SHUN ON FINANCE LTD v. WONG FUNG KWAN AND ANOTHER

DCMP 1428/2016

[2022] HKDC 240

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

MISCELLANEOUS PROCEEDINGS NO.1428 OF 2016

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J U D G M E N T

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1.  The Original Action was brought by Shun On Finance Limited (“the plaintiff”)  against Ms. Wong Fung Kwan (“the 1^st defendant”)  and Ms. Wong Kin Hing (“the 2^nd defendant”)  concerning unpaid sums due under a loan agreement dated 16 November 2015 (“the Loan Agreement”)  and secured by a Second Mortgage also dated 16 November 2015 (“the Second Mortgage”)  over Flat B, 2^nd Floor, Po Wah Court, 432-438 Un Chau Street, Kowloon (“Po Wah Court”).

2.  The plaintiff was and is at all material times a licensed money lender. The 1^st defendant became the sole registered owner of the Property on 30 April 2007. The 2^nd defendant is the mother of the 1^st defendant.

3.  The Loan Agreement was for a loan in the sum of HK$600,000. At the time the Loan Agreement and Second Mortgage was executed, the Property was subject to a first mortgage in favour of OCBC Wing Hang Credit Limited (“OCBC”)  dated 13 March 2015 as security for a loan facility in favour of the 1^st defendant in the sum of HK$1.82M.

4.  The plaintiff claims for recovery of the loan and enforcement of the Second Mortgage for a claim in the sale proceeds. OCBC, as the first mortgagee, has recovered possession by an order of the Court dated 2 February 2017 under HCMP 2234/2017 (the “Order”)  and sold the Property in May 2018, and from the sale proceeds, it has paid the balance HK$1,613,647.38 into Court (the “Sale Proceeds”).

5.  In their counterclaim, the 1^st defendant disputes the validity and enforceability of the Loan Agreement and the Second Mortgage. Secondly, the defendants contended that the 2^nd defendant had a pre-existing equitable interest in the Property. Thus, the plaintiff and the 2^nd defendant have launched competing claims over the entitlement to the sum paid into court.

Background

6.  This was a very unfortunate fraud case involving an intermediary, Well Done Financial Planning Centre (“Well Done”). In fact, 2 persons from Well Done have been convicted on various counts of fraud in May 2018 not only in relation to the defendants in this case, but also to a number of other victims. No charge or, indeed, allegation of fraud was raised against anyone employed by the plaintiff.

7.  Most of the relevant facts in this case are not disputed.

8.  In late 2015, the 1^st　defendant had a mortgage loan of HK$1.82M secured by the Property at 3.5% per annum with OCBC and another mortgage loan of HK$3M secured by another property in Lai Bo Garden (“Lai Bo Property”)  at 3.25% per annum with Bank of East Asia. She also had a debt totaling around HK$676,000 as credit card and credit facilities with different banks.

9.  The 1^st defendant received a “cold call” with someone who claimed to be an employee of Hang Seng Bank (“Hang Seng”)  with a proposal to “restructure” her debt.

10.  The 1^st defendant showed her interest and was arranged to meet with the representatives of Well Done at its office, and she eventually signed 2 agreements with Well Done.

11.  The proposal was similar for both mortgages: the 1^st defendant was told that both her mortgage could be transferred to Hang Seng with a substantially lower interest rate (1.5%), but she would need “guarantee money” to demonstrate her repayment ability to Hang Seng.

12.  For such “guarantee money”, she would need to obtain a short term loan from a money lender, but once the loan has been advanced from Hang Seng Bank, she could use part of that to repay the money lender.

13.  For the Lai Bo Property, the 1^st defendant borrowed HK$1.3M from a money lender called Fine Talent Finance Limited (“Fine Talent”)  as “guarantee money”. She then, as instructed, handed the sum to representatives of Well Done who were supposed to arrange a mortgage with Hang Seng for HK$3M at 1.5% per annum for her.

