DBS BANK (HONG KONG) LTD v. IREWIN INDUSTRIAL LTD AND ANOTHER

HCMP 2635/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 2635 OF 2012

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D E C I S I O N

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1. The Plaintiff seeks the court’s determination of how to deal with the surplus of the proceeds of sale of the properties, which were sold by the plaintiff in exercise of its power of sale as the mortgagee. It took out an ex parte originating summons which came before me. I adjourned the application to be decided on paper; and for such purpose, gave directions to enable all the parties concerned to make submissions (and if intended, to apply to intervene), if they so choose.

BACKGROUND

2. Briefly the plaintiff is the mortgagee bank of the 2 residential flats, A and B, mortgaged by the 2^nd defendant as security for the plaintiff’s loan to the 1^st defendant in September 2004.  Various guarantees and indemnities have also been executed by, among others, the 2^nd defendant to secure the plaintiff’s banking facilities to the 1^st defendant.  In default of repayment, the plaintiff proceeded to enforcement against the defendants.

3. Eventually the plaintiff obtained order for sale of the properties.  Net of the outstanding indebtedness and expenses, there remains a surplus of HK$1,208,463.42 in the hands of the plaintiff (“the Surplus”).

4. In 2013, the 1^st and the 2^nd defendants were wound up and made bankrupt respectively.  The Official Receiver (“OR”) stepped in.

5. The plaintiff is aware of its duty under section 54 of the Conveyancing and Property Ordinance, Cap 219 (“CPO”), which provides that:

“…any residue shall be paid to the person who, immediately before any sale or other dealing, was entitled to the mortgaged land or authorised to give a receipt for the proceeds of the sale of that land.”

6. According to the land search, the properties were mortgaged by way of subsequent and second mortgage by the 2^nd defendant to Swallow Kingdom Limited (formerly known as Luck Max Finance Limited) (“Swallow Kingdom”). Subsequently in 2013, Wing Hang Bank Limited (“Wing Hang Bank”) also obtained a charging order, which was registered against one of the properties, namely flat A.

7. Of course, ultimately there is the 2^nd defendant, now the OR as her trustee in bankruptcy, as the mortgagor entitled to any final surplus of the sale proceeds.

8. Now Swallow Kingdom, as the subsequent encumbrancer in priority, asked the plaintiff to pay the Surplus to it.  However ANZ (“ANZ”), an alleged creditor of the 1^st and the 2^nd defendants, raised objection.

9. ANZ argues that there is reason for suspecting that the 2^nd mortgage of the properties by the 2^nd defendant might not be genuine.  It so argues because the second mortgage was entered into when the 1^st and the 2^nd defendants were insolvent; and the 2^nd defendant’s integrity was doubtful.  At one stage, ANZ indicated its intention to apply to set aside the second mortgage in favour of Swallow Kingdom; and requested that the Surplus be paid to the OR for the time being.

10. This caused the plaintiff to take out an ex parte summons on 4 October 2013 before the Master for an order authorising it to pay the Surplus into court.  Upon that, the Master raised requisition as to why the court should entertain the application in the circumstances of the case.

11. In response, the plaintiff took out another ex parte summons on 25 October 2013 for the court’s direction as to whom the Surplus should be paid as an alternative to payment into court.

12. In the meantime, the plaintiff requested all the parties concerned to withhold any steps pending the outcome of its ex parte application before the Master.

13. After considering the submissions and authorities relied on by the plaintiff, the Master maintained that the plaintiff should consider other alternative to deal with the competing claims by other parties to the Surplus.  No specific order was made in respect of the ex parte summonses.

14. Before me, the plaintiff essentially repeats its previous applications before the Master, though under the same ex parte originating summons now.

15. During the hearing on 27 November 2013, solicitor for the plaintiff confirmed that no notice of the Master’s reply to its previous summonses or the present originating summons has been given to the parties concerned, namely, the OR, Wing Hang Bank and ANZ.  I considered that to be undesirable, especially after the plaintiff has invited these parties to withhold any step pending the outcome of its application to the Master.  I therefore directed the plaintiff to give notice of the present application to these parties so that they could be heard, if any of them so chooses.  Depending on the response and whether oral hearing is necessary, I would give my ruling on paper.

16. As a result of my directions, all the parties concerned were duly alerted of the present application.  Now Wing Hang Bank[1] confirmed that it would make no submission in respect of the present application, subject to costs.  The OR[2], as the trustee in bankruptcy of the 2^nd defendant, confirmed that it would take a neutral stance and make no submission either.  In particular, the OR explained that it has been unable to contact the 2^nd defendant since her bankruptcy and is not in a position to comment on the issue of genuineness of the second mortgage by the 2^nd defendant to Swallow Kingdom.  ANZ responded to this court only recently[3].

DISCUSSION

17. The plaintiff is trustee of the Surplus.  Section 62 of the Trustee Ordinance, Cap 29 (“TO”) empowers a trustee to pay the trust money in hands into court to be dealt with by the order of the court.  O.92, r.2 of the Rules of the High Court (“RHC”) contains the relevant procedure.  This was the first ex parte application mentioned above.

