HONG KONG FINANCE CO LTD v. WAH FUNG FOREST RESOURCES LTD AND OTHERS

HCA 1694/2020

[2023] HKCFI 1548

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1694 OF 2020

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D E C I S I O N

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1.  This is the appeal of the 2^nd and 3^rd Defendants[1] against the Order of Master Rita So dated 24 June 2022. In that Order, the learned Master granted, inter alia, (i) default judgment against the 2^nd and 3^rd Defendants by way of an order for possession upon the Plaintiff’s Summons filed on 2 November 2020 (“P Summons”); and (ii) dismissed the Summonses of the 2^nd and 3^rd Defendants filed on 26 March 2021 (“D2 Summons” and “D3 Summons”) seeking leave to file their Defences out of time.

2.  The 2^nd Defendant no long pursues its appeal against the Master’s dismissal of its Summons dated 25 May 2022 for (i) the 2^nd Defendant’s Defence filed (without leave) and served on the same day to be deemed good; and (ii) leave for the 2^nd Defendant to file and serve affirmation in opposition to P Summons out of time.

Issues

3.  In a nutshell, the dispute here concerns a landed property (“Property”) of which (i) the Plaintiff is the second chargee under a mortgage granted by the 1^st Defendant (“2^nd Charge”); (ii) the 2^nd Defendant is the current registered owner of the Property; and (iii) the 3^rd Defendant is a lessee under tenancies granted by the 1^st Defendant. Due to the 1^st Defendant’s default under the 2^nd Charge, the Plaintiff is entitled to possession of the Property. However, the 2^nd Defendant says that the Plaintiff has entered into a settlement agreement with it whereby the Plaintiff’s cause of action against it has been discharged. In the case of the 3^rd Defendant, it says that the Plaintiff is bound by its tenancy with the 1^st Defendant.

4.  This appeal turns on whether the said defences of the 2^nd and 3^rd Defendants are arguable.

5.  There is an application by the 2^nd and 3^rd Defendants to adduce additional evidence in the form of the 2^nd Affirmation of Wong Chor Cheung pursuant to their Summons filed on 21 December 2022 (“A/E Summons”).

6.  This application was previously consented to by the Plaintiff and a Consent Summons was placed before the court for consideration. It was not approved by the court before the court was not satisfied at that stage that the additional evidence might have an important influence on the outcome of this appeal[2], and it was directed that the A/E Summons should be dealt with at the commencement of the appeal hearing.

7.  The Plaintiff had a change of heart since because it is now opposing the A/E Summons. I shall deal with this application below.

Background

8.  The Plaintiff, a licensed money lender, had granted two loans to the 1^st Defendant. Under the first loan dated 16 November 2013, the Plaintiff agreed to lend to the 1^st Defendant HK$5,000,000, with interest at 2.25% per month. Under the second loan dated 8 January 2014, a sum of HK$2,000,000, with interest at 2.25% per month was lent to the 1^st Defendant.

9.  The Loans are secured by a Deed of Second Legal Charge dated 18 November 2013 and registered on 5 December 2013, ie, the 2^nd Charge, by which the Property (a residential property with a carpark on Planation Road) was mortgaged by the 1^st Defendant as owner in favour of the Plaintiff. The 2^nd Charge was subject to a first legal charge in favour of Dah Sing Bank.

10.  It should be noted that under Clause 7.01(j) of the 2^nd Charge, the 1^st Defendant covenanted and agreed that it would not, without the Plaintiff’s prior consent in writing, part with the use, occupation or possession of the Property in any way including letting the Property.

11.  On 4 September 2014, the 1^st Defendant purportedly mortgaged the Property to Marcellotino Ltd (“ML”) (“3^rd Mortgage”). The 2^nd Defendant became the current owner of the Property by way of an assignment from ML on 14 November 2016. It appears from the assignment that the sale by ML was in exercise of its power of sale under the 3^rd Mortgage. The consideration purportedly paid by the 2^nd Defendant was the sum of HK$1,000,000. The 1^st Defendant has since been wound up by a court order dated 11 June 2018.

12.  On 5 October 2020, the Plaintiff commenced this action against the 1^st Defendant for recovery of the Loans and against the 1^st to 3^rd Defendants for vacant possession of the Property. The 1^st Defendant did not contest this action, whilst the 2^nd and 3^rd Defendants did not file acknowledgement within the prescribed time. On 2 November 2020, the Plaintiff issued P Summons seeking default judgment against all 3 Defendants.

13.  The 3^rd Defendant was dissolved on 24 September 2021 but was restored on 9 June 2022. It was/is the tenant under 4 tenancy agreements with the 1^st Defendant as landlord in respect of the Property. The agreements were dated dated 16 February 2009, 31 May 2011, 30 August 2013 and 4 September 2014 (“4^th T/A”) (collectively, “Tenancy Agreements”). Each of the Tenancy Agreements was registered in the Land Registry.

