LU SHANG CHANG v. KINGROUP LTD

IN THE COURT OF APPEAL

1995, No.106
(Civil)

________________________

________________________

________________________

JUDGMENT

________________________

Bokhary JA:

1.  I am of the same view as my brother Ching and concur in his judgment.

Liu JA:

2.  The plaintiff was the landlord of the 1st Floor of Longlife Industrial Building at No.15 Ko Fai Road, Yau Tong Bay, Kowloon. These premises were leased to Kong Sun Dyeing Works Limited. In December 1994, the plaintiff applied for a warrant of distress against Kong Sun Dyeing Works Limited which had allowed its rental to fall into arrear for a period from 1 July 1994 to 30 November 1994. At $110,000 per month, the 5 months’ arrears were $550,000. Goods at the leased premises were seized by the bailiff in distraint. The appellant, Mr Lu Shang-chang successfully bid $201,000 for the distrained goods at a public auction held on 18 January 1995. Mr Lu paid cash and in the afternoon he took delivery of the goods from the bailiff at the premises. The auction had been advertised in the press. The advertisement for auction, as appearing in the press, carried a notification that “the successful bidder was required to pay in cash immediately and remove the goods within the prescribed period”. It was admitted by Mr Lee that at the commencement of the public auction the auctioneer announced the usual terms, including that for removal of goods within 7 days which expired on 25 January 1995 in this case. The landlord went further to suggest that since this period was a well known trade practice at all public auctions of this kind, a purchaser would be only too aware of his obligation to remove the auctioned goods within 7 days after fall of hammer. As a successful bidder, Mr Lu paid for the goods against a receipt issued by the auctioneers, on which was typed the following clearance clause:

“The above-mentioned goods and chattels must be cleared from the premises on or before 25th January 1995, failing which, they will be considered as abandoned by buyer and no refund of purchase money or part thereof will be allowed. All damages to the premises caused by the removal of goods and chattels must be made good by the buyer. No warranty can be given as to description.”

Mr Lu signed on the receipt and must have had notice of this clearance clause.

3.  After the auction, the unsatisfied portion of the outstanding arrears stood at approximately $385,700. By a letter dated 25 January 1995, the plaintiff’s solicitors wrote to Mr Lu reminding him of the clearance clause. The warning administered, with or without justification, was in these terms:

“…………. in such event, you will lose ‘all legal and equitable’ title to the goods and chattels on the premises. Since TIME IS OF THE ESEENCE, no extension of time will be allowed for the removal of all goods and chattels from the premises after 25 January, 1995.”

“Please inform us by way of return fax of the position you want to take and if we do not hear from you by the end of today, we shall treat the goods and chattels on the premises as abandoned by you and we shall proceed with legal actions to claim damages from you”.

The damages threatened to be claimed were presumably meant to be the “damages to the premises caused by the removal” as stated on the receipt of the auctioneers. The letter was copied to the auctioneers and the bailiff.

4.  In fact, after Mr Lu had accepted delivery of the auctioned goods at the leased premises, he allowed Kong Sun Dyeing Works Limited to continue to operate and use them. Sixteen days after the deadline for clearance, the plaintiff applied for another Distraint Warrant for the outstanding arrear, and the previously auctioned goods were seized by the bailiff for the second time under protest of Mr Lu. I shall call the plaintiff “the landlord”, Kong Sun Dyeing Works Limited “the tenant” and Mr Lu “the claimant”.

5.  The bailiff interpleaded. Her Honour Judge Barbara Chan held the distraint to be lawful and refused to exercise her discretion to return the goods seized to the claimant. The distrained goods have been removed from the premises and some $200,000 has been paid into court. The claimant feels aggrieved and now appeals against the decision of the District Judge.

6.  The legislation pertinent to the distress and the bailiff’s interpleader is section 87 and section 96(2) of the Landlord and Tenant (Consolidation) Ordinance :

“87. Property liable to seizure

In pursuance of a warrant, a bailiff shall seize the movable property found in or upon the house or premises mentioned in the warrant, and in the apparent possession of the person from whom the rent is claimed (hereinafter called the debtor), or such part thereof as may, in the bailiff’s judgment, be sufficient to cover the amount of the rent, together with the costs of the distress.”

