WING HANG BANK LTD v. RICHSUN INTERNATIONAL INVESTMENT LTD AND OTHERS

HCMP52/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO.52 OF 2002

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J U D G M E N T

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1. This is a mortgagee action brought by the plaintiff bank against 10 units of flats ("the Third Property") in the building called Richsun Garden erected on the land known as 49-51 Centre Street and 3-8 Cheung On Lane, Western District, Hong Kong ("the Second Property"). The plaintiff claims :

(a) Against the 1st defendant ("Richsun") :

(i) payment of the principal debts and interests owned by the 1stdefendant to the plaintiff in the aggregated sum of more than $28 million up to 19 March 2004;

(ii) delivery of possession of the Third Property.

(b) Against the 4th to 8th and 10th defendants :

(i) delivery of possession of the 8 respective units of the Third Property.

(c) Against the 4th to 10th defendants, a declaration that they are not entitled to any interest, whether legal or equitable, in the First Property, the Second Property and the Third Property.

2. The plaintiff's claim against the 4th to 10th defendants in respect of damages including mesne profits arising from the unauthorized use, occupation, and enjoyment by them has already been directed previously by Lam J to be adjourned after the present hearing.

3. I shall first of all deal with the background to the present proceedings. The 4th to 9th defendants were all beneficiaries under a will of the deceased registered owner of 5-6 Cheung On Lane. The 5th, 6th and 8th defendants were the executors.

4. One Mr Ng Hon Hoo ("Hoo") was the owner of No.3 Cheung On Lane. The 10th defendant was the owner of No.4 Cheung On Lane.

5. One Superon International Limited ("Superon") was the owner of Nos.49-51 Centre Street and No.7-8 Cheung On Lane.

6. By a shareholders' deed of agreement dated 19 September 1995 ("the Shareholders' Agreement") the aforesaid land owners, inter alios, entered into an agreement that the different parcels of land would be pooled together and assigned to Richsun in exchange for shares of Richsun and such parcels of land shall be amalgamated into one property ("the First Property") and be developed by Richsun into a new building later known as Richsun Garden, i.e. the Second Property.

7. Between 19 and 30 September 1995, the aforesaid parcels of land were assigned by their respective owners as aforesaid to Richsun and amalgamated to form the First Property to be owned and developed by Richsun.

8. In respect of the assignment by the 5th, 6th and 8th defendants as executors, the consideration for the sale to Richsun by the assignment of 5-6 Cheung On Lane was paid by Richsun by a cheque to the executors but the funds did not actually pass to them as the same sum was paid back by them to Richsun by endorsement of the same cheque back to Richsun for the allotment of 14 million shares in Richsun, representing 20% of the shares thereof pursuant to the said Shareholders' Agreement.

9. All the beneficiaries under the estate in turn signed a written confirmation dated 18 September 1995 confirming such arrangement of assignment of land for shares in Richsun and not for cash. Consequently all the beneficiaries under the estate obtained only shares to Richsun and have no interest in land in the First, Second or Third Property at all after the Shareholders' Agreement and the assignment.

10. On 30 September 1995, Richsun executed a first legal charge ("the Mortgage") on the First Property in favour of the plaintiff for "all money" general banking facilities. The Mortgage, although dated 30 September 1995, had been signed by Richsun earlier and delivered in escrow. Pursuant to that the solicitors for the mortgagee by a letter dated 22 September 1995 enclosed several split cheques totalling $24 million for the completion of the purchase of those parcels of land forming the First Property. Thus the draw down of $24 million for the fixed loan in 1995 was for the purpose of completing the purchase of the parcels of land forming the First Property.

11. In May 1996, a fixed loan for $38 million was drawn, of which $28 million was used to repay the previous fixed loan of $24 million and the then overdraft outstanding of about $4 million. The overdraft limit was reduced to $2 million. The fixed loan had therefore been fully repaid.

12. A Second Building Mortgage was executed by Richsun on the First Property in favour of the plaintiff to secure a building loan up to the sum of $48 million on 4 February 1997. The building loan was drawn between 1997 and 1998, totalling $51 million. Only part of it has been repaid and the outstanding debts under this building loan forms the bulk of the present indebtedness of Richsun and therefore the subject matter of this action. A small balance is under the aforesaid overdraft.

13. The occupation permit of Richsun Garden was issued on 23 January 1999 and registered in the Land Office on 3 July 1999.

14. On 29 November 2000, the plaintiff gave the relevant defendants notices that an event of default had occurred under the Mortgage and the plaintiff was entitled to enter into possession of the Third Property and demanded each one of them to deliver vacant possession of the their respective Third Property to the plaintiff. The sum outstanding as aforesaid was more than $28 million. I was informed by counsel for the plaintiff that the sale of the Third Property in the open market now will not be sufficient to repay the total outstanding loan given the present market condition.

