HKSAR v. HK SOURCES FINANCE LTD

[English Translation – 英譯本]

HCMA 20/2015

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MAGISTRACY APPEAL NO 20 OF 2015

(ON APPEAL FROM KCS 18357 OF 2014)

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JUDGMENT

1.  The appellant is a finance company and was charged with the offence of entering into as lender an agreement which related to land and which was void by virtue of section 17B[1] of the Housing Ordinance[2]. The appellant pleaded not guilty and, after trial, was convicted by a special magistrate (hereinafter referred to as “the magistrate”) sitting at the Eastern Magistracy.  It appeals against the conviction.

Facts

2.  There was no dispute about the basic facts of this case, which were outlined and produced as evidence in accordance with section 65C of the Criminal Procedure Ordinance[3]. The main points were as follows:

(1)  The property involved in the present case was a Home Ownership Scheme flat (hereinafter referred to as “the HOS flat”);

(2)  The Housing Authority (hereinafter referred to as “the Authority”) was authorized to nominate a purchaser in respect of the HOS flat;

(3)  The sale and alienation of any flat in the lot were subject to the terms, covenants and conditions specified in the Housing Ordinance[4];

(4)  On 29 June 1994, a Ms Cheng and a Mr Wu purchased the subject property;

(5)  On 21 August 2008, a Ms Yip was nominated by the Authority to be the purchaser of the property;[5]

(6)  By a deed of assignment dated 30 September 2008, Ms Cheng and Mr Wu assigned the property to Ms Yip at the price of $1,120,000;

(7)  On 26 July 2013, the appellant and Ms Yip entered into a loan agreement[6], under which the appellant granted a loan of $550,000 to Ms Yip;

(8)  The loan agreement contained the following term:

“If any Event of Default shall have occurred or in the event of any proceedings or steps being taken to exercise or enforce any powers or remedies conferred by any incumbrance over the Property, the Lender may redeem such incumbrance or procure the transfer of it to himself and may settle and pass the accounts of any incumbrancer entitled to such security and any accounts so settled or passed shall be conclusive and binding as well between the Lender and Borrower as between such incumbrancer and the Borrower. In such event, the title deeds and documents of the Property kept by any such incumbrancer shall be delivered to the Lender. The Borrower shall take all such steps and action[s] as shall be necessary to effect such redemption and delivery of title deeds as aforesaid.”[7]

(9)  Before the loan agreement was entered into the Authority did not receive any application for an assessment of premium in respect of the property, and up to 10 October 2014 the Authority had not received any premium in respect of the property referred to in the Schedule to the Housing Ordinance;

(10)   No prior permission in writing in respect of the loan agreement had been granted by the Authority or the Director of Housing.

Findings made by the magistrate

3.  The magistrate made the following findings:

(1)  There was an agreement of a charge which related to land entered into between the appellant and Ms Yip in respect of the property.

(2)  In any event, the loan agreement and the charge referred to therein were related to the subject property.  He was sure that the agreement of charge was an agreement which related to land and that it met the requirements set out in section 27A(a) of the Housing Ordinance.

(3)  That part in the agreement which was about the charge was void, because Ms Yip did not have any written permission of the Authority so to charge the flat.

(4)  Even if the loan agreement was not wholly void, so long as the part about the charge contravened section 17B(2) of the Ordinance, the offence under section 27(A) was committed by reason that the part about the charge was rendered void.

4.  Accordingly, the magistrate found the appellant guilty.

Ground of appeal

5.  At the appeal hearing, the appellant was represented by Mr David Ma of counsel[8], who put forward the following ground of appeal.

The magistrate erroneously found that the agreement in question was an agreement which related to land, that it constituted a charge imposed on the property held by Ms Yip and that therefore it was void by virtue of section 17B of the Ordinance.

