IISW v. SDS-W

FCMC 1399 / 2006

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

MATRIMONIAL CAUSES

NUMBER 1399 OF 2006

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R U L I N G
(Priority of orders)

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Introduction

1. The central issue that has arisen in this case concerns the priority of two competing order with respect to a property known as K Mansions, a property in Hong Kong which is registered in the name of the Respondent husband.

2. There are also other issues arising out of this as identified by Ms Por in her submission namely:-

a.  The Petitioner’s application on 24 January 2014 for, inter alia, an order of sale of K Mansion with the reserve or minimum price of HK$4,000,000;

b.  The Intervening Party’s Charging Order Nisi dated 4 November 2013, transferred from DCCJ 3408/2013 by order of Deputy District Judge Timon Shum dated 9 April 2014, to be made absolute;

c.  The Petitioner’s application on 27 January 2014, transferred from DCCJ 3408/2013 by order of Deputy District Judge Timon Shum dated 9 April 2014, to, inter alia, discharge the Intervening Party’s Charging Order Nisi dated 4 November 2013.

d.  The Petitioner’s Charging Order Nisi dated 6 February 2014 to be made absolute; and

e.  The Intervening Party’s application dated 3 March 2014 to, inter alia, discharge the Petitioner’s Charging Order Absolute dated 29 January 2014.

Background

3. The full background to this matter can be found in my judgment of the 6 February 2013, which I do not intend to repeat here, but to which reference can be made if necessary. Suffice it to say that there had been issues with respect to the interpretation of the original court order dated the 15 May 2007. The matter then returned to court for further direction on the 5 September 2013 and a Ruling was subsequently handed down on the 18 September 2013. In the context of the present applications before me it should be noted that in that Ruling I made the following observations:-

Directions on the Charging Order

8. Both sides made some representations in relation to the Hong Kong property. I have also been referred to some correspondence on the issue. In a nut shell the husband agrees to sell the property at the price of HK$4 million or above. He also agrees to use the net proceeds of sale in the first instance to pay a lump sum equivalent to the outstanding children’s school fees as set out above. However he wishes to retain any balance left over for his own use in order to pay off his creditors. The wife for her part said that she wishes the property to be transferred to her free from encumbrances so that she is able to use the same for the benefit of the children. However she has not made any application to transfer the property or otherwise and now asks for time in order to file the appropriate summons and affidavit in support. I have some difficulty with each parties approach given that my judgment was handed down some 7 months ago. Had the wife wanted to take out a further summons then she should have done so before now. I also have some difficulty with the order that she apparently intends to seek. How can the court order that the property be transferred to her unencumbered given the current circumstances? I am also loath to allow the parties to attempt to re litigate matters which may inevitably lead to going over old ground with very little purpose or hope of sensible resolution. It should also be noted that I do not accept the husband’s argument that he needs the remaining net proceeds of sale for his own use and that he is able to pay for the children’s school fees out of income. This, even on his own case, seems to me to be an extremely unlikely proposition at present. He is simply not earning enough to do so. 

9. In the alternative Mr Clough for the wife has suggested that the charging order nisi be made absolute and that in the first instance the net proceeds of sale be paid into court. By way of an indication this seems to me to be a much more sensible way to proceed. My preference would be to make an order that the charging order nisi be made absolute and that the net proceeds of sale (being the sale price less all reasonable costs and expenses related to the sale including the redemption of the mortgage and the loan in favour of Prime Credit Limited, legal costs and agency fees) be first applied to pay the lump sum of HK$ HK$1,330,490 referred to above. The remaining net proceeds of sale could then be paid into court so that the wife is able to claim against those funds for payment of the school fees going forward. A word of warning though - the funds paid into court will not be regarded as funds to be held as security in the event that the husband is unable to pay the school fees. Rather the funds shall be paid into court in order that the wife shall then claim against them in order to pay for the children’s school fees (tuition fees and capital levies) going forward. When those fees have run out she will then be at liberty to issue a further summons against the husband for maintenance of the children.

4. I made no order as to costs with respect to the original order and was critical of both sides litigation conduct in relation to the way in which they had approached the hearing and generally.

