KWONG FUNG RICE CO LTD v. FIDELITY CONCEPT DEVELOPMENT LTD t/a ROYAL PLAZA RESTAURANT

   DCCJ 2967/2008

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 2967 OF 2008

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BETWEEN

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J U D G M E N T

1.  Fidelity Concept, the Defendant, ran a restaurant at Kwun Tong. Kwong Fung, the Plaintiff, claimed and subsequently obtained judgment against Fidelity Concept for unpaid cost of goods sold and delivered and dishonoured cheques. In execution of the judgment, Kwong Fung obtained a writ of fieri facias. Upon execution of the writ by the Bailiff by seizing the properties in the restaurant premises, Chan, the Claimant, came forward and claims ownership of the seized properties. The Bailiff therefore interpleaded.

Background

2.  Kwong Fung commenced this action in July 2008.

3.  On 14 November 2008, Kwong Fung obtained an order whereby Fidelity Concept should make interim payment, failing which judgment in the amount claimed would be entered.

4.  Fidelity Concept settled the interim payment by 4 instalments. However 2 of the cheques drawn by Fidelity Concept for such purpose became dishonoured subsequently.

5.  In April 2009, Kwong Fung took out application for summary judgment against Fidelity Concept. By consent, judgment was entered against Fidelity Concept in May 2009.

6.  Kwong Fung obtained the writ of fieri facias on 3 July 2009 in execution of the judgment.

7.  On 13 August 2009, the Bailiff attended the restaurant and executed the writ by seizing the fixtures, chattels and equipment in the restaurant. The properties seized are set out in the Bailiff’s list (“the seized properties”). According to the notice of the same date, auction of the items was supposed to be held on 20 August 2009.

8.  Chan was alerted of the execution. On 14 August 2009, through his solicitors, formally put forward his claim of title to the seized properties.

Basis of the claim

9.  Chan claims that he is the rightful owner of the seized properties which he purchased at the price of HK$150,000 from Fidelity Concept in early December 2008. The properties were leased back to Fidelity Concept for a term of 15 months to enable the same to continue to run the restaurant. Chan has received rental in the sum of HK$5,000 from Fidelity Concept every month ever since.

10.  This arrangement is evidenced by a written Chinese sale and purchase agreement dated 2 December 2008 and a written Chinese leasing agreement dated 3 December 2008, both signed by Chan and Fidelity Concept. The properties purchased were set out in the list attached to both agreements.

11.  From the outset, Kwong Fung challenged the arrangement, describing it as artificial for the sole purpose of defeating the execution of any judgment against Fidelity Concept. Indeed instances of sham transaction set up to frustrate judgment creditors in the restaurant business may not be news. Nevertheless, whether this case is one of those instances has to be decided as a matter of fact. Each case has to be decided on its own facts.

Preliminary

12.  Mr Wong for Kwong Fung somehow sought to refer to numerous decided cases which invariably had to do with distress for rent, a relief available to landlord against the tenant for unpaid rent.

13.  Part III of the Landlord and Tenant (Consolidation) Ordinance, Cap.7 provides for the distress for rent. Sections 87 and 88 define the property liable to seizure under a warrant of distress. The court will first consider whether the properties in question are in the apparent possession of the tenant. If yes, the bailiff will be entitled to seize the properties but the court retains discretion to return the property to the rightful owner. In exercising the discretion, ownership is only one of the factors to be considered, along with all the other circumstances including the rights of the landlord.

14.  However, this is a case of execution of a writ of fieri facias pursuant to a judgment debt. Section 68A of the District Court Ordinance, Cap.336 (“DCO”) provides that:

“(1) A writ of fieri facias or other writ of execution against goods issued from the Court binds the property in the goods of the execution debtor from the time when the writ to be executed is delivered to the bailiff.

(2)  A writ of execution does not prejudice the title to any goods of the execution debtor acquired by a person in good faith and for valuable consideration unless the person had, at the time when he acquired his title, notice that the writ or any other writ under which the goods of the execution debtor might be seized or attached had been delivered to and remained unexecuted in the hands of the bailiff.

