MAK KA HING v. PANG MING CHUNG AND OTHERS

HCMP 1943/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 1943 OF 2004

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D E S I C I O N

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Introduction

1.  This is an application by the 1^st and 2^nd Applicants for leave to be joined as the 3^rd and 4^th Defendants respectively in these proceedings for the purpose of and in relation to the issues arising from the Plaintiff’s application for an Order for Sale of the property in Nicholson Tower (the “Property”) held by the 2^nd Defendant (“Gui”) for the benefit of the 1^st Defendant (“Pang”).  The circumstances leading to the application are as follow.  On 6 August 1999, the Plaintiff issued a writ under High Court Action No 12653 of 1999 (the “Main Action”) against Pang seeking the recovery of a loan of $14.9 million.  By a judgment dated 28 March 2002, Deputy High Court Judge Gill ordered Pang to pay the said sum of $14.9 million with interest to the Plaintiff.  As at the date of judgment, the judgment debt including accrued interest amounted to $30.14 million.  Pang appealed but his appeal was dismissed by the Court of Appeal on 11 November 2003.  In the interim, the Plaintiff recovered $8.01 million pursuant to two Garnishee Orders made in May and June 2002.

2.  Shortly after the issue of the writ in the Main Action, the Plaintiff applied for a Mareva Injunction against Pang on 23 October 1999 restraining him from removing his assets out of Hong Kong.  At the time, Pang was residing at the Property which was held by Hi-Max Developments Ltd (“Hi-Max”), a company owned and controlled by Pang.  Pang made his 3^rd affirmation dated 2 March 2000 disclosing his ownership of the Property through Hi-Max and undertook not to dispose of the Property until trial of the Main Action.  However, this affirmation was not filed until 17 June 2000.  Just three weeks prior to that, Hi-Max assigned the Property to Gui allegedly for a consideration of $13 million.  Gui is Pang’s brother in law.

3.  By an Order to Show Cause in the Main Action dated 12 August 2002, Master Ho ordered that unless sufficient cause to the contrary be shown, Pang’s beneficial interest in the Property should stand charged with the payment of the judgment debt.  The Order was amended on 3 September 2002 to reflect the interest in the Property as being held by Gui on trust for Pang.  The hearing of the Order to Show Cause for the Charging Order to be made absolute was adjourned pending Pang’s appeal in the Main Action.  The hearing was restored to 27 February 2004 before Mr Justice Barma.  However, just one day before the hearing, the Applicants applied to join as the 3^rd and 4^th Defendants in the Main Action.

4.  At the hearing, the Applicants’ then counsel applied for and was granted an adjournment because he did not have sight of some material evidence.  The hearing of the Order to Show Cause proceeded as against Pang and Gui.  At the conclusion of the hearing, Mr Justice Barma made the Charging Order absolute.

5.  About six months later, the Plaintiff applied for an Order for Sale on 5 August 2004.  A month later, the Applicants took out the present application under Order 15 rule 6 of the Rules of the High Court to join as the 3^rd and 4^th Defendants, though no application has been made to restored their earlier application to join in the Main Action.  Master Levy ordered that the application be adjourned to be heard before a Judge in Chambers before the Notice of Appointment to hear the Originating Summons for the Order for Sale.

The law

6.  The present application is made under Order 15 rule 6(2)(b) of the Rules of the High Court which provides:

“Subject to the provision of this rule, at any stage of the proceedings in any cause or matter the Court may on such terms as it thinks just and either of its own motion or on application –
(a)	…
(b)	order any of the following persons to be added as a party, namely -
	(i)	…
	(ii)	any person between whom and any party to the cause or matter there may exist a question or issue arising out of or relating to or connected with any relief or remedy claimed in the cause or matter which in the opinion of the Court it would be just and convenient to determine as between him and that party as well as between the parties to the cause or matter.”

