WA LEE FINANCE CO. LTD. v. YAU TAK WAH

HCMP1316/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO.1316 OF 2001

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J U D G M E N T

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Introduction

1. This is an appeal out of time against the master's order dated 6 June 2002 dismissing an application by Lau Chun Yung and Leung Foon ("the Applicants") to join as defendants in these proceedings and to set aside the various charging orders the plaintiff obtained against the defendant, Mr Yau Tak Wah ("Mr Yau").

2. The circumstances leading to these proceedings may be summarised as follows.

The Grant

3. By a new grant dated 4 July 1984 ("the Grant"), the government granted to Mr Yau's father as his trustee Lot No.867 in Demarcation District 226, Tseng Lan Shue, Hang Hau, New Territories. On 28 January 1986, after Mr Yau attained majority, his father vested the land in him. A small house was subsequently erected on it. The certificate of compliance in respect of the building works was issued on 27 March 1987.

Charging orders

4. In 2000, Mr Yau began to borrow from the plaintiff. There were altogether three loans resulting in three actions (two in the High Court and one in the District Court) and three charging orders against Mr Yau's interest in the property. The modus operandi for each loan agreement was similar. The parties entered into a loan agreement. Mr Yau further signed a letter of undertaking and a promissory note. The cheques for the loans were all made payable to one Lai Wing Ming. Mr Yau failed to make any repayment. The transactions are described more fully below.

5. The first loan agreement was made on 23 May 2000 for HK$400,000, repayable on the very next day. The plaintiff commenced HCA5257/2000 on 26 May 2000. Default judgment was entered on 4 August 2000. On 28 August 2000, the plaintiff obtained a charging order nisi which was registered with the Land Registry on 31 August 2000. The charging order was made absolute on 4 September 2000. It was registered on 17 October 2000.

6. The second loan agreement was made 15 August 2000 for HK$200,000 repayable on 19 August 2000. The plaintiff commenced HCA8438/2000 on 23 August 2000. Consent judgment was entered on the following day. The plaintiff obtained a charging order nisi on 4 September 2000 registered on 12 September 2000. The charging order absolute was made on 10 October 2000 and registered on 24 October 2000.

7. The third loan agreement was entered into on 9 November 2000 again for HK$200,000 repayable on 13 November 2000. DCCJ15818/2000 was commenced on 18 November 2000. A consent judgment was entered on 24 November 2000. The charging order nisi was obtained on 14 December 2000 and registered on 21 December 2000. The order nisi was made absolute on 10 January 2001 and registered on 8 February 2001.

Proceedings

8. The plaintiff commenced the present proceedings on 7 March 2001 to enforce the charging orders. On 14 March 2001, Mr Yau filed an acknowledgement of service indicating that he did not wish to defend the proceedings. Judgment by consent was then entered on 11 May 2001. The Registrar issued a writ of possession on 24 September 2001.

9. In October 2001, the Applicants and Mr Yau's father applied to join as defendants to defend the plaintiff's claims. On 6 June 2002, the master allowed the father's application but refused the Applicants'.

10. On 19 November 2001, the Applicants commenced separate actions (HCA4981 & 4982/2002) against Mr Yau for declaratory relief as to their beneficial interest in the ground floor and first floor of the small house respectively.

The Applicants' case

11. The Applicants allege that the parties had entered into a joint development agreement in 1984 ("the Development Agreement") pursuant to which they had each made financial contributions of HK$100,000 to the building costs of the small house and Mr Yau, in return, agreed to assign ground floor and first floor of the small house to them respectively. The arrangement was later recorded in writing in the form of a Chinese agreement dated 29 February 1988 ("the Chinese Agreement"). It read :

「新批地分樓合約

立合約人:	丘德華(YAU TAK WAH)(身份證號碼為XXXXXXXX) (以下稱甲方)。
	梁寬(LEUNG FOON)(身份證號碼為XXXXXXXX) (以下稱乙方)。
	劉親容(LAU CHUN YUNG)(身份證號碼為XXXXXXXX)(以下稱丙方)。

