SHUN HO ENERGY DEVELOPMENT CO LTD v. SMART DRAGON LTD

DCDT 4440/2008

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

DISTRAINT NO. 4440 OF 2008

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D E C I S I O N

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1.  The plaintiff was and is the registered owner of the premises known as the 1st Floor (Whole Floor) and Shops 5A and 5B on the Ground Floor, Yau Kwong Building, Nos 418-430 Hennessy Road, Wanchai, Hong Kong (hereinafter called “the premises”).

2.  Pursuant to a written tenancy agreement dated 23 May 2008 (hereinafter called “the tenancy agreement”), the plaintiff let the premises to the defendant for a term of two years from 16 April 2008 to 15 April 2010, at a monthly rent of $270,000 payable by the defendant in advance on the 1st day of each month.

3.  The following are the relevant express terms of the tenancy agreement: 

(a)  “租客不得將承租物業分租或部分分租或轉讓他人 ……”（Clause 9）

(b)  “租客同意以列於第二部分第（五）項之用途、性質及第二部分第（三）項之商號名稱經營該業務。 ……”（Clause 38）

(c)  “經營商號：      ”（Part 2 item 3）

(d)  “用途：商舖（業務性質：        ）/合法用途”（Part 2 item 5）

(e)  “租客同意按承租物業之現狀租用，包括承租物業內之所有裝修傢俬電器設備及水電燃之供應，承租物業之內外原有間格、門窗、裝飾設備、電箱電線掣箱、來水管去水管及業主提供之傢俱電器設備，均由租客負責保養維修，在租約期滿或終止遷出交樓時，必須以良好完整狀況交回（自然損耗除外）。 ……“（Clause 13）

(f)  “承租物業內原有之設備及業主提供之設備及傢俬（按現狀交予租客，業主不負責維修及保養）：見附表一業主將按現狀交吉或（如適用）連同另列於清單之裝修傢俬設備交予租客，租客同意按現狀接收上述物業及（如適用）該裝修傢俬設備，無論日後租客因經營需要而拆除、更改、更換或添加上述物業之現有裝修傢俬設備，租客須用書面通知業主並得業主同意租客可拆除、更改、更換或添加上述物業之現有裝修傢俬設備，所有費用由租客負責。本人蘇綺文 …… 同意保證在租約期滿時將上述物業及該裝修傢俬設備以完好完整可即時運作狀況交回業主。”（Part 2 item 14）

(g)  “本租約包括雙方同意並寫在列於第二部分第（十五）項之特別條款。”（Clause 10）

(h)  “租客同意在租約屆滿或交樓予業主時，留下所有設備裝修生財工具，以完好可用及可即時營業的狀況將承租物業交回予業主。”（Part 2 item 15(10)）.

4.  Part 2 item 14 of the tenancy agreement referred to “附表一” (hereinafter called “the tenancy annexure”) which set out 47 items of “承租物業內原有之設備及業主提供之設備及傢俬（按現狀交予租客，業主不負責維修及保養）”(hereinafter called “the landlord’s furniture/fittings”).  According to the second affirmation of Fok Fung-yin (hereinafter called “Madam Fok”), the plaintiff’s leasing manager, dated 10 December 2008, the tenancy annexure was delivered to the defendant at the same time of delivery of possession of the premises on 16 April 2008.  In the delivery record signed on behalf of the defendant, the defendant acknowledged acceptance of possession of the premises on an “as-is”condition, including the landlord’s furniture/fittings. 

5.  The defendant operated a Chinese restaurant at the premises under the style and trade name “醉喜樓”(hereinafter called “the restaurant”). 

6.  According to Madam Fok’s second affirmation, the defendant began to default rental payments shortly after entering into the tenancy agreement.  On or about 4 September 2008, in Distraint Case No. 3479/2008 (hereinafter called “the first action”), the plaintiff applied for and obtained a warrant of distress for recovery of arrears of rent under the tenancy agreement in the sum of $270,000 due on 1 August 2008 (hereinafter called “the first warrant”).

7.  I have caused the court file in relation to the first action to be available at the hearing.  It appeared from the court file record that the bailiff executed the first warrant on 18 September 2008 when the defendant failed to pay the outstanding rent on demand.  The bailiff’s inventory and appraisement of the goods and chattels seized at the premises (hereinafter called “the first inventory”) showed the bailiff seized 66 items of property, including money in cash, which were all associated with operating a restaurant business.  The bailiff gave notice that any person alleging himself to be the true owner of any property seized under the first warrant should lodge his or her claim to the Bailiffs’ Office within five working days from the seizure. 

8.  Public auction for the sale of the seized property in the first inventory was intended to be held on 25 September 2008.  On 22 September 2008, a sum was paid into court being arrears of rent under the first warrant together with court fees, guard fees and other expenses.  The plaintiff collected such sum and the balance of the deposit, so the first warrant was spent. 

9.  According to the second affirmation of Madam Fok, the defendant defaulted in payment of rent due on 1 September 2008.  On or about 23 September 2008, in Distraint Case No. 3750/2008 (hereinafter called “the second action”), the plaintiff applied for and obtained a warrant of distress for recovery of arrears of rent under the tenancy agreement in the sum of $270,000, due on 1 September 2008 (hereinafter called “the second warrant”). 

