CACV mortgage loan by benbenzhou


									                                                              CACV 148/2003

                     IN THE HIGH COURT OF THE
                          COURT OF APPEAL
                     CIVIL APPEAL NO. 148 OF 2003
              (ON APPEAL FROM HCMP NO. 2242 OF 2000)
                 WA LEE FINANCE COMPANY LIMITED                 Plaintiff
                  STARYORK INVESTMENT LIMITED                   1st Defendant
                  GOLAN LIMITED trading as EMPEROR              2nd Defendant
                 SEAFOOD RESTAURANT (明皇海鮮酒家)
                 KAN SHI LEUNG trading as LEUNG KEE             3rd Defendant
                          STORE (良記士多)
                    NGAN YIM HA trading as YU KEE               4th Defendant
Before: Hon Rogers VP, Le Pichon JA and Sakhrani J in Court
Date of Hearing: 1 June 2004
Date of Judgment: 1 June 2004
Date of Handing Down Reasons for Judgment: 17 June 2004

                       REASONS FOR JUDGMENT

Hon Rogers VP:

1.          This is an appeal from a judgment of Deputy High Court Judge To
given on 13 May 2003. By the judgment the judge dismissed the plaintiff’s
                                      -   2   -

claims against the 1st, 3rd and 4th defendants and he ordered the plaintiff to pay
$1 nominal damages for duress. The judge also held that the mortgage made
between the plaintiff and the 1st defendant, the rental assignment, the rental
assignment notice and the guarantee made by Mr Kan Choi Ming (“Mr Kan”)
dated 22 March 1999 were void and of no legal effect and ordered the vacation
of the registration of those documents. The 1st and 3rd defendants were
awarded their costs on an indemnity basis.

2.           By the time this appeal came to be heard the plaintiff had
abandoned all grounds of appeal save that the plaintiff was entitled to be
subrogated into the Hongkong and Shanghai Banking Corporation Limited’s
(“HSBC’s”) position as mortgagee of the premises which form part of the
subject matter of the action to the extent of $9,050,000 and the payment of
$9,050,000 together with interest accruing due to the plaintiff under the terms of
the HSBC mortgage. The 1st defendant cross-appealed on the basis that it
should be entitled to repayment of sums paid to the plaintiff both by itself and
by the tenants of its properties that were the subject of these proceedings.

3.           At the conclusion of the hearing of this appeal, this court dismissed
both the appeal and the cross-appeal and made an order of costs to follow both
events. In addition, paragraph 4 of the order of the judge below had provided
that the registration of the mortgage and the assignment should not be vacated if
a notice of appeal were to be filed within one month of the judgment.
Mr Horace Wong SC, on behalf of the plaintiff, did not resist an order that the
vacation of the registrations ordered under paragraph 4 should now take effect.


4.           In a detailed and careful judgment the judge set out the background
to the case and made specific findings of fact.   When the appeal was launched
                                      -   3   -

some of those findings were challenged but, as already mentioned, by the time
this appeal came to be heard there was no longer any appeal as to the judge’s
findings of fact. It suffices, therefore, to give a summary of the facts found by
the judge.

5.           The 1st defendant is a company controlled by Mr Kan. Although
Mr Kan was primarily concerned with the development of small village houses,
referred to as “Ting houses”, in December 1996, the 1st defendant purchased
some shop units on the ground floor of Fortune Centre in Yuen Long for
$48 million. Before completion of the purchase it was able to find purchasers
for some of the units and, as a result of selling on those units as confirmor, it
only had to pay $6.432 million, which, in effect, constituted the purchase price
of the remaining units. Completion took place on 30 April 1997. The units
which the 1st defendant acquired were referred to in the judgment as the “1 st Set
of Property”.

6.           Two matters may be noted in respect of the 1st Set of Property.
The Commissioner of Inland Revenue valued it for stamp duty purposes as
being worth $21 million as at 23 December 1996. In the second place Mr Kan
spent a great deal of money in refurbishing the whole or at least part of the
1st Set of Property so that it could be used as a restaurant. That matter was
important because the judge accepted Mr Kan’s evidence that he did not wish to
mortgage the 1st Set of Property because he did not wish to lose the
refurbishment costs should the property ever have to be sold by a mortgagee.

