D2”) were BVI companies.  They were wholly or substantially owned by Lam.  In the case of the D1, its shares were held by S W Lam, Inc (“SWL”), a company listed in the USA.  82% of the shares in SWL were owned by Lam.  Lam and Chan were the directors of D1.  Lam was the sole shareholder and director of D2.  Both D1 and D2 had a margin securities trading account with the plaintiff and they were wound-up by the BVI court in November 2009. 

5.  It is contended by the plaintiff that Chan is the beneficial owner of 300,000 shares in SWL, which are equivalent to 2.3% of the total shareholding.  Further, she was the Vice-President, CFO and a director of that company.  These contentions are denied by Chan.  I shall return to these matters when I deal with Chan’s evidence. 

6.  D1’s account with the plaintiff (“Account”) had a facility limit of HK$50 million.  In exchange for such facility, D1 had to deposit securities with the plaintiff and to maintain the value of such securities at no less than 500% of the amount of its liabilities to the plaintiff.  100 million shares of HFG were deposited with the plaintiff by D1 as such securities.

7.  For its account with the plaintiff (the contractual provisions of which were similar if not identical with those applicable to the Account), D2 had deposited 50 million shares of HFG with the plaintiff as securities.  I shall refer to the 150 million shares of HFG held by the plaintiff as “Securities”.

8.  For the purpose of the Account, Lam, Chan, D2 and the 5^th defendant (who was the CEO of HFG (“Ng”)) had each executed a Deed of Guarantee in favour of the plaintiff to stand as surety for D1’s liabilities arising out of the Account.  All the relevant documents in respect of the Account, including the guarantees, were in English.

9.  During the first half of September 2008, the level of securities for the Account fell below the contractual requirement due to the significant drop in the share price of HFG.  It may be remembered that in mid-September 2008 there was a worldwide financial tsunami.  Demands were made by the plaintiff to D1 for the reduction of outstanding margin facilities or an increase of securities.  By a letter dated 23 September 2008, D1 was notified by the plaintiff that if the outstanding sum of HK$50m was not repaid in full by 26 September 2008, an interest rate of 2.5% per month (equivalent to 30% per annum) would be applied from 29 September 2008. 

10.  In the small hours of the 26 September 2008, Lam suddenly died.  It was a Friday.  On Monday, 29 September 2008, the trading of HFG shares was suspended.  On the next day, when trading was resumed the share price went into a dive and as a result trading was again suspended in the afternoon by which time the share price had dropped 60% to HK$0.65 per share from the previous closing price of HK$1.63.  The trading for that stock was never resumed thereafter.

11.  A demand letter was sent by the plaintiff’s solicitors on 30 September 2008 to D1 for immediately repayment of all outstanding liabilities.  Similar letters were also sent on that day to each of the guarantors (in respect of Lam, the letter was sent to his personal representative).

12.  The demands were not met and on 6 October 2008, there were more bad news about HFG.  On that day, there were newspaper reports of a complaint to the police that someone at the senior management level of that company had misappropriated HK$200m from it. 

13.  On the 6 October 2008, the plaintiff exercised its power of sale over the Securities and sent out over 300 letters to Licensed Corporations inviting bids for the same by way of private placement.  There was only 1 response and those shares were sold to that sole bidder on 10 October 2008 at HK$0.1 per share. 

14.  After taking into account the net sale proceeds, the total amount owing under the Account was HK$36,030,376.64 (“Sum”), inclusive of interest up to 13 October 2008.  Helpfully, this court has been provided by Mr Liu, who appeared for the plaintiff, with a calculation sheet marked “B” setting out the details of how the Sum was arrived at.

The issues

15.  This trial is essentially about Chan’s claim of undue influence.  There are, however, some ancillary issues which have either been raised in her pleading or by this court in light of the fact that she was unrepresented at the trial (a Notice to Act in Person was filed by Chan on 13 September 2013).  The ancillary issues are:

(1)     Whether the Consolidated Daily Statement of the plaintiff dated 14 October 2008 (“Statement”) in respect of the Account with details concerning the Sum, which had been confirmed as accurate by one of its directors, Leung King Yuen (“Leung”) (who has since retired), can be relied upon as conclusive evidence in this action;

(2)     Whether the interest claimed by the plaintiff is unconscionable;

(3)     Whether the plaintiff had failed to mitigate its loss in the sale of the Securities;

(4)     Whether the plaintiff is entitled to costs on indemnity basis premised upon the provisions of the Deed of Guarantee and Indemnity executed by Chan (“Deed”).

The law on undue influence

16.  The applicable legal principles are reasonably clear by now.  I have been referred by Mr Liu to Chitty on Contracts, 31^st ed, vol 1, §§7-061, 062 and 065 wherein a good summary of those principles can be found.  I also remind myself of the judgment in Bank of China (Hong Kong) Ltd v Well Lok Printing Ltd & Ors, unrep, HCMP 3925/2002, 5 September 2006, paras 7, 33-35, 40-42 and 49.

17.  This is a case of “relationship based undue influence” as referred to in Well Lok Printing. The task for the court is one of fact finding, and the burden of proof is on Chan.  To make out her case, Chan is required to prove as prerequisites (a) that she reposed trust and confidence in Lam and (b) the transaction represented by the Deed is one which calls for an explanation (in the sense that it cannot be readily explicable by the relationship of husband and wife).  Once those prerequisites are established, they can give rise to a prima facie inference of undue influence. 

18.  If undue influence is established and given that this is a pure surety case (see para 49 below), the plaintiff was put on inquiry in respect of the propriety of the transaction.

Plaintiff’s evidence 

19.  Two witnesses were called by the plaintiff.  In addition to Leung, Josephine Ho (“Ho”), who was a solicitor in the employ of the plaintiff’s solicitors (“PCW”), was called to give evidence on her dealings in respect of 4 loan transactions which involved 6 sets of loan and related documents (there were 2 extensions in respect of 1 of the loans and hence there were 6 sets of documents).  Those transactions took place between March 2001 and May 2003.  The borrower was D1 in each case and the lender was the plaintiff or its affiliates.  Three of the loans were to be used for “general working capital” and the 4^th loan was taken out to repay an earlier loan.  Ho was responsible for preparing the documents, including the guarantees.  Chan was one of the guarantors in respect of each of the loans and the extensions.  Ho’s evidence is that she was also responsible for meeting Chan to explain the documents to her in Chinese.  On each occasion, she had advised Chan of her right to seek independent legal advice. 

20.  There was another similar loan transaction which took place in July 2000 but it was handled by a different solicitor.  Lam was the borrower in respect of that loan, which was used to repay an existing debt of D1.  It was also guaranteed by Chan.  Ho also confirmed that the Deed was not prepared by PCW or executed in her presence. 

21.  Ho’s evidence was not really challenged and I accept her evidence.

22.  Leung’s evidence was mainly to prove the plaintiff’s case.  In addition, various positions or offices held by Chan have been set out in Leung’s evidence.  The only real challenge to his evidence concerns the disposal of the Securities, which I shall deal with below under mitigation of damage.

Chan’s evidence

23.  Chan was born in the Mainland where she grew up.  In 1978, when she was about 15 years old, she came to settle in Hong Kong with her family.  She started working soon after her arrival for two reasons, namely, economic need and her inability to understand Cantonese.  She worked as a sewing worker in the garment industry and as a sewing and dispatch worker in the toy industry. 