14.  Under the 4^th T/A, the 1^st Defendant purportedly leased the Property to the 3^rd Defendant for a term between 1 September 2015 and 31 August 2017. Under Clause 12, the 4^th T/A is automatically renewed for a further period of 2 years on the same terms (including this right of automatic renewal) unless the 3^rd Defendant gives prior notice of termination. The 3^rd Defendant has not given any notice of termination and the tenancy is therefore subsisting.

15.  From 17 November 2020 onwards, shortly after P Summons was filed, the Plaintiff and the 2^nd Defendant began settlement negotiations through their respective solicitors, Messrs ML Tam & Co (“MLT”) and Messrs Justin Chow & Co (“JCC”).

16.  On 17 December 2020, JCC wrote to MLT, stating that an understanding had been reached whereby the 2^nd Defendant agreed to reduce the overdue interest amount by HK$2,000,000 and made an offer for payment of HK$21,357,240.47 as full and final settlement of the indebtedness pursuant to the 2^nd Charge (“1^st Offer”).

17.  On the same day, MLT replied and stated its understanding that no agreement had been reached yet, but the 1^st Offer had been passed to the Plaintiff. Confirmation was also sought from the 2^nd Defendant on details such as the time of repayment.

18.  On 28 December 2020, JCC made a further offer for settlement to MLT, stating that: (i) the 2^nd Defendant would pay a total sum of HK$21,357,240.57 as full and final settlement of the indebtedness pursuant to the 2^nd Charge (“Settlement Sum”) on or before 28 January 2021; and (ii) all legal costs incurred by the Plaintiff would be waived (“2^nd Offer”).

19.  On 31 December 2020, MLT informed JCC that the 2^nd Offer was “acceptable to [Plaintiff]”. On 22 January 2021, MLT wrote to JCC, stating that it had been agreed by the Plaintiff and the 2^nd Defendant that the Settlement Sum should be paid by the latter on or before 28 January 2021. It is the 2^nd Defendant’s case that the 2^nd Offer had been accepted by the Plaintiff and a settlement agreement was reached at the latest by 22 January 2021 (“1^st Agreement”).

20.  Relying on the settlement, the 2^nd Defendant approached a finance company, Truthful Finance Company (“TFC”), for a loan to pay the Settlement Sum.

21.  On 25 January 2021, JCC wrote to MLT seeking a two-week extension for the 2^nd Defendant to pay the Settlement Sum because TFC was still reviewing the documents in relation to the Property.

22.  On 1 February 2021, JCC wrote to MLT, proposing that the 2^nd Defendant would pay the Settlement Sum on the condition that: (i) the Plaintiff executes a release/discharge of the 2^nd Charge in favour of the 2^nd Defendant; and (ii) the Plaintiff agrees to discontinue this action against all Defendants with no order as to costs.

23.  On the same day, MLT confirmed with JCC that the Plaintiff “in principle has no objection to the proposed conditions subject to any necessary compliance with all relevant laws and regulations”, namely, potential requirements arising out of the 1^st Defendant’s liquidation. The 2^nd Defendant contends that by 1 February 2021, the Plaintiff and the 2^nd Defendant had reached a further agreement as to the conditions for payment of the Settlement Sum (“2^nd Agreement”).

24.  There is no dispute that no payment was ever made or attempted to be made by the 2^nd Defendant to the Plaintiff. On 9 March 2021, the Plaintiff informed the 2^nd Defendant that it would proceed with P Summons.

25.  On 25 March 2021, D2 Summons and D3 Summons were taken out for extension of time to file their defence. On 25 May 2022, the 2^nd Defendant filed and served its Defence without leave and by another Summons sought an order that it be deemed good.

Relationship between the Defendants

26.  Mr Siu, who appeared for the Plaintiff with Mr Ng, had made some pertinent observations about the dealings of the Defendants. Despite the extensive evidence filed by the 2^nd and 3^rd Defendants, no light has been shed on the relationship between them and the 1^st Defendant or ML.

27.  First, the purported granting of the 3^rd Mortgage was a breach of Clause 7.01(m) of the 2^nd Charge because it did not have the consent of the Plaintiff.

28.  Second, putting aside whether the grant of the 4^th T/A was a breach of Clause 7.01(j) of the 2^nd Charge given the lack of written consent by the Plaintiff, the terms of that agreement were highly unusual :

(1)  Recital (D) stated that the rent payable by the 3^rd Defendant would be set off against an alleged debt owed by the 1^st Defendant to the 3^rd Defendant;

(2)  Clause 11 entitled only the 3^rd Defendant as the tenant to terminate the tenancy by notice. No such right was given to the 1^st Defendant as the landlord;

(3)  Clause 12 stipulated that unless the 3^rd Defendant terminates the tenancy, the tenancy agreement shall be automatically renewed for 2 years on the same terms, including the automatic renewal term without the need to execute any document.

