GENERAL FIELD INVESTMENT LTD v. CHAN HOI LAM AND ANOTHER

DCMP 151/2017

[2018] HKDC 1564

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

MISCELLANEOUS PROCEEDINGS NO 151 OF 2017

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DECISION

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1.  This court is seized with two applications. First, General Field Investment Limited (“the Company”) took out a summons for default judgment dated 14 September 2018 (“the Default Judgement Summons”) against both Mr Chan and Madam Chiu. Second, Mr Chan has made a cross application by his summons taken out on 18 September 2018 for the grant of retrospective leave to file and serve a defence out of time (“the Time Extension Summons”).

2.  By way of background, the Company issued an originating summons dated 23 June 2016 (“OS”) against Mr Chan and Madam Chiu in the High Court (HCMP 1607/2016).  The Company seeks to enforce a default judgment against Mr Chan obtained in the District Court on 14 January 2013 in the sum of HK$416,024.04 (“the Judgment Sum”) by way of sale of his property known as Flat No.6, 33^rd Floor, Block B, Amoy Gardens, Phase 1, No.77 Ngau Tau Kok Road, Kowloon Bay, Kowloon (“the Property”).

3.  The Company has already obtained a charging order to show cause against the Property in January 2013 and a charging order absolute for the Judgment Sum in March 2013. The charging orders have been duly registered in the Land Registry against the Property.

4.  However, the Company found out that a sale and purchase agreement dated 23 July 2007 (“the Purported Agreement”) was registered against the Property on or about 2 August 2007.  By the Purported Agreement, Mr Chan purportedly sold the Property to Madam Chiu in consideration of HK$1 million. The completion date was fixed for 30 September 2007 and it was expressly provided that time should in every respect be of the essence (“the Time Essential Provision”). Up till the present moment, Mr Chan remains the sole registered owner of the Property, nevertheless.

5.  Therefore, by the OS, the Company also seeks a declaration that the Purported Agreement does not affect and has no effect on the Property and an order that Madam Chiu shall forthwith cause or procure the vacating of registration of the Purported Agreement against the Property.

6.  These proceedings were transferred to the District Court by an order dated 6 January 2017 made by a master in the High Court. The parties agree that the claim of the Company falls within the jurisdiction of the District Court. Mr Dong, for the Company, informs this court that the evidence of the rateable value of the Property was before the master. Mr Yung, for Mr Chan, does not take issue with this.

7.  By an order dated 16 January 2018 of a master in the District Court, it was ordered that the proceedings be continued as if begun by writ. The master further gave directions for the parties to file their pleadings. With an extension of time, the Company filed is Statement of Claim on 14 February 2018.

8.  Neither Mr Chan nor Madam Chiu filed a defence within time. It was only four days after the Company took out the Default Judgement Summons that Mr Chan took out the Time Extension Summons and filed his defence without leave out of time. It is about six months late. Madam Chiu is yet to take any step in these proceedings.

9.  The parties agree that the logical way to deal with the two Summonses is to consider the Time Extension Summons first having regard to the merits of the defence purportedly filed and then the Default Judgment Summons. This is the approach adopted by Ma J (as he then was) in Schindler Lifts (Hong Kong) Ltd v Ocean Joint Investment Ltd  [2002] 1 HKLRD 279 followed by Lisa Wong J in Koo Ming Kown v The Baptist Convention of Hong Kong operating as Pui Ching Primary School, unreported, HCA731/2017, 30.10.2017.

The Time Extension Summons

Adequate explanation for the delay?

10.  Mr Yung refers to The Decurion [2012] 1 HKLRD 1063 for the well-known principle that in considering an extension of time application, the court should look at all relevant matters and consider the overall justice of the case. Mr Dong has no quarrel with this.

11.  In his affirmation, Mr Chan does not dispute his liability to pay the Judgment Sum. Indeed, he says he has attempted to repay the same with as much money as he could earn. He says that he had some financial challenges around the prescribed time when his defence was due. He continues to claim that he could not instruct his legal representative to draft his defence for him. This is all he has said about the delay.

