XCHRX MEGALINK HOLDINGS LTD. v. WHOLE FORTUNE CO. LTD. and Others

HCMP4482/97

IN THE HIGH COURT OF THE

HONG KONG SPEICAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO.4482 OF 1997

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J U D G M E N T

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Background

1. Wong Tin Man and Tsoi Lai Ming, the 4th Claimant herein, were at all material times the registered owners of a property known as Flat C on 15th Floor, Continental Mansion, 294 King's Road, Hong Kong. On three different dates in 1995 they mortgaged the said property to three different mortgagees. The third mortgagee is the Applicant in the present proceedings.

2. On 14th February 1996, the registered owners signed an Agreement for Sale and Purchase with the 2nd Claimant to sell the said property to the 2nd Claimant for $2.5 million with the completion date agreed as 14th May 1996. Pursuant to the Agreement for Sale and Purchase, the 2nd Claimant paid $900,000 to the 4th Claimant. Another Sale and Purchase Agreement was signed in June 1996 with the 3rd Claimant.

3. On 7th June 1996, the 1st Claimant obtained judgment for $400,000 against Wong Tin Man, one of the registered owners and one of the 4th Claimant. On 12th August 1996, a Charging Order nisi was obtained by the 1st Claimant against the said property and this Charging Order was registered on 19th August 1996. The Charging Order was made absolute on 3rd October 1996 and registered on 24th October 1996.

4. The Agreement for Sale and Purchase in favour of the 2nd Claimant was registered on 7th June 1996. A writ of summons in the High Court was issued by the 2nd Claimant against the 4th Claimant/registered owners on 11th September 1996 after the registered owners failed to convey the property to the 2nd Claimant. The writ of summons was for specific performance of the Agreement for Sale and Purchase. After service of the writ, the 4th Claimant/registered owners, through their Attorney in the Philippines, executed a Deed of Assignment dated 5th December 1996 in favour of the 2nd Claimant. This Assignment was registered on 3rd January 1997. However, upon execution of the Assignment, the 2nd Claimant did not pay to the registered owners the balance of the purchase price, namely $1.6 million.

5. On the date of the Assignment, the said property was still subject to the three mortgages and on 24th October 1997, the 1st mortgagee exercised its power of sale under the mortgage and sold the said property for $3.95 million. After deducting all the sums owing to the three mortgagees and the costs and expenses of the sale, there remained a balance of $317,673.97. The 3rd mortgagee held this money and because of the possible conflicting claims between the Claimants, took out interpleader proceedings for the Court to decide to whom the balance of the proceeds of sale should be paid.

The Appeal

6. On 3rd February 1998, the matter came before Master Kwan for hearing. The 3rd and 4th Claimants did not appear at the hearing of the application. The dispute before the Master was between the 1st Claimant and the 2nd Claimant. After a hearing, Master Kwan ordered that the balance of the proceeds of sale should be paid to the 1st Claimant. The 2nd Claimant appealed against that Order and the matter came before me by way of an appeal against Master Kwan's Order.

7. On appeal, Mr Kenneth Chan, for the Appellant/2nd Claimant, submitted that on signing of the Agreement for Sale and Purchase in favour of his client, the equitable interest in the property passed to the 2nd Claimant. He submitted that because the vendor, on signing the Assignment, did not pass title to the purchaser, the purchaser had a lien in the property to the extent of the deposit paid, namely $900,000. The Assignment never purported to pass title to the purchaser because by that date, the three mortgages were still in existence. Mr Chan therefore rested his claim on the Agreement for Sale and Purchase which he submitted ranked before the Charging Order obtained by the 1st Claimant.

8. Mr Christopher Lam on behalf of the Respondent/1st Claimant submitted that the 2nd Claimant had to satisfy the Court that the Sale and Purchase Agreement was a bona fide sale and purchase agreement and that its interest was an enforceable one. He submitted that the 2nd Claimant had to satisfy the Court that her conduct had been beyond reproach. Mr Lam submitted that the 2nd Claimant did not have clean hands and that the Assignment to the 2nd Claimant was only a delivery on escrow pending payment and that the Assignment was another piece of evidence to show that the Sale and Purchase Agreement was just a loan agreement. He said that the purchaser should have asked for the three mortgages to be cleared before signing the Sale and Purchase Agreement. He submitted that the deposit which was paid by the 2nd Claimant, namely $900,000, was close to 40% of the purchase price and that this was an unusually high deposit for any genuine purchaser to be paying. He also drew my attention to Clauses 34, 35, 36 and 37 of the Sale and Purchase Agreement. These clauses were to the effect that if the Vendor could not complete by the completion date, 14th May 1996, the Purchaser agreed to extend that date by three months provided that the Vendor should refund half of the deposit to the Purchaser. However, if by the extended completion date, 14th August 1996, the Vendor returned the balance of the deposit in a sum of $450,000 to the Purchaser, the Vendor would have the right to rescind the sale and the Purchaser must accept and execute a cancellation agreement. Clause 36 was to the effect that if at any time before the completion date, the Vendor were to return the whole deposit to the Purchaser, then the Vendor would have the right to rescind the sale and also if at any time before the completion date the Vendor should sell the property at a price higher than $2.5 million, then the Vendor should instruct the firm of solicitors who acted for the Purchaser in the Sale and Purchase Agreement to act for the Vendor in the completion of the sale. Mr Lam submitted that in view of those provisions, the transaction in question was not a genuine sale but was no more than a loan agreement.

9. Mr Lam submitted that the Purchaser's lien was just one type of equitable lien and as an equitable right, it was subject to the rules of equity. He quoted para.560 of Halsbury's (Vol. 28 p.250) which said :

"A purchaser of land who has paid a deposit or money on account of the purchase price to the vendor and has then lawfully repudiated his contract has, in addition to a legal lien on any title deeds in his possession, an equitable lien on the vendor's interest in the land agreed to be sold for all sums paid by him under the contract on account of the purchase money, together with interest on it."

