STANDARD CHARTERED BANK (HONG KONG) LTD v. WONGGENOS ENTERPRISES CO LTD AND OTHERS

DCMP 878/2018

[2019] HKDC 1466

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

MISCELLANEOUS PROCEEDINGS NO 878 OF 2018

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JUDGMENT

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Introduction

1.  This is a mortgage action brought by the plaintiff, a licensed bank, under Order 88 of the Rules of the District Court. The mortgage in question was executed by the 1^st defendant and dated 9 March 2007 in respect of Flat C, 25^th Floor, St Louis Mansion, No 20 MacDonnell Road, Hong Kong (“the Property”).  The amount advanced under the mortgage loan was $2,112,500.

2.  The 1^st defendant is a limited company in Hong Kong.  The 2^nd defendant is its sole director and shareholder.  The 2^nd defendant executed a guarantee dated 8 March 2007 in favour of the plaintiff in respect of moneys and other liabilities owing by the 1^st defendant to the plaintiff, subject to a cap on the principal sum.

3.  The 2^nd and 3^rd defendants are daughter and father.  They, together with the 1^st defendant, were parties to the High Court action numbered HCA 899/2012.  In that action, the 3^rd defendant claimed against the 1^st and 2^nd defendants, alleging that the proceeds of sale of two properties, also located at MacDonnell Road, and the Property are held on constructive trust by the 1^st defendant and/or the 2^nd defendant for him.  After trial, the court found in the 3^rd defendant’s favour.  Judgment was handed down by Recorder Lisa K Y Wong SC (as she then was) on 30 September 2016 (“the Judgment”).  It was registered at the Land Registry on 13 October 2016. 

4.  Relevantly for present purposes, it was held that the Property was held by the 1^st defendant on constructive trust for the 3^rd defendant.  This was based on the finding that the money (in the form of down payment) used to purchase the Property was subject to constructive trusts held by the 1^st defendant and/or the 2^nd defendant for the 3^rd defendant.  See the recount of the parties’ cases in this regard in paras 43 to 52 and the ruling in paras 94 and 95 of the Judgment.

5.  The plaintiff now says that when the mortgage was executed, there was no publicly available information showing that the Property was not beneficially owned by the 1^st defendant.  It was not aware of the High Court action and only learnt of it when the 1^st and 2^nd defendants filed their opposing affirmations in the present action in May 2018.

6.  The plaintiff’s case here is that the 1^st defendant has failed to make the instalment payment since December 2017.  Notwithstanding demand letters sent on 1 March 2018, the 1^st and 2^nd defendants have to date failed to pay the sums due under the mortgage and the guarantee respectively.

7.  Accordingly, the plaintiff claims payment by the 1^st defendant of all sums due under the mortgage, payment by the 2^nd defendant of all sums due under the guarantee, vacant possession of the Property and declarations to the effect that the plaintiff’s legal interest in the Property has priority over and ranks ahead of the 3^rd defendant’s equitable interest.

Procedural history

8.  The plaintiff commenced the present action by originating summons on 23 March 2018.  At that time, the claim was made against the 1^st and 2^nd defendants only, for payment and vacant possession.

9.  After discovery of the High Court action, the plaintiff applied to join the 3^rd defendant as a party and to amend the originating summons seeking declaratory relief against him.  Leave was granted on 3 December 2018.

10.  In this action, the 1^st and 2^nd defendants acted in person.  They filed affirmations opposing the plaintiff’s claim in May 2018 and January 2019.

11.  The 3^rd defendant is legally aided. While he indicated that he intended to contest the proceedings when he lodged his acknowledgment of service, he made clear in his affirmation filed in January 2019 that he does not oppose the reliefs sought in the amended originating summons, save the issue of costs.

12.  The plaintiff now claims an outstanding sum of $883,340.02 (as at the date of the demand letter) together with interest.  The rateable value of the Property in the year of 2018/2019 was $173,640.  I am therefore satisfied that the present claim falls within the jurisdiction of the District Court under sections 32 and 35 of the District Court Ordinance.

