GLORY SKY FINANCE LTD v. WONG KOON YEE AND OTHERS

HCMP 2378/2017

[2020] HKCFI 712

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 2378 OF 2017

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BETWEEN

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J U D G M E N T

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A. Introduction

1.  The Plaintiff is a licensed money lender. The 1^st and 2^nd Defendants (“D1-2”) were owners of a flat known as Flat D, 36^th Floor, Tower 12 (Hoi Fung Mansion), Riviera Gardens, Nos. 7-9 Yi Lok Street, Tsuen Wan (“the Property”).  The 3^rd Defendant (“D3”) was an agent of the 1^st and 2^nd Defendants acting on a power of attorney.

2.  The Property has been subject to a number of mortgages, two of which were executed in favour of the Plaintiff.  Details of the transactions will be set out below.  In these proceedings, the Plaintiff seeks to rescind and vacate the registration of a receipt on discharge of a mortgage on the Property at the Land Registry on the basis of some misrepresentations allegedly made by the Defendants.  All three Defendants have not adduced any evidence against the Plaintiff’s case.  Neither have D1-2 appeared in these proceedings.

3.  It should be pointed out at the outset that Wealth Asia Credits Limited, another licenced money lender (“the Intervener”), has applied to intervene in these proceedings.  The gist of the Intervener’s case is that it held a competing security in the sale proceeds of the Property and that its interest would be adversely affected should the receipt on discharge in relation to the Plaintiff’s mortgage be rescinded.

4.  This judgment will therefore address both the Plaintiff’s case and the arguments put forward by the Intervener.

B. Background

5.  On 16 April 2012, the Property was made subject to a mortgage (“NCB’s Mortgage”) as security for a loan from Nanyang Commercial Bank Limited (“NCB”).  NCB’s Mortgage was registered at the Land Registry on 2 May 2012.

6.  In late August 2013, D3, acting on behalf of D1-2 under a power of attorney, successfully applied for a HK$2,100,000 loan from the Plaintiff (“P’s 1^st Loan”). P’s 1^st Loan was secured by a second mortgage over the Property (“P’s Mortgage 1”) on 12 September 2013, which was registered on 19 September 2013.

7.  On 7 October 2013, a third mortgage was created over the Property in favour of the Intervener (“Intervener’s Mortgage 1”) and it was registered on 21 October 2013.

8.  Yet another mortgage described as the “Fourth Legal Charge” was created in favour of the Intervener on 23 December 2013 (“Intervener’s Mortgage 2”) and was registered on 6 January 2014.

9.  In September 2014, P’s 1^st Loan was due to be repaid by D1-2.  At around that time, D3, acting on behalf of the D1-2 under a power of attorney, successfully negotiated with the Plaintiff for a “roll-over” of P’s 1^st Loan for another 12 months.  It was agreed that P’s 1^st Loan would be treated as having been repaid without the need to make any further advance of money on the following terms:-

(1) The Plaintiff would discharge the security for P’s 1^st Loan, namely, P’s Mortgage 1.

(2) The parties would enter into a new loan agreement for HK$2,100,000 (“the New Loan”), secured by a fresh second mortgage.

10.  On 17 October 2014, the Plaintiff and D1-2 entered into a memorandum in writing for the New Loan (“the Memorandum”) which contained the following terms:-

(1) Under clause 5(1) of the Memorandum, the New Loan would be secured by a fresh second mortgage over the Property.

(2) Under clauses 5(3)(3) – 5(3)(4) of the Memorandum, it was a condition precedent to the grant of the New Loan that:

“save and except the ‘UNLIMITED AMOUNT’ Mortgage dated 16^th April 2012 in favour of Nanyang Commercial Bank Limited [i.e. NCB] registered on 2^nd May 2012 in the Land Registry … the borrower shall fully redeem all or any other mortgagees and legal charges (if any) in respect of the Property and clear all or any other incumbrances, before or upon drawdown of the loan including but not limited to the Second Mortgage dated 12^th September 2013 over the Property in favour of Glory Sky Finance Limited … registered on 19^th September 2013 … the existing Third Legal Charge dated 7^th October 2013 in favour of Wealth Asia Credits Limited registered on 21^st October 2013 … and the existing Forth [sic] Legal charge dated 23^rd December 2013 in favour of Wealth Asia Credits Limited registered on 6^th January 2014” (Emphasis added).