“96. Adjudication in case of wrongful distress

(2) When so verified the court shall adjudicate thereupon, and make such order between the parties in respect thereof, and of the costs of the proceedings, as it thinks fit.”

Therefore the crucial features in the instant appeal are “movable property”, “apparent possession” for the levy of distress and “as [the court] thinks fit” for the court’s discretion to return the seized goods in the bailiff’s interpleader.

7.  Section 87 in part III of the Landlord and Tenant (Consolidation) Ordinance and its predecessor section 15 of the Distress for Rent Ordinance created a comprehensive code of distress for Hong Kong, independently of the common law. In delivering the judgment of the court in Fuleekoo Company Limited v Spiral Tubes International Limited [1986] HKC 269 at p.275 G-H/I , Silke VP, as he then was a judge of the Court of Appeal, had this to say:

“In so far as Judge Huggins was of the mind that the Distress for Rent Ordinance ‘to such extent regulated’ the exercise of the common law remedy, we are in respectful but nevertheless firm disagreement. We have formed the view that this ordinance, which is an entirely a (sic) “home-made” effort, was intended to, and did, do that which its purpose stated itself to be: that is ‘to Consolidate and Amend the Laws relating to Distraint for Rent’. We are confirmed in this view by s. 4(1) of the 1883 ordinance, now section 78(1), which provides that ‘no distress shall be levied for arrears of rent except under the provisions of this Ordinance. Many parts were, of course, drawn from the common law but not all, in particular, for example, the provision as ‘apparent possession’.”

8.  “Apparent possession” in the context of landlord and tenant legislation should be given its ordinary and natural meaning. It is a term adopted for the purpose of our Ordinance. How then should it be construed? In Hong Kong Land Investment & Agency Company Limited By Its Attorney William Robert Wilkinson v. Athena Studio and the Eastern Bazaar [1933] 26 HKLR 39, at p. 41 Lindsell, J formulated the following test:

“Nor do I find any great difficulty in the words ‘apparent possession’. In my view their effect is this, to make liable to the distraint all goods on the tenant’s premises which, at the moment of executing the warrant, the bailiff reasonably supposes on the evidence of its eyes to be in the possession of the tenant”. (Emphasis supplied).

“The only test in such a case as this is ‘on entry did the bailiff believe the disputed goods to be in the tenant’s possession, and, if so, had he reasonable grounds for that belief?’”.

9.  Some five years later in Hong Kong Fire Insurance Company Limited v. Wong Hon-sing [1938] 30 HKLR37at p. 40, when dealing with subletting of cubicles, the same judge seemed to have overlooked his exclusive eye test for the bailiff. He was prepared to accept that the bailiff could have regard to “the evidence of his own eyes or from statements made to him”. Generally, it must be unreal to wholly ignore other forms of evidence which came to the notice of the executing bailiff. Oral and written statements received by or made to the bailiff were not excluded by this court in Quarry Bay Developments Limited v. The Chartered Bank CA 148/87, the judgment of which was delivered by Huggins VP on 2 April 1984, unreported. See (1984) 14 HKLJ 358. Legal issues, such as claims of ownership or procedural objections, would not of themselves be sufficient to bar the bailiff from distraining, primarily because in our statutory regime for distress (Part III of the Landlord and Tenant (Consolidation) Ordinance s. 93 to 98), ownership and procedure disputes are entrusted to the court. In the limited time for executing his warrant, the bailiff cannot be expected to resolve these issues which may well be intricate. Put more precisely: the bailiff is not to act on any legal claim alone, such as that of ownership without the support of some visual evidence in the attendant circumstances. I shall come to the question of discretion under section 96(2) of the Ordinance, but it is worthy of note that this court in Fuleekoo Company Limited v. Spiral Tubes International Limited, supra at p. 276 A/B accepted the proposition that “ownership of itself would not cause the discretion to be exercised in favour a tenant”.