事由：

(1) 甲方原為新界西貢區井欄樹村之原有村民，根據新界地政署之條例，每一新界村落之壯丁均可在其本村範圍申請興建700平方英呎鄉村屋一間。

(2) 甲方在一九八四年七月獲得西貢地政署批出屋地一塊。地段號碼為D.D.NO.226 LOT NO.867(以下稱該地段)，面積為700平方英呎，在西貢地政署之新批編號為NEW GRANT NO.6769。

(3) 甲方在該地段批出稍後與乙丙方共同發展該地段，由甲方出地及部份之建築費，乙丙方出共餘之建築費，在建築完成後乙丙方分別取回該地段上蓋之地下及二樓，以作為乙丙方投資在該地段上之代價。

(4) 乙丙兩方已完成該地段之上蓋，有關新批之滿意紙並已在1987年3月27日批出。

今甲乙丙叁方將原有之協議記錄如下：

1. 乙丙之責任：乙丙兩方在該地段之上蓋已每人付出港幣拾萬元正，另甲方付出港幣拾貳萬元正，即叁方合作共付出叁拾貳萬元正。對於乙丙兩方所付支之代價，甲方特在此承認。至於建築方面，甲方承認乙丙方已完成所有有關工程，乙丙兩方無需再支付任何費用。

2. 乙丙權益：作為乙丙方投資上述該地段之代價，甲方擔保及同意在上述地段之滿意紙發出後，該地段上蓋之地下及二樓分別歸乙丙兩方所有，甲方再無任何權益，該兩層樓宇分別如附圖紅色及藍色之地方。至於叁樓及天台方面，則仍歸甲方所有，甲方並同意在乙丙兩方任何時間要求下將其地段之上蓋之地下及二樓無條件分別轉予乙方及丙方。惟過名時之屋契、土擔、轉名補價費等則全部由乙丙雙方負責。在樓宇過名後，則叁方各無拖欠，合約到此終結。

3. 法律手續：本合約由雙方暫行簽署，他日叁方再在乙丙兩方所指定之律師樓簽署有關該地段不可取消授權書，有關乙方權益樓宇之過名契及公契等，所有律師費則由乙丙方平均負責。

4. 乙丙方保障：在樓宇過名予乙丙方之前，為保障乙丙方投資起見，甲方同意將該上述地段之所有原裝地契交由乙丙方共同保管直至過名為止。

5. 部門接洽：過名時之一切有關部門聯絡及向地政署申請等之手續，甲方在此同意乙丙任何一方可代其申請。

6. 乙丙方稅務：將來有關乙丙方在售出其在該地段上應得樓宇後，所引起之利得稅及其他一切有關稅項問題，一切由乙丙方分別負責，與甲方無涉。

恐口無憑，立此為據。

甲方：丘德華

乙方：梁寬

丙方：劉襯容

1988年2月29日」

The Chinese Agreement had never been registered with the Land Registry under the Land Registration Ordinance, Cap.128 ("the Ordinance").

12. The Applicants allege that they have beneficial interest in the ground and first floor of the small house respectively and that they and their families have been in possession of the same since its completion. According to the plaintiff's officers who handled the loan transactions, they had been to the small house for the purpose of the loan applications but they had not been given access to either the ground floor or the first floor.

Three preliminary points

13. Before turning to the main issues, I would preface the discussion with three preliminary points.

14. First, this is an appeal out of time. As I understand Mr Lam, counsel for the plaintiff, his real objection is that the Applicants' case is unmeritorious. He did not seriously take issue on the length of delay in lodging this appeal and the explanation for the delay. Accordingly, if I am satisfied that the Applicants' case is meritorious, leave to appeal out of time and indeed the appeal proper should be allowed.

15. Second, the plaintiff had cast doubts on the veracity of the Development Agreement, the investment by the Applicants in the land and the Chinese Agreement. Likewise, the Applicants suspected if the loan agreements were made to circumvent the provisions in the Grant that prohibited alienation without the prior approval of the District Land Office. Other than suspicions and inferences, the parties have been unable to adduce any direct evidence to impugn the transactions. In my view, the matters concerning the veracity of the transactions cannot be resolved on affidavit. For present purposes, I will accept that all the transactions were bona fide.