14.  Similarly, for the Property, the 1^st defendant were to borrow HK$600,000 from the plaintiff as “guarantee money” for Well Done to secure a mortgage with Hang Seng for HK$2.5M at 1.5% per annum.

15.  The “loan restructure” proposal concerning Lai Bo Property is not the subject matter for this action.

16.  For the “loan restructure” proposal concerning the Property, the 1^st defendant attended the office of the plaintiff’s solicitors, Messrs. Au Thong & Tsang (“ATT”)  on 16 November 2015 and signed or executed a number of documents including a Loan Application form, Loan Agreement, Second Legal Charge in favour of the plaintiff and a confirmation letter.

17.  Afterwards, the plaintiff, through ATT, issued 2 cheques: a cheque of HK$450 in favour of the Government of HKSAR (as registration fee for the legal charge)  and HK$599,550 in favour of the 1^st defendant (Trial Bundle C, page 234).

18.  According to the 1^st defendant, after she left ATT’s office, the representatives of Well Done brought her to Hang Seng and requested her to hand over the cash, which she did. Well Done then issued a receipt dated 26 November 2015 in respect of the sum of HK$600,000.

19.  For both “loan restructuring” proposals, the representatives from Well Done had assured the 1^st defendant that they would handle the interest payments from the Money Lenders pending the Hang Seng loan drawdowns, so she needed not to bother.

20.  Instead of paying the interim interests of the Money Lenders and arranging for both mortgages at Hang Seng, the representatives simply took the money and disappeared.

21.  The 1^st defendant reported the matter to the police in January 2016 and in May 2018, various persons involved with Well Done in the fraud were convicted and imprisoned.

22.  As a result of this fraud, the 1^st defendant defaulted on the repayment of both Fine Talent and the plaintiff.

The 1^st defendant’s case

Collusion

23.  The 1^st defendant claims that the plaintiff acted in collusion with Well Done in contravention of s.27(3)  and 27(4)  of the Money Lenders Ordinance (Cap. 163)  (“MLO”)  which provide as follows:

S.27(3):

“it shall not be lawful for any money lender or his partner, employer, employee, principal or agent or any person acting for or in collusion with any money lender to charge, receiver or receive any sum as for or on account of any such costs, charges or expenses (other than stamp duties or similar charges)  or to demand or receive any remuneration or reward whatsoever from a borrower or intending borrower for or in connection with or preliminary to procuring, negotiating or obtaining any loan made or guaranteeing or securing the repayment thereto.”

S.27(4):

“if any money or money’s worth is directly or indirectly paid or allowed to or received by any person in contravention of this section, the amount or value thereof, to the extent of such contravention and notwithstanding any agreement to the contrary, may be recovered by the borrower from such person or, if such person is the money lender or a partner, employee, employer, principal or agent of the money lender or is in any way acting for or in collusion with him, may be set off against the amount actually lent (and that amount shall be deemed to be reduced accordingly)  or may be recovered by the borrower form such person or from the money lender.”

24.  There is no dispute as to the relevant legal principles, which has been set out succinctly by Mr. Simon Wong, Counsel for the 1^st defendant (“the 1^st defendant’s Counsel”), in his closing submission:

a)  The word “collusion” under 2.27(3), (4)  of the MLO should be construed in its own statutory context with its objective and intent in mind. The MLO has a key purpose of protecting the borrower from having to borrow money at excessive or extortionate interest rates. Relevantly, s.27(3), (4)  aims at to provide a “statutory protection afforded to a borrower from being stripped away or otherwise compromised by not only the money lender, but also by any other related persons in receiving costs, charges or expenses etc. from the borrower in addition to the interest charged by the money lender.” (Paragraphs 86-88, Ever-Long Finance Ltd v Yeung Wah Lung [2017] 1 HKLRD 500).