……”  (emphasis added)

15.  Chan entered into the sale and purchase agreement with Fidelity Concept on 2 December 2008. At that time, there was yet to be any judgment or writ of execution. Mr Wong for Kwong Fung argued that nevertheless Chan was not a purchaser in good faith and for value. This is one of the major issues that I am asked to determine.

16.  To do that, I took the view that the dispute could not be satisfactorily resolved on affidavit alone. Chan was present at the hearing and ready to take the witness stand. I therefore stood this case down for the same to be resumed and heard in the open court.

Whether Chan was a purchaser in good faith and for value

17.  Chan gave the following evidence:

(1)  Chan works for his family’s company which is in the business of trading in electronic products.  He became a shareholder of the company by virtue of the transfer of shares after the passing of his mother in late 2008.  The company search documents evidence the transfer of shares in November 2008.

(2)  Chan has been a regular customer of the restaurant and was introduced to the person in charge by the name of Lam Shek Kwan 5 or 6 years ago.  In about November 2008, Lam represented that he had financial difficulty (or in his words  “週轉不靈”) and proposed to sell to Chan the fixtures, chattels and equipment in the restaurant but then to lease them back to enable the restaurant to continue to operate.  The asking price was HK$240,000 for the properties to be leased back at the monthly rental of HK$8,000.

(3)  Thinking that the return was not bad, Chan felt interested and arranged cash withdrawal of this amount from his HSBC bank account for the intended deal.  The bank account statement shows that this happened on 11 November 2008.  This investment had nothing to do with his family’s company.

(4)  However, upon friends’ advice, he consulted 2 re-cycling dealers (or “夜冷”) and obtained estimated valuation of HK$150,000 and HK$200,000 respectively.  Chan then counter-offered to Lam the price of HK$150,000.  Lam accepted, after considering for about 8 to 10 days.  The properties would be leased back to the restaurant at the monthly rental of HK$5,000.

(5)  The above negotiation took about 3 to 4 weeks.  Lam then came up with the written sale and purchase agreement and the leasing agreement.  The owner of the properties was said to be Fidelity Concept which became the seller and lessee under the agreements.  The sale and purchase agreement was dated 2 December 2008 and the leasing agreement was dated 3 December 2008.

(6)  Chan made payment of the sum of HK$150,000.  The bank deposit slip dated the same date of the sale and purchase agreement evidences that.

(7)  Since December 2008, Chan has attended the restaurant to collect the cheque for the monthly rent of HK$5,000 every month.  The cheque would then be deposited into his bank account.  The cheque deposit slips for the period between December 2008 and August 2009 evidence that.

(8)  On 13 August 2009, Chan was informed of the Bailiff’s execution.  He went to the restaurant and came to understand that during the execution, the Bailiff was already informed that the seized properties belonged to Chan.  Chan was thus requested to attend.  Chan stated his case and, as mentioned above, formally did so through his solicitors on the following day.

18.  Whilst Mr Wong for Kwong Fung questioned the genuineness of the transaction between Fidelity Concept and Chan, there is really no evidence of any circumstance that suggests any relationship between Chan or his family’s company on the one part and Fidelity Concept or Lam on the other part. Chan had no idea whether Lam has made similar proposal to any other person.

19.  Chan’s acknowledgement of being told about the financial difficulty of the restaurant is neither here nor there. Chan confirmed that he had no knowledge about this action or any litigation against the restaurant at all material times. The only detail that Lam mentioned to him at one time had to do with mandatory provident fund. There is also no suggestion or evidence that the sale was at undervalue.

20.  Considering the evidence and seeing Chan testify, I accept his case. I am satisfied that he purchased the properties in good faith and for value.

Whether the seized properties are those purchased by Chan

21.  It was argued on behalf of Kwong Fung that the seized properties as per the Bailiff’s list do not tally with the properties purchased as per the list attached to the sale and purchase agreement and the leasing agreement. In terms of description, the differences do exist. However this should not be surprising. How the seized properties were described on the Bailiff’s list must be dictated by the Bailiff.