10.  I pass then to the discretion to be exercised in the bailiff’s interpleader application. Section 96(2) of the Ordinance is wholly indigenous. It is not derived from English legislation nor from the common law It confers on the court “a clear and wide discretion”. See Fulekoo Company Limited v. Spiral Tubes International Limited, supra at p. 275I. At pp. 275I - 276B, Silke JA observed:

“The wording of sub-s(2) of s. 96 can only be construed, with respect, as providing a clear and wide discretion. This appears nowhere in the English statutes nor is it part of the common law. We do not consider Yip Lam Shi to be authority for anything further than that goods in the apparent possession of a tenant are liable, regardless of ownership, to be seized.” (Emphasis added). “We accept that ownership of itself would not cause the discretion to be exercised in favour of a claimant. It is obviously a factor to be considered and must be weighed against the rights of the landlord. Indeed, all the attendant circumstances should be considered by a judge before coming to his decision and it is to be noted that he can impose such terms as he thinks fit.”

11.  Landlord and tenancy law is mostly judge-made. The law as decided and universally applied since 1986 and for “apparent possession” since 1933 should not be lightly departed from. The bailiff was aware of the clearance clause setting a deadline of 25 January 1995 for the claimant to lay claim to the auctioned goods in the first distraint. Remarks such as “considered as abandoned by the buyer”, “lose all legal and equitable title to the goods and chattels”, “ time is of the essence”, “no extension of time will be allowed for removal”, “shall treat the goods and chattels on the premises as abandoned by you” had been, within the bailiff’s knowledge, passed on the claimant’s perceived right. Whatever legal effect these entail, the claimant was left in no doubt as to what was adversely said of his entitlement or the cessation of it as at 26 January 1995. The silence of the claimant and his failure to refute these assertions must have led the bailiff to assume that the claimant was at least indifferent to the right to these goods. The so-called deadline had passed, and the second levy was not attempted until 10 February 1995, some 16 days after 25 January 1995. Not only had the claimant taken no step to clear whether ambiguity there existed, he agreed to the auctioned goods in the first distraint to be used by the tenant in the leased premises. The claimant knew full well that the premises would remain to be leased to and occupied by the tenant after the time set for clearance. The written consent of the claimant to allow the tenant to use these goods was not then shown to the bailiff. With such background knowledge and the visual evidence at the time of his visit, what other conclusion could the bailiff have come to but that the goods were in the tenant’s apparent possession? In fact, the said written consent dated 19 January 1995 was not disclosed until early February when the bailiff interpleaded. In it, there is no mention of any consent to user; it merely evidences the permission said to have been granted by the tenant for placing and storing the goods in its premises, yet not from the day after the auction in the first distraint i.e. 19 January 1995 but from 25 January 1995, the so-called deadline. The document was nevertheless dated 19 January 1995. In my view, there was indeed every conceivably good reason for the bailiff to suppose that these goods were in the “apparent possession” of the tenant. The distraint for the second time was lawful.

12.  Mr Chong invites this court to take into account the landlord’s dilatoriness in allowing rental to fall into arrears for some six months by the time of the first distraint and nine months by the time of the second restraint. Rental was as much as $110,000 per month. It is urged upon us that whilst the landlord irresponsibly gave, in effect, credit to the tenant in its known financial strait, the claimant paid hard cash for the goods at the auction in the first distraint. Mr Chong further submits that the landlord and the claimant, though both innocent, were thus not on the same culpability footing and that the landlord should not be given a windfall in the second distraint. There is clearly no substance in the estoppel point raised by Mr Chong.

