CHUN TAT PAPER CO LTD v. WONG IP CHENG AND ANOTHER

CACV 31/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 31 OF 2012

(ON APPEAL FROM DCCJ NO. 201 OF 2011)

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REASONS FOR JUDGMENT

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Hon Kwan JA:

1. This is the plaintiff’s appeal against the judgment of Deputy District Judge Kent Yee on 13 December 2011. The plaintiff was the purchaser in two agreements with the defendants both dated 28 September 2010 for a property at the Tsuen Wan Industrial Centre in Texaco Road, Tsuen Wan (“the Property”) and a parking space in that building. Completion did not take place on 18 November 2010 as scheduled, as the plaintiff took the stance that the defendants’ solicitors had failed to answer a requisition raised by the plaintiff’s solicitors. The plaintiff brought this action for various declarations that the defendants had wrongfully terminated the agreements and sought repayment of the deposits forfeited by the defendants.

2. The defendants took out a summons under Order 14A of the Rules of the District Court seeking determination of the question whether they had shown and proved a good title to the Property by the answers to the requisition in four letters of their solicitors.  In the event that the question was answered in their favour, they sought judgment against the plaintiff.

3. The judge found in favour of the defendants.  He held that the requisition raised by the plaintiff was not meritorious and that the defendants had satisfactorily and sufficiently answered the same.  The issue raised in this appeal is a narrow one and may be stated in this way:

In the absence of a formal release of an equitable charge, whether the defendants had shown good title to the Property on the objective facts available to both parties to the required standard of proof beyond reasonable doubt that the plaintiff would not be at risk of a successful assertion against it of an incumbrance in respect of the equitable charge?

4. We dismissed the appeal at the conclusion of the hearing and these are the reasons for judgment.

The background

5. The background facts not in dispute were helpfully set out in the judgment below.  They may be stated as follows.

6. The requisition raised by the plaintiff’s solicitors was in relation to a document entitled “Deed of Undertaking to Execute an All Monies Second Legal Charge by Chargor/Borrower” dated 25 April 1991 (“the Deed”).  The Deed was executed by Leung Wing Keung (the 1^st defendant’s predecessor in title; “Leung”) as the chargor and Forever Metalware Factory as the borrower (“Forever Metalware”) in favour of Wayfoong Credit Limited (“Wayfoong”).  The Deed declared that in consideration of Wayfoong agreeing to grant general credit facilities to Forever Metalware, the Property was equitably charged to secure repayment to Wayfoong on demand of all moneys which may be payable and outstanding at any time during the subsistence of this security.  Leung and Forever Metalware further undertook that during the subsistence of this security, they would not create any mortgage, charge or other disposition of the Property without obtaining Wayfoong’s prior consent.

7. By the requisition, the plaintiff sought “documentary evidence showing that [the Deed] has been duly discharged or released by [Wayfoong].”  It was common ground that there was no documentary or direct evidence that the equitable charge in the Deed was discharged before the scheduled date of completion.  It was not in issue that the equitable charge is an incumbrance.  Although the plaintiff accepted before the judge that it had learned after the completion date Wayfoong verbally agreed to execute a formal release (and hence the 1^st defendant, being the registered owner, does have good title to the Property), the plaintiff contended that this would not avail the defendants as they had failed to show good title by giving satisfactory answers to the requisition within a reasonable time prior to completion.

8. It is not necessary to dwell on the answers given to the requisition by the defendants’ solicitors.  The judge held that bad points were taken in the first three letters.  The fourth and last letter, whilst repeating the reasoning given in the earlier letters, stated as follows: “… there is no evidence that there is any claim on the breach of the alleged Undertaking [i.e. the Deed] which was extinguished and merged on conveyance.  If there is any breach of the alleged Undertakings, the time limit is barred for any claim on the breaches.”  The assertion that the Deed was “extinguished and merged on conveyance” is also a bad point.  I will return to the point about time bar.

9. In any event, it is the defendants’ position, here and below, that the objective facts known to both were such that there was compelling evidence pointing to a de facto release of the Deed, even in the absence of a release executed by Wayfoong.  So I should turn to those facts, which are as follows.

10. A mortgage dated 30 September 1986 was executed over the Property by Leung in favour of the Hongkong Shanghai Banking Corporation.  The Deed, which was executed in favour of Wayfoong on 25 April 1991, was registered in the Land Registry on 24 June 1991.  By a release made on 19 August 1997 and registered on 28 August 1997, the mortgage was released and discharged.

11. On 19 August 1997, Leung executed a legal charge of the Property (the consideration was “all money”) in favour of Kwong On Bank Limited.