16. Third, the rules require the Applicants, as intended interveners, to have some interest in the subject matter of these proceedings. As will be seen in a moment, whether they have sufficient interest to enable them to intervene is largely a matter of law. For present purposes, if they are able to satisfy me that they have an arguable case, they should be entitled to intervene. I need not make a definite ruling in their favour. Indeed, given the nature of this appeal, it would be inappropriate for me to do so.

The Applicants' proprietary interest

17. I now turn to the main issues. The first question is whether the Applicants have any proprietary interest in the property.

18. Clause 5 of the special conditions of the Grant contained the usual prohibition against alienation without the prior consent of the District Land Office and payment of additional premium. Mr Chong, counsel for the Applicants, readily accepted that the Development Agreement might be contrary to Clause 5 and hence unenforceable : Li Pui Man v. Wong Mei Yin [1998] 1 HKLR 84. However, he submitted that it would not affect the proprietary interest acquired by the Applicants in the land by virtue of their investing money in the land : Halsbury's Laws of England, 4th edn., Vol.16, para.1073 at pp.935-936. Their proprietary interest arose quite independent from the agreement which might be unenforceable. In this regard, he relied on Best Sheen Development Limited v. The Official Receiver and Trustee of the Property of Lai Thomas, a bankrupt [2001] HKCU 334, per Yuen J (as she then was).

19. I am of the view that leaving other points for the time being, it is certainly arguable on authority that the Applicants had by virtue of spending money on the land acquired an equitable interest in it. The form of remedy that they may be entitled may vary. But it is certainly open to the court to declare that they are the beneficial owners of the ground floor and first floor of the small house respectively and that Mr Yau is a mere constructive trustee.

20. The next issue that I need to consider chronologically is the effect of the Chinese Agreement. The effect, as will be seen in a moment, is two-fold : firstly, on the Applicants' position and secondly and more importantly on the implication of its non-registration under the Ordinance. I will deal with these two points in turn.

Effect of the Chinese Agreement on the Applicants' position

21. The Applicants' proprietary interest, if established, was an unwritten equity. It came into existence by virtue of their investment in the land. Mr Lam contended that the unwritten equity had been subsumed by the Chinese Agreement, which, he contended, was in substance an express declaration of trust by Mr Yau. In this connection, he relied on Li Sze Fat v. Cheng Ka Leung Tommy [2000] 3 HKC 224. There, the plaintiff entered into a sale and purchase agreement for a property with the defendant, the registered owner, on 13 March 1997. The property was acquired in 1985 under the housing ownership scheme. The scheme set out various restrictions against alienation of the property unless 10 years had elapsed after the date of the acquisition and upon payment of a premium to the Housing Authority. Thereafter the owner could enter into an agreement for the sale of the property provided there was a condition in the agreement that the premium would be paid before the assignment. The agreement contained similar provisions regarding the payment of the premium by the vendor and a receipt clause to acknowledge the deposits paid by the plaintiff. The agreement was registered within one month after its execution. In July 1997, the plaintiff entered into a sub-sale agreement with a company. Completion was to be on the same day as that under the head sale and purchase agreement, namely 28 August 1997. In the event, completion did not take place. The plaintiff commenced proceedings claiming for return of deposits. On 4 September 1998, the defendant's mother registered a trust document purportedly executed by her son in 1988. The document contained a statement by the son acknowledging that it was the mother who had paid for the property and that he was willing to transfer the title back to his mother or her nominee for her disposition. She argued that as the beneficial owner of the property, she could defeat the plaintiff's lien on the property.

22. Yuen J (as she then was) held that the resulting trust in favour of the mother was an unwritten equity but the document was an express declaration of trust and the unwritten equity had thereby been subsumed. As it was not registered until after the plaintiff's registration of the agreement, the plaintiff's lien took priority.

