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A useful reminder for banks when a wife secures her husband’s debts

In the recent Hong Kong case, Bank of China (Hong Kong) Limited v Wong Kam Ho and Ors, [2014] 1 HKLRD, 41, the presiding Judge, G Lam J. examined the doctrine of undue influence, which enables a court to strike down a transaction where the intention to enter into it has been procured unconscionably. Specifically, in this case, the court examined a bank’s duties where a wife guaranteed banking facilities granted to her husband’s business, Wing Fat. An interesting point also arose in relation to the recoverability of interest payable by the wife on the principal sum due to the bank.

In the circumstances of this case, the court found that the wife had not been unduly influenced by her husband when she signed a Legal Charge in favour of the bank over a property jointly owned by herself and her husband, to secure the indebtedness of Wing Fat. The Legal Charge contained a personal covenant by the wife to repay to the bank, without limit, all sums owing to the bank by way of general banking facilities granted to Wing Fat. As the wife failed to prove that she had been unduly influenced in this case, judgment was entered in favour of the bank against the wife for the sums outstanding to the bank.

The judgment serves as a useful reminder to banks of the steps it should take whenever a wife offers to secure her husband’s debts. If the court finds that a wife has been unduly influenced by her husband in such circumstances, it will then consider whether the bank should have been put on inquiry. The court said that the law imports a low threshold in this regard, namely that a bank is put on inquiry whenever a wife offers to stand as surety for her husband’s debts. In the present case, the court held that the bank was plainly put on inquiry, as it knew that the property secured by the Legal Charge was owned jointly by the husband and wife.

Once a bank is put on inquiry, the next question is whether the bank took all reasonable steps to satisfy itself that there was no undue influence. The court said that what a bank has to do in this type of case is 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; the bank is not required to see to it that the wife understood the risks, but to take reasonable steps to bring her to an understanding of the implications. What are reasonable steps, the court said, will depend on facts of each case, but may include the following:-

  1. A representative of the bank having a private meeting with the wife (in the absence of her husband) at which she is told of the extent of her liability as surety, warned of the risk she is running and urged to take independent legal advice.
  2. An acceptable alternative to 1 above, would be for the bank to rely on the fact that the wife had received separate legal advice from a solicitor who acts solely for her.

As stated above, the court held in this case that the wife had not proved that she had been unduly influenced by her husband to sign the Legal Charge in question and, accordingly, judgment was entered against her for the sum due to the bank.

An interesting and rather important point also arose in relation to the amount of interest payable by the wife. The court held that the bank was entitled to interest on the principal sum due to it, for the period 2 July 2002 (the date of demand for repayment) to 5 December 2002 (the date on which judgment had been obtained by the bank against Wing Fat) at the contractual rate (i.e. the rate provided for in the Legal Charge). The bank conceded that it was not entitled to interest at the contractual rate after 5 December 2002 i.e. after the date on which it obtained judgment against Wing Fat. Instead, the bank sought interest at the lower judgment rate for the period between 5 December 2002 and the date of the present judgment against the wife on 31 October 2013. The court held that the bank’s claim for interest against the wife at judgment rate during that period was contrary to both principle and authority. It said that as far as Wing Fat was concerned, the liability to repay the bank pursuant to the covenants contained in the Legal Charge had merged into the judgment obtained on 5 December 2002. Accordingly, the amount of indebtedness became a debt owed by Wing Fat under the judgment and not under the Legal Charge. Wing Fat’s covenant to pay interest, which was ancillary to the covenant to pay the principal, had also merged with the judgment.

After 5 December 2002, interest accrued against Wing Fat not under the Legal Charge, but as a judgment debt under section 49 of the High Court Ordinance, which provides that judgment debts shall carry simple interest, at such rate as the court may order, from the date of judgment, until satisfied. There being no judgment (until now) against the wife, there was no basis under section 49 to make her liable for interest from 5 December 2002 to the date of the present judgment against her.

As the court said, when a judgment was obtained against the principal debtor, the guarantee would not generally extend to interest after judgment because interest did not accrue under the deed but under the rules of the court. Here, there were no special words in the Legal Charge which rendered the wife, as guarantor, liable for any interest accruing at judgment rate either on the entire judgment sum against Wing Fat or on the outstanding principal debt. Accordingly, the bank was not entitled to claim interest from the wife between 5th December 2002 and the date of this judgment against her on 31st October 2013.

Accordingly, in the absence of special words in a Legal Charge, if a bank obtains judgment against the principal debtor first, and continues its action against the guarantor, the bank will not be able to recover interest against the guarantor in respect of the outstanding principal from the date of judgment entered against the principal debtor to the date of judgment obtained against the guarantor, which in the present case was a shortfall of over 11 years’ interest.

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