12. On 18 March 2010, Leung assigned the Property to the 1^st defendant as the purchaser.  By a release of the same date, DBS Bank (Hong Kong) Limited (the successor bank of DBS Kwong On Bank Limited, formerly known as Kwong On Bank Limited) released and discharged the legal charge executed by Leung.  Also on the same date, the 1^st defendant executed an all moneys mortgage over the Property in favour of the Industrial and Commercial Bank of China (Asia) Limited (“ICBC”).

13. A point taken by the defendant successfully before the judge was that any claim of Wayfoong to enforce the equitable charge in the Deed would be time barred even if the Deed had not been released.  It was contended that the limitation period was 12 years under section 19(1) of the Limitation Ordinance, Cap 347 and time began to run from the date of creation of the Deed on 25 April 1991 (Chevalier Property Management Ltd v Yu Chau Yeung [2007] 4 HKLRD 473 at para 13).  In the application for leave to appeal heard by the judge, Mr Jeremy Cheung, who appeared for the defendants here and below, accepted that Ms Teresa Wu, who appeared for the plaintiff in the leave application and on appeal, was correct about the limitation period, which should be 20 years not 12 years and that the equitable charge, if it was subsisting, could be enforced up to 24 April 2011.  This was because the Deed was made prior to 1 July 1991, so the transitional provision in section 38A of the Limitation Ordinance would apply to a cause of action which arose before that date and the applicable limitation period should be 20 years.

14. The judge accepted that he was in error in ruling that the limitation point was also a full answer to the requisition, and it was mainly for that reason he granted leave to appeal.

The arguments in this appeal

15. Ms Wu relied on the statement in Emmet and Farrand on Title (19^th ed) vol 2 at para 25.222 that “a simple receipt is sufficient to show that the [equitable] charge has ceased.”  As I understand her submission, since there was no receipt, it follows that the equitable charge was not discharged at the date of completion. I do not agree with this.

16. Mr Cheung referred us to another extract of the same work at para 25.190 under the heading “Discharge in the absence of statutory receipt” and the relevant parts read:

“Also, there are old cases where discharge was presumed even though there was no evidence of it. In one case it was assumed that a discharge (then requiring a reconveyance, since the mortgage was by way of assignment) has been executed, even though the mortgage was not shown to have been paid off, when the mortgagor had long dealt with the property as if unincumbered and the circumstances were such as to lead strongly to the conclusion that it had been paid off (Pickett v Packham (1868) 4 Ch App 190). In another case the fact of an equitable charge being found in the possession of the mortgagor, although no receipt was indorsed thereon, was considered strong evidence that the charge had been paid off (Nicoll v Chambers (1852) 11 CB 996, at p. 1004 and see also; Farmer v Turner (1899) 15 TLR 522).

Nevertheless, even if not essential, the use of a receipt satisfying s 115 [of the Law of Property Act 1925] is clearly advisable, as providing apparently conclusive proof that all obligations secured on the property have been discharged.”

17. It is clear from the above extract that the absence of a receipt does not mean it must be concluded that the equitable charge had not been discharged.  Discharge may be inferred if there is strong evidence pointing to this.

18. Ms Wu reminded us of the high standard of proof in this regard.  It is necessary to cite only this passage in the joint judgment of Bokhary PJ and Sir Anthony Mason NPJ in Chi Kit Co Ltd & Ltd v Lucky Health International Enterprise Ltd (2000) 3 HKCFAR 268 at 282J to 283A:

“The burden is on the vendor to prove a good title to the very high standard of proof beyond reasonable doubt that the purchaser will not be at risk of a successful assertion against him of an incumbrance (MEPC Ltd v Christian-Edwards [1981] AC 205 at p 220). The vendor discharges his obligation if he shows to that standard that he is in a position to convey the estate or interest contracted to be sold “without any blot, or possibility of litigation to the purchaser” (Re Stirrup’s Contract [1961] 1 WLR 449 at p 454).”

19. The judge held that having regard to the transaction history of the Property I have mentioned above, the reasonable conclusion is that the equitable charge was discharged before the legal charge in favour of Kwong On Bank and the mortgage in favour of ICBC, as common sense dictates that the banks would not offer an all money charge or mortgage on the Property if they would be subject to the prior equitable charge of an unknown sum which could well exceed the market value of the Property.

20. Ms Wu argued before us, as she had argued before the judge in the leave application, that there may be plausible reasons why these two banks agreed to enter into such transactions despite the subsistence of the equitable charge.  Kwong On Bank might have agreed to do so because Leung had provided other forms of security such as a personal guarantee and there was no evidence to exclude this possibility.  ICBC might have agreed, having satisfied itself that the value of the Property was sufficient to cover the liabilities under the Deed and under the 1^st defendant’s mortgage to ICBC, or it might simply be prepared to take a risk out of commercial considerations.

