STARTFORD LIMITED v. LAM MUI FONG

1995, No.MP91

H E A D N O T E

(1) 2nd Mortgagees' action. Defence of:-

(a) Non Est Factum
(b) Misrepresentation
(c) Illegality

raised on affirmations rejected on preliminary point taken by the Plaintiffs and they are entitled to payment of the debt due and owing thereunder.

(2) 2nd Mortgagees did not give notice to the 1st Mortgagees in these proceedings herein for :

(a) possession and
(b) sale of the property subject to the 1st Mortgagees' rights. Such notice is necessary. Accordingly, Order Nisi is made in respect of possession and sale of property for 21 days from the date of service of this Order within which period the 1st Mortgagees can apply to be joined if they want to exercise their rights and power of possession and sale themselves.

 

1995, No.MP91

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

MISCELLANEOUS PROCEEDINGS

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IN THE MATTER OF Order 88 of the Rules of the Supreme Court

and

IN THE MATTER OF a Second Mortgage dated 19th August 1994 and registered in the Sai Kung New Territories Land Registry by Memorial No.224516 in respect of All Those 1,298 equal undivided 1,000,000th parts or shares of and in Lot No.526 in Demarcation District No.210 and The Extension Thereto (All That House No.A6 of Stage V of Marina Cove, Sai Kung, New Territories)

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J U D G M E N T

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1. The Defendant is the registered owner of a property at Marina Cove ("the Property"). The Plaintiff is the second mortgagee of the Property. This is an application by the Plaintiff against the Defendant under O.88 for :-

(1) Payment of all monies due under the Second Mortgage of the Property;

(2) An order for possession of the Property; and

(3) An order for sale of the Property subject to the rights of the first mortgagee.

Background and undisputed facts

(1) The said property was subject to a first mortgage between OTB and the Defendant dated 28 February 1994.

(2) By an agreement for sale and purchase of the property dated 7 July 1994, the Defendant purportedly signed as the vendor for the sale of the Property to one Katmore Enterprises Limited at the price of $8 million. Further, the Defendant purportedly signed an acknowledgement of receipt therein for a deposit of $4 million paid by the purchaser.

(3) In mid August 1994, a firm of solicitors, Amelia Cheung & Co., received instructions from the Plaintiff to prepare a second mortgage in respect of the Property.

(4) On 19 August 1994, the Defendant attended the office of Amelia Cheung & Co. and she purportedly executed the following documents :

(a) The Defendant signed a letter of acknowledgement that she had instructed Amelia Cheung & Co. that it would not be necessary to obtain any consent from the first mortgagee OTB in spite of the fact that the first mortgage provided that the Defendant would not be allowed to create a second mortgage without the consent of the first mortgagee. The Defendant further confirmed that she would be responsible for any consequences.

(b) The Defendant executed the second mortgage, the subject mortgage in these proceedings.

(c) The Defendant signed an cancellation agreement of the aforesaid sale and purchase and agreed to repay Katmore upon cancellation the sum of $3.8 million.

(d) The Defendant drew a post-dated cheque for $3.8 million dated 7 January 1995 in favour of the Plaintiff for repayment of the principal sum under the second mortgage.

(e) The Defendant signed an instruction letter to Amelia Cheung & Co. instructing them to advance the sum of $3.8 million to Katmore's solicitors Leo Lok & Co. upon their undertaking to return to Amelia Cheung & Co. the cancellation agreement duly executed by the purchaser Katmore.

(f) One Hui Kam-yuen issued five post-dated cheques in favour of the Plaintiff for payment of interest under the second mortgage for the five months between 7 September 1994 and January 1995. (The Defendant said this person and the fact that he issued the aforesaid cheques were unknown to her.)

(5) By a letter dated 15 December 1994, Amelia Cheung & Co. notified the Defendant that one postdated cheque for interests dated 7 December 1994 had been dishonoured and demanded payment with warning of the exercise of the mortgagee's rights. On 6 January 1995, Amelia Cheung & Co. sent out a demand letter before action to the Defendant's then solicitors.

