MAXCOLM FINANCE LTD v. CHENG CHI MAN AND ANOTHER

HCMP 948/2018

[2019] HKCFI 2928

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 948 OF 2018

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R E A S O N S   F O R   D E C I S I O N

(Money Judgment, Possession Order, Sale Order)

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Introduction

1.  This is the resumed hearing of an application by the second mortgagee of the Property for, amongst other things, Money Judgment, Possession Order and a Sale Order of the Property under the Partition Ordinance, Cap 352 (“PO”).

2.  At the previous hearing on 11 April 2019, P’s application was adjourned by this Court for reasons handed down on 19 June 2019 (“1^st Reasons”).  Save otherwise indicated herein, I shall adopt the same abbreviations in the 1^st Reasons.

3.  At the end of the hearing, I granted the orders sought by P, save that the Property was not to be put up for sale until vacant possession being delivered by D1 and D2.  My reasons are set out hereinafter.

1^st Reasons

4.  In the 1^st Reasons, this Court raised a number of concerns and directed P to file further affirmation and written submissions.  The issues raised by the Court have been summarised by Mr Cheung as follows: -

(a)  Issue 1: Whether P has effected due and proper service on Ds;

(b)  Issue 2: Whether all relevant requirements under the Money Lenders Ordinance (Cap 163) (“MLO”) have been complied with;

(c)  Issue 3: Whether P is entitled to the Money Judgment against D1;

(d)  Issue 4: Whether P is entitled to the Possession Order against Ds;

(e)  Issue 5: Whether P is entitled to the Sale Order for sale of the Property against D1 and D2;

(f)  Issue 6: Whether the Court can make orders in favour of P without joining the Bank; and

(g)  Issue 7: Whether P is entitled to seek costs against Ds on an indemnity basis.

Issue 1

5.  The main concern raised by this Court under Issue 1 was in relation to the service of the Originating Summons on D2 in that there was no sufficient evidence produced by P as to the basis of his knowledge, information and belief that D2’s last known address was the address of the Property and the relationship between D1 and D2.

6.  Since then, Mr Wong on behalf of P had filed his 5^th affirmation in support of the Originating Summons (“5^th Affirmation”) in which he stated that P was told by the third party (who referred D1 to P) at the time of the referral for the application of the loan that D2 is the mother of D1.  Further, on the Bank’s mortgage executed by both D1 and D2 on 7 July 2016, their address was stated to be that of the Property and D2 remains one of the registered owners of the Property.  There was also no tenancy agreement/lease agreement registered against the Property.

7.  Having considered all the evidence, I was satisfied that the last known address of D2 to P was that of the Property and that there had been proper service effected on D2 of the Originating Summons and all relevant documents.  I was also satisfied that proper service had been effected on D1. 

Issue 2

8.  It was submitted on P’s behalf that the Loan Agreement dated 16 November 2017 was the note or memorandum in writing referred to in section 18(i)(a) of MLO.  Mr Cheung submitted that the Loan Agreement was signed by D1 and the relevant terms of the MLO had been listed in the Loan Agreement where D1 had also signed.  In any event, in the 5^th Affirmation, Mr Wong had also produced a copy of the memorandum dated 16 November 2017, which contained all the particulars as prescribed by section 18(2) of the MLO.

9.  The interest charged by P (ie 24%) did not exceed 48% and hence the Loan Agreement complied with sections 24 and 25 of MLO.

10.  The default interest stipulated in Clause 7 of the Loan Agreement was permissible under the proviso to section 22 of MLO.

11.  P had also exhibited a copy of its current money lender’s licence pursuant to section 23 of MLO.

12.  In the 5^th Affirmation, Mr Wong had also provided a copy of the loan agreement in relation to the earlier loan, as evidence of the “pre-existing debt” referred to in the Completion Account mentioned in the 1^st Reasons.

13.  Having considered the further evidence and submissions, I was satisfied at the hearing that P had duly complied with all relevant provisions under the MLO.

Issue 3

14.  The Originating Summons was issued under Order 83A and Order 88 of the Rules of the High Court (RHC).

15.  Although Order 83A rule 2 of RHC provides that every money lender’s action may be begun by writ, it was submitted by Mr Cheung that this was not a mandatory requirement and which I accepted at the hearing.  

16.  P’s claim for the Money Judgment against D1 was based on D1’s non-compliance of the payment of the instalments of principal and interest as required by the Loan Agreement.  I was satisfied that P should be entitled to the Money Judgment against D1.

Issue 4

17.  P claims possession of the Property under Order 88 of RHC.

18.  At the hearing, the original copy of the 2^nd Mortgage and all relevant documents had been provided to the Court for examination.  In the 5^th Affirmation, Mr Wong confirmed that to the best of P’s knowledge, information and belief, that as at the date of that affirmation, the Property remained to be in the use, possession and control of D1 and D2.  There was no evidence to contradict such evidence.  As said earlier, there was further evidence that D2 is the mother of D1.  There had been due service of the Originating Summons on D2 in accordance with Order 88 of RHC.  Further on 14 June 2018, P had through his solicitors given notice to D2 that P would apply for an order of sale of the Property in its entirety and that D2 was to inform P within 7 days if she had any objection therein.  There was no response.