7.  Under this rule, the jurisdiction may be exercised if two conditions are satisfied.  Firstly, there must be a question or issue between the party applying to be joined and one of the parties to the existing cause or matter arising out of or relating to or connected with any relief or remedy claimed in that cause or matter.  This condition is satisfied if the party applying has a legitimate legal or financial interest in the outcome of the matter in dispute: see Wing Mou Construction Co Ltd (in Liquidation) and Cosmic Insurance Corporation Ltd and Mansion Holdings Ltd, HCCT  No 40 of 2001.  For the present purpose, the Applicants have to show they have an arguable case on such a legitimate interest.  The second condition is that in the opinion of the Court it would be just and convenient to have that question or issue determined as between the applicant and one of the parties as well as between both parties to the cause or matter.  In Wing Mou Construction Co Ltd, Ma J, as he then was, suggested that certain factors will regularly feature in the Court’s exercise of its discretion.  I respectfully adopt those factors as factors to be considered under the second condition.  The exercise of the Court’s discretion necessarily involves balancing the prejudice to the parties in the event an order is or is not made, the stage the action has reached when the application for joinder is made, any delay in making the application and any delay that may be caused should an order be made.

The Applicants’ grounds for application

8.  Each of the Applicants filed an affirmation in support of their application.  The affirmations are almost identical except as regards the number and amount of the loans they made to Pang.  The Applicants’ case is as follows.  They are residents of the People’s Republic of China.  They had known Gui for over ten years through their business dealings.  They knew that Gui’s sister, Gui Ai Zhen who was married to Pang, was a very prominent and successful business woman in China who had received numerous awards, commendations and prizes in recognition of her contribution and successes in the business community in Shanghai.  They understood Gui Ai Zhen had two companies known as Shanghai Hua Tian Properties Development Co Ltd and Shanghai Huahai Real Estate Development Ltd which had bought a big piece of land for development with Dr Stanley Ho, a well-known business tycoon in Hong Kong and Macau.  With a view to establish connection with Gui Ai Zhen, through the introduction of Gui, they lent a total of RMB7.8 million in cash to Pang between March and July 1999.  These were short term loans repayable with interest.  Pang was unable to repay when due.  It was then resolved between the two Applicants, Gui and Pang that Pang would sell the Property as a means to repay the loans.  The parties drew up an agreement dated 12 April 2000 (the “Settlement Agreement”) which was attested by two lawyers in Shanghai.  The agreement is in the following terms:

“	1.	[Pang] has borrowed money respectively from [Gui] RMB 2,000,000.00; from [the 1st Applicant] RMB 2,600,000.00 and RMB 2,700,000.00; from [the 2nd Applicant] RMB 2,500,000.00.  [Pang] is unable to repay the aforesaid loans and the interest thereof and agrees to use [the Property] owned  by him as a security to repay the loans.  The four parties agree to value the Property at the market price of HK$13,000,000.00.
	2.	The four parties agree to waive interest and convert the said loans in Hong Kong currency, i.e. [Pang] owed [Gui] HK$2,000,000.00; owed [the 1st Applicant] HK$ 5,300,000.00; owed [the 2nd Applicant] HK$ 2,500,000.00 totalling HK$9,800,000.00.  The balance of HK$3,200,000.00 shall be paid by [Gui] by an initial sum of HK$500,000.00 to [Pang] as deposit, the balance of HK$2,700,000.00 shall be paid by [Gui] to [Pang] after the signing of the Agreement for Sale and Purchase of the Property.
	3.	The four parties agree to complete the legal procedures of the sale of the Property by [Pang] and [Gui] with [Gui] as the owner of the Property.  Upon the assignment of the Property to [Gui], the debts owed by [Pang] to [Gui], [the 1st Applicant] and [the 2nd Applicant] shall be totally discharged.  Copies of evidence of the aforesaid loans are annexed to this agreement.  Upon attestation of this agreement by lawyers, the original evidence of loans will be invalid.
	4.	The actual owners of the Property shall be [Gui], [the 1st Applicant] and [the 2nd Applicant].  After sale of the Property the proceeds therefrom will be distributed to [Gui], [the 1st Applicant] and [the 2nd Applicant] according to the ratio of their contributions.
	5.	This agreement is in quadruple, each party hold one copy, all with legal effect.”

