CITIC KA WAH BANK LTD v. FUNG KAM FEI AND ANOTHER

HCMP 853/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 853 OF 2006

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D E C I S I O N

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Introduction

1.  This is the application of the first defendant (“D1”) for extension of time to appeal against the order of the Registrar dated 12 February 2007 (and to set aside the part of that order (specified in para. 12 below) if time is extended).

2.  The plaintiff bank’s conduct in this action since the date of Registrar’s order has been, to put it as mildly as I can, remarkable.

3.  To better understand the above statement, the background leading to this decision needs to be gone into briefly.

Background

4.  The plaintiff was the mortgagee and D1 the mortgagor.  The mortgaged property was several residential units in Pilkem Court, Jordan, Kowloon (“the suit property”).

5.  There was default in the repayment of the mortgage loan in July 2001.  The plaintiff therefore commenced this action seeking payment of all money due to it.  It also sought an order that:-

“	[in] default of payment of such sum as may be adjudged to be due under the said Mortgage, delivery to the Plaintiff by [D1] of possession of [the suit property]” (emphasis supplied) (para. 2, prayer for relief).

6.  It turned out the suit property was let out to some tenants.  They were in turn joined as defendants herein.

7.  The relevant parts of the Registrar’s order, the subject-matter of this application, read in short:-

(a)	the plaintiff do recover $4,085,368.61 secured by the said mortgage together with interest on $3,934,408.27 at judgment rate from 1 February 2007 to payment;
(b)	the defendants do within 28 days after service of the order deliver to the plaintiff vacant possession of the suit property;
(c)	the tenant defendants do pay the plaintiff $175,000 for their occupation of the suit property;
(d)	upon the defendants paying to the plaintiff “… the money hereby ordered to be paid and all other moneys (if any) secured to the Plaintiff by the said Mortgage … ” the plaintiff do redeliver to D1 possession of the suit property.

8.  The plaintiff’s claim herein, particularized in the supporting affirmation, also sought the payment of additional interest since the date of default (“default interest”).  The transcript of the hearing before the Registrar shows that the plaintiff’s solicitors agreed to forego the claim for default interest when he sought the above order from the Registrar.

9.  In view of the prayer for relief (quoted in para. 5 above) and what transpired at the hearing before the Registrar, there is no valid basis for the emphasised passage to be added into the part of the Registrar’s order set out in para. 7(d) above.  I understand subsequently that that addition apparently originated from a standard form used by the High Court Registry for approving orders.

10.  Further, it is undisputed:-

(1)	between the date of the Registrar’s order and March 2007, the plaintiff received $210,000 in total from the tenant defendants by way of rent/mesne profits;
(2)	on about 2 April 2007 the judgment debt was fully repaid by D1 (without taking into account the said $210,000).

According to D1’s affirmation dated 30 November 2007, the amount he repaid was $4,162,376.67 (inclusive of interest).  Hence, the amount of interest paid for the period between 1 February and about 2 April 2007 (about 2 months) was $77,008.06 (4,162,376.67 – 4,085,368.61).

11.  Because of what happened subsequent to the Registrar’s order (para. 10(1) and (2) above), from the layman’s point of view, it is hardly surprising D1 sought repayment of $210,000 from the plaintiff since April 2007.

12.  When the plaintiff refused repayment, D1 took out this application which, in short, seeks to set aside the part of the Registrar’s order summarised in para. 7(c) above.

13.  At the hearing of this application on 15 May 2007, the plaintiff still refused to repay the sum, contending the Registrar’s order had erred in not allowing the full sum claimed by it ($4,477,368.41).  As stated earlier, the lesser sum specified in the Registrar’s order resulted from the exclusion of default interest from the plaintiff’s claim.

14.  Despite its earlier indication to forego default interest (see para. 8 above) (of which the plaintiff was again reminded during the hearing on 15 May 2007), the plaintiff insisted on obtaining an adjournment to consider whether to bring an appeal against the exclusion of default interest in the Registrar’s order out of time.  At the end, an adjournment was granted.

15.  When the hearing resumed on 5 December 2007, to everyone’s surprise, the plaintiff indicated it would not lodge any appeal out of time.  But it sought another adjournment for the purpose of preparing an account of what it claims to be a set-off of the debt owed by D1 against the sum of $210,000.  No satisfactory explanation has been given why that was not done during the period from May to December.  The plaintiff merely claimed there was a misunderstanding of the nature of the 5 December hearing.