24.  After her had arrival in Hong Kong for about 1 year, Chan began to attend evening English classes.  Understandably, Chan was quite vague in her recollection over these classes.  In any case, she said that those classes lasted 1 or 2 hours and they were held in 3 or 4 evenings every week.  She attended those classes for 2 to 3 years and it was during such attendance that she met Lam. 

25.  Chan is adamant about having very limited ability in English.  Despite her attendance at evening classes many years ago, I have to bear in mind that there is no evidence that Chan has ever been a regular user of that language.  In the course of her cross-examination, Chan was asked by the court if she knew the English address of her previous home in Bowen Road.  Her answer was spontaneous and it reflects a very limited ability in English.  There is no reason to doubt the truthfulness of that answer.  There is no evidence to contradict that of Chan’s regarding her understanding of the English language, and I accept the same as true.

26.  Chan’s evidence is that she came from a very traditional Chiu Chow family where girls were discriminated.  This is well-illustrated by her evidence that she had to look after her younger brother and only started school when she was 9 years old together with her younger brother.  She was half-way through the 2^nd year of secondary school when her education came to an end in the Mainland. 

27.  Chan was married in 1984 when she was 21 years old.  She started working for Lam’s jewellery business the year before with the responsibility over receipt and despatch, which is apparently an important position given the value of the trading stock.  Lam started his jewellery business with a workshop in 1979 or 1980.  When Chan joined him in 1983, there were 5 employees including her.  In 1984, the business took a downturn and only the husband and wife were left in the company.  The business recovered in 1985 after Chan gave birth to a son.

28.  Lam was described by Chan as a hardworking, able and ambitious man.  This is fully borne out by the fact that Lam was able to nurture his business from a 2-man band to a listed company (listing took place in 1999).  Chan’s evidence is that Lam was also a very dominating Chiu Chow husband with a violent temper.  Lam made all the decisions.  He did not consult Chan even on the purchase of the family home.  He would not tolerate any dissent from his wife and had resorted to using violence on her. 

29.  As a traditional and submissive wife, Chan was asked from time to time by her late husband to sign various documents.  She dared not ask about the contents of those documents to avoid any conflict with Lam.  I infer form such evidence that Chan did not know the nature of the documents which she was asked to sign.  There is also a good possibility that at least some of those documents were in English. 

30.  In respect of the Deed, she believes that she was asked by Lam on the day before signing that document (21 March 2005) to go to the company to sign some documents for opening an account, and she did so accordingly.  Ng gave her the Deed to sign at the company.  There was no explanation given to her as to what she was signing.  Chan was adamant that had it not been for her late husband’s influence over her, she would not have signed the Deed.  She maintains that Lam had abused her love, trust and reliance on him.

31.  When Chan gave evidence about the pressure on her since the death of her husband, her humble background and her reluctance to reveal the details of her relationship with her husband, she became emotional and broke into tears.  I have no reason to believe that the outburst of emotion was anything but genuine.  Insofar as these aspects of her evidence are concern, I believe that Chan was telling the truth.

32.  As regards D1 and the Account, Chan’s evidence is that she had no interest in D1.  It was owned by Lam through SWL.  She denied having any interest in SWL or holding any position in the same.  Chan had nothing to do with the Account.  She had no right to operate it and derived no benefit from it.  I note that apart from the fact that Chan was one of the directors of D1, there is no evidence of any connection between Chan and D1 or the Account. 

33.  Chan was, expectedly, cross-examined at some length.  There are 3 areas which I should deal with.  Firstly, Chan’s original pleaded case was that the Deed was signed at PCW.  It was alleged that PCW failed to explain the contents of the document to her, nor advised her of her entitlement to seek independent legal advice before she signed the Deed.  It was also alleged that Chan was “therefore induced to sign the [Deed] whilst acting under the influence of [PCW]”.  I must say that the basis of that averment is quite unclear.  However, that pleading was subsequently amended to advance a case of undue influence by Lam.

34.  Chan explained that when she was sued by the plaintiff she was at a lost as to what she had signed.  She discussed the matter with Ng.  Neither of them recalled what took place.  Chan only remembered attending PCW many times to execute documents which were all in English.  They could not recall the signing of an important document at the office.  The old pleading was produced by Chan’s lawyers based on the discussion between her and Ng. However, the pleading was amended when it was shown by the plaintiff that the Deed was not signed at PCW but at the office. 

35.  I find this explanation by Chan quite plausible. This action was started over 3½ years after the execution of the Deed.  Chan could not understand that document.  There is a ring of truth to the explanation.  I do not therefore take this episode as an adverse reflection of Chan’s credibility.

36.  Secondly, Chan was taxed in cross-examination on the various positions and offices which she was holding for the purpose of showing that she was and is in fact quite a sophisticated person.  In particular, Mr Liu has deployed a good deal of firepower on Chan’s fellowship with The Professional Validation Council of Hong Kong Industries.  I have no reason to doubt Chan’s evidence, despite its inconsistency with the website information obtained by the plaintiff, that she was not required to undergo any vigorous training before obtaining the fellowship. 

37.  In respect Chan’s chairmanship of the Mainland Affairs Committee of the Hong Kong Jewellery Manufacturer’s Association, I believe that she was downplaying her role or importance.  Further, she evidence is that she was able to pass onto her son her membership of the Chinese People’s Political Consultative Conference of China Committee of Jinan.  Such evidence suggests that Chan is a person of influence.

38.  However, it is unnecessary to rely upon those evidence (it is not uncommon for some people to have a desire to accumulate various titles to enhance their social status) to come the view that Chan is certainly not an ignorant lady.  She was the Vice Chairman of HFG for many years.  Although she denied that she was involved in the running of HFG, Chan accepted that she was responsible for the development of the Mainland market.  Clearly, she may not be well-educated but the years of struggle in the business world must have provided good training for her.  I have no doubt that the development of the jewellery business by Lam had a lot to do with Chan’s contribution over the years.

39.  Thirdly, Chan was taken to a lot of material concerning, inter alia, a company which only came into existence in August 2010 – Elody International Co Ltd.  That company owns another company in Shenzhen called Elody Jewellery (Shenzhen) Co Ltd.  Chan was adamant that Elody is owned by a friend and that she is only a consultant employed by that company.  I find this part of Chan’s evidence quite unconvincing.  I have little doubt that she was trying her best to cover her assets.  In particular, there is evidence that in October 2010 a property worth over HK$8 million was acquired in the name of Chan’s son.  I reject the suggestion that the property was paid for by a generous friend because Chan was living in a rented property at the time.

40.  The second and third matters stated above certainly damage Chan’s credibility.  On the other hand, a balanced view must be taken by the court on the totality of the evidence.  Plainly, Chan is alive to the fact that the plaintiff will seek to show that she is a sophisticated woman.  Under an adversarial system, it is not surprising for a witness to adopt a protective stance in such circumstances.  Similarly, it is unsurprising that Chan does not want to reveal her assets in public given her financial circumstances. 

41.  The real issue is whether Chan executed the Deed under the undue influence of her late husband.  To that I now turn.

Undue influence

42.  First and foremost, Chan was unable to read the Deed.  There is no evidence that there was any explanation provided to her as to what she was signing.  Indeed, Chan’s evidence is that there was no such explanation.  This clearly undermines the proposition that Chan had consented to the obligations set out in that document. 

