CHAN MIU CHEUNG v. PRAGUE ENTERPRISES LTD. AND OTHERS

A2200/1985

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.2200 OF 1985

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DECISION

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1. This is an appeal from a master who had ordered that (i) a Charging Order obtained by the Plaintiff against two properties of the 1st Defendant ("Prague") and (ii) a Charging Order obtained by the Plaintiff against one property of the 2nd Defendant ("Mr Fahy"), be made absolute.

History of the case

2. To fully understand the issues between the parties, it is necessary to go briefly into the history of the case.

Issue of writ in present action

3. This case has a very long history. It started with the issue of the writ in 1985 by John Gilbert, who has since died (I shall refer to him, as well as to his estate, as "Gilbert").

Lands Tribunal order

4. The issue of the writ herein was followed by proceedings brought by Mr Fahy against Gilbert in the Lands Tribunal for arrears of rent and mesne profits. In 1987, Mr Fahy succeeded in obtaining an order against Gilbert for arrears and mesne profits, which were not paid.

Judgment in present action

5. The present case went to trial in 1991 and in October 1992, Gilbert was awarded damages in the sum of $176,225 together with interest and costs. That award of damages together with interest and costs has now grown to about $1.9m.

1992 action

6. In 1992, Mr Fahy issued another action (A8740/1992) against Gilbert. The defences raised on behalf of Gilbert included limitation and misrepresentation. Unconditional leave to defend was given to Gilbert in 1995, and there has been no progress since.

1994 action

7. In 1994 Mr Fahy, together with a company, issued yet another action (A7220/1994) against Gilbert. The defences raised on behalf of Gilbert included limitation and estoppel. There has been no progress since directions were given in 1995.

Costs order in present action

8. In March 1995, a certificate of costs was given in this action. The costs now constitutes by far the largest portion of the sum of $1.9m owed by Prague and Mr Fahy to Gilbert.

Previous applications for charging orders

9. In April 1995, the Plaintiff made his 1st ex parte application for a charging order against the properties owned by Prague and Mr Fahy. An order nisi was made the same month, but that was set aside on technical grounds in October 1995.

10. After a hiatus of about 1 1/2 months, the Plaintiff launched his 2nd ex parte application for a charging order against the properties in late November 1995. An order nisi was made in December but that was set aside, also on technical grounds, in March 1996.

11. Between March and May 1996, the Plaintiff made yet another ex parte application for a charging order against the properties, but this was not pursued by the Plaintiff.

12. On 20 May 1996, the Plaintiff made his 3rd substantive ex parte application for charging orders against the properties, and on 21 May 1996, the orders were made. In June 1996, the Defendants issued a summons to discharge the charging orders. However, neither party took any further action - the Plaintiff did not apply for the charging orders nisi to be made absolute, nor did the Defendants pursue their summons for discharge of the orders nisi.

Present application for charging orders

13. On 14 April 1997, the Plaintiff made his 4th ex parte application for charging orders against the properties, supported by a substantial affidavit of the Plaintiff's solicitor (the 13th Affidavit of Timothy John Hancock), and in that Affidavit, the discharge of the 1996 orders was sought by the Plaintiff herself. On 16 April 1997, the present charging orders nisi were made, and on 9 May 1997, the 1996 orders were discharged by a master. On 13 May 1997, the Defendants issued a summons for the discharge of the present charging orders.

14. A hearing before a master was fixed for 3 February 1998, but the parties agreed to the vacating of that date for negotiations.

15. On 22 May 1998, the 1st Defendant issued a summons to discharge the charging order nisi on 1 property out of 3 properties of Prague which had been subject to the charging order nisi, and on 23 May 1998, a master gave an order of discharge in relation to that property.

16. It was finally on 24 November 1998 that the master heard the parties, and he made the charging orders absolute which are the subject of the present appeal before me.

Adjournment refused

17. Before I deal with the substantive issues argued before me, I should record that the Defendants had applied for an adjournment because they say they wanted an opportunity to present further materials which may be relevant to the Court's determination whether the charging orders should be made absolute.

18. For the reasons which I had given in a separate decision, I refused the application, in the exercise of my discretion, due to the substantial delay on the part of the Defendants and the prejudice to the Plaintiff that would be caused by putting back the present hearing.

Principles to be applied

19. The principles to be applied in the determination by the Court whether to make charging orders absolute are well-established. In the exercise of its discretion, the Court has both the right and the duty to take into account all the circumstances of a particular case (whether they arose before or after the making of the orders nisi), and it should exercise its discretion so as to do equity, so far as possible, to all the parties involved, i.e. the judgment creditor, the judgment debtor and/or other unsecured creditors (The Supreme Court Practice 1999 Vol. 1 50/9A/25).

