XIPHO DEVELOPMENT CO LTD v. CHM HOLDINGS CO LTD

IN THE COURT OF APPEAL

1996, No. 112
(Civil)

-------------------------------------------------------

----------------------

J U D G M E N T

----------------------

Litton, V.-P. (giving the judgment of the Court):

Introduction

1. This appeal concerns two warrants of distress - Distraint Nos. 7227/95 and 935/96 - issued on the application of the landlord of room Nos. 1202-06, 12/F, Harbour Centre, 25 Harbour Road, Wanchai. The tenant of those premises is a company called St. Chare Corporation Ltd, holding under a tenancy agreement dated 14 October 1994. The agreement contains a prohibition against subletting in these terms:

4(bb) Not to assign underlet or otherwise part with the possession of the said premises or any part thereof either by way of subletting lending sharing or other means whereby any person or persons not named as a party to this Agreement obtains the use or possession of the said premises or any part thereof irrespective of whether any rental or other consideration is given for such use or possession ....

2. The distraint by the bailiff, giving rise to the present proceedings, was effected on 12 March 1996. Prior to that, there had been an earlier distraint, in November 1995. At that time, when the landlord's representative attended with the bailiff upon the premises, he was met by a representative of the tenant who claimed that part of the premises had been sublet to a company called CHM Holdings Company Limited (the claimant). At the same time a copy of an Assignment dated 6 November 1995, purportedly entered into between the tenant and the claimant whereby, for the sum of HK$125,000, certain chattels were assigned by the tenant to the claimant, was shown to the landlord's representative. In consequence of this, the seizure of goods, in execution of that warrant of distress, was confined to those found upon the "remaining portion" of the premises: that is to say, the portion not allegedly sublet to the claimant.

3. A few days after the seizure by the bailiff in November 1995, the arrears of rent were paid up and the warrant of distress was discharged.

4. Because of this earlier history, when the bailiff came to execute the two warrants of distress with which this case is concerned (Distraint Nos. 7227/95 and 935/96), it was only those goods and chattels found upon the "remaining portion" of rooms 1202-1206, 12/F, Harbour Centre which were seized. The goods were, in essence, of a kind which one would expect to find in an office in the business districts of Hong Kong: office furniture, cabinets, electronic office equipment of various kinds including computers, printers, photocopiers, telephones etc. After executing the distress warrants, the bailiff made an inventory and appraisement of the property seized, as he is required to do under s89 of the Landlord and Tenant (Consolidation) Ordinance, Cap 7, and gave notice to the tenant that unless it paid the amount of arrears of rent together with the cost of the distress within five days or obtained an order from the court to the contrary, the property would be sold.

5. On 15 March 1996 Mr Fung Piu, a Director of the claimant, made an affirmation in which he referred to the bailiff's inventory of property seized and claimed that some of the property in fact belonged to the claimant: having been assigned by the tenant to the claimant under an assignment dated 6 November 1995 for the sum of HK$50,000. He purported to exhibit that assignment, but in fact did not do so: what he did exhibit was the assignment which had been shown to the landlord's representative in November 1995 when the first distress was effected. It is common ground that this assignment had nothing to do with the goods seized on 12 March 1996.

6. On 15 March 1996 solicitors for the claimant sent a fax at 7.22pm to the landlord's solicitors' office, to the effect that the claimant intended to apply to the court to discharge the distraint warrants but had been told that no hearing could be fixed before 19 March, the day fixed for the sale of the goods; in the circumstances, they said, they intended to appear before the Duty Judge the next day (Saturday, 16 March) to make the application ex parte. As might have been expected, there was no one in the landlord's solicitors' office to receive this fax and it was not read until about 9.30am the following morning. In the meantime, the claimant's solicitors went before the Duty Judge and obtained an extension of time to make an application under s93 of the Landlord and Tenant (Consolidation) Ordinance for the discharge or suspension of the warrants, or release of the goods distrained.

7. On Monday 18 March 1996 the claimant went ex parte before HH Judge Muttrie and succeeded in getting an order discharging the two warrants. On the following day, the parties, represented by counsel, went before the judge again who then (i) set aside his previous ex parte order and (ii) proceeded to hear the claimant's application upon its merits. Upon a consideration of all the material before him, the judge dismissed the claimant's application. Pursuant thereto, the distrained goods were sold by the bailiff and the proceeds of sale, after deduction of expenses, were handed over to the landlord in part satisfaction of the arrears of rent.