The Defendant's case

2. The Defendant filed three affirmations on 30 March 1995, 3 July 1995 and 6 November 1995. The Defendant did not dispute that those documents which bore her signature were signed by her. However, she raised two points in her defence, namely, (A) non est factum and (B) misrepresentation. Her contention on affidavit could be summarised as follows :-

(1) In or about June 1994 her husband was indebted to his friend called Lee Kwok-tim in respect of certain gambling debts in the sum of $4 million. It was not clear from the affidavits whether this sum was a loan from his friend to pay his own gambling debts or debts incurred in gambling with Lee Kwok-tim directly. The Defendant just said that on or around 1 July 1994, she was informed by her husband, one Ma Tak that due to gambling losses he was indebted in the sum of HK$4 million to his friend Lee Kwok-tim.

(2) On 7 July 1994 upon the request of her husband, the Defendant followed Lee Kwok-tim to the office of Messrs K.C. Man & Co. (solicitors purportedly acting for her in the aforesaid purported sale and purchase agreement) to sign some documents. She was told by her husband and believed that :-

(a) the purpose of signing those documents was to formally acknowledge on record as evidence of her husband's indebtedness to Lee Kwok-tim; and

(b) her husband would personally be responsible for the entire repayment of the debt.

(I note here that (a) and (b) are conflicting since her husband said he would be responsible for the repayment, there was no need for her to acknowledge such indebtedness herself unless this was strictly an arrangement between her and her husband and would not affect the creditor.)

3. She was further advised by : (a) a Mr Tsang, staff from Messrs K.C. Man & Co. immediately before signing of the documents and (b) by Mr Lee Kwok-tim himself before their arrival at the office and again before the signing of the documents that she was about to execute an "I.O.U." she said that she was not informed at all as to the purpose of signing the documents or of the nature of such documents. She was not aware nor was she informed, as she said, that the documents she signed was an agreement for the sale of her property.

(3) She said that she was advised earlier by her husband and later by Lee Kwok-tim and Tsang Wan-ching and believed that the two documents she signed at the solicitors office on 7 July 1994 were simply written confirmation of her husband's indebtedness to Lee Kwok-tim in the sum of HK$4 million.

(4) The Defendant further said that before arriving at the office of Messrs K.C. Man & Co., Lee Kwok-tim also told her that she should also "mortgage" the Property in order to provide him with security for his loan to her husband. However, Lee Kwok-tim assured her that he would never seek to enforce the mortgage given the length of his friendship with her husband.

(5) On about 15 August 1994 she was informed by her husband and believed that he had already repaid in cash HK$200,000 of the HK$4 million that was due to Lee Kwok-tim (i.e. arithmetically she should realise by then, according to her husband, the total amount that was due and owing would be HK$3.8 million).

(6) On 19 August 1994, upon the request of her husband, she again followed Lee Kwok-tim to attend the office of Messrs Amelia Cheung & Co. in order to sign some documents which would amend the record of her husband's indebtedness to Lee Kwok-tim to HK$3.8 million. Then she said in paragraph 11 of her 3rd affirmation as follows :-

"11. Lee explained to me that the documents I was to sign would merely serve as a formal acknowledgement by me of my husband's indebtedness to Lee Kwok Tim. In order to give added security to this acknowledgement of my husband's indebtedness, and to guarantee the repayment of my husband's gambling debt to Lee Kwok Tim, I was told that the documents also took the form of a charge on my property at House No.6, Stage V, Marina Cove, Sai Kung, New Territories, Hong Kong. However I was reassured by Lee Kwok Tim, and believed that given the length of his friendship with my husband, he would never seek to enforce the charge." (emphasis supplied)

She agreed that she wrote out a cheque in favour of the Plaintiff in the sum of HK$3.8 million postdated to 7 January 1995. She further agreed that she had signed a document purporting to be a letter of authorisation authorising Lee Kwok-tim to receive the said postdated cheque for the same amount of HK$3.8 million drawn in favour of Startford Limited (the Plaintiff herein) which she believed all along to be the letter of authorisation in favour of Lee Kwok-tim. Lastly, she said she herself had drawn five postdated cheques purportedly as payments of interests by five monthly instalments with the payee and date left blank. She was not aware of those five cheques drawn by Hui Kam-yuen nor such a person.