7.           In August 1997, no doubt buoyed by the success of the purchase in
respect of the 1st Set of Property, the 1st defendant contracted to purchase the
whole of the 1st floor and two shop units on the ground floor of Fortune Centre
for $35 million. This was referred to as the 2nd Set of Property. Two deposits
of $3.5 million each were paid and the completion was due to take place in
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November 1997. Since the 1st defendant did not have the funds to complete,
an extension was obtained to 6 February1998 and then a second extension to
20 February 1998 subject to an additional part payment of a further $7 million.
In addition, the 1st defendant obtained banking facilities of $10 million from the
HSBC secured by a mortgage of what Mr Kan thought was the 2nd Set of
Property only (the “HSBC Mortgage”); but in fact both the 1st and 2nd Sets of
Property were mortgaged to the HSBC.

8.           It was at this stage that Mr Tam Ming Tat (“Mr Tam”) appeared on
the scene. Mr Tam was a consultant employed by the plaintiff. The judge
described him as being a very sophisticated businessman, with lawyers and
architects at his finger tips. Mr Kan met Mr Tam through a business friend,
Chai Chai. Mr Tam got to know of Mr Kan’s need for finance; he approached
Mr Kan and offered the 1st defendant facilities of $10 million at 100% interest
per annum for a term of one year, using what Mr Kan thought to be the 2nd Set
of Property as security. The loan was to be provided by Snyder Holdings
Limited (“Snyder”) which was a British Virgin Islands company. The judge
held Snyder to be no more than a front for the plaintiff.   As the 2nd Set of
Property had been mortgaged to HSBC, a sale and purchase agreement in
respect of the property between Snyder and the 1st defendant for completion
after one year was to be used as security.    The agreement included a provision
that the 1st defendant could avoid the sale by paying an additional $10 million,
thus in effect amounting to the 100% annual interest. Mr Kan agreed and was
paid $6 million on 14 February 1998, with which he completed the purchase of
the 2nd Set of Property on 20 February 1998. On the following day, i.e.
21 February 1998, Mr Kan executed the formal sale and purchase agreement of
both Sets of Property with Snyder (“the Snyder Agreement”). On 2 and
7 April 1998, the Plaintiff paid Kan two sums of $2 million, making up the
$10 million loan.
                                     -   5   -

9.           Although the Snyder Agreement was expressed as a sale and
purchase agreement, the judge had no difficulty in coming to the conclusion that
the Snyder Agreement was no more than an agreement for a loan.        What is
perhaps equally important is the finding, referred to above, whereby the judge
came to the conclusion that Snyder was, in effect, simply the plaintiff in
disguise. At the trial Mr Tam produced an agreement between the plaintiff and
Snyder which purported to be a loan which in turn was said to finance the loan
from Snyder to the 1st defendant. The judge also held that the purported loan
to Snyder and the documents and authorisations which were produced were
sham documents which the plaintiff had “conveniently fabricated”.

10.          Mr Tam had given Mr Kan a cheque for $6 million on 14 February
1998, that had been drawn on the plaintiff’s account. Towards the end of
March 1998 Mr Tam suggested that Mr Kan should draw down another
$2 million on the basis of the Snyder Agreement. In consequence on 2 April
1998 Mr Kan was given a cheque for $2 million, again drawn on the plaintiff’s
account. As part of the transaction Mr Kan gave Mr Tam a cheque for
$100,000 which had been demanded as a handling fee. The same thing
happened on 7 April 1998. The two cheques which Mr Kan had given Mr Kan
were paid into bank accounts of Well Chest Trading Ltd and Chinko Ltd
respectively. These companies apparently share the same address as the
plaintiff in the Emperor Group Centre, Hennessy Road.

11.          As the judge explained in his judgment, Mr Kan was content that
the 1st defendant should borrow money at what appeared to be extravagant
interest rates. He had previously made considerable profits on the Ting houses
and the judge concluded from the evidence before him that Mr Kan was
confident that his fortunes would be restored and he would again be able to
make substantial profits. Matters did not, however, turn out in Mr Kan’s
                                       -   6   -

favour. The property market did not revive. Instead, Mr Kan faced
increasing difficulties. The judge found that Mr Kan was even driven to
transferring his shares in the 1st defendant in order to avoid his creditors.
During 1998 Mr Kan had to borrow money on other occasions but those are not
significant as regards the issues in this appeal.