11.  Further, Clause 6 of the Memorandum provided that the Plaintiff would have no obligation, legal or otherwise, to advance the New Loan to D1-2 should they fail or refuse to fully and punctually comply with the terms of the Memorandum.

12.  It is the Plaintiff’s case that on 17 October 2014, the Plaintiff’s general manager, Ms Fanny Yeung, explained to D3 (who acted for D1-2) that compliance of all the conditions precedent as set out in the Memorandum would have to be strictly complied with; otherwise the Plaintiff would not have approved the New Loan and would have to insist on full repayment of P’s 1^st Loan.  Ms Fanny Yeung’s evidence is that she asked, before D3 signed on the Memorandum, if all the conditions precedent were complied with, D3 replied by saying that apart from the NCB’s Mortgage, there were no other loans in respect of the Property (“the Representation”).  Ms Fanny Yeung said she (on behalf of the Plaintiff) relied upon what D3 said on behalf of herself and also D1-2.

13.  On 21 October 2014, the Plaintiff signed a Receipt on Discharge in respect of P’s Mortgage 1 (“the Receipt on Discharge”).  The Receipt on Discharge was registered at the Land Registry on 27 November 2014.  The Plaintiff then executed a second mortgage (“P’s Mortgage 2”) with D1-2 over the Property.  This mortgage was registered in the Land Registry on 4 November 2014.  The liabilities of D1-2 were also secured by a Deed of Guarantee and Indemnity signed by D3 in favour of the Plaintiff.  

14.  D1-2 subsequently defaulted on NCB’s loan and the New Loan. Pursuant to the NCB’s Mortgage, NCB took possession of the Property and sold it for HK$4,550,800.  The surplus proceeds, amounting to HK$3,649,575.60, were subsequently paid into court.

15.  In around June or July 2016, the Plaintiff discovered that whilst Intervener’s Mortgage 1 and Intervener’s Mortgage 2 were discharged on 8 October 2014 (i.e. before the Representation was made prior to the execution of the Memorandum), D1-2 had on the same day obtained a new loan from the Intervener which was secured by way of a “Third Mortgage” over the Property (“Intervener’s Mortgage 3”). Intervener’s Mortgage 3, also executed on 8 October 2014, was registered on 5 November 2014 (i.e. one day after the registration of P’s Mortgage 2 in favour of the Plaintiff).

C. Proceedings

16.  On 24 October 2017, the Plaintiff took out an Originating Summons in an expedited form for an application to rescind the Receipt on Discharge and also to vacate the registration of the same at the Land Registry.  An affirmation of Ms Fanny Yeung (“Fanny Yeung’s Affirmation”) was also filed on the same day in support of the Originating Summons. 

17.  A hearing first took place before Deputy High Court Judge Robert Pang SC on 8 December 2017.  The matter was adjourned because queries were raised as to whether the Originating Summons should be in the expedited form or the long form and also whether the service on D1-2 was valid.  It was then ordered that (1) the Originating Summons be amended to delete reference to the expedited form; and (2) substituted service of a sealed copy of the Amended Originating Summons and Fanny Yeung’s Affirmation with exhibits be effected by sending the same in prepaid post addressed to D1-2’s last known address and also by advertising a notice of these proceedings in Chinese in Ming Pao. 

18.  On 15 December 2017, the Plaintiff filed an Amended Originating Summons pursuant to the above order made by Deputy High Court Judge R Pang SC to the effect that it was no longer in its expedited form.  Further, on 15 February 2018, the Plaintiff filed the 2^nd Affirmation of Ching Ming Yu (“Ching’s 2^nd Affirmation”) in support of an application for an order for substituted service on D1-2 in respect of the service of the Notice of Appointment to hear Amended Originating Summons.