23. Under the Chinese Agreement, Mr Yau acknowledged the Applicants' interest in the ground floor and the first floor of the small house, confirmed that he had no interest therein and agreed to transfer the same to the Applicants at their expense without condition at any time when called upon to do so. In my view, it is certainly arguable that it was an express declaration of trust and that the Applicants' proprietary interest being an unwritten equity had been subsumed accordingly. I do not propose, however, to make a finding that the Chinese Agreement was indeed an express declaration of trust. As will be seen later, it is not necessary to do so for the purpose of disposing of this appeal.

Any interest upon which the charging orders might fasten

24. I next consider whether the Applicants' interest affected the charging orders.

25. The question is given the Applicants' beneficial interest (if established), either as an unwritten equity or under the Chinese Agreement as an express declaration of trust, whether there remained any beneficial interest on the part of Mr Yau upon which the charging orders might fasten insofar as the ground floor and first floor of the small house are concerned.

26. Section 20 of the High Court Ordinance, Cap.4 enables a judgment creditor to obtain a charging order on any such property of the debtor as may be specified in the order so as to enforce that judgment. However, the charge may be imposed only on an interest held by the debtor beneficially : see section 20A(1)(a). Did Mr Yau have any beneficial interest in the ground floor and the first floor at the dates of the various charging orders? As I have demonstrated above, it is arguable that Mr Yau was either a constructive trustee of the Applicants' unwritten equity or an express trustee under the Chinese Agreement insofar as their beneficial interest in these floors (if established) is concerned. It follows that it is arguable that at the dates of the charging orders, Mr Yau did not have any beneficial interest in these floors upon which the charging order might fasten : see by analogy Tse Fook Choy & another v. Kwong On Bank Ltd [1999] 3 HKC 126, applying Ho King Yim v. Lau King Mo [1980] HKLR 42.

Position under the Ordinance

27. I now come to the more controversial question. Would the above position be displaced by the non-registration of the Chinese Agreement under the Ordinance? If the Applicants' interest remains an unwritten equity, the non-registration of the Chinese Agreement will not affect their priority. This proposition is well supported by authority. Mr Lam, however, contended that where the Chinese Agreement is an express declaration of trust, the position is entirely different. This brings me to examine the relevant statutory provisions and the authorities he relied on.

28. Section 3 of the Ordinance provides :

" (1) Subject to this Ordinance, all such deeds, conveyances, and other instruments in writing, and judgments, made, executed, or obtained, and registered in pursuance hereof, shall have priority one over the other according to the priority of their respective dates of registration, which dates shall be determined in accordance with regulations made under this Ordinance.

(2) All such deeds, conveyances, and other instruments in writing, and judgments, as last aforesaid, which are not registered shall, as against any subsequent bona fide purchaser or mortgagee for valuable consideration of the small parcels of ground, tenements, or premises, be absolutely null and void to all intents and purposes:

Provided that nothing herein contained shall extend to bona fide leases at rack rent for any term not exceeding 3 years."

29. Mr Lam is not relying on section 3(2). He must be right as a chargee is not a subsequent purchaser within the meaning of that subsection : see Financial and Investment Services for Asia Ltd v. Baik Wha International Trading Co. Ltd [1985] HKLR 103 and Ng Kam Ha v. Vincent Sina Traders (HK) Ltd [1987] 2 HKC 517. He however contended that under section 3(1) of the Ordinance, the Chinese Agreement as an express declaration of trust is registrable. Since it has never been registered, it is null and void against the subsequent registered charging orders.

30. On a first glance, section 3(1) deals with priority of registered documents inter se according to their dates of registration. But relying on Kwok Siu Lau v. Kan Yang Che (1913) 8 HKLR 52 and Keep Point Development Ltd v. Chan Chi Yam & others [2000] 2 HKLRD 147, Mr Lam argued that under section 3(1), if a registrable instrument is not registered, it is null and void against the one registered subsequently.