5. Other points which are salient to the present application include the fact that the wife obtained a charging order nisi on K Mansions on the 19 April 2011. This was based on her mistaken interpretation of the original court order dated the 15 May 2007. On the 29 January 2014 this was subsequently made a charging order absolute. I accept that this was wrong and that this charging order should be set aside. On the 6 February 2014 the wife obtained a second charging order nisi against K Mansions in relation to the outstanding school fees from September 2009 – July 2014 in the sum of HK$1,607,330. It should be noted that this figure is different from that set out in my Ruling above of HK$1,330,490.

Background to the present application

6. The husband represented himself at the hearing before me on the 5 September 2013, but prior to that he had been represented by Hampton Winter & Glynn (HW&G), who are now the intervening party. The husband filed a Notice of Acting in person on the 3 September 2013 – 2 days prior to the court hearing referred to above. On the 4 September HW&G issued a writ to recover their solicitor and own client fees from the Respondent in the sum of HK$510,573.75. These costs had not been taxed. The hearing was undefended. Judgment was entered against the husband on the 16 October 2013. Shortly thereafter on the 4 November 2013 a charging order was obtained against K Mansions. No notice had been given of these proceedings to the wife or her solicitors or indeed to the court. As soon as the wife’s solicitors became aware they sought to intervene in the civil debt action. It was subsequently directed that all matters should return to the Family court for adjudication.

7. Thus the wife’s second charging order nisi of the 6 February 2014 ranks second to the intervening party’s charging order nisi of the 4 November 2013. The intervening party asks that there be an order for sale and that their fees be paid first prior to any claim that the wife may have because they are first in time. The wife for her part asks that the intervening party’s charging order nisi be discharged and that she take the whole of the net proceeds of sale – or that they be paid into court as was originally intended.

8. Ms Por for the wife summarizes the situation thus:-

a.  whether the Intervening Party’s Charging Order Nisi dated 4 November 2013 should be discharged so that the Petitioner takes the whole of the sale proceeds, after Prime Credit Limited’s mortgage, for payment to her of all arrears of the children’s school fees as ordered and for the children’s future school fees; or

b.  whether the Intervening Party’s Charging Order Nisi dated 4 November 2013 should be made absolute (and whether the Petitioner’s Charging Order absolute dated 29 January 2014 be discharged) so that the Intervening Party can be paid their legal fees from the net proceeds of sale in priority to payment of all or part of the arrears of children’s school fees as ordered and the children’s future school fees.

The law

9. The relevant law can be found in section 3 of the Land Registration Ordinance, Cap 128, which states as follows:-

“(1) Subject to this Ordinance, all such deeds, conveyances, and other instruments in writing, and judgments, made, executed, or obtained, and registered in pursuance hereof, shall have priority one over the other according to the priority of their respective dates of registration, which dates shall be determined in accordance with regulations made under this Ordinance.

(2) All such deeds, conveyances, and other instruments in writing, and judgment, as last aforesaid, which are not registered shall, as against any subsequent bona fide purchaser or mortgagee for valuable consideration of the same parcels of ground, tenements, or premises, be absolutely null and void to all intents and purposes:-

Provided that nothing herein contained shall extend to bona fide leases at rack rent for any term not exceeding 3 years.”

10. The relevant date in determining priority of interest is the date of the charging order nisi.

11. Section 52 A of the District Court Ordinance, Cap 336 states that:-

“In deciding whether to make a charging order the Court has to consider all the circumstances of the case and, in particular, any evidence before it as to-

a. the personal circumstances of the debtor; and

b.  whether any other creditor of the debtor would be likely to be unduly prejudiced by the making of the order.”

Case law  

12. The most recent case on matters of this nature is the Court of Appeal decision in England and Wales, Krest v Agrest [2013] EWCA Civ 41. I have as promised read this case in full and although the factual matrix is very different, nevertheless it is at its heart concerned with the competing interests of a creditor and a wife with respect to a property in the UK. I accept therefore that it is of great assistance in the context of this case and I do not accept that it should be distinguished in any way – either because it concerns the matrimonial home or otherwise. Lord Justice Moore – Bick said as follows:-

10.  It is common ground that the judge had a discretion whether to make a charging order absolute in favour of Mr Chesnokov [the creditor] and that in reaching his decision he was obliged to consider all the circumstances of the case.  Section 1(5) of the Charging Orders Act 1979 provides:-

“In deciding whether to make a charging order the court shall consider all the circumstances of the case and, in particular, any evidence before it as to-

(a) the personal circumstances of the debtor, and

(b)  whether any other creditor of the debtor would be likely to be unduly prejudiced by the making of the order.”