10.  I have caused the court file in relation to the second action be made available at the hearing.  It appeared from the court file record that the bailiff executed the second warrant on 8 October 2008, when the defendant failed to pay the outstanding rent on demand.  According to the second affirmation of Madam Fok, the claimant turned up at the premises and alleged that, on 22 September 2008 (i.e. the very day when the defendant settled, inter alia, the outstanding rent for August 2008 under the first warrant) the defendant sold business assets and chattels of the restaurant to him.  At the hearing today, the claimant clarified he did not turn up at the premises, but reminded the defendant to let the bailiff know of the situation. 

11.  Be that as it may, the bailiff was informed of the stamped Chinese sale and purchase agreement (hereinafter called “the  SP agreement”) as follows: 

“買賣契約22-9-2008

瑞龍有限公司下稱“賣方”現將轄下醉喜樓飯店地址香港軒尼詩道418-430號1/F店內之生財用具及冷氣機設備全套及包括全部餐椅、餐枱面、厨房設備等(下稱上述設備)賣予吳承志先生(下稱“買方”價值港幣叁拾萬元正。

上述設備詳列於后 ..

(1)  冷氣機及電器設備全套裝置，SONY電視機一部，SKYWORTH電視機二部，MY450SCTSMAN冰粒機一部，SD/43冰粒機一部，全部餐椅160張，餐枱面40張，養魚缸及過瀘係統全套，40磅不銹鋼電滾水罉壹座連茶壺柜架。

(2)  厨房內不銹鋼電熱洗碗機一座，大小合金企身煲8個，不銹鋼電熱腸粉連兩口蒸點心爐臺座。

(3)  味部不銹鋼燒鴨爐1個，電磁爐頭3座，4口平頭爐1座，不銹鋼三格電熱蒸柜一座，凹格粥車一部。

(4)  厨房不銹鋼炒鑊三口爐全座，2格不銹鋼荷枱2張，點心部不銹鋼荷枱連雪柜兩張。

(5)  厨房不銹鋼砧板枱連雪拒兩張。

(6)  其他傢俬什物包括茶柸，碟，筷等全部。

註{ “買方”同意由即日起將上述設備全部租予“賣方”，每月租金港幣壹萬元正，為期六個月，期滿另行商討處理。

“賣方”有優先權在六個月內照上述買賣價加25%向“買方”購回上述設備，“買方”不得拒絕。逾期則“買方”可自由處理例如售賣予他人或搬走。

賣方 兹收到“買方”港幣叁拾萬元正乃上述設備之買賣價 For and on behalf of SMART DRAGON LIMITED 端龍有限公司 蘇綺文   簽署 瑞龍有限公司登記 No. XXX

買方         [簽名]    簽署 身份証号碼 XXX”

12.  The bailiff proceeded to seize other goods and chattels at the premises in execution of the second warrant.  The bailiff’s inventory and appraisement of the goods and chattels seized at the premises (hereinafter called “the second inventory”) listed 30 items associated with operating a restaurant business, including money in cash.  The bailiff gave notice that unless any person alleging himself to be the true owner of any property seized under the second warrant lodged his or her claim to the Bailiffs’ Office within five working days from the seizure, or obtained an order from the court to the contrary, the seized goods and chattels would be sold on 15 October 2008.

13.  On 15 October 2008, a public auction took place and the buyer took possession of the seized goods and chattels on the same day.  Subsequently, the plaintiff collected the net sale proceeds, the seized cash paid into court by the bailiff, and the balance of the deposit.

14.  According to the first affirmation of Madam Fok dated 6 November 2008, notwithstanding a debit note dated 22 September 2008 issued by the plaintiff requiring the defendant to pay, inter alia, rent for the premises for October 2008, the defendant again defaulted and was indebted to the plaintiff for the sum of $270,000 being arrears of rent for October 2008 payable in advance on 1 October 2008. 

15.  According to Madam Fok’s first affirmation, two Chinese newspapers published on 5 November 2008 carried news articles on the sudden closure of business by the defendant at the premises the day before.  Such articles further reported that the defendant had failed to pay wages to his employees for a few months.  In the afternoon of the same day, Madam Fok attended the premises and saw people coming out of the premises carrying belongings and other items.  She verily believed that the defendant was attempting to remove items and articles from the premises and was concerned that the defendant might tamper with the landlord’s furniture/fittings.  Madam Fok therefore applied for a warrant of distress on an urgent basis. 

16.  On 6 November 2008, priority was given by His Honour Judge Yung and a warrant of distress was issued directing the bailiff to distrain the goods and chattels on the premises and in the apparent possession of the defendant for the sum of $270,000 being one month’s rent due to the plaintiff on 1 October 2008 (hereinafter called “the third warrant”). 

17.  According to the affirmation of the bailiff, Lee Tsz-leung Marco, dated 10 November 2008, he attended the premises on the same date to execute the third warrant but found the outer doors and windows, being the only means of access to the premises, locked.  No one answered his calls when he knocked and pressed the doorbell. 