b)  The word “collusion” should not be interpreted narrowly. To construe otherwise, an intermediary who somewhat involves in the lending and borrowing process would, by reasons of its ambiguous relationship with the lender, fall outside he statutory net and would be able to impose charges on the borrower. (Paragraph 65, Gain Wealth Global Credit & Investment Limited v Lam Hau Kay DCCJ 2610/2015)

c)  “Collusion” means that the money lender and the intermediary were “playing the same game” or “acting in concert”. (Paragraph 49(2), Field Finance Limited v Sit Ka Man [2021] HKDC 864)

d)  As such, “collusion” is a wider concept than “conspiracy”. The board definition of “playing the same game” does not require any explicit or implicit agreement between the parties to be found (paragraph 49(3)(a), the case of Field Finance Limited as above)

e)  Someone “connected to” the money lender charging a procurement fee on the borrower is a breach of s.27(3). (paragraph 68, the case of Lam Hau Kay as above)

f)  It is sufficient to find collusion if the money lender and the intermediary cooperate with each other to do or abstain from doing something with a view to facilitate the conclusion of the loan transaction against the borrower’s interest or otherwise to his prejudice. (Paragraph 49(3)(b), the case of Field Finance Limited as above)

g)  “Collusion” is broad enough to cover cooperation between parties to deceive or otherwise to do harm to others (Paragraph 49(3)(c), the case of Field Finance Limited as above).

h)  The co-operation between money lender and the intermediary can take numerous forms. They may even appear to act independently. Nonetheless, if the arrangement including their roles and conduct taken as a whole is to facilitate the receipt of a sum in connection with the procuring, negotiation, obtaining and securing the repayment of the loan, such conduct should also amount to “collusion”. (Paragraph 70, the case of Lam Hau Kay as above)

i)  Usually, the intermediary acting in collusion with the money lender would appear to be one who identifies its interest with the money lender’s rather than the borrower’s. (Paragraph 90, the case of Ever-Long Finance Limited as above)

j)  The court is entitled to rely on overt acts of the money lender and the intermediary and established facts to draw inference for making a finding of collusion (Paragraph 49(2), the case of Field Finance Limited as above)

k)  To establish “collusion”, the standard of proof remains the balance of probabilities (Paragraph 50, the case of Field Finance Limited as above).

25.  Having these legal principles in mind, I will now look at the evidence before the court.

26.  Kenneth Cheung (“Mr. Cheung”), the witness for the plaintiff, gave evidence that an agent named Alex (“Alex”)  approached the plaintiff around 5 November 2015 by way of a cold call in respect of a potential loan application for the 1^st defendant.

27.  Mr. Cheung obtained such information from the records kept by the plaintiff. The employee of the plaintiff approached by Alex was Wesley Ng (“Mr. Ng”)  who has since left employment of the plaintiff.

28.  At the time, the operation of the plaintiff was that Mr. Ng was in charge of external contacts of the plaintiff while Mr. Cheung was in charge of assessment of the documents. Mr. Cheung also needed to seek approval from another colleague called Sam (“Sam”)  who would give him instructions for approval of loan applications.

29.  Mr. Cheung admitted that he did not know if Alex was connected with Well Done. However, on balance of probability, I find that Alex must have been a representative of or at least related to Well Done.

30.  Further, there were communications between the plaintiff and Alex before the conclusion of the loan transaction. It was not in dispute that Alex sent the 1^st defendant’s loan documents twice to the plaintiff (on 5 and 11 November 2015).

31.  Overall, I find Mr. Cheung to be an honest witness. There were certain discrepancies in his witness statements but he was ready to admit them. Mr. Cheung clearly did not pay enough attention to the drafting of his witness statement but I don’t think there was anything sinister.

32.  Much emphasis was placed by the 1^st defendant’s Counsel on the fact that Alex had passed the 1^st defendant’s telephone contact to Mr. Ng before the loan transaction was concluded. This was similar to what happened in the case of E-way (Hong Kong)  Property Credit Limited v Fung Wing Tim [2019] HKDC 39. The argument of the learned deputy judge in that case, at paragraphs 49-51 of the judgment, was that if the agent had given the contact details at that stage to the money lender, there was nothing preventing a deal to be struck directly between the money lender and the borrower, with the agent being cut of any payment for his trouble. As such, there must be some “understanding” between the money lender and the agent that there was no danger of the agent being unpaid for his service.