11.  In cases where the available assets are insufficient to satisfy both the financial claims of one former spouse (usually the wife) and the debts of the other (usually the husband) a conflict arises between the interests of the claimant and those of the creditors.  The conflict is all the more acute when a creditor has obtained a judgment which, in the ordinary way, he could expect to enforce by means of a charging order.  This question was considered at some length in Harman v Glencross [1986] Fam 81, on which Mr Feehan QC placed a good deal of reliance.  In that case the sole asset available to satisfy the claims of the wife and those of the judgment creditor was the former matrimonial home.  Without a charging order the judgment creditor was unlikely to recover anything, but if a charging order were made in this favour, the remaining assets would be insufficient to provide a home for the wife and children.  The court held that in such cases it was necessary to strike a balance between the normal expectation of a judgment creditor that an order would be made to enforce his judgment and the hardship that such an order would entail to the wife and children.  In a passage at page 97, to which Mr Feehan particularly drew our attention, Balcombe LJ said:-

“… unless the transfer of the husband’s share in the house to the wife is necessary to give her adequate protection so that she may have a home for herself and the children, it is difficult to see why the judgment creditor’s undoubted rights should not take preference to the wife’s claim to a transfer of property order.”

12.  Later, at page 99 he said:-

“When considering the circumstances, the approach of the court should be to recall the statement of Sir Denys Buckley in the Hegerty case [1985] QB 850, 866, that a judgment creditor is justified in expecting that a charging order over the husband’s beneficial interest in the matrimonial home will be made in his favour. The court should first consider whether the value of the equity in the house is sufficient to enable the charging order to be made absolute and realised at once, as in Llewellin v Llewellin (unreported), even though that may result in the wife and children being housed at a lower standard than they might reasonably have expected had only the husband’s interests been taken into account against them. Failing that, the court should make only such order as may be necessary to protect the wife’s right to occupy (with the children where appropriate) the matrimonial home. The normal course should then be to postpone the sale of the house for such period only as may be requisite to protect the right of occupation – a Mesher type of order – again bearing in mind that the court is holding the balance, not between the wife and the husband, but between the wife and the judgment creditor. If the judgment creditor asks, even in the alternative to his claim to an immediate order, for a Mesher type of order, then it seems to me that it would require exceptional circumstances before the court should make an order for the outright transfer of the husband’s share in the house to the wife, thereby leaving nothing on which the judgment creditor’s charging order can bite, even in the future.”

13.  These passages support the conclusion that when striking a balance between the interests of the judgment creditor and those of the wife, the interests of the judgment creditor should be respected, save to the extent that it is necessary to override them in order to make appropriate provision for the wife and any minor children.  In some cases that can be achieved by an order postponing the sale of the property (usually known as a Mesher order – see Mesher v Mesher and Hall [1980] 1 All ER 126), or in a more extreme case by withholding a charging order altogether and transferring the husband’s interest to the wife free of any encumbrance.  However, each case depends on its own facts.  As Waite J observed in Austin-Fell v Austin-Fell [1990] Fam 172, there can never be automatic predominance for any claim; each case depends upon striking a fair balance between the normal expectations of the judgment creditor and the hardship to the wife and children if a charging order is made.  In some cases justice to the creditor will demand that the wife accept a degree of provision that in other circumstances would have been regarded as inadequate.

15.  In weighing up all the circumstances in this case it is important to identify the essential needs of Ms Kremen and her children.  Mr Feehan submitted, as he had to the judge, that the court should be concerned only with the need for reasonable accommodation, and not necessarily accommodation of the standard to which they had previously been accustomed. The argument was based on a passage in the judgment of Balcombe LJ in Harman v Glencross at page 99 where he said:-

“There will, of course, be cases (such as Llewellin v Llewellin (unreported), 30^th October 1985, Court of Appeal (Civil Division) Transcript No 640 of 1985, which we heard immediately after this appeal) where the figures are such that even if the charging order is made absolute, and then the charge is realised by a sale of the house, the resultant proceeds of sale (including any balance of the husband’s share after the judgment debt has been paid) will be clearly sufficient to provide adequate alternative accommodation for the wife and children.”

