THE HONG KONG CHINESE BANK LTD. v. SKY PHONE LTD.

HCMP1012/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO.1012 OF 2000

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J U D G M E N T

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1. This case concerns the priority of mortgages of Flat B, 1/F, Block 15 Richwood Park, Tai Po, and a related car parking space ("the Property").

2. The registered owner of the Property is Timford International Properties Ltd ("Timford"). There is a related company, Interbuild Construction Co. Ltd ("Interbuild"). They have common directors and shareholders, Messrs Lee Kam On, Alan and Lee King Cheung.

3. On 9 April 1995 Timford executed a first legal charge over the Property in favour of the Dah Sing Bank to secure banking facilities for itself and Interbuild. This mortgage was registered on 20 November 1995.

4. In March 1997 Timford wanted to re-mortgage the Property to the plaintiff. Solicitors acting for the plaintiff, Messrs K.B. Chau & Co., were instructed on 20 March 1997 to prepare a first legal charge.

5. On 21 April 1997, Timford executed a first legal charge over the Property in favour of the plaintiff. The plaintiff advanced $5,500,000 and this was paid over to the Dah Sing Bank by the solicitors. The Dah Sing Bank mortgage was discharged. The new mortgage in favour of the plaintiffs was registered on 23 May 1997.

6. In the meantime, and unknown to the plaintiff, their solicitors, or the Dah Sing Bank, Timford executed a second legal charge in favour of the defendant on 10 April 1997 to secure a loan of $1,500,000. It recited the Dah Sing Bank mortgage as the first mortgage. The defendant knew nothing of the arrangements for re-mortgage to the plaintiff. This second mortgage was registered on 21 April 1997.

7. The defendant discovered the existence of the new first mortgage in July 1997 but on legal advice took no action at that stage. Ultimately, Timford defaulted on payment to the defendant in November 1998. Some payments had been made but the defendant says that the balance of principal outstanding as at 31 March 2000 was $1,000,000. Interest at the horrendous, if legal rate of 5% per month was payable on the loan, and the defendant says that as at 31 March 2000 the outstanding interest amounted to $800,000 and still continues to run against the outstanding principal at $1,612.90 per day. The total at 26 December 2000 is calculated at $2.25 million.

8. Against this background the plaintiff and the defendant seek declarations as to the priorities of their respective mortgages.

9. Put simply, the plaintiff's case is that by paying off the mortgage in favour of Dah Sing Bank, the plaintiff became subrogated to it. The plaintiff stood in the shoes of the Dah Sing Bank and in equity took over the interest of the Dah Sing Bank secured by its mortgage. The defendant's case is that priority is governed by statute and under section 3 of the Land Registration Ordinance, Cap 128, its second mortgage, whose effective date of registration was 10 April 1997 has priority over the plaintiff's first mortgage which did not even come into being until 21 April, quite apart from the fact that it was not registered until 23 May 1997.

10. So what is concerned here is the conflict between common law and equitable principles, and the statutory provisions of the Land Registration Ordinance.

11. The plaintiff says that a person who advances money to discharge a mortgage and whose money is so applied becomes an equitable assignee of the mortgage and is entitled to have it kept alive for his benefit. There is a plethora of authority on this but Mr Merry relies in particular on the case of Ghana Commercial Bank v. Chandiram [1960] AC 733, which was followed by Hunter J in Financial and Investment Services for Asia Ltd v. Baik Wha International Trading Co. Ltd [1985] HKLR 103.

12. The plaintiff also says that without subrogation, the defendant would be unjustly enriched in that it would be advanced from the position of a second mortgagee to that of a first mortgagee, without giving any consideration for the discharge of Dah Sing Bank's prior charge and the consequent promotion of its charge. Mr Merry relies in support of the doctrine of subrogation as a remedy for unjust enrichment on Boscawen v. Bajwa [1996] 1 WLR 328 and Banque Financière de la Cité v. Parc (Battersea) Ltd (No. 4) [1999] 1 AC 221.

13. I do not think it is necessary to look closely at these cases. There seems to be little argument that in equity, by paying off the debt owed to the Dah Sing Bank, the plaintiff would be subrogated to the rights of the Dah Sing Bank under its mortgage. I am satisfied that it was so subrogated. The question is whether the plaintiff's equitable rights can stand in the face of the provisions of section 3 of the Land Registration Ordinance.

14. There are two lines of authority on this in Hong Kong. That relied on by Mr Lam for the defendant is to be found in Consolidated Sales Ltd v. Lynn & Anor [1970] HKLR 222 and Kai Sun Investment Ltd v. Dah Sing Bank Ltd [1986] HKLR 850. That relied on by Mr Merry for the plaintiff is to be found in Financial and Investment Services for Asia Ltd v. Baik Wha International Trading Co. Ltd and Ng Kam Ha v. Vincent Sina Traders (HK) Ltd [1987] 2 HKC 517.

15. Consolidated Sales was concerned with a charging order. It was registered against a property on 24 February 1970. The property had been sold to the claimant for valuable consideration on 10 January 1970. The assignment was not registered until 3rd March 1970. Briggs J held that the purpose of the Land Registration Ordinance was to make priority of registration according to the Ordinance on the test of ownership. Therefore it mattered not that the land which was the subject of the charging order was no longer the property of the judgment debtor; and the purchaser took the land subject to the charging order which was registered prior to the assignment.

