CHINA CAPITAL LTD v. CHU SAN HUNG AND OTHERS

HCA 2367/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2367 OF 2012

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J U D G M E N T

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1. The 1^st defendant in this action was the owner of Flat D on the 37^th Floor of Block 2 of Chelsea Heights, Tuen Mun in the New Territories and also owned a half‑share of another flat C on the same floor of the said development, his former wife, who is not a party to this action, owning the other half‑share.

2. The 2^nd defendant is his second former wife.

3. The 3^rd and 4^th defendants are two firms of solicitors who successively acted for the 1^st defendant in his divorce proceedings in respect of the 2^nd defendant. The 4^th defendant had also acted for the 1^st defendant in 2010, but the precise nature of their involvement is not clear yet!

4. The plaintiff is a financial institution with which the 1^st defendant entered into a second mortgage or legal charge.

5. This action is essentially concerned with the plaintiff’s entitlement to payment out of the net proceeds of sale of the two flats and the irregular, to use a relatively neutral term, disposal of those net proceeds which has left the plaintiff without any satisfaction of its entitlement.

The sequence of mortgages and registrations

6. In May 2008 the 1^st defendant’s interests in both flats was charged by way of a 1^st legal mortgage to GE Capital.  That charge was assigned to another company, Prime Credit Limited on or about 29 June 2010.

7. In the meantime the 1^st defendant made his interests in both flats subject to a 2^nd legal mortgage in favour of the plaintiff company in January 2010 (this was before the assignment of the 1^st mortgage to Prime Credit Limited but that is immaterial).

8. The next factor in this sequence of events was the registration on 11 February 2011 of the 2^nd defendant’s application for ancillary relief against the 1^st defendant’s interests in the flats.

The sale of the flats

9. In late October 2011 Prime Credit, the assignee of the 1^st mortgage charge, exercised its power of sale and realised proceeds of HK$7,930,000.  The net proceeds after Prime Credit had deducted what was due to it were paid into court pursuant to an order of 2 April 2012.  The amount was HK$3,822,383.56.  What should then have followed was the satisfaction of the debt due to the 2^nd mortgagee, the plaintiff.  That did not happen.

The monies start a journey

10. An order of the registrar of the District Court dated 26 April 2012 (DCCJ 899/2011) provided for the plaintiff to recover the sum secured by the 2^nd legal charge/mortgage, HK$951,435.62 being the principal of HK$500,000 together with interest accrued at that date, and continuing, and assessed costs.

11. In late June 2012 the plaintiff issued proceedings (HCMP 1329/2012) for an order for payment out of the sums so provided for (as above) from the net proceeds of sale which, it was believed, were still in court following the steps taken by Prime Credit Limited, the 1^st mortgagee.  But the money had gone as a result of a court order of 28 February 2012 in circumstances where the court was clearly misled.

12. The first beneficiary was the 2^nd defendant (the second former wife of the 1^st defendant) who received HK$1.7 million as a lump sum settlement of her maintenance claim under the Consent Order of 28 February 2012.  The second beneficiary under the order was the 1^st defendant himself who was to receive the balance of the monies in court.  He at least must have known in any event that the plaintiff had prior claim over the monies.

13. The balance of over HK$2.122 million was in fact received by the 3^rd defendant on behalf of the 1^st defendant as his solicitors in the ancillary proceedings.  They in turn transferred HK$1.8 million to his new solicitors the 4^th defendant and retained HK$322,383.56 as their costs and disbursements for the two actions in which they represented him.  At the very least they ought to have known and probably did know of the plaintiff’s claim under the 2^nd mortgage.  The plaintiff clearly has a good claim against them (see file from the District Court — letter from China Capital’s solicitors to the 3^rd defendant, 5 May 2011).

14. The last step on this financial merry‑go‑round was the 4^th defendant’s transfer of HK$1.7 million back to their client, the 1^st defendant, thus retaining HK$100,000 in respect of their costs and disbursements.  A simple chart shows the course of payments.  There is no dispute about these.

The 4^th defendant’s application

15. This is an attempt to strike out the proceedings against them on two bases:

(1)   that there is insufficient plea that the monies actually received by the 4^th defendant were the traceable or followable proceeds of monies in respect of which the plaintiff has a proprietary claim, and

(2)   that in respect of the claim for dishonest assistance, the 4^th defendant could not be held to be dishonest given Judge Bruno Chan’s order of 28 February 2012 (the consent order in FCMC 916/2011, the ancillary proceedings), ordering funds to be paid out of court to the 1^st defendant.

16. I will take them separately:

(1)   It is beyond contention that the sum received by the 4^th defendant, for and on behalf of the 1^st defendant, came out of the net proceeds of sale of the two flats under the power of sale exercised by the mortgagee.  It is easily traced to their hands.  These defendants had written to the plaintiff on behalf of the 1^st defendant on 2 September 2010 making reference to the mortgages of the flats and asking for the outstanding liability under them.  This is pleaded in their defence, a disorganised and repetitive pleading.  The Statement of Claim sets out the course taken in respect of the net proceeds of sale and the ultimate recipients.  A constructive trust of those monies and an allegation of dishonesty are clearly alleged.  The plaintiff is seeking to follow the monies — it has already effectively traced them — and there is no substance in the 4^th defendant’s contention.  The action is properly constituted and adequately pleaded.  It may be prudent to add a claim in negligence.

(2)   I have difficulty in following this argument.  It appears to suggest that because Judge Bruno Chan made the order of 28 February 2012 releasing the balance of the funds in court to the 1^st defendant, the 4^th defendant cannot be said to have acted dishonesty.  That is a “non sequitur” argument.  That can only be advanced if the 4^th defendant disclosed to the judge that the plaintiff in fact was entitled to have its charge “paid off” first. That obviously did not happen, otherwise the judge would have given effect to it.

17. Mr Bernard Man, on behalf of the 4^th defendant, extended his argument on two fronts.  Unsurprisingly Mr Ross Yuen, for the plaintiff, took an opposing stance.

18. He suggested that because the balance of the net proceeds were paid into court under an order, by Prime Credit, they were mixed with general suitors’ funds and not being identifiable could not be subject to tracing.  This is not tenable.  Throughout the various proceedings the sum has been identified and has so easily been traceable even after its erroneous distribution.  The fact that the money for practical purposes is mixed with other suitors’ funds does not change its nature.

19. As an adjunct to this, it is argued that the court was not acting as a trustee of the moneys paid in.  This, again, is not tenable.  The whole purpose of the order requiring Prime Credit to pay the net proceeds into court was to give some protection to the legal beneficiaries of that sum, otherwise it would not have been paid in.  The court was, in my view, unarguably acting as a trustee of the moneys for the proper prime beneficiaries.  Sadly it was misled into a distribution of the funds to those who were not entitled to them, though it seems that the 1^st defendant would probably have received some residue.  In my view it is not necessary to plead specifically that the court held the money as trustee.  It is implicit.

20. This application is dismissed with costs which are summarily assessed at HK$65,000.