Relevant provisions in the Ordinance

6.  The present case mainly concern two provisions in the Housing Ordinance, which are set out below:

“Section 27A

(1) [sic]Where -----

(a) a person whether as lender, borrower or otherwise purports to create a mortgage of or otherwise charge land or to assign or otherwise alienate land or to enter into an agreement which relates to land; and

(b) the purported mortgage or other charge or the purported assignment or other alienation or the purported agreement is void by virtue of section 17B,

the person commits an offence and is liable to a fine of $500,000 and to imprisonment for 1 year.

Section 17B

(1) (omitted)

(2) Where -----

(a) land described in subsection (1)(a)(ii)[9] is sold with the written permission of the Authority; and

(b)

(i) the person to whom the land is sold purports to mortgage or otherwise charge the land and has not the written permission of the Authority so to mortgage or otherwise charge; or

(ii) (omitted)

the purported mortgage or other charge, together with any agreement so to mortgage or otherwise charge, shall be void.

(3) (omitted)”

Discussion and consideration

7.  At the appeal hearing, Mr Lui, Acting Senior Public Prosecutor, who represented the respondent, stated that the basis of prosecution in the present case was that the agreement in question contained an agreement which charged the land, and that therefore it was an agreement related to land.

8.  Mr Ma said that this was what the appellant understood to be the prosecution case at the trial and during the appeal.

9.  On this basis, my consideration would first focus on whether the agreement in question was one which charged the land.

10.  Mr Ma, based on the following reasons, argued that the agreement was not one which charged the land:

(1)  The event of default referred to in paragraph 8.01 of the agreement had nothing to do with the loan agreement involved in this case, but was related to the mortgage created between Ms Yip and the first mortgagee bank.

(2)  Paragraph 8.01 only gave a discretion to the appellant to redeem other incumbrances or procure the transfer of such incumbrances to itself.  If the applicant chose not to exercise this discretion, the provision would not have any actual effect.  Mr Ma submitted that only when all the following three conditions were fulfilled could it be possible that the agreement be regarded as having given rise to an equitable mortgage:

(i) An event of default related to the first mortgage occurred;

(ii) The appellant chose to redeem other incumbrances or procure the transfer of such incumbrances to itself, and settle the accounts of any incumbrancer entitled to such security; and

(iii) The title deeds were delivered to the appellant.

As long as these conditions were not fulfilled, the situation in which the land was charged did not exist.

(3)  The magistrate’s finding that the parties to the agreement intended to create a charge on the property was erroneous, because:

(i) The appellant did not enjoy a present right, but only a future right;

(ii) Paragraph 8.01 did not segregate the subject property to use it to repay the debt owed under the loan agreement;

(iii) The conclusion made by the magistrate that the appellant, being engaged in the money lending business, would not lend $550,000 to Ms Yip without obtaining any security was wrong and was against the weight of the evidence.

11.  I have the following observations on the above arguments.

The first argument

12.  Although paragraph 8.01 of the agreement was under the heading ‘Settlement of Other Incumbrances’, I do not agree that the event of default referred to therein had nothing to do with the loan involved in this case.  Paragraph 8.01, phrased in the following way, provided that if certain things happened or if an event of default referred to by the appellant occurred, that would trigger the exercise of the relevant powers:

“If any Event of Default shall have occurred or[10] in the event of any proceedings or steps being taken to exercise or enforce any powers or remedies conferred by any incumbrance over the Property, the Lender may[11] redeem such incumbrance or procure the transfer of it to himself and may settle and pass the accounts of any incumbrancer entitled to such security and any accounts so settled or passed shall be conclusive and binding as well between the Lender and the Borrower as between such incumbrancer and the Borrower. In such event, the title deeds and documents of the Property kept by any such incumbrancer shall be delivered to the Lender. The Borrower shall take all such steps and actions as shall be necessary to effect such redemption and delivery of title deeds as aforesaid.”

13.  I consider that “If any Event of Default shall have occurred” definitely referred to any event of default relevant to the present case.

14.  As to what events of default were covered under the agreement, they were listed in paragraph 7 ‘Events of Default’ of the agreement, and they included the borrower’s failure of making repayment and the making of a bankruptcy petition against the borrower[12]. These events had nothing to do with the first mortgage but were directly related to the agreement involved in this case.  Mr Ma submitted that paragraph 7 comprised certain default events directed against the first mortgage, such as those mentioned in paragraph 7(b) and (k).  Even though paragraph 7 of the agreement might comprise default events directed against the first mortgage, it does not follow that paragraph 8.01 of the agreement did not cover default events directed against the agreement involved in this case.

15.  In my view, there were two situations or default events the arising or occurrence of which would trigger the exercise of the relevant powers:

(1)  Any event of default related to this agreement; and

(2)  Any steps or proceedings taken to enforce the first mortgage or to exercise any powers conferred by that mortgage.  This was the situation mentioned in paragraph 8.01[13] after the word ‘or’[14].

The use of the word ‘or’ clearly evinces the intention that the relevant powers could be exercised if either one of the two situations arose.  Therefore, I find that the ambit of paragraph 8.01 was not restricted to events of default related to the first mortgage, but encompassed events of default related to this agreement.

The second argument

16.  Paragraph 8.01 conferred only a discretion on the appellant. Given the use of the word ‘may’[15] in the agreement, I agree with this view.  However, this kind of wording can be found in quite many agreements.  It is a common phenomenon that a money lender would like to give himself some flexibility when dealing with any breach of agreement or any default.

17.  Mr Ma also accepted that there was no actual difference, at least in the present case, between the discretion he referred to and the rights which could be found in contracts generally.

18.  The main point of Mr Ma’s submission was that as long as the appellant did not exercise the powers to cause the title deeds to be delivered to it, no mortgage would be created, nor would any charge be created.

19.  Mr Ma cited Wise Wave Investments Ltd v TKF Services Ltd[16] to support his argument that an instrument which merely imposed an obligation to give a charge in future would not create an equitable charge by itself.

20.  Wise Wave Investments originated from the buying and selling of a landed property.  The vendor owed a substantial amount of management fees and caused the purchaser to become concerned, so the purchaser asked the vendor to pay off the outstanding management fees or to provide sufficient security before completion.  The vendor refused and, after the lapse of the completion time, regarded the sale and purchase agreement as having been terminated and forfeited the deposits paid.  The purchaser sought a decree of specific performance to complete the transaction.

21.  One of the issues in that case was whether the non-payment of the management fees by itself gave rise to a charge over the property as a result of the operation of the following provision in the deed of mutual covenant of the building:

“It is hereby declared that:

(a) Any sums or part thereof payable by any Owner under this Deed as shall be unpaid for 30 days next after the due date for payment of the same shall be a charge upon the share and interest of the defaulting Owner of and in the Property.”

22.  I think that the background, nature, facts and issues of that case cannot be mentioned in the same breath with those of this case.  That being so, the support it can give to Mr Ma’s argument is limited.

23.  Firstly, the decision in that case was to a considerable extent influenced by the two requirements laid down in section 5(1)(a) of the Conveyancing and Property Ordinance[17] that a charge must be created by an instrument in writing and that the instrument must be signed; whereas these considerations did not feature in the present case.

24.  Secondly, in order to determine the effect of any contractual term, to interpret any provision involved in a dispute and to find out the contractual intent, the specific circumstances of each particular case must be looked into.

25.  Thirdly, the present case is about section 27A of the Housing Ordinance, but that case did not concern the Housing Ordinance.

26.  Mr Ma further submitted that the agreement was only a loan agreement, and that the existence of paragraph 8.01 would not change the fact that the nature of the agreement was a loan agreement.

27.  I do not agree with this argument.  As far as section 27A of the Housing Ordinance is concerned, once there is an agreement which relates to land, then notwithstanding that it is only one of the terms of an agreement, so long as it is void by virtue of section 17B, it falls within the ambit of section 27A.

28.  Paragraph 8.01 provided for the repayment of the loan granted under the first mortgage, the redemption of the title deeds and the delivery of the title deeds to the lender for custody.  The effect of this provision was such that the status and protection held and enjoyed by the appellant were equivalent to those held and enjoyed by the lender of the first mortgage.  This provision was to burden the land with a charge.

29.  Mr Ma did not dispute this point but he stressed that before the occurrence of any event of default, or if the appellant did not exercise its right, or without the delivery of the title deeds to the appellant, the charge would not come into being.

30.  Mr Lui, for the respondent, cited Pine Enterprises Ltd v Cyber Strategy Ltd & Another[18] and submitted that the agreement in the present case had created a charge on the land.

31.  In that case, Deputy High Court Judge To (as he then was) made the following comments:

“151. Whether a document has the effect of creating a charge is essentially a matter of construction of the relevant terms of the document. The question is one of intention of the parties. As explained by Atkin LJ in National Provincial and Union Bank of England v. Charnley [1924] KB 431 at 449: -

“The first question that arises is whether or not this document does create a mortgage or charge, and to determine that it is necessary to form an idea of what is meant by a ‘charge’. It is not necessary to give a formal definition of a charge, but I think there can be no doubt that where in a transaction for value both parties evince an intention that property, existing or future, shall be made available as security for the payment of a debt, and that the creditor shall have a present right to have it made available, there is a charge, even though the present legal right which is contemplated can only be enforced at some future date, and though the creditor gets no legal right of property, either absolute or special, or any legal right to possession, but only gets a right to have the security made available by an order of the Court. If those conditions exist I think there is a charge. If, on the other hand, the parties do not intend that there should be a present right to have the security made available, but only that there should be a right in the future by agreement, such as a licence, to seize the goods, there will be no charge.” (Emphasis added.)

To similar effect was the approach set out by Buckley LJ in Swiss Bank Corporation And Lloyds Bank Ltd and Others [1982] AC 584 at 595: -

“... whether a particular transaction gives rise to an equitable charge of this nature must depend upon the intention of the parties ascertained from what they have done in the then existing circumstances. The intention may be expressed or it may be inferred. If the debtor undertakes to segregate a particular fund or asset and to pay the debt out of that fund or asset, the inference may be drawn, in the absence of any contra indication, that the parties’ intention is that the creditor should have such a proprietary interest in the segregated fund or asset as will enable him to realise out of it the amount owed to him by the debtor: compare In re Nanwa Gold Mines Ltd [1955] 1 WLR 1080 and contrast Moseley v Cressey’s Co (1865) LR 1 Eq 405 where there was no obligation to segregate the deposits. But notwithstanding that the matter depends upon the intention of the parties, if upon the true construction of the relevant documents in the light of any admissible evidence as to the surrounding circumstances the parties have entered into ... an equitable charge ... the fact that they may not have realised this consequence will not mean that there is no charge. They must be presumed to intend the consequences of their acts.” (Emphasis added)

152.     Counsel have no dispute about the above principles.  Their dispute is whether the parties intended to create a charge over Lecture Kit’s 510,002 shares in UR Limited.  However, Mr Li draws attention to the underlined part of Buckley LJ’s dicta and submits that the inference that a charge has been created will be drawn if three conditions are satisfied, namely: (a) the debtor undertakes to segregate a particular asset; (b) the debtor undertakes to pay the debt out of that segregated asset; and (c) there is no contra indication of the creation of the charge.  I would not go that far as to say that Buckley LJ was laying down criteria which must be fulfilled in order to create a charge.  His Lordship was only giving an example, and a very strong one, of when the intention to create a charge would be inferred.  Obviously, segregation of asset is a very strong indication of such intention.  Whether the debtor has undertaken to pay the debt out of the segregated asset is another piece of evidence on which the intention of creating a charge over the segregated asset could be inferred.  But I do not think anything short of that would preclude the intention from being inferred.  Whether there is contra indication is also one of the factors to be considered in ascertaining the intention.  The real test is whether reading the Lecture Kit Shareholders’ Agreement as a whole and in the light of the admissible surrounding circumstances the Court is satisfied that it is the intention of both parties that by virtue of clause 5.2 Lecture Kit has given the right to Pine over its 510,002 shares in UR Limited held by the Custodian for the purpose of securing Lecture Kit’s and Cyber Strategy’s payment obligation.”