43.  Why would she sign a document which she did not understand?  Here, the fact that Chan was not an ignorant person works against the plaintiff’s case.  Chan’s willingness to sign a document which she could not understand is consistent with her evidence that she was a submissive wife who yielded to the demand of her volatile husband.

44.  On the totality of the evidence, I have no difficulty finding that Chan had at all material times reposed trust and confidence in Lam.  They were not merely husband and wife but also partners in their business venture.  Plainly, the Deed is a transaction which calls for an explanation – a wife standing as surety for the margin trading by her husband’s company. 

45.  I have not overlooked the fact that there is some medical evidence to corroborate Chan’s claim that Lam had used force on her.  It is unnecessary to make a specific finding on the point.  I have reminded myself that Chan’s evidence on her relationship with her late husband is not something which an outsider is in a position to contradict.  I have therefore paid special attention to Chan’s demeanour as a witness.  I have considered carefully if there is any indicium in the evidence that Chan was not telling the truth.  There is simply no reason for the court to doubt this part of Chan’s evidence, despite my observation that she has been less than candid on the matters identified above.

46.  Mr Liu tried his best to turn the table by pointing out that Chan was a willing guarantor of D1’s debts.  Relying on the evidence of Ho, Mr Liu submitted that prior to the execution of the Deed there had been no less than 7 occasions where a deed of guarantee was willingly signed by Chan after she was properly informed.  However, that does not answer the problem that on the occasion when the Deed was executed Chan did not understand the document and she signed it under the instruction of Lam. 

47.  Further, when that very point was explored with Chan in evidence, she gave another spontaneous reply by saying that she did willingly provide guarantees for the purchase of properties but she would not have agreed to stand as guarantor for shares speculation.  She said that she did not at that time even know what margin trading was about.  There is again a ring of truth to the evidence.  It is consistent with the fact that the loans involved in the 7 previous transactions identified by Mr Liu were, more likely than not, all needed for general working capital. 

48.  In the premises, I am driven to the conclusion that the Deed was executed by Chan under the undue influence of Lam.

49.  Mr Liu has, quite rightly, accepted that this is a pure surety case.  As a consequence, the plaintiff was put on inquiry in respect of the transaction in question.  It has no case in this regard.  The evidence is that Leung’s colleague by the name of Francis Lee simply left the unexecuted Deed to Ng for Chan’s signature.  There was never any contact made between any of the plaintiff’s staff and Chan until after the death of Lam. 

50.  Accordingly, this action must be dismissed. 

51.  For completeness, I shall state briefly my decisions on the ancillary arguments, for which purpose I have scrutinised the various contractual provisions relied upon by the plaintiff.  They have been helpfully identified in a document prepared by Mr Liu marked “A”.

52.  I am satisfied that the Statement contains no detectable error and that the plaintiff is entitled to reply upon it as prima facie conclusive evidence.  There is in fact no evidence to contradict the same.

53.  I see no substance in the unparticularised allegation that the interest charged by the plaintiff is unconscionable.  In any case, Mr Liu has rightly pointed out that, as explained in “B”, the default interest of 30% per annum was only applied for a short period of time from 29 September to 13 October 2008.  Thereafter, interest is payable pursuant to a summary judgment entered against, inter alia, D1 dated 25 May 2009.  By virtue of that judgment, the default rate was applied up to the date of judgment and the judgment rate is applicable thereafter. 

54.  I am satisfied that there is no inordinate delay in the prosecution of this action such as to justify a reduction on the interest entitlement.

55.  I disagree with the failure to mitigate loss argument.  There was only a small window (morning of the 30 September 2008) whereby the plaintiff could have disposed of the Securities in the market. During that morning, the decision-maker (Chairman of the plaintiff) could not be contacted because he was on a flight.  Further, there is no evidence to suggest that the purchaser of the Securities was in any way connected with the plaintiff. 

56.  I am also satisfied that had it succeeded in this action the plaintiff would be entitled to an order for costs on indemnity basis pursuant to its contractual rights.

Conclusions 

57.  This action is dismissed with costs to Chan to be taxed if not agreed.

58.  Last but not least, I am grateful to Mr Liu for his assistance to the court.

Mr Michael K W Liu, instructed by P C Woo & Co, for the plaintiff

The 4^th defendant appeared in person

HCA1995/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1995 OF 2008

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BETWEEN

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DECISION   ON   COSTS

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1.  A written judgment dated 7 August 2009 was given in this matter allowing the appeal by the 4^th and 5^th defendants from the decision of the Master.

2.  In that written judgment, a costs order nisi was included awarding the costs of the appeal and the costs of the application and the hearing before the Master to be paid by the plaintiff to the 4^th and 5^th defendants in any event.

3.  By letter dated 18 August 2009, the solicitors for the plaintiff sought to vary that costs order nisi to the extent that the costs of the application and the hearing before the Master be costs in the cause.

4.  That application for variation of the costs order nisi was consented to by the 4^th and 5^th defendants as per the letter dated 20 August 2009 from the defendants’ solicitors.

5.  Accordingly, there will be Order in terms as per the variation sought by the plaintiff stated in the plaintiff’s solicitor’s letter of 18 August 2009.

HCA 1995/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1995 OF 2008

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BETWEEN

(By Order to carry on proceedings dated 7^th January 2009)

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D E C I S I O N

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1.  On 25 May 2009 I entered judgment for the Plaintiff and made an order nisi as to costs in the following term:

“42. I make an order nisi as to costs that the Defendants pay the Plaintiff’s costs of the whole action including all costs reserved and the costs of the Order 14 application together with certificate for one counsel comparable to the experience, seniority and standing of Mr. K.M. Chong.”

2.  At the hearing of the assessment, both parties applied to me by consent to vary the above order and asked that the costs be taxed instead. I refused the application and informed the parties that I would give my reasons later. For that purpose I now give my reasons.

3.  The primary objective of the Civil Justice Reform is to increase the cost effectiveness of the practice and procedure of the Court and to ensure that its resources are distributed evenly.

4.  Taxation has taken up a lot of the masters’ time. The cost incurred in carrying out a taxation is often not in proportion with the claim in the subject matter of the litigation itself. Sometimes, a million dollar claim will have a taxation costs over $100,000. Hence, the Civil Justice Reform has made amendment to the Rules encouraging assessment. Assessment has the advantages of the hearing master doing the assessment while the case is still fresh in his mind and he can easily decide what is necessary and proper. Assessment hearing will usually last no more than an hour.

5.  The parties submitted that taxation could provide a full opportunity to the parties to examine each item of work in greater detail. It would be much fairer. I disagree. In an itemized bill, the same event will appear in different parts of the bill: the costs relating to the same matter are so fragmented and scattered in different parts that the taxing master could easily lose sight of the general picutre.

6.  The Civil Justice Reform has made it as a rule that appears in Order 62 rule 9C which states:

“9C. When summary assessment not allowed (O.62, r.9C)

(1) No direction or order may be made under rule 9(4)(b) or 9A(1)(a) or (b) for the payment of a sum of money if –

(a) the paying party shows substantial grounds for disputing the sum claimed for costs that cannot be dealt with summarily;

(b) the receiving party is an aided person, and the legal representative acting for the receiving party has not waived the right to any further sum of money in respect of the costs of the interlocutory application; or

(c) the receiving party is a person under disability as defined in Order 80, rule 1, and the legal representative (or the next friend or guardian and litem) acting for the person under disability has not waived the right to any further sum of money in respect of the costs of the interlocutory application.”

