KONG KWAI WING v. LI TAK FAN and Others

HCMP 3206/97

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS

ACTION NO. MP3206 OF 1997

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J U D G M E N T

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1. This is a dispute between two sets of judgment creditors as to the priority of their respective charging orders on the proceeds of sale of the judgment debtor's interest in a property. The facts are straightforward and in short compass despite the existence of three sets of proceedings and excessive paper work.

2. Messrs. Chow and Lee obtained a judgment for $317,000 with interest and costs against Mr. Ng on the 6th May 1996. They obtained a charging order nisi on the 7th May 1996 which was registered on the 15th May. A return date on the 24th May was fixed for the Defendant, Mr. Ng, to show cause why the order should not be made absolute. For some reason which I do not need to inquire into, the solicitors for Messrs. Chow and Lee failed to attend court on that date. The charging order nisi was discharged.

3. Messrs. Chow and Lee started again. On the 28th May, they obtained a further charging order nisi with a return date for Mr. Ng to show cause on the 19th June 1996. The charging order was registered on the 5th June 1996.

4. On the return date the Registrar adjourned the hearing sine die with liberty to restore. Costs were reserved. Although there is no record of the reasons, it must follow that at that stage the Learned Registrar deemed it fair to take that course. The principal reason may well have been the fact that on the 10th May Ng had taken out a summons to set aside the judgment. Had the Registrar made the charging order absolute the pending application would have been a waste of time.

5. On the day before this adjournment Mr. Kong obtained judgment against Ng for $980,000 plus interest and costs. On the 26th June, one week after the hearing, he obtained a charging order nisi. This was made absolute a month later on the 27th July 1996 and both were registered on the 3rd August 1996.

6. Ng's summons to set aside the judgment obtained by Messrs. Chow and Lee was heard and dismissed on the 9th September. On the 11th September they restored the adjourned hearing to show cause. This was heard on the 1st October when the charging order was made absolute. It was not registered however until the 20th January 1997.

7. The next events of any significance occurred in the form of correspondence between solicitors for Mr. Kong (Kwan & Kwan) and for Messrs. Chow and Lee (Chan & Wan). In a letter of 7th November 1997 the former wrote asking for the amount due in respect of the charging orders (and Judgment) to Chow and Lee, indicating that they intended to "seek a Court Order for sale of the above property." Messrs. Chow and Lee's solicitors replied on the 12th November 1997 with a figure calculated up to the 18th May 1997 of over $560,000.

8. But the solicitors for Mr. Kong had, two months earlier, taken out an Originating Summons seeking sale of the property jointly owned by Mr. Ng and one other, in order to discharge the judgment debt due to Mr. Kong. No provision had been made to include Messrs. Chow and Lee either as parties to the proceedings, or in respect of their judgment. The affidavit of Mr. Kong sworn in support of that Originating Summons made reference only to a subsequent charging order nisi by Messrs. Chow and Lee which was not registered until 26th June 1997, subsequent of course to Mr. Kong's own registered charging order absolute. How he came to omit reference to the earlier charging orders is not clear, although the entries were exhibited to his affirmation. A later affirmation corrected this in the light no doubt of the correspondence referred to and his solicitors consideration of the entries in the registry. Nonetheless no attempt was made to join Chow and Lee in the proceedings which were heard by Master Kwan on the 23rd December 1997. The consent of the Defendant Ng was obtained to the order made but not of Messrs. Chow and Lee. The effect of that order was to exclude Chow and Lee from any share in the proceeds of sale by postponing any settlement of their interest i.e. judgment, until after Mr. Kong had his judgment settled. There were not sufficient proceeds to do more than satisfy part of Mr. Kong's judgment.

9. Messrs. Chow and Lee's solicitors were not informed of this outcome until Ng's solicitors wrote to them on the 4th March 1998. They then promptly applied to be joined in the proceedings initiated on behalf of Mr. Kong and were so by the Registrar's order of 19th March 1998.

10. Messrs. Chow and Lee appeal against the order of Master Kwan as to the disposal of the proceeds of sale. Mr. Kong belatedly seeks to set aside the charging order nisi of the 28th May 1996 and with it therefore, the charging order absolute of the 1st October 1996, since the validity or otherwise of the two charging orders is central to the arguments of the parties involved. It is agreed that Mr. Hung on behalf of Mr. Kong should advance his case first.

11. His main contention is that the charging order nisi lapsed and/or was discharged on the 19th June 1996. This was the return date for the Defendant Ng to show cause why the order nisi should not be made absolute. Because the Learned Master adjourned the hearing, the Defendant having taken out a summons to set aside the judgment, Mr. Hung says the nisi order ceases to exist.

