UNITED ASIA FINANCE LTD v. YIU TSZ NGAR

HCA 774/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 774 OF 2014

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J U D G M E N T
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1. This was the hearing of the plaintiff’s application for the charging order nisi obtained on 26 August 2014 to be made absolute.  The plaintiff’s charging order extends over six properties registered in the name of the defendant (“the Charged Properties”). The applicant opposed the application.  At the conclusion of the hearing, judgment was reserved pending further written submissions from the parties to be exchanged within seven days. 

BACKGROUND FACTS

2. The plaintiff obtained a money judgment in the sum of just over $2 million against the defendant who had defaulted in making repayment of three personal loans she had obtained from the plaintiff.  The default commenced in about March 2014.  The loans were secured by a second mortgage over a property known as the “Jolly Garden property” and a third mortgage over a property known as the “Park Avenue property” (collectively “the Secured Properties”). 

3. On 5 August 2014, the plaintiff obtained its money judgment against the defendant and, on 26 August 2014, the plaintiff obtained the charging order nisi.

4. Meanwhile the applicant had obtained a Mareva injunction on 21 March 2014 over the defendant’s assets including, inter alia, the Secured Properties and the Charged Properties in aid of proceedings issued in Singapore.  After obtaining judgment from the Singapore court in April 2014, the applicant obtained another Mareva injunction on 6 June 2014 that effectively replaced the earlier injunction.  The Mareva injunctions have been registered against each of the Secured Properties as well as the Charged Properties.

5. A related company of the plaintiff’s had made loans to the defendant secured on one of the Charged Properties.  When the defendant defaulted, the related company made an application for, inter alia, possession of the relevant Charged Property.  When the matter came before him on 17 July 2014, the master is said to have remarked that a possession action by a mortgagee might not come within the exceptions to the injunction order because the relevant exception was limited to set‑offs.  (In this regard, I would add that it would be a remarkable state of affairs if a Mareva injunction could interfere with pre-existing rights of a mortgagee that would prevent him from enforcing his remedies against the Secured Properties.)

6. Be that as it may, the uncertainty arising caused the plaintiff not to seek a possession order and, instead, to seek a charging order nisi.  The plaintiff considered it necessary to protect its interest in as much as the Bank of East Asia had an “all monies” first mortgage on the Jolly Garden property and the plaintiff was unable to ascertain the amount that was owing to the bank because of confidentiality issues. 

7. So far as the Park Avenue property is concerned, the plaintiff is but the third mortgagee.  Again it was subject to prior mortgages securing “all monies” advances, the first and second mortgagees being banks/finance houses.  In those circumstances, the plaintiff could not be certain that the security it had as second and third mortgagee of respectively the Jolly Garden property and the Park Avenue property would be sufficient to cover the loans made to the defendant that remained outstanding.

8. The applicant filed its application to register the Singapore judgment on 16 July 2014 and obtained the order for registration on 28 July 2014.  However, he was unable to take any action to issue execution until the expiration of the date specified pursuant to Order 71, rule 10, being 30 August 2014 by which time the charging order nisi had been made in the plaintiff’s favour and registered.

THE APPLICANT’S JOINDER SUMMONS

9. It is clear beyond peradventure that under the provisions of section 20B (4) of the High Court Ordinance and Order 50, rule 7 of the Rules of the High Court, any person interested in any property to which the charging order relates may apply to discharge or vary the charging order.  There is no question but that the applicant has the necessary locus to be heard at these proceedings.  In those circumstances, the applicant did not pursue his application to be joined as a party pursuant to Order 15, rule 6(2)(b)(ii).

THE ISSUES

10. In his written submissions, Mr Haddon‑Cave (who appeared for the applicant) submitted that the charging order should not be made absolute.  His objections were threefold, namely, that:

(1) to do so would defeat the purpose of the Mareva injunction;

(2) it would be disproportionate having regard to the value of the debt and the aggregate value of the Secured Properties and of the Charged Properties (the “over‑securitisation” point); and

(3) the plaintiff should exhaust its remedies as secured creditor over Secured Properties first.

Those objections are considered below.