Grounds in opposition to orders absolute

20. A number of matters were raised on behalf of the Defendants in their opposition to the orders absolute. I do not deal with arguments of form or service because these were abandoned by Mr Coleman, counsel for the Defendants.

Keeping 3rd charging order nisi extant

21. Mr Coleman submitted that it was inequitable for the Plaintiff to have kept the 3rd ex parte charging order nisi extant until the present application was launched, when the Plaintiff has accepted that that order ought to have been discharged. That meant that the Defendants have lost the opportunity to dispose of or otherwise deal with the properties (or any of them).

22. In my view, that criticism is objectively rightly made, but I find it difficult to accept that the Defendants have been prejudiced in any way, when they themselves have seen fit not to re-fix a date for the hearing of their summons to discharge, for a period of 10 months from mid-June 1996 to mid-April 1997.

Plaintiff's interest

23. Then Mr Coleman submitted that the Plaintiff had no real interest in the Charging Order. The basis for that submission was Mr Hancock's 13th Affidavit where he said at paragraph 7 that Gilbert (or more accurately, his estate) would not benefit in real terms from the order, because as far as damages were concerned, Mr Fahy would be entitled to set-off the sums owed to him under the Lands Tribunal order, and as far as costs were concerned, the litigation had been funded by legal aid, so that any moneys recovered by Gilbert would be subject to a charge by the Legal Aid Department.

24. In my view, even though Legal Aid would have a first charge over any amounts recovered by Gilbert, it is clear from Madam Chan's Affirmation that she has continued to authorise these proceedings, and she retains an interest in the Charging Order in that she is at liberty at any time to discharge the costs owed to Legal Aid by any other means.

Set-off claims

25. Mr Coleman also submitted that the Court should take into account the claims that the Defendants say they have against Gilbert which should be set-off against any amount owed to Gilbert.

26. As to the 1st Defendant Prague, the claims have been too briefly described in the Affirmation of Yeung Suk Tao filed on 21 November 1998. Of the payments made by Prague between 1985 and 1988 of amounts said to be owed by Gilbert, no explanation has been given as to why they were not dealt with in the trial of the present action in 1991. No information is given as to when the other payments were said to have been made by Prague.

27. It is well-established that the burden is on the Defendants to show why the orders nisi should not be made absolute, and in my view, the burden has not been discharged by the extremely scanty information that has been offered by Prague of these claims, which have apparently been put forward for the first time in this lengthy history of litigation between the parties.

28. As to the 2nd Defendant Mr Fahy, he wishes to rely on the claims that are the subject-matters of the 1992 and 1994 actions. Mr Coleman submitted that even if they are statute-barred (which the Defendants of course do not accept), they could still be used as set-off, and an inquiry could be ordered in these proceedings to determine how much is owed to enable proper accounting to be done between the parties.

29. The court can of course direct an issue to be tried in charging order proceedings. But as I have said, the burden of showing cause why an order nisi should not be made absolute is upon the judgment debtor. It was therefore incumbent upon the Defendants to show that such an inquiry would be worthwhile.

30. No or no sufficient materials have been placed before the Court on the merits of these claims. This is notwithstanding the fact that the charging orders nisi were made 23 months ago, and the master made the charging orders absolute nearly 4 months ago.

31. In considering whether to direct an issue, I have also taken into account the fact that neither the 1992 action nor the 1994 action have been progressed by Mr Fahy since 1995. One would have thought that as the plaintiff with the carriage of the actions, Mr Fahy would have taken some steps to advance his case(s) in the 4 years that have elapsed (especially when charging orders had been placed on his property) if there were any merits in these claims.

32. Yet no substantive evidence has been adduced to explain why these claims have not been pursued for such a long period. There is evidence in Mr Fahy's Affidavit of 19 March 1999 that he has been unwell and has spent time in hospital, but there was no substantive evidence to show that he was so unwell as to be unable to give instructions, when it is admitted that he has been corresponding with the Legal Aid Department during this period. The burden was on him to show cause why the order nisi should not be made absolute by reason of these claims, and it was for him to explain why he did not pursue these claims all these years if there was really anything in them.

33. In view of the matters above, I would not exercise my discretion to direct an issue of those claims to be tried.

Rate of interest

34. It was also submitted on behalf of the Defendants that the Court should, in the exercise of its discretion, discount the rate of interest to reflect the fact that time had been wasted by the Plaintiff's successive unsuccessful applications for charging orders.