18.  On 11 November 2008, the plaintiff’s solicitors wrote to the bailiff, urging for an early appointment for a second attempt to execute the third warrant.  By such letter, the plaintiff’s solicitors also advised the bailiff that the landlord’s furniture/fittings listed in the delivery record belonged to the plaintiff, and were let to the defendant under the tenancy agreement. 

19.  According to the affirmation of the bailiff, Wong Hing-sheung, dated 12 November 2008, he attended the premises on the same date to make a second attempt to execute the third warrant.  On arrival, he found the outer doors and windows locked, and no one answered his calls when he knocked and pressed the doorbell. 

20.  On the application of the bailiff on 13 November 2008, Deputy District Judge Mierczak, on 17 November 2008, granted an order for the bailiff to break open the outer door and windows of the premises so far as may be necessary to enable him to execute the third warrant (hereinafter called “the break-open order”). 

21.  According to the bailiff’s records, when he arrived at the premises on 26 November 2008, the door was locked and no one responded to his calls.  The locksmith engaged by the plaintiff broke open the outer door and the bailiff seized goods and chattels in execution of the third warrant (hereinafter called “the seized goods”).  The bailiff prepared an inventory and appraisement of the seized goods that ran to 54 items (hereinafter called “the third inventory”) including a locked safe seized at the premises.

22.  On 26 November 2008, the bailiff issued to the defendant a notice under section 89 of the Landlord and Tenant (Consolidation) Ordinance, Cap.7 (hereinafter called “the Ordinance”) to the effect that the bailiff had seized the seized goods listed in the third inventory for the sum of $270,000, being one month’s rent due to the plaintiff on 1 October 2008.  The defendant was informed that unless it paid that amount together with costs of the distress within five days, or obtained an order from the court to the contrary, the seized goods would be sold on 3 December 2008. 

23.  On the same day, the bailiff wrote to the plaintiff’s solicitors saying that the bailiff had seized goods and chattels belonging to the distrainee at the premises, and that a copy of the third inventory had been given to the defendant’s representative at the spot.  The plaintiff was also informed that the bailiff proposed to sell the seized goods by public auction on 3 December 2008.

24.  Also on the same day, the bailiff wrote further to the plaintiff’s solicitors stating that the plaintiff’s solicitors should arrange for a locksmith to break open the seized safe immediately after auction. 

25.  On 1 December 2008, the Registrar authorised auctioneers to sell by public auction the seized goods on 3 December 2008 to the value of $303,109.90 being the amount required to satisfy the plaintiff’s claim. 

26.  On 2 December 2008, the claimant wrote to the Bailiffs’ Office stating:  “在案宗位置「醉喜樓」 …… 之生財工具(詳列附件表1-6項)共叁拾萬圓之設備，早經登記為本人擁有，而該物業業主亦明知此等設備非租客「瑞龍有限公司」所擁有，而執意拍賣，故本人申請依法律手續取回”。  The claimant verified such claim by his declaration of the same date, and to the same effect, and annexed a copy of the SP agreement thereto.

27.  On the same day, the claimant attended the premises.  He identified 34 items of seized goods, i.e. items 7 to 11, 13 to 15, 17, 20 to 23, 32 to 38, 40 to 46 and 49 to 54 of the third inventory, as goods and chattels that belonged to him (hereinafter called “the claimed goods”).  On the same day, the bailiff notified the auctioneer and the plaintiff’s solicitors of the claimant’s claim.  The plaintiff’s solicitors replied on the same day, saying that the plaintiff would oppose such claim. 

28.  On 3 December 2008, the bailiff issued an interpleader summons pursuant to section 95 of the Ordinance, for an order that the plaintiff and the claimant appear and state the nature and particulars of their respective claims to the seized goods under the third warrant, and maintain or relinquish the same and abide by such order as may be made therein, and that in the meantime all further proceedings be stayed.

29.  On the same day, the bailiff wrote to the plaintiff’s solicitors requesting additional security guard fees of $10,400 to be incurred for the period from 3 to 18 December 2008. 

30.  Madam Fok, in her second affirmation, claimed that but for the alleged change of ownership of the goods and chattels identified in the SP agreement, there was hardly any change to the running and operation of the restaurant by the defendant at the premises.  She pointed out that, in respect of the goods and chattels identified in items (1) and (3) of the SP agreement, i.e. “全部餐椅160張”，“餐檯面40張”and“不銹鋼三格電爐蒸柜1座”, appeared to overlap with items 31, 30 and 11 of the tenancy annexure, i.e. the plaintiff delivered possession of such items to the defendant pursuant to the tenancy agreement to facilitate the defendant to carry on the business of the restaurant at the premises.

31.  Madam Fok went on to say, in her second affirmation, that she strongly believed from all the evidence that there was no change to the beneficial ownership of the goods and chattels identified in the SP agreement.  She added there was no genuine commercial reason for the defendant to enter into the SP agreement, except to forestall the plaintiff from distraining against the relevant goods and chattels for the defendant’s non-payment of rent. 