12. This cannot in my view be the case. The nisi order clearly states that unless the defendant shows sufficient cause on the return date, his interest in the asset "shall, and it is ordered that in the meantime it do, stand charged with payment of" ... the judgment sum. The Defendant was clearly unable to show cause sufficient to discharge the nisi order. The hearing was adjourned to enable him to see if he could get the judgment set aside. Therefore the charge nisi remained in force in the meantime. In any event the effect of the adjournment was merely to maintain the status quo. Having the matter adjourned was of no advantage to the Plaintiffs (Messrs. Chow and Lee) who wanted the order made absolute. Therefore the effect of an adjournment could hardly be to their advantage by allowing as a consequence the charging order to lapse or be discharged. It would have required a positive order to that effect. There was no requirement on them to file a further affirmation. The illogical nature of the argument can be seen in the inequitable effect that it would produce - the Defendant could achieve what he wanted i.e. discharge of the charging order, not by showing cause but simply by asking for an adjournment because he wanted to set the judgment aside.

13. The next argument advanced by Mr. Hung is that the Master should not have adjourned the hearing sine die but to a specific date and he relies upon the first paragraph of the White Book commentary at page 816 (Order 50/1 - 9/23) under "Making charging order absolute." It states:

"On the further consideration of the matter the Court must either make absolute the order nisi, with or without modifications, or discharge it." Mr. Hung says that the further consideration took place on the 19th June and since no order absolute was made, it should have been discharged. That cannot be correct. The hearing was adjourned. There was no consideration. This did not take place until 1st October when the Defendant failed to show cause and the order absolute was made.

14. The paragraph goes on to say - "If the court is minded for good reasons, to adjourn the further consideration of the matter, it should not adjourn the matter generally to a date to be fixed but ... to a fixed time and place as in the case of the original order nisi". Mr. Hung says that since the master did not follow this, the order should be treated as lapsed or discharged. Whilst I agree that it would have been preferable to have complied with this I can well understand the Master not fixing a date when there was to be an application to set aside the judgment to be heard on 9th September. In fact Messrs. Chow and Lee's solicitors applied for the restored hearing date within 48 hours of the Defendant failing in his application.

15. It is clear from this paragraph as a whole that neither of Mr. Hung's contentions holds water. The consequence is that the charging orders both nisi and absolute are valid and therefore Messrs. Chow and Lee's order absolute of the 1st October 1996 had priority over that of Mr. Kong. It was effective from the 6th June 1996 the day following the registration of the order nisi. Mr. Hung relies on the House of Lords' decision in Roberts Petroleum Ltd v. Kenny Ltd. [1983] 2 A.C. p. 192 in support of his argument that a charging order nisi should not be made absolute where there is some merit on the part of a subsequent charge. That authority does no more than confirm that the holder of a charging order nisi has only a defeasible right - as is implicit in the need for a 'show cause' hearing. The facts of that case, as he readily concedes, do not assist him.

16. The next argument advanced on behalf of Mr. Kong is that both he and his solicitors suffered under the delusion that in law his order absolute ranked in priority over Messrs. Chow and Lee's order. In other words neither Mr. Kong (whose ignorance is excusable) nor his solicitors knew what the law was. As a consequence it is contended, they were led into persisting in this ignorance by the action, reaction or inaction of Messrs. Chow and Lee's solicitors, and proceeded to take out an Originating Summons against the Defendant in order to secure sale of the property he owned jointly with another, and apply the net proceeds in discharge of the debt due to Mr. Kong.

17. Mr. Hung relies upon some correspondence passing between the respective solicitors. The first letter from Mr. Kong's solicitors to Messrs. Chow and Lee's, dated the 7th November 1997, refers to four charging orders obtained by Messrs. Chow and Lee (though not the fifth even though it had been obtained and registered by that time) and asks for the outstanding amount including interest and costs. It states that Mr. Kong intended to proceed with Action 3206 of 1997 and seek a court order for sale. The inference I am asked to draw from that letter is that Mr. Kong's solicitors were asserting his priority over Messrs. Chow and Lee's charging order. There is nothing in my view to justify such an inference being drawn.

18. Secondly, Mr. Hung says the reply of Chow and Lee's solicitors, dated 12th November 1997 is an acceptance of Mr. Kong's priority. He says that the fact that the letter simply set out the lump sum of the judgment, of the interest, and of the costs, supports the argument. No such conclusion can possibly be drawn. They were asked for the "outstanding amount including interest and costs." This is what they gave. The two letters do no more than refer to the sums due to Messrs. Chow and Lee. By no stretch of the imagination can it be said that such correspondence indicates both parties were proceeding on the basis that Mr. Kong's charge had priority. What Mr. Kong's solicitors did not disclose was that they had taken out a Consent Summons on the 31st October 1997 which clearly provided for Mr. Kong's charge to be paid off first. No affirmation by Mr. Kong was disclosed to Messrs. Chow and Lee's solicitors yet his Affirmation which was sworn on the 27th September 1997, referred to the gross price obtainable, the costs of the sale, an existing mortgage, but was silent as to the interest of a co-owner of Mr. Ng and the pre-existing charging orders in favour of Messrs. Chow and Lee. Only a later charging order was mentioned which clearly did not have priority. The exhibits to the Affirmation included the Land Registry search which did show the earlier charging orders but the Affirmation neglected to deal with these.