7.  Order 14 is an interlocutory application. No one disputes that I have the power to make the assessment of costs order. Neither side has advanced any ground to show that the costs cannot be dealt with summarily.

8.  I consider that it is a relatively simple straightforward case. Though it has quite a number of affidavits filed, the facts in issue are not complicated at all. At the hearing I proceeded with the assessment notwithstanding the joint effort to object the method of assessment.

Indemnity Costs

9.  The Plaintiff also applied for variation of my order and requested the assessment be made on indemnity basis. Mr. Tang for the Plaintiff pointed out that according to the contractual term the Plaintiff was entitled to costs on an indemnity basis.

10.  It is trite to say that cost is a matter of discretion. We respect what has been agreed between parties. However, we should consider the circumstances of the case including the issue whether the Defendants had acted so unreasonably that indemnity costs should be awarded. The Defendants in this case were exercising their statutory rights to defend. The way that they conducted the case was reasonable and fair.

11.  I do not accept that the power of the court in awarding costs has been abrogated because of the parties’ agreement. I bear in mind the agreement as a factor but it is not such a decisive factor that I have to ignore the other circumstances of the case. The Defendants have sensibly and reasonably present their cases and there is no factor that makes me feel it is right to grant indemnity costs. I maintain that the costs be assessed on party and party basis.

Assessment

12.  I am very surprised by the claim of over $1.5 million as the Plaintiff’s legal costs for a proceeding which was relatively simple and lasted only for about 7 months.

13.  As it is an assessment on a party and party basis, I will only allow what is proper or necessary in prosecuting the claim.

14.  I cannot say this is complexed or complicated case. The Plaintiff is a stock brokering firm claiming against its clients and their guarantors for a sum of about $36 million. The grounds of defense are nothing more than those usual ones of bad faith and sale of shares at a under value while the wife and the employee being guarantors alleged that under undue influence they signed the guarantees. The legal issues are those familiar ones found in Royal Bank of Scotland plc v Etridge (No. 2).

15.  The legal process is slightly complicated as it involves service out of jurisdiction and appointment of the 4^th Defendant to represent the estate of the 3^rd Defendant. I hasten to add such applications should not be regarded as difficult or unusual. The Order 14 summons lasts for only one and half days, the first half day of which was used for hearing a last minute application for admission of the new evidence. Again this often happens in any interlocutory application hearing.

16.  The documents involved like margin account agreement and guarantees are the standard documents commonly used in the trade. Solicitors with 7 or 8 years’ experience who have handled similar cases before should not have found them difficult at all. The number of witnesses who have filed their evidence are not many: two from each side making 14 affirmations between them.

17.  Three counsel have been retained by the Plaintiff: one senior and two junior. Among the three, it is quite clear Mr. Michael Lui did the main drafting work e.g. the affidavits and statement of claim. Counsel fees alone amount to about $750,000 that accounts for nearly half of the legal fees claimed. Against such background I have allowed only the fee of one counsel.

18.  The case was handled by Mr. Tang himself. He had more than 18 years of practicing experience, first in England and then in 1998 in Hong Kong. I note that during the course of proceeding nearly every step had been advised by counsel. I doubt it was necessary to take such precaution for the attainment of justice or for enforcing the Plaintiff’s right. The usual rate for a solicitor of over 10 years’ experience is $4,000. There is no reason or justification for me to go higher than that in this case.

19.  The trainee solicitor rate as suggested by the Law Society of Hong Kong ranges from $1,033 to $1,300. I do not find it reasonable for this case to go to the highest end of the scale. I allow only $1,200.

20.  The rate for litigation clerk in the suggested scale ranges from $800 to $1,000. I allow $900 for this case.

21.  I have no comment for items B1 and B2 and allow them.

22.  For attendance on client, a total of 75 hours between the 3 fee-earners has spent and I consider it as excessive. The Plaintiff is a corporate client and everything is well-documented. The persons involved and giving evidence or instructions are well-educated senior staff of the corporation. There should not be much difficulty.

23.  As I understand from the verbal submission, much time had been spent in considering whether to apply for a Mareva injunction because of the fear that the defendants would dissipate their assets. The idea was dropped. Such part of costs should not be allowed. Further, with Mr. Tang’s experience the time for taking instruction should be much shortened.

24.  As to C2, I really doubt the role that the litigation clerk could play relating to attendance on client.

25.  For C3, my comment is trainee solicitors could have assisted Mr. Tang in many ways but do we require two persons to do the same job? For example, the trainee solicitor had been attending court together with Mr. Tang in the one and half day’s hearing. The general rule is that one fee-earner is allowed to do the same piece of work.

26.  For C4, Mr. Ho for the 4^th and 5^th Defendants submitted that he did not find that there was such extensive correspondence and communication justifying the claim. I agree with his view. I consider a case of this nature should require much less time for correspondence and communication.

27.  I do not know what role litigation clerks could play in respect of attendance on the other side. Usually they contact the other side to attend court to make appointments for hearing and to effect service of documents. Both types of work should have been covered by B2.

28.  Mr. Tang spent 14 hours for attendance on counsel. As I have stated earlier, time has been spent on the abandoned plan of taking out a Mareva injunction. Further, quite a number of works should have been handled by solicitors himself without consulting counsel. Mr. Tang’s time on this should be greatly reduced.

29.  Again, I see no role of a litigation clerk serving counsel except service of documents which should have been covered by B2.

30.  As I have mentioned earlier, no two fee-earners are allowed in doing the same job. In this case the trainee solicitor usually accompanied his principal to attend conferences. This should not be allowed in this case. I reckon that he has other duties to perform relating to counsel but not much.

31.  For D1, I accept that there are quite a number of documents prepared by the solicitors that include statement of claim, application for service out of jurisdiction, application of appointment of the 4^th Defendant to represent the estate of the 3^rd Defendant, the Order 14 application and the different affidavits. Most of them are not complicated or unusual.

32.  For D2, the different affidavits are factual and the different agreements and guarantees are rather standard. Perusal should not take so much time as suggested in D2.

33.  I do not see the necessity of a solicitor requiring 12.6 hours as claimed in D3 for preparation for hearing. The time for hearing is excessive: the time for call over is less than 30 minutes each and the hearing of Order 14 application lasted for one and half days only.

34.  I see no reason for litigation clerk to attend the call-over or the hearing of Order 14 application proper in D5.

35.  On counsel fee, I have three comments to make:

(a) It is not necessary for the solicitor to consult counsel on every step he takes or for counsel to settle nearly every document the solicitor has drafted;

(b) I allow only one counsel for the hearing; and

(c) The fee for counsel will be that of counsel comparable to the experience, seniority and standing of Mr. K.M. Chong, counsel for some of the defendants.

36.  Having considered the different aspects of the costs claimed as set out in the Statement of Costs, I have made an assessment and find that the proper amount for the Plaintiff’s cost is $650,000.00.

HCA1995/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1995 OF 2008

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BETWEEN

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J U D G M E N T

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1.  This is an appeal by the 4^th and 5^th defendants from the decision of Master C. Chan given on 25 May 2009 when the Master gave, inter alia, summary judgment to the plaintiff against the 4^th and 5^th defendants in the sum of $36,030,376.64 with interest thereon.