13.  I am also satisfied that the requirements set out in Order 88, rule 5 concerning the plaintiff’s supporting affidavits are complied with.

The claim and the defence

14.  The plaintiff’s claim is a straightforward claim by a mortgagee to seek redress upon default by the mortgagor and its guarantor. The mortgage incorporated “The Mortgage Conditions (Two-party Version) (2003 Edition)”.

15.  As the 1^st defendant has failed to make the instalment payment since December 2017, the outstanding principal became immediately due and payable pursuant to the terms of the mortgage.

16.  As set out in the affirmation in support, the plaintiff claims that the following sums are due from the 1^st defendant under the terms of the mortgage:-

Outstanding principal as at 1 March 2018,
ie the date of demand	$883,340.02
Overdue interest as at 9 March 2018	$516.82
Late charge together with administrative
fee for payment	$394.53
Interest from 9 March 2018 to 23 March 2018	$439.03
Further interest on the principal sum of
$883,340.02 at the rate of 1.3814% pa
from 24 March 2018	Accruing

17.  The plaintiff further claims that under the terms of the guarantee, the 2^nd defendant is liable to pay to the plaintiff money owed by the 1^st defendant to the plaintiff, subject to the pre-set cap.

18.  Furthermore, pursuant to the terms of the mortgage, the plaintiff seeks delivery of vacant possession of the Property. To the best of the plaintiff’s knowledge, it has not been let out and the 1^st defendant is in possession and control.  The 2^nd defendant confirmed at today’s hearing that she resides at the Property. 

19.  As confirmed in his affirmation, the 3^rd defendant has no objection to the above reliefs sought against the 1^st and 2^nd defendants.  In addition, he has no objection to the declaratory reliefs sought by the plaintiff against him.

20.  In the High Court action, it was ordered, amongst others, that the 1^st defendant do transfer the Property to the 3^rd defendant.  To date, the 1^st defendant has not complied with that order.  The 3^rd defendant took out an application seeking an order that the 1^st defendant do execute an assignment of the Property to him absolutely within 28 days.  On 27 June 2018, the application came before Lisa Wong J.  In light of the present action, that application was adjourned sine die.  See paras 4 to 7 of the decision at [2018] HKCFI 1482.    

21.  The 3^rd defendant’s present position is this.  In the event of a sale of the Property, which is currently valued at about $8.6 million, any net sale proceeds after deduction of expenses and indebtedness owed to the plaintiff should be paid into court, instead of being handed over to the 1^st defendant.

22.  The plaintiff confirms that it has no objection to this.

Defence of the 1^st and 2^nd defendants

23.  As revealed in their opposing affirmations and in their written submissions, the 1^st and 2^nd defendants’ defence is, in essence, that the judge had reached the wrong decision in the High Court action and they are in the process of seeking an appeal from the decision.  For that reason, the present action should “be set aside until the Court of Appeal has a hearing” or, alternatively, it should be transferred to the High Court “to be dealt with all in one”.  In her latest affirmation filed in January 2019, the 2^nd defendant goes further and asks this court to declare that the 1^st and 2^nd defendants are the beneficial owner of the Property. 

24.  In her oral submissions this morning, the 2^nd defendant argued that the 1^st defendant was in fact not in default under the mortgage.  In a normal situation, the 1^st defendant would be considered as being in default when it stopped servicing the mortgage repayments.  However, here, it is now ruled that the 1^st defendant has no interest in the Property, but only holds its title.  The 1^st and 2^nd defendants therefore had to make the difficult choice of halting mortgage repayments, given that the 1^st defendant no longer owns the property and therefore has no further role insofar as the mortgage is concerned.  As such, the 1^st and 2^nd defendants, they contend, are not in default. 

Discussion

25.  The defence put forward by the 1^st and 2^nd defendants has no merit. 

26.  The following chronology relating to the High Court action is relevant:-

(1)  The Judgment was handed down on 30 September 2016.

(2)  On 17 March 2017, the 1^st and 2^nd defendants took out a summons seeking an extension of time to lodge an appeal and a stay of the Judgment.

