GE CAPITAL (HONG KONG) LTD v. LO WAI MAN AND ANOTHER

HCMP 1249/2009

MISCELLANEOUS PROCEEDINGS NO 1249 OF 2009

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(By original writ and order to carry on)

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(By counterclaim and order to carry on)

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REASONS FOR JUDGMENT
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A. INTRODUCTION

1.  The 2^nd defendant, Madam Lau Siu Fong (“Lau”), was the registered owner of the property at 3^rd floor, No 254 Hollywood Road, Hong Kong (“the Property”).  By an assignment dated 14 May 2008, Lau assigned the Property to the 1^st defendant, Mr Lo Wai Man (“Lo”) (“the Assignment”).  The Assignment was executed by Mr Poon Wing Leung (“Poon”), Lau’s son, on behalf of Lau pursuant to a power of attorney dated 15 December 2006 (“the PA”).  On 14 May 2008, Lo executed a legal charge over the Property (“the Charge”) in favour of GE Capital (Hong Kong) Limited (“GE”).

2.  GE commenced a mortgagee action against Lo pursuant to Order 88, Rules of the High Court (“the RHC”) on 6 July 2009.  By an assignment dated 29 June 2010, GE assigned, inter alia, its rights and benefits under the Charge to Primecredit Limited (“Primecredit”).  As a result, Primecredit substituted GE as the plaintiff in this action.

3.  Lo has never appeared in these proceedings.  On the other hand, Lau joined as the 2^nd defendant.  These proceedings then continued as if begun by writ.  Lau also made a counterclaim against both Primecredit and Lo.  In short, she claimed that the PA is void because she thought what she had signed was only a will; and hence, the Assignment as well as the Charge are also void.

B. SETTLEMENT BETWEEN PRIMECREDIT AND LAU

4.  In the afternoon on the first day of this trial, I was informed by counsel appearing for Primecredit and Lau that Lau would no longer contest Primecredit’s claim, and they had reached a settlement.  I was also informed that Lau is still in possession of the Property.

5.  Accordingly, subject to a proviso which I decided to add with the agreement of Mr Remedioson the second day of the trial, I made an order by consent in the following terms:

(a) The 2^nd defendant do within 28 days after service upon her of this Order deliver to the plaintiff vacant possession of the property known as ALL THAT one equal undivided 6^th part or share of and in ALL THAT piece or parcel of ground registered in the Land Registry as SECTION B OF INLAND LOT NO 697 And of and in the messuage or tenement and other erections and buildings thereon known at the date hereof as “No 254 Hollywood Road, Hong Kong” (“the Building”) TOGETHER with the sole and exclusive right and privilege to hold use occupy and enjoy ALL THAT the THIRD FLOOR of the Building (“the Property”).

(b) The 2^nd defendant’s counterclaim against the plaintiff be dismissed.

(c) The 2^nd defendant shall pay the costs of plaintiff’s action as against her to be taxed if not agreed.

6.  The proviso which I have added is that I will give 28 days to Lau to vacate the Property.  This is to ensure that the order for possession that I make against Lau and Lo will be consistent, as I shall explain below.

7.  Further, upon the application of counsel for Lau, I also made an order that the 2^nd defendant’s counterclaim against the 1^st defendant be dismissed with no order as to costs.

C. PRIMECREDIT’S CLAIM AGAINST LO

8.  The trial of Primecredit’s claim against Lo then proceeded in the absence of Lo.  I am satisfied that Lo has been given sufficient notice of this trial.

9.  By an agreement dated 23 April 2008 (“the Loan Agreement”), GE agreed to lend $1,225,000 to Lo (“the Loan”).  The Charge was executed to secure the Loan pursuant to clause 3 of the Loan Agreement.  Under the Loan Agreement, the Loan shall be repaid in 300 months.  The interest rate shall be the prime rate minus 1.75% per annum from 1 to 300 months.

10.  I note that in Bank of China (Hong Kong) Ltd v Fu Ming Kong Michael & another, HCA 7769/2000 and HCMP 3909/2000 (consolidated) (22 July 2005, unreported), it was held that the requirement under Order 88, rule 5(2) to produce the original mortgage does not apply to the trial of an action which was commenced by Originating Summons but was ordered to continue as if begun by writ (see Hong Kong Civil Procedure 2016, vol 1, §88/5/6 at p 1496).  Nevertheless, the original Charge has been produced to me for inspection during the trial.  I am satisfied that the Charge is genuine, and is legally valid and binding.

