The Bank of East Asia Ltd v Mody Sonal M and Others

JurisdictionSingapore
JudgeAndrew Ang JC
Judgment Date13 July 2004
Neutral Citation[2004] SGHC 149
Docket NumberSuit No 837 of 2003
Date13 July 2004
Published date02 September 2004
Year2004
Plaintiff CounselRobert Wee (Ho and Wee)
Citation[2004] SGHC 149
Defendant CounselDefendants in person
CourtHigh Court (Singapore)
Subject MatterWhether mortgagee's alleged breach of duty forming basis for counterclaim by surety for damages arising therefrom,Mortgagee's duty to act in good faith and take reasonable steps to obtain true market value at time of sale,Credit and Security,Personal guarantee given as directors of company to secure company's debts,Undue influence,Equity,Equitable duties owed by mortgagee,Mortgage of real property,Elements to be proven to raise presumption of undue influence,Mortgagee’s power of sale,Presumed

13 July 2004

Andrew Ang JC:

The facts

1 The plaintiff is a bank incorporated in Hong Kong with a branch in Singapore. The suit by the plaintiff bank (“the Bank”) is against three members of a family (“the defendants”) in respect of a joint and several guarantee dated 28 June 2000 given by them to the Bank to secure overdraft facilities extended by the Bank’s Singapore branch to the Bank’s customer, MTM Trading Pte Ltd (“the Company”). All three defendants are directors of the Company. The first defendant and the third defendant are also shareholders of the Company respectively holding 10% and 20% of the Company’s shares. The second defendant holds none.

2 The Company had mortgaged to the Bank an apartment, #07-02 at 83 Meyer Road (“the Property”), to secure its own indebtedness. The Property was sold at a public auction on 17 April 2003 at a price of $1.14m. After the net proceeds of sale were applied in payment of the Company’s outstandings to the Bank, a balance remained owing under the Company’s overdraft account which, as at 16 July 2003, amounted to $639,293.19. The Company has since been wound up. The Bank’s claim is for payment of this sum and interest thereon from 17 July 2003 at the rate of half per cent per annum above the Bank’s prime lending rate in respect of the first $1.3m and at the rate of 4% per annum above the Bank’s prime lending rate in respect of the balance owing.

The defences

3 The defendants appear in person. However, until five days before the trial of this action, the first and third defendants were represented by Straits Law Practice LLC and the second defendant was represented by M/s Ravi, Lim & Partners. Hence, all documents filed by the defendants prior thereto were prepared by their respective former solicitors. The defendants have put up the following defences:

(a) All three defendants alleged that they were not given a breakdown of the sum demanded from them despite numerous requests. I should say right away that I find no merit in this defence. The Company had been provided monthly statements of account. The defendants as the directors of the Company knew, or ought to have known, the state of the accounts. In any case, the Bank annexed to their reply detailed statements of account showing how the sum of S$639,293.19 was arrived at. There was no challenge to this at the trial.

(b) More interesting is the defence put up by the first and third defendants that the guarantee was “procured by the undue influence of the second defendant over them”.

The first and third defendants are respectively the daughter and the wife of the second defendant. They averred that the second defendant ran the business of the Company with the help of his son and that they were not involved, save that they signed documents on the instructions of the second defendant. They further averred that they had always reposed confidence and trust in the second defendant, depending totally upon him in all financial matters. It was also alleged that the second defendant was always the dominant personality whom neither the first defendant nor the third defendant was allowed to question. Accordingly, they maintained they were not exercising an independent will when told by the second defendant to sign the guarantee.

The first and third defendants further contended that entering into the guarantee was manifestly disadvantageous to them in that they had nothing to gain and everything to lose. They had also entered into the guarantee without the benefit of independent legal advice. They averred that the Bank knew from the beginning that the second defendant alone was to enjoy the banking facilities and that it was he who liaised and negotiated with the Bank.

Undue influence

4 It is usual, following the lead in Bank of Credit and Commerce International SA v Aboody [1990] 1 QB 923, to divide cases of undue influence as follows:

(a) Class 1 – Actual undue influence.

