Introduction
Marital homes are often purchased in the joint names of husbands and wives. It is also common that the husband would get a bank loan and mortgage the marital home as security. In such circumstance, the wife as joint owner will be required by the mortgagee bank to stand surety for the loan.
In the Hong Kong Court of Appeal case, Bank of China (Hong Kong) Ltd v Well Lok Printing Ltd & Others (2008), such security documents signed by the wife were challenged and the presumption of undue influence raised in defence.
The Case
In the above case, the husband and wife purchased a residential property in their joint names. The wife's understanding was that she was not required to make any financial contribution towards the purchase and the mortgage loan would be taken up by the husband alone and all that was required of her was to agree to have the property charged as security for the mortgage. The husband applied for a mortgage loan and an overdraft facility from the plaintiff bank. A Second Charge was executed by the husband and wife with the husband as the borrower and the property being placed under an all monies mortgage.
The Court considered the wife's minimal educational background and inability to read English and evidence of her other background. The wife came to Hong Kong from mainland China when she was 11 and married her husband in 1966. She was a very traditional Chinese and a submissive wife who always follows her husband's decisions. It was held that she executed the Second Charge under the undue influence of the husband and the bank was put on inquiry.
The Court found on the facts that the bank's solicitors did not make reference to, let alone a proper explanation of, the fact that the wife potentially would be liable for an amount in excess of the balance owing on the mortgage loan however that amount may be accrued. As such, the bank failed to take reasonable steps to satisfy itself that the wife has had brought home to her, in a meaningful way, the practical implications of the proposed transaction.
"Reasonable Steps"
The presumption of undue influence could arise in all situations especially where an individual gives security for another and the relationship is a "non-commercial" one. This may include transactions involving spouses, parents and children, siblings etc. The function of the reasonable steps which the law requires the bank to take is to try and ensure that the wife (the influenced party) understood what she was doing in entering into the proposed transaction and that her consent to do so was an informed consent.
Guidelines to Banks
Cases have not laid down any requirements (as distinct from guidelines) that will discharge the duty imposed on banks when they are put on notice of the presumption. The precise action to be adopted will depend upon the circumstances and the particular attributes or inadequacies of the person involved. Some practical guides are :-
- The wife should have the opportunity to nominate her own
solicitor and to seek independent legal advice. The legal
advisor should hold separate meeting with the wife without
the husband or the lender present.
- The bank should provide the wife's solicitor with
the necessary financial information relating to the
transaction, e.g. details of the amount and terms of the
facility, the purpose of the facility and the potential
amount of the husband's indebtedness. If the husband
does not consent to the disclosure of these information, the
bank should not proceed with the transaction.
- The bank should obtain a written confirmation from the
wife's solicitor stating that the nature and effect
of the security documents have been fully explained to her
together with their practical implication.
The above guidelines should be followed not only in the case of a husband and wife relationship, but in every transaction where the surety/security provider has a "non-commercial" relationship with the borrower.
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 other 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.
