KINGSWAY FINANCE LTD v. WANG QINGYI AND ANOTHER

HCA 360/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 360 OF 2012

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D E C I S I O N

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The agreed facts:

1.  These proceedings constitute a dispute between mortgagees as to priority in respect of advances made to the Ms Wang.  Wing Wui, the holder of what was originally the third mortgage over Ms Wang’s property asserts that Kingsway, the holder of the second mortgage, and claiming rights by way of subjugation to the first mortgage, has no priority .

2.  The parties have agreed the facts which I now set out.  I have varied the nomenclature to make the agreed facts more readable and have omitted certain irrelevant facts.

(a) Both Kingsway and Wing Wui were at all material times licensed money lender under the Money Lenders Ordinance, Cap. 163

(b) At the material times, Ms Wang was the registered owner of Flat H, 33rd Floor, Block 21, Park Island, Ma Wan, New Territories (together with the roof thereabove and the flat roof adjacent thereto) (Park Island) by an assignment dated 30July 2010.

(c) On 19August 2010, Ms Wang executed a mortgage for all moneys in favour of Oi Wah Pawnshop Holding Limited (Oi Wah) in respect of Park Island (Oi Wah Mortgage); which was registered on 3September 2010.

(d) On 30May 2011, Kingsway and Ms Wang entered into a loan agreement (Kingsway’s 1^stLoan) whereby Kingsway agreed (inter alia) to lend a sum of HK$2 million to Ms Wang. That sum of HK$2 million was advanced by Kingsway to Ms Wang on 30 May 2011.  A Second Mortgage dated 30May 2011 (the Second Mortgage) was executed by Ms Wang in favour of Kingsway in respect of Park Island to secure repayment to Kingsway of all sums of money payable by Ms Wang to Kingsway under (inter alia), Kingsway’s 1^stLoan. It was registered on 15June 2011. 

(e) On 3August 2011, Wing Wui agreed to lend a sum of HK$1.5 million to Ms Wang by way of a loan agreement.  On the same day, Wing Wui made a payment of HK$1.5 million to Ms Wang by way of a cash cheque through its solicitors Messrs. Tang Wong Cheung (TWC). For purpose of securing repayment, Ms Wang executed the Third Charge dated 3August 2011 in favour of Wing Wui in respect of the Property (the Third Charge).  That charge was registered on 5^thAugust 2011.

(f) In Recital (4) and Clause 3 of the Third Charge, Wing Wui acknowledged that the First and Second Mortgages were valid and subsisting and that Ms Wang charged the Property to Wing Wui subject to the First and Second Mortgages.

(g) Immediately after the grant of the Kingsway’s 1^st Loan and Kingsway’s 2^nd Loan, Ms Wang requested Kingsway to grant her a further loan to discharge the Oi Wah First Mortgage.  On 9August 2011, Kingsway and Ms Wang entered into the 3^rdloan agreement whereby Kingsway agreed to (inter alia) lend a sum of HK$7.62 million to Ms Wang on 9August 2011 (Kingsway’s 3^rdLoan).

(h) Pursuant to Kingsway’s 3^rd Loan, the sum of HK$7.62 million was advanced to Ms Wang by Kingsway on 9 August 2011 in the following manner:-

(i) A cheque issued by Messrs. S.W. Tai & Co., former solicitors for P on behalf of Ms Wang dated 9 August 2011 in favour of Oi Wah in the sum of HK$7,561,443.41 in discharge of the Oi Wah First Mortgage;

(ii) A cheque issued by Messrs. S.W. Tai & Co. on behalf of D1 dated 9August 2011 in favour of Messrs. C.L. Chow & Macksion Chan, solicitors for Oi Wah, in the sum of HK$2,300 being their costs and disbursements.

(i) On 12August 2011, the Oi Wah First Mortgage over Park Island was discharged by virtue of the aforesaid payments advanced by Kingsway to Ms Wang.

(j) On 16November 2011, Kingsway agreed to (inter alia) lend a sum of HK$9.62 million to D1 on 30November 2011 for the purpose of restructuring the repayment of Kingsway 1^stand 3^rdLoan (Kingsway’s 4^thLoan).