C1. Principal and interest

11.  Under clause 2(a) of the Loan Agreement, Lo was obliged to repay the Loan by monthly repayment installments. As at 14 April 2009, the amount of the outstanding principal was $1,199,178.83. This figure is confirmed by the breakdown of calculations based on GE’s books and records exhibited as “LKT2‑1” to the 2^nd affirmation of Leung Kin Tak dated 9 August 2010.  On 14 April 2009, Lo was obliged to pay the monthly repayment installment in the sum of $6,133.23.  However, he only paid $3,032.75 leaving a shortfall of $3,100.48.  He did not make any further repayment subsequently.  In the circumstances, Lo breached the Loan Agreement since 14 April 2009.

12.  As a result, GE elected to exercise its right under clause 2(c) of the Loan Agreement to demand for repayment of the entire outstanding Loan together with all interest and other charges due and owing at that time.  Hence, by a letter dated 29 April 2009, GE demanded Lo to pay the outstanding principal plus interest and late charge.  As Lo did not accede to the demand, GE commenced these proceedings on 6 July 2009.

13.  In the statement of claim dated 30 May 2013 filed after the court ordered that these proceedings be continued as if begun by writ, Primecredit claimed that, as at 6 July 2009 (when this action was commenced), Lo was indebted to GE in the total sum of $1,209,961.13 as follows:

(a) outstanding principal: $1,199,178.83;

(b) interest accrued on the principal up to and including 6 July 2009: $9,882.30; and

(c) default interest up to and including 6 July 2009: $900.

14.  In respect of the claim for default interest, clause 2(d) of the Loan Agreement provides that “Any overdue installment will be subject to a late charge at such rate the Company may at its discretion decide and stipulate in the Fees & Charges Schedule”.  In the Fees & Charges Schedule attached to the Loan Agreement, it is provided that the late charge shall be 1% per month with a minimum amount of $300.  As explained in the breakdown of calculation exhibited as “LKT2‑1” to the 2^nd affirmation of Leung Kin Tak dated 9 August 2010, up to 29 April 2009 when GE demanded for repayment of the entire outstanding Loan, Lo was late in paying the monthly repayment installments which fell due on 14 March 2009 and 14 April 2009 respectively.  Hence, at the monthly rate of $300, the late charge for the first mentioned installment shall be $600 and the late charge for the second mentioned installment shall be $300, making up a total sum of $900.  Mr Remedios confirmed to me that since GE demanded for repayment of the entire outstanding principal on 29 April 2009, no late charge on overdue monthly installment was payable since then.

15.  As to interest on the outstanding principal, Ms Lam Wai Han (“Lam”), an Assistant Officer of Primecredit, confirmed in her witness statement dated 16 February 2016 that interest accrued on the outstanding principal, calculated at 3.5% per annum (being the prime rate minus 1.75%) from 7 July 2009 to 16 February 2016, is $277,685.48.  Her witness statement was filed pursuant to my direction made on the first day of trial that Primecredit shall adduce updated evidence on quantum.  Lam also confirmed in court that the prime rate had not changed during the relevant period of time.  If one adds the sum of $277,685.48 to the total amount due as pleaded in the statement of claim, the total sum now due and payable is $1,487,646.61.

16.  I should mention that, apart from the said provisions under the Loan Agreement, Lo was liable to pay the said sums pursuant to the covenant for repayment of secured indebtedness under clause 2.01 of the Charge.

C2. Possession of the Property

17.  It is clear that, due to Lo’s failure to pay the sums as demanded by GE as mentioned, an event of default within the meaning of clause 5.01 of the Charge has occurred.  Pursuant to clause 6.01(ii) of the Charge, if any event of default shall have occurred, it shall be lawful for GE thereafter without any consent on the part of Lo or any person to enter into and take possession of the Property.  I am satisfied that Primecredit is entitled to an order for possession.

18.  Although it appears that Lau is now in actual possession of the Property, in view of the fact that Lo is the registered owner of the Property and is therefore prima facie entitled to possession thereof, and that Lau has abandoned her counterclaim against Lo, I agree that an order for possession should be made against Lo in addition to the order for possession that I have made against Lau as stated above.