12.  I cannot accept his explanation. There is no evidence of his financial condition for the material period of time and he does not explain what he has done to raise some fund to take an essential step in these proceedings albeit in vain. His alleged financial plight is not convincing given his ability to take out the Time Extension Summons with his defence purportedly filed only a few days after the Default Judgment Summons was issued.

Merits of the purported defence

13.  Now I turn to Mr Chan’s purported defence. Basically, Mr Chan insists on the enforceability and validity of the Purported Agreement. He contends that his beneficial interest has already been assigned to Madam Chiu. The pleaded case of the Company is primarily that the Purported Agreement ceased to have any legal effect in the absence of completion of the purported sale thereunder and the strong inference is that the parties no longer intend to proceed with the completion. Alternatively, the company maintains that the Purported Agreement is only a sham transaction.

14.  I should first point out that it is remarkable that Madam Chiu chooses not to do anything to protect her alleged interest in the Property against the claim of the Company. She did not contest the charging orders and she has taken no step to set them aside. She chooses not to contest the Default Judgment Summons. Mr Chan says that Madam Chiu was, at the time of the execution of the Purported Agreement, his girlfriend and she and her family still reside in the Property. Nor does she say anything to collaborate the allegation of Mr Chan. The silence of Madam Chiu is deafening. The purported defence has to be examined in this light.

15.  It is common ground that there has never been any completion of the sale under the Purported Agreement. To defend the enforceability of the Purported Agreement after all these years, Mr Chan in the purported defence avers that there is no expiry issue of the Purported Agreement and that it took effect upon the signings of the parties. He simply ignores the completion date and the Time Essential Provision.

16.  Mr Chan further relies on the preamble of the Purported Agreement. He claims that all the rights and beneficial interest of the Property was passed from him to Madam Chiu upon the execution of the Purported Agreement and he only retains a bare legal title to the Property. I do not think that the preamble supports his proposition and obviates the need for completion.

17.  As a matter of law, he assertion is not sustainable. In Mildred Howard v William Miller and Anor. [1915] AC 318, Lord Parker making the speech for the Privy Council explained the nature conferred by an agreement of sale and purchase relating to a property. It is an interest commensurate with the relief which equity would give by way of specific performance. Anthony Chan J in Feng Hongyan v Collector of Stamp Revenue [2018] 2 HKLRD 1471 at §§22-26 acknowledged such a nature of “interest”.

18.  In the present case, assuming that the Purported Agreement is a genuine transaction and that Mr Chan was in breach of the same, Madam Chiu may sue Mr Chan and pray for a decree of specific performance. However, she has not done so and she does not even indicate that she would do so in these proceedings. There is no basis for me to conclude that Madam Chiu would ever intend to commence legal proceedings against Mr Chan for the Purported Agreement to be specifically performed.

19.  In his evidence, Mr Chan actually says that Madam Chiu, after 2013, made oral enquiries with him as to whether the Property could be returned to her when she visited him in prison. He claims that she and her family believe that he would honour the Purported Agreement after the conclusion of a high court action instituted against him by Hong Kong Finance Company Limited under HCA 378/2010 (“the HC Action”).

20.  Assuming the assertion of Mr Chan is truthful, even if Madam Chiu now applies for a decree of specific performance, it is highly likely that she will be refused the equitable relief by reason of laches. For specific performance, she has to show that she has been ready, desirous, prompt and eager to complete the transaction: Snell’s Equity, 33^rd Edition, 2015 §17-044. She has adduced no evidence in this regard.

21.  I also accept the submission of Mr Dong that Madam Chiu cannot be entitled to a decree of specific performance given the clear prejudice caused to the Company as a creditor of Mr Chan.

22.  In addition, I do not accept the assertion of Mr Chan that Madam Chiu had been let into possession of the Property and kept up with the mortgage repayments. There is simply no collaborative evidence to support this assertion. Madam Chiu does not claim to have acquired any equitable interest in the Property on this basis. Nor does Mr Chan make such a claim in his purported defence.

23.  For completeness, I fail to see any relevance of the HC Action to the parties’ failure to complete the transaction pursuant to the Purported Agreement. As rightly pointed out by Mr Dong, the HC Action was commenced only three years after the contractual completion date. It appears to me to be a lame excuse of Mr Dong only.