(k) By an order made by Master J Wong dated 3July 2012, upon hearing the respective applications of Kingsway (under the present action) and Wing Wui (under HCMP No. 146/2012 in which Wing Wui is the plaintiff), the Court:-

(i) granted vacant possession of Park Island to Kingsway and entered judgment in favour of Kingsway against Ms Wang in the sum of HK$10,978,012.69 together with interest thereon (under the present action);

(ii) entered judgment in favour of Wing Wui against Ms Wang in the sum of HK$1,762,500.00 together with interest thereon (under HCMP No.146/2012); and

(iii) granted leave to Kingsway to join Wing Wui in the present action for the purposes of adjudicating the priority issue between Kingsway and Wing Wui in relation to the remaining balance of the proceeds of sale of the Property.

3.  It is not in dispute that in addition to those agreed facts the amount owing under the Oi Wah mortgage, and repaid by Kingsway by the 3^rd Loan to Ms Wang, was a sum of HK$7.62 million.

The questions for answer:

4.  Based upon those facts, three questions are posed for determination under O 14A, (I have omitted irrelevant words in order that the questions are clear):

1. Whether the Second mortgage dated 30 May 2011, made between Ms Wang in respect of the (Park Island) securing the sum of HK$2 million advanced by Kingsway to Ms Wang under Kingsway’s 4^th Loan dated 16 November 2011, together with interest thereon has priority over the Third (registered) Charge dated 3 August 2011, made between Ms Wang and Wing Wui; (the second mortgage/4^th Loan issue)

2. Whether Kingsway is, and has since 9 August 2011, been an equitable assignee of the First Mortgage dated 19 August 2010, made between Ms Wang and Oi Wah in respect of the (Park Island property) by virtue of (Kingsway’s) payment of the sum of HK$7,561,443.41 (the sum) to discharge the First Mortgage and entitled in equity to the same priority as the First Mortgage for the sum (together with interest thereon) and hence has priority over the Third Charge; (the equitable assignment issue)

3. Whether Kingsway is and has since 9 August 2011, been subrogated to the rights of Oi Wah under the First Mortgage in respect of the sum (together with interest thereon) in priority to the third charge.  (The subrogation issue).

The equitable assignment issue

5.  The question of an equitable assignment simply does not arise. 

6.  That this is so is clear from Banque Financière de la Cité v Parc (Battersea) Ltd [1999] 1 AC 221 at 231, per Lord Hoffman at 236 F, (see §11 below).  In subrogation, as an equitable remedy, the legal relations with a defendant who would otherwise be unjustly enriched are regulated as if the benefit of the charge had been assigned to him.  The plaintiff is not treated as an actual assignee, (see §§8-11 below).

7.  While I required to answer this question, the answer would be; NO. However, this answer has no consequence at the end of the day.

The subrogation issue

8.  It is convenient to deal with the third question next.  A clear statement of the principle upon which subjugation is based may be found in Burston Finance Ltd v Spierway Ltd (in liquidation) [1974] 1 WLR 1648, per Walton J at 1652:

“What is the basis of subrogation? It is simply that, where A’s money is used to pay off the claim of B, who is a secured creditor, A is entitled to be regarded in equity as having had an assignment to him of B’s rights as a secured creditor……(Subrogation) finds one of its chief uses in the situation where one person advances money on the understanding that he is to have certain security for the money he has advanced, and, for one reason or another, he does not receive the promised security. In such a case he is nevertheless to be subrogated to the rights of any other person who at the relevant time had any security over the same property and whose debts have been discharged, in whole or in part, by the money so provided by him, but of course only to the extent which his money has, in fact, discharged their claims.”

9.  In the present case the right of subrogation relied upon by Kingsway is an equitable right, and not a contractual right. The issue is not peripheral, and the manner in which the distinction is made clear by the following passage from Banque Financière at 231, per Lord Hoffman, insight is given to the concept of subrogation. In particular Lord Hoffmann makes it clear that the “assignment” concept referred to by Walton J in the previous citation is inappropriate.  Lord Hoffmann said:

“My Lords, the subject of subrogation is bedevilled by problems of terminology and classification which are calculated to cause confusion. For example, it is often said that subrogation may arise either from the express or implied agreement of the parties or by operation of law in a number of different situations: see, for example, Lord Keith of Kinkel in Orakpo v Manson Investments Ltd [1978] AC 95, 119. As a matter of current terminology, this is true. Lord Diplock, for example, was of the view that the doctrine of subrogation in contracts of insurance operated entirely by virtue of an implied term of the contract of insurance (Hobbs v Marlowe [1978] AC 16, 39) and although in Lord Napier and Etterick v Hunter [1993] AC 713 your Lordships rejected the exclusivity of this claim for the common law and assigned a larger role to equitable principles, there was no dispute that the doctrine of subrogation in insurance rests upon the common intention of the parties and gives effect to the principle of indemnity embodied in the contract. Furthermore, your Lordships drew attention to the fact that it is customary for the assured, on payment of the loss, to provide the insurer with a letter of subrogation, being no more nor less than an express assignment of his rights of recovery against any third party. Subrogation in this sense is a contractual arrangement for the transfer of rights against third parties and is founded upon the common intention of the parties. But the term is also used to describe an equitable remedy to reversal prevent unjust enrichment which is not based upon any agreement or common intention of the party enriched and the party deprived. The fact that both contractual subrogation and subrogation to prevent an unjust enrichment both involve transfers of rights or something resembling transfers of rights should not be allowed to obscure the fact that one is dealing with radically different institutions. One is part of the law of contract and the other is part of the law of restitution. Unless this distinction is born clearly in mind, there is a danger that the contractual requirement of mutual consent will be imported into the conditions for the grant of the restitution remedy or that the absence of such a requirement will be disguised by references to a presumed intention which is wholly fictitious. There is an obvious parallel with the confusion caused by classifying certain restitution remedies as quasi-contractual and importing into them features of the law of contract.”

10.  Ms Lin, for Kingsway, makes it clear that it is the equitable remedy he seeks.

11.  Lord Hoffmann went on to say, at 234:

“These cases seem to me to show that it is a mistake to regard the availability of subrogation as a remedy to prevent unjust enrichment as turning entirely upon the question of intention, whether common or unilateral. Such an analysis has inevitably to be propped up by presumptions which can verge upon outright fictions, more appropriate to a less developed legal system then we now have. I would venture to suggest that the reason why intention has played so prominent a part in the earlier cases is because of the influence of cases on contractual subrogation. But I think it should be recognised that one is here concerned with a restitutionary remedy and that the appropriate questions are therefore, first, whether the defendant would be enriched at the plaintiff’s expense; secondly, whether such enrichment would be unjust; and thirdly, whether there are nevertheless reasons of policy for denying a remedy. An example of a case which failed on the third ground is Orakpo v Manson Investments Ltd [1978] AC 95, in which it was considered that restitution would be contrary to the terms and policy of the Moneylenders Acts.”

And further at 236:

“In my view, the phrase “keeping the charge alive” needs to be handled with some care. It is not a literal truth but rather a metaphor or analogy: see Birks, An Introduction to the Law of Restitution, pp93-97. In a case in which the whole of the secured debt is repaid, the charge is not kept alive at all. It is discharged and ceases to exist. In a case like the present, in which part of the secured debt is repaid, the charge remains alive only to secure the remainder of the debt for the benefit of the original chargee. Nothing can affect his rights and there is no question of competition between him and the party claiming subrogation. It is important to remember that, as Millet LJ pointed out in Boscawen v Bajwa [1996] 1 WLR 328, 335, subrogation is not a right or cause of action but an equitable remedy against a party who would otherwise be unjustly enriched. It is a means by which the court regulates the legal relationships between a plaintiff and defendant or defendants in order to prevent unjust enrichment. When the judges say the charge is “kept alive” for the benefit of the plaintiff, what they mean is that his legal relations with a defendant who would otherwise be unjustly enriched are regulated as if the benefit of the charge had been assigned to him. It does not by any means follow that the plaintiff must for all purposes be treated as an actual assignee of the benefit of the charge and, in particular that he would be so treated in relation to someone who would not be unjustly enriched.” (Original emphasis)

12.  Ms Yiu acknowledged that the appropriate questions to be asked as a test to entitlement to subrogation are the three posed by Lord Hoffmann in Banque Financière at 234:

1. Whether the defendant would be enriched at the plaintiffs’ expense;

2. whether such enrichment would be unjust;

3. whether there were nonetheless reasons of policy for denying a remedy.