33.  However, I find that this finding, by itself, may not amount to “collusion”. There is no “universal test” for “collusion” and each party’s role and conduct must be analysed taking the whole arrangement as a whole on a case by case basis. Scams could take many forms and the court must not be tempted to draw the same conclusion just because two cases shares some common features without looking at other facts.

34.  First of all, unlike the case of E-way, in this case, there was something preventing the 1^st defendant from directly striking a deal with the money lender behind the back of Well Done.

35.  In the agreement between Well Done (being named as “Party A”)  and the 1^st defendant (being named as “Party B”)  regarding the Property (the “Well Done Agreement”)  (Trial Bundle D1, page 468), under the sentence (as I translate):

“In order or ensure smooth operation of the application, Party B must abide by the following conditions:

1.  After Party B signs this agreement, if Party B use another company or personally use any method to deal with the matter, whether successfully or not, Party B will still have to pay Party A the entire sum of the consultation fee (the period for the application is 3 months)”

36.  Thus, even if the plaintiff had tried to go behind the back of Well Done to strike the deal directly with the 1^st defendant, this clause meant that the 1^st defendant still had to pay Well Done so she would not likely do that.

37.  Indeed, if the plaintiff and Well Done were “playing the same game”, there would be no need for this clause.

38.  Further, in the case of E-Way, the agent did receive a “service fee” as well as a “stakeholder money” from the borrower which amounted to over 70% of the sum of the loan. In fact, in many other cases mentioned above, e.g. the cases of Lam Hau Kay, Ever-Long Finance Limited etc., a substantial sum from the loan money was deducted under the guise of “application fee”, “administrative fee” etc.

39.  In the current case, there was no “service fee” or, indeed, any “additional fees on top of the interest” between Well Done and the 1^st defendant. In fact, none was taken under such guise: the “loan restructure” proposal was to utilise the entire sum of HK$600,000 as “guarantee money” to obtain a new mortgage from Hang Seng at a lower interest rate. The 1^st defendant paid HK$600,000, that, the entire sum without deduction, to Well Done, which also released a receipt for the entire sum to the 1^st defendant.

40.  The issue of this receipt was also an important distinction: Well Done, on the face of it, did not impose any fees or charges to deduct this loan money.

41.  In fact, Clauses 2 and 3 of the Well Done Agreement, appear to suggest (with some ambiguity)  that the “consultation fee” would only be payable on successful implementation of the “loan restructure” and if not successful, the 1^st defendant needed not pay any fees.

42.  Thus, the charging of this “consultation fee” appeared to be condition upon the success of obtaining the new mortgage and separate from the money lender’s loan arrangement, and, importantly, there was no indication in the agreement that this fee would be deducted from the loan money.

43.  There is no evidence from Hang Seng or any bank on whether this “loan restructure” plan may or may not work, so on face of it, up until this stage, the court cannot assume that this proposal might not work to help the 1^st defendant obtain a new mortgage at a lower interest rate. This would have benefited the 1^st defendant. Even if the plan failed to work, on the face of this agreement, Well Done might be expected to simply return the sum without charging the 1^st defendant any fees. It has issued a receipt for the whole sum after all.

44.  Therefore, at this stage, there is no evidence that there was any breach of s.27(3)  or (4).

45.  What happened next was that Well Done breached this agreement: not only that it did not help the 1^st defendant to obtain a new mortgage from Hang Seng, it took the loan money and disappeared. As such, the loan money was not being “stripped away” by way of “imposing additional fees on top of the interest”, but was simply stolen.

46.  This has nothing to do with the plaintiff’s loan transaction with the 1^st defendant.

47.  Under the circumstances, it was perhaps unfair to infer anything sinister when Mr. Cheung admitted that he thought Alex would get paid. That admission alone should not be deemed a “test” for showing that the money lender and the intermediary must be “playing the same game”. It is indeed difficult to imagine why the plaintiff, running a money lending business, would wish to join Well Done in “playing the game” of the crime of theft.