19.  Notice of P’s application for possession was given to the Bank, which had indicated that it would not join in these proceedings and it had no objection to the Possession Order and/or Sale Order.

20.  Having considered the affirmations of Mr Wong, I was satisfied that the requirements under Order 88 were met and P was entitled to the Possession Order of the Property as sought.

Issue 5

Whether P held an interest in possession in the Property

21.  The relevant sections in the PO are :

“Section 2: Power to order partition or sale of property in land

Subject to this Ordinance, where any property in land is held by 2 or more persons, whether as joint tenants or as tenants in common, the Court may—

(a)  make an order under section 4 for a partition of the property;

(b)  make an order under section 6 for a sale of the property; or

(c)  refuse to make any order.”

“Section 3 Institution of proceedings and parties thereto

Where any property in land is held in the manner referred to in section 2, any person interested in such property may institute proceedings in the Court under this Ordinance by way of an action for partition or sale ...”

“Section 5 Court may apportion rights and obligations and create easements

(1) The Court may, at any time after it has made an order under section 4 for the partition of the property, on the application of any person interested or of its own motion, make an order under this section, which order may —

(a) apportion or adjust between the several parcels into which the property is partitioned any rights, obligations or liabilities in force in respect of the property;

(b) create, as between the several parcels into which the property is partitioned, or any of them, any easement, together with rights and obligations attaching thereto,

and any order under this section shall have effect as if all necessary dispositions or agreements had been duly made for that purpose by all persons concerned …”

“Section 6: Sale of land

(1) In any proceedings under this Ordinance, where it appears to the Court that a partition of the property would not be beneficial to all the persons interested by reason of —

(a) the nature of the land to which the proceedings relate;

(b) the number of the persons interested or presumptively interested;

(c) the absence or disability of some of the persons interested; or

(d) any other circumstances,

the Court may make an order for the sale of the property.”

(emphasis added)

22.  The issue raised by this Court in the 1^st Reasons was whether a second mortgagee in relation to a partial interest in a property would fall within section 3(1) of the PO.

23.  As mentioned in the 1^st Reasons, Mr Cheung relied on Clause 6.01 of the 2^nd Mortgage which essentially provides that:

(a)  D1 to forthwith upon written demand by P make good and discharge to P the secured indebtedness (as defined therein)[1].

(b)  An event of default would occur if, amongst other things, (i) D1 makes default in the payment of the secured indebtedness (as defined therein) or any part thereof following demand duly made,(ii)D1 makes default in the payment on the due date and in accordance with the terms and conditions of any term loan (whether demanded or not), or(iii)there is any breach of or omission to observe any of the agreements, covenants or obligations under the 2^nd Mortgage (the “EoD”)[2].

(c)  If any EoD has occurred, P could at any time thereafter without consent on the part of D1 (or of any person but subject always to the rights of the Bank), amongst other things, (i) enter into and upon and take possession of D1’s share in the Property (including via the commencement of legal proceedings), (ii) sell, assign, call in, collect and convert into money D1’s share in the Property, (iii) exercise any powers or rights incidental to the ownership of the Property, (iv) bring any claim, action or proceedings in relation to the Property and (v)do any things necessary or desirable for realising the Property or any part thereof[3].

(d)  D1 shall pay or reimburse to P on demand all costs, charges and expenses incurred (including those incurred in the commencement of legal proceedings for the enforcement of the 2^nd Mortgage[4].

24.  Mr Cheung had submitted a further authority to this Court, namely Fortis Bank Asia HK v Yu Kam Hoi & Another HCMP 134/2002 (unreported, 4.3.2004).  In his judgment, Reyes J had referred to Chan Ching Kit, Katherine v Lam Sik Shi and Lam Sik Ying HCMP 2239 of 2000, 24 June 2002 in which Kwan J, as she then was, held at paragraph 44 that “an equitable chargee of a co-owner without any right to possession or foreclosure ... is not eligible to apply for an order for sale of the entire Property under the [PO]”.  Reyes J  agreed with Kwan J the words “any person interested in such property” in section 3(1) of the PO must be read restrictively as confined to persons holding an interest in possession[5].

25.  In both the above cases, the relevant bank was an equitable chargee.

26.  Mr Cheung referred the Court to Fisher and Lightwood’s Law of Mortgage (13^th ed), where the learned editors stated at paragraph 29.2 that a “second or subsequent mortgagee is similarly entitled to possession, except as against prior mortgagees”[6] and submitted that in the present case, P was a legal mortgagee/mortgagee.  It was further submitted on behalf of P that a second or subsequent mortgagee being a person who has interest in possession is a “person interested” within the meaning of the PO.