19. I am bound to say that had Messrs. Chow and Lee's solicitors been more alert and more prudent they would have asked to be involved in the proceedings initiated on behalf of Mr. Kong, instead of accepting at face value, that their clients' interests were being provided for according to the law; and in reliance upon the letter from Mr. Kong's solicitors of the 7th November 1997.

20. The matter did not however proceed on the basis of the Consent Summons but the parties were directed to attend before the Master. A further Affirmation was sworn by Mr. Kong in which reference was made to all the charging orders and a copy of the letter of 21st November 1997 (which was simply an updated calculation of the figure provided in the letter of the 12th November) from Chow and Lee's solicitors was exhibited.

21. In fact the Master made an order identical to that in the Consent Summons - the only charging order referred to being the charging order nisi of Messrs. Chow and Lee in respect of the second judgment figure which clearly ranked after Mr. Kong's charging order. The order was entirely silent about the charging order absolute which ranked in priority to Mr. Kong's order and in any event unarguably in priority to the later charging order of Chow and Lee. How that state of affairs was reached is quite unknown. But even if Mr. Kong and his solicitors had been right in thinking that Mr. Kong had priority over Chow and Lee in respect of their charging orders of 1996 the payment to Chow and Lee after payment to Kong, would have to have been in respect of those earlier charging orders and not that of 1997. Somehow the Learned Master was misled by those appearing for Mr. Kong on the hearing. Had they taken the step of including Chow and Lee in their proceedings, or at least disclosing what they were up to, this would not have happened.

22. Messrs. Chow and Lee's solicitors did not learn of the outcome of the hearing before Master Kwan (23rd December 1997) until 4th March 1988 when Ng's solicitors informed them of the likely proceeds of sale and asked for comments. Within a few days correspondence disclosed that under the Order, and by virtue of the statement of sale proceeds, Chow and Lee would get nothing as there were insufficient sale proceeds. They moved quickly and by a Court order of 19th March 1998 were joined in Kong's proceedings with a view to setting aside Master Kwan's order.

23. Although Mr. Hung has advanced arguments as to election and estoppel by convention, they both proceed from his contention that Mr. Kong and his solicitors were ignorant of the position at law and that ignorance was shared by Chow and Lee's solicitors who, it is argued accordingly, 'elected' to allow Mr. Kong priority. As I have indicated earlier they did no such thing in my judgment. The doctrine of estoppel by convention equally does not apply. Even if the language of the correspondence could be so strained as to meet the argument, it necessarily fails. This was not an action or a transaction to which Chow and Lee were parties, but, more fundamentally, the contended for 'agreed assumption' was as to the law not as to the existence of a state of facts. Here we are concerned with rights at law. Kong can only assert his right over a priority right i.e. Chow and Lee's prior charging order, if there is an unequivocal agreement by Chow and Lee, with full knowledge of their rights in law, to a request that Kong be paid off first in the distribution of the net proceeds of sale. I cannot envisage that ever happening.

24. Not only am I satisfied that nothing written or done by Chow and Lee or their solicitors on their behalf, amounts to waiver, election or estoppel, I am also satisfied that there was no mistake in the minds of Kong or his solicitors as to who actually had priority in respect of the proceeds of sale. The Affirmations of Kong, his solicitors correspondence, the form of the consent order, and the silence in respect of matters which ought to have been communicated to and which should have involved Messrs. Chow and Lee, suggest to me that this was a deliberate attempt to secure an order which gave Kong priority over the recognised priority of Chow and Lee.

25. The summons of Kong to discharge Chow and Lee's priority charging order is dismissed with costs to Chow and Lee. The appeal by Chow and Lee against Master Kwan's Order is allowed with costs to Chow and Lee here and below, including the costs of the application to be joined as 2nd Defendants to Kong's action, MP No. 3206 and those consequent thereon. I order that the net proceeds of sale be distributed in the following order of priority, the payment in discharge of the mortgage to First Pacific Bank Limited having already been made:

1) discharge of the costs and expenses of the sale;

2) one half of the remaining proceeds of sale to be paid to the first-named Defendant Li Tak Fan;

3) the other half of the proceeds to be paid to firstly, the 2nd Defendants Chow Man Li and Lee Chi Sing in respect of the charging order Nisi dated 28th May 1996 registered as memorial 721796 made absolute on the 1st October 1996 and registered as memorial 758710;

secondly all the costs due to Messrs. Chow and Lee in respect of which I have made the orders set out herein before;

thirdly to the Plaintiff, Kong Kwai Wing in respect of charging order nisi dated 25th July 1996 registered as memorial 729855, made absolute on the 26th July 1996 and registered as memorial 729856;

fourthly to the 2nd Defendants in respect of the charging order nisi dated 24th June 1997 registered as memorial 792041 made absolute on 3rd October 1997 and registered as memorial 815336; and

fifthly to the second named 1st Defendant Ng Si Chup.

(Conrad Seagroatt)

Judge of the High Court