2.  By this appeal, the 4^th and 5^th defendants seek to set aside the order of the Master and for unconditional leave to defend the plaintiff’s claim against them.

Background

3.  The 1^st and 2^nd defendants are both BVI companies effectively owned and controlled by Lam Sai Wing, deceased, (“the Deceased”) before his death on 26 September 2008.

4.  Before his death, the Deceased was also the Chairman of a public listed company, Hang Fung Gold Technology Limited (“Hang Fung Gold”).

5.  The 3^rd defendant is the estate of the Deceased.

6.  The 4^th defendant was at all material times the wife of the Deceased.

7.  The 5^th defendant was at all material times the Chief Executive Officer of Hang Fung Gold working under the Deceased who was the Chairman thereof.

8.  On 21 March 2005 and 5 September 2007, the 1^st and 2^nd defendants had opened Margin Securities Trading Accounts with the plaintiff whereby the plaintiff granted credit facilities to them to trade in securities listed on the Hong Kong Stock Exchange. The documentations for opening such Margin Securities Trading Accounts with the plaintiff were signed by the Deceased on behalf of both the 1^st and 2^nd defendants. The credit facilities thereby granted to the 1^st and2^nd defendants by the plaintiff was limited to $50 million.

9.  It was however a requirement that the securities put up by the 1^st and 2^nd defendants for the granting of such credit facilities from the plaintiff be maintained at a level of not less than 500% of the amount of the liabilities.

10.  The 1^st and 2^nd defendants deposited shares of Hang Fung Gold with the plaintiff as securities for such credit facilities granted to them by the plaintiff.

11.  Quite apart from the shares of Hang Fung Gold being deposited with the plaintiff as securities, on 22 March 2005, i.e. one day after the 1^st defendant had opened the Securities Trading Account with the plaintiff, both the 4^th and 5^th defendants each signed a Deed of Guarantee and Indemnity in consideration of the plaintiff granting and/or continuing to make available the advances, loans, credit facilities or financial accommodation to the 1^st defendant.

12.  It was expressly stated in both the Deeds given by the 4^th and5^th defendants that each of them, as primary obligor and not merely as surety, irrevocably and unconditionally guaranteed the due and punctual discharge by the 1^st defendant to the plaintiff of all of the 1^st defendant’s obligations which might at any time thereafter become due or owing to the plaintiff.

13.  In September 2008, the price of Hang Fung Gold shares dropped from $1.96 to $1.65 per share.

14.  On 18 September 2008, the plaintiff requested the 1^st and 2^nd defendants to meet the margin requirement in respect of their Securities Trading Account or to repay the outstanding sum owing to the plaintiff.

15.  On 26 September 2008, the Deceased died. The 1^st and 2^nd defendants did not come up with further securities, did not meet the margin call and did not reduce or repay the outstanding sum to the plaintiff.

16.  On 15 October 2008, the plaintiff exercised its power of sale and disposed of the Hang Fung Gold shares held by it as securities at the price of $0.10 per share. The net proceeds of the securities thus realized were used to set off part of the debt leaving an outstanding sum of $36,030,376.64.

17.  The plaintiff then looked to the guarantors for payment but the outstanding amount was not paid by any of the defendants.

18.  The Writ herein was issued on 14 October 2008.

19.  The Statement of Claim was served on 24 October 2008.

Defence raised by the 4^th and5^th defendants

20.  On 8 December 2008, both the 4^th and 5^th defendants filed their respective Defence.

21.  In their pleaded defence, both the 4^th and5^th defendants pleaded that they were induced to sign their respective Deed of Guarantee and Indemnity whilst acting under the influence of the plaintiff’s solicitors.

22.  Shortly before the hearing before the Master, the 4^th and 5^th defendants sought to introduce the defence of “undue influence” of the Deceased in the 4^th Affirmation of the 4^th defendant and the 2^nd Affirmation of the 5^th defendant respectively. Both those affirmations were allowed by the Master in the hearing before him.

23.  The defence of being induced to sign the Deeds whilst acting under the influence of the plaintiff’s solicitors was premised on the basis that both Deeds of Guarantee and Indemnity were signed by the 4^th and5^th defendants at the office of the plaintiff’s solicitors. That was the evidence of both the 4^th and 5^th defendants.

24.  The plaintiff’s solicitor, Ms Ho Kit Hung Josephine, being the solicitor in charge at the time has categorically refuted that the two Deeds were signed at the office of the plaintiff’s solicitors. This was supported by the evidence of Francis Leung, the credit manager of the plaintiff, that the two Deeds were handed over to the 5^th defendant on 21 March 2005, after the Deceased had signed the documents opening the security trading account. Those two Deeds were later returned to the plaintiff duly signed by the 4^th and 5^th defendants.

25.  When the two Deeds are looked at, not only is there nothing on the face of them which would indicate that they were signed or executed in a solicitor’s office, but the fact that on both the Deeds, the 4^th and 5^th defendants witnessed each other’s signatures is a strong indication to show that they were not executed in a solicitor’s office.

26.  The Master took the view that in the light of all the evidence, in particular the contemporaneous documents in the form of the two Deeds, the story given by the 4^th and 5^th defendants that the two Deeds were signed in the office of the plaintiff’s solicitor was unbelievable.

27.  Indeed at the hearing of this appeal, counsel for the 4^th and 5^th defendants did not seek to make any submission on this defence of being induced by the plaintiff’s solicitors to sign the Deeds.

28.  For all intents and purposes then, I can safely assume that this defence is no longer relied upon, at least for the purpose of seeking leave to defend the plaintiff’s claim.

29.  The submission made at the hearing by counsel for the 4^th and 5^th defendants relate only to the defence of undue influence of the Deceased.

30.  In so far as the defence of undue influence goes, it merit different consideration in so far as it relates to the 4^th and the5^th defendants due to the fact that both of them stand in very different relationship to the Deceased as well as to the 1^st defendant.

31.  The only common feature to both the 4^th and 5^th defendants in relation to the defence of undue influence is the fact that that defence was raised very late in the day in their 4^th Affirmation and 2^nd Affirmation respectively.

32.  In that respect, since the Master has seen fit to accept their late affirmations (in which that defence were raised) prior to the hearing before the Master, I am of the view that I am bound to consider that defence so raised by them.

33.  The fact that it was raised late in the day is only one factor which may show that it may not be a bona fide defence. That it was not pleaded in the pleadings is, in my view, not fatal to the present application since, if the matter goes to trial, there is still time to amend the pleadings to properly plead that defence of undue influence.

34.  I shall therefore deal with the defence of undue influence as it relates to the 4^th and the 5^th defendants separately in this judgment.

Undue influence relating to the 4^th defendant

35.  The basis upon which the defence of undue influence of the Deceased over the 4^th defendant is as follows :

(a) the Deceased was the sole shareholder of the 1^st defendant and the only person who was authorized to operate the margin account for his own benefit;

(b) the 4^th defendant was the wife of the Deceased but had no interest in the 1^st defendant, nor did she have any authority or right to operate the margin accounts;

(c) the 4^th defendant signed the Deed of Guarantee and Indemnity because she knew that the Deceased had signed similar document;

(d) the contents of that Deed was not explained to the 4^th defendant nor the risk of signing it. She was not told of her right to seek independent legal advice; and

(e) the 4^th defendant received little formal education, only up to Form 2 level in China with very limited ability to communicate or understand English. She was a submissive wife and throughout her marriage, the Deceased made all the decisions relating to the Hang Fung Group.