(3)  The Court of Appeal dismissed the summons on 28 February 2018.  See the judgment at [2018] HKCA 109.

(4)  On 6 March 2018, the 1^st and 2^nd defendants issued a summons for a “reconsideration” of the Court of Appeal’s judgment at an oral hearing inter partes.

(5)  The Court of Appeal dismissed that application on 11 September 2018.  See the decision at [2018] HKCA 597.

(6)  Lastly, the 2^nd defendant issued an application to set aside and impeach the Judgment in July 2019.  That application came before Deputy High Court Judge Leung, and was dismissed by the judge on 8 August 2019.  See the decision at [2019] HKCFI 1947.

27.  It is plain and clear that as regards the dispute over the Property between the 1^st and 2^nd defendants on the one hand and the 3^rd defendant on the other, it has been disposed of in the High Court action.

28.  The Court of Appeal has refused to extend time for the 1^st and 2^nd defendants to lodge an appeal.  This means that there will not be a substantive appeal hearing of the Judgment.

29.  As things presently stand, the Judgment is binding on the 1^st, 2^nd and 3^rd defendants. On the materials before me, there does not appear to be any room for it to be set aside either at the first instance level or at the Court of Appeal.  There is also no reason why the present action should be transferred to the High Court, so that it can be dealt with together with the High Court action.  There is no outstanding matter there save for the enforcement of the judge’s ruling.

30.  In sum, as things stand, the 3^rd defendant is the beneficial owner of the Property.  And he does not oppose to the reliefs sought by the plaintiff in this action. 

31.  However, even taking the 1^st and 2^nd defendants’ case at its theoretical highest, and assuming that the Judgment can be overturned, that does not assist the 1^st and 2^nd defendants in any way to resist the plaintiff’s present mortgage action.  Even if the 1^st defendant owns the Property beneficially, the 1^st and 2^nd defendants have not attempted to dispute the validity of the mortgage and the guarantee, the fact that there has been a default and that sums remain outstanding and owing and due by the 1^st and 2^nd defendants, and the legal entitlement of the plaintiff in such event.  All these have been proved by the affirmation evidence put forward by the plaintiff. 

32.  Lastly, the contention that the 1^st and 2^nd defendants are not in default is also without merit.  From the perspective of the plaintiff, notwithstanding the High Court ruling, the 1^st defendant remains the borrower of the mortgage loan and the 2^nd defendant the guarantor of the loan.  This contractual relationship, as agreed by the parties in the mortgage documents, is not altered by the High Court ruling that the 3^rd defendant is in fact the beneficial owner of the Property all along.

33.  The obligation to pay on the part of the 1^st and 2^nd defendants remains binding.  Hence, they are in default.

34.  In the circumstances, the plaintiff is entitled to the reliefs as sought pursuant to the terms of the mortgage and the guarantee.

35.  The plaintiff proposes that vacant possession be delivered within 28 days.  The 1^st and 2^nd defendants ask for around three months to do so, because there may be room for them to discuss with the plaintiff regarding the repayments and the 2^nd defendant also mentioned that she would have to deal with the year-end audit of her own business. 

36.  The period of 28 days is fairly standard.  Given that the Property is a residential flat at the Mid-Levels, it is a reasonable period.  The 1^st and 2^nd defendants have not put forward any good reason for a lengthier period.  If they wish to make any alternative arrangement with the bank, it is open to them to do so expeditiously within the period.