Any defence of non est factum

4. From the affirmations of the Defendant, she agreed that she was prepared to stand in the shoes of her husband in the repayment of the debts and she was willing to sign an I.O.U. acknowledging her husband's debt as her debt due and owing to Lee Kwok-tim. Assuming that she was not aware that the documents she signed on 7 July 1994 was instead a sale and purchase agreement for the amount of $4 million, the Plaintiff is however not connected with this sale and purchase agreement nor suing under this document.

5. Before the Defendant attended Messrs Amelia Cheung & Co. and in fact even before she attended the office of Messrs K.C. Man & Co., Lee Kwok-tim had already told her that she should also "mortgage" the Property in order to provide him with security for his loan to her husband. Lee also explained to her before the attendance at the office of Messrs Amelia Cheung & Co., the document she was about to sign was to give added security to her acknowledgement of her husband's indebtedness and the document would take the form of a charge on her property.

6. Accordingly, from her own evidence, she was fully aware of the nature of the document she was to sign, i.e. a mortgage. It is therefore not open to her to say as she said in her 1st affirmation that "although I do not dispute that I executed the said second mortgage, I had no knowledge of the nature of the same when I was called to so execute thereof", or further that "had I known that such document was a mortgage I would not have signed on it for there was no reason for me to execute a mortgage in favour of an unknown person to whom I owed no money". The Defendant's case is therefore far from those cases cited before me, i.e. :-

(1) Gallie v. Lee [1971] AC 1004;

(2) Norwich and Peterborough Building Society v. Steed [1993] Ch 116;

(3) Kincheng Banking Corporation v. Chan Siu Kit, Civ App No.160 of 1985.

Any misrepresentation

7. As I have said before Mr Lee had not misrepresented as to the nature and effect of the mortgage document. The Defendant claimed that Mr Lee assured her that he would never seek to enforce the mortgage. Be that as it may, the Defendant has never claimed that Mr Lee is an agent of the Plaintiff. There is no evidence as to the relationship between Mr Lee and the Plaintiff. Accordingly, there is no case of misrepresentation against the Plaintiff from all the evidence presented by the Defendant before me.

Illegality

8. The Defendant, through her counsel and solicitors, submitted a further submission the day after the last hearing on 9 November 1995 and raised this new point which was not argued before me at the hearing. It was submitted that the Defendant had made it clear that the debt owed to Lee Kwok-tim was a gambling debt. Accordingly insofar as the execution of the second mortgage was intended to give security over the Plaintiff's asset for repayment of such debt, it is void. Counsel for the Defendant relied on Chitty on Contracts, 27th Edition, para.38-051 :-

" Fictitious consideration for securities. The Acts cannot be evaded by stating a fictitious consideration in the security. Thus in William Hill (Park Lane) Ltd. v. Hofman [1950]1 All ER 1013 a mortgage was allegedly given for money lent, but really for money lost at play. The court disregarded the false recital and deemed the mortgage to have been given for an illegal consideration."

However, it is not money lost by the Defendant in gambling. It is the Plaintiff trying to enforce the mortgage and the Plaintiff was a third party to certain gambling debts and there is no evidence to say that the Plaintiff knew of the circumstances in which the mortgage was given. There is no evidence from the Defendant either to prove that the Plaintiff did not give value therefor. (The question of giving value is in any event irrelevant because the mortgage was signed, sealed and delivered in a mortgage deed.) Chitty went on in para.38-052 to say :-

" New promise to pay. Suppose that a person loses bets on horse-races and later promises to pay his losses in consideration of not being posted as a defaulter. This promise cannot be enforced because of section 18 of the Act of 1845. But if the loser now gives a cheque in discharge of his liability under this new promise it seems that the cheque may not be tainted with illegality. The reasoning of Hill v. William Hill (Park Lane) Ltd. [1949] AC 530 does not apply since section 18 of the Act of 1845, in providing that a promise to pay a lost bet cannot be enforced, does not refer to the consideration for the promise; while securities are only deemed to have been given for an illegal consideration under the Acts of 1710 and 1835 'where the whole or any part of the consideration shall be for money or other valuable thing won by gaming ... or repaying any money knowingly lent ... for such gaming.' Where the consideration for the loser's cheque is the winner's promise not to post the loser as a defaulter, the cheque may thus not be deemed to have been given for an illegal consideration since it is arguable that the consideration is not 'money ... won by gaming.' The cheque cannot be enforced between the original parties since between them the cheque has no greater enforceability than the promise in respect of which it was given; and this could not be enforced by reason of the second limb of section 18 of the Gaming Act of 1845. But a third person may be able to enforce it, even though he knew of the circumstances in which it was given, unless the defendant proves that the third person did not give value." (emphasis supplied)

The Plaintiff is only a third person. It should be able to enforce the debt acknowledged by the Defendant in the mortgage deed. By reason of the aforesaid matter, in my view the Defendant has no case on illegality at all.