32.  The issuance and execution of the third warrant was pursuant to Part III of the Ordinance.  Section 87 of the Ordinance provides that: “In pursuance of a warrant, a bailiff shall seize the moveable property found in or upon the house or premises mentioned in the warrant, and in the apparent possession of the person from whom the rent is claimed (hereinafter called the debtor), or such parts thereof as may, in the bailiff’s judgment, be sufficient to cover the amount of rent, together with the costs of distress.” 

33.  The interpleader summons was issued pursuant to section 95 of the Ordinance which provides, inter alia, as follows: 

“If any claim is made to in respect of any property seized under a warrant, or in respect of the proceeds or value thereof, by any person not being the debtor, the Registrar, on the application of the bailiff who seized the property, may issue a summons calling before the court the claimant and the person who obtained the warrant, and thereupon any action which may have been brought in respect of such claim shall be stayed, and the court, on proof of the service of such summons and that the property was so distrained, may order that the plaintiff to pay the costs of all proceedings in such action after the service of such summons.” 

34.  Section 96 of the Ordinance provides, inter alia, that: “Every claim under section 95 shall be verified by affidavit setting out the facts on which it is founded.”  In this respect, the claimant has filed his declaration and the plaintiff has filed the second affirmation of Madam Fok.

35.  Then section 95(2) of the Ordinance goes on to provide that when the claims are so verified, the court shall adjudicate thereon, and make such order between the parties in respect thereof, and of the costs of the proceedings, as it thinks fit.

36.  To date, the defendant has not appeared to challenge the present distraint proceedings by denial of either (a) the landlord and tenant relationship asserted by the plaintiff, (b) the liability to pay arrears of rent claimed by the plaintiff, or (c) the lawfulness of the distraint.  Further, the defendant has not paid all or any part of the arrears of rent clamed by the plaintiff since the execution of the third warrant.  I have no hesitation in concluding that the seized goods, exclusive of the claimed goods - i.e. items 1 to 6, 16, 18 to 19, 24 to 31, 39, 45, 47 to 48 and 35 metal chairs in item 12 of the third inventory - were, at the time of the execution of the third warrant, in the apparent possession of the defendant and liable to seizure by the bailiff. 

37.  At the hearing before me today, the claimant produced a copy of a “備查卡” of the Nanyang Commercial Bank, Ltd dated 22 September 2008, which was marked payable to the order of the Hong Kong Government in the sum of $300,500 (hereinafter called “the bank record”).  Mr Chui, solicitor for the plaintiff, agreed to have the bank record adduced as evidence before the court, but reserved the right to address on the relevancy and weight of such document.

38.  Both Mr Chui and the claimant agreed to deal with the interpleader summons by way of summary procedure.  The claimant, in the course of his submissions, referred to a wealth of matters as to fact not covered in his letter to the bailiff dated 2 December 2008, or in his declaration.  Mr Chui took a pragmatic stance and dealt with the claimant’s submissions in the course of his own submissions. 

39.  The claimant submitted that he was the relative of the husband of a shareholder of the defendant.  When the claimant patronised the restaurant previously, he found that its business was good.  Later, he became aware of the execution of the first warrant on 18 September 2008 and the public auction was scheduled on 25 September 2008.  Mr Jill, i.e. his wife’s younger brother, approached him for a monetary loan.  Mr Jill assured him that the business at the restaurant was expected to get better by year end which was the high season for restaurant business.  There were a lot of discussions. 

40.  On 22 September 2008, after signing the SP agreement, the claimant paid a cashier order of $300,500, as evidenced by the bank record, to the court to pay off the sums due under the first warrant for the release of the goods and chattels seized thereunder.  The claimant submitted that the SP agreement was entered into on 22 September 2008 because he wanted assurance that the defendant would repay the money lent by him.  The SP agreement was then stamped.

41.  The claimant went on to say that he asked others whether the SP agreement was effective, and on being informed it was, he reminded Mr Jill of the same.  The claimant was later informed of the execution of the second warrant on 8 October 2008, with the public auction scheduled on 15 October 2008.  He was not present at the time of execution of the second warrant.  Indeed, he said he did not patronise the restaurant or contact the defendant after the SP agreement.  It appeared that Mr Jill informed the bailiff of the SP agreement. 

42.  The claimant was aware that, by this time, the business of the restaurant was difficult, so during lunch on 15 October 2008 with Mr Jill, the claimant told Mr Jill that if there was any urgent need for money, the defendant could use the monthly fee of $10,000 under the SP agreement for such urgent purpose.  Indeed, the claimant said he was embarrassed when he was offered a monthly fee of $10,000 for the defendant’s use of the goods and chattels identified in the SP agreement. 

43.  The claimant said that the restaurant ceased business on 3 November 2008.  Mr Jill informed him of such fact and asked him to remove the goods and chattels identified in the SP agreement.  But when the claimant attended the premises on 5 November 2008, he saw an old man and certain security tapes inside the premises, but he was unsure whether the security tapes were placed by the bailiff.  He asked his friend, Mr Chan, to liaise with the plaintiff for access to the premises to collect the goods and chattels identified in the SP agreement, but access was refused.  Mr Chan made a report to the police.  The claimant did not say in his submissions what happened following such report to the police. 