Order

37.  For the above reasons, I make the following orders:-

(1)  The 1^st defendant do pay the plaintiff the sum of $885,593.05 together with interest on the principal sum of $883,340.02 at the rate of 1.3814% per annum (ie $33.43 pay day) from 20 April 2018 to the date hereof and thereafter at judgment rate until full payment;

(2)  The 2^nd defendant do pay the plaintiff the said sum of $885,593.05 together with interest on the said principal sum of $883,340.02 at the rate of 2.8814% per annum (ie $69.73 pay day) from 20 April 2018 to the date hereof and thereafter at judgment rate until full payment;

(3)  The 1^st defendant do within 28 days after service upon it of this order deliver to the plaintiff vacant possession of the Property;

(4)  Upon the 1^st and 2^nd defendants paying to the plaintiff the money ordered to be paid and all other moneys (if any) secured to the plaintiff by the mortgage, the plaintiff (subject and without prejudice to the due exercise of any power of sale for the time being vested in it) do redeliver to the 1^st defendant possession of the Property and release to the 1^st defendant the security constituted by the mortgage as the 1^st defendant may agree or the court may direct;

(5)  A declaration that the plaintiff's legal interest in the Property by way of the mortgage shall have priority over the 3^rd defendant’s interest under the Judgment;

(6)  A declaration that the plaintiff’s legal interest in the Property would be entitled to priority and ranks ahead of the equitable interest of the 3^rd defendant in the Property and that the plaintiff shall take the legal estate, ie the Property, free of the said equitable interest of the 3^rd defendant; and

(7)  There be liberty to apply.

38.  That is based on the undertaking that in the event the plaintiff exercises its power of sale, insofar as there will be any net sale proceeds after the sale of the Property and payment of the outstanding indebtedness and expenses owed by the 1^st and 2^nd defendants to the plaintiff, the plaintiff do pay into court the net sale proceeds of the Property.

Costs

39.  As for costs, the starting point here is, as always, that costs should follow the event.

40.  In respect of the plaintiff’s costs incurred as against the 1^st and 2^nd defendants, the position is straightforward.  The plaintiff should have its costs. 

41.  As regards the basis for taxation or assessment, the mortgage does not expressly provide that the plaintiff’s legal costs be granted on an indemnity basis whereas the guarantee does.  It is in theory possible to award the plaintiff costs against the 1^st and 2^nd defendants on a party and party basis and on an indemnity basis, respectively.  However, taking an overall and pragmatic view of the matter, the present action being a composite action against the defendants and a substantive part of the relief being vacant possession against the 1^st defendant, I would award the costs on a party and party basis.

42.  In respect of the plaintiff’s costs incurred as against the 3^rd defendant, the latter’s position is that no order should be made on these costs as he is not the wrongdoer here and if anything he is as much a victim as the plaintiff. 

43.  In my view, one (again) needs to take an overall and practical approach on the issue of costs.  The plaintiff commenced the present mortgage action to recover the debts owed by the 1^st and 2^nd defendants and enforce its security rights against the Property.  When the mortgage was executed in 2007, the plaintiff was not aware of the 3^rd defendant’s right in it.  On the other hand, it was the 3^rd defendant’s case in the High Court action that the 2^nd defendant acquired the Property in the 1^st defendant’s name after consulting him and obtaining his agreement and he was apparently aware that a mortgage would be required to complete the purchase – see paras 43 and 50 of the Judgment.

44.  While the High Court action was in progress, the plaintiff was in the dark about it and the 3^rd defendant’s efforts to assert his right in the Property.

45.  Upon learning of the ruling, the plaintiff took step to join the 3^rd defendant as a party in the present action.  It was clearly proper and reasonable for the plaintiff to do so in order to protect its interest in the Property.  In the end, the plaintiff successfully obtains declarations that its rights rank prior to the 3^rd defendant’s. 

46.  As between the plaintiff and the 3^rd defendant, there is no reason why the plaintiff should not have its costs.  After all, to secure its interest in the Property vis-à-vis the 3^rd defendant is a necessary step to enforce its security interest in the circumstances of the present case.  The 3^rd defendant being its beneficial owner, I fail to see how he can escape the consequence of bearing such of the plaintiff’s costs.

47.  For the above reasons, I order that the 1^st, 2^nd and 3^rd defendants do pay to the plaintiff its costs of the action.  I grant a certificate for counsel.

48.  The 3^rd defendant’s own costs be taxed in accordance with the Legal Aid Regulations.

[Submissions on quantum of costs]

49.  The plaintiff’s costs be summarily assessed in the sum of $160,000.