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

Last Updated: 11 May 2010

Introduction

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.

Conclusion

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions