SIU WING YEE ANGELINE v. EARNING YIELD LTD

HCMP 1405/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1405 OF 2012

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BETWEEN

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J U D G M E N T

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Introduction

1.  This is the hearing of a vendor‑purchaser summons taken out by the plaintiff vendor (the “Vendor”) seeking certain declarations relating to the title of a flat (the “Property”) which is the subject matter of a formal sale and purchase agreement (the “Agreement”) with the defendant purchaser (the “Purchaser”) and an order for specific performance of the Agreement.  Under clause 3.1 of the Agreement, the Vendor’s obligation is to assign the Property to the Purchaser “free from encumbrances”.  The Purchaser’s query over the title arose out of a legal charge registered against the Property (the “Legal Charge”) which was vacated pursuant to an order of the District Court (the “Vacation Order”) but had not been properly discharged.  Both the Vendor and the Purchaser are willing parties and desire to complete the sale and purchase.  Simply put, they are seeking to have the court to perfect the title of the Property.

The background

2.  The Vendor acquired the Property in 1992.  At the time, she was employed as a cashier and then a manageress in Lamma Seafood Kitchen owned by Holst Limited (“Holst”).  The shareholders of Holst were Nobis Limited (“Nobis”), Angela Lee, the Vendor and two others.  Angela Lee and Nobis together held 306 out of 490 issued shares in Holst.  The Vendor was issued 10 shares in Holst and was one of its directors from August 1992 to January 1993.  But she had no recollection of the circumstances when she was issued the shares, appointed as its director and resigned.  Lamma Seafood Kitchen closed down in November 1993.

3.  Charles Lo and Angela Lee were the sole shareholders and directors of Nobis.  They were respectively a professional accountant and a practising solicitor.

4.  On 21 October 1993, the Vendor executed the Legal Charge in favour of Nobis for loans to be advanced to the Vendor or to Holst at the request of the Vendor from time to time.  The Vendor admitted signing the Legal Charge but said that the document had not been explained to her before she signed and she did not know what the document was.  She said she only signed at the suggestion and on the faith of Angela Lee whom she knew was a practising solicitor.  She had not borrowed any money from Nobis and had no knowledge whether any loans had been advanced to Holst as she was not in charge of finance and accounting matters in Holst or Lamma Seafood Kitchen.

5.  Holst was struck off the register of the Companies Registry on 25 July 1997, pursuant to section 290A of the Companies Ordinance.  On 7 October 1997, Angela Lee and Charles Lo resigned as directors and secretary of Nobis.  Two Mainland Chinese were appointed directors and another Mainland Chinese was appointed as secretary of Nobis.  No annual returns had been filed by Nobis since.  However, Angela Lee and Charles Lo remained as its sole shareholders.  On 20 February 2004, Nobis was also struck off the register, pursuant to section 291 of the Companies Ordinance.

6.  On 12 January 2011, the Vendor and Purchaser executed the Agreement.  The Property was purchased along with other adjacent properties for redevelopment.  On 21 January 2011, the Vendor took out an application against the Secretary for Justice in the District Court under DCMP 171/2011 seeking a declaration that the Legal Charge was null, void, invalid or unenforceable and an order that the registration of the Legal Charge in the Land Registry be vacated.  In connection with that proceeding, Angela Lee and Charles Lo made a statutory declaration stating, inter alia, that (a) any debts secured against the Property had been over due and past the limitation period; (b) they had no intention to enforce the Legal Charge; (c) they had no objection to declaring the Legal Charge to be of no further effect on the Property; and (d) they had no objection to vacating its registration from the Land Registry.

7.  By consent, Registrar Lee of the District Court ordered the registration of the Legal Charge to be vacated and that the remaining remedies sought by the Vendor be withdrawn.

8.  The Purchaser’s solicitors were not satisfied with the Vendor’s answer to their requisition relating to the discharge of the Legal Charge.  Then the parties agreed to a postponement of the completion date of the Agreement for the Vendor to take out a vendor‑purchaser summons to determine whether she has shown and proved good title in respect of the Property.

The issues

9.  The Purchaser stance is that without a proper release or discharge, the Legal Charge is still subsisting despite the Vacation Order and remains an encumbrance on the Property.  A vendor‑purchaser’s summons will only bind the parties to the application and not subsequent purchasers and assignees.  Since the Property is intended to be part and parcel of a future redevelopment, defect in title of the Property will affect the whole development.  The Purchaser therefore wishes to have an assurance that the Vendor can indeed show, prove and give a good title.

10.  The Vendor argues that the effect of vacating the registration of the Legal Charge is to render the Legal Charge void and unenforceable against subsequent purchasers for value and that in any event there is no real risk of enforcement of the Legal Charge by reason of sections 3 and 4 of the Land Registration Ordinance and/or section 19 of the Limitation Ordinance.  Hence, the Vendor takes the view that the Vacation Order is as good as a discharge of the Legal Charge and that good title has been shown.  In addition, Miss Lui, counsel for the Purchaser, suggests that the Vendor could have applied to have the Legal Charge discharged pursuant to section 12A of the Conveyancing and Property Ordinance.

11.  The issues raised by this summons are:

(1) whether the Vacation Order has the effect of discharging the Legal Charge;

(2) whether Nobis’ right of action has been extinguished by section 19 of the Limitation Ordinance;

(3) whether pursuant to sections 3 and 4 of the Land Registration Ordinance, the Legal Charge is rendered null and void against the Purchaser as a bona fide purchaser and cannot rank in priority to the Agreement registered subsequently; and

(4) whether the Vendor should have applied for a discharge of the Legal Charge under section 12A of the Conveyancing and Property Ordinance.

Whether the Vacation Order has the effect of discharging the Legal Charge

12.  Mr Chu argues by drawing analogy from section 21 of the Land Registration Ordinance that the effect of the Vacation Order is a valid discharge of an interest in land.  Section 21 provides:

“ Entry of discharge by Land Registrar

   If an order is made for vacating any such registration, the Land Registrar shall, on the filing with him of a memorial and an office copy of such order, enter a discharge of such lis pendens on the register, and may issue certificates of such entry.”

Mr Chu recognises that this section applies to vacating lis pendens registered against a property.  However, he argues that where the court ordered the registration of some instruments to be vacated, the effect would be, so far as interest in land is concerned, that such instrument is discharged, or else the law in this area would be absurd.  He refers to the following entry in the Land Register in relation to the Vacation Order:

“ IN D.C.M.P. NO. 171 OF 2011 TO DISCHARGE MEM. NO. UB5824017”

He argues that it is equally absurd if only the memorial, but not the actual instrument concerning the land is discharged.  With respect, Mr Chu’s submission is not supported by any authority and is inconsistent with the scheme of registration of lis pendens under the Land Registration Ordinance and with the concept of legal estate in land law.

13.  First, the scheme of registration of lis pendens and vacation of such registration is set out respectively in sections 14 to 18 and sections 19 to 21 of the Land Registration Ordinance.  “Lis pendens” is defined in section 1A as meaning:

“(a) any action or proceeding pending in a court or tribunal that relates to land or any interest in or charge on land; and

(b) a bankruptcy petition;”

Lis pendens is just a notice of certain pending litigation relating to land or interest in land or charge on land.  The notice is not an instrument creating any interest in or charge on land.  The registration is a registration of such a notice.  Thus vacating the registration of lis pendens has the effect of discharging or removing the lis pendens only.  A legal charge is a legal estate.  It is created by a deed.  Vacating the registration of a legal charge only removes its registration from the Land Register.  It does not have the effect of extinguishing the legal estate or legal interest in land created by the deed.  The legal charge still exists, though its registration has been vacated from the Land Register.  Its vacation does not amount to a discharge or release of that interest in land.  It remains as an encumbrance in land.

14.  Mr Chu’s argument based on the entry in the Land Register relating to the Vacation Order is also misplaced.  That entry is an inaccurate summary of the Vacation Order, which is in the following terms:

“ the registration of the legal charge/mortgage dated 18^th October 1993 registered in the Land Registry by Memorial No UB5824017 (“Legal Charge”) against [the Property] be vacated from the Land Registry.”

According to the terms of order, the Vacation Order discharged nothing.  It did not discharge the instrument or the Legal Charge.  It only ordered the vacation of the registration of the legal charge registered by the memorial quoted.  Apart from making an impossible quantum leap from discharging a memorial used to register a legal interest to discharging that legal estate, his argument is based on totally wrong premises.  By no reading of the Vacation Order can it be construed that the court intended to discharge that legal estate or to render the Legal Charge null, void or unenforceable.  In fact, by consent, the Vendor was allowed to withdraw her application for those remedies. I also doubt if the court has jurisdiction to discharge a legal estate (see for example Godfrey J’s observation in Fung Kam Cheung v Kwok Yiu Wing [1991] 1 HKC 321).

15.  Second, Mr Chu’s argument is inconsistent with the concept of legal estate in land law.  Under section 2 of the Conveyancing and Property Ordinance, a legal charge is a legal estate.  Pursuant to section 4(1), a legal estate in land may be created, extinguished or disposed of only by deed.  If a mortgage or legal charge was registered against a property, it became an encumbrance on the title of the property.  The nature and extent of that encumbrance has to be ascertained from the deed creating the legal charge.  Similarly, if a mortgage or legal charge is to be discharged, it may only be discharged or released by deed.  Without a valid release by deed, even if the vendor had repaid the mortgage loan, the legal estate still remains in the mortgagee and the vendor could not pass the legal estate free from encumbrances to the purchaser.

16.  In Ko Lan v Hoo Man Kuen Martin & Anor HCMP 4416/1998, unreported, 19 January 1999, the purchaser raised a requisition relating to the discharge of a mortgage by a written release issued by the mortgagee bank acknowledging that all monies due under the mortgage had been repaid, but the release was not executed in the form of a deed.  Recorder Chan SC held that release was not a valid discharge of the mortgage, which must be effected by deed.  In further answer to the vendor’s argument based on section 55 of the Conveyancing and Property Ordinance, he held that while the acknowledgment constitutes a good discharge to the person paying the money, it does not have the effect of releasing the legal estate which comes into existence when the legal charge is created.  He said at page 21:

“ It is convenient for me now to explain why I reject the Vendor’s argument that the release need not take the form of a deed and that the instrument under hand signed by Raymond Yee was a sufficient release of the legal charge dated 28^th February 1998. The crux of the Vendor’s argument was that (1) the instrument signed by Raymond Yee was a clear receipt by the Bank through its authorised attorney, and (2) by reason of section 55 of the Conveyancing and Property Ordinance a receipt given by a mortgagee need not be under seal. Hence it was argued that section 4(2)(f) of the same Ordinance applied to such receipt and accordingly section 4(1) did not apply to make it mandatory that the release of the legal estate in the form of legal charge must be by deed. Hence it was contended that the document would constitute a good release even though the same was not under seal.

I am unable to accept this argument. Section 55 of the Ordinance read:

“55. (1) A receipt in writing of a mortgagee or a receiver shall be a sufficient discharge for the money arising under a power of sale or for any money or security comprised in the mortgage or arising under it; and a person paying that money or transferring that security shall not be concerned to inquire whether any money remains due under the mortgage.

 (2) A receipt mentioned in subsection (1) need not be under seal.”

In my judgment, section 55(1) only provides that a receipt in writing given by the mortgagee will constitute a good discharge to the person paying the money.  The discharge referred to in this section is the discharge of the payment obligation when the property charged is sold under a power of sale.  It does not have the effect of releasing the legal estate which comes into existence when the legal charge is created.  It is only a provision directed for the protection of persons making payment to the mortgagee from any allegation that the mortgagee had acted improperly in selling the mortgaged property or from dealing with the proceeds.”

I respectfully agree with the learned recorder’s statement of the law.

17.  In Au Wai Ming & Anor v Kam Tze Ming Alfred & Anor [2009] 4 HKC 469, the Court of Appeal reached the same conclusion without referring to Ko Lan v Hoo Man Kuen Martin & Anor.  The Court of Appeal held, relying on sections 2 and 4 of the Conveyancing and Property Ordinance that a legal charge is a legal estate which could only be extinguished or disposed of by deed and that in the absence of a valid deed of release that legal estate is still held by a former mortgagee.  This must be taken as the correct principle of law applicable to the present case.

18.  Thus, applying the principle in Au Wai Ming & Anor, the Legal Charge has never been discharged; no proper deed having been executed by the chargee to extinguish that legal estate.  As explained in paragraph 13, the Vacation Order did not discharge the Legal Charge and did not have that effect.  The legal estate created by the Legal Charge survives the vacation of its registration in the Land Register.

Whether Nobis’ right of action has been extinguished by section 19 of the Limitation Ordinance

19.  Section 19 of the Limitation Ordinance provides a limitation period of 12 years from the date when the right to receive money secured by a mortgage or other charge on property accrued.  The Purchaser’s solicitors suggested the Vendor could have relied on section 19 of the Limitation Ordinance and applied for a declaration that the Legal Charge was no longer subsisting or capable of taking effect.  Mr Chu and Miss Lui refer me to a number of cases in which such a course was taken and submit that possibly the Legal Charge in the present case has become unenforceable.

20.  In Fung Kam Cheung v Kwok Yiu Wing [1991] 1 HKC 321, a mortgage affecting a property was created and registered in the District Office.  The memorial indicated that the property was mortgaged for securing payment up to 1942 without interest.  Thereafter, there were a number of transactions involving the property.  In 1989, the vendor and purchaser entered into a sale and purchase agreement in respect of the property acknowledging that the sale and purchase was subject to an order of the Supreme Court that the mortgage was discharged. At the time, section 12A of the Conveyancing and Property Ordinance had not yet been enacted.  Godfrey J, as he then was, noted that the court had no jurisdiction to make an order to discharge the mortgage.  He assumed, however, that the mortgage had long since been discharged and made a declaration that the 1931 mortgage was no longer subsisting or capable of taking effect.  He acknowledged that such a declaration operates only as between the vendors and purchasers who are parties to the proceedings and does not bind the mortgagee.

21.  In Ally Town Investment Ltd v Weng Seng Heng Land Investment Co Ltd [1995] 3 HKC 242, the property concerned had been mortgaged to a company on 9 January 1915 with the mortgagor covenanting to repay on 11 January 1917.  On 12 July 1927, the benefit of the mortgage was assigned to a Mr Barlow. In a vendor‑purchaser summons, Findlay J granted a declaration that the risk of Mr Barlow, or any of his successors‑in‑title, now emerging nearly 70 years after the assignment to him, to claim an interest in the mortgage was remote in the extreme such that the only reasonable assumption was that his interest was discharged many years ago.

22.  In Alpha Star Enterprises Ltd v Personal Representative of Tang Mei Shin (deceased) [2002] 4 HKC 218, the plaintiff became the registered co‑owner of half share of a property which was subject to a mortgage created in 1905.  It obtained an order made ex parte allowing it to serve the documents by way of substituted service on the personal representative of the mortgagee who is presumably deceased.  It sought a declaration that the mortgagee’s rights under the mortgage had accrued for more than 12 years and were hence time-barred.  Unlike Fung Kam Cheung v Kwok Yiu Wing and Ally Town Investment Ltd v Weng Seng Heng Land Investment Co Ltd, which were proceedings between vendors and purchasers, the plaintiff was seeking a declaration against the original mortgagee.  Chung J said there were at least three possible ways in which a mortgage document would provide for repayment of the mortgage debt: on a prescribed date, or upon demand, or without any express provision.  He held that the burden was on the plaintiff to show that the mortgagee had been time‑barred from claiming against the mortgagor and/or the suit property.  He refused to make the declaration as the plaintiff failed to establish its case as to when repayment was due and cause of action accrued and became time‑barred.

23.  Both Mr Chu and Miss Lui submit that any debt secured by the Legal Charge dated 18 October 1993 must have by now past the limitation period of 12 years.  They draw my attention to the fact that Nobis was struck off and dissolved on 20 February 2004; that Lee and Lo, the sole shareholders of Nobis, made a statutory declaration stating that (i) any debts secured against the Property were over due and past the limitation period, (ii) they had no intention to enforce the Legal Charge, and (iii) they had no objection to declaring the Legal Charge to be of no further effect on the Property; that the new directors of Nobis have been silent the entire time; and that it seems unlikely that Nobis will be reinstated to enforce the Legal Charge.  They submit it is appropriate for the court to make a declaration that the Legal Charge is unenforceable by reason of limitation.

24.  I am unable to draw any inference from the mere fact that as the Legal Charge was created in 1993 it must have by now, about 20 years since, past the limitation period of 12 years.  It was stated in the preamble of the Legal Charge that Nobis would make advances to the Vendor or, at her direction, to Holst from time to time.  Under clause 2.01, the Vendor covenanted to pay Nobis on demand the secured indebtedness.  Clause 3 further provided that the Legal Charge shall be a continuing security and shall remain in full force and effect until the secured indebtedness has been paid in full, notwithstanding the death, bankruptcy, insolvency or liquidation or any incapacity or change in the constitution or status of the Vendor.  Unlike the case of Fung Kam Cheung and Ally Town Investment Ltd in which the mortgage loans were to be repaid on a prescribed date, the Legal Charge was a continuing security and the loan was to be repaid on demand.  Time does not run from the date of creation of the Legal Charge but from the date when cause of action accrued.  Nobis’ cause of action only accrued on the Vendor’s failure to pay on demand.  There is no evidence when the loans were repayable or when any demand was made.  By the mere fact that about 20 years lapsed since the creation of the Legal Charge, the Vendor has quite failed to discharge the burden of showing that the cause of action has become time-barred.

25.  The position taken by Angela Lee and Charles Lo in their statutory declaration made on 28 July 2011 was equivocal.  They did not expressly confirm or deny if any loan had been advanced to the Purchaser or Holst, but averred that any debts secured against the Property were over due and past the limitation period and that they had no intention to enforce the Legal Charge.  While they did not confirm that any debt had been fully repaid, their avowed intention was not to enforce the Legal Charge and had no objection to declaring the Legal Charge to be of no further effect on the Property.  The present case is distinguishable from Fung Kam Cheung and Ally Town Investment Ltd in which the inference that the loans had been repaid could be readily drawn from the long lapse of time after repayment was due.  In the present case, reading between the lines, it seemed that Nobis had actually advanced money to Holst which had not been repaid, but Angela Lee and Charles Lo did not want to enforce the Legal Charge on the Property, which would be equivalent to enforcement against the Vendor.  Also, there was no evidence as to when the demand for repayment was made and accordingly there was no basis for them to averred that the debts were time‑barred.  At the time of the making of the statutory declaration, Nobis had already been struck off. Taken at its highest, the statutory declaration is no more than a declared intention by the shareholders of Nobis which no longer existed, not to mention that even if Nobis had not been struck off, their intention has not been formalised into Nobis’ undertaking not to enforce the Legal Charge.  It does not show that Nobis’ cause of action has become time-barred.  The fact that Nobis was struck off and that its last directors had remained silent over the years is neither here nor there.  It may be relevant to the question of risk of enforcement but do not assist the Purchaser on the limitation issue.

26.  It is curious why Angela Lee and Charles Lo could not have been more forthcoming in their declaration and provide more specific information about the debt, whether demand for repayment had been made and when it was made and why they did not wish to enforce the Legal Charge.  They were the only shareholders of Nobis.  They could have come forward to reinstate the company to properly discharge the Legal Charge, if they were serious that the Legal Charge was not to be enforced.  According to the Vendor, the Legal Charge was executed under suspicious circumstances.  The Vendor was allotted 10 shares in Holst, appointed as its director without her knowledge and then induced to sign her own resignation without her knowledge.  She had not asked for loans to be advanced to her or to Holst.  At the time of signing the Legal Charge, she was not even a director of Holst.  She has made some serious allegation against Angela Lee, a practising solicitor, in inducing her to sign the Legal Charge without explaining the contents to her.  In the circumstances, the court has to be very cautious in acting on the strength of the statutory declaration from persons accused of having engaged in such dubious conduct.

27.  Also, there was no explanation from the Vendor as to why the application in the District Court for declaration that the Legal Charge was null, void and unenforceable was withdrawn.  Mr Chu explained that there had been a change of solicitors acting for the Vendor.  That is not a satisfactory explanation.  The former solicitors must have explained the situation and sought authority from the Vendor before consenting to the order to be made.  There is also nothing to prevent the present solicitors from seeking clarification from the former solicitors. There must be something more which the Vendor or Angela Lee and Charles Lo were not prepared to disclose.  The statutory declaration is also inconsistent with any suggestion that the debt had been paid.  I also have to be very cautious in acting on the Vendor’s assertion that no loan had been advanced to Holst, even if I am to accept that no loan had been advanced to the Vendor herself.

28.  For all these reasons, this is not a case in which the inference that the debt had been time barred or had been paid could be readily drawn.  The only conclusion that I can safely reach is that the Purchaser has failed to discharge the burden of showing that Nobis’ cause of action has become time‑barred or that the debt secured by the Legal Charge had been fully repaid.

Whether the Legal Charge is rendered null and void pursuant to sections 3 and 4 of the Land Registration Ordinance

29.  Mr Chu argues that if the Vacation Order does not have the effect of discharging the Legal Charge, it has the effect of rendering the Legal Charge null and void against the Purchaser as a bona fide purchaser by operation of sections 3 and 4 of the Land Registration Ordinance.  As a result, the Legal Charge cannot rank higher in priority to the Agreement which was registered subsequently.  These sections provide:

“3. Priority of registered instruments; effect of non‑registration

(1) Subject to this Ordinance, all such deeds, conveyances, and other instruments in writing, and judgments, made, executed, or obtained, and registered in pursuance hereof, shall have priority one over the other according to the priority of their respective dates of registration, which dates shall be determined in accordance with regulations made under this Ordinance.

(2) All such deeds, conveyances, and other instruments in writing, and judgments, as last aforesaid, which are not registered shall, as against any subsequent bona fide purchaser or mortgagee for valuable consideration of the same parcels of ground, tenements, or premises, be absolutely null and void to all intents and purposes:

Provided that nothing herein contained shall extend to bona fide leases at rack rent for any term not exceeding 3 years.

4. Notice of unregistered instrument not to affect registered instrument

No notice whatsoever, either actual or constructive, of any prior unregistered deed, conveyance, or other instrument in writing, or judgment, shall affect the priority of any such instrument as aforesaid as is duly registered.”

30.  Mr Chu’s argument is as follows.  The Legal Charge is a “registrable instrument” affecting land within the meaning of section 2 and an order that the registration of the Legal Charge be vacated from the Land Registry shall have the effect of making the Legal Charge fall into the category of “registrable but not registered” instruments within the meaning of section 3(2).  In other words, it becomes an instrument which has not been registered and shall as against any subsequent bona fide purchaser or mortgagee for valuable consideration of the same parcels of ground, tenements, or premises, be absolutely null and void to all intents and purposes.  To further reinforce his argument, Mr Chu submits that there should be no distinction between an instrument which has never been registered and an instrument, like the Legal Charge, which was once registered but removed from the register.  He submits that the phrase “registrable but not registered” should not be construed narrowly to mean the former category of instruments.  Furthermore, section 4 gives a bona fide purchaser the added protection that notice of the Legal Charge shall not affect the priority of his instrument if duly registered.  Thus, the combined effect of the Vacation Order and sections 3 and 4 guarantees the Purchaser priority against Nobis and its successors in title.  I agree with his submission.  Sections 3 and 4 ensure that the Purchaser has priority over Nobis and its successors‑in‑title.  As Nobis was struck off the companies register and there is no sign of its restoration, the position of the Purchaser is quite secured.

31.  However, Miss Lui argues that be that the issue here is not one of priority as between the Purchaser and Nobis, but whether the Vendor can pass to the Purchaser a good title in the Property which she contracted to pass.  She submits that in essence Mr Chu is asking the Purchaser to compare the interest which it will acquire as a bona fide purchaser for value against Nobis as a mortgagee.  Despite the low risk of enforcement, the defect in title remains.  She argues that the Purchaser should not be forced into the position of having to decide for itself whether its interest in the Property, upon registration of the assignment, if completion is to take place, will have priority over the Legal Charge.  The burden is on the Vendor to show she can pass to the Purchaser a good title which she has contracted to sell.  That remains the vital question.

32.  Registration does not create and has no effect on the creation of interests in land.  It merely acts as a record of transactions.  The memorial is just a means of providing secondary evidence of the matters contained in the instrument to which it relates.  It conveys or assigns nothing.  It is the conveyance on sale or the assignment which conveys the interest in land.  Vacating the memorial to the Legal Charge does not affect its existence.  As was rightly submitted by the learned authors of Sihombing and Wilkinson, Hong Kong Conveyancing,Vol 1(B) Division XIV [121]:

“The system of registration is one of registration of deeds rather than of title. Thus registration does not produce or effect title, rather it simply gives priority to those claims which have been duly registered; and acts as a record of transactions with land … Under a genuine deeds system, registration will not enhance the title of the owner nor will non-registration detract from that title; for title comes from the execution of the deed. … Priority does not mean that because the claim is registered then it automatically affects the land; priority merely means that the first in time to register has the right to pursue his claim ahead of all others. Registration under the deeds system affects nothing.”

and in [Division XIV [139]:

“ … Registration will not create the interest sought, nor will it cure any defect in that interest; it will merely give priority pending court determination of the right of the party registering the interest, and any priority gained thereby.”

and in Division XIV [152]:

“ The purpose of registration is not to effect interests, to ensure the registering party ends up with the land, or to convert an equity or doubtful interest into a proprietary interest. The purpose is simply to give notice.”

Registration only affects priority.  The combined effect of the Vacation Order, registration and the operation of sections 3 and 4 only ensure the Purchaser’s priority against Nobis and its successors‑in‑title.  They do not have the effect of discharging the Legal Charge and the defect in title remains.

33.  It is trite law that a vendor has a duty and an obligation to show or prove a good title before completion.  This is done by either sending all the original title documents, or certified copies, for inspection by the purchaser.  The vendor has a duty to show that all mortgages registered against the title of the property have been reassigned or discharged. This duty is encapsulated under section 13 of the Conveyancing and Property Ordinance.  At completion, the vendor has a duty to make or give good title by handing over the original title deeds and documents (see: Trump Well International Ltd v Siu Fung Knitting Factory Co Ltd HCMP 2408/1998, unreported, 7 January 1999 (CFI); CACV 64/1999, unreported, 9 July 1999 (CA)).

34.  Returning to the facts of the present case, under the provisional sale and purchase agreement the Vendor contracted to sell the Property to the Purchaser free from encumbrances.  Under the formal Agreement, the Vendor was also obliged to assign the Property to the Purchaser free from all encumbrances.  Clause 7.1 and Schedule 2 of the Agreement noted that the Property was mortgaged/charged under the Legal Charge and that the Vendor would undertake to redeem the Property at her own cost and expense on completion.  Therefore the Vendor was under a contractual obligation to show that all the encumbrances, including specifically this Legal Charge, could be and would be discharged upon completion.

35.  It is also trite law that a purchaser or mortgagee is bound to inquire into the title of his vendor or mortgagor, and will be affected with notice of what appears upon the title even if he does not so inquire (see Wilson v Hart (1866) LR 1 Ch 463, per Turner LJ at 467).  The Legal Charge had been registered against the Property, albeit its registration has been vacated.  The Purchaser is fully aware of the Legal Charge which was clearly stated in the Agreement and could be revealed upon a search of the Land Register.  The original deed creating the Legal Charge remains missing.  There is no dispute that there has never been a valid discharge of the Legal Charge by deed.  For reasons as explained, the Vacation Order vacating the registration of the Legal Charge has no effect on the legal estate created by the Legal Charge.  In the circumstances, the Vendor has failed to show a good title and will be unable to give a good title to the Property.

36.  While I agree with Mr Chu that the Vacation Order, registration of the assignment, if the parties proceed to completion, and the effect of sections 3 and 4 of the Land Registration Ordinance guarantee the Purchaser priority against Nobis and its successors in title, these sections do not perfect an imperfect title.  The Vacation Order does not have the effect of extinguishing the legal estate created by the Legal Charge.  Upon a search at the Land Registry, one can still discover the Legal Charge existed and had never been properly discharged.  The defect in title remains, though it may be cured over time.  This defective title is not what the Purchaser has contracted to buy and the Vendor contracted to sell.  It just lies ill in the Vendor’s mouth to simply say that the Purchaser has no need to worry and that its interest will have priority over Nobis’ Legal Charge.

Whether the Vendor should have applied for a discharge of the Legal Charge under section 12A of the Conveyancing and Property Ordinance

37.  It was suggested by the Purchaser’s solicitors that the Vendor should have applied for a discharge of the Legal Charge under section 12A of the Conveyancing and Property Ordinance.  The Vendor’s solicitors declined.  The section states that where land is subject to an encumbrance, and the encumbrancer is out of the jurisdiction, cannot be found or is unknown, or if it is uncertain who the encumbrancer is, the court may, if it thinks fit, direct or allow payment into court of a sum of money sufficient to redeem the encumbrance and any interest thereon.  While the present case arguably falls within one of the circumstances described in the section, the difficulty is to determine the appropriate amount to be paid into court to redeem the encumbrance.  Given the scant details of the drawing up of the Legal Charge and what had truly happened in the 1990s, it is impossible for the court to assess the magnitude of that likely encumbrance.  The safest course would be to equate it with the market price of the Property.  That or even any significant percentage of the market price would render the sale nugatory to the Vendor.  The section 12A course is not practicable.

Risk of enforcement

38.  Mr Chu submits that it is trite law that where the titles are doubtful, the court might apply the “no real risk” test to save the title.  But that test is inapplicable where the title is obviously bad.  A doubtful title is one where there is some uncertainty as to whether or not the title could be successfully challenged.  A bad title is one where there is no uncertainty; a challenge will most certainly be successful.  An example of a bad title given by Sihombing and Wilkinson, Hong Kong Conveyancing,Vol 1(B) Division V [199.1] is one where a mortgage or charge has not been properly reassigned, released or discharged.  In Ko Lan, despite that the risk of any action taken by the charge was nil as all monies were repaid, Recorder Edward Chan SC nevertheless held the test does not provide a complete answer. He said at paragraph 32:

“However the fact that there was no risk of any enforcement action by the Bank does not provide a complete answer in the present case. It must be remembered that under the agreement, the purchaser was entitled to a legal estate in the property agreed to be sold free from encumbrances (see Chen Paul v Lord Energy Ltd.[1998] 1 HKC 702 at 709A; also pages 7 & 12 of the transcript of the judgment of Chief Justice Li in the decision of the same case in the Court of Final Appeal: FACV No 11 of 1998). Without a valid release, even though the mortgagor had fully repaid the indebtedness under a mortgage by way of legal charge, his interest in the land would still be subject to the legal charge, which is a legal estate. He would not be in a position to assign to his purchaser the legal estate in the property free from encumbrances. No doubt in such circumstances, he would be in a position to call for the legal title by calling for a release. However without such release, the purchaser is entitled to refuse to complete.”

39.  Mr Chu argues that the title of the Property is not bad but only doubtful as the registration of the Legal Charge had been vacated from the Land Register.  He also seeks to distinguish Ko Lan from the present case on the basis of the statutory declaration of Angela Lee and Charles Lo confirming that any debt owed were overdue and time-barred, that they had no intention to enforce the Legal Charge and that the registration of the Legal Charge was indeed vacated.  He also relies on the fact that Nobis was dissolved under section 291 of the Companies Ordinance and that it was unlikely that it would be restored to enforce the Legal Charge and, at least, the sole shareholders had indicated that they had no intention to take enforcement action.  He therefore argues that there is no real risk that the Legal Charge would ever be enforced.

40.  I am unable to agree with Mr Chu that the title of the Property was merely doubtful.  As already explained above, the Vacation Order does not have the effect of discharging the Legal Charge.  It only gives priority as against Nobis and its successors in title.  The present case is indistinguishable from Ko Lan.  For reasons as already given above, the title of the Property is clearly bad.  I have also made some unfavourable observation about the statutory declaration and the lack of explanation for the Purchaser’s withdrawal of the application for declaration before the District Court.  But even assuming that there is no risk of enforcement, that cannot save a title which is obviously bad.  This defect can be cured by time under section 13(1)(a) of the Conveyancing and Property Ordinance as well as under section 291 the Companies Ordinance.  As the matter stands today, it is inappropriate for the court to make a declaration that the Legal Charge is null, void or unenforceable because there is no risk of enforcement.  It may well be a commercial decision for the Purchaser to decide whether the risk is one which is worth taking.

Conclusion

41.  I reach the conclusion that the order vacating the registration of the Legal Charge did not discharge the Legal Charge and did not have the effect of rendering the charge null, void, or unenforceable.  Though that order, the prompt registration of the assignment if the parties are to complete the sale and purchase and the operation of sections 3 and 4 would ensure the Purchaser’s priority against the chargee, the Legal Charge remains as an encumbrance on title of the Property.  While the risk of enforcement of the Legal Charge is low, it cannot cure the defect in title.  I am not satisfied that the chargee’s right to enforce the Legal Charge has been time-barred under the Limitation Ordinance.  I do not consider it appropriate to discharge the Legal Charge pursuant to section 12A of the Conveyancing and Property Ordinance.  In any event, no such application has been made.

42.  The Vendor has contracted to sell the Property to the Purchaser free from encumbrances.  Specifically, she has contracted to redeem the Legal Charge, but she did not.  She has failed to show a good title in the Property which she has contracted to sell and has failed to answer the requisition satisfactorily.  Accordingly, I dismiss her application and refuse to grant any of the declarations sought.

43.  The parties agree that each party should bear its own costs.  I therefore make no order as to costs.