24.  In the premises, on the evidence, the allegations of the Company that the legal effect of the Purported Agreement, if any, must have expired and that the parties no longer intend to proceed with the completion of the sale of the Property thereunder are borne out. None of the explanations proffered by Mr Chan can sufficiently negate this conclusion.

25.  I proceed to consider the allegation that the Purported Agreement is a sham.  Mr Dong is correct in his submission that even if a document was genuine at the outset, it may turn into a sham if the parties have subsequently departed from the agreement and yet have allowed is shadow to mask their new arrangement: Marac Finance Ltd v Virtue [1981] 1 NZLR 586.

26.  In the Statement of Claim, the Company relies on the following allegations for its contention that the Purported Agreement is a sham. First, the there is no discharge or variation of the prior two mortgages obtained by Mr Chan charged against the property (the HSBC mortgage dated 30 April 1998 and the second legal charge in favour of Hong Kong Finance company Ltd dated 14 August 2006).  Mr Chan in these mortgages remains the legal and beneficial owner of the Property.

27.  Second, the Company avers that the Purported Agreement is not a genuine arms-length transaction in that the consideration of HK$1 million is clearly inadequate given the purchase price that Mr Chan had paid to acquire the Property (HK$2,175,000) in April 1998.

28.  It is thus claimed by the Company that there is no actual transfer of the ownership of the Property genuinely intended by the parties and their Purported Agreement was just created to place the Property out of the reach of the creditors of Mr Chan including the Company.

29.  Looking at the evidence in the round, I believe the irresistible inference is that from start to finish Mr Chan had no intention to sell and Madam Chiu has no intention to purchase the Property pursuant to the Purported Agreement.

30.  Though it was expressly provided that Madam Chiu had paid an initial deposit in the sum of HK$500,000 before the signing of the Purported Agreement, such a payment is not supported by any documentary evidence. I cannot accept this assertion albeit contained in the Purported Agreement at its face value.

31.  The allegations of Mr Chan in his affirmation cannot begin to explain away the radio silence and inaction of Madam Chiu throughout all these years. It is only inexplicable that she has allowed herself not to even take a simple step to protect her interest in the Property despite the expiry of the limitation period relating to the Purported Agreement, the charging orders and the present proceedings. I am not convinced by the submission of Mr Yung that it is acceptable that Madam Chiu to hold the view that it is not necessary to complete the transaction in these circumstances. Madam Chiu could not possibly count on any oral assurance of Mr Chan to complete the transaction, particularly after the alleged breakup in 2014. Madam Chiu does not say so to start with.

32.  On the other hand, Mr Chan is unable to explain why he did not demand completion on the scheduled date. The alleged basis of the purported sale of the Property to Madam Chiu in 2007 is that he was in need of money and coincidentally Madam Chiu was looking for a property in the same area. There is no reason why he did not ask Madam Chiu to pay him the balance of the purchase price to ease his financial pressure and complete the transaction.

33.  As pointed out above, Mr Chan could not have had the need to settle the HC Action in 2010 with a view to completion.

34.  All in all, coupled with my conclusion that the parties have presently no intention to complete the transaction under the Purported Agreement, I have no doubt that the Purported Agreement is a sham and does not represent a bona fide transaction.

35.  I do not have to resolve the issue as to whether the Property was purportedly sold at undervalue to Madam Chiu. I am reluctant to come to a conclusion in the absence of valuation evidence. Further, the relationship between Mr Chan and Madam Chiu may rationalize any discount of the purchase price of the Property. I would not hold the Purported Agreement is a sham by reason of the consideration involved alone.

36.  To conclude, Mr Chan remains the legal and beneficial owner of the Property despite the Purported Agreement. The Purported Agreement cannot be a genuine transaction given the fact that the parties have done nothing to proceed to completion as scheduled even if I am wrong to hold that Madam Chiu did not pay the initial deposit at all. It is indeed a sham.

37.  There being no excusable explanation for the failure of Mr Chan to file his defence within time and no reasonable defence shown in the purported defence, I see no reason why Mr Chan should be given an extension of time to file his purported defence. The Time Extension Summons must be dismissed.

Default Judgement Summons

38.  Mr Yung rightly reminds this court that for the purpose of this application, this court can consider the pleaded case of the Company only and cannot rely on its evidence filed in support.