19.  As stated in Hong Kong Civil Procedure 2016, vol 1, §88/5/9 at p 1496, the practice is to order possession 28 days after service of the order on the defendant in case of residential property.  Such practice is reflected in Practice Form No 158.  Accordingly, I shall give both Lo and Lau 28 days to vacate the Property.

C3. Costs

20.  Primecredit relies on clause 14.01 of the Charge which provides, inter alia, as follows:

“The Borrower shall pay or reimburse to the Lender … on demand:‑

(a) all costs, charges and expenses incurred and all payments made by the Lender … (including legal costs and expenses on full indemnity basis) in the lawful exercise of any of the powers hereby conferred upon him…; and

(b) all expenses (including legal costs and expenses on full indemnity basis) incurred by the Lender in connection with … the… enforcement of this Legal Charge…”

21.  Mr Remedios initially submitted that there is a distinction between costs on “full indemnity” basis and costs on an “indemnity” basis.  As I understand, he submitted that costs on “full indemnity” basis means that the lender is entitled to recover whatever costs actually incurred irrespective of whether they have been reasonably incurred or whether the amount is reasonable, whereas costs on an “indemnity” basis means that all costs are to be allowed except those unreasonably incurred or of unreasonable amount, the receiving party being given the benefit of any doubt (see Hong Kong Civil Procedure 2016, vol 1, §62/App/11 at p 1233).  After some discussions, Mr Remedios and those instructing him very sensibly agreed that costs of these proceedings should be taxed on an indemnity basis, without insisting on adding the word “full”. I take the view that this is the correct stance that Primecredit should take as a matter of law.  In Bank of China (Hong Kong) Ltd v Twin Profit Ltd and others, CACV 94/2010 (18 March 2011, unreported), the defendants in the mortgage documents expressly agreed to pay or reimburse the bank the costs and expenses incurred in connection with the enforcement of the securities on a full indemnity basis.  In §5 of the judgment, Yuen JA held that:

“In Gomba Holdings (UK) Ltd v Minories Finance Ltd [1993] Ch 171 Scott LJ held, after noting the court’s full discretion over litigation costs in proceedings between mortgagor and mortgagee (at 182A–B), that similar language in a mortgage giving the mortgagee full indemnity costs entitled the mortgagee ‘to be paid or to retain out of the mortgaged property all their actual costs, charges and expenses… except in so far they are of an unreasonable amount or have been unreasonably incurred and with any doubts as to whether the costs have been reasonably incurred or are unreasonable in amount being resolved in favour of the [mortgagee]’ (187A–C). If however the mortgage deed went so far as to provide that even charges of an unreasonable amount or charges unreasonably incurred would have to be paid by the mortgagor, then the court may interfere on public policy grounds (188A).”

22.  In §6 of the judgment, Yuen JA noted that the Gomba approach was followed by the Hong Kong Court of Appeal in Chekiang First Bank v Fong Siu Kin [1997] 2 HKC 302.  In §7 of the judgment, she held that a previous decision of the Court of Appeal is binding on the Court of Appeal unless it was “plainly wrong”, and she was not persuaded that Chekiang First Bank was plainly wrong.  She reaffirmed the legal principle as follows:

“Where parties have entered into a commercial transaction on a certain basis, the court should be slow to disturb the parties’ agreement, unless the circumstances are such as to cause the court in the exercise of its discretion to intervene. For instance, the court may well consider intervention in the situation referred to in Gomba where the mortgagor is required to pay charges of an unreasonable amount or charges unreasonably incurred, but it is not suggested by the Defendants that that would be the case here.”

Hence, she ordered that the defendants in that case pay the plaintiff’s costs on an indemnity basis in accordance with the mortgage documents.  While Stone J gave a dissenting judgment, Sakhrani J concurred with Yuen JA.

23.  In that case, the defendants’ application for leave to appeal was dismissed by the Hong Kong Court of Final Appeal: see Bank of China (Hong Kong) Ltd v Twin Profit Ltd (2012) 15 HKCFAR 560.  The defendants submitted that the correct principles and proper approach to be applied to the question of costs and the exercise of discretion when awarding costs in circumstances where the contractual documents contain “indemnity costs” clauses give rise to a question of great general or public importance.  Ribeiro PJ rejected the submission and held in §21 of the judgment that:

“That is not an apt question for the grant of leave. As with all questions of costs, the Court has a discretion which it exercises judicially. No one suggests that the discretion is fettered, Yuen JA having expressly noted the contrary. The parties’ agreement as to how costs should be dealt with provides the starting point for the discretionary exercise. No change is warranted. It would be counter‑productive, were it possible, to try to lay down any less flexible ‘legal principles’ as invited by the formulated question.”