Undue influence relating to the 5^th defendant

36.   (a) The 5^th defendant was neither a director nor shareholder of the 1^st defendant and had no connection or interest in the 1^st defendant;

(b) the 5^th defendant was an employee of Hang Fung Group and worked under and upon the instructions of the Deceased;

(c) although the 5^th defendant was given the title as a director of the Hang Fung Group, all decisions of the Hang Fung Group were made by the Deceased;

(d) the 5^th defendant signed the Deed of Guarantee and Indemnity because the Deceased had asked her to sign it, as he had done with other similar documents; and

(e) the contents of the Deed of Guarantee and Indemnity was never explained to her.

Decision

37.  The law as to undue influence as a defence was extensively considered by Lord Browne-Wilkinson in Barclays Bank Plc. v O’Brien [1994] 1 AC 180.

38.  In his judgment in that case, Lord Browne-Wilkinson adopted the classification used by the Court of Appeal in Bank of Credit and Commerce International S.A. v Aboody [1990] 1 QB 923.

39.  By that classification Class 1 refers to where it is necessary for a claimant to prove actual undue influence.

40.  Class 2, where undue influence is presumed, is sub-divided into Class 2(A) where as a matter of law, undue influence is presumed, and Class 2(B) is where there is no relationship falling within Class 2(A) but the complainant proves the de facto existence of a relationship under which the complainant generally reposed trust and confidence in the wrongdoer, the existence of that relationship raises the presumption of undue influence.

41.  A relationship of husband and wife as well as that of an employer and employee would fall within Class 2(B) of that classification.

42.  It follows therefore that in the present case, the case of the 4^th defendant (being the wife of the Deceased) and the 5^th defendant (being an employee of the Deceased) would come within the Class 2(B) classification.

43.  In the case of Barclays Bank Plc v O’Brien, Lord Browne-Wilkinson said at page 189 :

“In a Class 2(B) case therefore, in the absence of evidence disproving undue influence, the complainant will succeed in setting aside the impugned transaction merely by proof that the complainant reposed trust and confidence in the wrongdoer without having to prove that the wrongdoer exerted actual undue influence or otherwise abused such trust and confidence in relation to the particular transaction impugned.”

44.  Applying the words cited above, seemingly it would be sufficient for the 4^th and5^th defendants in this case to raise the presumption of undue influence of the Deceased, by showing that they reposed trust and confidence in the Deceased which led to their signing the Deeds. That necessarily arise from the relationship of being the wife (in the case of the 4^th defendant) and being the employee (in the case of the 5^th defendant) of the Deceased.

45.  Lord Browne-Wilkinson then went on to consider how undue influence of the wrongdoer would impact on third parties such as the creditor bank and says at page 191 of his judgment :

“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 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.”

46.  In the present case, nothing suggests that the Deceased acted as the agent of the plaintiff.

47.  Applying those words cited above to the present case, whether or not the plaintiff bank has actual or constructive notice of undue influence presumed upon the 4^th and/or5^th defendants by the Deceased will be a question of fact. That can only be resolved after hearing the evidence including cross-examination.

48.  When the Master decided this matter, he reached the conclusion that he did for the reason given in paragraphs 39 and 40 of his written judgment in which it was stated :

“39. I ask myself the question: ‘Is there any evidence that justifies the conclusion that the two Deeds of Guarantee and Indemnity executed by the two Defendants were procured by undue influence of the Deceased?’

40. I find none whatsoever. I dismiss their defence of undue influence.”

49.  It is not easy to comprehend fully what the Master meant by that.

50.  If the Master was saying that the evidence as it stands at present cannot raise the presumption of undue influence by the Deceased, he must be wrong.

51.  If he was not saying that the presumption of undue influence cannot arise from the evidence, then it is for the plaintiff to rebut that presumption and it must be wrong of the Master to make a finding of fact on affidavit that the presumption had been rebutted, if that was what he meant.

52.  Clearly there is here a triable issue of fact which can only be determined after trial.

53.  Whether or not each of the 4^th and 5^th defendants will ultimately succeed on the defence of undue influence of the Deceased enabling them or either of them to set aside the Deed is quite another matter, but that there should not be a mini trial on affidavit at this stage.

54.  For these reasons the appeal is allowed and the order of Master C. Chan set aside.

55.  In place thereof, there will be unconditional leave to the 4^th and5^th defendants to defend the claim subject to the 4^th and 5^th defendants making an application to amend their respective Defence within 21 days to include the defence of undue influence in their pleadings.

Costs

56.  The costs order made by the Master below is also set aside.

57.  There will be a costs order nisi that the costs of this appeal and the costs of the application and the hearing before the Master be paid by the plaintiff to the 4^th and 5^th defendants in any event.

58.  There will be certificate for only one counsel both for this appeal and the hearing below.

Appeal by the Plaintiff to Court of Appeal dismissed. Please refer to CACV278/2009 dated 6 May 2010

HCA 1995/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1995 OF 2008

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(By Order to carry on proceedings dated 7^th January 2009)

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J U D G M E N T

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1.  This is an application by the Plaintiff under Order 14 for summary judgment against all the Defendants for a sum of HK$36,030,376.64 together with interest thereon.

Facts of the Case

2.  The Plaintiff is a limited company carrying on the business of stock and share brokerage and marginal financing.  Both the 1^st and 2^nd Defendants are British Virgin Islands companies formerly operated by Mr. Lam Sai Wing (“the Deceased”) who passed away on 26 September 2008.  The 4^th Defendant was his wife and the 5^th Defendant was an employee of a publicly listed company referred to in this case as Hang Fung Gold.

3.  The 1^st and 2^nd Defendants opened margin accounts for buying and selling of shares operated by the Deceased with a facility limit of HK$50 million.  It is a requirement that the value of the securities for the facility must be maintained at a level of no less than 500% of the amount of liabilities (“the margin requirement”).  The two Defendants deposited shares of Hang Fung Gold as securities.  The 2^nd Defendant, the Deceased, the 4^th Defendant and the 5^th Defendant, each of them signed a Deed of Guarantee and Indemnity for the purpose of those margin accounts.  Their liabilities are specified not merely as guarantors but also as primary obligors.

4.  Because of the sudden downturn of share prices in Hong Kong, the price of each Hang Fung Gold share dropped drastically from $1.96 to $1.65 on 18 September 2008.  The Plaintiff asked the Defendants to meet the margin requirement or to repay the outstanding sum owing to the Plaintiff.  On 26 September 2008 Lam Sai Wing passed away.  The Defendants did not come up with further securities to meet the margin call or reduce the outstanding sum.

5.  On 15 October 2008 the Plaintiff exercised the power of sale and disposed of the Hang Fung Gold shares at a price of HK$0.1 per share.  After using the net proceeds of sale to set off part of the debt, the margin accounts remain to have an outstanding sum that the Plaintiff now claims.  The Defendants did not pay it.  The Plaintiff commenced its present proceeding and Messrs. K.C. Ho & Fong acknowledged receipt of service on behalf of all the Defendants.  The Plaintiff took out this Order 14 application.