19.  On 22 February 2018, Lok J made another order for substituted service on D1-2 (similar to the one made on 8 December 2017) in respect of the service of the Notice of Appointment to hear Amended Summons filed on 5 February 2018 and Ching’s 2^nd Affirmation with exhibit.

20.  The matter came before me on 17 April 2018.  Prior to the hearing, the Plaintiff’s solicitors had written to the Intervener and its solicitors, Messrs Francis Kong & Co, requesting the Intervener to state its position on the Plaintiff’s claim.  By letter dated 29 March 2018, Messrs Francis Kong & Co simply reserved its position without stating anything concrete.  The day before the hearing, the Intervener wrote to this Court alleging that (1) it held a competing security interest in the sale proceeds of the Property; and (2) its interests would be seriously affected should the Court rescind the Receipt on Discharge.

21.  I found the conduct of the Intervener unsatisfactory and unhelpful.  On the one hand, it sought to provide its reasons for opposing the Plaintiff’s claim by way of correspondence; but, on the other hand, despite repeated requests, it did not take any steps to inform the Court or the Plaintiff whether it intended to join in the proceedings, notwithstanding its alleged interest therein.  Hence, at the hearing on 17 April 2018, I gave directions that the Court would write to the Intervener which would be given 7 days to confirm if it would apply to be joined in these proceedings and also that an application together with a supporting affirmation would need to be filed within 14 days (should the Intervener decide to take out the same).  The matter was adjourned to 11 May 2018.

22.  On 23 April 2018, the Intervener’s solicitors indicated in writing that their client wished to participate in this action.  On 30 April 2018, it took out a summons for leave to be joined as an intervener or, alternatively, as the 4^th Defendant in these proceedings.  An affirmation was filed on behalf of the Intervener, which set out the Intervener’s legal position, details of which are essentially the same as those contained in its letter dated 16 April 2018.

23.  At the hearing on 11 May 2018, Mr Bernard Man SC, for the Plaintiff, informed the Court that despite his objections in the Plaintiff’s skeleton submissions, he was prepared to consent to the Intervener’s application for joinder subject to the question of costs.  Mr Fung, for the Intervener, sought to adjourn the hearing on the basis that it had difficulties in gathering factual evidence in relation to the Plaintiff’s claim against the Defendants.  However, there was no explanation either in the affirmation filed by the Intervener or in Mr Fung’s submissions regarding what further evidence the Intervener wished to adduce.  No reason was given as to why the Intervener would be in a position to contradict or comment on the Plaintiff’s factual case on misrepresentation.  Further, the Intervener had been given ample opportunities to consider and respond, if necessary, to the Plaintiff’s claim.  The Intervener’s application for adjournment was therefore refused.

24.  As mentioned above, I will now deal with the Plaintiff’s claim and the Intervener’s position.

D. The Plaintiff’s case on misrepresentation

25.  First, the Receipt on Discharge amounts to an “accord and satisfaction” in respect of P’s Mortgage 1.  Unlike a “release by deed”, an “accord and satisfaction” allows a party to discharge his outstanding contractual obligations if the other party agrees to accept “some other or additional consideration in return for the right which he abandons”.  As per British Russian Gazette and Trade Outlook Ltd v Associate Newspapers Ltd [1933] 2 KB 616, at 643 – 644, an “accord and satisfaction” is:

“… the purchase of a release from an obligation whether arising under contract or tort by means of any valuable consideration, not being the actual performance of the obligation itself”.

26.  An accord may also be vitiated by “any circumstance which would render a contract void or voidable”.  There are well-known examples in the context of duress (see D. & C. Builders Ltd v Rees [1966] 2 QB 617), but an accord may also be vitiated by misrepresentation or mistake (see Chitty on Contracts, 32^nd ed (2015), §22-021).