In these cases the person wronged needs to show affirmatively that he entered into the impugned transaction because of the undue influence exerted on him by the wrongdoer.

(b) Class 2 – Presumed undue influence.

In such cases, there is no requirement to prove actual undue influence. It is enough if the complainant demonstrates that (i) there was a relationship of trust and confidence between him and the wrongdoer; and (ii) the relationship was such that it could fairly be presumed that the wrongdoer abused the trust and confidence in procuring the complainant to enter into the impugned transaction.

(c) Class 2(A).

Certain relationships have been recognised by law as giving rise to such a presumption ipso facto. These include the relationships between solicitor and client, trustee and cestui que trust, and between doctor and patient. The relationship between husband and wife is not within this class: Bank of Montreal v Jane Jacques Stuart [1911] AC 120.

(d) Class 2(B).

Outside of these special categories, it is open to a complainant to raise such presumption as against a wrongdoer if he proves that there existed a relationship between them under which he generally reposed trust and confidence in the wrongdoer. Unless such presumption of undue influence is rebutted by proof otherwise, the complainant will succeed in setting aside the transaction without having to prove actual undue influence or that the wrongdoer abused the trust and confidence.

The foregoing consider the right of the complainant to set aside the impugned transaction as against the wrongdoer. In surety cases, however, the complainant seeks to avoid a transaction, not against the wrongdoer but against a creditor, such as the creditor bank in the present case. In such cases, the decisive question is whether the creditor bank had notice, actual or constructive, of such wrongdoing. Additionally, if the wrongdoer was acting as agent for the bank in obtaining the surety from the complainant, the transaction will also be set aside as the wrongful act of the agent will be attributed to the bank. Lord Browne-Wilkinson took the law in relation to the doctrine of constructive notice one step further when he outlined in Barclays Bank Plc v O’Brien [1994] 1 AC 180 the circumstances in which a creditor is put on inquiry when a wife stands surety for her husband’s debts.

5 In O’Brien, the first and second defendants, who were husband and wife, mortgaged their matrimonial home as security for overdraft facilities extended by the plaintiff bank to a company in which the husband, but not the wife, had an interest. The wife signed the deed without reading it, in reliance on the husband’s false representation that it was for a smaller amount and that it would last only three weeks. When the company breached its overdraft limit, the bank sought to enforce the mortgage and obtained an order for possession. The judge at first instance dismissed the wife’s appeal, holding that there was no evidence that in deceiving the wife the husband was acting as the agent of the bank and that, accordingly, they could not be held responsible for his misrepresentation. The Court of Appeal allowed an appeal by the wife, holding that she was entitled to special protection in equity. The bank’s appeal to the House of Lords was dismissed. It was held (and I take the liberty of quoting from the headnotes at 180) that:

there was no basis for providing special protection in equity to wives in relation to surety transactions; but that where a wife had been induced to stand as surety for her husband’s debt by his undue influence, misrepresentation or some other legal wrong, she had an equity as against him to set aside that transaction; that on ordinary principles the wife’s right to set aside the transaction would be enforceable against a third party who had actual or constructive notice of the circumstances giving rise to her equity or for whom the husband was acting as agent ...

Lord Browne-Wilkinson then went on to say, at 196:

[I]n my judgment a creditor is put on inquiry when a wife offers to stand surety for her husband’s debts by the combination of two factors: (a) the transaction is on its face not to the financial advantage of the wife; and (b) there is a substantial risk in transactions of that kind that, in procuring the wife to act as surety, the husband has committed a legal or equitable wrong that entitles the wife to set aside the transaction.

It follow [sic] that unless the creditor who is put on inquiry takes reasonable steps to satisfy himself that the wife’s agreement to stand surety has been properly obtained, the creditor will have constructive notice of the wife’s rights.