13.  On behalf of the claimant, counsel further pleads with this court that the machineries were difficult to dismantle for removal, particularly at a time close to Chinese New Year when ready labour was scarce. The claimant’s stated intention as given on affirmation was that he was waiting for his factory in South China to be ready. But from an alleged disclosure made by a director of the tenant to a director of the plaintiff, his “long time friend”, the claimant was invited to bid for the machineries at the auction in the first distraint, held on 18 January 1995 and the machineries would not be taken off the leased premises before possession was recovered from the tenant by the landlord. This disclosure which was set out in the trainee solicitor’s affirmation filed on 6 March 1995, was repeated by the landlord’s director, Mr Chong, in his affirmation dated 13 March 1995. It matters not whose version is true. The issue came up twice. The claimant should at least have obliged Judge Babara Chan with a denial or an application for cross examination, especially when the claimant carried the initial affirmative burden in his prayer for an exercise of discretion under section 96(2). The claimant had repeated warnings, justifiable or not, to remove his goods. Not only had the claimant not taken heed to these warnings, it was not made known to the bailiff that their accuracy was challenged. On the contrary, the visual evidence was that the tenant continued to run and operate the machinery as if the tenant had been, at least, the controller. The claimant was the author of his own misfortune. At the material time, there was no disclosure to the bailiff of the said written consent and I have expressed my own scepticism on its contents. The claimant must have been alive to the risk of a possible further distraint. By his indifference to an adverse claim and grant of permission to resume operation, the claimant had clothed the tenant with all the indicia of “apparent possession”. Moreover, the claimant has since demonstrated no more than a claim of ownership. In Fuleekoo, this court “accepted that ownership of itself would not cause discretion to be exercised in favour of a claimant”. With open eyes, the claimant put himself at risk. In the situation in which it found itself, the landlord was justified and entitled to cause the goods to be distrained a second time. After all, the power to distrain is a protection afforded to a landlord by law. It was open to the landlord and there was a need to distrain. By his conduct, the claimant cannot complain. The goods in question should not, in the exercise of the discretion of this court, be returned to the claimant. I would dismiss the appeal with costs together with costs of the claimant’s motion to amend the notice of motion.

Ching, J.A. :

14.  I have had the advantage of reading in draft the judgment of Liu, J.A. I regret that I cannot agree with it. In my view, the judgment of the Court below cannot be allowed to stand.

15.  The Plaintiff is the owner of premises which were let to Kong Sun Dyeing Works Limited at a monthly rental of $110,000. They were used as a dyeing factory. The tenant fell into arrears of rent for five months and the Plaintiff obtained a Warrant of Distress. Under that warrant the Bailiff seized goods and chattels including heavy machinery and office equipment which were put up for auction on 18th January, 1995. The Appellant attended and was the successful bidder at $201,000 which sum he paid. He accepts that before each item was put up the auctioneer mentioned that the successful bidder should remove the goods within seven days. On the same afternoon he was given notional delivery. He was told by the Bailiff that the buyer was usually required to remove auctioned goods within seven days of the auction. He was handed a document which was a delivery note from the auctioneers to the Bailiff requesting the Bailiff to deliver the goods to the Appellant. Both the Bailiff and the Appellant signed it under words to the effect that all the items had been checked, had been found to be correct and had been handed over to the Appellant. On it, however, had been typed the words:

“Clearance : The above-mentioned goods and chattels must be cleared from the premises on or before 25th January 1995, failing which, they will be considered as abandoned by buyer and no refund of purchase money or part thereof will be allowed. All damages to the premises caused by the removal of goods and chattels must be made good by buyer. No warranty can be given as to description.”

The Appellant did not remove the goods. In his affirmation in the Court below he said that he experienced difficulty in obtaining labour for their removal because it was the Chinese New Year period. In addition, he was constructing a new factory in China for which the goods were destined and he had nowhere to store them meanwhile. He says that he therefore asked a Mr. Lau of the tenant if he could leave the goods at the factory and he agreed that they could be used by the tenant. He produced a document on the letterhead of and signed by the tenant which in translation reads:

“The Company allow the machine and capital goods inside the 1st Floor Longlife Industrial Building, Ko Fai Road, Yau Tong bought by Mr. Lu Shang Chang from Lammert Brothers Limited on 18th January 1995 continue to be placed and stored here from 25th January 1995 until further notice.”

On 25th January, 1995, the Plaintiff’s solicitors wrote to the Appellant purporting to remind him to remove the goods on that date. They claimed that the auctioneer had specifically pointed out to him that the goods had to be cleared from the premises on or before that date ‘failing which all the aforesaid goods and chattels will be considered as abandoned by you and no refund of purchase money or part thereof will be allowed’. The letter continued:

“In such event, you will lose ‘all legal and equitable’ title to the goods and chattels on the premises. Since TIME IS OF THE ESSENCE, no extension of time will be allowed for renewal of all goods and chattels from the premises after 25th January, 1995.”