31. In Kwok Siu Lau, the Full Court held that the effect of sections 3 and 4 of the Ordinance in the absence of fraud is to make an unregistered deed null and void as against the registered deed of a subsequent bona fide purchaser for value, even though the latter had, at the time of registration, notice of the former unregistered deed. Havilland de Sausmarez J said at pp.64-66 :

" The Ordinance provides a register of deeds and other instrument, and Section 3(1) provides for the priority of such deeds and instruments according to the priority of their respective dates of registration. Subsection (2) provides that unregistered deeds are void against "any subsequent bonâ fide purchaser or mortgagee for valuable consideration of the same parcels," apparently whether such purchaser has registered or not... Section 3(2) appears to me to deal simply with unregistered instruments and it places a heavy disability on unregistered deeds, postponing them to other instruments whether registered or unregistered, under which a subsequent bonâ fide purchaser for value may claim the property in question. As between two unregistered deeds equitable doctrines will no doubt apply, but I do not desire to go further; all I have to do is to see that the different sections of the Act are capable of being construed in their natural sense without conflict. It is said that the legislature cannot have intended to postpone a prior to a subsequent unregistered deed. That is an argument which would be of weight could not the priority of unregistered deeds inter se immediately be altered or confirmed by the registration of one of them. The penalty is severe, but the escape is easy.

Having dealt with the priority of deeds, registered and unregistered, the Ordinance by Section 4 goes on to enact that, "no notice, either actual or constructive, of any prior unregistered, deed, &c., shall affect the priority of any such instrument as aforesaid as is duly registered in pursuance of this Ordinance," thus at a stroke cutting off the application of the equitable doctrine of notice to any registered deed. It has been suggested that by such an interpretation as is put upon the section by the learned Chief Justice bonâ fide and malâ fide purchasers are put in the same position, and so a door to fraud is opened. I do not think so, for when there is actual fraud by a subsequent purchaser, which is what the Ordinance seeks to defeat, it cannot be contended that the registration of a deed will cure it, but if by malâ fide purchaser is meant a purchaser with notice I think the section does put the two classes on the same footing and purposely.

The effect of the Ordinance, as I read it, is to make registration the test of priority, and by imposing harsh terms on persons failing to register to compel them to do so, and, further, to remove the doctrine of notice from transactions in land in the Colony. ..."

32. Other judges agreed. Davies CJ said at pp.66-67 :

" There was a good deal of new matter introduced in argument on appeal and I think it desirable to express in a few words the construction which I also place on sections 3 and 4 of the Ordinance. Section 3 sub-section (1) deals with the priority of registered deeds. Subsection (2) deals with unregistered deeds and provides that deeds which are not registered shall be void as 'against any subsequent bonâ fide purchaser or mortgagee for valuable consideration of the same parcels,' and I agree that it applies whether the subsequent purchaser has registered or not, and that the object of the Ordinance being to enforce registration the question of postponing a prior to a subsequent unregistered deed was apparently not regarded by the Legislature as an element of weight. As regards the words 'bonâ fide' purchaser I adhere to the view expressed in the Court below that the equitable doctrine of notice referred to in the cases which I cited would be applicable but for the existence of section 4.

Section 4 expressly negatives such equitable doctrine."

Gompertz J said at pp.67 :

" There is no difficulty about section 3(1): that clearly regulates the priorities inter se of registered deeds.

Subsection (2) deals with unregistered deeds, making them, with one saving clause, null and void against subsequent bona fide purchaser, apparently whether these latter are registered or not. This subsection makes applicable the equitable doctrine or Le Neve v Le Neve 2W and T Eq Ca 175 (7th edn) Amb 436(a).

But section 4, it seems to be, makes a new departure, and brushes away the equitable doctrine altogether in favour of a duly registered deed."

33. I just wonder if the judgments quoted above supported the very general proposition contended by Mr Lam on the effect of section 3(1). The judges simply did not deal with the question whether an unregistered deed was null and void against a subsequent registered one under section 3(1). They all expressly stated that section 3(1) regulates priorities inter se of registered deeds.