32.  Mr Ma did not challenge the views expressed by Atkin LJ in Natural Provincial and Union Bank of England; indeed he also cited that case to support his argument.

33.  However, Mr Ma pressed the point that the agreement in the present case did not create an existing or present right, while Mr Lui submitted that the relevant right was brought into existence by virtue of the agreement.

34.  I consider that in the present case the intention of the parties at the time of entering into the agreement could not be clearer.  It was intended that when one of the situations stated in paragraph 15 hereof arose, the appellant was entitled to exercise the powers conferred by paragraph 8.01 of the agreement.

35.  However, had the appellant contravened the provision in the Ordinance anyway notwithstanding, as submitted by Mr Ma, that there was no occurrence of any event of default, or the appellant chose not to exercise the powers given to him by the agreement, or the title deeds were not delivered to the appellant? Or instead, is it the case that the arrangement in question did not give rise to a present right as described by Atkin LJ in National Provincial and Union Bank of England, so no charge had been created over the land?  In my judgment, the right was already in existence, because once an event of default occurred, the appellant could exercise the powerswithout any need for further discussion or agreement. Moreover, Ms Yip was contractually bound to effect the delivery of the title deeds to the appellant.  By such arrangement the appellant acquired a proprietary interest in the flat.  The last sentence of paragraph 8.01 of the agreement reads:

‘The Borrower shall take all such steps and actions as shall be necessary to effect such redemption and delivery of title deeds as aforesaid.’

36.  For the above reasons, I find that the agreement created a charge over the land.

37.  Furthermore, I consider that at the time of the enactment of section 27A, what was regarded as important was the intention of the parties to an agreement.  This can be shown, in particular, by the characters used in the provision‘看來是…將土地押記… (purports to … charge land)’.

38.  My view is that the expression 看來 was used purposely.  The wording in the English version of this provision is ‘purports to create’.  Generally, the word ‘purport’ means to profess or claim to be something or to have done something. In the Shorter Oxford English Dictionary the definition of this word is ‘that which is intended to be done or effected by something’.

39.  In construing Section 27A of the Housing Ordinance, regard must be had to the legislative intent of the relevant provisions.  In CHEUK SHU YIN v YIP SO WAN & Another[19] Chan PJ pointed out that sections 17B and 27A of the Housing Ordinance had to be construed in the context of the Home Ownership Scheme.  Chan PJ emphasized that the price at which the Housing Authority sold a HOS flat was a discounted price, which was lower than the market price and did not include the value of the land.  The requirements and restrictions in the Ordinance were intended to prevent a person who bought a HOS flat from taking advantage of the discount and making a profit by any unpermitted act.  To create a mortgage or a charge over a flat without the permission of the Housing Authority is exactly an act which is to be prevented.

40.  Section 19 of the Interpretation and General Clauses Ordinance[20] provides that:

“An Ordinance shall be deemed to be remedial and shall receive such fair, large and liberal construction and interpretation as will best ensure the attainment of the object of the Ordinance according to its true intent, meaning and spirit.”

41.  To put it simply, I find that under the agreement the land was charged, this agreement or at least this part of the agreement was an agreement which related to land, and that this agreement was void by reason that it did not comply with the requirement in section 17B.

The third argument

42.  This argument concerns the magistrate’s finding about the contractual intent of the parties.

43.  Mr Ma’s criticisms of the magistrate can be found in paragraph 10(3) hereof.

44.  As for point (i), for the foregoing reasons, I find that the appellant had an existing or present right, not merely a future right, because once an event of default mentioned in the agreement occurred, the appellant was entitled to exercise the right immediately.

45.  As regards point (ii), segregation of the property would have been a strong indication of the existence of a charge, but as Deputy Judge To observed in Pine Enterprise Limited, the absence of any segregation of the property would not necessarily negate the existence of a charge.  It depends on what can be inferred from all the circumstances.

