XCHRX CAPACIOUS INVESTMENT LTD. v. TANG WING HONG ALAN

1991 No. A9745

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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J U D G M E N T

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1. This is an appeal by the Defendant against an Order of Master Woolley made on 17th December 1992 making absolute an order charging the property known as Lot No. 1618 in DD No. 109 (the property charged) with payment of secret profits in the sum of HK$1,807,774.00.

2. The Plaintiff claimed to be the beneficial and equitable owner since 20th March 1982 of 16 out of 22 houses erected on Lot No. 1618 R.P. in DD 109 which the deceased held as the Plaintiff's trustee. On 12th June 1992 upon the Plaintiff's application for summary judgment, Master Yam gave the Defendant unconditional leave to defend. The Defendant served and filed a Defence and Counterclaim. The details are irrelevant to this application save that the Defendant averred that the estate of the deceased was entitled to be reimbursed with all sums paid towards the rates and maintenance of the 16 houses and sought relief against the Plaintiff accordingly.

3. The Plaintiff appealed against Master Yam's order. On 25th August 1992, Mayo. J. allowed the Plaintiff's appeal and gave final judgment for: an order that the Defendant should assign the property; a declaration that the Plaintiff was equitable owner of the 16 houses since at least 20th of March 1982; an order that:

"The Defendant to furnish an account of all secret profits in respect of the use and letting of the said 16 houses and payment of all such secret profits to the Plaintiff;"

and for damages for breach of trust to be assessed.

4. Pursuant to that order, by affirmation dated 6th October 1992, the Defendant verified an account showing that since 15th October 1990, the estate had received rent amounting to HK$2,035,474.00. The estate had, however, disbursed HK$899,274.33. The latter sum included HK$575,674.33 for rates from December 1980 to September 1992. Property tax paid on the received, however, remained to be ascertained from the rent Hong Kong Government. Upon receipt of that account, the Plaintiff applied for and obtained on 30th October 1992 a charging order nisi. On 17th December 1992, the order was made absolute.

5. The sum of HK$1,807,774.00 which appears in the order absolute is simply a mathematical error on the part of the Plaintiff's solicitors in adding up the individual amounts of rent received by the estate. It is not the total amount received according to the account less certain unspecified deductions.

6. It was not in dispute that under Order 50 R.S.C. a charge on the property of a judgment debtor cannot be imposed for an unascertained sum. Mr. Li for the Defendant argued that the sum due to the Plaintiff remains unascertained so that the application for the charging order was misconceived. He relied for his argument upon Order 43, rule 6 which in relation to accounts and enquiries provides:

"In taking any account directed by any judgment or order, all just allowances shall be made without any direction to that effect."

7. Mr. Li said that the effect of that rule is that, an account having been ordered by the Court, expenses and disbursements paid by the accounting party are to be brought into the reckoning as well as income and receipts, so that a fair and proper balance to be paid by the accounting party can be ascertained. He said that "just allowances" is a phrase which has a common and well understood meaning, that is, deductions and expenses.

8. In relation to the present case, Mr. Li said that there are disbursements still to be established by the Defendant, particularly property tax. Until all the disbursements which the Defendant claims on behalf of the estate have been established and a balance struck, there is no ascertained sum payable by the Defendant upon which a charging order can be based.

9. Mr. Wong for the Plaintiff argued that rule 6 does not provide for the set off of disbursements and expenses where such set off has not been made part of the order of the Court. He said that rule 6 is to allow the Court flexibility when taking the account in relation to figures which cannot be precisely ascertained. He said that the rule simply spells out the inherent power of the Court to do the best it can on the information available to it, a power which is exercised on an almost daily basis; for example, in the assessment of damages. He emphasized that the crucial factor is the order made by the Court. Such an order may be comprehensive, for example, covering all transactions carried out by a person over a period of years which would necessarily include both income and expenditure; or restricted in scope, for example, an account of all receipts. The nature of the order is vital and should not be altered in its scope by the provisions of rule 6.

10. Mr. Wong pointed out that Mayo J. was concerned only with the Plaintiff's claim and, therefore, the receipt of secret profits. The judge did not deal with the counterclaim by which the Defendant effectively seeks a set off of disbursements. Had the judge intended that the account which he ordered should deal with disbursements, he would have so ordered.

11. I confess to some difficulty in accepting Mr. Wong's argument that the Rules Committee, in rule 6, was doing no more than enjoin the Court to exercise powers already available to it.