44.  The claimant said that, on 1 December 2008, the auctioneer informed Mr Jill that the seized goods would be sold by public auction.  Mr Jill informed the claimant who made his claim over the claimed goods to the bailiff.  The claimant noted that the plaintiff had put up advertisement for letting the premises together with furniture and fittings. 

45.  The initial question is whether the claimed goods were in the apparent possession of the defendant.  If the answer is ‘no’, the claimed goods should be released to the rightful owner.  If the answer is ‘yes’, the bailiff is entitled to seize the claimed goods.  But the court still has a discretion to return the claimed goods to the rightful owner.  Therefore, a question also arises as to whether the claimant has shown himself to be the rightful owner of the claimed goods, and whether, as he claimed, the plaintiff’s awareness of the SP agreement prior to the execution of the third warrant rendered such execution unlawful. 

46.  As explained above, the first question is whether the bailiff reasonably believed that the distrainee, i.e. the defendant, was in apparent possession of the claimed goods according to the evidence of the bailiff’s eyes and from statements made to him.

47.  In the present case, what were the overt indications to the bailiff’s eyes?  All the claimed goods were goods and chattels consistent with a restaurant business.  There was no indication of any occupier other than the defendant at the premises.  This was consistent with the tenancy agreement that prohibited the defendant from subletting or assigning the premises or part thereof to any third party.  Even if the SP agreement dated 22 September 2008 were taken to its highest, it showed that the claimant agreed to lease back the goods and chattels as identified therein, which, according to him, included the claimed goods, to the defendant for six months for a monthly fee of $10,000.  In the circumstances, even according to the SP agreement, the claimed goods would still be in the possession of, and used by, the defendant after 22 September 2008 for the purpose of the business of the restaurant, and hence the claimed goods were necessarily in the apparent possession of the defendant. 

48.  But the plaintiff was aware of the SP agreement in the course of execution of the second warrant, i.e. prior to the commencement of the third action.  Would it alter the above position?  In Prosperity Clothing Company Ltd v Corona Fashions Ltd (Defendant) and Victor Ching Sai Poon & Another (Claimants) [1976] HKLR 46, a quantity of office equipment on the leased premises of the tenant company was seized on distress warrants issued at the instance of the landlord for rent due from the tenant.  The claimants alleged that one of the directors of the landlord was also a director of the tenant company, together with the 1st claimant, and knew that part of the goods seized belonged to either the 1st claimant or to the 2nd claimant.  It was held by Power DJ, as he then was, that the goods upon which distraints might be levied were all goods in the apparent possession of the tenant, and that the ownership of the goods and knowledge of the landlord as to the ownership were immaterial.

49.  The learned judge, at page 49, said that, in the ordinary case, when the landlord let the premises to the tenant, he consented to the tenant placing his own goods and goods of others on the land.  The landlord’s express consent was no more than a gratuitous affirmation of the general consent which he has already given and would in no way vitiate distraint proceedings.  But if the consent involved more than mere standing by, so that it amounted to fraud on behalf of the landlord, the court, in interpleader proceedings, had an inherent power to order the return of distrained goods.  An example would be an express personal consent and assurance by the landlord to the third party, allowing a third party to place goods on the land and assuring that they would be safe, and then subsequently impounding them.

50.  In that case, as in the present case, there was no allegation of fraud on the part of the landlord.  In that case, what was alleged was that the landlord, through its director, had knowledge of the position, but the learned judge held that the situation was no different from that which occurred in most business tenancies, where the landlord must have known and, therefore, tacitly consented to goods of others moving in and out of the leased premises.  On the other hand, in the present case, there is no evidence that the plaintiff was aware of the SP agreement until the bailiff executed the second warrant.  By that time, the defendant was already in arrears of rent and the plaintiff had already issued distraint proceedings to recover outstanding arrears of rent.  It could not be suggested that the plaintiff consented to the arrangement in the SP agreement, and there was no such suggestion.  Given there was no fraud on the part of the plaintiff, I do not consider that the plaintiff’s knowledge of the SP agreement had any material impact on the question whether the claimed goods were in the apparent possession of the defendant at the time of the execution of the third warrant.  There is no suggestion that the claimant occupied any part of the premises.

51.  But apart from the plaintiff, the bailiff was also aware of the SP agreement during the course of the execution of the second warrant.  Would such awareness affect the bailiff’s decision, at the time of the execution of the third warrant, that the claimed goods were in the apparent possession of the defendant?

52.  In Lu Shang Chang v Kingroup Ltd [1995] 3 HKC 709, the landlord applied for a warrant of distress against the tenant for arrears of rent.  Machinery and equipment was seized by the bailiff in distraint.  The appellant purchased the distrained goods at the auction.  It was announced at the beginning of the auction that the bidder had to remove the distrained goods within seven days.  The delivery note signed by the appellant also said that the goods were to be removed in seven days, otherwise they would be treated as abandoned.  The appellant left the goods at the leased premises and he allowed the tenant to continue to use the machines.  Sixteen days after the deadline for clearance, the bailiff seized the goods for the second time.  The bailiff interpleaded. 