18. In the event that a trustee is in doubt as to who is entitled to the funds in hands, O.85 of the RHC is generally available for the purpose of getting the point decided instead of payment into court under section 62 of TO: see Hong Kong Civil Procedure 2014 (Vol.1) at 92/2/1.  Hence the second ex parte application mentioned above.

19. It was the Master who drew the plaintiff’s attention to Wing Hang Bank Limited v Chi Shing Plastic & Mould Tooling Limited & Anor, HCMP 526/2012 (11 June 2013), which referred to The Tien Yieh Commerical Bank Limited v Tam Sai Chun & Anor, HCMP 4317/1999.  Essentially, in the event that the plaintiff finds that there is a dispute, an interpleader summons should be taken by the stakeholder; and it would be wrong to pay the money into court pending the parties’ asserting claims to it.  In the circumstances of these cases cited, I agree.

20. The plaintiff here emphasizes the observations expressed by ANZ about the genuineness of the second mortgage by the 2^nd defendant to Swallow Kingdom.  It is said that, unlike the cases cited above, this is not a simple matter of deciding the priority of the subsequent encumbrances here.  I note the difference.

21. The plaintiff then relied on the 19^th century cases of Re Davies’ Trust (1871-72) LR 13 Eq 163; Re Headington’s Trust (1857) LJ Ch 175, 6 WR 7; Re Jones (1857) 3 Drew 679 and Re Wylly’s Trust (1860) 28 Beav 458.  However, unlike those cases, the plaintiff here is faced with a duty to deal with the Surplus in accordance with the statute.

22. Section 54 requires the trustee to pay the residue of the proceeds of sale to the person, who immediately before the sale, was entitled to the mortgaged land or authorised to give a receipt for the proceeds.  As the matter now stands, Swallow Kingdom takes priority.

23. For the arguments raised by ANZ in the correspondence and then somehow endorsed by the plaintiff, the second mortgage in favour of Swallow Kingdom is said to be liable to be set aside.  Without that mortgage, the Surplus, net of the surplus proceeds of sale of flat A accounted to Wing Hang Bank, would have had to be accounted to the 2^nd defendant as the mortgagor.

24. As the 2^nd defendant is now bankrupt, it would have been in the interest of the trustee in bankruptcy to see that such amount would become available to the creditors of the 2^nd defendant including ANZ.  It would be up to ANZ as a creditor of the 2^nd defendant to convince the trustee in bankruptcy to intervene for such purpose.

25. Further this application is not just for payment into court.  There is the alternative application for exercise of the power of the court under O.85, r.2 to determine the entitlement to the Surplus.  Neither the trustee in bankruptcy nor ANZ has sought to intervene in this part of the application.  The trustee in bankruptcy of the 2^nd defendant made no submission in this respect either.

26. Nor has any step taken by any party, including ANZ, notwithstanding the expressed intention of ANZ at some stage to apply to set aside the second mortgage by the 2^nd defendant.  By its recent letter, ANZ acknowledged that it failed to secure the intervention of the OR.  Whilst it made the (further) allegations and observations contained in that letter, it had no intention of seeking to intervene in respect of the plaintiff’s application to seek the court to determine the entitlement to the Surplus.

27. No doubt the plaintiff is not expected to take upon itself to decide between competing claims, and I add, one way or the other.  At the same time, in discharge of the duty under section 54 of CPO, the plaintiff is not expected to act on the suspicion that the second mortgage to Swallow Kingdom is liable to be set aside, if, notwithstanding the opportunity, the party (or parties) interested chooses not to intervene to contest Swallow Kingdom’s entitlement under the section and in the O.85, r.2 application.

28. In the circumstances, I do not see the risk of liability for breach of duty on the part of the plaintiff as a trustee by dealing with the Surplus in accordance with section 54 of CPO.

29. I therefore refuse the application for payment of the Surplus into court.  I direct that the plaintiff shall pay the Surplus in accordance with section 54 of CPO and therefore Swallow Kingdom and Wing Hang Bank in accordance with their respective priority and extent of the encumbrances over the properties.

30. I should add this: By its solicitors’ recent letter, the plaintiff reiterated its neutral stance as to whom the court may determine to be entitled to the payment of the Surplus.  This was described as the consensus between the plaintiff and Swallow Kingdom.  However, for the avoidance of doubt, I make clear that I come to the above conclusion without relying on such consensus.

31. At one stage, the plaintiff sought costs of the application out of the Surplus. Swallow Kingdom also sought costs against the plaintiff.  Query whether a costs order should be made concerning a party not seeking to be joined.  Hence my further directions for clarification mentioned above.

32. Now it is confirmed that the plaintiff will not seek any costs against the Surplus while Swallow Kingdom withdraws the request for costs against the plaintiff, including those of the present application.  As to Wing Hang Bank, that, in its position, it has no comment on the present application is not surprising.  I therefore have doubt as to the reasonableness of legal costs being incurred for making known such stance.

33. I therefore make no order as to costs.

34. As sought, I also direct that the affirmation of Lim Ee Nah filed on 4 October 2013 in support of this application be put in a sealed envelope and shall not be inspected without leave of the court.

35. I trust that the plaintiff will have to inform the parties concerned of this decision for the purpose of giving effect to it.