Mareva relief

11. In the judgment of Lehane J in Re Ling, Ex parte Enrobook Pty Ltd (1996) 142 ALR 87 at 92, the precise character of Mareva relief was described in these terms:

“ ... It deprives the party subject to its restraint neither of title to nor of possession of the property to which it extends. It does not create a security interest, confer priority or in any sense rewrite insolvency law (AJ Bekhor & Co Ltd v Bilton [1981] 2 All ER 565 at 579, 580 per Ackner LJ …); it is an order in persona restraining the party to whom it is directed from disposing of assets or removing them from the reach of creditors. The administration of the property is not placed in the hands of a receiver, trustee or other officer of the court, nor is it assumed by the court itself. For those reasons, to speak of a Mareva injunction as ‘freezing’ assets may, with respect, be somewhat misleading: it operates as a personal restraint against the party to whom it is directed. …

…

More importantly, however, the purpose of the Mareva injunction is to prevent a defendant from dissipating assets, or putting them beyond the reach of creditors, in circumstances where there is a real fear that, unless restrained, the defendant will do so. Its purpose is not to prevent creditors from exercising their rights. …

…

  … a Mareva injunction is not a form of administration of the debtor’s property and should not be taken to have the effect on creditors’ rights or claims that an administration in bankruptcy, or an external administration under the Corporations Law, has ...”

12. Ms Wu counsel for the plaintiff submitted that in the light of Re Ling, it is clear that a Mareva injunction does not give any security to, confer priority or any proprietary interest on, the party obtaining the injunction.  It followed that the fact that a Mareva injunction has been issued over the Charged Properties would not have the effect of preventing a creditor from exercising his right to seek a charging order over the Charged Properties to secure payment. 

13. Mr Haddon‑Cave did not challenge the Re Ling principles the correctness of which I accept.

Over‑securitisation

14. Relying on online valuations obtained on 15 September 2014 from the website of the Standard Chartered Bank, the applicant submitted that as at that date, two of the Charged Properties alone (namely the properties at Unique Tower and Central Park) are shown to have an aggregate value of $24.86 million.  It was submitted that when one takes into account the fact that the debt is only of the order of $2 million and it is already secured against the Secured Properties (shown on the online valuation as having an aggregate value of $10.68 million), it was disproportionate for the plaintiff to seek a charging order absolute over the Charged Properties.

15. Leaving aside the reliability of the online valuations, and assuming that they reflect the market value of those properties, evidence as to the value of the secured/charged properties offers limited assistance absent information as to the value of the prior encumbrances that existed over each of those properties or, put differently, the value of the unencumbered balance.  While land searches reveal the existence of prior encumbrances, they do not show the debit side of the balance sheet, ie the amount outstanding. 

16. In those circumstances, valuation information alone is insufficient to enable any creditor to come to any informed view as to the adequacy or otherwise of his security.  Nor is the court in any better position to do so.  In those circumstances, there are obvious difficulties in the applicant’s way in showing that the charging order nisi is disproportionate and completely unnecessary to secure the plaintiff’s interest.

Whether the plaintiff’s application is premature

17. To the extent that any shortfall arises between the value of the plaintiff’s judgment debt and the value of the plaintiff’s security over the Secured Properties, the plaintiff would be in the position of an unsecured creditor as regards the shortfall.  The charging order absolute that it seeks would provide security in the event that the Charged Properties have any residual value after discharging prior encumbrances.

18. Under the principles stated in Re Ling, Mareva relief is no bar to a judgment creditor taking steps to enforce its rights through obtaining a charging order over assets that are subject to a Mareva injunction. 

19. I know of no authority (and none has been has been cited) in support of the proposition that a secured creditor must first exhaust his remedies against the property over which he has security before he is in a position to seek relief such as a charging order over other property owned by the debtor. 

20. In the present case, because of confidentiality issues, the plaintiff is not in a position to ascertain the extent of the prior encumbrances affecting the Secured Properties and, as a result, it is not in a position to tell whether there would be sufficient security remaining after satisfying the prior encumbrances affecting those properties.  While there was some suggestion during the hearing that the burden was on the plaintiff to establish the shortfall before it could seek a charging order, it was not pursued.

THE COURT’S DISCRETION

21. Ms Wu referred to the principles that govern the exercise of the court’s discretion as stated in the judgment of Lord Brandon in Roberts Petroleum Ltd v Kenny Ltd [1982] 1 WLR 301, 307E‑H:

“ (1) The question whether a charging order nisi should be made absolute is one for the discretion of the court.

(2) The burden of showing cause why a charging order nisi should be made absolute is on the judgment debtor.

(3) For the purpose of the exercise of the court’s discretion there is, in general at any rate, no material difference between the making absolute of a charging order nisi on the one hand and a garnishee order nisi on the other.

(4) In exercising its discretion and the court has both the right and duty to take into account all the circumstances of any particular case, whether such circumstances arose before or after the meeting of the order nisi.

(5) The court should so exercise its discretion as to do equity, so far as possible, to all the various parties involved, that is to say, the judgment creditor, the judgment debtor, and all other unsecured creditors.

