CITI HONOUR LTD. v. CITI HONOUR LTD.

HCA3185/2001
& HCA3191/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.3185 OF 2001

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(HEARD TOGETHER)

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REASONS FOR DECISION

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Background

1. Tai Lin Radio Service Limited ("Tai Lin") is a well-known business in Hong Kong, specialising in selling electrical appliances and electronic products. Its founder, Mr Lam Kau, passed away in December 1965. His will provided for his residual estate and income to be divided between his wife ("Mrs Lam") and his two sons, Mr Lam Chok Wai ("Mr CW Lam") and Mr Lam Chok Lai ("Mr CL Lam"). Since 1978 and 1980, the brothers were registered as owners (tenants in common) of two properties at No.312 Nathan Road, and of two properties at Nelson Street respectively. These properties are collectively referred to as "the Properties" below. A fuller description of the Properties can be found at the appendix at the end of this judgment.

2. In July 2002, Mr CW Lam commenced HCMP 3814 of 2000 for partition and sale of the Properties and HCCW 680 of 2000 for winding up of a family property holding company. In the affirmations filed in those actions, Mr CL Lam stated that at all material times the beneficial interest of the Properties was vested in their mother and them equally, i.e., one-third each and the brothers held the Properties on trust for their mother insofar as her interest was concerned. In his affirmations in reply, Mr CW Lam did not contest his mother's interest in the Properties. Later in April 2001, he caused the actions to be withdrawn. Mrs Lam died in November 2001. Mr CL Lam is one of the executors of her estate.

3. Mr CW Lam was previously married to Madam Lam Choi Wai Ying ("Madam Choi"). Their marriage was however dissolved in 1994 because of his affairs with Ms Tam Shuet Mui ("Ms Tam"). Under a consent order and deed of settlement dated 27 July 1995, Mr CW Lam was ordered to pay a sum of HK$39 million to Madam Choi. But by August 1997, she had only received HK$10 million. The balance of HK$29 million remains outstanding to date. Madam Choi has been pursuing against Mr CW Lam for payment of the balance.

4. On 16 July 2001, Sino Billion Limited ("Sino Billion"), a BVI company, commenced HCA 3185 of 2001 against Mr CW Lam, purportedly claiming for repayment of a loan of HK$30 million. On the same day, Citi Honour Limited ("Citi Honour"), another BVI company, commenced HCA 3191 of 2001 against Mr CW Lam, also purportedly claiming for repayment of a loan of HK$30 million. Sino Billion and Citi Honour were represented by the same firm of solicitors in the actions, Messrs Ho & Partners. They had a common director, namely, Ms Tam. On 4 October 2001, Sino Billion and Citi Honour obtained default judgments against Mr CW Lam. On 14 December 2001, they obtained charging orders nisi against Mr CW Lam's interest in the Properties. The orders made no reference to Mrs Lam's purported interest in the Properties. The charging orders nisi were registered with the Land Registry on 20 December 2001. But Mr CL Lam was not notified of the charging orders at the time.

5. On 2 January 2002, Madam Choi obtained a charging order nisi against Mr CW Lam's interest in the Properties. The order nisi was registered on 17 January 2002. Mr CL Lam was served with the charging order proceedings. He duly made representation in respect of Mrs Lam's interest in the Properties. On 26 March 2002, the charging order was made absolute with addition of the words "after giving credit to and without prejudice to any interest of [Mrs Lam] or her estate or Lam Chok Lai in the assets".

6. On 28 January 2002, the charging orders nisi Sino Billion and Citi Honour obtained were made absolute. They were then registered on 7 February 2002. Again, Mr CL Lam was not informed of the same at the time.

