HUEN WAI KEI v. CHOY KWONG WA CHRISTOPHER

HCA 1093/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO. 1093 OF 2006

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D E C I S I O N

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1.  The consolidated actions have been tried and judgment entered in favour of the plaintiffs. This is the application by the defendants, among other things, to vacate the registration of the writ herein.

BACKGROUND

2.  Huen Wai Kei[1] (“Huen”) and Choy Kwong Wa Christopher[2] (“Choy”) were shareholders of Pacific World Asset Management Ltd (“Pacific”).  Raking Limited[3] (“Raking”) is a company owned by Choy and his wife.  Raking was and still is the registered owner of a duplex at Residence Bel-Air, Island South, and 2 car parking spaces (“the Properties”).

3.  Litigation commenced in 2006.  The parties’ actions were consolidated in 2007.  Briefly, the pleaded case of Huen and China Gain Corporation Limited[4] (“China Gain”) were as follows:

(1)   By an agreement dated 26 October 2005, Choy agreed to purchase from Huen his shares in Pacific for HK$40 million (“the Shares Agreement”).

(2)   On 4 November 2005, the parties agreed that Choy and Raking would put up the Properties as security for the discharge of Choy’s liability to pay under the Shares Agreement (“the Security and Set-Off Agreement”).  Should Choy default in payment under the Shares Agreement, Raking would assign the Properties to China Gain, a vehicle used by Huen, the consideration for which would be set off against the amount in default.

(3)   Accordingly Huen and Choy signed a memorandum of agreement whereby Raking agreed to assign the Properties to China Gain at the then market value of HK$38.4 million.  Huen and Choy further signed a supplemental agreement to the Shares Agreement providing that the parties would procure the signing of the memorandum as a guarantee for Choy’s liability under the Shares Agreement.

(4)   Pursuant to the above, China Gain and Raking then entered into an agreement dated 8 November 2005 for the sale and purchase of the Properties at agreed consideration of HK$38.4 million (“the S&P Agreement”)[5].

(5)   Choy has paid HK$10 million under the Shares Agreement.  The balance of HK$30 million was settled by 3 cheques of HK$10 million each post-dated between January and July 2006.

(6)   All the post-dated cheques were dishonoured; and the balance of HK$30 million has since been outstanding.

(7)   In the premises:

(a)    Huen claimed against Choy for the sum of HK$30 million with interest (for the dishonoured cheques and breach of the Shares Agreement); or in the alternative an order for specific performance of the Security & Set-Off Agreement;

(b)   China Gain claimed against Raking (as an alternative to Huen’s above claim for HK$30 million) an order for specific performance of the S&P Agreement and damages.

4.  On 9 June 2006, the writ of summons in HCA 1242/2006 was registered in the Land Registry as a lis pendens against the Properties.

5.  On 8 October 2012, Huen and China Gain re-registered the writ against the Properties.

6.  After trial, Suffiad J handed down judgment on 28 May 2013 (“the Judgment”) holding that:

“382. Having accepted the plaintiffs’ case in its entirety on the facts, Choy is liable to Huen for the dishonour of the 1^st Cheque, the 2^nd Cheque and the 3^rd Cheque in the total amount of HK$30 million alternatively, the said sum of HK$30 million as being a debt under the Shares Agreement.”

The learned judge made the following order (“the Order”):

“383. Accordingly, there will be judgment to Huen for HK$30 million as against Choy with interest at 1% above prime from the date of Writ until judgment and thereafter at judgment rate.

384. In the alternative, being alternative to the judgment sum of HK$30 million above, an order for specific performance by Raking of the S&P Agreement by assigning the Properties free from encumbrances to China Gain and to set off the set consideration of HK$38.4 million against the said judgment sum of HK$30 together with interest awarded thereon.

385.     The consolidated counterclaim is dismissed.”

7.  On 23 July 2013, Huen and China Gain registered the Order against the Properties.

8.  Choy never pays the judgment sum.  Instead he wants to sell the Properties to fund the payment of the judgment sum; and has caused Raking to enter into a sale and purchase agreement dated 20 May 2013 with a third party for the sale of the Properties at HK$77 million.  Completion will take place on or before 6 December 2013.