(6) The following combination of circumstances, if proved to the satisfaction of court, would generally justify the court in exercising its discretion by refusing to make the order absolute: (i) the fact that the judgment debtor is insolvent; and (ii) the fact that a scheme of arrangement has been set on foot by the main body of creditors and has even reasonable prospect of succeeding.

(7) In the absence of the combination of circumstances referred to in (6) above, the court would generally be justified in exercising its discretion by making the order absolute.”

22. Lord Brandon went on to state (at 308C‑D) that:

“ … The authorities do not … establish that the insolvency of a company, followed or to be followed inevitably by a liquidation, is enough of itself to justify the court in exercising its discretion by refusing to make an order nisi absolute. There must … be some further factor in the situation, the most common such factor being that a scheme of arrangement has been set on foot by the main body of creditors and has a reasonable prospect of succeeding.”

23. Ms Wu placed particular reliance on principles (6) and (7) as well as the passage at 308C‑D.  She also relied on Burston Finance Ltd v Godfrey [1976] 1 WLR 719 to which Lord Brandon had referred in Roberts Petroleum.  Burston (at 734) was to the effect that the mere fact of a receiving order, or even an adjudication of bankruptcy, subsequent to the order nisi, would not necessarily suffice as sufficient cause for refusing to make the order absolute.  If however there were other circumstances such as a scheme of arrangement, agreed or being negotiated amongst creditors, the court might well think it equitable to refuse to make the order absolute.

24. It is to be noted that while principles (1) to (5) of Roberts Petroleum are stated in the annotation at §50/9A/23 (p 949‑950) of Hong Kong Civil Procedure2015, as some of the “general principles governing the exercise of discretion”, principles (6) and (7) are not, and for good reason.  In their place one finds the passage set out below which takes into account the reversal of the Court of Appeal on that aspect by the House of Lords (see [1983] AC 192):

“ 6. The liquidation of the company, whether by a resolution for voluntary winding up or by a compulsory order for winding up brings into operation a statutory scheme for dealing with the company’s assets, and accordingly if such liquidation occurs after the making of the charging order nisi and before such order is made absolute, the court in its discretion will decline to make the charging order absolute …

It would seem that the same principle will apply to the bankruptcy of an individual which occurs between the charging order nisi and the hearing of the application to make it absolute.”

In Roberts Petroleum, the House of Lords also disapproved Burston: see Lord Brightman’s speech at 211H‑212B.

25. Accordingly, neither principles (6) and (7) stated by Lord Brandon nor Burston could assist the plaintiff. 

26. At the hearing, I raised with counsel the annotation at §49/1/5 concerning the circumstances relevant to the exercise of the court’s discretion in garnishee proceedings that according to principle (3) of Roberts Petroleum are not materially different from circumstances governing the court’s discretion when making a charging order absolute.  That was the matter on which counsel were given leave to address by way of further written submissions.

27. For present purposes, only one of the 3 authorities needs to be considered.  George Lee & Sons (Builders) Ltd v Olink [1972] 1 WLR 214 was a case where on the evidence before the court, there was “a very serious doubt” whether that estate was solvent.  Russell LJ held (at 216H‑217C):

“ … One solution in such a case might be to say that unless it is shown that the estate is insolvent then the garnishee order should be made absolute. But it seems to me that where there is a doubtful case such as the present that would be to run the grave risk of preferring one creditor over others, which would be wrong. Another solution might be to refuse to make the garnishee order absolute unless it is shown at the time of the application that the estate of solvent. But this might place an undue obstacle in the way of the judgment creditor when he seeks his garnishee order absolute.

…

  … in my view in this case the order absolute should be set aside; the garnishee should be ordered to pay into court the sum in question; there should be ordered an enquiry by the district registrar for his decision whether this is estate is solvent or insolvent, the enquiry to be conducted with all speed …”

28. That case concerned a claim by a creditor based on a judgment debt against the defendant the executrix of her deceased husband’s estate.  It would appear from the report that the court was taken through the particulars of the estate (which were not described in the report) and it was on that evidence that the Court of Appeal came to the view that it did.  The circumstances that gave rise to the “very serious doubt” cannot be discerned from the report but it was an estate that was in the course of administration and the firm of solicitors acting in the administration happened to be the garnishee and was regarded by the court as informally representing the executrix of the estate. 