7. On 8 March 2002, Citi Honour obtained an order for sale with the consent of Mr CW Lam in HCMP 428 of 2002 for the purpose of enforcing the charging order. The order for sale provided, inter alia, that unless within seven days Mr CW Lam redeems the charge, his interest in the Properties will be sold by private treaty and that the conduct of the sale shall be committed to Citi Honour. On the same day, Sino Billion obtained an order for sale in similar terms with Mr CW Lam's consent in HCMP 427 of 2002. Again, Mr CL Lam was not served with any of the papers regarding those proceedings, although he was the registered co-owner of the Properties.

8. On 15 March 2002, Citi Honour, acting under the order for sale, entered into a memorandum of agreement purporting to sell as vendor half part or share in the Properties to Mr Liu Kwai Man at the consideration of HK$30 million. Mr Liu was a director of Win Source International Limited ("Win Source"). Win Source produced a supplemental agreement dated 4 April 2002 which purported to vary the terms of the memorandum of agreement by allowing a two-month extension to the purchaser if there was proof that the purchaser's mortgage loan was not available on the stipulated completion date of 15 April 2002. Win Source further produced a deed of nomination dated 8 April whereby Win Source was nominated by Mr Liu to take the subsequent assignment.

9. On 13 May 2002, Mr CL Lam, in his capacity as executor of Mrs Lam's estate, commenced proceedings against Mr CW Lam, seeking, inter alia, a declaration of Mrs Lam's one-third beneficial interest in the Properties. The writ was registered against the Properties as lis pendes on 14 May 2002. Despite the registration, Citi Honour purported to assign as vendor and chargee one moiety or half part or share of and in the Properties to Win Source under an assignment dated 29 May 2002. It is Win Source's case that Winland Capital Limited ("Winland"), as mortgagee, provided HK$20 million to finance the transaction.

Applications

10. Numerous applications were taken out by the parties returnable before me on 2 October 2002 and 29 January 2003. Some were not contested and were disposed of accordingly. I do not propose to set them out here. The substantial ones that required my determination were :

(1) The application by Madam Choi under Order 50, rule 7 to set aside the charging orders obtained by Sino Billion and Citi Honour.

(2) The application by Mr CL Lam under Order 50, rule 7 to vary those charging orders so that it would be without prejudice to Mrs Lam's and his interest and that the orders for sale be set aside or varied to take into account their interest.

These applications were opposed by Win Source and Winland (which was allowed to intervene pursuant to leave granted on 29 January 2003). Although they had been duly served, neither Mr Lam Chok Wai, Sino Billion nor Citi Honour appeared. At the conclusion of the hearing on 29 January 2003, I set aside the charging orders and the orders for sale obtained by Sino Billion and Citi Honour and gave directions regarding consequential relief. These are my reasons.

Locus of Win Source and Winland

11. It is the primary case of Mr CL Lam and Madam Choi that the default judgments and charging orders obtained in the actions and the subsequent orders for sale were all obtained by collusion and fraud on the part of Mr CW Lam, Sino Billion and Citi Honour. The purported loans Sino Billion and Citi Honour sued upon were sham transactions. The parties had filed various affirmations concerning these factual matters. But Mr Yu, SC, counsel for Mr CL Lam and Mr Man, counsel for Madam Choi, took a preliminary point, which was quite independent of these factual issues. They contended that Win Source had simply failed to acquire any interest in the Properties. Winland, as a mortgagee claiming through Win Source, likewise did not have any interest in the Properties. Accordingly, neither Win Source nor Winland had any locus to oppose the applications. Mr Smith, SC, counsel for Win Source and Ms Ho, counsel for Winland, naturally disagreed. Their submissions brought me to a closer examination of the effect of a charging order and the means of enforcement under the statutes.

Enforcing a charging order

12. Section 20B of the High Court Ordinance, Cap.4 provides that a charge imposed by a charging order shall have the like effect and shall be enforceable in the same manner as an equitable charge created by the debtor by writing under his hand. A charging order on an interest in land, unlike a mortgage, does not confer any proprietary right or title in the land. There is, I believe, a wealth of authority to support this proposition. For present purposes, it is sufficient to refer to the following :

(1) A mortgage is a conveyance of property subject to a right to redemption, whereas a charge conveys nothing and merely gives the chargee certain rights over the property as security for the loan : Megarry & Wade, The Law of Real Property, 6th edn, para.19-005 at p.1170.