29.  In effect, under the 4^th T/A, the 3^rd Defendant has the right to rent the Property with the rent frozen and without having make any payment for rent for as long as it desires. There is no evidence about the veracity of the alleged debt owed by the 1^st Defendant to the 3^rd Defendant.

30.  Third, I agree with Mr Siu that it is perplexing why the 2^nd Defendant would see fit to buy the Property, which was subject to two Legal Charges, the 3^rd Mortgage, and most importantly, the 4^th T/A, which on its face gave the 3^rd Defendant the right to occupy the Property indefinitely.

31.  These matters may not be relevant to the issues to be resolved, but they must be stated to make clear that the dealings between the Defendants may not be what they appear to be.

Applicable principles

32.  Where an application for default judgment and a cross-application for extension of time are placed before the court concurrently, the latter is considered first: Schindler Lifts (HK) Ltd v Ocean Joy Investment Ltd [2002] 1 HKLRD 279, [19], per Ma J, as he then was.

33.  The court would have regard to the merits of the defence or draft or proposed defence, applying the “at least arguable” standard: Lee Leung Nang v Karen Lee [2007] 3 HKLRD 615, [2] and [33], per Lam J, as he then was.

Settlement

34.  In respect of the 2^nd Defendant’s defence based on a settlement, Mr Yeung, who appeared for the 2^nd and 3^rd Defendants, referred the court to the following principles :

(1)  Generally, a compromise agreement will discharge all original claims and counterclaims unless it expressly provides for their revival in the event of a breach. The question is whether the consideration for the compromise, ie, party A’s promised forbearance, should be properly construed as being in return for party B’s (1) promised performance, or (2) actual performance: Wealthy Tech Group Holdings Ltd v Yung My Fong Betty [2021] HKCFI 2966, [21], per Recorder E Fung SC;

(2)  Whether the settlement agreement is executory in nature or provided for executed performance as satisfaction is entirely a matter of construction. All the surrounding circumstances must be considered: Kin Wah J F Construction & Engineering Co Ltd v L & M Foundation Specialist Ltd, unrep, CACV 28/2005, 28 July 2005, [18], per Woo VP;

(3)  If a settlement is reached in return for a promise to pay, there is an accord and satisfaction. As soon as an agreement is reached, the plaintiff can no longer pursue his original cause of action since the lis is extinguished or gone: Lam Fung Ying v Ho Tung Sing, unrep, HCA 2329/1992, 30 June 1992), [43], per DHCJ Tong QC.

35.  Mr Yeung submitted that it is at least arguable that the Plaintiff and the 2^nd Defendant entered into a settlement agreement, namely, the 2^nd Agreement (which had superseded the 1^st Agreement) whereby the Plaintiff’s cause of action against the 2^nd Defendant was discharged in consideration of the latter’s promise to pay the Settlement Sum.

36.  Further, given that the payment was “on the condition” that the Plaintiff (a) executes a release/discharge of the 2^nd Charge and (b) agrees to discontinue this action, under the 2^nd Agreement the 2^nd Defendant is only obliged to pay the Settlement Sum after the 2^nd Charge is released or discharged, and this action is discontinued.

37.  Perhaps stating the obvious, the Plaintiff has neither executed any release or discharge of the 2^nd Charge, nor discontinued this action.

38.  There are two fragilities with the 2^nd Defendant’s case, each of which is fatal. First, I agree with Mr Siu that there was no acceptance of the 1 February 2021 offer by the Plaintiff. It is trite that an acceptance must be unequivocal, absolute and unconditional. If an acceptance is said to be contingent on the occurrence or non-occurrence of an event, it will not take immediate effect: Furmston and Tolhurst on Contract Formation, 3^rd edn, [4.52]-[4.53]; also World Food Fair Ltd v Hong Kong Island Development Ltd (2006) 9 HKCFAR 735, [16], per Ribeiro PJ.

39.  In response to the 2^nd Defendant’s offer, the Plaintiff only indicated that it had no objection in principle. More importantly, it was stated that the “no objection” was subject to “any necessary compliance with all relevant laws and regulations”. Self-evidently, such matters of compliance had to be ascertained. Indeed, MLT’s reply went on to state :

“… Kindly let us have your view as to whether consent needs to be sought from and/or enquiry needs to be made with the Liquidator in relation to the discharge of the Second Legal Charge which were created by the [1^st Defendant]. We enclose herewith a copy of the Second Legal Charge for your reference.”