9.  The Applicants explained that it was intended that the Property would be sold after it was conveyed to them and as they spent most of their time in Shanghai and as Gui had better connection with Hong Kong and travelled more frequently to Hong Kong, they thought it would be convenient and practical to have the Property assigned to Gui. The arrangement would enable Gui to deal with the subsequent resale of the Property without requiring their attendance in Hong Kong and was a sensible arrangement in view of the volatility of the property market. Hence, they agreed to have the Property transferred to Gui.  However, Gui delayed the resale waiting for a higher price. 

10.  The Applicants’ explanation for the delay in taking out the joinder application is that it was only until the end of 2003 that Gui informed them that the Property was involved in litigation and subject to enforcement action.  That was about the time when the Court of Appeal dismissed Pang’s appeal in the Main Action.  Hence, they instructed their solicitors to file the joinder application in the Main Action.

11.  In a nutshell the Applicants’ case for the joinder is that they had contributed to the purchase price of the Property by extinguishing their loans to Pang and they became beneficial owners of the Property held by Gui under a resulting trust.

The Plaintiff’s grounds for objection

12.  Mr Wong, Counsel for the Plaintiff, attacks the application on all possible grounds.  Firstly, he submits that the affidavit evidence of the Applicants is incredible.  Secondly, he argues that even if it is credible, the Settlement Agreement, put at the highest, did not create any interest in land.  Thirdly, if the Settlement Agreement created an interest in land, it is a mere equity and does not defeat the interest of the Plaintiff.  Fourthly, even if the Settlement Agreement created an equitable interest in land, it has not been registered in accordance with the Land Registration Ordinance and is therefore void as against the Plaintiff’s interest in the Charging Order which has been duly registered.  Lastly, Mr Wong argues that even if he fails to persuade me on any of the above grounds, in all the circumstances, it would not be just and convenient to exercise the discretion to allow the joinder.

Whether the Applicants’ evidence is credible

13.  Mr Wong referred to the chronology which I have set out above.  Pang’s evidence in the Main Action was disbelieved by Deputy High Court Judge Gill who entered judgment against him.  Pang’s appeal to the Court of Appeal was also dismissed.  His conduct has all along been suspicious.  Having disclosed in his affirmation dated 2 March 2000 that he held the Property through Hi-Max and having undertaken not to dispose of the Property until trial, he caused Hi-Max to assign the Property to Gui.  Furthermore, having made the affirmation disclosing the above on 2 March 2000, he did not file it until 17 June 2000 after he had caused Hi-Max to assign the Property to Gui on 26 May 2000.  That was blatant dishonesty.  It is obvious that Pang was trying to take the Property out of reach of his creditor.

14.  On the other hand, Gui contested the Plaintiff’s application to have the charging order nisi over the Property made absolute by claiming to be a bona fide purchaser for value.  But, instead of producing the Settlement Agreement in support of his and the Applicants’ claim to the beneficial interest of the Property, he file an affirmation alleging that he purchased the Property at a price of $13 million from Hi-max by paying a deposit of $500,000 in cash and the balance of $12.5 million by bank transfer to Hi-Max’s bank account.  He exhibited copies of the transfer slips effected at the Bank of East Asia Limited as evidence in support.  However, the Plaintiff obtained evidence from the Bank of East Asia Limited showing that the transfers were no more than a set of circular transactions involving movement of funds but at the end of the day, Hi-Max’s bank account had exactly the same closing balance as its opening balance.  Mr Justice Barma therefore found that the Property was held by Gui on trust for Pang and made the Charging Order absolute.