(2) An equitable charge is created by appropriating specific property to the discharge of some debt or other obligation without there being any change in ownership either at law at in equity : Megarry & Wade, para.19-040 at p.1183.

(3) "The difference between [a mortgage and a charge] is that a mortgage involves a transfer of legal or equitable ownership to the creditor, whereas an equitable charge does not" : Re Cosslett (Contractors) Ltd [1998] Ch 495, per Millet LJ (as he then was) at p.508G.

(4) "[An equitable charge] confers on the chargee rights to apply to the court for an order for sale or for the appointment or a receiver, but no right to foreclose (so as to make the property as own) or take possession" : Carreras Rothmans Ltd v. Freeman Mathews Treasure Ltd [1985] 1 Ch 207, per Peter Gibson J at p.227D.

13. When applying for an order for sale for the purpose of enforcing a charging order, the judgment creditor may also apply for :

(1) An order under section 25A of the High Court Ordinance directing the judgment debtor to execute the necessary conveyance and in case of non-compliance, ordering that the conveyance shall be executed by such person as the court may nominate for that purpose.

(2) An order under section 48 of the Trustee Ordinance, Cap.29 vesting the land in question or such estate or interest as the court thinks fit in the land in the purchaser or mortgagee or in any other person. (If the judgment debtor's interest in the land is vested in the judgment creditor, the latter can then proceed to convey the same to the ultimate purchaser.)

(3) An order under section 51 of the Trustee Ordinance in cases where a vesting order can be made, appointing a person to convey the land.

I would add that according to my past experience as a High Court master, applications under section 25A of the High Court Ordinance are more frequent.

Effect of the order for sale

14. With the above in mind, I now turn to consider the charging orders and the orders for sale obtained by Sino Billion and Citi Honour. For present purposes, it is sufficient to discuss those obtained by Citi Honour only. The position regarding those obtained by Sino Billion is just the same. It is not in dispute that that the charging order did not confer on Citi Honour any title or interest in the Properties which was capable of being conveyed by it as vendor to Win Source as purchaser. Citi Honour had to obtain an order for sale and one of the three requisite orders referred to in paragraph 13 above in order to convey Mr CW Lam's interest to Win Source. The question is whether the order for sale was sufficient for such purposes. It is obvious and rightly conceded by Mr Smith and Ms Ho that no order was made under either section 25A of the High Court Ordinance or section 48 of the Trustee Ordinance. Mr Smith, however, contended that the order for sale did appoint Citi Honour to convey Mr CW Lam's interest in the Properties under section 51 of the Trustee Ordinance. With respect, I disagree. On its face, the order for sale merely committed the conduct of sale to Citi Honour. Such conduct normally referred to the administrative matters of the sale only. Had any appointment been intended under section 51, I see no reason why the same was not spelt out expressly in the order.

15. Reference was made to the affirmations filed in HCMP 428 of 2002 in support of Citi Honour's application for the order for sale, including that of Mr CW Lam's. I do not find that exercise useful. I have doubt if it was permissible to go to those affirmations to ascertain the true effect of the order for sale, which should in my view be determined by the terms of the order only. Even if that was permissible, I do not consider any assistance could be derived from the affirmations. The effect of the affirmations is this, Mr CW Lam (said to be living in the Mainland) was old and sick and he agreed to allow Citi Honour to effect the sale as vendor on his behalf. Citi Honour therefore applied to sell Mr CW Lam's interest in the Properties as vendor on his behalf. Mr Smith, echoed by Ms Ho, argued that the commission of the conduct of sale to Citi Honour by the order, in light of these affirmations, meant that Citi Honour was appointed to convey on behalf of Mr Lam. I disagree. If that were the true effect, I again see no reason why the order did not spell it out in clear terms by express reference to section 51 of the Trustee Ordinance. Making an application by Citi Honour to enable it to act as vendor for Mr Lam to convey his interest is one thing. Making an order by the court to that effect is quite another. I do not subscribe to the submissions that construing the order in the way as suggested by Mr Smith and Ms Ho is the only way to give true effect to it. As rightly pointed out by Mr Yu, after the sale and purchase agreement was signed (assuming that such an agreement was valid and effective), another application for a vesting order under section 48 of the Trustee Ordinance to vest Mr CW Lam's interest in the purchaser could be made to complete the conveyance.