12. A number of authorities was cited in the course of argument. Wilkes v. Saunion 7 Ch.D. 188 and Tipton Green Colliery Company v. Tipton Moat Colliery Company 7 Ch.D. 192 were mortgage redemption actions. In Wilkes, the mortgagees of a ship, in relation to an account of what was due on the mortgage for "principal and interest", were entitled to be allowed expenses incurred in relation to the taking and holding possession of the ship under the head of "just allowances". In Tipton Green, the mortgagee was entitled to "necessary repairs" under the head of "just allowances". In the latter case, Jessel, M.R. said at page 194: -

"As I understand, the mortgagee in a redemption suit never has permanent improvements allowed unless he proves at the trial that there are some, and gets them inserted in the decree. The law is so stated in Fisher on Mortgages, where it is said that "to entitle a mortgagee to an inquiry as to money laid out in lasting improvements, he need not prove at the hearing what precise sums were so laid out; yet no inquiry will be granted on his bare allegation, without evidence that he has laid out money for the purpose." Mr. Fisher also says, and says correctly, that "the words 'all just allowances' in a decree, cover all payments to which the mortgagee is entitled under the terms of his security," except lasting improvements; and I think that necessary repairs are included in the words.....

I am, therefore, clearly of opinion that under "just allowances," which are supposed to be in the decree, you will get necessary repairs. If you want anything else, such as improvements, or what are sometimes called "substantial repairs," you must ask for them; but then you must not only allege, but also prove them."

13. It was Mr. Wong's submission that the mortgagees were entitled to their expenses because of the law peculiar to mortgages and not because of some general application of the phrase "just allowances" which appears in rule 6. He said that where a mortgagee is justifiably in possession, the mortgagee may recover first, the cost of taking and holding possession and secondly, any expenses incurred for repairing and keeping the property in condition. The mortgagee's entitlement, said Mr. Wong, arises from his liability to take good care of the property. He drew my attention to the first passage which I have cited from the judgment of Jessel, M.R. and the words "entitled under the terms of his security".

14. Mr. Wong maintained that a case of breach of trust, as here, is a different situation. I shall return to this.

15. Mr. Li argued that these cases are simply illustrations of the meaning of "just allowances" in given situations. I am persuaded that he is right. An examination of Wilkes shows that the argument for the defendant/mortgagee was recorded thus:-

"These items represent expenses necessarily incurred for the purpose of enforcing and giving effect to our security, and we therefore submit we are entitled to have them allowed under the head of "just allowances," pursuant to Cons. Ord. XXIII., r. 16 (22nd Aug., 1859), Morgan, which is still in force, and which provides that "in taking any account directed by any decree or order, all just allowances shall be made, without any direction for that purpose in such decree or order."

16. In the course of argument, counsel for the plaintiff/mortgagor cited an authority that a mortgagee could not be allowed the costs of a successful ejectment as "just allowances" where the decree was silent as to such costs. Jessel, M.R. interpolated:-

"That case was decided in 1844, before the order under which "just allowances" are now imported into every decree directing accounts. The case is not quite correctly stated in Seton, for the decision clearly intimates that if "just allowances" had been mentioned in the decree the costs of the ejectment by the mortgagee, that is, the costs incurred by her in enforcing and giving effect to her security, would have been allowed. Mr. Wigram, in his argument, states the law to be that in an account, between mortgagor and mortgagee, the mortgagee is entitled to all costs incurred in fairly and reasonably maintaining his title at law; and in support of that proposition he cites Dryden v. Frost and Ellison v. Wright. To that statement of the law Vice-Chancellor Knight Bruce in reality assents, but under the particular circumstances of the case he declined to give the mortgagee the costs."

17. In his judgment, Jessel, M.R. went on to allow the defendant's claim under the head of "just allowances". Tipton was argued along the same lines by the same counsel for the defendant/mortgagee. Counsel for the plaintiff/ mortgagors apparently conceded that the defendants would get whatever they were entitled to as a matter of course under the head of "just allowances". The real dispute revolved around permanent improvements which the Master of the Rolls decided the defendants could not get.

18. It is plain to me, therefore, that those two decisions were based upon the then Order 43 rule 16 which contained wording substantially similar to that of the present rule 6. I see no warrant for holding that the two cases were decided upon principles peculiar to mortgages rather than upon a general application of the term "just allowances."