15.  Looking at the situation as it was in April and May 2000 when the Property was assigned to Gui, according to the Applicants’ case, Gui had in his possession a copy of the Settlement Agreement dated 12 April 2000 and copies of loan receipts signed by Pang.  If at the time he had the Settlement Agreement attested by two Shanghai lawyers with Pang’s the loan receipts annexed thereto which would have provided credible evidence of consideration for the transfer of the Property, why should he go through the trouble of creating these transfer slips?  These bank transfer slips must have been deliberately created in anticipation of these proceedings.  He could not have created these transfer slips without the assistance and agreement of Pang on behalf of Hi-Max.  This must be looked at against the setting that Gui had conspired with Pang to take the Property out of reach of the Plaintiff.  A plausible explanation is that even as early as May 2000, Gui had in mind to cheat the Applicants of their share in the Property.  But, what additional benefit would he obtain by so conspiring with Pang than to stand honestly on the side of the Applicants.  These cast doubts on the genuineness of the Settlement Agreement and the veracity of the Applicants’ story and suggests that the Settlement Agreement was concocted after the circular movement of funds was exposed by the Plaintiff towards the end of 2002.

16.  Mr Wong also referred to Pang’s 4^th Affirmation filed on 18 July 2000 pursuant to Mr Justice Suffiad’s order requiring Pang to disclose the proceeds from the sale of the Property.  In that affirmation, Pang said he had $11 million in his bank accounts, while the proceeds of sale of the Property had been applied towards repayment of his and Hi-Max’s loans.  Mr Wong submits that this is inconsistent with the Applicant’s story that Pang had to sell the Property to repay his loan of $9.8 million to the Applicants and Gui.

17.  Mr Wong further submits that after Pang exhausted all channels to prevent the Property from being sold, the Applicants appeared on the scene.  The Applicants appeared twice at the eleventh hour in the Main Action and in this application.  I can sense the suspicion created by the Applicants’ late appearance in the scene.  The alleged cash loans in millions of Reminbei are also suspicious.  I have no difficulties to find that Pang and Gui are incredible.  But I must treat the Applicants’ case separately from Pang’s and Gui’s as they are contesting the Plaintiff’s case on a different front.  In considering the Applicants’ affirmation, I have to keep my mind open to the possibility that Gui might be practising a fraud on the Applicants and lied about the Settlement Agreement and kept the Applicants in the dark about the proceedings.  The Applicants’ case is supported by the Settlement Agreement which has allegedly been attested by two Shanghai lawyers.  It is not appropriate for me to embark upon a mini trial on affidavit evidence.  I should assume what is said in the affidavits is true unless it is so inconsistent with incontrovertible facts and documentary evidence as to amount to practical moonshine.  Despite the grave suspicion I have, I am quite unable to reject the Applicants’ evidence as so incredible as to be unworthy of belief and shut them out because of some gravely suspicious and even blatantly dishonest conduct of Gui and Pang.

Whether the Settlement Agreement created any interest in land

18.  Mr Wong argues that the Settlement Agreement is not an agreement to acquire an interest in land.  His argument is based on Clause 1 of the Settlement Agreement in which it was recorded that Pang agreed “to use the Property owned by him as a security to repay the loans”.  Hence, he submits that the claim under the Settlement Agreement is a monetary claim and not proprietary claim, limited to the amount of the loan the Applicants and Gui advanced to Pang. 

19.  With respect, this is a very distorted way of interpreting the Settlement Agreement.  Construction of a document is not the same as interpreting the words of the document.  It is to find out the intention of the parties as expressed by the document by reading it as a whole.  Though the words “security to repay the loan” were used in Clause 1, it is clear reading the document as a whole that the agreement was a scheme of arrangement whereby the Property was to be sold to Gui and the Applicants in satisfaction of Pang’s debt.  The parties put a value to the Property in Clause 1.  In Clause 2, the parties agreed to the mode of payment of the balance of the value of the Property in excess of the outstanding loan.  In Clause 3, the parties agreed to complete the legal procedures of the sale of the Property with Gui as the owner and upon assignment of the Property to Gui the loans shall be discharged.  Under Clause 4, Gui and the Applicants agreed to share in the proceeds of sale of the Property according to the ratio of their contributions.  It is not, as Mr Wong submitted, that the Applicants and Gui were to receive a monetary payment using the Property as a security.  On a proper construction of the Settlement Agreement, they will receive whatever the Property could sell for proportionate to their contributions.  They will receive the benefit of any appreciation in the value of the Property and will be at risk of any fall in the value of the Property.  I have no difficulties to find that the Settlement Agreement is an agreement whereby the parties agreed to convert their Reminbei loans into Hong Kong currency and to waive interest and Pang agreed to transfer the Property to Gui in discharge of his outstanding loans to Gui and the Applicants plus a payment of $3,200,000 by Gui representing the excess in the value of the Property over the loans.