24.  In view of the above authorities, I take the view that the “full indemnity costs” provisions under clause 14.01 of the Charge shall be construed as an agreement that Lo shall pay legal costs to be taxed on an indemnity basis.  They shall not be construed in a way which would require Lo to pay costs unreasonably incurred or of an unreasonable amount, which would be against public policy.  As a matter of discretion, and in the absence of any special circumstances, I agree that the parties should abide by what they have agreed in this case.  It follows that Lo shall pay Primecredit’s costs of these proceedings on an indemnity basis.

25.  In Hong Kong Civil Procedure 2016, vol 1, §88/5/15, p 1497, the authors state that:

“A mortgagee is entitled to add indemnity costs of enforcing his mortgage to his security (see e.g. Gomba Holdings (U.K.) Ltd v Minories Finance Ltd (No. 2) [1993] Ch. 171). Therefore in a claim for possession the plaintiff does not usually ask for an order for costs, relying on his rights under the security to avoid the need for taxation.”

With respect, I have serious reservations whether these are correct statements of the law and practice.  First, in my view, a mortgagee is not entitled to costs on an indemnity basis as of right, or as a matter of course.  It would depend primarily on the express terms of the mortgage in question.  I appreciate that, even if there is no express agreement, there would be an implied agreement arising from the particular relationship between mortgagee and mortgagor whereby the mortgagee has a right to costs, reasonably and properly incurred, of proceedings between himself and the mortgagor and its sureties for the enforcement of its security (Bank of China (Hong Kong) Ltd v Twin Profit Ltd and others, CACV 94/2010 (18 March 2011, unreported), §4).  However, as explained in the said authorities, the court retains an unfettered discretion on costs in these circumstances.  It is therefore incorrect, and potentially misleading, to say that the mortgagee is “entitled” to indemnity costs.  Second, Practice Form No 158, which reflects the current and usual practice, includes an express provision on costs at the end.  I am inclined to the view that, in order to recover legal costs, an express court order is essential.  Order 62, rule 3(1) provides that “Subject to the provisions of this Order, no party shall be entitled to recover any costs of or incidental to any proceedings from any other party to the proceedings except under an order of the Court”.  It cannot be right that the mortgagee should be allowed to avoid the need for taxation, and thereby claim whatever costs it sees fit from the mortgagor.  Further, the provision on costs in Practice Form No 158 merely provides that “the costs of these proceedings be to the Plaintiff to be taxed if not agreed”.  The absence of any reference to “indemnity basis” reinforces that costs are not awarded on an indemnity basis as a matter of course.  For these reasons, I would urge the authors of the Hong Kong Civil Procedure to reconsider the said statements.

26.  Mr Remedios raised a separate issue on costs.  Relying on G Lam J’s judgment in Wing Hang Credit Ltd v Hui Chun Kit Benjamin and another, HCMP 732/2009 (3 November 2011, unreported), he submitted that Lo should also be held liable to pay the costs incurred by GE and Primecredit against Lau.  Similar to what happened in this case, the second defendant in that case (namely one Madam Wu), the predecessor in title of the mortgagor, challenged the validity of the assignment between her and the mortgagor, but the challenged failed.  G Lam J held in §107 of his judgment:

“In my judgment, as a matter of construction, the costs incurred by Wing Hang in recovering the Property from Madam Wu and in resisting her counterclaim fall within the ‘expenses … incurred by [Wing Hang] … in connection with the protection or enforcement of this security’. The phrase ‘in connection with’ is of wide import and I see no reason why this should not include the costs under consideration. This is supported by the result in the leading case of Gallie v Lee, where the House of Lords held that a clause providing that all ‘moneys costs charges and expenses properly paid or incurred by the society under this mortgage or in relation to this security … shall be a charge on the mortgage property’ was applicable to the costs incurred by the building society as against the old widow Mrs Gallie: see Gallie v Lee (No. 2) [1971] AC 1039, 1045H–1046B.”