Notice of appeal

8. On 24 June 1996, pursuant to leave granted by the judge, the claimant lodged its appeal seeking an order from this court that (i) the judge's order made on 19 March 1996 be set aside and (ii) that the goods be released to the claimant unconditionally or upon such terms and conditions as this court should deem "just and reasonable".

9. As can be readily seen from the notice of appeal itself, the order sought, if the appeal be successful, was not one which this court could possibly have made - the goods having already been sold.

10. Appreciating this difficulty, counsel for the claimant, at the commencement of the hearing, obtained leave to substitute the relief sought in the following terms:

"(b) the issue whether the chattels and goods with reference numbers corresponding with those in the inventory of chattels and goods distrained by the bailiff as shown in Exhibit marked 'FP-6A' of the Supplemental Affirmation of Fung Piu filed herein on 18th March 1996 had been lawfully distrained and/or whether their continued detention and subsequent sale thereof was lawful be remitted to the District Court for trial to be tried by another judge;"

11. Counsel's submission, in essence, is this: The judge, having found upon the material before him that the claimant was the true owner of the goods listed in exhibit "FP-6A" which formed part of the bailiff's inventory of property seized, the only order the judge could properly have made was for the release of the goods to the claimant. Counsel also submits that as the bailiff was shown a copy of the assignment dated 6 November 1995 under which the claimant, for $50,000, acquired title to some of the goods seized, the seizure was unlawful: the warrant did not authorise the bailiff to seize those goods since they were not "in the apparent possession of the person from whom the rent was claimed" in terms of s87 of the Ordinance.

12. To examine the validity of counsel's points, it is necessary to go back to first principles.

The scheme of the statute

13. Part III of the Landlord and Tenant (Consolidation) Ordinance provides a statutory scheme for distress for rent. It has its origin in the Distress for Rent Ordinance, 1883 which consolidated and amended the laws relating to distraints for rent. Although, by and large, proceedings in relation to distraints for rent have almost invariably been conducted within the statutory framework of Part III, and therefore the matter is ultimately one of statutory interpretation, an understanding of the historical origins of distress for rent will help to clarify the rights and liabilities of the parties.

The common law position

14. In its origin, the common law rule heavily favoured the landlord. A landlord was entitled to seize and distrain for arrears of rent all goods and chattels found on the tenant's premises. The question of ownership was, generally speaking, irrelevant to the right of distress. As Buckley LJ said in In re Button, ex parte Haviside [1907] 2 KB 180 at 189-90:

"Where the goods of a stranger on the premises of a lessee are distrained for rent, and the stranger is obliged to pay the rent to redeem them, he may maintain assumpsit against the lessee: Exall v. Partridge 8TR 308."

15. The stranger's redress, if he had any, was not against the distraining landlord but against the tenant who, by his conduct, had caused the goods to be distrained. Over the years, the harshness of the rule was mitigated by having categories of goods privileged from distress: for example, "things sent or delivered to a person exercising a trade to be carried, wrought, or manufactured in the way of his trade, as a horse in a smith's shop, materials sent to a weaver, or cloth to be made up .... " see Lord Easher MR in Clarke v. Millwall Dock Co. [1886] 17 QBD 494 at 501. These categories of goods privileged from distress are now to be found in paragraphs (a) to (g) of s88 of the Ordinance. Such things apart, all movable property found in or upon the premises mentioned in the warrant and in the apparent possession of the person from whom the rent was due was liable to seizure under the common law rule, irrespective of ownership: in Hong Kong, this rule is encapsulated in s87 of the Ordinance.

16. As mentioned earlier regarding the goods of a stranger which were on the premises, if these should be lawfully distrained by the landlord for rent due, the owner's redress was to seek reimbursement of their value from the person from whom the rent was due: see para 250 Vol. 13 Halsbury (4th ed.).

Application under section 93

17. Section 93 states:

"93. Discharge or suspension of warrant or release of distress

(1) The debtor, or any other person alleging himself to be the owner of any property seized under this Part, may, at any time within 5 days from such seizure, apply to the court to discharge or suspend the warrant or to release a restrained article; and the court may discharge or suspend the warrant or release the article, on such terms as it may think just.

(2) An applicant under subsection (1) shall give to the person who obtained the warrant and the bailiff who executed it 24 hours' notice of the application. The notice shall set out the facts on which the claim is founded and the facts shall be verified by affidavit."

