Hong Kong: Banking: Duties of Banks and Lawyers in Non-Commercial Transactions

Last Updated: 11 May 2010


In the Hong Kong Court of Appeal case of Wing Hang Bank Ltd v Kwok Lai Sim & Others, the security document signed by the surety/security provider in a "non-commercial" transaction was set aside, the bank's claim against the security provider was dismissed and judgment was entered against the solicitors acting for both the bank and the surety/security provider for breach of duty of care as solicitors.

It was held that in situations where an individual gives security for another and the relationship between the surety and the debtor is "non-commercial" (e.g. transactions involving spouses, parents and children, siblings etc), the surety/security provider must be fully aware and be properly advised of his liabilities or obligations pursuant to the security documents.

The Case

In the case, 2 sisters ("Sisters") charged their property by way of executing an all monies legal charge ("Legal Charge") in order to secure banking facilities provided to their brother's company ("Company") by a bank. The bank and the Sisters were both represented by the same solicitor firm ("Solicitor"). Pursuant to the Legal Charge, it was expressly provided that "the Mortgagor shall be deemed a principal debtor in respect of the Secured Indebtedness" and thus it is clear from the terms of the Legal Charge that the Sisters were undertaking unlimited personal liabilities in respect of the Company's liability to the bank.

The bank claimed against the Sisters for sums owed to it by the Company, interest thereon and vacant possession of the charged property. The Sisters counterclaimed that they had been induced by the misrepresentation of their brother to charge the property and sought to set aside the Legal Charge as against the bank. The Sisters also claimed that the Solicitor was in breach of its duty of care as their solicitors and claimed against the Solicitor a declaration that they were entitled to be indemnified as against the bank's claim.

The High Court dismissed the bank's claim, set aside the Legal Charge and entered judgment against the Solicitor. The bank and the Solicitor appealed against the decision.

The Court of Appeal dismissed both appeals and ordered, inter alia, that the Solicitor was in breach of its duty to the Sisters and the Sisters were entitled to be indemnified by the Solicitor in respect of any claim by the bank against them due to the Solicitor's breach of duty to the Sisters.

In a case where the relationship between the surety and the debtor is non-commercial, unless the creditor takes reasonable steps to bring home to the surety the risks involved, the creditor may be held to have constructive notice if the surety had been induced by undue influence, misrepresentation or other wrong doing of the debtor to stand as surety. Thus, when acting for both lender and surety (who may be potentially unduly influenced), a solicitor should take care to follow relevant guidelines issued by the Hong Kong Law Society.

Meeting with Surety

On the facts, the Solicitor had failed to hold separate meetings with the Sisters without the presence of their brother (who was representing the debtor Company). Further, the Solicitor had failed, inter alia, to advise the Sisters of their unlimited personal liability under the Legal Charge; or that the bank required that they be given the advice that if they signed the security documents, the Sisters would not be able to claim afterwards that they were not legally bound by them; or to consider if they had the financial ability to repay the bank.

The Court found the Solicitor only sought to discharge its duties in a perfunctory way and its attempt to comply with its responsibilities as solicitors for the Sisters were inadequate.

Financial information

The Law Society guidelines provide that where the solicitors had financial information regarding the borrower, they may not disclose them to the surety without the permission of the borrower. If there was a real risk of conflict of interest, the solicitors must cease to act for the surety as such financial information is highly relevant to the surety's decision whether to provide the security or otherwise.

In the case, the Solicitor discovered that there were several legal proceedings brought against the Company but did not reveal them to the Sisters. The Court held that the Solicitor should have informed the Sisters about the legal proceedings against the Company and advised them that it was against their interest to agree to an unlimited charge or that it was unwise of them to provide personal undertakings to repay. On the balance of probabilities, had the true financial situation of the Company be made known to the Sisters, they would not have agreed to provide a charge over the property.


Banks will generally have their own preferred solicitors to prepare the banking documentation. However, sureties/security providers should be aware of their rights and have the opportunity to nominate their own solicitor and seek independent legal advice. They should also be provided with the necessary financial information relating to the transaction, including details of the amount and terms of the facility, the purpose of the facility and the potential amount of the borrower's indebtedness, and have the right to request for copies of the security document for review prior to execution.

Lawyers in our Banking Department will be happy to provide you with a copy of the above judgment or assist you with any queries you may have on any banking matters.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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