34. The facts in Keep Point Development Ltd are in summary these. In 1996, the plaintiff purchased a site from a third party and in 1997 registered the assignment. The third party had purchased various units of a property on the site from the defendants and had given them options to purchase equivalent units in a new building to be constructed on the site by him. The option agreements were not registered and in 1998, when the defendants sought to do so. The plaintiff sought declarations, inter alia, that they were not entitled to. At issue was whether the agreements were null and void as against the plaintiff, under section 3(1) or (2) of the Ordinance. Deputy Judge Woolley held that the agreements were null and void as against the plaintiff under both subsections and that under section 3(1), the plaintiff had established priority by reason of the earlier registration. He said at pp.150D-151H thus :

"However, as Sir John Swaine for the plaintiff has pointed out, his case here rests on s.3(1), not s.3(2), in that he is claiming priority over the defendants by reason of prior registration, and that brings into play the protection given by s.4, even if the plaintiff had notice. He submits that, if the plaintiff comes within s.3(1), it has a clear title extinguishing any claim by the defendants, and its priority is only defeasible if it has been guilty if fraud, and the burden of proving fraud lies on those alleging it.

In support of this contention he has drawn my attention to a number of authorities, commencing with the decision of the Full Court in Kwok Siu Lau v Kan Yang Che [1913] 8 HKLR 52 ...

This was followed by the Court of Appeal in Ho King Yim v Lau King Mo [1979] HKLR 268 where it was held that a charging order registered after a sale and purchase agreement was registered, but before the assignment, could not take priority to the interest of the purchaser or his successors.

This must be right. The effect of s.3(1) must give a good transferable title to the purchaser, otherwise it would produce an absurdity. In the case of a lease for a term of years which is registered it is clear that, as against a subsequent purchaser, who also registers, the lease will have priority and the assignment to the purchaser takes effect only as a reversion upon expiry of the lease. But in the case of a purchaser who registers first, priority can only mean that the title conferred by the assignment, which would otherwise be a complete and unfettered title, by operation of the section is still such, even if the purchaser had notice of the prior unregistered interest, provided of course that no fraud was involved in the transaction. And the purchaser must similarly be able to pass on such unfettered title, otherwise his title would be largely meaningless, if the only effect of the section were to postpone the later registered interest until the purchaser relinquished his title, which it is unlikely in those circumstances he would ever be able to do, at least not by sale. In the same way, a mortgagee, if all he acquired under the Ordinance was a postponement of the later interest, could never realise his security by sale, if the later registered interest took effect the moment he attempted to do so."

35. It is clear from the judgment quoted that the learned deputy judge was dealing with the title of the plaintiff purchaser in the land and his priority over a prior but unregistered option agreement. Here, the situation is arguably distinguishable. The plaintiff is not a purchaser. It is a chargee under the various charging orders. Again, I wonder if Keep Print Development Ltd is capable of supporting the very wide interpretation Mr Lam sought to place on section 3(1).

36. In the absence of full submissions, I do not consider it right to decide this point at this stage. And I do not propose to go any further. In my view, it certainly requires fuller and mature consideration of the effect of section 3(1) and the relevant authorities.

Conclusion

37. For the above reason, I am not persuaded by Mr Lam that the Applicants' case is clearly untenable as a matter of law. On the contrary, I am quite satisfied that they have demonstrated that they have sufficient interest to intervene. I would therefore give leave to appeal out of time and allow the appeal proper to the extent that the master's order dismissing the application to intervene be set aside. However, I will not set aside the charging orders. Indeed, whether they should be set aside can only be determined after trial. It would be wrong to do so at this stage. Accordingly, that part of the master's order will not be disturbed.

38. To enable the matter to proceed in the usual manner, I will grant an interim stay of the execution of the charging orders including the execution of the writ of possession until after trial or further order. I will leave the directions regarding future conduct of the matter to the parties for the time being. As I have indicated above, Mr Yau's father is now a party to these proceedings. I do not consider it appropriate to make any direction in his absence.

39. On the question of costs, I see no reason why costs should not follow the event. Although only part of the appeal is allowed, the substantive argument really centred around the Applicants' interest to intervene. In the circumstances, I think the Applicants should be entitled to costs without any apportionment. I will therefore make an order nisi that costs below and the costs of this appeal be to Applicants in any event, to be taxed if not agreed. The order nisi will become absolute 14 days after handing down.