27.  The question was whether at the time of the issue of the Originating Summons, P was a person interested in possession entitled to seek an order for sale under the PO.  

28.  Mr Cheung submitted that as an EoD had occurred, P could at any time thereafter without consent on the part of D1 (or of any person but subject always to the rights of the Bank), amongst other things, to enter into and upon and take possession of D1’s share in the Property and for that purpose to take any legal proceedings.

29.  In short, it was Mr Cheung’s submissions that it was not necessary for P to take legal proceedings for possession or any foreclosure proceedings first before P could be said to have an interest in possession, as P’s interest in possession arose as soon as an EoD occurred.  

30.  As mentioned in the 1^st Reasons, Mr Cheung referred to (1) Uplink Finance Ltd v Lee Sze Tai and Others, DCMP 794/2016 (unreported), 16 March 2017 at paragraph 25, and (2) Law Chun Wai v Chu Suk Har [2016] 1 HKLRD 224 at paragraphs 22-23. 

31.  In the present case, the Bank had indicated no intention to apply for any order for possession and it had chosen not to participate in the present proceedings and indicated that it had no objection to the Sale Order sought by P.

32.  There were no authorities to contradict Mr Cheung’s submission.  Having considered those further submissions, I was prepared to accept that P, being entitled to take possession of the Property after an EoD occurred was at the date of the issue of the Originating Summons, a person holding an interest in possession in the Property.   

Whether to grant a Sale Order

33.  There was no evidence from D1 or D2 or the Bank suggesting that it would be possible or desirable to physically partition the Property into two halves.  The Property is a residential unit in a multi-storey building with a saleable area of around 554 sq ft[7].  I accepted Mr Cheung’s submission that it would be neither practicable nor beneficial to the owners to make an order for its partition[8].  Further, even if it was possible, doing so would no doubt greatly devalue the Property, and prejudice D2’s financial interests.

34.  There was no sign that D1 or D2 would intend to defend P’s applications.  No acknowledgment of service and no evidence had been filed by D1 and D2.

35.  There was no evidence from D1 or D2 or the Bank suggesting that an order for sale would cause great hardship or any irreparable damage to one or some of them.

36.  As said earlier, the 1^st mortgagee, ie the Bank had not made any objections to any Possession and/or Sale Order so long as the sale proceeds would be applied towards the discharge of the 1^st mortgage in favour of the Bank.  As at 11 July 2019, the outstanding loan balance to the Bank was HK$3,010,783.53 (excluding the Bank’s charges, court fees, bailiff’s charges and legal fees).  There was no evidence of any conceivable injustice to and/or prejudice on the part of Bank.

37.  It was submitted by Mr Cheung on behalf of P that given D1’s uncooperative and unreasonable attitude, P would not be able to recover (or recover fully) the outstanding sums without the Court’s order. P would thus suffer prejudice by the late repayment of the outstanding sums.

38.  Further, the Property would only be sold upon vacant possession being delivered to P, and also a reserve price at the market value of not less than HK$5,720,000 would be set up by P[9]. At the valuation provided by P, some surplus would be left for D1 and D2 after a sale of the Property and after payments to the Bank.  The estimated share of D1 and D2 would be a net amount of approximately HK$1.2m each, with D1’s share subject to payments to P under the 2^nd Mortgage. 

39.  Mr Cheung further submitted that :

(1)  The 2^nd Mortgage was the only security available to P and was the last resort taken by P to recover the outstanding loan and interests.  P’s real security right granted voluntarily and consensually by D1 in a commercial context should be respected and enforced by the Court.

(2)  Even assuming P at the end was entitled to only an insignificant amount of sale proceeds (or even nothing), granting an order for sale would not do any injustice since:

i.  The Property was subject to the Bank’s 1^st Mortgage and the Bank was entitled to an order for sale in the event of D1 and D2’s default; and

ii.  In the unlikely event that P was only entitled to an insignificant amount, P’s application was similar to assisting the Bank with the Bank’s application for an order for sale in accordance with all parties’ legal rights and expectations.

40.  Having considered all above, I came to the view that in the circumstances of this case, a partition would not be beneficial to all the persons interested and a Sale Order ought to be granted upon vacant possession of the Property being obtained by P against D1 and D2.

Issue 6

41.  As said above, the Bank was fully aware of the present proceedings and indicated that it would not join as a party to the present proceedings, I decided that there was no need to join the Bank.

Issue 7

42.  I accepted Mr Cheung’s submissions that P was entitled to indemnity costs as provided in paragraph 17.01 (ii) of the 2^nd Mortgage, and summarily assessed the amount to be paid by D1 to be HK$120,000 inclusive of all Counsel’s fees and disbursements.  I do not see any reason for making any order for costs against D2.

Conclusion

43.  The above are my reasons for making an order as per draft submitted on behalf of P at the hearing, subject to the Court’s amendments including that the Property being placed for sale only after vacant possession being delivered by D1 and D2.