13.  Ms Yiu correctly accepted that, subject to her argument as to the enrichment not being unjust, and a policy argument, upon Kingsway repaying the Oi Wah mortgage, Kingsway would be entitled to be subrogated to the Oi Wah mortgage.  A consequence of that subrogation, if it survived her arguments, was that although the advance made to repay the Oi Wah mortgage was made later in time than the advance secured by the Third Charge to Wing Wui, Kingsway would have priority.  Straightforward examples of subrogation in this manner may be found in Hong Kong Chinese Bank Ltd v Sky Phone Ltd [2001] 1 HKC 50, and Netwell Properties Ltd v JCG Finance Co Ltd [2002]2 HKC 558.

14.  Ms Yiu contended that there were four factors in this case which prevented the usual role of subrogation applying.  These were, first, the presence of Kingsway’s Second Mortgage, second, that by Kingsway’s 4^th Loan, any rights Kingsway had by way of subrogation to Oi Wah’s mortgage and the Second Mortgage were lost, third, as a matter of policy, subrogation should be refused, and finally, any enrichment to Wing Wui was not unjust.

The registration of the discharge of mortgage:

15.  Before I deal with those four matters, I put to rest the issue of the consequences of the registration of the discharge of the Oi Wah mortgage.  The simple answer is that the fact that that discharge was registered is not a bar to Kingsway relying upon the provisions of that mortgage to give it a priority over Wing Wah.

16.  That is clear from the decision in Financial and Investment Services for Asia Ltd v Baik Wah International Trading Co Ltd [1985] HKLR 103, per Hunter J, which makes it clear that the right of subrogation, being an equity arising solely from the application of  equitable principles to the fact of payment, and consequently unwritten, was not registrable under the Land Registration Ordinance Cap 128.  The registration is not a test of ownership but is merely prima facie evidence of a fact.  That decision was followed in Hong Kong Chinese Bank Ltd, supra at 54D-55D.

The Kingsway second mortgage:

17.  At a time when the Oi Wah mortgage still extant, Kingsway entered into Kingsway’s 1^st Loan with Ms Wang to lend her the sum of HK$2 million, to be secured by a first mortgage.  In fact only a second mortgage was given, but nothing turns on that.  The Second Mortgage was completed, and duly registered.  Subsequently, Wing Wah advanced to Ms Wang HK$1.5 million which was secured by the Third Charge.

18.  It is not disputed that at the time the Third Charge was registered Oi Wah had priority over Wing Wah for the sum of HK$7.62 million under the first mortgage, and Kingsway had priority over Wing Wah for the sum of HK$2 million, a total liability in priority of $9.62 million.

19.  Mr Lin accepts that if a lender who might otherwise be entitled to equitable rights by way of subrogation over a prior lender receives all the security that he has bargained for, he loses his right of subrogation. 

20.  That principle was made clear in Burston Finance.  There, the plaintiff lender agreed with the defendant company to provide overdraft facilities on condition that a first legal charge should be created over the properties.  The advance was made and the first legal charge was duly given and registered in the Land Registry.  But the plaintiff lender failed to register the charge under the Companies Act 1948.  That had the disastrous effect of rendering the charge void, notwithstanding registration on the Land Registry.

21.  In order to get around that consequence the plaintiff sought a declaration that by way of subrogation it was entitled to an unpaid vendor’s lien over the property.  The argument failed.  The bargain the plaintiff lender had entered into was to advance money in return for a first legal charge over the properties.  It had received that charge and had consequently received all that it was entitled to.  Registration under the Companies Act was not part of the bargain.

22.  Ms Yiu sought to argue that because at the time Kingsway’s 3^rd Loan was made, Kingsway already had a mortgage on the title, which became a first mortgage upon the discharge of the Oi Wah mortgage, and so Kingsway had all that was entitled to, a first mortgage. 