Mr Lam submitted that as the 2nd Claimant was not a real purchaser, she had no claim to a purchaser's lien. If the 2nd Claimant had no purchaser's lien, then she had no enforceable interest in the land and she was merely an unsecured creditor.

10. Mr Lam relied on para.751 of Volume 16 of Halsbury's to make the point that "he who comes into equity must come with clean hands". He submitted that if the 2nd Claimant was seeking to get some security for the loan, she should have executed a legal charge or a mortgage. He submitted that if the Agreement for Sale and Purchase was enforceable, the 2nd Claimant would have an edge over other creditors. He said that equity would examine closely to see if the plaintiff (the 2nd Claimant) has conducted himself to deserve the assistance of equity.

The Law

11. The 2nd Claimant relied on the case of Ho King Yim v. Lau King Mo [1980] HKLR 42. In that case, charging orders were made after registration of an agreement for sale and purchase but prior to the registration of the assignment. The Court of Appeal held that at the time of making the charging order, the vendor held the legal estate as trustee for the purchaser but still retained a limited beneficial interest in the property which was capable of being charged. The interest on which the charge originally fastened was an equitable interest peculiar to the vendor. That interest did not pass to the purchaser. By the time the assignment was completed, that interest had served its purpose and had gone out of existence. The registration of the charging order could not destroy the effect of the prior registered agreement and thus affect the purchaser's beneficial interest which the agreement had transferred. Where both a contract for sale and purchase of land and an assignment pursuant to that contract had been registered, no charge created after the date of the contract could rank prior to the interest of the purchaser. Huggins JA at p.45 said :

"... It was the agreement which in the first place transferred the substantial beneficial interest and that transfer was merely confirmed by the assignment. Such beneficial interest in the land as the vendor continued to enjoy pending completion was essentially temporary in character and could not exist in any one after completion. The registration of the charging order could not destroy the effect of the prior, registered Agreement and thus affect the purchaser's beneficial interest which the agreement had transferred."

12. Based on Ho King Yim (supra), what happened on 14th February 1996 when the 2nd Claimant signed the Agreement for Sale and Purchase with the registered owners/vendor was that the 2nd Claimant acquired an equitable interest in the property which was described by the Court of Appeal as a "substantial beneficial interest". That equitable interest acquired by the purchaser subsisted until the Assignment was executed when the Agreement for Sale and Purchase merged with the Assignment. Before the Assignment was executed, the vendor held the legal estate in the property as trustee for the purchaser. The equitable interest of the purchaser, which was acquired before the Charging Order was registered on 19th August 1996, would rank superior to the Charging Order and as the Court of Appeal held, "the registration of the charging order could not destroy the effect of the prior, registered agreement" and thus affect the purchaser's beneficial interest which the agreement (for sale and purchase) had transferred.

13. In para.751 of Halsbury's quoted above, it was said that a court of equity refuses relief to a plaintiff whose conduct in regard to the subject matter of the litigation has been improper. This was formally expressed by the maxim "he who has committed iniquity shall not have equity". Later it was said that the plaintiff in equity must come with perfect propriety of conduct, or with clean hands.

14. Mr Chan also relied on the case of Kai Sun Investments Ltd v. Dah Sing Bank Ltd [1983] 2 HKC 554 where it was held that where there were two or more conflicting interest in land, the first to be registered took priority regardless of the date of acquisition. Otherwise, the purpose of the Land Registration Ordinance would be defeated.

15. I do not agree with Counsel for the Respondent/1st Claimant that because the provisions in the Sale and Purchase Agreement are unusual, the Agreement must have been a loan agreement disguised as a Sale and Purchase Agreement. Apart from these unusual provisions, there is no evidence whatsoever that this was in fact a loan agreement as opposed to a real agreement to buy the property. The 2nd Claimant, at the time she signed the Sale and Purchase Agreement, might have been aware that there were three pre-existing mortgages in favour of three different mortgagees. The 2nd Claimant's solicitors in a letter written to the solicitors for the Applicant said that they had asked solicitors for the mortgagees what the redemption figures were because the 2nd Claimant was genuinely thinking of seeking bank finance to clear up all prior encumbrances. It was said that the bank finance subsequently was not available which was why the three mortgagees were not paid off. I find that on the evidence before me, there is insufficient material for me to say that the Sale and Purchase Agreement was not a genuine transaction to purchase the property but was a loan agreement disguised as a sale and purchase agreement. I have ruled that in law the 2nd Claimant's Sale and Purchase Agreement ranked prior to the Charging Order which was registered about two months after the Sale and Purchase Agreement was registered on 7th June 1996.

16. Accordingly, I allow the appeal and reverse the Order of Master Kwan. I order that the sum representing the balance of the proceeds of sale, namely $317,673.97 be paid to the 2nd Claimant. The other orders made by Master Kwan will remain, namely, that the Applicant be released from this matter and that the costs of the application be to the Applicant and be paid out of the fund. The order that the 3rd and 4th Claimants be precluded from making any claim against the Applicant will also remain, as will the order that the 1st Claimant be given leave to amend the name of the company as per the affidavit of Chan Tak Wai filed on 27th January 1998 and that re-service be dispensed with. The Order by Master Kwan that the costs of competing parties will go with the event with Certificate for Counsel is reversed and I order that the 2nd Claimant be awarded her costs before the Master and before me, to be paid by the 1st Claimant and to be taxed if not agreed. The Certificate for Counsel granted by the Master in respect of the hearing before her will remain.

(Peter Nguyen)

Judge of the Court of First Instance,
High Court