22.  By affidavit, Kwong Fung listed out various discrepancies between the Bailiff’s list and Chan’s list. By affidavit, Chan already conceded that various items of the seized properties are not part of those he purchased in December 2008. In court, he made a couple more concessions. Doing my own comparison, I also find that items such as the stock of drinks found on site hardly formed part of those purchased by Chan in December 2008.

23.  I find that the following items of the seized properties did not form part of those he purchased in 2008:

(1)  item no. 3: fax machine;

(2)  item no. 102: 30 boxes of mahjong (except for 10 full sets belonging to Chan);

(3)  item no. 19: “ZF-400B” vacuum packing machine;

(4)  item no. 68: “Rinnai” gas water heater;

(5)  items nos. 1, 13, 49, 71: 4 clocks;

(6)  item no. 11: ceramic cat;

(7)  item no. 7: old “Nobleland” electric fan;

(8)  item no. 44:  “PARCO” plastic fan;

(9)  item no. 82: ‘Daikin” separate type air conditioner;

(10)  item no. 111: 80 pieces of table clothing;

(11)  item no. 95: old picture with wooden frame;

(12)  item no. 78: “Ray power” battery charger machine;

(13)  item no. 108: 100 cans of beers;

(14)  item no. 109: 200 cans of soft drinks; and

(15)  item no. 110: 20 bottles of beer.

24.  For the other alleged discrepancies particularised, Chan managed to explain them well. According to him, when he entered into the sale and purchase agreement and the leasing agreement, Lam took him for a tour around the restaurant and pointed to him the items on the list to be attached to the agreements. In court, he managed to give details of the locations and setup of the fixtures and equipments.

25.  Chan revealed in his evidence in chief that the “Daikin” air conditioner (above) did not exist at the time of the agreements. He also revealed that not all the 30 boxes of mahjong seized belong to him because he purchased only 10 full sets. He acknowledged that there might be addition or removal of properties after his agreements with Fidelity Concept. But it could be seen that a lot of the items of the seized properties are less in quantity than those on Chan’s list, not the other way round.

26.  By the time when he attended the restaurant on 13 August 2009, the Bailiff has already compiled his list of the seized properties. Upon Chan claiming to be the true owner of the seized properties, the Bailiff, according to Chan, also took Chan for a brief tour of the restaurant to indicate roughly where the Bailiff found those items on his list. Chan managed to recognise them as those he purchased.

27.  Notwithstanding the assertion in the affidavit on behalf of Kwong Fung that there are still many other discrepancies between the Bailiff’s list and Chan’s list, none of them was further specified, though Mr Wong had the chance to cross-examine Chan in court.

28.  On balance, I am satisfied that Chan has proved his title to the items of the seized properties except for those itemised above.

Conclusion and costs

29.  I find that Chan is the rightful owner of the seized properties except for the items identified under paragraph 23 above.

30.  As Chan succeeds in substantiating his claim to most and not all of the properties seized, I am of the view that he should be entitled to 90% of his costs of these interpleading proceedings.

31.  Though requested by Mr Yip, I am not satisfied that Kwong Fung is guilty of any conduct that would have warranted an order that the costs of these interpleading proceedings should be taxed on an indemnity basis.

32.  Parties drew my attention to their dispute as to scope of the costs order made by Her Honour Judge Mimmie Chan on 2 November 2009. Judge Chan ordered that Chan should pay the costs of, occasioned and thrown away by the last adjournment. The dispute lies in whether such costs should include the security guard fees during the period of adjournment. As I indicated in the hearing, it is for the parties, if they want, to seek clarification of the order from Judge Chan.

Order

33.  Except for the items listed under paragraph 23 above, the seized properties shall be released from execution and returned to Chan. Execution in respect of the items under paragraph 23 above may proceed.

34.  Without prejudice to the costs orders previously made, Kwong Fung is to pay 90% of the costs of these interpleading proceedings. Kwong Fung is also to pay any costs incurred by the Bailiff. Costs shall be taxed, if not agreed, with certificate for counsel.