  Mr Feehan submitted that the court should be concerned only with the provision of accommodation and not with wider financial needs. He argued that Ms Kremen did not require the whole of the equity in Sough Lodge in addition to the sum in court in order to obtain adequate accommodation, even if that accommodation was of a standard lower than that to which they had been accustomed.

16.  The judge did not accept that submission and neither do I.  The issue raised by Mr Feehan was not directly before the court in Harman v Glencross.  It was not necessary for Balcombe LJ to deal with it and there is nothing to suggest that he intended to do so.  In any event, once it is accepted, as it was, that the court must have regard to all the circumstances of the case when exercising its discretion, it is difficult to see how it could properly ignore the wider financial needs of the wife and children, or, as the judge put it, the need to pay for their daily bread.  For similar reasons I would reject Mr Feehan’s submission that the wife is entitled to protection only in relation to her occupation of the former matrimonial home and that since Sough Lodge was never the matrimonial home (have been bought by Mr Argest as in investment) the approach adopted in Harman v Glencross had no application in this case.

13. The Judge added at paragraph 21.

I agree with the judge that this is an exceptional case, not because Mr Chesnokov is seeking to assert a claim against what is once again Mr Agrest’s property, but because of the circumstances in which the debt which he seeks to recover was incurred.  The contract to purchase Everclear, and by that means South Lodge, was not binding on Mr Chesnokov until he had obtained mortgage finance and before that had happened he had become aware of Ms Kremen’s claim and of the order prohibiting Everclear or Mr Agrest from disposing of any interest in the property.  Nonetheless, he proceeded with the purchase in circumstances where he must have been aware that there was at least a risk that the transaction would be challenged and might be held to have been ineffective.  He was, therefore, the author of his own misfortune and in my view that undermines to a very significant extent any expectation he might otherwise have had as a judgment creditor that the court would make an order to enable him to recover the losses incurred as a result.  That is all the more so in circumstances where Ms Kremen and her children would be likely to suffer a degree of hardship if a charging were made in his favour.  Given the amount involved, I do not think that it would be appropriate to make a Mesher order in this case. The reality is that the equity in South Lodge is likely to be exhausted within a relatively short time, but in any event, for the reasons I have given, I do not think that the interests of justice would be served by making a charging order absolute over the property on any terms in favour of Mr Chesnokov.

14. Lord Justice Thorpe added:-

31.  Mr Feehan QC submits that the judgments of Balcombe LJ and Fox LJ establish the principal that the just entitlement of the creditor is not to be denied save and in so far as some element of that entitlement has to be allocated to provide a roof for the wife to a minimum standard.

32.  There is no clear statement to that effect within the judgments.  I can see no rational reason to distinguish between the wife’s bare needs whether for housing, lump sum or maintenance; particularly maintenance for children, for in assessing what is fair the court has to have first regard to the welfare of the children.

15. Reference was also made to the Hong Kong judgment Chan Ting Wai William v Lam Sai Pak [1999] 1 HKC 843 which applied the case referred to in Krest namely Harman v Glencross [1986] Fam 81. Although again the factual matrix was somewhat different I accept that this is authority, as stated by Sakhrani J in that judgment for the following:-

… The court, of course, has a discretion whether or not to make a charging order either nisi or absolute and before it does so, it should consider all the circumstances of the case including circumstances of any other creditor … .

Discussion

16. It is therefore clear that this is not simply a case of enforcing the intervening party’s prior claim against K Mansions as claimed by the intervening party. Neither do I accept that the cases cited i.e. Harman v Glencross [1986] Fam 81 and Chan Ting Wai, William v Lam Sai Pak [1999] 1 HKC 843are capable of distinction and should not be applied in this case. The intervening party argues that:-

10.  The cases cited by SWC for the Ex-Wife can be distinguished as follows:-

(i)  In Harman v Glencross [1986] Fam 81, there was a pending divorce proceedings, the charging order was applied by the Husband’s former business partner against the matrimonial home and the matrimonial home was the only valuable asset of the family.

(ii)  K Mansion was never a matrimonial home of the parties herein and the Ex-Wife had already obtained her share of the family assets, the value of which is substantial.

(iii)  The divorce proceedings had already been concluded and K Mansion was not subject to any orders in the Consent Order or under the Judgment dated 06.02.2013.  It is simply an asset owned by the Ex-Husband.  Therefore, there shall not be any special treatment for the Ex-Wife’s claim for arrears of children maintenance.  Ordinary principles of Charging Order shall apply.