They said they would treat the goods and chattels as being abandoned if not removed that day and to proceed with legal action to claim damages. The Appellant did not reply to this letter. He explained that he did not see how anyone could deprive him of goods he had bought and paid for.

16.  The Plaintiff obtained another Warrant of Distress for the balance of three months rental not covered by the auction price paid by the Appellant. On 10th February, 1995, notwithstanding the protests of the Appellant the goods were seized once more and the Bailiff interpleaded. The matter came before the Judge below on affirmation. The Appellant’s evidence was as summarised above. In addition, a member of the firm of solicitors acting for him put in an affirmation exhibiting a newspaper advertisement for the auction from which it can be seen that it contained the words:

“The successful bidder is required to pay in cash immediately and remove goods within the prescribed period.”

The prescribed period was not stated and no consequences of failure to remove within that period was mentioned.

17.  The Plaintiff put in evidence. It claimed that because the goods had not been removed they had been abandoned. It said that it had been told by the auctioneers that ‘it is the normal course of business that the purchaser must remove the goods within 7 days and it applies to every auction sale,’ that as normal practice the auctioneer would ‘announce the condition of sale’ prior to ‘the bidding’ and that the clearance clause on the delivery note was intended to be a condition of the auction sale. Finally, an affirmation was put in relating to a telephone conversation between a director of the Plaintiff and Mr. Lau the effect of which was that the latter had said that the Appellant had purchased the goods for him and that the goods would not be removed until an order for possession, presumably of the premises, had been made.

18.  The Judge below found against the Appellant. She found that the goods were in the apparent possession of the tenant and she refused to exercise her discretion in favour of the Appellant. I regret that I must say that I have had the greatest difficulty in understanding that judgment.

19.  Section 87 of the Landlord and Tenant (Consolidation) Ordinance, Cap.7, provides that the Bailiff shall seize moveable property found in or upon the premises mentioned in the warrant and in the apparent possession of the person from whom rent is claimed. The goods here were clearly in or upon the premises and it was not argued that they were not moveable. In Chan Mok-thaim v. Tao Tak-po (1965) HKLR 158, Judge T.L. Yang, as he then was, held that goods on the premises are prima facie in the possession of the tenant. Generally as a matter of common sense that must be so. The words ‘in the apparent possession of the person from whom rent is claimed’ must, however, mean something more than that the goods are physically on the premises for otherwise they would be superfluous as stated in The Hong Kong Fire Insurance Company Limited v. Kan Chak (1938) HKLR 37 at 39. That was a case where the premises were occupied not only by a tenant but by sub-tenants as well. The Bailiff cannot be expected to go into a detailed enquiry on the spot and ownership of the goods is not necessarily determinative but all of the circumstances must be taken into account as to which see Fuleekoo Co., Ltd., v. Spiral Tubes International, Ltd., (1986) HKLR 269. The only other authority it is necessary to mention is Quarry Bay Developments, Ltd., v. The Chartered Bank (Unreported, Civil Appeal 1983 No. 148). There the bank had, to the knowledge of the Bailiff, appointed receivers who had taken possession of the goods which were still within the premises. It was held that they were not in the apparent possession of the tenant.

20.  In coming to her conclusion that the goods in the present case were in the apparent possession of the tenant, the Judge below took no account of the fact that the Appellant had purchased their goods at a public auction and had paid $201,000 for them. Nor did she take into account the fact that it was the Bailiff himself who had sold the goods and who had received payment for them. Nor, finally, was any consideration given to the Appellant’s evidence as to the reasons for which and the manner in which he came to leave the goods on the premises. It is to be noted also that the Judge did not take into account the hearsay evidence put forward to the effect that the Appellant had purchased the goods on behalf of Mr. Lau. She therefore did not find that the purchase by the Appellant was merely a device to prevent a further seizure of the tenant’s goods.