48.  Importantly, as stated above, the Well Done Agreement did state that a consultation fee be charged upon successful arrangement of the “loan restructure” proposal. The agreement did not indicate that this fee would come out from the money loaned by the plaintiff.

49.  This is therefore very different from other cases where the sum falling within MLO s.27(3)  and (4)  was in substance a disguised additional fee on top of the borrowing, or was an extra cost in connection with the procuring of the loan by a colluding party. The fraud perpetrated in this case was Well Done persuading the 1^st defendant to hand over her money under the guise of arranging a “loan restructure” proposal for her.

50.  Further, the plaintiff was able to produce an internal record dated 9 November 2015 (Trial Bundle D1, page 465-1). This was an internal note which showed, inter alia, that the plaintiff was only prepared to approve a loan of HK$500,000 to the 1^st defendant initially.

51.  Pausing there, I note that there was no dispute as to the authenticity of this internal note. It contains details like wording of “重發” written by Mr. Cheung, who explained that Sam had failed to reply to the first time he sent the note on 9 November 2015. So he re-sent the application note on 11 November 2015 and wrote “重發” so Sam could not blame him.

52.  This is a perfectly logical and reasonable explanation to show the contemporaneous nature of this note. Such details would not likely to be contained in any evidence “manufactured” to support a claim since the “forger” would likely only be concerned that the evidence supports the claim entirely.

53.  More importantly, the internal note also documented that Alex had requested to increase the proposed loan from HK$500,000 to HK$600,000 failure of which he threatened to cancel the application.

54.  This clearly pointed towards a transparent, arm’s length flow of the approval process between Mr. Cheung and Sam. This strongly militates against any suggestion of collusion or “playing the same game”.

55.  Another piece of evidence was that the plaintiff received a TransUnion credit report (Trial Bundle D1, page 465-5)  which appeared to be obtained by the 1^st defendant.

56.  Mr. Cheung’s unchallenged evidence was that although this report was sent to the plaintiff by Alex (along with other documents), it was not something that any agent could obtain itself unless one was a member of TransUnion. However, the membership fee was hefty so only big banks, but not agents or money lenders like the plaintiff, would likely sign up. In any case, the letter from TransUnion was addressed to the 1^st defendant by name so Mr. Cheung thought that the 1^st defendant must have obtained the credit report herself and gave that to Alex who then released that to the plaintiff.

57.  This credit report gave the 1^st defendant a credit rating of “C” which meant (as I translate): “according to past information, in the 12 months after the assessment, amongst persons with the same rating, 99.26% will comply with their loan obligations” (Trial Bundle D1, page 465-12).

58.  Mr. Cheung gave evidence that, upon reviewing this, together with land search record and property valuation, he was prepared to allow the loan application.

59.  Again, this supports that the loan transaction went through a formal and reasonable assessment process and differed from cases where the money lender took a somewhat “cavalier approach” on assessing the borrower’s ability to repay the loan and granted the loan simply because “the loan was secured by the property” (paragraphs 11(3)  and 52(3), the case Field Finance Limited as above). There is no evidence that the loan transaction, from the plaintiff’s assessment, would burden the 1^st defendant with a debt that she could not service (Gain Wealth Global Credit & Investment Ltd v Chan Suk Fong [2020] 4 HKLRD 831)

60.  There are really only 2 factual disputes in the case.

61.  The first dispute concerns with whether Mr. Ng called the 1^st defendant on 15 November 2015 to negotiate and agree on the terms of the loan.

62.  Mr. Cheung fairly admitted in court that he only overhead a telephone conversation and would not know who Mr. Ng was talking to, but that it was the usual practice to make a call to confirm the agreed terms so that there would be no dispute in the upcoming meeting at ATT’s office.

63.  The 1^st defendant denied this and claimed that she never had any contact with the plaintiff’s staff prior to the meeting at ATT’s office on 16 November 2015.