23.  But, she said, Kingsway was in the same position as Burston Finance, and was unable to exercise its rights under its first mortgage because in order to do so, and gain priority over Wing Wah’s Third Charge, it would be necessary for Kingsway to tack the advance of HK$7.62 million applied in repayment of the Oi Wah mortgage onto its existing mortgage.  She argued, and Mr Lin accepted, that tacking was only possible in Hong Kong under s 45 Conveyance and Property Ordnance Cap 219, (CPO) and that Kingsway could not bring itself within either of the three categories of mortgagee entitled to tack.

24.  The argument, unattractive as it is, involving giving with one hand but taking away with the other, must in my view fail.  It fails, because, not being able to tack, Kingsway has not in fact achieved that to which it was entitled under the Third Loan agreement, namely a first mortgage security.  It is a principle of subrogation that the lender must not have achieved all that to which it was entitled.  Kingsway has plainly not achieved the first mortgage security to which it was entitled under the Second Loan agreement.

25.  I accordingly reject the argument that the presence of Kingsway’s second mortgage is a bar to Kingsway being subrogated to Oi Wah’s rights as first mortgagee.

The Fourth Loan is a bar to subrogation:

26.  There is no doubt on the facts that in November 2011, Kingsway made a further loan agreement with Ms Wang, known as the 4^th Loan.  The sum advanced under this loan was HK$9.62 million, and this sum was applied in repayment of the amount owing to Kingsway that had been applied in repayment of the Oi Wah mortgage, and the amount of HK$2 million owing under Kingsway’s second mortgage.

27.  Ms Yiu’s argument in this respect turned upon the decision in Re Alton Corporation [1985] BCCL 27, Ch D per Sir Robert Megarry VC.  The issue before the court was not one of subrogation, but whether an equitable mortgage or charge had been created.  The judge said this at 35-36:

“There is a further aspect to this point. I do not know whether there is any definition of the term ‘further advance’; none has been put before me. It is familiar enough in the law of mortgages in relation to tacking, both before 1926 and after 1925. Under the law, a later loan could in certain circumstances be ‘tacked’ to an earlier loan and take priority of that earlier loan as against intervening encumbrances. That presupposes the continued existence of that earlier loan with its superior priority, for once it has gone there is nothing to which the further advance can be tacked. Where, however, the later loan is made with the object of repaying and so destroying the earlier loan, I would hesitate to describe the later loan as being a ‘further advance’. In one sense, it is indeed an ‘advance’, and a ‘further’ one at that. Yet in the way in which the term is normally used in the law of mortgages, and not least in respect of a mortgage by deposit of deeds being security for ‘further advances’, I doubt whether the judges and authors concerned had in mind that the making of a new loan to replace an existing loan and so destroy it would be described as making a ‘further advance’; and in the absence of compelling authority I certainly would not do so.”

28.  I have no doubt that that is a correct statement of the law.  But it is a statement made in the context of determining whether or not an equitable mortgage existed.  The issue was not whether there had been by repayment of an earlier loan leading to a question of equitable subrogation to protect the lender against an unjust enrichment.  It is at the very heart of the principle of equitable subrogation that the rights to which subrogation is claimed, have been extinguished.  By way of the subrogation they are, as Lord Hoffmann said in Banque Financière “kept alive”.

29.  Just as the rights that Oi Wah had under the original first mortgage were “kept alive” by the subrogation protection given to Kingsway when making the 3^rd Loan, so must the rights that Kingsway then had be equally “kept alive” when it repaid the Second Mortgage and what was now its own subrogated first mortgage, by way of the 4^th Loan.

30.  Mr Lin submitted, and I accept, but there is no reason why rights obtained by subrogation should not in turn continue by way of a further subrogation.

31.  I am satisfied that the 4^th loan is not a bar to Kingsway obtaining priority by way of subrogation.

The argument on policy:

32.  Mr Lin accepted that Kingsway is not entitled to tack either Kingsway’s 3^rd Loan of HK$7.62 million, or Kingsway’s 4^th Loan of $9.62 million to the Second Mortgage.

33.  First, the consent of subsequent mortgagees was not obtained, thus Kingsway could not rely on s 45(1)(a) CPO.  Second, it is clear that where the mortgage to which a lender seeks to tack a further advance, or re-advance, is an “all monies” mortgage, and not for a specified sum, the lender cannot rely on s 45(1)(b) CPO.  Third, Kingsway is not an “authorized institution (as defined in the Banking Ordinance (Cap 155))”as required by s 45(1)(c)” such an institution being the only party entitled to tack to an “all monies” mortgage.