12.          The judge held that from December 1998 Mr Tam had visited
Mr Kan’s office and had met him at the Emperor Seafood Restaurant in Yuen
Long and had reminded Mr Kan of the necessity of repaying the $10 million
loan. At that stage Mr Kan was still under the impression that only the 2nd Set
of Property had been the subject of the Snyder Agreement. But when the
documents were faxed to him he realised that both sets of properties had been
included in that agreement. Mr Kan gave evidence that towards the end of
December 1998 and early January 1999 he began to be harassed and threatened.
On one occasion a group of men went to his mother’s home which was in the
same village as Mr Kan’s home. They said that they were looking for Mr Kan
and threatened his mother that if they did not find Mr Kan her family would be
in trouble. On the following morning Mr Kan’s secretary, a Miss Chow, found
that glue had been put into the keyhole of the lock on the door of the
1st defendant’s office. Whilst the judge did not accept the plaintiff’s counsel’s
submission that those acts could have been done by dissatisfied buyers of Ting
houses, he drew no adverse inference against the plaintiff and made no finding
that the plaintiff or Mr Tam had been responsible for those acts.

13.          There then followed a series of events which can be briefly
summarised on the basis that Mr Tam was doing everything possible first to
force Mr Kan to cause the 1st defendant to honour of the Snyder Agreement and
finally, by threats and violence primarily against Mr Kan, to force the
1st defendant to take the loan which was the subject of this action. The judge
                                       -   7    -

held that the purpose and intent of Mr Tam had been to convert the illegal
Snyder loan into a lawful mortgage. Part of Mr Tam’s tactics had been to
instruct solicitors, purportedly to act on behalf of the 1st defendant, but in reality
to act on Mr Tam’s own instructions.

14.          The events started on 22 January 1999 when a firm instructed by
Mr Tam, Y.T. Szeto & Co., wrote to the HSBC to inquire about the amount of
the outstanding balance under the HSBC mortgage which would have to be paid
to redeem both sets of properties and also requesting that the title deeds of the
properties should be forwarded to them.        By 2 February 1999, Mr Kan had
instructed Chan & Tsu, who have remained the 1st defendant’s solicitors, to
write to Y.T. Szeto & Co. informing them that they had instructions to act on
behalf of the 1st defendant and requesting that all title deeds and documents and
relevant correspondence should be forwarded to them without any further delay.
The importance of Chan & Tsu in the events which took place was that as early
as 9 February 1999 they had written to Henry Fok & Co., who were solicitors
instructed on behalf of Snyder, explaining, for reasons which the judge held to
be correct, that the Snyder loan was illegal.

15.          On 20 February 1999 a writ was issued on behalf of Snyder against
the 1st defendant seeking specific performance of the Snyder agreement. A
copy of that writ was faxed to the plaintiff, a matter the significance of which
was not lost on the judge by any manner of means. It would appear that
neither the 1st defendant nor Mr Kan were cowed by the writ. As the judge
held, they were ably advised by Chan & Tsu who returned the title deeds to
HSBC’s solicitors, Johnson, Stokes & Master. As the judge held, the parties
were then in deadlock. Around 4 and 5 March 1999, Mr Tam faxed a draft of
the plaintiff’s loan agreement to various firms of solicitors for advice. On
8 March 1999, Mr Tam faxed the final version of the draft agreement to the
                                       -   8   -

1st defendant. Mr Kan in turn faxed it to Chan & Tsu for their advice. Two
days later Johnson, Stokes & Master informed the solicitors that had been
instructed on behalf of the plaintiff that the 1st defendant did not agree to
dispose of any of the properties or to obtain refinancing.

16.          It was on 12 March 1999 that what, in my view, are the crucial
events started. In brief, as the judge held, Mr Kan was kidnapped by Mr Tam
and three other men one of whom was a known triad. They took him to an
office of a finance company that was owned by a Mr Cheung, who was one of
the people behind the plaintiff, and there he was forced to sign a loan agreement
for $29 million with the plaintiff.   He was told that he would not be allowed to
leave unless he did sign it. Since Mr Kan did not have the 1st defendant’s
company chop with him, one of the men took the documents back to Mr Kan’s
office to have the company chop affixed to it. Before Mr Kan was released,
Mr Tam told him that he and a codirector would have to attend a solicitors’
office to sign other documents and that two men would be stationed in
Mr Kan’s office “to keep an eye on him”.

17.          The judge considered the evidence both from the plaintiff and the
defendants in this respect very carefully.     He came to the conclusion that
Mr Kan’s version was to be believed. Indeed, not only were two men
stationed in Mr Kan’s office between 9:30 am and 6 pm every day between
13 March and 22 March 1999, but the office staff became afraid. Quite
significantly Miss Chow asked to resign after about a week.