64.  On balance, I would find for the 1^st defendant because Mr. Cheung really had no record of this telephone conversation and did not know who Mr. Ng was calling, and had only based his views on “usual practice”.

65.  However, even if Alex has passed the 1^st defendant’s documents to the plaintiff to assist in a “pre-approval” of the loan application, this, by itself, could not be evidence that there must be “collusion”. S.27 does not prohibit the introduction of a loan application to a money lender through a referral agent, nor prohibit the agent assisting the borrower in providing documents to the money lender. The mischief that is targeted by s.27 is the charging of additional fees on top of the interest charged by the money lender either by the money lender or by a person acting in collusion with the money lender etc. (However, the absence of any direct negotiation between the money lender and the borrower may have other implications, as I will deal with later.)

66.  The other dispute concerned whether Mr. Cheung, after becoming of such scams in late 2015 / early 2016, called its clients including the 1^st defendant, who told him about this fraud. The 1^st defendant denied this conversation. I do not think that this dispute is relevant to the case as it happened long after the scam.

67.  I do not think that my findings in these disputes would affect the question of whether there was “collusion” between Well Done and the plaintiff in this case.

68.  After assessing the evidence before the court as stated above, and, on a balance of probability, I have to conclude that there was no collusion.

Breaches of the MLO

69.  According to s.18(2)  of the MLO, the Loan Agreement shall set out the amount of principal of the loan in words and figures (s.18(2)(d)), the rate of interest charged on the loan expressed as a rate percent per annum (s.18(2)(i))  and a declaration as to the place of negotiation and completion of the loan agreement (s.18(2)(j)).

70.  If the plaintiff failed to comply, pursuant to s.18(3), if the court has the discretion to held the Loan Agreement unenforceable and may instead order the agreement to be enforceable to such extent, and subject to such modifications or exceptions, as the court considers equitable.

71.  I would accept that the Loan Agreement was in minor breach of s.18(2)(d)  because it stated the principal was HK$600,000 when in fact HK$450 was deducted for registration fee for the Second Mortgage so in fact the actual sum advanced was HK$599,550.

72.  Further, there was also a minor breach of s.18(2)(i)  because it was stated that the interest rate was 30% p.a. but when the HK$450 was calculated as part of interest, the interest rate should be 30.1%.

73.  Under paragraph 19 of the Loan Agreement (Trial Bundle D1, page 476), it was stated that the place of negotiation and completion of the Loan Agreement by both the 1^st defendant and the plaintiff took place either at the plaintiff’s office or at ATT’s office. However, I find that the negotiation was solely carried out by Alex who communicated with the plaintiff via email and possibly telephone. No evidence suggested that Alex nor the 1^st defendant ever attended the plaintiff’s office or ATT’s office.

74.  Whilst I accept that using email and telephone is “the modern way of business transaction” (paragraph 84, the case of E-Way as stated above), I have already found that there was no telephone conversation between Mr. Ng and the 1^st defendant for negotiation of the Loan Agreement: all the negotiation and approval had clearly taken place before she attended ATT’s office, at which stage the Loan Agreement and Second Mortgage had already been prepared. As such, the 1^st defendant was not involved in any part of the negotiation at any of the stated addresses at all. I find this a contravention of s.18(2)(j).

75.  I think this breach was significant because of the circumstances of this case.

76.  Mr. Cheung’s evidence was that Alex was completely new and unknown to the plaintiff but the plaintiff did not care to look into the background or identity of this agent, let alone look into the company he might be working for, the way the negotiation was conducted via an agent without any direct discussion and negotiation personally with the 1^st defendant prior to the completion had clearly exposed the 1^st defendant to the risk of being scammed.

77.  Such failures were made worst in this case because the default for repayment arose because the whole loan sum was stolen by Well Done, all due to the misplaced trust of the 1^st defendant in handing over the whole sum to Well Done. But for this theft, at least according to TransUnion credit report, the 1^st defendant should likely be able to comply with the loan obligations.

