CS CREDIT LTD v. MARSPAN LTD AND ANOTHER

HCMP 1484/2019, HCA 1852/2020
& HCA 153/2021 (Heard together)

[2022] HKCFI 1462

HCMP 1484/2019

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 1484 OF 2019

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HCA 1852/2020

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1852 OF 2020

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HCA 153/2021

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 153 OF 2021

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(Heard together)

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DECISION

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1.  On 10 December 2021, I handed down my Judgment (“Judgment”) in the trial of (a) the mortgagee action in HCMP No.1484 of 2019 (“2019 Proceedings”) and (b) preliminary issues in HCA No.1852 of 2020 (“2020 Action”) and HCA No.153 of 2021 (“2021 Action”). For convenience I will adopt the nomenclature in the Judgment herein.

2.  The central issue in all these proceedings is priority over the Property, a four-storey house with garden in Sai Kung which is said to be of substantial value. In short, Marspan is the registered owner of the Property which 99.9% shareholder is Margaret Chiu; CS Credit is the mortgagee under 2 legal charges; and Tan and Far East (respectively Margaret Chiu’s ex-husband and a company owned by Margaret Chiu’s family members) each claim to have a 50% beneficial interest and an one-sixth beneficial interest in the Property that they say CS Credit should take subject to.

3.  The only issues for determination at the aforesaid trial were (a) CS Credit’s entitlement to enforce the legal charges in the 2019 Proceedings (which was undefended); (b) whether CS Credit was a bona fide purchaser for value without notice of either Tan’s or Far East’s alleged equitable interests (in the 2020 Action and 2021 Action); and (c) whether CS Credit has an additional defence in the 2021 Action on estoppel.

4.  By the Judgment, I found in favour of CS Credit on issue (a) above; in favour of CS Credit on issue (b) above, and against CS Credit on issue (c) above. The net result is that CS Credit is entitled to vacant possession and takes free of Tan’s and Far East’s alleged beneficial interests.

5.  On 6 January 2022, Far East and CIE filed a Notice of Appeal against the Judgment on issue (b) concerning Far East, on the ground that I have erred in law on the notice requirement in the bona fide purchaser defence.

6.  On 23 February 2022, Far East and CIE took out a summons seeking stay of execution of the Judgment pending their appeal. By consent, such application is to be determined on the papers.

7.  The applicable principles on stay of execution pending appeal are well established and are common ground between the parties, namely it is for Far East and CIE to show that (i) there is an arguable appeal and (ii) there is evidence to show that the absence of a stay would render an appeal nugatory.

8.  First, Far East and CIE argue they have at least an arguable appeal. For the reasons below, I do not accept their argument and I do not find that they have an arguable appeal.

(1)  First, one should recap what was decided in the Judgment.

(a)  In issue was whether CS Credit had constructive notice of Far East’s alleged beneficial interest in the Property. Far East’s case was based on it having paid HK$987,000 for Marspan in 1996 for the purpose of a surrender and regrant between Marspan and the Government pursuant to which Marspan obtained an additional small strip of land that comprises the Property in its current form (paragraphs 11, 67, 68 of the Judgment).

(b)  My findings on the law on notice are set out in paragraph 52 of the Judgment. First, I set out the proposition that if the party asserting that he takes free of the earlier rights of another knows of certain facts which put him on inquiry as to the possible existence of the rights of that other and he fails to make such inquiry or take such other steps as are reasonable to verify whether such earlier right does or does not exist, he will have constructive notice of the earlier right and take subject to it (paragraph 52(2) of the Judgment).

(c)  I then identified that the standard required of the purchaser is to make all usual and proper inquiries, or such enquiries as would have been made as a matter of prudence having regard to what is usually done by men of business under similar circumstances (paragraph 52(3) of the Judgment).

(d)  I further explained, with respect to the 2 requirements identified in sub-sub-paragraph (b) above, that the first is there must be facts already known to the purchaser that would point to either (i) the probable existence of a right, or (ii) there is serious cause to question the propriety of the transaction (paragraphs 52(5) and (6)). In the case of (i), constructive notice is established and no further inquiry would be necessary. In the case of (ii), the second requirement below is engaged.

(e)  The second requirement is that the purchaser must make inquiries which would have revealed the probable existence of a proprietary right, and there must be a causal link between such further inquiries and the revelation of the probable existence of the right (paragraphs 52(5)(c), (7), (8)).

(f)  I then identified the legal burden was on CS Credit to establish the bona fide purchaser defence, including each of the elements in contention (paragraph 57 of the Judgment).

(g)  Then I turned to the facts. I referred to CS Credit’s pleaded case and the evidence available (in respect of both the 2020 Action and the 2021 Action), and found that on those facts it would not have indicated to CS Credit that there was a possible prior right or serious cause to question the same (paragraphs 53(3) and 60(1)).