34.  The argument made by Ms Yiu was that if Kingsway were entitled subrogation, they were effectively tacking, a right to which they were not entitled.  Consequently they would be avoiding the provisions of s 45 CPO, which, she said, as a matter of policy should not be permitted.

35.  No authority was cited to the proposition which I reject. 

36.  The mere fact that by virtue of the provisions of s 45 CPO the route of tacking is not open to Kingsway is not, in my view, a basis to say that consequently Kingsway should not be entitled to look to another perfectly lawful route to achieve the same end.  I do not understand it to be the policy of the law that if a claimant cannot achieve a result by one route he is barred all routes to his result.  It would be tantamount to saying that if two different causes of action arose from one set of facts, and that there was a bar, for example, time, to one, then the other, in time, should not be allowed to succeed.  I do not understand that to be the law.

No unjust enrichment:

37.  Ms Yiu was obliged to accept that with the Oi Wah mortgage having been repaid, and only a HK$2 million mortgage ahead of the Third Charge her client had been “enriched” in the sense that the debts with higher priority had been reduced from HK9.62 million to HK$2 million, with a greater likelihood of recovery on the sale of the property.  The issue is whether or not that enrichment is unjust.

38.  First, Ms Yiu argued that in fact Kingsway had achieved that which it was promised, namely a first mortgage, because when the Oi Wah mortgage was repaid the second mortgage became a first mortgage.  That argument would be good only if Kingsway were entitled to tack the later advance of HK$7.62 million to the second mortgage.

39.  The proposition upon which Ms Yiu mounts her argument is insufficiently stated.  What Kingsway was promised was not merely a first mortgage, but a first mortgage securing HK$7.62 million.  In the absence of the ability to tack, it has plainly not achieved that position.  In this respect see §§17-25 above.

40.  If Kingsway has not achieved a first mortgage in return for its payment of HK$7.62 million to discharge the Oi Wah mortgage, it would be unfair to Kingsway, and any enrichment to Wing Wui would be unjust.  I reject that argument.

41.  Second, Ms Yiu relied upon the rule in Hopkinson v Rolt (1861) 9 HL Cas 514. In Goode on Legal Problems of Credit and Security, 4^th edn at 5-10, the rule is expressed in these terms:

“Under the rule in Hopkinson v Rolt (1861) 9 HL Cas 514, notice of the second mortgage terminated the right to tack further advances, a rule considered necessary to avoid the first mortgagee having a monopoly over the debtor’s financing. The rule was applied even if the prior legal mortgagee was under an obligation to make further advances.”

42.  The simple answer to the proposition is that the rule is a rule which applies to circumstances of tacking, and it is clear that Kingsway has no right to tack.  No authority was cited for the proposition that the rule should apply to subrogation.  I reject the argument.

Conclusion as to question 3:

43.  As a starting proposition, I am satisfied that Kingsway is entitled to the equitable protection of subrogation to give priority over Wing Wui’s third charge to prevent unfair enrichment for Wing Wui. I have rejected each of the arguments mounted with admirable skill by Ms Yiu. 

44.  It accordingly follows that the answer to question 3 must be “YES”.

The second mortgage issue:

45.  This issue is simply resolved by the answer to the submission that the 4^th Loan was a bar to subrogation, see §26-31 above.  Upon same reasoning the answer to question 1 is YES.

Relief:

46.  The O 14A summons proposed three declarations in the event that the questions were answered in Kingsway’s favour.  The purpose of making those declarations it does not matter that question 2 was answered, NO.  It is sufficient to entitle Kingsway to each of the three declarations in its favour if questions 1 and 3 are answered in its favour, as they have.

47.  There will accordingly be declarations in favour of Kingsway as sought in the summons.

Costs:

48.  There will be an order nisi that Kingsway is to have its costs of the proceedings, including any reserved costs or costs in the cause, to be paid on a party and party basis.  If exceptions to be taken to this order I will hear counsel in Chambers on the issue at 10 AM on Tuesday 30 July. 

49.  If there is any issue as to the relief to be granted leave is reserved to apply and I will hear counsel, in chambers, at the same time.