27.  Secondly, in the present case, in view of the evidence adduced by the Plaintiff and in the absence of anything which contradicts the facts put forward by the Plaintiff, I am satisfied that misrepresentation on the part of the Defendants has been established because:-

(1) As mentioned above, the Plaintiff has adduced evidence that before the Memorandum was signed, D3 (on behalf of herself and D1-2) made the Representation that apart from the NCB’s Mortgage, there were no other loans in respect of the Property.  This was clearly a statement of fact.

(2) The Representation was plainly false because although Intervener’s Mortgage 1 and Intervener’s Mortgage 2 were discharged on 8 October 2014 (i.e. before the Representation was made prior to the execution of the Memorandum), D1-2 had on the same day obtained a new loan from the Intervener which was secured by way of Intervener’s Mortgage 3.  Intervener’s Mortgage 3, also executed on 8 October 2014, was registered on 5 November 2014 (i.e. one day after the registration of P’s Mortgage 2).

(3) It is difficult to conclude solely on the basis of the evidence from Ms Fanny Yeung that the Representation was made fraudulently.  However, for present purposes, even an innocent misrepresentation would be sufficient for the Plaintiff’s claim for rescission.

(4) It is not necessary for the misrepresentation to be the sole cause which induced the representee to make the contract (see Chitty on Contracts, 33^rd ed (2018), §7-037); but it is essential to establish that the misrepresentation did operate on the mind of the representee (Chitty on Contracts §7-035).  According to its evidence (which is not challenged), the Plaintiff acted on the Representation and believed that the condition precedent under Clause 5(3)(3) of the Memorandum was fulfilled.  I am satisfied that as a result, the Plaintiff agreed to discharge P’s Mortgage 1, secure the New Loan by another fresh mortgage over the Property, and execute the Receipt on Discharge and P’s Mortgage 2.

28.  In view of the above and subject to the consideration of the Intervener’s position (which will be set out below), I find that there is at least a prima facie case that the Receipt on Discharge should be rescinded. 

E. The Intervener’s position

29.  As stated above, no evidence has been adduced by the Intervener to take issue with the Plaintiff’s factual case on misrepresentation.  As submitted by Mr Fung, the Intervener’s case is that it would be unjust and inequitable for the Court to set aside the Receipt on Discharge and the following points have been raised by the Intervener:-

(1) The memorandums evincing P’s 1^st Loan and the New Loan were not registered in the Land Registry.

(2) The decision to grant the New Loan and execute the Receipt on Discharge was made by the Plaintiff. It was their duty to investigate compliance with the conditions precedent rather than rely on the information provided to them by D3.

(3) The Plaintiff would be entitled to damages in lieu of rescission in the case of misrepresentation. 

(4) The Plaintiff should have had notice of Intervener’s Mortgage 3 when it registered the Receipt on Discharge on 27 November 2014.  The fact that it took the Plaintiff 19 months to realise this was an unreasonable delay and equity therefore should not assist the Plaintiff.

(5) The Receipt on Discharge was registered in the Land Registry.  In doing so, the Plaintiff informed the public that P’s Mortgage 1 had been discharged and the Property was no longer subject to it.  Should the Receipt on Discharge be rescinded, it would be unjust for the Plaintiff’s interest to rank in priority to that of the Intervener.

30.  Points (1) – (3) above do not help advance the Intervener’s case.

31.  First, I am unable to see how the Plaintiff’s failure to register the memorandums is material to the present dispute as the Intervener fails to demonstrate how this could in any way affect its interest.

32.  Secondly, the Plaintiff has no duty to make any further inquiries about the truthfulness of the Representation. As per Chitty on Contracts, at §7-043: ^[1]

“If the representee did not know that the representation was false, it is no defence to an action for rescission that the representee might have discovered its falsity by exercise of reasonable care … ‘it is not enough to show that the claimant could have discovered the truth, but that he did discover it’ …”

33.  Thirdly, whilst it might be appropriate for damages to be awarded in the case of misrepresentation, point (3) above is not helpful as it only begs the question as to whether rescission should be granted in the circumstances of the present case.