18.          In addition to that, Mr Kan arranged for another solicitor, a
Mr Clive Chan of Ng, Tam, Ko & Chan, to act for the 1st defendant in the action
which had been commenced on behalf of Snyder.          The judge described Clive
Chan graphically as a puppet dancing to the tune of Mr Tam.        This is an aspect
which the Law Society may need to enquire into.        A notice of change of
                                      -   9   -

solicitors was filed on 17 March 1999. On 22 March 1999 Mr Kan, as the
judge held, instructed by Mr Tam, attended the office of the solicitors acting on
behalf of the plaintiff with the 1st defendant’s chop and seal. When he arrived
he was told by Mr Tam that the loan had to be increased to $29.5 million to
allow for solicitors’ fees and that the surplus would be paid to him. Mr Kan
and the fellow director of the 1st defendant executed the loan agreement
provided by the plaintiff, a deed of mortgage in respect of both sets of
properties, a rental assignment, a rental assignment notice and a personal
guarantee for the loan. Mr Kan also signed a Cancellation Agreement in
respect of the action which had been brought on behalf of Snyder. Clive Chan
arrived afterwards and signed the Cancellation Agreement and the Consent
Summons terminating the action brought by Snyder. Mr Kan was given a
cheque for the balance of $371,650.

19.          The judge had no difficulty in coming to the conclusion that
Mr Kan had signed the 1st defendant’s loan agreement with the plaintiff and
signed the various documents on 22 March 1999 as a result of the threats which
Mr Tam had made against him on 12 March 1999 and renewed every day by
having the two men stationed in his office. To describe this as duress is, in my
view, a euphemism.     It was thuggery with menaces. No physical harm
appears to have been occasioned to Mr Kan, but then he complied with all
demands that were made.     One of the documents which was signed on
22 March 1999 was a letter addressed to the plaintiff and signed by Mr Kan on
behalf of the 1st defendant and that reads as follows:
                                         -   10   -


                           Re : Shops Nos. 3-10, 62-71, 74 and A1 on the
                               Ground Floor and the whole of the First Floor,
                               Fortune Centre, Yuen Long, New Territories

                          We, the undersigned, hereby authorize and direct you to
             release the mortgage loan for HK$29,500,000.00 in respect of the
             above property by issuing cheques in the following manner:-

                     1.    Snyder Holdings Limited                  20,000,000.00
                     2.    Messrs. William W.L. Fan & Co.                25,000.00
                     3.    Messrs. Ng, Tam, Ko & Chan                    10,000.00
                     4.    The Hongkong & Shanghai Banking            9,050,000.00
                           Corporation Limited for the a/c of
                           Staryork Investment Limited
                     5.    Messrs. Johnson Stokes & Master                3,350.00
                     6.    Messrs. Laurence Pang & Co.                   40,000.00
                     7.    Staryork Investment Limited                  371,650.00

                                                         TOTAL:     29,500,000.00

                         We further agree that we shall not hold you responsible for
             any damages, losses and claims that we may suffer as a result of the
             aforesaid authorization under our direction and request.

                          Dated this 22nd day of March 1999.

                                         For and on behalf of
                                         STARYORK INVESTMENT LIMITED
                                                         Authorised Signature(s)
                                         STARYORK INVESTMENT LIMITED ”

20.          The judge not only held that the Snyder loan had been illegal but
also held that loan agreement with the plaintiff was void. He then went on to
consider the question of whether the plaintiff was entitled to be subrogated to
the rights of HSBC in respect of the mortgage. After disposing of other
arguments he said:
                                         -   11   -

             “118. However, in exercising my discretion to grant or to withhold
             this remedy from the Plaintiff, I cannot turn a blind eye to the illegality
             surrounding the Wa Lee Loan Agreement. In seeking this equitable
             remedy, the Plaintiff must come with clean hands. If a person invests
             clean money in an illegal enterprise, the money is mixed with his
             illegal investments and becomes tainted with the illegality. The
             Plaintiff’s hands have been badly soiled. The $9.05 million paid to
             discharge the Hong Kong Bank Mortgage was part of the illegal design
             to convert the security under the illegal and unenforceable Snyder
             Agreement into an enforceable mortgage. That payment was badly
             tainted with illegality. If as a matter of law, because of illegality the
             Plaintiff may not enforce a security, how can he call upon equity to
             save him as regards part of that security from the consequence of what
             he did as part of his illegal design? Even though the 1st Defendant
             has been enriched and unjustly so if subrogation is withheld from the
             Plaintiff, public policy is strongly against granting the relief. The
             maxim ex turpi causa non oritur actio applies. It is better that a loan
             shark be harshly deterred than to be assured that if the court finds
             against it, it may still recover part of its investment in its illegal
             enterprise. As between harshness to the Plaintiff and unjust
             enrichment to the 1st Defendant, the latter choice is certainly the lesser
             of the two evils.