35. That time has been wasted by the Plaintiff is undoubtedly true, but the point still remains that she is entitled to a judgment debt, and the Defendants have had the use of the money to which she is entitled. By the same token, Mr Fahy is claiming an undiscounted rate of interest in his set-off of the Lands Tribunal award. Accordingly, I see no reason why the court should exercise its discretion to discount the rate of interest.

Over-security

36. Before I deal with the Defendants' submission as to over-security, I should record that the master had made two charging orders absolute. To date, however, only one order has been perfected. I have been asked by the parties to assume that the unperfected order would follow mutatis mutandis.

37. The order is that the Defendants' properties stand charged with payment of $1.4m odd even though Gilbert's judgment debt amounts to $1.9m odd. This deduction takes account of the Lands Tribunal order in favour of Mr Fahy together with interest. No arguments as to the arithmetic were raised before me.

38. The Defendants did submit however that it was inequitable for the Plaintiff to keep all the charging orders when the total value of Prague's and Mr Fahy's properties may be more than $5m.

39. The principle is of course right - 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 (Robinson v Bailey [1942] 1 Ch 268, 271).

40. However in the present case the evidence as to the valuation of the charged properties is not satisfactory. Mr Fahy has sworn an Affidavit on 19 March 1999 (the Friday before the hearing on Monday 22 March 1999) stating that he had caused valuations to be done in December 1998. These valuation reports were however not produced, according to Mr Fahy because they were not specifically obtained for the purpose of Court proceedings.

41. According to Mr Fahy, "the open market value of the [valued] properties as at 14 December 1998, on the basis that they were available for sale in the market with the benefit of physical vacant possession and the title being free of any material encumbrances or defect" were respectively:-

(a) a flat in Star Mansion (owned by Prague) - $1m.;

(b) Units 6 & 7 in King's Commercial Building (owned by Prague) - $1.75m. (it is to be noted that this is the value of 2 units, but the charging order was only on Unit No.7);

(c) a flat in Far East Mansion (owned by Mr Fahy) - $2.5m.

42. As far as Star Mansion is concerned, I am prepared to accept (in the absence of contrary evidence from the Plaintiff) that if it is sold with vacant possession and unencumbered, it would be worth $1m. However, I have not been taken to any evidence to show that vacant possession is available. Nor have I been shown what is the current extent of the Sun Tat On all moneys mortgage. The existence of that mortgage obviously affects the saleability of the property as it is unlikely that a purchaser would want to buy a property with an encumbered title.

43. In fact no information has been given by the Defendants as to whether any of the properties are tenanted, a factor which obviously affects the value in a sale. The fact that the valuations of open market value were done on the assumed basis of vacant possession was known to the Defendants from Mr Fahy's quotation of the valuers' report, and yet they have produced no evidence to the effect that vacant possession could be obtained; or that if the properties are tenanted, the returns were such that values close to those for vacant possession could be obtained.

44. As for King's Commercial Building, the valuation given was of 2 units, 6 and 7. In the absence of any information about the building, it cannot be assumed that Units 6 and 7 were of equal size. Again, it is not known what is the state of occupancy of Unit 7. Again it is subject to the Sun Tat On all moneys mortgage.

45. In brief, the evidence provided by the Defendants as to the real value of Prague's properties is most unsatisfactory, and I cannot accept the submission made by Mr Colman (who is instructed on behalf of both Defendants) that Prague's properties alone would be sufficient to discharge the debt under the present Charging Order.

46. As for Far East Mansion, it would appear, from the land search exhibited to Mr Fahy's latest Affidavit, that there were 2 charging orders absolute in favour of the Revenue prior to the Plaintiff's charge - in respect of Inland Revenue Appeal No. 4/91 and Inland Revenue Appeal No. 6/91.

47. An earlier land search of Star Mansion was shown to me to demonstrate that Inland Revenue Appeal No.6/91 has been satisfied recently. I am prepared to accept that.

48. Mr Coleman accepts that there is no evidence that Inland Revenue No.4/91 has been satisfied. There is however evidence that this charge by the Revenue is not that substantial. According to "YST-4" to Yeung Suk Tao's Affirmation filed on 22 May 1998, the extent of this charge was only $25,000 odd together with interest from January 1992.

49. However again there is no evidence as to the state of occupancy, so that it cannot be assumed that the market value of the property is $2.5m as alleged by the Defendants. A court cannot be left to speculate as to what discount on this value should be given if the property were tenanted, as much would depend on the rate of return. Therefore I do not feel safe in assuming that this property in itself would be sufficient to satisfy the charge so as to permit Prague's properties to be discharged from the charging order.

Order

50. In conclusion, therefore, the Defendants have failed to show cause why the charging orders nisi should not be made absolute and the appeals are dismissed with costs.