34.  Point 4 does not assist the Intervener either.  Plainly, the fact that the Plaintiff should have had notice of Intervener’s Mortgage 3 when the Receipt on Discharge was registered does not change the Plaintiff’s case on the misrepresentation which was made by D3 before Intervener’s Mortgage 3 was registered.

35.  Point 5 relates to whether it would be unjust and inequitable to have the Receipt on Discharge rescinded in view of the fact that Intervener’s Mortgage 3 was executed on 8 October 2014 (i.e. before the Receipt on Discharge which was executed on 21 October 2014).  However, it is noteworthy that the Intervener did not rely on the Receipt on Discharge when it entered into Intervener’s Mortgage 3 since the Intervener had always understood that their mortgage (described as “Third Mortgage”) was to rank third (i.e. behind NCB’s Mortgage and P’s Mortgage 1).  In the circumstances, I agree with the Plaintiff that the Intervener would not be deprived of any rights it acquired “in reliance on the integrity of the impugned transaction”, i.e. the Receipt on Discharge in the present case (see O’Sullivan, Elliot & Zakrzewski:  The Law of Rescission, 2^nd ed (2015), §20.28).

36.  Hence, in the absence of its reliance on the Receipt on Discharge, the Intervener’s complaint that the rescission sought by the Plaintiff would create a competing interest has no merits.  As explained in Snell’s Equity, 33^rd ed (2015), §15-015:-

“The bar is not activated where the only effect of rescission would be to make a third party’s rights less valuable, as by shrinking the wrongdoer’s resources or increasing the claims on them …

  … The third parties’ rights against the defendant debtor remained intact although they were less valuable because rescission created a competing claim of their assets period it appears that the bar will only be activated where the consequence of rescission is to destroy or necessarily frustrate the third party’s rights.”

37.  In the circumstances, I take the view that the Intervener’s objections should not constitute any bar to the Plaintiff’s claim for rescission.  I therefore make an order that the Receipt on Discharge of a Charge dated 21 October 2014 and registered against the Property in the Land Registry by Memorial No 14112701010018 be rescinded or set aside and the said registration in the Land Registry be vacated forthwith on the ground of misrepresentation and also on the ground that the condition precedent to the Receipt on Discharge had not been fulfilled.  For the sake of completeness, I also make an order that Wealth Asia Credits Limited (i.e. the Intervener) be joined as Intervener in these proceedings.

38.  In relation to costs, I take note of the fact that the proceedings up to the hearing on 17 April 2018 only concerned the Plaintiff’s claim against the Defendants as the Intervener only applied to be joined in the proceedings thereafter.  I also bear in mind that the hearing before Deputy High Court Judge R Pang SC on 8 December 2017 was adjourned as a result of some issues relating to the form of the Originating Summons and service which were then not resolved and it would only be fair for the Plaintiff to bear its own costs in respect of that hearing.  Further, D1-2 were required to pay legal costs on an indemnity (or solicitor and own client) basis under P’s Mortgage 1 and P’s Mortgage 2 whereas D3 signed on the Deed of Guarantee and Indemnity to guarantee payment of all liabilities of D1-2. 

39.  The proceedings after 23 April 2018 (i.e. when the Intervener confirmed that it wished to be joined herein) were confined to the dispute between the Plaintiff and the Intervener and there is no reason why costs should not follow the event. 

40.  Having regard to the matters mentioned in paragraphs 38 and 39 above, I now make a costs order nisi that:-

(1) costs of the proceedings up to (and including) the hearing on 17 April 2018, save and except costs of the hearing on 8 December 2017, be paid by the 1^st, 2^nd and 3^rd Defendants on an indemnity basis, to be taxed if not agreed;

(2) there be no order as to costs in respect of the hearing before Deputy High Court Judge R Pang SC on 8 December 2017; and

(3) costs of the proceedings which have been incurred since 23 April 2018 be paid by the Intervener to the Plaintiff, to be taxed if not agreed.

41.  The above costs order nisi shall become absolute unless an application to vary the same is made within the next 14 days.