29. In the present case, all that is known about the defendant is that in addition to the Secured Properties, she is also the registered owner of the Charged Properties.  Each of those properties is subject to a number of encumbrances.  She was also the sole director of are the Cayman Islands’ company—FB Maitreya Fund—that is now in liquidation.  The company had previously carried on the business of investing in shares of Facebook for three investors.  According to the liquidators the defendant had allegedly realized certain shares without consent and had applied the sale proceeds to purchase various properties.  The winding up order is pending registration.  So, potentially, there may be proprietary claims against the properties.  There is no information as to the debtor’s other assets, if any.  Other than that, the court was informed at the hearing that the Bank of East Asia has commenced mortgagee proceedings against the defendant.

30. Apart from banks/finance houses, the plaintiff and the applicant, one can infer from the encumbrances shown registered against the properties since the date of the charging order nisi that the defendant’s other creditors include credit card companies, estate agents, the incorporated owners of one of the Charged Properties and management companies.  Nevertheless as at the date of the hearing no bankruptcy petition has been filed.

31. While the recent encumbrances suggest that the defendant is experiencing financial difficulties, it does not necessarily mean that she is insolvent.  Cash flow difficulties alone do not establish insolvency. 

32. In my view, the court must entertain “a very serious doubt” based on the evidence before it should it consider making a George Lee type order.  Each case is fact sensitive and it must be a matter of judgment whether such a course is warranted in any particular case.  The facts of George Lee were somewhat unusual. In George Lee, Russell LJ considered it relevant that the “full facts about the estate [were] in the hands of the garnishee and his client” (at 217C‑D).  In those circumstances, no doubt any inquiry into the question of solvency could have been done swiftly. 

33. Those circumstances do not obtain in the present case.  First, these are not garnishee proceedings: there is no sum that can be paid into court.  Second, in any event, the circumstances are materially different and, in my view, are not sufficient to give rise to “a serious doubt” as to the defendant’s solvency. 

THE APPLICANT’S PROPOSAL

34. In his further submissions, Mr Haddon‑Cave sought a variation of the proposed charging order in the following manner:

(a) To discharge the charging order nisi in respect of items 1 to 4 of the Schedule; or alternatively, if it is made absolute, to stay the execution thereof.

(b) To make the charging order absolute in respect of items 5 and 6 of the Schedule (i.e. the two car parks).

35. The submission is based on the statement at §50/9A/23 (p 950) that:

“… [i]t would not be 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 citing Simmonds J in Robinson v Bailey [1942] Ch 268, 271; cited with approval in Chan Miu Cheung v Prague Enterprises Ltd, unreported, No A2200 of 1985, 1999.”

36. While it is accepted that the applicant is unable to show what the unencumbered balance of the Secured Properties would be, it was urged upon the court that it should look at what is proportionate and reasonable.  Citing the example of the value of one of the Charged Properties (item 2 on the list being the Unique Tower property) sold by the first mortgagee on 22 December 2014 for $6.98 million, it was submitted that while the price was 5% lower than the Standard Chartered online valuation, the property in question had appreciated in value substantially since the date of its purchase in February 2011 by the defendant for $5.45 million, an appreciation of approximately 28%.

37. Based on that approach, it was reasoned that leaving aside the car parks (which are items 5 and 6 on the list), the remaining four Charged Properties together with the Secured Properties (all of which were purchased in the 2011 to 2012 period) would have appreciated in similar fashion.  The applicant submitted that in the circumstances to make the order absolute would be inequitable and disproportionate.

38. It was drawn to the court’s attention that unlike the other properties in items 1 to 4, the car parks (being items 5 and 6 of the list) are unencumbered apart from the charging orders of the plaintiff and its related company.  In effect, the court was asked to proceed on the basis that as the car parks were acquired at a cost of $1.27 million, it would be reasonable to assume that a sale now would fetch at least that amount; when that is coupled with the net proceeds from the sale of the Secured Properties (given their assumed appreciation in value), it should be more than sufficient to satisfy the judgment debt of only $2 million odd.

39. Mr Haddon‑Cave’s reasoning assumes that the unencumbered balance from the proceeds of sale of the Secured Properties would be at least $730,000.  But as explained in §16 above, the court is not in a position to form any view as to that and certainly should not embark on what would be nothing more than pure speculation.

40. That aside, if I were to vary the charging order as proposed, in the event of the Secured Properties being insufficient to meet the plaintiff’s judgment debt, as matters stand, it would mean that the applicant would be gaining priority at the plaintiff’s expense.  That would not be a fair result.

41. Accordingly, while I do not disagree with the principle in Robinson v Bailey, it is simply inapplicable given the facts of the present case.

CONCLUSION

42. For the reasons stated above, there is no proper basis for refusing to make the charging order nisi absolute.

ORDER

43. Accordingly, the charging order nisi is made absolute with an order of costs nisi in favour of the plaintiff.