16. Mr Smith then sought to rely on section 52 of the Conveyancing & Property Ordinance, Cap.219 which provides as follows :

"Where a sale is made under a mortgage, the title of the purchaser shall not be affected by the fact that no case had arisen to authorize the sale or that due notice was not given or that the power was otherwise improperly or irregularly exercised; but any person who suffers loss through an unauthorized, improper or irregular exercise of the power of sale shall have a remedy in damages against the person exercising the power."

Under section 2 of the same Ordinance, "mortgage" means a security over land for securing money or money's worth.

17. Mr Smith submitted that a charging order is security over land for securing money or money's worth, and the sale to Win Source was made pursuant to such security. In the circumstances, it was a sale under a mortgage within the meaning of section 52. Thus, Win Source, as the purchaser, obtained a good title unaffected by any matters that might otherwise impeach its title. Win Source will be protected unless it had notice of such an irregularity, impropriety or fraud as would vitital the sale : Cousins on the Law of Mortgages (2nd ed.) at para.16-65, Lord Waring v. London & Manchester Assurance [1935] Ch 310. Mr Smith argued that as Win Source was not aware of any impropriety, it is therefore protected by section 52.

18. I am unable to accept Mr Smith's submissions. As noted, the distinction between a mortgage and an equitable charge is well-established. I do not consider the definition of the word "mortgage" in the Conveyancing and Property Ordinance intends to remove the distinction, which is the effect of Mr Smith's submission. Further, the sale here was made purportedly under the order for sale, and not pursuant to the charging order or the charge created thereunder. Any suggestion that the order for sale is a mortgage within the meaning of the Ordinance is untenable. In my view, section 52 does not apply.

19. For these reasons, I ruled that under the order for sale, Citi Honour did not have the power to convey Mr CW Lam's interest in the Properties to Win Source, who accordingly acquired no interest pursuant to the purported assignment. Winland, which claimed through Win Source, did not have any interest in the Properties either. They thus did not have locus to oppose the substantive applications before me.

20. To those applications, I now turn.

Setting aside

21. As noted, Mr CW Lam, Citi Honour and Sino Billion were all absent at the hearings before me. There was no evidence to contradict the evidence adduced on behalf of Mr CL Lam and Madam Choi. I do not propose to set out their evidence in detail. Suffice it to say that I had carefully considered their evidence and counsel's submissions in this regard. The evidence was indeed overwhelming. It clearly showed and I accepted that Mrs Lam did have one-third beneficial interest in the Properties; that Mr CW Lam acknowledged her interest in previous proceedings commenced by him; that the purported loans to Mr CW Lam by Sino Billion and Citi Honour and their claims in the actions were bogus; that the default judgments, the charging orders and the orders for sale were all obtained by collusion and fraud by Mr CW Lam, Citi Honour and Sino Billion to defeat Madam Choi's claim against Mr CW Lam to enforce the maintenance order and to deny Mrs Lam's interest in the Properties. I accordingly allowed the applications of Madam Choi and Mr CL Lam and set aside the charging orders under Order 50, rule 7 and the orders for sale in the exercise of my inherent jurisdiction. I also gave directions regarding the consequential relief to remove from the Land Registry certain registrations arising from my decision.