53.  The Court of Appeal held by majority that the goods on the premises were prima facie in the tenant’s possession for the purpose of section 87 of the Ordinance, but ‘apparent possession’ must mean more than the goods were physically on the premises.  The bailiff could not be expected to go into a detailed inquiry on the spot, and ownership of the goods was not necessarily determinative.  All the circumstances must be taken into account.  In that case, the judge erred by failing to take into account:  (a) the appellant had purchased the goods at a public auction; (b) it was the bailiff who sold the goods to him and who received payment for the goods; and (c) the appellant’s reasons for leaving the goods at the premises.  These matters affected the perception of apparent possession, particularly as it was the bailiff who let the appellant as buyer to leave the goods on the premises in the first place.  The judge fell into error in finding that the clearance clause at the auction was a condition of contract evidenced by the delivery note, and there was no evidence that the appellant was ever told of the consequence of failing to remove the goods, or that he agreed to this. 

54.  In the present case, the  factual matrix is very different.  Even taking the claimant’s case to the highest on the basis of the SP agreement as known to the bailiff in the course of execution of the second warrant, there was plainly (a) no consent by the plaintiff, his landlord, as to the arrangements in the SP agreement, (b) the goods and chattels identified in the SP agreement were leased back to the defendant so that they remained in the possession of and used by the defendant for the business of the restaurant, and (c) there was no evidence that it was made known to the bailiff that the leaseback arrangement had ceased by the time of the execution of the third warrant.  Quite simply, the goods and chattels identified in the SP agreement were, at the time of the execution of the third warrant, squarely within the apparent possession of the defendant irrespective of the question of ownership.

55.  In Hang Lung Real Estate Agency Limited v Glory Good Limited (Defendant) and Full Gold (China) Limited & another (Claimants) DCDT3179/2005, unreported, 1 August 2005, Deputy Judge J Ko dealt with an interpleader summons whereby two claimants asserted ownership of over 400 items seized by the bailiff in execution of a warrant of distress.  The 1st claimant claimed that when the former occupier ceased its restaurant business at the leased premises, it transferred the general restaurant licence to the 1st claimant for $80,000 and, further, agreed to let the 1st claimant retain and use all the furniture, goods and chattels at the leased premises.  The 1st claimant further claimed that after the landlord leased the premises to the tenant, the 1st claimant, as licensee, and the tenant, as licensor, entered into a licence agreement whereby the 1st claimant licensed to the tenant the general restaurant licence and all “profit generating tools” (一切生財工具) for the purpose of carrying on the restaurant business at the premises for six years at a monthly licence fee of $100,000.  Since the tenancy agreement provided that the tenant agreed not to assign, transfer or sublet or part with possession of the leased premises, or any parts thereof, the bailiff demanded more evidence to substantiate the 1st claimant’s claim, apart from the licence agreement, but none was forthcoming.  The bailiff was not informed of the 2nd claimant’s claim at the time.  The learned deputy judge held that the goods and chattels seized pursuant to the execution of the warrant of distress were liable to seizure as being in the apparent possession of the tenant.

56.  It is plain from Hang Lung Real Estate Agency Limited that even if the bailiff is aware of a lease agreement between the third party owner and the tenant, which is akin to the sale and leaseback arrangement in the SP agreement in the present case, it does not necessarily follow that the goods and chattels on the leased premises owned by a third party will be exempt from seizure under a warrant of distress.  The key consideration is whether the seized goods and chattels were in the apparent possession of the tenant and the execution of the warrant of distress will be lawful if they are.

57.  It is a question of fact whether the defendant was in apparent possession of the claimed goods at the time of execution of the third warrant.  Here, the claimant claimed he was the owner of the claimed goods, but other than the SP agreement and the bank record, there was no other evidence to support the claimant’s contention that the bailiff should not have seized the claimed goods.  In my view, in light of the aforesaid analysis, neither the SP agreement nor the bailiff’s failure to seize the relevant goods under the second warrant was sufficient to rebut the bailiff’s conclusion at the material time, i.e. at the time of execution of the third warrant, that the claimed goods were in the apparent possession of the defendant and liable to seizure. 

58.  As regards the ownership of the claimed goods, I am in doubt as to the arrangement under the SP agreement, which I find artificial.

59.  First, the rent-free period under the tenancy agreement expired on 31 May 2008.  The defendant paid the monthly rent for June and July 2008, but started to default payment in August 2008.  This is in line with the newspaper articles of 5 November 2008 referred to above, which showed that the business of the restaurant had deteriorated and the defendant had stopped paying wages to its employees for several months.  The plaintiff applied for the first warrant in early September 2008, and the defendant did not pay off the amounts thereunder until 22 September 2008. 