Whether a mere equity or an equitable interest

20.  Mr Wong submits that the Applicant’s interest under the Settlement Agreement is a mere equity.  It is trite principle that where two or more persons contributed to the purchase money of a property but the property is conveyed to one of them, it is presumed that the person in whose name the property is taken holds the property under a resulting trust for himself and all those who contributed to the purchase money in proportion to the amount of their contribution: Underhill and Hayton Law Relating to Trusts and Trustees, 16^th Edition, at 350 – 352.  The Applicants’ case is that by discharging the loans due from Pang pursuant to the Settlement Agreement they contributed to the purchase price of the Property and as the Property was conveyed to the sole name of Gui, Gui held the Property under a resulting trust for them to the extent of their contributions to the purchase price.  They become joint beneficial owners of the Property with Gui.  It can hardly be argued that the Applicants’ interest is a mere equity.

Whether the Settlement Agreement or the Applicants’ equitable interest is registrable

21.  Mr Wong’s argument is that even if the Applicants had an equitable interest in the Property, they had not registered the equitable interest or the Settlement Agreement which is the root of that equitable interest.  Accordingly, the Applicants’ interest is void as against the interest of the Plaintiff under the Charging Order which has been duly registered.  On the other hand, Mr Au, Counsel for the Applicants, argues that the Applicants’ equitable interest is created by operation of law and not by the Settlement Agreement, hence the Settlement Agreement or the equitable interest is not registrable.

22.  A similar factual situation arose in Financial and Investment Services for Asia Ltd and Baik Wha International Trading Co Ltd [1985] HKLR103.  In that case, the owner of a property mortgaged to Wayfoong Finance Limited decided to change bankers to the plaintiffs.  On 23 February 1982, the plaintiffs put up funds to discharge the mortgage to Wayfoong Finance Limited.  The reassignment to the owner and the mortgage to the plaintiffs were completed on 13 March 1982.  The reassignment was registered on 17 March 1982 while the mortgage was not registered until 8 April 1982.  In the interim, the defendant registered a charging order nisi over the property in respect of an unsatisfied judgment on 2 March 1982.  The issue for the Court was whether the plaintiffs could claim priority from 23 February 1982 as equitable assignees of Wayfoong Finance Limited’s mortgage or whether they should be deferred to the defendant’s charging order.  Hunter J, as he then was, held that the plaintiffs’ equitable interest arose solely from the application of equitable principles to the fact of their payment to discharge the original mortgage.  It was not only not dependent upon any actual agreement or documentation: it survived inconsistent agreement and documentation.  Accordingly, he held the interest was unwritten and not registrable under the Land Registration Ordinance.  Mr Au argues that for the same reason, the Applicants’ equitable interest arose by operation of law to the fact of the Applicants discharging Pang’s loans and hence the equitable interest is unwritten and not registrable.