16. This was followed in Kai Sun Investment Ltd, another charging order case. It is not necessary to go into the facts. Mantell J held at page 856:

"In my judgment, it is not necessary to consider the effect of registration upon ownership of land or the rights of ownership to land, save in so far as the particular circumstances contemplated by s. 3(1) have arisen or are concerned. It may be that Mr Justice Briggs went further than was necessary or justified in stating that registration was a determining factor of ownership. For my part, I am content to state that where there are two or more conflicting interests in land, the first to be registered takes priority regardless of the date of acquisition. Otherwise, the purpose of the Ordinance as set out in the preamble would be defeated. To my mind it makes no difference that in this case the divesting instrument is a cancellation agreement rather than a sale agreement. It ranks after the charging order.

17. In Financial and Investment Services for Asia Ltd Hunter J (as he then was) considered, but did not follow the two above-mentioned cases. In that case a mortgagor arranged to change bankers from another bank to the plaintiff which was prepared to advance money to discharge the original mortgage and take a fresh mortgage. The funds were put up on 23 February 1982. The reassignment which recorded the discharge of the original mortgage and a new mortgage to the plaintiff was completed on 13 March and registered on 17 March 1982. The new mortgage was registered on 8 April 1982. However on 1 March, the defendants had obtained a charging order nisi which was registered on 2 March 1982.

18. The issue was whether the plaintiffs could claim priority from 23 February as equitable assignees of the original mortgage, or whether the execution and registration of the deed of reassignment operated to elevate the defendants from second to first mortgagees and leave the plaintiffs tied with regard to priority to 17 March, the date of its registration, and thus postponed to the defendants. Hunter J having found, following the Ghana Bank that the plaintiffs had become entitled in equity to claim the same priority as the first banker, went on to consider the effect of the Ordinance. He held that section 3(1) did no more than provide for priority between valid documents of the defined classes which are registrable and registered. It did not exclude inquiry into the underlying transaction which was the subject matter of the registration. Thus the registration of the reassignment and of the mortgage to the plaintiffs was not decisive to postpone the plaintiffs to the defendants, since registration was not the test of ownership but constituted prima facie evidence only.

19. In Ng Kam Ha, Mayo J (as he then was) held that the land registration system in Hong Kong was registration of title deeds rather than registration of title. There was no duty or obligation imposed on a party to register a transaction. Registration affected the priority of the transaction, not its validity, subject to the provisions of section 3(2).

20. Mr Tam for the defendants says that common law or equitable principles cannot take precedence over statute. He further argues that Financial Services should be distinguished because :

1. Unlike the position there, where money was paid before the charging order was registered, here the defendant's second mortgage was already in existence and registered before the plaintiff put up the money to discharge the original mortgage to Dah Sing Bank;

2. The defendant is a bona fide mortgagee for value, so section 3(2) applies; and

3. There is no suggestion that the defendant's mortgage is not valid.

21. Mr Merry, however, relies on the registration of the Dah Sing Bank mortgage to which the plaintiff became subrogated to give it priority through equity. Section 3(1) only applies to registrable interests; the plaintiff's equity is unregistrable.

22. On the question of whether, as Briggs J held, the purpose of the Land Registration Ordinance was to make priority of registration according to the Ordinance and the test of ownership, I would respectfully say that this is at best difficult to accept. The system we have in Hong Kong is one of registration, not of title but of documents of title. In fact it is the memorials of those documents that are registered. What appears in the memorial is not always conclusive as to the effect of the document itself. The document itself is only evidence of ownership. In other words the registration is quite far removed from the legal effects of the underlying transaction. It is therefore difficult to see how registration could finally decide ownership and exclude inquiry into the underlying transaction. I would therefore respectfully follow the reasoning of Hunter J and apply it to this case.

23. In this case, the plaintiff became subrogated to the rights of the Dah Sing Bank on 21 April. It is true that by this time there was a valid second mortgage in favour of the defendant, but I cannot see that that makes a difference because what the plaintiff was taking over was the rights, already registered of the Dah Sing Bank.

24. Perhaps another way to look at it would be to say that the rights which the plaintiffs bought on 21 April included the rights of the Dah Sing Bank as first mortgagee against the defendant as second mortgagee. The second mortgage includes a declaration that on the exercise of power of sale, the second mortgagee will hold the proceeds on trust first for expenses and then for satisfaction of the amount owing to the first mortgagee. I mention this in passing; it was not specifically argued and I do not want to become involved in abstruse considerations which have not been argued. But it does seem difficult to me to imagine that the duty on the second mortgagee as trustee for the first mortgagee could vanish into thin air.

25. It is of course true that the defendants were bona fide mortgagees for value. Section 3(2) does not, however, come into the picture. On 10 April they were registered and ranked in priority behind the Dah Sing Bank. The plaintiff must be taken to have bought the priority of Dah Sing Bank along with the other rights.

26. The consideration for which the defendants gave value was of course a charge which could only be satisfied after the first mortgagee's charge was satisfied. Put in simple terms, they bought a second mortgage; they did not buy a first mortgage. If they are to convert that into a first mortgage, they will be unjustly enriched. I cannot see that the effect of the statute can be to justify unjust enrichment. That would be unconscionable.

27. For all these reasons, I find that the plaintiff is entitled to a declaration that it is entitled to the same priority for the sum of $5,500,000 paid by the plaintiff on 21 April 1997 to the Dah Sing Bank in discharge of the mortgage by Timford dated 9 October 1995, as did the Dah Sing Bank. There will be declarations as sought by the plaintiff. The defendant's points of counterclaim are dismissed. Costs nisi be to the plaintiff, to be taxed if not agreed.