9.  One of the conditions precedent to completion of such sale and purchase is the vacation of the registration of the writ herein.  Huen and China Gain did not and do not agree to that.  Hence the present application by Choy and Raking by summons filed on 12 July 2013.

10.  I pointed out during the hearing that the paragraphing of the summons is problematic.  Mr Fung SC (appearing with Mr Chen) for Choy and Raking confirmed that the terms of the summons should effectively read as follows:

(1)   Upon the defendants paying into the court the judgment sum together with interest out of the proceeds of sale of the Properties in pursuance to the Judgment:

(a)    the registration and the re-registration of the writ on 9 June 2006 and 8 October 2012 be vacated;

(b)   declaration that the S&P Agreement is of no further effect;

(c)    further and other consequential order;

(2)   costs.

THE PRINCIPLES

11.  Section 19 of the Land Registration Ordinance, Cap 128 provides that:

“The court or judge before whom any property sought to be bound is in litigation, may on the determination of the lis pendens, or during the pendency thereof, where the said court or judge is satisfied that the litigation is not prosecuted bona fide, or for other good cause shown, make an order for the vacating of the registration in the Land Registry of such lis pendens without the consent of the party who registered it, and may direct the party on whose behalf the registration was made to pay all the costs and expenses occasioned by the registration or the vacating thereof, including the costs of the application to vacate or may make such other order as to such costs or any of them as to the said court or judge may seem just.”

12.  Both sides refer to Ho Yau Kong v Ho Cheng Kwai Ying [1991] 1 HKLR 649. Noting that the terms of the section are very wide for a reason, Bokhary J (as he then was) said in that case (at 562G):

“The formula “other good cause shown” in s.19 is unrestricted by any words of the statute.  It seems to me that the courts may, and should, approach it by reference to what they normally do when dealing with interlocutory injunctive relief, subject to this.  The position of somebody with a lis penden which he or she can register is stronger than that of someone seeking or seeking to maintain such relief.  First of all, the registration may be made without reference to a court and without the burden of having first to make out a case.  Secondly, I think it is right to be even more reluctant to vacate a registration that to refuse or discharge an injunction which would have similar effect.  That is my approach here.”

13.  The circumstances of the case in which his Lordship decided to frame what he said above differ from the present one.  Suffice it to say that good cause must be shown in any given case to justify the order to vacate the registration.  Such burden in the present case is on Choy and Raking.

THE DIFFERENCES BETWEEN THE PARTIES

14.  Choy admits that he is unable to pay the judgment sum.  He claims to be entitled to sell the Properties and settle the judgment sum with interest by the proceeds of sale.

15.  Huen disagrees.  He argues the terms of the order in the Judgment are such that as Choy never pays up, China Gain is entitled to enforce the order for specific performance of the S&P Agreement for the assignment of the Properties by Raking.

16.  Choy also complains that:

(1)   Huen and China have once consented to the sale of the Properties by Choy and Raking; but now changed their position; and

(2)   the market value of the Properties, net of the outstanding mortgage, far exceeds the Judgment sum plus interest; and it would therefore be unfair and unreasonable to allow Huen and China Gain to gain a substantial windfall by obtaining the assignment of the Properties.

The Judgment and the Order

17.  I must take the Judgment and the Order as they are.

18.  According to the documents, in particular, pleadings and submissions before the trial judge, the case of Huen and China Gain was that should Choy default in payment under the Shares Agreement, the Security and Set-Off Agreement and consequentially the S&P Agreement oblige Choy and Raking to assign the Properties to China Gain at the agreed consideration of HK$38.4 million, which, net of the outstanding mortgage, would serve to set off the liability of Choy under the Shares Agreement.

19.  The trial judge accepted the case of Huen and China Gain “in its entirety on the facts”; and he took the care to make clear that the order for specific performance shall be “alternative to the judgment sum”; and serves to “set off the set consideration of HK$38.4 million against the said judgment sum”.