16.  When further pressed, the plaintiff disclosed for the first time what in effect was a defence to D1’s claim.

17.  I reserved the decision as to whether to grant the adjournment.  The plaintiff was also informed (and it expressed no objection) that, if the application is refused, D1’s application may be determined without hearing the parties further.  These are now dealt with in this Decision.

The Plaintiff’s Case

18.  On the law, the plaintiff relies on the House of Lords’ decision in Economic Life Assurance Society v. Usborne and Others [1902] AC147.

19.  The facts in the Usborne case were these.  A property was subject to two mortgages, one with interest at 4.5%, and the other with interest at 5%.  The mortgages were transferred to the appellants in consideration for a loan.  The mortgagor executed another deed in the appellants’ favour with a proviso for redemption:-

“	[to pay] the [loan] with interest for the same after the rate at the times and in manner hereinafter covenanted”.

The interest rate was later covenanted to be at 5%.

20.  A dispute arose among various mortgagees, including the appellant, as regards (among other things) priority to distribution.  The lower courts decided the appellants were entitled to interest at 4%.  Their appeal against the decision was allowed by the House of Lords.

21.  Earl of Halsbury LC said in Usborne:-

“	… it appears to me that there is a confusion of thought which … has pervaded the whole of the argument [of counsel].
	…
	… it seems to me that Fry L.J. in the case of Ex parte Fewings (1883) 25 Ch D 338, 355 … has with great precision and accuracy put the whole point: ‘When there is a covenant for the payment of a principal sum, and a judgment has been obtained upon the covenant for that sum, it is plain that the covenant is merged in the judgment, and, if there is a covenant to pay interest which is merely incidental to the covenant to pay the principal debt, that covenant also is merged in a judgment on the covenant to pay the principal debt.  Of course a covenant to pay interest may be so expressed as not to merge in a judgment for the principal; for instance, if it was a covenant to pay interest so long as any part of the principal should remain due either on the covenant or on a judgment.’
	… it seems to me that the question is a simple one : it is a question of the construction of this particular deed and the remedy that is now being enforced … ” (emphasis supplied) (pp.149-150).

22.  Lord Davey also thought that it was a matter of construction.  He said in Usborne:-

“	… the question had to be considered whether the covenant for the payment of the interest was an independent covenant or a covenant which was merely ancillary to the payment of the principal money, and the learned judge [in Popple v. Sylvester 22 Ch D 98] … came to the conclusion that it was an independent covenant which was not merged in or extinguished by the judgment obtained upon the principal covenant. … the form of the covenant was to pay interest as long as anything was due upon the security.
	…
	Now, … the question here, therefore, is what is the construction of these deeds and, in my opinion … that is the only question in this case.
	…
	… when the new arrangement was made with [the appellants] in 1858 they … took … a fresh security … but another deed was executed … That deed contains a covenant for the payment of principal and interest on a certain day, and for the payment of subsequent interest if the principal is not paid upon that day, and there is a proviso for redemption …
	… according to the true construction of the proviso I have read it is not a security to secure the performance of the covenant, but it entitles the mortgagees to sit upon their deeds, as we used to say, or to hold their security until they have been paid every penny … together with interest measured by what is expressed in the covenant. … That is a very different thing from a deed to secure the performance of the covenant.  It is not a deed of that character, but a deed which entitles them to retain their security until they are fully paid … ” (emphasis supplied) (pp. 152-154).

23.  On the facts, the plaintiff contends that the mortgage deed in this action gives it the same entitlement.  Reliance is placed on the following provisions therein:-