27.  In addition, G Lam J held in §§108–110 of his judgment that, under the common law, a mortgagee is entitled to recoup from the mortgage property any costs, properly incurred, of proceedings between himself and a third party where what is impugned by the third party is the title to the estate; whereas, in contrast, where the third party impugns the title to the mortgage, or the enforcement or exercise of some right or power accruing to the mortgagee thereunder, the costs are not recoverable out of the mortgaged property.  He held that the case before him was one where the third party had sought to impugn the title of the estate as opposed to only the title of the security or the exercise of rights or powers by the mortgagee; and hence, the bank was entitled to add the costs incurred vis‑à‑vis Madam Wu to the security.

28.  Returning to this case, I agree with Mr Remedios that the wording of clause 14.01 of the Charge is virtually identical to the relevant clause considered by G Lam J in the said case (and that in Gallie v Lee (No 2) which G Lam J had referred to).  In particular, the phrase “in connection with” is of wide import, and includes the costs incurred by GE and Primecredit against Lau.  I also agree that this is a case where Lau sought to impugn the title of the estate (ie Lo’s title to the Property), and such challenge was only withdrawn on the first day of the trial.  Hence, irrespective of any contractual provision, under the common law, Primecredit is now entitled to add the costs incurred by it and GE vis‑à‑vis Lo to the security.  As such costs fall within the scope of clause 14.01 of the Charge, as a matter of discretion, I agree that they should be awarded on an indemnity basis to be taxed if not agreed.  To avoid any doubt, I have included a proviso in this respect in the costs order made against Lo.

29.  As mentioned, I have already ordered that Lau shall pay Primecredit’s costs against her to be taxed if not agreed.  In effect, as against Lau, Primecredit shall be entitled to recover such costs on a party and party basis only; but as against Lo, Primecredit shall be entitled to recover such costs on an indemnity basis.  I do not see any inconsistency between these two orders.  I note that in Wing Hang Credit Ltd v Hui Chun Kit Benjamin and another, HCMP 732/2009 (3 November 2011, unreported), apart from holding that the costs as between the bank and Madam Wu are covered by the security, G Lam J made a separate order in §113(2) of his judgment that Madam Wu do pay the bank’s costs of the latter’s claim against her and her counterclaim against the bank.  Mr Remedios accepted correctly that, in any event, Primecredit is not entitled to seek double recovery of the same costs in fact.  In practice, Primecredit must be concerned that Lau may be unable personally to meet the costs order against her, and is therefore keen to be able to recover such costs from the Property.

C4. Conclusion

30.  For the above reasons, as I pronounced at the end of the trial, Primecredit is entitled to the following orders against Lo:

“1. The Plaintiff do recover against the 1^st Defendant under a First Legal Charge dated 14^th day of May 2008 registered in the Land Registry by Memorial No 08060200570162 (“the Mortgage”) for the sum of HK$1,487,646.61 with interest on the principal of HK$1,199,178.83 from 17^th February 2016 at the judgment rate until payment.

2. The 1^st Defendant do within 28 days after service upon him of this Order deliver to the Plaintiff vacant possession of the property comprised in the Mortgage and known as ALL THAT one equal undivided 6^th part or share of and in ALL THAT piece or parcel of ground registered in the Land Registry as SECTION B OF INLAND LOT NO. 697 And of and in the messuage or tenement and other erections and buildings thereon known at the date hereof as “No. 254 Hollywood Road, Hong Kong” (“the Building”) TOGETHER with the sole and exclusive right and privilege to hold use occupy and enjoy ALL THAT the THIRD FLOOR of the Building (“the Property”).

3. Upon the 1^st Defendant paying to the Plaintiff the monies hereby ordered to be paid and all other monies (if any) secured to the Plaintiff by the Mortgage the Plaintiff (subject and without prejudice to the due exercise of any power of sale for the time being vested in it) do redeliver to the 1^st Defendant possession of the charged property and release to the 1^st Defendant the security constituted by the Mortgage as the 1^st Defendant may agree or this Honourable Court may direct.

4. There be liberty to apply.

5. The costs of these proceedings be paid to the Plaintiff by the 1^st Defendant on an indemnity basis to be taxed if not agreed (such costs shall include the costs incurred by the Plaintiff against the 2^nd Defendant).”