20.  Miss Cheng SC (appearing with Mr Cheung) for Huen and China Gain submitted that the liability of Raking to assign the Properties pursuant to the above agreements arose upon default of Choy under the Shares Agreement.  This happened in 2006 and so did the right of Choy and China Gain to the assignment of the Properties by Raking.

21.  I agree.  By the Judgment and the Order, the trial judge recognised such right of Huen to the payment of the amount under the Shares Agreement and gave effect to China Gain’s such entitlement to specific performance of the S&P Agreement already accrued upon Choy’s default.

22.  Mr Fung argued that specific performance would not be ordered unless it achieves more perfect and complete justice than an award of damages, citing in support Chitty on Contracts (31^st ed) at §27-005 and Spry on Equitable Remedies (8^th ed) at p.60.  He argued that Huen and China Gain fail to justify their insistence on specific performance of the S&P Agreement.

23.  The issue of whether specific performance ought to be ordered in the circumstances of this case has already been tried.  The order for specific performance has already been made.  I do not see how Huen and China Gain would be obliged to further justify their right to enforce the order.

24.  Miss Cheng argued that China Gain’s entitlement to the assignment of the Properties does not rest upon the default of Choy satisfying the order for payment of the judgment sum.  More precisely, the option is not that of Choy to choose between paying the judgment sum and complying with the order for specific performance for the assignment of the Properties by Raking.

25.  In a way, I see the force of Miss Cheng’s argument.  The claim by Choy and Raking of the right to refuse the assignment of the Properties but to sell the Properties to fund the payment of the amount of the judgment sum, if allowed, will effectively defeat the rights of Huen and China Gain pursuant to the various agreements which have already accrued upon the default of Choy under the Shares Agreement in 2006.

26.  In view of the disagreement between the parties, the solicitors for Choy and Raking reverted to the trial judge, seeking what was described as clarification of the order.  In their letter dated 11 June 2013, the solicitors referred to some evidence and submissions made during the trial; and submitted that “it should not be the intention” of the learned judge to allow Huen and China Gain to insist on specific performance of the S&P Agreement and thus assignment of the Properties to China Gain.

27.  Miss Cheng reminded this court that there is no power to make clarification of a judgment or order save where it is to express what was the obvious and manifest intention of the court but which was somehow mistakenly omitted: see O.20, r.11; Hong Kong Civil Procedure 2013 at 20/11/1; Skink Ltd v Comtowell Ltd [1998] 1 HKLRD 542 (at 543F-G).

28.  As a matter of principle, I agree.  As a matter of fact, the learned judge did reply promptly as follows:

“I see nothing to clarify. Either the defendants pay up the Judgment sum to the Plaintiffs together with interests FORTHWITH upon the Judgment being delivered else the plaintiffs would be entitled to enforce the order for specific performance.”

29.  The emphasis on payment forthwith upon delivery of the Judgment was that placed by the trial judge.  Therefore, even on the basis of the learned judge’s reply, Choy in fact failed and was admittedly unable to pay the judgment sum forthwith upon delivery of the Judgment.  Huen and China Gain are entitled to enforce the order for specific performance.  Choy and Raking can hardly claim at the same time the right to sell the Properties in order to fund the payment of the judgment sum.

30.  That brings us to what I see is the real complaint of Choy and Raking.  Mr Fung acknowledged that this has all to do with the fact that the value of the Properties has risen during the past years since 2006.  According to the agreement between Raking and the third party purchaser as well as the surveyor, the Properties are valued at HK$77 million.  Net of the outstanding mortgage (about HK$12 million), the value of the Properties far exceeds the judgment sum plus interest.  This also explains the defendants’ suggestion in the letter to the trial judge mentioned above that it should not be his intention to allow Huen and China Gain to “get more than the judgment sum” by enforcing the order for specific performance.

Specific performance of the S&P Agreement

31.  Mr Fung emphasized the nature of the S&P Agreement as security for Choy’s payment obligation under the Shares Agreement.  He submitted that Huen/China Gain is in no different position than that of an equitable mortgagee. Therefore Huen/China Gain should be under the duty to account any surplus of proceeds of sale of the property subject to the mortgage after satisfaction of the secured debt.  As such, Huen and China Gain should in any event not expect to gain a windfall by enforcing the order for specific performance.  Otherwise, the result, Mr Fung described, would be absurd and contrary to the common intention of the parties.