(h)  I next turned to Far East and CIE’s assertion that the payment of the premium by Far East would constitute facts known to CS Credit such as to trigger either (i) or (ii) in sub-sub-paragraph (c) above (for which they bore the evidential burden). I found that the only fact visible and hence could be known to CS Credit was the surrender and regrant registered against the Property at the Land Registry, and while those documents referred to the fact a premium had been paid, they did not cast any light on who paid the same (paragraph 70 of the Judgment). In other words, Far East and CIE could not even show that the very fact they contended CS Credit to know was actually known to CS Credit.

(i)  Further, I found that on Far East’s and CIE’s evidential case, causation was also not satisfied, because it could not be shown just from the fact that a premium had been paid for the regrant that someone other than Marspan must have paid for the same, and that Marspan being a private company would not without more have led to such conclusion (paragraphs 71 and 72 of the Judgment).

(j)  Accordingly, I concluded Far East and CIE could not rely on the surrender and regrant (and the payment associated with that) to show that CS Credit should be affixed with constructive notice (paragraphs 69 and 73 of the Judgment). I set out what I stated in paragraph 69 (since it is subject to challenge):-

“69. I do not consider Mr Fung’s reliance on the payment of the premium is able to undermine CS Credit’s case on absence of constructive notice. Put another way, the surrender and regrant (to which the premium related) was not a fact that would have caused CS Credit to believe there was a possible equitable interest, or otherwise to put CS Credit on inquiry.” (emphasis added)

(2)  In the Notice of Appeal and the skeletons filed, Far East and CIE contend that I have erred in law in my findings in paragraphs 69 and 71 of the Judgment:-

(a)  First, it is said that in stating, in paragraph 69, whether CS Credit was put on inquiry, I have asked the wrong question, and the correct test should be what inquiries would have been made by a reasonable and prudent conveyancing solicitor, since whether a subsequent mortgagee will be bound by a prior beneficial interest depends on whether he had made all the usual and proper inquiries, and the constructive notice doctrine imposes an objective standard of diligence (citing Wong Chim Ying v Cheng Kam Wing [1991] 2 HKLR 253).

(b)  Further, it is said that because I erred in my approach above, I also erred finding that a causal link needs to be established between the payment of premium and that someone else (not Marspan) paid the same in paragraph 71, when the causal link should be between inquiries which ought to have been made by a purchaser and the matters which he would have discovered had he made those inquiries. In other words, the entirety of Far East’s and CIE’s appeal turns on sub-sub-paragraph (a) above.

(3)  It can be seen from the more complete recitation of what was actually decided on law and fact in sub-paragraph (1) above that Far East’s and CIE’s contention is based on a blinkered reading of a few paragraphs of the Judgment and plainly wrong. There is no error of law as contended by Far East and CIE, because the Judgment did recognize that the legal burden with respect to constructive notice rests on CS Credit, which applying the correct standard I found CS Credit to have discharged on the facts available on a prima facie basis, and paragraphs 69 and 71 of the Judgment (the subject of the challenge on appeal) were concerned with whether Far East and CIE had discharged their evidential burden such as to undermine CS Credit’s prima facie case (see the underlined in sub-paragraph (1)(j) above).

9.  The above would have sufficed to dispose of the stay application, but for completeness I would proceed to consider the second element on whether the appeal would be rendered nugatory without a stay.

10.  In essence, Far East and CIE say that if no stay is granted, CS Credit would likely proceed to exercise its power of sale over the Property qua mortgagee, and in such a case their appeal would be rendered nugatory because if they ultimately succeed to establish Far East’s one-sixth beneficial interest in the trial (yet to happen) in the 2021 Action, they would:-

(1)  not be able to challenge or oppose the sale of the Property by CS Credit;

(2)  not be able to challenge the valuation CS Credit put forward in the sale of the Property;

(3)  have difficulty sourcing a comparable property since the Property is unique; and

(4)  not be able to allow Margaret Chiu to continue to reside in the Property and that constitutes hardship to Far East.

11.  As Far East and CIE submit, the test is whether good reasons exist to justify the grant of a stay, the appeal being render nugatory being an aspect or illustration of good reason. I am not satisfied that good reasons exist in this case to grant a stay in any event.

(1)  First, the very premise of Far East and CIE is that Far East will be deprived of its interest in and use of the Property, but they have yet to establish that Far East does have such interest. As CS Credit submits, the pending appeal by Far East and CIE, even if successful, would not have conferred or recognized any beneficial interest of Far East in the Property. As such, it is difficult to see why there exists good reasons to deprive CS Credit of the fruits of its Judgment.

(2)  Second and in any event, Far East’s interest in the Property, even if established, is a financial one – it only claims to be a one-sixth beneficial owner, and it has never occupied the Property (which has been the residence of Margaret Chiu instead). Thus, even if Far East is ultimately successful on the appeal and in the 2021 Action, it would most likely only be entitled to compensation for its one-sixth interest in the Property, at which time any issue on valuation can be raised and adjudicated on, and there is no suggestion that CS Credit would not be in a position to satisfy the amount so determined.

12.  The stay application is accordingly dismissed with costs. I further direct that there be a certificate for leading counsel for taxation purposes.