             119. The same conclusion can be reached as follows. Subrogation
             is an equitable remedy. The equitable charge created by the Plaintiff
             discharging the Hong Kong Bank Mortgage has momentary existence
             only because the intention of the Plaintiff and the 1st Defendant was to
             create a legal charge over the two Sets of Property. Indeed, as soon
             as the equitable charge was created, it merged into the legal charge
             which was unenforceable. Accordingly, the Plaintiff’s claim for
             subrogation must fail.”

21.          Whilst not in any way detracting from the conclusion to which the
judge arrived and his basis for doing so, I would go further. The discharge of
the HSBC mortgage was part and parcel of an agreement which had been forced
upon the 1st defendant by threats of physical harm against Mr Kan. To my
mind, it is unthinkable that a court would give an equitable remedy in
circumstances where any rights which had been acquired as a result of violence
or even threats of it. The plaintiff paid the $9,050,000 to the HSBC in
purported reliance on a document signed because of threats of serious violence.
If a party uses threats of violence, not only does that negative consent on the
                                       -   12   -

part of the other party, but a court cannot countenance giving any rights, let
alone equitable rights, alleged to arise out of it.

22.          I would add that the judge did take into account the fact that the
1st defendant benefited from the payment of $9,050,000 to the HSBC when
awarding Mr Kan only $1 damages in respect of duress. Of course, there is a
distinction between Mr Kan and the 1st defendant and, furthermore, one does
not know the amount of damages that the judge would have awarded Mr Kan on
the basis of the duress if there were no benefit which he derived indirectly
through the 1st defendant.

The cross-appeal

23.          At the trial the 1st defendant raised a number of matters by way of
counterclaim, in addition to the claim by Mr Kan in respect of duress. The
1st defendant claimed recovery of the two payments of $100,000 which have
been referred to in paragraph 10 above. In addition the 1st defendant claimed
recovery of the amounts which have been paid in both December 1998 by
Mr Kan to Mr Tam when Mr Tam was pressing him in respect of the Snyder
loan. Those payments totalled approximately $300,000. There was then also
a claim for $2,275,000 which was rent which had been paid by one of the
tenants to the plaintiff pursuant to the rental assignment and the notice of rental
assignment which formed part of the agreement signed in March 1999.

24.          The judge disposed of these claims quite shortly. In respect of the
claims in respect of the two sums of $100,000 which had been paid by the
plaintiff as handling fees under the Snyder Agreement, the judge said that
Mr Kan had knowingly and willingly caused the 1st defendant to take the illegal
loan and enter into the void loan agreement and since that agreement was
unenforceable by either party, the claim for the return of the two sums had to be
                                     -   13   -

dismissed. Mr Mumford SC, on behalf of the 1st defendant, sought to argue
that the parties were not “in pari delicto”. However, I consider that the judge
was quite correct in his approach. The Snyder loan had been accepted by
Mr Kan on behalf of the 1st defendant without any pressure being put on him,
because Mr Kan considered that he would soon be in a position to pay off that
loan and was happy for the 1st defendant to take the loan at exorbitant interest
rates. As regards the payments totalling some $300,000 which Mr Kan paid to
Mr Tam, again those were in respect of the Snyder loan and they would be

25.           As the judge pointed out, the rental period was from 15 July 1999
to 14 August 2000 when the rents of $2,275,000 were paid to the plaintiff. But,
again as the judge pointed out, Mr Kan was well aware from 9 February 1999
that the Snyder loan had been illegal and unenforceable.     He had been so
advised by the solicitors who still act on behalf of the 1st defendant. In my
view, the judge was quite correct in his approach and the 1st defendant’s cross
appeal fell to be dismissed.

Hon Le Pichon JA:

26.           I agree.

Hon Sakhrani J:

27.           I agree with the reasons given by Rogers VP.

      (Anthony Rogers)         (Doreen Le Pichon)           (Arjan H Sakhrani)
       Vice-President           Justice of Appeal              Judge of the
                                                           Court of First Instance
                                -   14   -

Mr Horace Wong SC and Mr Vincent Lam, instructed by Messrs William W L
   Fan & Co., for the Plaintiff/Appellant

Mr Christopher Mumford SC and Mr Andy Hung, instructed by Messrs Chan &
   Tsu, for the 1st Defendant/Respondent

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