“	‘interest’ means interest at such rate and upon such terms as shall be determined by [the plaintiff] from time to time and payable as well after as before any demand or judgment” (emphasis supplied) (clause 1(A));
“	‘Secured Sums’ means and includes all principal sums outstanding and owing by … [D1] to [the plaintiff] and all interest thereon and all other monies or liabilities covenanted by … [D1] with [the plaintiff] to be paid or discharged under the provisions of clause 2 hereof … ” (emphasis supplied) (clause 1(A));
“	In consideration of [the plaintiff] making or continuing advances or otherwise providing any banking accommodation whatsoever or granting time to the Borrower … [D1] hereby jointly and severally covenant with [the plaintiff] that .. they will pay or discharge on demand by [the plaintiff] to … [D1] … the following …
	… all present and future indebtedness …
	… all costs, charges and expenses owed to or incurred … by [the plaintiff] in relation to this Mortgage …
	together with interest, commission and bank and discount charges on all of the foregoing” (clause 2);
“	By way of security for the Secured Sums and for the due fulfilment by … [D1] of the covenants herein contained [D1] as beneficial owner …
	HEREBY CHARGES [the suit property] to [the plaintiff] by way of legal charge … ” (emphasis supplied) (clause 3(a));
“	If … [D1] shall on demand as aforesaid have paid to [the plaintiff] the Secured Sums and shall have observed and performed all the covenants … [the plaintiff] shall at the request and cost of [D1] execute a receipt or otherwise discharge this Mortgage” (emphasis supplied) (clause 4);
“	… for the avoidance of doubt it is hereby declared that the Secured Sums shall continue to bear interest from the date upon which the security hereby constituted becomes enforceable [on the happening of the prescribed events] until fully repaid … ” (emphasis supplied) (clause 10).

Is the Plaintiff Entitled to Retain the Security Until Payment ?

24.  It is trite law (which is undisputed by the plaintiff) that:-

“

[equity] does not allow a mortgagee who as such goes into possession of the mortgaged property to any advantage beyond securing payment of the sums due under the mortgage. … The mortgagee is therefore bound to account to the mortgagor, both for the rent and profits actually received … ”: Fisher & Lightwood’s Law of Mortgage (2002) 11th Ed., para. 19.65.

25.  The plaintiff’s argument can only prevail if it is still open to the plaintiff to ask D1 to pay default interest, although the rate of interest has already been specified in the Registrar’s order.

26.  In other words, as was stated in the decision in Usborne, the interest provisions in the mortgage deed must be

“	… expressed as not to merge … ”,

with the Registrar’s order, and that they would entitle the plaintiff

“	… to sit upon [the deed], as we used to say, or to hold their security until they have been paid every penny … together with interest measured by what is expressed in the covenant … ”

as a matter of construction.

27.  I consider the plaintiff’s argument to have no merits.

28.  A perusal of the clauses quoted in para. 23 above shows that D1’s obligation to pay interest was “merely incidental to the covenant to pay the principal debt”.  The following wordings are important:-

(a)	in clause 2, D1’s obligation to repay states: “[D1] … covenant with [the plaintiff to] pay or discharge on demand … all present and future indebtedness … costs, charges and expenses … together with interest … ” (emphasis supplied).  The wording shows that interest is not a self-standing item of debt;
(b)	because clause 1(A) (in relation to the definitions of “interest” and “Secured Sums”) is only a definition provision, it cannot advance the plaintiff’s advance.  In this connection, clause 1(a) stipulates that “Secured Sums” should mean “… all … sums … and all interest thereon … covenanted … to be paid or discharged under … clause 2 hereof … ”;
(c)	the reasoning in (b) above applies equally to the other clauses relied on by the plaintiff.  In particular, clause 3(a) provides that the suit property was to be a security “for the due fulfilment by … [D1] of the covenants herein contained”.

29.  The wordings of the above clauses are different from that of the proviso for redemption in Usborne, which the House of Lords found to amount to:-

“	… a covenant to pay interest … expressed as not to merge in a judgment for the principal … ”;

or

“	… a covenant to pay interest so long as any part of the principal should remain due either on the covenant or on a judgment.”;

or

“	[the proviso was] … not a security to secure the performance of the covenant, but it entitles the mortgages to sit upon their deeds … ”.

The Plaintiff’s Rights under the Registrar’s Order

30.  Even if (contrary to the above conclusion) the true construction of the mortgage document is that there was to be no merger of the obligation to pay interest with the Registrar’s order, because of the relief sought by the plaintiff (which resulted in the making of the Registrar’s order) (see para. 5 above), and because of the plaintiff’s indication to the Registrar to forego default interest (see para. 8 above), the matter should be regarded as res judicata.

31.  It was said in Dunlop: Creditor-Debtor Law in Canada (1994) 2^nd Ed.:-

“

There are a number of English and Canadian cases which can be best explained on the assumption that the cause of action survives the judgment for some purposes.  For example, it is clear law that where a creditor takes collateral security and then sues to judgment on the principal debt the creditor can, if the judgment be unsatisfied, proceed to realise on the collateral security … ” (the Usborne decision was cited in support of the last proposition) (p. 202).