78.  Under the circumstances, I find it equitable to hold the Loan Agreement to be unenforceable.

79.  Although I do not find any “collusion” between the plaintiff and Well Done, I do think that the attitude of the plaintiff in handling the transaction partially culpable. The 1^st defendant was clearly not a sophisticated businesswoman or borrower (for example, she had signed the Well Done Agreement the terms in which were ambiguous, and the calculation for consultation fee was not even properly filled up)  so there was clearly a difference in knowledge and experience between the parties.

80.  Taking into account of all the circumstances of the case, I would assess that the plaintiff was about 2/3 culpable. It is equitable to order that the Loan Agreement to be enforceable to the extent that the sum of HK$400,000 be set off against the loan and that the remainder of HK$200,000 is enforcebale under the Loan Agreement.

The 2^nd defendant’s case

81.  The remaining question is whether the plaintiff could enforce this modified Loan Agreement via the Second Mortgage on the net sale proceeds paid into court.

82.  There are two matters to be resolved:

i)  First, whether a trust exist over the Property with the 1^st defendant as the trustee for the 2^nd defendant’s sole benefit.

ii)  If yes, whether the plaintiff had notice (in particular constructive notice)  of the trust.

83.  Much of the facts are not in dispute between the plaintiff and the 2^nd defendant. The loan was secured by the Second Mortgage over the Property and at the relevant time, the 1^st defendant was the sole registered owner.

84.  The 2^nd defendant is the 1^st defendant’s mother, and the late Mr. Wong Shun Cheung (“Husband”)  was the 2^nd defendant’s husband and the 1^st defendant’s father.

85.  The Husband and the 2^nd defendant were former owners (as joint tenants)  of the Property. The 2^nd defendant became the sole owner after the death of the Husband in 2001.

86.  The 2^nd defendant assigned the Property in favour of the 1^st defendant on 30 April 2007 apparently for HK$1M.

87.  The 2^nd defendant’s case is that the 1^st defendant held the Property either on a resulting trust or a common intention constructive trust in favour of her.

88.  It is trite that beneficial title is presumed to follow the legal title (Stack v Dowden [2007] UKHL 17)  so the 2^nd defendant bears the burden of proving the existence of the trust.

89.  The 2^nd defendant’s evidence was that as a result of her advanced age, she assigned the Property (and also Lai Bo Property)  to the 1^st defendant so that the 1^st defendant may hold and manage on her behalf during her lifetime. Although both assignments provided for consideration to be paid, the 1^st defendant actually did not pay.

90.  Further, the 2^nd defendant has 3 other children (including the only son, Mr. Wong Chi Sing, “Mr. Wong”)  and the Property and Lai Bo Property was the bulk of the assets of the Husband and the 2^nd defendant). Mr. Wong and his family in fact were residing at the Property at the time. The 2^nd defendant said that she let the 1^st defendant manage both properties for her because of the 1^st defendant’s ability and experience compared with the other siblings.

91.  These matters were fully accepted by the 1^st defendant and not disputed by the plaintiff.

92.  In view of the evidence showing the family dynamics, I find it inherently unlikely that the 2^nd defendant had intended to disinherit the 3 other children (including their only son)  in favour of the 1^st defendant only. In other words, this would likely be a case where the parents in a Chinese family setting vesting a property in the name of their children yet retaining control and beneficial ownership during their lifetime (Primecredit Ltd v Yeung Chun Pang Barry [2017] 4 HKLRD 327).

93.  As such, I find that a common intention constructive trust existed for the Property with the 2^nd defendant as the beneficial owner.

94.  The second question is whether the plaintiff had constructive notice of the trust at the time when the Second Mortgage was entered to.

95.  It was not in dispute that the plaintiff did not inspect the Property before concluding the Second Mortgage.

96.  Mr. Cheung gave evidence that he relied on the land search record. But he did a “current search” instead of a “current and historical” search. Mr. Cheung fairly accepted that if a historical search had been carried out, he would be able to tell that predecessor owners were “quite certain” to be the family members of the 1^st defendant.