39.  Basically, Mr Yung takes two points. First, he argues that the Statement of Claim falls foul of the pleading requirements for an allegation of a sham transaction set out by Waung J in Alexina Investments Limited and Anor. v Keysberg Limited and Ors, unreported, HCA6359/1992, 8 January 2004 at §40.

40.  There, the judge referred to the dictum of Diplock LJ in Snook v London & West Riding Investments Ltd [1967] 2 QB 786 and then said this:

“The essential ingredients to establishing that a document is a sham are therefore according to the Snook judgment :

(1) the common intention of;

(2) both parties;

(3) that the document was not to create legal rights;

(4) but to give to the third parties the appearance of the document creating legal rights between them; and

(5) different from the actual legal rights between the parties.”

41.  Though the matters pleaded in §7 of the Statement of Claim are not set out in such a neat and tidy manner, when the paragraph is considered as a whole, the allegations contained therein, if accepted, do suffice to support the allegation of a sham document in my view.  I find no merit in Mr Yung’s submission on this pleading point.

42.  Mr Yung further asks this court to take into account the issue of over-security in the consideration of whether to exercise its discretion to make an order for sale. He highlights the repayment of Mr Chan in the aggregate sum of HK$140,000 (though the cashier order of HK$35,000 has been returned to Mr Chan by the Company).

43.  Mr Yung helpfully invites this court’s attention to Chan Miu Cheung v Prague Enterprises Ltd [2012] 3 HKLRD 414. There, Yuen J (as she then was) at §39 stated that it is not a proper exercise of discretion to make a charging order on an asset of considerable or substantial value in respect of a relatively small debt payable by the debtor. He then submits that the ratio between the outstanding amount (approximately HK$600,000) and the market value of the Property (approximately HK$6.3 million) would be only about 9.7% and it would not be right to make an order for sale.

44.  Chung J in Union Finance Limited v Leung Wai Ling [2000] 2 HKC 821 held that the court’s discretion over whether enforce a charging order by sale must be exercised judicially. A judgment creditor is prima facie entitled to enforce the judgment by a charging order unless the debtor can establish some good reasons to the contrary. The competing equities of the parties must be carefully weighed. While the amount of judgment debt is a relevant factor in the weighing exercise, the court has to take into account other matters such as the conduct of the debtor.

45.  In the present case, I am prepared to take into account the repayment effort of Mr Chan and the said ratio. However, this court is particularly concerned about the fact that Mr Chan allowed the default judgment be entered against him in January 2013 and did not oppose the charging orders two months later. Without any challenge to his liability to pay the Judgment Sum, he only started to repay the Company in late 2017.

46.  The outstanding amount cannot be said to be a small sum. The Company could not be faulted for its non-acceptance of the repayment schedule of Mr Chan in light of the long delay. In the absence of any cogent evidence that Mr Chan can soon repay the outstanding amount and that he would suffer any exceptional hardship if the Property is sold, I see no reason why this court should deny the Company its entitlement to recover the Judgment Sum by the enforcement of the charging orders.

47.  Though allegedly Madam Chiu is now residing in the Property with her family, I have received no evidence from her about any hardship she may suffer if an order for sale is granted. I may assume that she has no objection to this application at all.

48.  I have considered all the matters pleaded in the Statement of Claim. In my view, they are sufficient to lead this court to the conclusion that the Purported Agreement is a sham and it does not affect and has no effect on the Property. It follows that the registration of the Purported Agreement must be vacated. This court also believes that the Company should be entitled to an order for sale of the Property in view of all the circumstances. The Default Judgment Summons should accordingly be granted.

Conclusion and order

49.  For all the reasons given, the Time Extension Summons is dismissed and the Default Judgment Summons is allowed. The Company should submit a draft order detailing the proposed directions regarding the conduct of sale for this court’s approval.

50.  There is no reason why costs should not follow the event. I make a costs order nisi that Mr Chan and Madam Chiu should pay the Company the costs of this action including these two applications (all costs previously reserved inclusive), to be taxed if not agreed. I also grant certificate for counsel to the Company.

51.  It remains for me to thank both Mr Dong and Mr Yung for their helpful assistance.