6 This case was followed eight years later by Royal Bank of Scotland Plc v Etridge (No 2) [2002] 2 AC 773. As the first and third defendants have relied principally on Etridge in seeking to avoid the guarantee, I shall devote greater attention to the case. The Etridge case was one of eight appeals heard by the House of Lords at the same time. Each case arose out of a transaction in which a wife charged her home in favour of a bank as surety for her husband’s indebtedness or that of a company through which he carried on business. In each of the cases, the wife later contended that she executed the charge under the undue influence of the husband. It was held that the relationship of husband and wife was not one of those special relationships where an irrebutable presumption of trust and confidence arose. Accordingly, where a wife sought to impugn a transaction which she had entered into on the ground of her husband’s undue influence, she had to establish two prerequisites. First, that she reposed trust and confidence in her husband in the management of her financial affairs. Second, that the transaction was not readily explicable other than on the basis that it had been procured by undue influence exercised by her husband: see Etridge at [30]. Only then could she rely on a presumption of undue influence which shifts the burden of...

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2 cases
  • BOM v BOK and another appeal
    • Singapore
    • Court of Appeal (Singapore)
    • November 29, 2018
    ...It is well-established law that there are two classes of undue influence: see The Bank of East Asia Ltd v Mody Sonal M and others [2004] 4 SLR(R) 113 at [4] and Rajabali Jumabhoy and others v Ameerali R Jumabhoy and others [1997] 2 SLR(R) 296 (“Jumabhoy”) at [184] (affirmed in other respect......
  • Susilawati v American Express Bank Ltd
    • Singapore
    • High Court (Singapore)
    • October 18, 2007
    ...FCA 963 (refd) Bank of Credit and Commerce International SA v Aboody [1990] 1 QB 923 (refd) Bank of East Asia Ltd, The v Mody Sonal M [2004] 4 SLR (R) 113; [2004] 4 SLR 113 (refd) Cook v Evatt (No 2) [1992] 1 NZLR 676 (refd) Craig, decd, In re [1971] Ch 95 (refd) Deepak Fertilisers & Petroc......
6 books & journal articles
  • Contract Law
    • Singapore
    • Singapore Academy of Law Annual Review No. 2004, December 2004
    • December 1, 2004
    ...the alleged wrongdoing. This issue was raised in Singapore before the High Court in the case of The Bank of East Asia Ltd v Mody Sonal M[2004] 4 SLR 113. Andrew Ang JC (as he then was) considered the House of Lords decision in Royal Bank of Scotland Plc v Etridge (No 2)[2002] 2 AC 773 (‘Etr......
  • VITIATING FACTORS IN CONTRACT LAW — SOME KEY CONCEPTS AND DEVELOPMENTS
    • Singapore
    • Singapore Academy of Law Journal No. 2005, December 2005
    • December 1, 2005
    ...at paras 9.66—9.71 and Phang, supra n 98, at para 9.60, respectively). 243 See generally the main text accompanying infra n 252 ff. 244 [2004] 4 SLR 113. 245 Supra n 235. 246 Supra n 5. 247 See supra n 244, at [11]. 248 Ibid. 249 See generally id at [12]—[20]. 250 Id at [21]. Interestingly,......
  • Contract Law
    • Singapore
    • Singapore Academy of Law Annual Review No. 2005, December 2005
    • December 1, 2005
    ...of the need to take into account the individual circumstances of the particular case (see, eg, The Bank of East Asia Ltd v Mody Sonal M[2004] 4 SLR 113 and Oversea-Chinese Banking Corp Ltd v Chng Sock Lee[2001] 4 SLR 370). Nevertheless, it is hoped that there will soon be an opportunity to ......
  • Equity and Trust
    • Singapore
    • Singapore Academy of Law Annual Review No. 2004, December 2004
    • December 1, 2004
    ...The case does demonstrate, however, that the Aboody classification is best forgotten. 12.61 The Bank of East Asia Ltd v Mody Sonal M [2004] 4 SLR 113, decided earlier in the year, concerned the rather more familiar situation where undue influence is alleged in the familial context (father a......
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