21. I agree with the judge these were not real possibilities in the commercial world.

22. Ms Wu argued that even assuming there was no risk of enforcement action by Wayfoong, the defendants were still required to assign the Property free from incumbrance.  I have no quarrel with this proposition.  But I think her reliance on Ko Lan v Hoo Man Kuen Martin & Anr (HCMP 4416 of 1998, 19 January 1999, Recorder Edward Chan, SC) at page 20 was misplaced.  The Recorder in the relevant passage was dealing with a legal charge, not an equitable charge, and it was in that context he said “without a valid release, even though the mortgagor had fully repaid the indebtedness under a mortgage by way of legal charge, his interest in the land would still be subject to the legal charge, which is a legal estate.  He would not be in a position to assign to his purchaser the legal estate in the property free from encumbrances.”

23. I agree with the judge it is highly unlikely that any of the two banks would have entered into a legal charge or mortgage for all moneys if the equitable charge had not been discharged or released.  Given the express covenant in the registered Deed that the borrower and chargor agreed not to create any mortgage, charge or other disposition of the Property without obtaining Wayfoong’s prior consent, it is not conceivable that that the two banks would agree to accept a legal charge or mortgage with the equitable charge subsisting.  The mortgage in favour of Kwong On Bank was included in the title deeds delivered to the plaintiff’s solicitors for title investigation.  This mortgage contained the usual declaration by the mortgagor that the property under mortgage was free from all charges and incumbrances.  Approaching this with common sense, it would be contrary to commercial reality that two different banks were willing to lend money on the basis that their security would rank after the equitable charge for an unknown sum, and all the indications on the objective evidence were to the contrary.

24. It is worth emphasising the words of Litton PJ in Mexon Holdings Ltd v Silver Bay International Ltd (2000) 3 HKCFAR 109 at 117D to E:

“A good title does not mean a perfect title, free from every possible blemish. Whenever a question like this arises, it must be approached from the stand-point of a willing purchaser and a willing vendor, both possessed of reasonably robust commonsense, both intending to see the transaction through to completion in terms of their own bargain.”

25. Liu JA in a dissenting judgment in Jumbo Gold Investment Ltd v Yuen Cheong Leung & Anr [1999] 3 HKLRD 825 (his judgment was upheld on appeal to the Court of Final Appeal) also had this to say at 833F to G:

“In a vendor and purchaser summons under s 12 of the Conveyancing and Property Ordinance (Cap 219), the court would be considered best guided by the commercial reality as to whether there is any real risk of problems in title. It is not to be troubled by the absence of an absolute risk-free assurance, nor unduly hampered by strict legal proof in matters requisitioned. Conveyancing practice must be geared to uphold bargains. In most cases, unless the obvious commercial reality is shaken by compelling contra-indications, the court would more readily conclude beyond reasonable doubt that risk of Government intervention [the case was in the context of a breach of covenant in a government lease] is remote.”

26. I am satisfied the circumstances here are sufficiently compelling for it to be inferred with as much practical certainty as if it had actually been recorded that the liabilities of the equitable charge had been paid off and that the equitable charge was released de facto.  I agree with the judge that the requisition was unmeritorious.

27. That leaves the question if the answers to the requisition were sufficient.  The judge found that the answers were not helpful and that the defendants’ solicitors could and should have been more cooperative.  Notwithstanding that, he did not find the defendants’ solicitors to have failed to answer the requisition satisfactorily.

28. The words of Litton VP (as he then was) in Active Keen Industries Ltd v Fok Chi Keong [1994] 1 HKLR 396 at 406 line 37 to 407 line11 are instructive in this kind of situation:

“But assume the objection to have no substance. In such a case, as Godfrey, J. remarked, this presents considerable difficulties. Is it enough for the vendor to say: "there is no substance in the purchaser’s objection”? The judge answered this question as follows:

“If there is nothing the vendor can usefully add, I would hold it is enough. …”

In my judgment the judge's approach must in principle be correct. If the matter was self-evident, the purchaser's solicitor cannot insist upon a fuller reply. But the vendor's solicitor must act with total candour, so that the purchaser can be reasonably certain that there are no facts and material relevant to the requisition known to the vendor which have not been disclosed. A requisition as to title is not an occasion for the parties' solicitors to bandy propositions of law: each party must decide for himself, ultimately, what the legal position is, based upon the facts known to himself: although, obviously, if one party can persuade the other to his own point of view on the law, so much the better. …”

29. Notwithstanding the bad points made in the answers of the defendants’ solicitors to the requisition, given that the requisition was without merit and the position was clear on the objective facts, I agree with the judge that the defendants had discharged their obligation to answer the requisition satisfactorily.

30. For the above reasons, we have dismissed the appeal with costs to the defendants.

Hon Fok JA:

31. I agree with the Reasons for Judgment of Kwan JA.

Hon Barma JA:

32. I agree with the Reasons for Judgment of Kwan JA.