XCHRX THE CHINA STATE BANK LTD. v. GOBOWAY INVESTMENT LTD. & OTHERS

HCMP 6216/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 6216 OF 2000

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J U D G M E N T

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1. This is an appeal by the 2nd and the 3rd Defendants against the order of Master Mary Yuen of 3 August 2001 in which she gave judgment against the Defendants in the sum of $21,511,621.50 and interest.

2. The proceedings arise from an originating summons dated 1 December 2000 under O. 88 of the Rules of the High Court in respect of monies advanced by the Plaintiff Bank to the 4th Defendant. The summons related to two properties. The first property was a flat in Yick Fung Garden, Kennedy Town owned by the 1st Defendant and charged to secure the 4th Defendant's liabilities to the Bank. This property and the charge thereon is not relevant to these proceedings. The second property is relevant. It is a flat on the 4th Floor at 7 Eastern Street. It was the home of and owned by the 2nd and 3rd Defendants who are now aged 70 and 67 respectively. They had signed the document dated 27 November 1991 charging the flat to secure advances and banking facilities given to the 4th Defendant which was a company operated by their son-in-law.

3. In October 2000, before the originating summons had been taken out by the Plaintiff, the 2nd and 3rd Defendants had received letters from the Plaintiff demanding monies owed by the 4th Defendant to the Bank. They instructed solicitors who negotiated with the Bank concerning the sum necessary to redeem the charge on their property. On 4 January 2001 (i.e. after the filing of the originating summons) the Plaintiff signed a Document of Release whereby the mortgage on the property was discharged in return for the sum of $870,400.

4. On 3 August 2000, the originating summons came before Master Mary Yuen. The 2nd and 3rd Defendants were represented at that hearing and they had filed an affirmation setting out what had happened in relation to the Document of Release.

5. The learned Master nonetheless gave judgment against them in the sum to which I have referred. There was no written judgment but it is apparent that the Master's order must have been based on the fact that in Clause 1 of the document which had created the legal charge, the 2nd and 3rd Defendants had covenanted to pay, inter alia, all present and future indebtedness of the 4th Defendant to the Bank.

6. The 2nd and 3rd Defendants appeal before me today relates only to the order of Master Mary Yuen in so far as it affects them.

Jurisdiction

7. The principal matter raised by Mr Ho on behalf of the 2nd and 3rd Defendants is that the learned Master had no jurisdiction to enter judgment.

8. This submission has called for consideration of whether the action falls within the terms of O. 88 of the Rules of the High Court. O. 88 r.1(1) specifies the actions to which it applies. The relevant part of that rule for the purpose of these proceedings is r.1(1)(a) which refers to "a claim for payment of money secured by a mortgage".

9. Mr Ho has argued that while the Plaintiff's claim may have been one for payment of money secured by a mortgage at the time the originating summons was taken out, it ceased to be so when the Plaintiff released the security of the property in January 2001. He points in particular to the latter part of a footnote to O.88 r.6 (88/6/2) Hong Kong Civil Procedure 2001 which is in the following terms: "However, an application for payment is only a "mortgage action" so long as the monies claimed remain "secured by the mortgage":r.1(1)(a). Therefore a claim for payment of a debt which was formerly secured by a mortgage or charge but is no longer so secured (e.g. where the mortgaged property has been sold but the proceeds of sale have been insufficient to discharge the debt in full) is not a mortgage action and is outside O.88, so judgment in default can be entered without leave in the ordinary way. If at the time the action was begun, the monies were secured but ceased to be secured after the action has begun, the action ceased to be a mortgage action and judgment in default may be entered without leave: Newnham v Brown [1966] 1 WLR 875".

10. Miss Cheung argues that Newnham v Brown is not authority for the latter sentence of this paragraph and that there is no authority supporting this proposition. She has argued that a mortgage action does not cease to be a mortgage action because the security is released by the mortgagee, that in these proceedings the Plaintiff was relying on the guarantee which was contained in the mortgage document and that dicta of Lord Denning MR and Russell LJ in Newnham v Brown suggest that the relevant time for considering whether the payment of monies are secured by the mortgage is at the time the claim was made (i.e. at the time of the taking out of the originating summons).

11. I am persuaded that the arguments of Mr Ho are correct.

12. The decision of the English Court of Appeal in Newnham v Brown establishes that where at the time of the commencement of the action there were no monies secured by a mortgage or charge, the fact that earlier a covenant by the Defendant to pay a sum of money had been contained in a document which had created a legal charge in favour of the Plaintiff, did not mean that an action to claim the money was a claim for payment of money secured by a mortgage or charge.

13. I find that the learned editors of Hong Kong Civil Procedure 2001 are correct in their view that the same principle must apply where monies were secured by a mortgage or charge at the commencement of the action but ceased to be so secured after the action had begun. The claim of the plaintiff would no longer in the words of O.88 r.1 be "a claim for the payment of monies secured by mortgage". I am satisfied that the reference to mortgage is a reference not simply to the document but to the security. Although both Lord Denning MR and Russell LR in their judgments made reference to the need to look at whether at the time of the writ the payment of monies was secured by a mortgage or charge that was because that was the time that was relevant for the purpose of that action. They were not called upon to consider any later time in that action.

14. This interpretation is supported by the provisions of O.88 r.5 which relate to the evidence which must be adduced on affidavit in support of the originating summons. It anticipates that security provided by the mortgage is still subsisting at the time of the court's determination.

15. I find that the learned Master did not have jurisdiction to enter judgment under O.88.

16. I find also that she did not alternatively have jurisdiction to enter judgment under O.28 on the basis that the proceedings had been begun by the originating summons procedure.

17. The footnote to O.28 r.9 (28/9/2) Hong Kong Civil Procedure 2001 makes it clear that save in exceptional cases (of which this is not one) an originating summons should be set down for substantive hearing in open Court. By virtue of O.32 r.11 a Master only has the authority and jurisdiction of a Judge in Chambers but not the authority and jurisdiction of a Judge in open Court.

18. I accordingly allow the appeal of the 2nd and 3rd Defendants and set aside the Masters' order of 3 August 2001.

19. It is therefore unnecessary for me to rule upon the 2nd and 3rd Defendants' summons for leave to file their further affirmations for the purpose of the hearing of the appeal. I would only add that if I had found that the learned Master had jurisdiction to make the order she had, I would nonetheless have exercised my discretion to allow the additional affirmations to be filed. Those affirmations disclosed that there is a triable defence. Accordingly I would have allowed the appeal in any event.

20. In allowing the appeal of the 2nd and 3rd Defendants and setting aside the order of Master Yuen, I make the following orders:

(1) the action herein, so far as it relates to the 2nd and 3rd Defendants shall be treated as if it had been begun by writ with a new action number allotted thereto;

(2) the Plaintiff shall file and serve a statement of claim within 21 days hereof;

(3) leave to the 2nd and 3rd Defendants to file a Defence within 21 days thereafter;

(4) leave to the Plaintiff to file a Reply to the Defence within 21 days thereafter.

21. I make the following order nisi as to costs that unless either party applies to be heard on the question of costs within 14 days, the costs of the application before the Master and of the appeal be to the 2nd and 3rd Defendants.