The Defence raised by the 4th to 8th and 10th defendants

15. The 4th to 8th and 10th defendants relied heavily on a shareholders meeting as evidenced by the minutes dated 18 October 1996 of Richsun, i.e. before Richsun Garden was completed. Apparently, in this meeting it was agreed among the shareholders that certain units of Richsun Garden which had not been completed, i.e. the respective 8 units in the Third Property, would be allocated to the 4th to 8th and 10th defendants in full and final settlement of all their shareholders' claims of and in Richsun and Richsun Garden in lieu of cash payments.

16. The 4th to 8th and 10th defendants claim that the respective contributors of parcels of land to Richsun retained some beneficial interest in the contributed parcels, the First Property, and thus the Second Property and the 8 respective units of the Third Property. The 4th defendant seemed to allege that somehow some borrowings by Richsun were contrary to the provision in the Shareholders' Agreement, but this was not clearly made out in their affirmation or submission. The issue before this court is whether the shareholders have any proprietary interest in the First Property and Richsun Garden.

Shareholders' Interest and Proprietary Interest

17. Under the provisions of sections 3 to 6 of the Conveyancing and Properties Ordinance, Cap.219, a legal or beneficial interest in land has to be created or evidenced in writing, except unwritten equity such as resulting or constructive trust. Under section 3 of the Lands Registration Ordinance, any deeds or instruments in writing takes effect according to the sequence of registration dating back to the date of their creation if registered within one month of their execution. If they were not registered, the instruments are null and void against subsequent bona fide purchaser or mortgagee for valuable consideration.

18. Accordingly, priority of various interests in land will rank strictly in accordance with registration, unless it is unwritten equity not required to be in writing despite actual notice. This effect can be found in the two decisions in Markfaith Investment Ltd v. Chiap Hua Flashlights Ltd [1991] 2 AC43; and Chan Yiu Tong v. Wellmake Investments Ltd [1996] 1 HKC 528 (CA).

19. In the recital C in the Shareholders' Agreement, it was stated that the shares were to be allotted to the parties in consideration of their assigning the parcels of land to Richsun. Clause 2 thereof set out the shares to be allotted to them at no additional consideration.

20. The assignments of those parcels of land to Richsun at a nominal price was taken as subscription for shares so that in reality it was an assignment of land for shares in this company, Richsun. There was no suggestion that Richsun is only nominally holding the different parcels of land for the assignors. The assignors' interest then became a shareholder's interest in Richsun just as any shareholder in any limited company, not in the parcels of land which had become the property of Richsun in law and equity.

21. Further the building plans were annexed to the Shareholders' Agreement as Appendix A, pursuant to clause 1.01. Thus the assignors could foresee at the time of executing the Shareholders' Agreement that, in the development pursuant to the Shareholders' Agreement, their parcels would become indistinguishable and inseparable once the First Property was developed into Richsun Garden, with many units each with undivided shares in the whole of the First Property (see clause 15.01), instead of building different wholly separate blocks of buildings in the different parcels of land for the different assignors.

22. In fact, the amalgamation of different parcels of land was the whole purpose of the pooling of the parcels in Richsun. If a separate block is to be built on each different parcel to be given back together with the original parcel to the assignor, there is no point of having Richsun as the vehicle in the redevelopment at all.

23. Accordingly, the Shareholders' Agreement contains no provision giving the assignors any right to any particular piece of land, or even any specified or unspecified unit in the future Richsun Garden, or indeed any proprietary right against the Richsun Garden on the First Property at all apart from allotment of shares in Richsun.

24. On the contrary, clause 11 provided for the sale of all units, reserving an unspecified 126 sq.m. for government use only (clause 11.05), and that such proceeds should first be applied to satisfy the principal and interest under an unlimited "Building Legal Charge" (clause 9.01-9.02).

25. However, Superon being one of the owner of the parcels of land, should be responsible and pay or repay Richsun any of such amount of loan and principal for the construction of the development (clause 9.02), as Superon was to be responsible for all development and construction costs (clause 6.03), in return for entitlement of 37.5% of such gross proceeds (clause 6.04).

26. It was expressly provided by the Shareholders' Agreement that the balance of 62.5% of the gross sale proceeds would then be distributed amongst the shareholders according to the shareholding ratio. Any unsold units after 12 months would, after valuation, also be distributed (by drawing lots failing agreement) according to the shareholding ratio.

27. Consequently at the time of entering into the Shareholders' Agreement and making the assignments to Richsun, the assignors of the different parcels of land envisaged that their individual parcels would be merged into an indistinguishable whole (the First Property to be developed into the Second Property) and would be sold as flats in the new building by Richsun with full legal and beneficial interest to outside purchasers. They did not intend then to have any in specie return of any share of the First or Second Property to them.