40.  I bear in mind Mr Yeung’s submissions that the issue of acceptance is facts sensitive and the language used may not be conclusive, as well as the low threshold which the 2^nd Defendant is required to meet for the present purpose. However, in the circumstances of this case, it cannot reasonably be said that the Plaintiff had unequivocally accepted the settlement offer, or that the acceptance was absolute and unconditional.

41.  As regards Mr Yeung’s reliance on the Plaintiff’s own evidence which suggested that a compromise agreement had been reached by the parties, I agree with Mr Siu that what was set out in paras 21 and 25 of the 3^rd affirmation of Tse Pui To was the Plaintiff’s case that a compromise agreement was reached between the parties at one stage but it had lapsed due to the non-payment by the 2^nd Defendant. I do not believe that the evidence can take the 2^nd Defendant’s case any further.

42.  Second, assuming that there was a valid compromise embodied in the 2^nd Agreement, the 2^nd Defendant’s contention that in return for its promise to pay the Settlement Sum on an unspecified date, the Plaintiff had agreed to discontinue its claims against not only the 2^nd Defendant, but also the 1^st and 3^rd Defendants, and to discharge the 2^nd Charge is not realistic, if not absurd. No reasonable businessman would agree to such terms, not to mention one who had the security of a charge over a property situated at one of the most prestigious residential areas in Hong Kong.

43.  At the highest, and of course assuming that the 2^nd Agreement constituted a valid compromise, the 2^nd Defendant may say that the payment of the Settlement Sum would be concurrent with the delivery of a release of the 2^nd Charge and the discontinuation of this action. There is no basis to say that the Plaintiff’s performance would be a condition precedent for the 2^nd Defendant’s payment.

44.  On Mr Yeung’s own case, the payment would have to be made within a reasonable time in the absence of express stipulation. At no time has the 2^nd Defendant even attempted to make payment. Such reasonable time had long expired.

45.  In respect of the 2^nd Defendant’s alternative argument based on estoppel by convention, there is no room for it in light of the above analysis. There was simply no common assumption.

46.  Further, Mr Siu had referred this court to First Laser Ltd v Fujian Enterprises (Holdings) Co Ltd (2012) 15 HKCFAR 569, [85]-[86] where the Court observed that estoppel by convention cannot normally be used to validate an agreement which would otherwise be invalid or unenforceable by statute, illegality or uncertainty.

47.  In the premises, I am not satisfied that the 2^nd Defendant has an arguable defence to this action.

4^th T/A

48.  The 3^rd Defendant contends that the Plaintiff has accepted its tenancy as the Plaintiff’s own. Alternatively, the Plaintiff is estopped from denying its tenancy.

49.  The following principles are uncontroversial :

(1)  In the absence of any evidence that the mortgagee did consent in writing, it must be taken that to begin with the tenancy is not binding on the mortgagee;

(2)  The fact that the tenant of the mortgagor, who could have been treated by the mortgagee as a trespasser, was allowed to remain in possession for a long period cannot itself in any way preclude the mortgagee from treating him as a trespasser if and when he desires to do so;

(3)  It would be wrong to infer merely from the fact that the mortgagee allowed the tenant to remain in possession, having knowledge of the tenancy, that the mortgagee consented to take the tenant as his own;

(4)  The creation of a new tenancy between the tenant and the mortgagee cannot be inferred merely because the mortgagee took no active steps to disavow a tenancy created by the mortgagor.

See Po Sang Bank Ltd v Luxton Development Ltd [2000] 3 HKLRD 211, 238D-239A.

50.  To show that the mortgagee had accepted the mortgagor’s tenant as his own, something more than mere knowledge and inaction is required: Nijar v Mann (2000) 32 HLR 223, headnote (1). If a new tenancy is to be regarded as having been created, there must have been acts constituting the offer of a new tenancy and its acceptance: Standard Chartered Bank v Grow Up Trading Ltd, unrep, CACV 4, 5 & 6/1999, 3 June 1999, [12].

51.  Even with the additional evidence in mind, the highest which the 3^rd Defendant can put its case is that the Plaintiff actually required the 1^st Defendant to let the Property so that income could be generated, it knew about the 4^th T/A and had taken no action over it. There is simply no basis to infer that the Plaintiff had accepted the 3^rd Defendant’s tenancy as its own.

52.  With the same analysis, there is no basis for an estoppel argument.

53.  The above demonstrates that the additional evidence cannot meet the 2^nd requirement under the Ladd v Marshall test, ie, it might have an important influence on the outcome of this appeal.

Disposition

54.  For the above reasons, the A/E Summons is dismissed with costs to the Plaintiff. The appeals of both the 2^nd and 3^rd Defendants are dismissed with costs to the Plaintiff. Both sets of costs are to be taxed if not agreed.

55.  I am grateful to counsel for their assistance.