23.  Mr Wong’s contention is that if the Applicants had acquired an equitable interest they had acquired it under the Settlement Agreement and not by operation of law.  The Settlement Agreement is therefore the root of the interest and not evidence of the interest and that interest shall be deferred to the Plaintiff’s registered legal charge for want of registration.  I think Mr Wong’s distinction based on root of interest and evidence of interest is unnecessary and in any event would not assist him in his argument.  In Financial and Investment Services for Asia Ltd, Hunter J went on to consider whether the plaintiffs’ solicitors’ letter to Wayfoong Finance Limited was an instrument in writing within the meaning of section 2(1) of the Land Registration Ordinance and registrable under the Ordinance.  He assumed without deciding that the words “other instrument in writing” were wide enough to cover documents in writing which did not themselves create or affect rights, but evidenced rights such as a note or memorandum of an agreement sufficient to satisfy what is now section 3(1) of the Conveyancing and Property Ordinance.  But in the end he held even on that interpretation the letter was insufficient to evidence any agreement between Wayfoong Finance Limited and the plaintiffs.  In my view, the Settlement Agreement obviously satisfy the requirements in section 3(1) of the   Conveyancing and Property Ordinance.  But, be that as it may, on the well established equitable principles, I am not convinced that the Applicants do not have an arguable case.  That their equitable interest founded on resulting trust is an unwritten interest and not registrable under the Land Registration Ordinance.

Whether Applicants have a legitimate interest to be joined

24.  The Applicants have shown an arguable case that they have acquired an equitable interest in the Property by reason of their contribution to the purchase price.  It is also arguable that as the interest arose from application of legal principle to their discharging Pang’s loans, the equitable interest is an unwritten interest and not registrable under the Land Registration Ordinance and is an interest which has been created prior to the Plaintiff’s interest under the registered Charging Order.

Whether just and convenient to allow the joinder

25.  Accepting as I must for the purpose of the present application that the Applicants had no knowledge of the Main Action and were only informed by Gui of the Charging Order towards the end of 2003 when Pang’s appeal was dismissed, their delay in applying to be joined as parties to the Main Action in February 2004 was not inordinate.  At the hearing before Mr Justice Barma, they sought an adjournment of their application and they never restored the application.  It was only after the Plaintiff applied for an Order for Sale under the present proceedings that they applied to be joined again.  Their inaction reflects adversely on the genuineness of their claim. 

26.  Mr Wong submits that the Applicants would suffer no prejudice if their application is refused as they can start proceedings against the Plaintiff seeking damages or an injunction restraining the Plaintiff from disposing of the proceeds of sale.  I am unattracted by that argument.  Such a course would create inconvenience to all the parties and would result in wasted costs.  In my view, if the joinder is granted, the Plaintiff would not be any worse off except for any delay which such joinder may cause.  The delay is unlikely to be substantial if the parties would promptly proceed with the hearing of the Originating Summons and could be compensated for by allowing the application on the Applicants’ undertaking that they shall compensate the Plaintiff for all loss of interest on the proceeds of sale of the Property which the Plaintiff would have earned but for the delay caused by the Applicants’ intervention. 

Conclusion

27.  Having balanced the Applicants’ conduct against the delay and injustice which may be caused to the parties by allowing or refusing the application, I think greater injustice would be caused by shutting the Applicants out at this stage than by allowing them to be joined as parties on certain terms.  Accordingly, I allow the application for the 1^st and 2^nd Applicants to be joined as the 3^rd and 4^th Defendants respectively on condition that the Applicants undertake within fourteen days to indemnify the Plaintiff in all events jointly and severally of the Plaintiff’s loss in interest calculated at judgment rate on the proceeds of sale of the Property to which the Plaintiff shall be entitled for a period equivalent to the period from 4 October 2004, the date when the Order of Sale would have been granted but for the Applicants’ intervention until the date when such order shall be actually granted.  If the Applicants shall be wholly unsuccessful in contesting the Order for Sale, they shall indemnify the Plaintiff of all loss in interest as aforesaid.  If they shall be successful or partially successful, their indemnity shall be reduced proportionately to the extent of their beneficial interest in the Property.  Until the hearing of the Originating Summons, both parties shall have liberty to apply to vary the above terms upon giving three days’ written notice to the other side.  The costs of this application shall be in the cause of the Originating Summons.