But the authors also said:-

“	If the creditor has gone to judgment on the debt without claiming all or part of the agreed interest, that claim will normally merge in the judgment” (emphasis supplied) (P. 205).

The authorities cited in support are McKay v. Fee (1860) 20 UCQB 268 and Calder v. International Harvester Co. [1918] 2 WWR 905.

32.  The decision in McKay was made by the Canadian Queen’s Bench Court by way of special case stated.  The plaintiff sued the defendant (the maker of two promissory notes) and another person in a joint claim.  Both have individually given an undertaking to pay interest at 2.5% per month (or 30% per annum).  The trial judge ruled the undertakings to be inadmissible, and judgment was entered with interest thereon at 6% per annum.

33.  The dispute was whether the undertakings have merged with the judgment.  The court opined that they have for the following reason:-

“	… The learned judge at the trial decided that question at the time, and the plaintiff acquiesced, and took his verdict for the interest at six per cent., and has entered judgment upon it.  We think after this he can sue for no more interest on those notes … ”.

34.  The decision in Calder was that of the Saskatchewan King’s Bench Court.  A mortgagee sued and, at the end of the mortgage action, obtained judgment with interest at 7% per annum only.  In dismissing a subsequent action, which relied on a purported extension agreement which provided for an increased interest rate at 10% per annum, the court said:-

“

I am of the opinion, however, that the claim … is precluded by the findings in the mortgage action, and the amount due … must be deemed to be finally settled in the mortgage action.  Was it not a matter which existed at the time of the giving of the judgment in the mortgage action and which the party had an opportunity of bringing before the Court? … I therefore conclude that the mortgagees had such opportunity and the matter is therefore res judicata” (p. 908).

35.  What happened earlier in this action is similar to what happened in McKay and Calder.

36.  First, as stated above, the Registrar’s order was made after the plaintiff has agreed to forego default interest.

37.  Further, the Registrar’s order has specified both the amount of debt and the rate of interest (see para. 7(a) above).

38.  The only part of the Registrar’s order which arguably may entitle the plaintiff to additional sum(s) is that referred to in para. 7(d) and 9 above.  But, as I pointed out in para. 9 above, that part of the Registrar’s order could not have been what the court truly intended.  It should therefore be removed therefrom pursuant to RHC Ord. 20 r. 11 or the court’s inherent jurisdiction (which is exercisable by me if I should decide to extend the time for appeal.  An appeal from the master is by way of re-hearing.)

39.  I should perhaps add that, if for any reason the plaintiff should still be able to contend that that part of the Registrar’s order was correctly made, it is quite arguable I can direct the taking of an account to find out whether any other sum(s) are due under the mortgage.  It will be within my jurisdiction to order any sum found due to be paid by either party (see, for example, Ord. 43 rr. 2 and 3).  Because the plaintiff does not dispute the fact regarding the receipt of $210,000, and because of the conclusions reached herein, that sum should be paid to D1.

D1’s Delay

40.  The plaintiff also opposes the application for extension of time, contending that there has been undue delay.  The Registrar’s order was made on 12 February 2007.  This application was taken out on 27 April 2007, about 2-1/2 months later.

41.  The special feature in this application is that the ground giving rise to D1’s grievance only arose after the Registrar’s order; namely, the judgment debt was only repaid on about 2 April 2007.

42.  On 2 April 2007, D1 filed an affirmation setting out the matters referred to in para. 10(1) and (2) above.  The same was in essence repeated in his affirmation dated 26 April 2007 (one day before the taking out of this application).

43.  In these circumstances, I consider any delay to be technical in nature.  The plaintiff does not assert irreparable prejudice and I cannot find any.  I will therefore exercise my discretion and extend the time to enable D1 to take out the appeal.

Conclusion

44.  By reason of the above matters, I will allow the appeal to the extent that the part of the Registrar’s order set out in para. 7(c) above be set aside.  To avoid any doubt, this is intended to show that I do not consider the plaintiff should be entitled to retain the sum of $210,000 it earlier received from the tenant defendants.

45.  As stated in para. 38 above, the reference to “and all other moneys (if any) secured to the Plaintiff by the said Mortgage” should be deleted.

Costs Order Nisi

46.  There is no apparent reason to depart from the usual rule that costs should follow the event.  There will accordingly be a costs order nisi pursuant to Ord 42 r 5B(6) that the costs of this application (including any reserved costs) be paid by the plaintiff to D1 to be taxed if not agreed.