9. I must also add here that the aforesaid further submission was put in without the leave of the Court. The other side was not informed before the letter together with the further submission were put before the Court. In fact, when the other side was contacted through the Court's clerk, they said they had not received it and a copy was sent by the clerk through Fax to them. Nothing further was heard from them. If I decide otherwise, I must convene another hearing as the Plaintiff is entitled to be heard on both whether leave should be granted and if so the point raised. In any event here, no leave was obtained from the Court.

10. In the case of R. v. Sheung Kwok-leung [1976] HKLR 742, the defence put in a further submission after the hearing albeit with the consent of the prosecution. Pickering, Ag. C.J. said, at p.755 that :-

"the exercise was unauthorised, unhelpful and unnecessary and therefore unwelcome."

I hope this casual way of handling litigation should stop.

Notice to first mortgagee

11. Whilst Mr Remedios for the Plaintiff submitted that according to s.50 of theConveyancing and Property Ordinance, Cap.219, the second mortgagee has every right to enforce the mortgage for payment, possession and sale of the property, subject of course to the rights of the first mortgagee, Mr Bell for the Defendant submitted that as a matter of procedure, the second mortgagee in enforcing the mortgage should give notice to the first mortgagee which has not been done by the second mortgagee here. It was said in Atkins Court Forms 1986 Issue, Vol.28 at p.10 :-

" (3) Possession under a legal or equitable mortgage: a second mortgagee may take possession subject to the rights of the first mortgagee. Although in theory a subsequent mortgagee may sell the security subject to a prior mortgage, in practice he finds it difficult to do so, and usually finds it necessary to pay off the prior mortgagee and make him a party to the conveyance. Before commencing proceedings to obtain possession with a view to sale, therefore, the second mortgagee should ascertain how much the prior mortgagee claims, in case the security should be insufficient, and whether the prior mortgagee proposes to exercise his prior right to possession."

Further, in Halsbury's Laws, 4th Edition, Vol.32, para.828 it has been said that :-

"Before proceedings are begun it should be confirmed that the right to possession has arisen and any necessary notice given5. Possession are usually begun by originating summons. (5. E.g. a notice to quit might be necessary if the mortgagor had attorned tenant depending on the wording of the clause : see para.612, ante. A subsequent mortgagee should give notice to any prior mortgagee of his intention to apply for possession.)" (emphasis supplied)

12. I accept the submission of Mr Bell that although the second mortgagee has the right to possession and sale of the property subject to the rights of the first mortgagee, it is incumbent on the second mortgagee to give notice to the first mortgagee in the proceedings before me. This is particularly so in light of the fact that the Defendant had instructed her solicitors that the 2nd Mortgagee should be created without the knowledge and consent of the 1st Mortgagee.

13. However, the failure to give notice would not affect the lis between the second mortgagee, i.e. the Plaintiff herein, and the Defendant. An order nisi for a certain period of time in respect of the remedies of possession and sale can augment the situation, within which the first mortgagee upon notice can take the necessary action if they deem fit.

Conclusion

14. By reason of the aforesaid matter, I do not consider any defence has been disclosed by the Defendant herein. The Plaintiff is entitled to enforce the mortgage deed for payment and possession and sale of the Property subject to the right of the first mortgagee. Accordingly, there shall be an order in terms of paragraph 1 for payments of the debt due under the second mortgage as claimed by the Plaintiff. There shall be an order nisi for possession and sale of the Property as claimed in paragraphs 2 and 3 for a period of 21 days from the service of this order on the first mortgagee within which the first mortgagee can apply to be joined in these proceedings herein. There shall also be a usual order nisi for costs against the Defendant for these proceedings herein.