97.  This admission is not surprising given that:

i)  There was no sale and purchase agreement registered against the Property, which would be most unusual if it was a genuine arms-length transaction between 2 strangers.

ii)  The price stated on the land search record would appear to be on the low side, which Mr. Cheung accepted.

98.  Further, a rates demand note for the Property (Trial Bundle D1, page 465-4)  which was passed by Alex to the plaintiff showed that the payers were the 2^nd defendant and the Husband. Mr. Cheung admitted that he did not raise any queries about this.

99.  Mr. Cheung also explained that he had also relied on the fact that OCBC, a bank of much larger scale than the plaintiff, had approved and granted a similar mortgage loan in 2015, and had retained the title deeds.

100.  In the China and South Sea Bank, Ltd v Ma Koon Ah and So Chun Ho, Deputy High Court Judge Longley stated:

“In my view, occupation by itself is sufficient to put a purchaser or mortgagee on an enquiry and will amount to constructive notice of an occupier’s right.”

101.  Similarly, the learned editors of “The Law of Real Property” Megarry and Wade stated:

“A purchaser is expected to inspect the land and make inquiry as to anything which appears to be inconsistent with the title offered by the vendor…occupation of the premises by a person whose presence is inconsistent with the vendor’s title places any purchaser on inquiry as to the occupier’s right.”

102.  As such, an inspection would have revealed the occupation of the Property by Mr. Wong and his family, and the plaintiff should have made inquiry as to the “family dynamics” within the family of the 1^st and 2^nd defendants.

103.  Under the circumstances, doing a current land search and relying on the fact that a bigger bank has approved a similar mortgage is not enough to show that Mr. Cheung (and the plaintiff)  has taken all reasonable steps to ascertain whether third party interests existed, in particular, failure to conduct an inspection.

104.  The plaintiff argued that even if proper enquiries were made, they would not have found out about the 2^nd defendant’s beneficial interests.

105.  However, I note from the judgment of Kingsnorth Finance Co. Ltd v Tizard [1986] 1 WLR 783, page794:

“The plaintiffs did not make any further inquiries or inspections; had they done so it would have open to them to contend that they had all that was reasonably required and if they still have no knowledge of Mrs. Tizard‘s rights or claims, that they were not fixed with notice of them. But in the absence of further inquiries or inspections, I do not think it is open to the plaintiffs to say that if they had made a further inspection they would still not have found Mrs. Tizard in occupation.”

106.  As such, the court would not entertain such an argument.

107.  Further, the plaintiff raises the doctrine of estoppel by deed. However, I agree with Mr. Vincent Lung, counsel for the 2^nd defendant, that it is well established that estoppel by deed is not an objection to asserting the existence of a constructive or resulting trust (Re Yip Yam Yu Alex [2019] HKCFI 75, HCB 3926/2015)

108.  Under the circumstances, I would allow the 2^nd defendant’s counterclaim.

Order

109.  The Loan Agreement be held unenforceable and to be modified to the extent that HK$200,000 of the Loan Agreement is deemed enforceable against the 1^st defendant.

110.  The plaintiff’s claim against the 2^nd defendant be dismissed.

111.  There be a declaration that the 1^st defendant has since 30 April 2007 been holding the Property on trust for the 2^nd defendant, and upon the sale of the Property pursuant to the Order, the 2^nd defendant has been and still is the sole beneficial owner of the Sale Proceeds.

112.  There be a declaration that the 2^nd defendant’s beneficial interest in the Property (and upon the sale of the Property pursuant to the Order, the Sale proceeds)  shall have priority over and ranks ahead of the plaintiff’s interest in the Property (if any, whether under the Second Mortgage or otherwise).

113.  There be an order nisi for the plaintiff to pay the costs for the 2^nd defendant and 2/3 of the costs of the 1^st defendant in this action, to be taxed if not agreed. The 2^nd defendant’s own costs be taxed in accordance with the Legal Aid Regulations.