32.  Mr Fung’s argument is essentially premised on the relevance of the market value of the Properties, which may fluctuate.  He took the view that there is no magic about the agreed consideration of HK$38.4 million for the assignment of the Properties.

33.  I do not agree.  By virtue of the Security and Set-off Agreement, it was agreed that the Properties should be assigned, by the S&P Agreement as the instrument, to China Gain at the agreed consideration of HK$38.4 million upon Choy’s default under the Shares Agreement.  The agreed consideration, net of the outstanding mortgage, serves to set off against the liability of Choy.  This was the actual agreement between the parties, which the trial judge accepted.

34.  There can be no suggestion that the trial judge made the Order without realising the significance of the agreed consideration under the S&P Agreement.  The Judgment, the Order and, as far as it could be relied on, the trial judge’s reply dated 13 June 2013 mentioned above reflect exactly that.

35.  Had the current market value of the Properties been relevant to whether the order for specific performance ought to be granted or, even if granted, whether the order should be made in terms as it is, I would have expected the same to be argued at the trial.  It was not in issue: see (for instance) §§53-54 as well as §§134 and 384 of the Judgment.

36.  Mr Fung reiterated that his clients stand by the Judgment (presumably for the purpose of the present application).  Nevertheless, insofar as Choy and Raking are effectively suggesting that the order for specific performance with the effect as discussed above should not reasonably be made, I say that this should have been a matter for argument at the trial, not now in another court.

37.  Miss Cheng referred to cases including Hunter v Chief Constable of the West Midlands Police [1982] AC 529 (at 536C-D; 541B-C; 542C-D); China North Industries Investments Ltd v Chum [2010] 5 HKLRD 1 (at §§50-58); and Tsang Chin Keung v ECAS [2003] 2 HKLRD 627 (at §§31-33).  That the mounting of a collateral attack in new proceedings on a decision made against a party by another court of competent jurisdiction in previous proceedings in which that party had a full opportunity of contesting the decision amounts to an abuse of process is an accepted principle.

38.  Having said that, even assuming I am to consider the complaint that it is unreasonable or unfair; or, as the defendants put it, it should not be the intention of the trial judge to order specific performance with the effect as discussed above, I have reservations about the validity of the complaint.

39.  The apparent unreasonableness or unfairness stems from the fact that the market value of the Properties has risen since the S&P Agreement during the past years.  HK$38.4 million, as pleaded and accepted by the trial judge, was the then market value of the Properties agreed between the parties.  The market value could have risen as it could have fallen since the time of the agreement. That was an equal risk that the parties agreed to take by setting the agreed consideration for the purpose of the assignment at the time of the Security and Set-off Agreement and the S&P Agreement.

40.  Importantly, the unreasonableness or unfairness to Choy and Raking stemming from the risen market value of the Properties since 2006 is illusory because Choy and Raking have been assuming that they were entitled to hold on to the Properties notwithstanding Choy’s default under the Shares Agreement in 2006 and even now.  The Judgment proves them wrong.

41.  Had Choy and Raking complied with the Security and Set-off Agreement and S&P Agreement upon the default of Choy under the Shares Agreement back in 2006, the Properties should have already been assigned to China Gain.  The risk of fluctuation in the property market, and thus gain or loss, thereafter would have been that for China Gain to take.  As Miss Cheng put it, the fact that the market price of the Properties has since risen only serves to highlight the unfairness suffered by China Gain as a result of the breach on the part of Choy and Raking.

42.  In considering the argument that the right of Huen and China Gain to the assignment of the Properties accrued back in 2006, I do notice the possible relevance of the responsibility for the mortgage repayments during the interim until now.  However, this was not argued one way or the other; and I take this no further.