46.  Turning now to point (iii), I agree that the magistrate gave too much weight to this factor and that he overlooked the fact that Ms Yip had provided a guarantor.

47.  A magistracy appeal is conducted by way of rehearing[21].  I am entitled to make my findings according to the evidence that was before the magistrate.

48.  In order to make the finding that the parties had the intention to create a charge (when the specified conditions were fulfilled), such a finding must be the only reasonable inference which can be drawn from the evidence as a whole.

49.  Mr Ma submitted that the agreement touched on the subject property, but that it was just one piece of information supplied to the appellant for it to consider whether it would grant the loan.  I can hardly agree with this.

50.  It is beyond question that the purpose of paragraphs 8.01 and

8.02[22] of the agreement must have been to enable the appellant to exercise the right to redeem the flat from the first mortgagee bank and to keep the title deeds in its custody, as if it had become the holder of the first mortgage, in cases where Ms Yip failed to repay the debt to the appellant[23], she was confronted with the prospect of being made bankrupt[24], or her guarantor was unable to fulfil his duty[25]. If such had not been their intention, these two paragraphs would not have been included in the agreement at all.

51.  Although neither one of the two parties gave evidence, I find that to charge the land was definitely the intention of both parties to the agreement.  This is the only reasonable inference that can be drawn from the evidence as a whole.

Conclusion

52.  I hold that both parties intended to charge the land and that the agreement was one which related to land.  Because the charge was created without the written permission of the Authority, it was void.  Although this particular agreement was only a part of the whole ‘Loan Agreement’[26], and other parts of the agreement were still valid despite the part in question being rendered void by virtue of section 17B of the Ordinance [27], I endorse the magistrate’s view that if the term in the agreement by which the charge was created was void by virtue of section 17B, the appellant contravened section 27A of the Ordinance.

53.  For the above reasons, I dismiss the appeal and uphold the conviction.

Translated by the Judgment Translation Unit of the Judiciary and vetted by Mr. P. Y. Lo,Barrister-at-law.

[1] Contrary to section 27A of the Housing Ordinance.

[2] Cap 283, Laws of Hong Kong.

^[3] Cap 221, Laws of Hong Kong.

[4] See New Grant No. 2988 and the deed of assignment; certified copies of them were prosecution exhibits P5 and P6.

[5] The certified copy of the Letter of Nomination was prosecution exhibit P7.

[6] The certified copy was prosecution exhibit P9.

[7] Paragraph 8.01 of the agreement.

^[8] At the trial the appellant was represented by two counsel, Mr David Ma and Mr Wilson Lau.

[9] Land in respect of which the Authority is authorized to nominate purchasers.

[10] Emphasis added to highlight its importance.

[11] Emphasis added to highlight its importance.

[12] Paragraphs 7(a) and (b) of the agreement.

[13] See paragraph 12 of this judgment.

[14] The first word I underlined.

[15] See the second word underlined in paragraph 12 of this judgment.

[16] [2007] 4 HKLRD 762.

[17] Cap 219, Laws of Hong Kong.

[18] HCA 1221/2006.

[19] FACV 9/2011.

[20] Cap 1, Laws of Hong Kong.

[21] See the holdings of the Court of Final Appeal in Chou Shih Bin v HKSAR (2005) 8 HKCFAR 70.

[22] “All principal sums interests costs charges and expenses paid or incurred by the Lender in redeeming or procuring the transfer of any such security and in procuring any entries to be made in the Land Registry shall be paid by the Borrower to the Lender on demand with interest from the date or respective dates of the same having been paid at the interest rate set out in the First Schedule hereto until payment and the terms of this Agreement shall apply to the Redemption Monies as if it forms part of the Land.”

[23] See paragraph 7(a) of the agreement.

[24] See paragraph 7(b) of the agreement.

[25] See paragraph 7(c) of the agreement.

[26] The original text of the agreement is in English and is entitled “This Loan Agreement”.

[27] See paragraph 11 of the agreement.