Defence of the 1^st & 2^nd Defendant

6.  The 1^st and 2^nd Defendant had not filed their defence but a draft of which can be found in an exhibit to the 2^nd Affirmation of the 4^th Defendant in her capacity as a director of the 1^st Defendant and also as the wife of the Deceased who was the sole shareholder and director of the 2^nd Defendant.  Essentially it raises two issues: (a) the Plaintiff was acting in bad faith by selling the Securities at undervalue in a non arm’s length transaction and (b) it was unconscionable for the Plaintiff to increase the interest rate from SCB Prime Rate plus 5.5% per annum to 2.5% per month.

7.  At the hearing Messrs. K.C. Ho & Fong, though still solicitors on record for the 1^st and 2^nd Defendant, through Mr. K.M. Chong of counsel, informed the court that they had received no instruction from the 1^st and 2^nd Defendant.

Bad Faith

8.  The events leading to the sale of the Hang Fung Gold shares are generally not in dispute.  As stated earlier, the price of Hang Fung Gold shares suffered a significant drop on 18 September 2008.  The Plaintiff made a margin call.  On 26 September Lam Sai Wing passed away.  On 29 September 2008 Hang Fung Gold made a public announcement that had an adverse effect on its share price.  Trading of the shares at the stock exchange was suspended on that day.  On 30 September 2008 trading resumed and the price was further dropped to HK$0.65 per share.  Trading was suspended again at 2.30 pm and has not been resumed since then.

9.  There had been negotiation between the Plaintiff and the 4^th Defendant as the person representing the estate of the Deceased.  On 6 October 2008 newspapers reported that police had launched an investigation into the affair of Hang Fung Gold.  On the same day the Plaintiff decided to exercise the power of sale by sending out over 300 letters inviting bids for the Collaterals i.e. the Hang Fung Gold shares by way of private placement.  Only one responded and the shares were sold on 15 October 2008.

10.  According to Clause 3.8 in the Schedule to the Client Agreements signed by the 1^st and 2^nd Defendant, the Plaintiff has power to sell the securities in case of default.  Having considered the circumstances mentioned above, I find that the Plaintiff had committed nothing wrong in exercising the power of sale and disposed of those shares to a third party, the only person who bid for them.

Unconscionable interest rate

11.  I agree that there was a significant increase in the interest rate from 5.5% per annum over SCB prime rate (i.e. about 10.5% per annum) to 2.5% per month (i.e. 30% per annum).  However, we have to consider that as the 1^st and 2^nd Defendant failed to meet the margin call it was an event of default.  According to Clause 2.6 the Plaintiff could in its discretion from time to time by written notice specify the rate of interest payable by the Defendants.  I see nothing wrong with the increase.

12.  For the reasons above mentioned I find that the 1^st and 2^nd Defendant do not have any defence to the Plaintiff’s claim.

Defence of the 3^rd Defendant

13.  The 4^th Defendant was acting for the estate of Lam Sai Wing, the Deceased and in that capacity she was not legally represented.  At the hearing I invited Madam Chan to address me but she made no submission.  But, in her 3^rd Affirmation the 4^th Defendant exhibited a draft Defence and Counterclaim of the 3^rd Defendant, which is in effect substantially the same as that of the 1^st and 2^nd Defendant except with an additional issue.  It was intended to plead: “The Plaintiff was estopped from selling the Securities by reason of an express/implied representation and/or promise of the Plaintiff, made to the 4^th Defendant (representing the estate), with the intention that the 4^th Defendant should act on such representation and/or promise, which the 4^th Defendant did, in fact do.”

14.  The representation arose out of a meeting held on 7 October 2008 between the 4^th Defendant in that capacity and the senior management of the Plaintiff, among which was a certain Mr. Lee.  The conversation in Chinese in verbatim was as follows: The 4^th Defendant requested: “唔好將股票拋出街”.  Mr Lee’s reply was: “好啦” and also said: “免得人家話我欺負孤兒寡婦”.

15.  The 4^th Defendant’s request could be subject to at least two interpretations.  The first one as relied on by the 3^rd Defendant is that the Plaintiff agreed not to sell the shares for the time being.  The second one is that the shares were not to be sold in the open market at the stock exchange.  If it is the second one, the method used by the Plaintiff i.e. by private placement is not in contravention of the representation.

16.  Assuming the first interpretation was the correct one, the subsequent correspondence did not bear that out.  On 9 October 2008 the Plaintiff through its solicitors indicated that it would sell the shares and requested for immediate reply.  The then solicitor firm representing the 3^rd Defendant did not raise that issue in its letter of reply and made no mention that there was such representation and assurance or agreement.  Instead, it requested for more time to put in more collaterals.  If there were such assurance and representation or agreement, the solicitors firm would have mentioned it and would have taken appropriate legal action to stop the sale as the Plaintiff did not agree to the request.

17.  I agree with Mr. Patrick Fung S.C. for the Plaintiff that the terms of the so-called assurance, representation or agreement were so vague that I doubt it is enforceable.

18.  I find that the 3^rd Defendant’s defence is incredible.  I give judgment against the 3^rd Defendant.

Defence of the 4^th and 5^th Defendant

19.  Each of them has filed her defence respectively.  They raised all the issues raised by the 1^st and 2^nd Defendant as mentioned above and in addition, the allegation of undue influence.

20.  The point first appears in the defence in the following way: They were “induced to sign the Deed of Guarantee and Indemnity whilst acting under the influence of the Plaintiff’s solicitors”.

21.  Shortly before the hearing, the two Defendants sought to introduce the 4^th Affirmation of the 4^th Defendant and the 2^nd Affirmation of the 5^th Defendant respectively asserting that they signed the Deeds under the undue influence of the Deceased.  For the sake of completeness, I allowed the two Affirmations to be filed and served and to be included for consideration in this Order 14 application.

Solicitors’ Inducement

22.  In their defences both Defendants pleaded in great length how they attended the offices of Messrs. P.C. Woo & Co and under what circumstances they executed the two Deeds of Guarantee and Indemnity.  They alleged that the staff of the solicitor firm did not explain the documents to them.  Neither did the staff advise them that they were entitled to seek independent legal advice.  The two Defendants were simply being asked to execute the documents.  For these reasons the Defendants claimed that they were induced to sign the Deeds whilst acting under the influence of the Plaintiff’s solicitors.

23.  The Plaintiff filed an Affirmation of Ms. Ho Kit Hung Josephine to refute such allegations.  Ms. Ho was the solicitor in charge of the whole transaction.  She set out the facts and gave various reasons, which are very convincing, to show that the Deeds were not signed at the solicitors office.

24.  Mr. Leung King Yuen in his 3^rd Affirmation described how the two Deeds got into the hand of the 5^th Defendant.  He stated that on 21 March 2005 Mr. Francis Leung, a credit manager of the Plaintiff, attended and brought a number of documents to the Defendants’ office.  After signing the documents by the Deceased, Mr. Lee left the two Deeds with the 5^th Defendant to be signed by her and the 4^th Defendant.  Later, the two forms were signed and dated 22 March 2005 with the 4^th and 5^th Defendant witnessing the signatures of each other.

25.  Mr. Chong of counsel for both Defendants did not make any submission on whether the two Deeds were signed at the solicitors’ offices.  He said that for the sake of this application assuming that they were signed at the Defendants’ office, the facts remain the same:

(a)  The Deceased was the sole shareholder of the 1^st Defendant and the only person who operated the margin accounts for his own benefit.