21.  In coming to her conclusion that the goods were in the apparent possession of the tenant, the Judge laid a great deal of stress upon the fact that the goods had been allowed to remain upon the premises despite the fact that, according to her, the Appellant had been told of the consequences of not removing them within seven days. She also refers twice to the ‘repeated’ warnings given to the Appellant to remove the goods which he had ignored. Factually this was wrong. The Appellant had been warned to remove the goods only once and that was by the solicitors’ letter dated 25th January, 1995. It was only in that letter and in the delivery note that the consequences of a failure to remove was mentioned.

22.  The major part of the reasoning given by the Judge was the clearance clause. She found that it was a condition of the contract which she describes as having been signed by the Appellant and the auctioneer. The document that was signed was not a contract. The clearance clause upon it was imposed after the contract had been arrived at and to describe it as a condition of the contract flies in the face of the decision in Olley v. Marlborough Court, Ltd. (1949) 1 AER 127. Nor is it possible to say that the signature of the Appellant upon that document shows that it was a term previously agreed. The advertisement for the auction did not state the time within which the goods were to be removed, nor did it set out the consequences of a failure so to remove. Similarly, none of the affirmations before the Judge reveal that the Appellant was ever told of or agreed to those consequences. It is not possible to ascertain from the judgment with whom it was that the Judge found that the Appellant had contracted as she found.

23.  The Judge then went on to consider the legal effect of the clearance clause. She found that it was a condition of the contract evidenced by the delivery note. She so found because such a clause was reasonable and

“(2) It is a condition because consequence of its breach could given rise to a right in the innocent party to treat himself as discharged, in this case, discharged from having to retain the goods in its place of storage beyond the stipulated period to await clearance. The party at fault, the purchaser would not be entitled to a refund of monies paid prior to the discharge.

Alternatively from the wording of the Clearance Condition and to give effect to its meaning there can be implied a term that property in the goods do no (sic) pass until Clearance and non compliance with the Clearance Condition would lead to discharge of the contract with the resultant remedy for the parties.”

I am unable to ascertain any legal or factual basis upon which any of these findings could have been made.

24.  On the grounds I have attempted to summarise above, the Judge found that the Appellant had abandoned the goods. For the reasons I have given I am firmly of the view that that was wrong. Having found, however wrongly, that the Appellant had abandoned the goods it must follow that the Appellant would have no interest in them at all and that there could have been no question of returning them to him. Nonetheless the Judge went on to consider whether or not she should exercise her discretion to do so. In refusing to exercise that discretion in favour of the Appellant she gave three reasons. The first was that the goods were being used by the tenant. It is to be remembered that the Judge did not find that the Appellant had purchased the goods for the tenant or that it had been anything other than a genuine purchase for himself. In the circumstances, it does not appear to me that the use of the goods by the tenant was in itself of any great significance to the exercise of discretion. In her second reason the Judge found that it was exceptional for the purchaser to leave distrained goods on the premises to be used by the tenant even having regard to the document signed by Mr. Lau. She found that the clearance clause was such that the Appellant would have been expected to comply with it and would have been aware of the risk of leaving the goods on the premises. She does not appear to have considered the reasons advanced by the Appellant for leaving the goods on the premises and allowing the tenant to use them. Her final reason was that the Appellant had ignored repeated warnings to remove the goods from the premises. There were no such repeated warnings.

25.  In my view, all of the circumstances show that the goods were not in the apparent possession of the tenant and therefore were not liable to seizure. No question of any exercise of discretion to return the goods to the Appellant therefore arises. If that question had arisen, I would have held that the way in which the Judge did exercise her discretion was not in fact an exercise of it at all. I would therefore allow the appeal and make an order nisi for costs in favour of the appellants here and below except for the costs of his Notice of Motion dated 20.9.95 which will be to the Respondent.

Bokhary JA:

26.  By a majority, the appeal is allowed with an order nisi (i) that the costs here and below be to the appellant save for the costs of his Notice of Motion dated September 20, 1995, for leave to a file a supplementary notice of appeal and (ii) that the costs of that Notice of Motion be to the respondent.