28. The assignors, therefore, could not have intended to retain any beneficial interest in the different parcels. The assignors' rights are those of a shareholder of Richsun, and Richsun alone was the legal and beneficial owner (subject to the two aforesaid mortgages to the plaintiff) of the First Property, and thus the Second Property.

29. The provision for the gross proceeds to satisfy first the Building Legal Charge reinforce the construction that it was intended and realized that the Chargee would have rights in priority to any right the assignors/shareholders might have against Richsun Garden and the sale proceeds. Thus, Richsun became the legal and equitable owner of the whole of the interest in the First Property after the respective assignments in September 1995, which Richsun had in turn mortgaged to the plaintiff. In short the assignors after the respective assignments to Richsun did not have any beneficial or proprietary interest in the parcels of land they contributed.

30. A fortiori, the subsequent purported agreement to allocate the respective flats of the Third Property to the respective defendants in the purported Shareholders' Agreement in October 1996 could only be binding as between the shareholders of Richsun, but not its mortgagee, nor the general creditors of Richsun if any. The equity in the redemption of the Third Property, which cannot be traced back to the different individual parcels of land contributed by the shareholders, and which came into existence after the division and allocation of shares of the Second Property and the completion of construction, must belong legally and beneficially to Richsun and in liquidation, for payment to its creditors, and not its shareholders.

31. In any event, the Mortgage was in 1995, a year earlier than the purported allocation agreement in 1996. Further, the 4th and 7th defendants were only the beneficiaries of the estate of the deceased who contributed their relevant parcel of land and they have no beneficial interest in such parcel of land in any event and have no locus standi to sue in respect of the parcel of land which is no longer identifiable separately from the building in any event. (See Williams, Mortimar and Sunnucks on Executors, Administrators And Probate 17th edn, pages 451 and 1050-1051). All in all the 4th to 8th and 10th defendants do not have any beneficial or proprietary interest in the respective 8 units of the Third Property.

32. Further, the plaintiff is not a party to the Shareholders' Agreement and did not know of it until late and is not bound by it. On proper construction of the Shareholders' Agreement there was no breach by Richsun in borrowing as it did for only the financing of the development of the First Property, as far as known or reasonably known to the plaintiff. Thirdly, for the purpose of argument only, even if the 4th to 8th and 10th defendants may have a claim in personam for damages against the plaintiff (which is denied by it) for the tort of inducing breach of contract by Richsun, that is no defence against the plaintiff's proprietary claim for possession of the respective 8 units of the Third Property as mortgagee against the 4th to 8th and 10th defendants who have no right to remain in possession at all.

33. The overwhelming bulk of the present debt was the building loan. The Architech's certificates or documents from the building contractor and other relevant documents showed that the relevant amounts were either spent in relation to the development or to be paid for the connected purpose thereof.

34. The Shareholders' Agreement had authorized a building loan to be secured by a building mortgage without limiting its amount. Consequently there has not been any breach of the Shareholders' Agreement in any event.

35. It is quite apparent from the arrangement of the various parties and the modus operandi of the amalgamation of parcels and the redevelopment of the First Property into the Second Property in 1995 and 1996, the parties anticipated that the property after redevelopment would be able to repay its mortgagee with the balance of proceeds to be shared among all the shareholders of Richsun. They even anticipated that after 12 months of sale, those unsold units could be allotted to various shareholders to be distributed by drawing lots according to the shareholding ratio. Thus, the shareholders' meeting on 18 October 1996 arrangement was made in anticipation that after part of the units were sold, the proceeds thereof would be sufficient to repay the mortgage leaving other units to be distributed among shareholders. Accordingly, the 4th to 8th and 10th defendants agreed with other shareholders to be allotted with those 8 units in the Third Property in advance before the building was completed.

36. However, it is common and general knowledge that after 1997 the property market has dropped drastically and by 1999 when the building was completed, after all other units were sold, there was still an outstanding debt amounting to more than $28 million as aforesaid. The whole redevelopment became not viable and the developer is now heavily indebted to the bank mortgagee. Inevitably, the 4th to 8th and 10th defendants could not possibly retain those units which were allotted to them in anticipation that other units when sold would be sufficient to pay the outstanding debt under the two mortgages. This is the bare reality of the present situation.

Conclusion

37. Richsun has not appeared to show any defence at all. The alleged beneficial interest of the 4th to 8th and 10th defendants is not supportable by reasons of the aforesaid analysis. The alleged contravention of the Shareholders' Agreement is not made out or is, in any event, irrelevant.

38. There should be judgment of the outstanding debts and interest and possession of the Third Property against Richsun and judgment for possession of the 8 respective units of the Third Property against the 4th to 8th and 10th defendants.

39. There should also be a declaration that the 4th to 10th defendants are not entitled to any interest, whether legal or equitable, in the First Property, the Second Property and the Third Property.

40. There should be costs on an indemnity basis against Richsun pursuant to the Mortgage agreement and costs on party and party basis against the 4th to 10thdefendants.