19. I am satisfied that rule 6 permits the deduction of essential expenses legitimately incurred by an accounting party. I do not accept that the Rules Committee has thus undermined what might be a more restricted order because the application of rule 6 falls far short of providing for a general account between the parties, as Tipton Green demonstrates.

20. I am fortified in my view by a passage which appears in Vol. 1 of the 2nd Ed. of Atkin's Court Forms, at page 609:-

"8. Allowances. Just allowances will be made without any express direction in the order and so they need not be mentioned in the account claimed. There have been numerous decisions as to what are or are not just allowances in particular cases; it is really a question of fact, depending on the particular circumstances, and so reported decisions are of little assistance.

A general distinction may be drawn between an allowance and a cross-claim: where a party claims a sum of money from the person to whom he is accounting, then it is suggested that if the money is not due as an expense of the transactions comprised in the accounts, payment should be claimed by counterclaim or as a set-off in the action, and not as a "just allowance" on taking the accounts."

21. The first paragraph of that passage relies upon Wilkes. Mr. Wong sought to draw comfort from the second paragraph which he said is similar to the situation in the instant case. I accept that there is a counterclaim, but the counterclaim is for expenses in relation to the matter in issue between the parties. The second paragraph effectively begs the question as to the meaning of "just allowance".

22. "Just allowances," as I have said, are essential expenses legitimately incurred. Put in more general terms, they are expenses and disbursements which it is just should be allowed to the accounting party. The important word, in relation to this case, is "just". The cases to which I have been referred all involved mortgagees acting lawfully and justifiably. In contrast, the Defendant, i.e. the deceased, behaved unlawfully, in breach of trust. That, in my judgment, distinguishes this case. I do not consider it just that a party who is called to account for secret profits arising out of breach of trust should be entitled to any allowances without explicit order of the court. Such a party should separately pursue any claim for expenses or disbursements as the Defendant, by counterclaim, may do here.

23. Two other points were made by Mr. Li. First, he drew my attention to Order 50, rule 1 (3) which provides that the application for a charging order shall be supported by an affidavit:

"(b) stating the name of the judgment debtor and of any creditor of his whom the applicant can identify;"

24. Mr. Li said that the Plaintiff's supporting affidavit did not set out whether there was any creditor who could be identified. He drew attention to marginal note 50/1-9/20 in the Supreme Court Practice which states that if an applicant is unable to identify any creditor then his affidavit should say so. Mr. Li said that, in the circumstances, the Plaintiff's affidavit was defective.

25. I rejected that contention which, it must be said, Mr. Li did not press strongly. The statement in the marginal note is unsupported by authority. It is not a requirement of the rule itself. Plainly it may be a matter of good practice but failure to observe that practice does not amount to any irregularity.

26. Second, Mr. Li said that the Master should not have exercised his discretion in favour of the Plaintiff. He said that, as an alternative security, the Defendant had offered to the Plaintiff two of the remaining six houses on Lot 1618. These two houses the Defendant alleged to be worth HK$4,000,000.00, a rough estimate based upon the Plaintiff's valuation of the 16 houses at HK$32,000,000.00 or more. The property charged, however, is worth very much more and ripe for development, development which will be hampered by virtue of the charging order imposed upon it.

27. The state of the evidence before me is this. The Plaintiff accepts that it valued the 16 houses at some HK$32,000,000.00. It has now, however, inspected the two houses offered by the Defendant. Because of the condition of the houses and the nature of the tenants, they are virtually worthless and unsaleable. For the Defendant Mr. Alan Tang affirms that he has been informed by his mother that a development company is interested in developing the property charged and values the land at about HK$400.00 per square foot giving a total value of about HK$12,000,000.00. Neither contention is supported by a formal valuation, although the Plaintiff's deponent stated in his affidavit that he was "advised by Dominion Surveyors Limited" as to the value of the two houses.

28. It is agreed that the Court should not impose a charging order on an asset of considerable value in respect of a relatively small debt. In this case, the Plaintiff has asserted a debt of HK$1.8 million which is, in my judgment, a substantial sum and, as a matter of fact, approximately 15% of the value of the property charged. The two houses which the Defendant offers are, in contrast, of indeterminate value and do not necessarily represent any real security for the Plaintiff. In the circumstances, I am satisfied that the Master exercised his discretion correctly.

29. There was, accordingly, an ascertained sum to which the Plaintiff is entitled, in excess of the sum charged on the property. I dismiss the appeal. I make an order nisi that the Plaintiff has the costs of the appeal.