60.  In the circumstances, it is plain that, by August and September 2008, i.e. shortly after the defendant commenced business, the defendant was not doing well at all.  The defendant did not pay rent due on 1 September 2008 or any time thereafter.  I am not persuaded by the claimant’s submission that the business of the restaurant was good and well prior to the economic tsunami.  In any event, latest by mid-September 2008, the claimant, on his own case, became aware of the execution of the first warrant and the defendant’s inability to pay rent.  By 22 September 2008, again on the claimant’s own case, he was aware that the defendant was only able to pay off the outstanding rent for August 2008 with moneys from him.  Further, by that time, the first warrant had been executed and the rent due on 1 September 2008 was already outstanding for three weeks, yet interestingly, there was no evidence that the claimant ever sought clarification as to (a) whether the rent for September 2008 had been paid or not; and (b) if not, how the defendant would be able to pay rent for September 2008 to stave off another distraint and to operate the business of the restaurant, when the moneys from him were wholly used up to pay off the rent for August 2008.  Given the precarious finances of the defendant, with the indebtedness due to the plaintiff and its employees and the difficult business of the restaurant, I agree with Mr Chui that little commercial purpose appears to be served in the claimant purchasing the profit-generating tools at the premises and other goods and chattels identified in the SP agreement.  It was not suggested that the claimant was in the same line of business. 

61.  Secondly, the purported effect of the sale and leaseback arrangement in the SP agreement was to transfer ownership of the goods and chattels identified therein to the claimant, whilst leaving the defendant in possession of such goods and chattels so that the landlord, or any other creditor inspecting the premises, would be under the impression that the defendant was carrying on business as before.  There was a further agreement that after expiry of six months of the leaseback arrangement, the defendant had a right of first refusal to repurchase such goods and chattels at the premium of 25 per cent over the original consideration of $300,000, which right of first refusal was binding on the claimant.  I agree with Mr Chui that such arrangement gives an impression that it was in fact a loan from the claimant to the defendant clothed as the sale and leaseback arrangement.  In fact, the claimant admitted as much in his submissions.  He said that Mr. Jill approached him for a loan, he lent money to the defendant, and the SP agreement was made as an assurance that the defendant would repay. 

62.  Thirdly, the claimant did not exhibit to his declaration any documentary proof of his payment of the consideration of $300,000 under the SP agreement, save for the bare acknowledgment of receipt by the defendant endorsed on the SP agreement.  Mr Chui criticised the bank record as not being able to show who paid the sum of $300,500 therein. 

63.  As an initial observation, if the SP agreement between the parties were a true sale and leaseback arrangement, the claimant would not have been concerned with the business affairs of the defendant.  There would be no need for the claimant to become involved in discharging the first warrant, or making payment of $500 in excess, apart from paying the consideration under the SP agreement to the defendant.  Quite obviously, even from the chronology of events disclosed by the claimant, the purpose of entering into the SP agreement and paying the sum of $300,000 referred therein was to source moneys to pay off the sums due under the first warrant in order to stave off the imminent public auction of the profit-generating tools and furniture/fittings of the defendant at the premises.  In my view, it was essentially to rescue the business of the defendant.

64.  This lends weight to the above analysis that the claimant, well knowing the execution of the first warrant and the dire financial straits of the defendant, had little commercial justification for letting the goods and chattels identified in the SP agreement to remain on the premises, to risk seizure under a future warrant of distress or by other creditors, when especially, according to the claimant, he had paid $300,500 as he claimed. 

65.  Fourthly, the claimant, according to his own submissions, knew the defendant failed to pay rent for September 2008 because he knew the bailiff executed the second warrant on 8 October 2008.  Given such situation, there was no discernible commercial reason why he would continue to let the goods and chattels identified in the SP agreement remain in the premises after such date.

66.  Further, under the purported sale and leaseback arrangement under the SP agreement, the defendant was required to pay a monthly fee of $10,000 for possession and use of the goods and chattels identified in the SP agreement.  There was no evidence of receipt of the first monthly fee of $10,000 which should have been paid on or before 21 October 2008.  Alternatively, if no such payment were received, and given (a) the poor financial background of the defendant, and (b) the execution of the first and second warrants, there was little commercial reason for the claimant to continue to leave the goods and chattels identified in the SP agreement on the premises.  Yet, even on his own case, the claimant allowed such goods and chattels to remain at the premises, at least up to the time when the defendant ceased business on 3 November 2008.

67.  Fifthly, the SP agreement did not make any provision for assurance that the goods and chattels identified therein would not be removed and replaced by the defendant when they were leased back to the defendant for their use.  This can be contrasted to the provision in clause 13 and Part 2, items 14 and 15(10) of the tenancy agreement referred to above.  Mr Chui pointed out that, in fact, some goods and chattels had been removed; for example, the Sony television set identified in the SP agreement was not amongst the seized goods at the premises.  Yet the claimant appeared unconcerned about this, which suggested that he was more interested in, as he admitted, repayment of the moneys rather than the goods and chattels identified in the SP agreement. 