(iv)  In Chan Ting Wai, William v Lam Sai Pak [1999] 1 HKC 843, a charging order nisi has been made after the divorce petition but before the application for ancillary relief has been heard.  In this case, the divorce proceedings was concluded long time ago and it is not the situation that the subject matter of ancillary relief proceedings is to be preserved prior to any determination by the Family Court.

17. In so far as Harman is concerned Krest makes it clear that the fact that the concern in Harman was with the matrimonial home does not mean that the general principles should not apply to the other needs of the wife and children, as in this case. Here the issue is with the maintenance for the children and in particular to their education fees. Similarly it does not seem to me that the fact that in Chan Ting Wai, William v Lam Sai Pak [1999] 1 HKC 843 the application was made before the ancillary relief proceedings had been concluded should make any difference. Certainly in Krest the ancillary relief proceedings had been concluded and the requisite orders had been made. The wife was simply trying to enforce her order against the husband’s available assets in the UK post the ancillary relief order being made.

18. Thus it seems to me that the correct approach as set out in Krest, is to try to strike a balance between the normal expectations of the judgment creditor, here the husband’s former solicitors, that an order should be made to enforce their debt as against the hardship that that would entail to the wife and children. In doing so I need to take into account all of the circumstances of the case.

19. In this case it seems to me that it would not be appropriate for the intervening party to enforce their debt in priority to the wife. In coming to that decision I have taken into account the following factors:-

a)  I accept that the wife is in real and genuine need of the entire proceeds of sale (subject of course to the mortgage with Prime Credit Limited and the other costs normally associated with a sale). The husband has not paid anything to the wife for the children since the funds held in court were exhausted save for US$4,700 and US$5,000. This is despite his submissions in court during the hearing on the 5 September 2013 that he would be able to pay the children’s school fees out of income. This has not happened. The K Mansions property is the only asset that the wife can enforce her claims for maintenance for the children and school fees against. There is nothing else. Even in that event the likelihood is that there will only be funds available to cover the school fees for a fairly limited period. I accept that “The impact on the children’s living and education would be particularly draconian” (p. 29 of the Wife’s submission). As far as the wife and the intervening party are aware the husband continues to reside in Vietnam. Enforcement will therefore most probably continue to be an issue.  

b)  Although I accept that the intervening party is a genuine creditor the fact remains that they took on the risk of acting for the husband when they agreed to act for him in May 2011. They were aware that his financial position was somewhat precarious and that he was resident outside of the jurisdiction. There was no guarantee at any point that they would be able to rely on K Mansions as security for their own fees.

c)  I have also taken on board the fact that these are untaxed costs and that the effect of allowing HW&G’s charging order to take precedence over that of the wife would be to undo the order made by the court that there should be no order as to costs with respect to the substantive application. Ms Por confirmed that the wife also owed her firm a sum in excess of HK$1 million in unpaid fees. These likewise will not be paid from the net proceeds of sale of the property.   

d)  I am also concerned about the timing of the debt proceedings – i.e. that the intervening party issued proceedings to recover their fees when they knew that the matter was back before the court and that the sale of the K Mansions property and what should happen to the net proceeds of sale would be in issue. I am also concerned that although they were not strictly speaking required to give notice to the wife at the time, that in the circumstances that would have been the appropriate thing to do.

Order 

20. I will therefore make an order as follows:-

1.  The wife’s charging order absolute dated the 29 January 2014 shall be set aside. For the avoidance of doubt the charging order nisi dated the 19 April 2011 shall be discharged.

2.  The intervening party’s charging order nisi dated the 4 November 2013 shall be discharged

3.  There shall be an order in terms of paragraphs 2 – 9 (3) and 9 (6) – (7) and 10 of the Petitioner’s summons dated the 24 January 2014.

21. For the avoidance of doubt the effect of this order is that the K Mansions property shall be sold and the net proceeds of sale shall be paid into court. I have not made an order in terms of the paragraph 1 and 9 (4) and (5) because the court is not sure of the basis of the calculation bearing in mind the fact that the wife’s charging order absolute dated the 29 January 2014 has been set aside. Given the previous Ruling and judgment it needs to be clear that the sums of money to be paid out to the wife do not include her claim for maintenance for the children which was later found to be incorrect.

22. Costs shall be to the wife to be taxed if not agreed on a party and party basis.