(b) Neither the 4^th nor the 5^th Defendant had any interest in the 1^st Defendant.  Nor did they have the right to operate the margin accounts.

(c)  They signed the Deeds because they knew that the Deceased had signed it.

(d) No one interpreted the contents of the Deeds to them or explained the risks of signing such documents.

(e)  They were not informed of their right to seek independent legal advice.

(f)  In the case of the 4^th Defendant, she received very little formal education only up to the level of Form 2 in China with very limited ability to communicate with other in English.  She was a submissive wife and throughout her marriage the Deceased made all the decisions relating to Hang Fung Group.  She did not dare to raise any contrary view.

(g)  In the case of the 5^th Defendant, she had worked for the Deceased since 1991.  She knew the character of the Deceased; she dared not comment or express any view on what the Deceased said or acted.  She was very loyal, faithful and obedient to the Deceased.  The Deceased was from Chiu Chow, a very traditional and conventional boss, he was in charge of all the operations, gave instructions and expected all his colleagues to follow them.  The 5^th Defendant had no choice but to carry them out.

26.  Both Defendants seemed to have abandoned the argument that the Deeds were signed at the solicitor’s office.  Even if not, comparing and considering the evidence of Ms. Ho, the solicitor in charge, buttressed by the 3^rd Affirmation of Leung King Yuen against the allegations set out in the Defences and the Affirmations of both Defendants, I find that the story given by the Defendants was unbelievable.  There is no explanation given why they witnessed each other’s signature if the documents were signed in the presence of a solicitor.

Undue Influence of the Deceased

27.  Both Defendants did not tell us how the Deceased actually influenced them to sign the Deeds.  The only evidence I can find is in paragraph 12 of the 4^th Affirmation of the 4^th Defendant and also in paragraph 10 of the 2^nd Affirmation of the 5^th Defendant; both said in the same way:

“I verily affirm that I signed the document titled ‘Deed of Guarantee and Indemnity’ dated 22^nd March 2005 because my late husband (in case of the 5^th Defendant ‘my late boss’) had signed similar document.”

28.  Would this fact together with the facts pointed out to us by Mr. Chong support a case of undue influence as a defence?

Law

29.  Both counsel relied very heavily on the case of Royal Bank of Scotland plc v. Etridge (No. 2) [2002] 2 AC 773.  Different parts have been cited to me in length.  The most helpful passage is found in the speech of Lord Scott of Foscote on page 841 at paragraph 158 discussing the presumption in Class 2B cases after referring to a passage in O’Brien:

“158  In my respectful opinion, this passage, at least in its application to the surety wife cases, has set the law on a wrong track.  First, it seems to me to lose sight of the evidential and rebuttable character of the Class 2 presumption.  The presumption arises where the combination of the relationship and the nature of the transaction justify, in the absence of any other evidence, a conclusion that the transaction was procured by the undue influence of the dominant party.  Such a conclusion, reached on a balance of probabilities, is based upon inferences to be drawn from that combination.”

30.  In other words, I should not simply look at the relationship alone.  I have to consider the nature of transaction and all other evidences.  If there are no other evidences, by balance of probabilities I have to ask whether the conclusion of undue influence could be reached.  It is not an automatic conclusion.

31.  I believe such principle of law is applicable to the employer and employee relationship in the case of the 5^th Defendant.

The 4^th Defendant

32.  It is not disputed that the 4^th Defendant was the Deputy Chairman of Hang Fung Gold, a publicly listed company.  She has had vast experience in jewellery industry.  She had been handling the business of Hang Fung Gold in China.  She holds certain high positions in public organizations like being Committee Member of the Chinese People’s Political Consultative Conference of China Committee of ShangDong and JiNan respectively and executive committee member or director of difference associations in their trade.

The 5^th Defendant

33.  The 5^th Defendant is the Chief Executive Officer of Hang Fung Gold.  She joined the Group in 1990 and had been assisting the Deceased and his wife in handling all documentation.  She holds a Bachelor degree from a famous university in Canada and a Diploma from a reputable gemological association.

Both

34.  Both of them drew substantial sums as remunerations.  The public place their trust and confidence in them to look after the affairs of the public company.  No one would have expected that they did not exercise their own independent judgment in handling their own affairs, and claimed that they just blindly followed the acts of the Deceased.

35.  Even if it were so, they themselves chose to ignore the risks and the legal consequences that would follow by signing the Deeds.  I find that the Plaintiff owed them no duty to advise them that they should seek independent legal advice.

Decision

36.  I rely my decision on another passage of Lord Scott’s speech in the same case on page 842 at paragraph 159:

“For my part, I would assume in every case in which a wife and husband are living together that there is a reciprocal trust and confidence between them.  In the fairly common circumstance that the financial and business decisions of the family are primarily taken by the husband, I would assume that the wife would have trust and confidence in his ability to do so and would support his decisions.  I would not expect evidence to be necessary to establish the existence of that trust and confidence.  I would expect evidence to be necessary to demonstrate its absence.  In cases where experience, probably bitter, had led a wife to doubt the wisdom of her husband’s financial or business decisions, I still would not regard her willingness to support those decisions with her own assets as an indication that he had exerted undue influence over her to persuade her to do so.  Rather I would regard her support as a natural and admirable consequence of the relationship of a mutually loyal married couple.  The proposition that if a wife, who generally reposes trust and confidence in her husband, agrees to become surety to support his debts or his business enterprises a presumption of undue influence arises is one that I am unable to accept.  To regard the husband in such a case as a presumed ‘wrongdoer’ does not seem to me consistent with the relationship of trust and confidence that is a part of every healthy marriage.”

37.  Such remarks could equally and fairly apply to the employer and employee relation.

38.  In support of my view I would like to refer to what Lord Scott said in a Court of Final Appeal decision in the case Li Sau Ying v Bank of China (Hong Kong) Ltd (FACV No. 9 of 2004) where he expressed his view about the so-called presumption of undue influence in Class 2B cases in paragraph 30 of the judgment:

“30.  The strong message from Etridge therefore is that, particularly in Class 2B cases, concentration on a so-called presumption of undue influence is likely to detract from the real issue, namely, whether the evidence justifies a conclusion that the impugned transaction was procured by undue influence.”

39.  I ask myself the question: “Is there any evidence that justifies the conclusion that the two Deeds of Guarantee and Indemnity executed by the two Defendants were procured by undue influence of the Deceased?”

40.  I find none whatsoever.  I dismiss their defence of undue influence.

Judgment

41.  For the above reasons I enter judgment against all Defendants for the sum of $36,030,376.64 with interests thereon at the rate of 30% per annum from 14 October 2008 until judgment and thereafter at judgment rate until full payment.

42.  I make an order nisi as to costs that the Defendants pay the Plaintiff’s costs of the whole action including all costs reserved and the costs of the Order 14 application together with certificate for one counsel comparable to the experience, seniority and standing of Mr. K.M. Chong.

43.  I fix 29 May 2009 at 9:30 a.m. for hearing of the application for variation of the order nisi, if any, and also for assessment of the Plaintiff’s costs with half an hour reserved.  The Plaintiff is required to prepare, file and serve a statement of costs before the hearing.  Counsel is excused from attending such hearing.