68.  Sixthly, even on the claimant’s case of being refused entry to the premises by the landlord on 5 November 2008, he did not explain in his submissions what was the result of the report to the police by Mr Chan.  Strangely enough, on being refused entry to the premises by the landlord on 5 November 2008, up till 1 December 2008 when Mr Jill contacted him, there is no evidence, or even submissions, before me that the claimant ever made contact with the defendant to discuss repayment or damages for breach of the SP agreement.  This is particularly so as the claimant, as he submitted, perceived the arrangement as a matter of loan and repayment.  After all, there is no dispute that it was the defendant’s failure to pay rent that led to the various distraint proceedings.  Such attitude gives rise to concern as to the reliability of the alleged arrangements. 

69.  Seventhly, under the tenancy agreement, the defendant rented the premises on an “as-is” basis.  It took possession of the premises inclusive of the landlord’s furniture/fittings as listed in the tenancy annexure, and agreed to return them in good condition (fair wear and tear excepted) upon the expiry or termination of the tenancy agreement.  The tenancy agreement further provided that if the defendant should wish to dismantle, change, replace or add to such furniture and fittings, it had to apply to the plaintiff in writing for such purpose.  The tenancy agreement also provided that the defendant had to leave behind all fittings and profit-generating tools upon the expiry or termination of the tenancy such that the premises would be immediately ready for business operation. 

70.  There is no evidence that the defendant had applied to the plaintiff for permission to dismantle, change, replace or add to the aforesaid furniture and fittings, but the evidence showed that with the continuous delay and/or default in payment of rent since August 2008, the defendant must have known there was a real risk of the tenancy being terminated, with the result that all fittings and profit-generating tools would have to be returned to the plaintiff.  In such circumstances, any sale and leaseback arrangement in late September 2008 in relation to furniture and fittings and profit-generating tools at the premises leaves the court with concern as to the reliability of the alleged arrangement.

71.  Mr Chui made a number of arguments.  First, he suggested that it was an illegal contract.  I do not think there is any need for this court to go so far.  Next, he suggested that the sale and leaseback arrangement, if construed as a loan, in light of the monthly fee and the premium to be paid on the exercise of the defendant’s right of first refusal to repurchase the goods and chattels, the effective rate of interest is in excess of 90 per cent per annum and is unlawful under section 24 of the Moneylenders Ordinance, Cap.163.  But as Mr Chui rightly conceded, it is unnecessary for me to come to any definitive conclusion on this and I refrain from doing so. 

72.  In my view, in light of the objective evidence and the parties’ submissions, I am not persuaded that the claimant has satisfied me that he was the owner of the claimed goods.

73.  Even if I am wrong and the claimant is, in fact, the owner of the claimed goods, i.e. accepting all the assertions of the claimant’s declaration and submissions, I still find it an insufficient answer to the seizure of the claimed goods. 

74.  In Fuleekoo Co. Ltd. v Spiral Tubes International Ltd. [1986] HKC 269, it was held that the ownership of the goods and chattels seized, of itself, would not cause the discretion to be exercised in favour of the claimant.  It is but a factor to be considered and must be weighed against the rights of the landlord.  All the attendant circumstances should be considered by the judge before coming to his decision and he can impose such terms as he thinks fit. 

75.  Here, the plaintiff took prompt action whenever there was default.  The plaintiff took out the first action on or about 4 September 2008 for the outstanding rent for August 2008, the second action on or about 23 September 2008 for the outstanding rent for September 2008, and the third action on or about 6 November 2008 for the outstanding rent for October 2008.  It cannot be said that the plaintiff has allowed the arrears to accrue to such point that it would be unfair to exercise the discretion in its favour. 

76.  The plaintiff knew the defendant rented the premises to operate the restaurant, which was precisely the user before it ceased business very shortly before the execution of the third warrant.  As I found, the seized goods were in the apparent possession of the defendant.  Even though the plaintiff was aware of the SP agreement, it was not a party to it and did not give consent to such agreement.  It was also evident that the defendant and the claimant entered into the SP agreement at the time when the plaintiff had issued and executed the first warrant, and the defendant was obviously in a financially poor way with a real risk of not being able to pay rent. 

77.  The claimant, in fact, paid the consideration under the SP agreement in order to pay off the sums under the first warrant to stave off the public auction.  The claimant was even accommodating enough to allow deferral of the monthly sum to enable the defendant to pay more pressing charges if the need required.  Clearly, the claimant was accommodating the business affairs of the defendant at the time when their finances were poor.

78.  Upon considering all the circumstances and the relevant factors, I decline to exercise my discretion in favour of the claimant.

79.  In Xipho Development Company Limited v CHM Holdings Company Limited, CACV112/1996, unreported, 13 November 1996, the Court of Appeal said that if the goods of a stranger were on the premises and lawfully distrained by the landlord for arrears of rent, then the redress of the owner of the goods was to seek reimbursement of the value from whom the rent was due.  In the present case, that would be the defendant. 

80.  In the circumstances, the claimant’s claim is dismissed. 

(Submissions on costs)

81.  Since the claimant’s claim is dismissed, costs would follow the event.  I am informed by the bailiff that the seized goods are anticipated to be sold on 17 December 2008.  In the circumstances, I order that the claimant do pay the plaintiff the costs of the interpleader summons, to be taxed if not agreed, and additional security guard fees in the sum of $9,100 for the period from 4 to 17 December 2008.