18. Section 93 reproduces s21 of the old Distress for Rent Ordinance. As Hogan, C.J. said in So Kai v. Chan King Yu [1965] HKLR 50 at 65, the courts in Hong Kong have, in practice, interpreted the section as prescribing a procedure complete in itself. This statement is of course correct, but must be seen in the overall context of the landlord's right of distress for rent, which has its origins in the common law. Thus, although, on its face, s93(1) gives the court wide powers to discharge or suspend the warrant, it would be wrong to conclude that the court has an unfettered discretion. The discretion must be exercised within the context of Part III of the Ordinance.

19. Before a seizure under s87 can be lawful, the property must be "in the apparent possession of the person from whom the rent is claimed". Possession connotes of course a right to possess. Normally, this would be judged by the evidence of the bailiff's eyes: see Lindsell J's remark to this effect in HK Land Investment and Agency Co. Ltd. v. Athena Studio [1933] 26 HKLR 39 at 41. But other cogent evidence can also come into play to displace the prima facie view, such as the majority of this court found in the unusual case of Lu Shang Chang v. Kingroup Ltd. [1995] 3 HKC 709. There, goods seized under a distress warrant were auctioned on 18 January 1995. The purchaser bought the goods from the bailiff but they remained on the tenant's premises. They were seized again upon a second distress. The District Judge had wrongly concluded that the purchaser had abandoned the goods (having paid $201,000 for them only about three weeks before). Upon all the circumstances of that case, this Court, by a majority, concluded that the only reasonable inference from all the facts known to the bailiff was that the machinery in question was not in the apparent possession of the tenant.

20. Counsel for the claimant, in argument before us, relies heavily upon the majority decision in Lu Shang Chang but, in my judgment, the case was decided upon its own peculiar facts and affords no guidance as to the principle of law with which this case is concerned.

The facts

21. As far as can be judged from the affidavit evidence before the court, the tenant was, at all material times, conducting some form of business on the premises in question. One of the persons who made an affirmation in support of the claimant's application was Tong Mui Kok, whose address was that of the premises in question, and who described herself as "the financial controller of St. Chare Corporation Ltd.". The goods seized were all found within the "remaining portion" and were items of office furniture and equipment which one would expect to find in an operating office: chairs, sofas, desks, electronic equipment of various descriptions etc. On 12 March 1996, when the warrant of distress was executed by the bailiff, there was nothing to rebut the evidence of his eyes: that everything within the area of the "remaining portion" was in the apparent possession of the tenant. The law in this regard is clear. The circumstances of the distress at the time it is made constitutes the test of legality: see para 248 Vol. 13 Halsbury (4th ed.).

Lawful distress

22. In this case, the judge had found that there was no wrongful distress. This finding is, in our judgment, unimpeachable.

23. Having reached this point, what room is there for the court to make an order on the claimant's application under s93(1)?

Suspension of warrant or release of goods

24. If the warrant could not be discharged on the claimant's application, could the judge have suspended the warrant or ordered the release of the goods in terms of s93(1)?

25. When the claimant went before the judge on 19 March, there was no offer to put up security for the release of the distrained goods in satisfaction of any part of the arrears of rent. What the claimant did was to assert ownership to some of the property distrained, upon highly dubious evidence. The founding affidavit, that of Mr Fung Piu affirmed on 15 March 1996, exhibited an assignment which did not relate to the goods in question. This assignment of property, purportedly for the sum of $125,000, had been shown to the landlord's representative in November 1995 and was admittedly of no relevance to these proceedings. Then Mr Fung made a second affirmation saying that the earlier assignment was exhibited "due to an inadvertence" and he exhibited another assignment of the same date, this time for $50,000 which was said to cover part of the property seized. It is curious that this document, dated 6 November 1995, did not see the light of day when the landlord's representative attended at the premises with the bailiff at the end of November 1995.

26. Furthermore, and not surprisingly, it was discovered that the claimant and the tenant were related companies. They have two common directors.

27. In these circumstances the judge declined to order the release of the goods to the claimant.

Conclusion

28. In our judgment, there was nothing before the court to displace the prima facie view that all the goods seized on 12 March 1996 were in the tenant's apparent possession. That, in effect, concluded the matter in the landlord's favour. Nothing put forward by the claimant subsequently, to substantiate its purported ownership of some of the goods, displaced the landlord's right to distrain for rent. There is now this additional point: The distrained goods have, since HH Judge Muttrie dismissed the claimant's application on 19 March 1996, been sold. To reverse the judge's order can bring no palpable benefit to the claimant. This appeal is, in effect, academic. In our judgment, this appeal must be dismissed with costs.