Stance of Huen and China Gain

43.  Mr Fung referred to Brightland Corporation Ltd v Banhart Co Ltd, HCA 1445/2005 (10 April 2008).  There the learned master exercised his discretion to vacate the registration of a lis pendens upon the defendant’s provision of security for the plaintiff’s claim.  However, as Mr

Fung acknowledged, the plaintiff there claimed merely damages.  I do not agree with Mr Fung’s submission that the analysis of the learned master in the circumstances of that case applies with full force in the present case.

44.  Nothing prevents Huen and China Gain from accepting payment by Choy of the judgment sum plus interest or consenting to the sale of the Properties with a view to obtaining satisfaction of the debt owed by Choy under the Shares Agreement and nothing more.  However, the option, as a matter of rights, is that belonging to Huen and China Gain.

45.  Choy and Raking complain that Huen and China Gain have, through solicitors, indicated their consent to the sale of the Properties subject to the provision of security for the amount of Choy’s liability under the Shares Agreement. Allegedly it was such representation that caused Choy and Raking to believe that they could proceed to sell the Properties with a view to funding the payment of the judgment sum.  They proceeded accordingly; only that Huen and China Gain have now changed their mind.

46.  The stance of Huen and China Gain at the trial was best summarised by their counsel’s closing submission (at §52).  They asked the court to enter judgment against Choy and Raking in the way as pleaded; and if necessary, formal minutes of draft judgment (or order) could be submitted for the trial judge’s consideration after considering the judgment.  As pleaded, Huen and China Gain claim against Choy for the sum of HK$30 million being the amount of the dishonoured cheques or alternatively debt under the Shares Agreement; or as an alternative to such claim, specific performance by Choy or Raking of the Security and Set-Off Agreement and the S&P Agreement.

47.  In the circumstances, reference to pre-trial correspondence between the parties dated 2010, be that suggestive of the stance of Huen and China Gain that they might not insist on the specific performance of the Security and Set-Off Agreement and thus the S&P Agreement, becomes immaterial.

48.  The correspondence and the alleged representation, even if material, should have been brought before the court during the trial as relevant to the question of whether it would be equitable to make an order for specific performance of the S&P Agreement in its present terms.

49.  The post-trial but pre-judgment correspondence on this subject started at the end of August 2012.  The solicitors started by referring to the pre-trial correspondence dated 2010 mentioned above.  Without waiting for a reply from the solicitors for Huen and China Gain, the solicitors indicated that they would proceed with the intended sale as they took the view that there could be no justification for any contrary view on the part of Huen and China Gain.  This happened in September 2012.

50.  In the circumstances, it was the decision of Choy and Raking to proceed with the intended sale of the Properties; but not as a result of the representation or suggestion of consent on the part of Huen and China Gain.

51.  Huen and China Gain subsequently re-registered the writ in conformity with their proprietary claim against the Properties.  The letters from their solicitors since late November 2012 made clear their stance in this respect, which is their stance now.

52.  Choy and Raking refer to a further letter from the solicitors for

Huen and China Gain dated 21 December 2012, whereby they indicated their readiness to consent to the sale of the Properties on terms. However the same was expressed to be without prejudice; and formal acceptance in reply is nowhere to be found.  Miss Cheng’s objection to place reliance on this as evidence of representation of consent is therefore understandable.

Appeal

53.  I mentioned above Mr Fung’s emphasis that his clients stand by the Judgment (presumably for the purpose of the present application).  I was informed at the end of the hearing that the Judgment is actually being appealed.

54.  This is not an application for stay pending appeal.  As made clear from the outset, I have to take the Judgment and the Order as they are for the purpose of the present application.

CONCLUSION

55.  Miss Cheng submitted that Huen and China Gain have the necessary interest in the Properties to maintain the registration.  Choy and Raking fail to show good cause why the same should be vacated.  Likewise, there is no basis for the declaration that the S&P Agreement is of no further effect.  For the above reasons, I agree.

ORDER

56.  The defendants’ application is dismissed with costs to the plaintiffs to be taxed, if not agreed, with certificate for 2 counsel.  This costs order is nisi and shall in the absence of application in 14 days to vary become absolute.