PACIFIC CAPITAL (INVESTMENT) LTD. v. RICH RESOURCES ENTERPRISES LTD.

HCA 13244/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 13244 OF 1999

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J U D G M E N T

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1. In these proceedings the plaintiff seeks a declaration that the mortgages held by them as security for a loan have priority over a lien the defendant claims in respect of the same properties. In the statement of claim the plaintiff originally sought a declaration that the defendant had no lien over the properties, but it is conceded by Mr Leong for the plaintiff that the defendant has an unpaid vendor's lien. The only issues now before me are whether the plaintiff had notice, constructive or otherwise, of that lien, when they granted the mortgages on 7 October 1998, and whether the defendant is estopped from asserting such a lien against the plaintiff, or has waived its right to do so.

2. The background to the matter concerns an agreement for sale and purchase of seven properties in a development called Scholar Court, 15 Sands Street, Hong Kong, of which the defendant was the developer and vendor. By a provisional sale and purchase agreement dated 19 September 1998, which superseded two others dated 17 September, the defendant agreed to sell to one Fung Kam Shun, trading as Suntex International Investment Co. (Suntex), seven flats in that building (the properties) for a total of $10,739,400.00. The date of completion was fixed to be on or before 25 September 1998, some six days later, and a deposit of $350,000.00 by a cheque, post-dated to 25 September, was acknowledged, although it appears that this was dishonoured on presentation.

3. Meanwhile, on 17 September 1998, Suntex, by Mr Fung, and one James Ho who became a guarantor, had applied to the plaintiff for a loan of $7,000,000.00 for one month, offering a first charge on the properties as security. Having checked the value of the properties, which they were advised was between $11 million and $12 million, the plaintiff agreed to the loan, and instructed Messrs Joseph S C Chan & Co. as their solicitors to prepare the mortgages, where the matter was dealt with by Miss Chan Chui Mei, their conveyancing clerk. The latter wrote to Messrs Ho & Partners, Suntex's solicitors, on 18 September to advise them that they were acting for the plaintiff, and requested the title deeds and other documents to enable them to prepare the mortgages, and the amount of the balance of the purchase price and the costs payable on completion. The title deeds were sent, on 21 and 25 September, and the plaintiff raised a number of requisitions which were copied to the defendant's solicitors, Messrs Chan, Lau & Wai. On the same day, 25 September, it was agreed to postpone completion until 5 October.

4. Also on 25 September, the defendant's solicitors wrote to Messrs Ho & Partners to inform them that draft assignments the latter had prepared, which included the usual acknowledgement of receipt of the purchase moneys, and which had already been approved by the plaintiff's solicitors, were approved without amendment, and that Suntex had tendered two personal cheques in favour of their client in purported payment of the whole purchase price, one being the deposit cheque handed over with the provisional sale and purchase agreement, and another dated 26 September for the balance of the purchase price. They also pointed out that their client had no obligation to execute the assignments unless and until the cheques had been honoured. There is no evidence that the plaintiff or their solicitors ever saw this letter.

5. On 29 September the defendant's solicitors again wrote to Messrs Ho & Partners with regard to their requisitions, and noted that Suntex had "failed to pay the preliminary deposit". As there is no evidence from the defendant's then solicitors, I assume that what is meant by this is that the post dated cheque had been dishonoured, although they do not say so in the correspondence nor give notice of dishonour. Again the evidence is that the plaintiff's solicitors did not see this letter either, being a matter between the solicitors for the purchaser and vendor only.

6. On 30 September the defendant's solicitors wrote to Messrs Ho & Partners three letters setting out the balance payable on completion. The first of these, referring to a completion date of 3 October, states the sum to be $3,400,000.00 by cashier order, and the balance of $7,339,400.00 by way of a cheque already tendered by Suntex to their client. This appears to have been as a result of one of a series of further oral agreements after 25 September between Mr Peter Lam How Mun of the defendant, and Mr Fung of Suntex, as a result of which Mr Fung gave the defendant a further cheque, dated 3 October, for the sum referred to above, which was to be presented immediately after the execution of the assignments, and was also guaranteed by Mr James Ho. The date of completion was also changed by these agreements, eventually to 7 October.

7. The first letter of 30 September also stated that the defendant would have a lien on the properties if the cheque was dishonoured. Mr Ho Kwan Hung, a partner of Messrs Ho & Partners, gave evidence that he received this letter and realised that, as a mortgagee was involved, and would need evidence of the balance to be paid on completion, the presence of a lien may affect the views of the mortgagee as to the loan, and render him unable to give necessary undertakings upon completion. He therefore requested the defendant's solicitors to provide a further letter the same day. The second letter, however, also referred to the cheque tendered by his client and he foresaw similar problems, so he asked them to write another letter. The third letter merely referred to the total consideration for the properties, a completion date, now 5 October, and continued:

"We are further instructed that at completion, your client will pay to ours by way of Cashier Order or Solicitors' Cheque the sum of HK$3,400,000.00."

8. Mr Lok for the defendant sought to cast doubt on the evidence of Mr Ho, particularly as to who was the handling solicitor for this matter in his firm. As with the plaintiff's solicitors, the immediate care of the case was in the hands of a conveyancing clerk, Miss Kitty Fung, but a partner's reference appears on all letters. This reference changed during the course of this matter from a combination of that of Mr Ho and his sister, Ho Chui Lin, to just that of his sister, and outgoing letters seem to have been signed by either him, his sister, or the third partner, their younger brother Ringo. As I have said, it was Miss Fung who was primarily dealing with the matter, under the partners' supervision, and in a small firm such as this, I have no doubt that she may have sought advice, and the signing of letters, from whichever partner was there. I see no reason, however, to doubt Mr Ho in his assertion that he was familiar with the case and knew what transpired, and, indeed, being somewhat out of the ordinary, that he took personal interest in it.

9. Whatever was the situation in the office of the purchaser's solicitors, I am satisfied on the evidence of Miss Chan of the plaintiff's solicitors that the third letter of 30 September was the only one of the three seen by her when she sought clarification of the sums payable on completion.

10. On 5 October Mr Fung Kam Shun attended at the offices of the plaintiff's solicitors to execute the loan agreements and mortgages in escrow. Miss Chan was later informed by Miss Fung that completion was further postponed to 7 October and she requested Miss Fung to give instructions about how the cheques for the loan money should be split. Miss Fung orally informed her that a total of $3,400,000.00 was to be payable to the vendor and the balance of the $7,000,000.00, apart from the sums payable by way of costs, was to be paid direct to her firm, for the purchaser. This was followed by written instructions to the same effect in respect of each of the seven properties. Miss Chan not unnaturally queried why the whole sum was not to be paid to the vendor's solicitors. In response to this Miss Fung faxed to her the third letter of 30 September and an authorization from Mr Fung Kam Shun to release the balance of the loan direct to his solicitors. Miss Chan being satisfied as to the explanation, sent the cheques to Suntex's solicitors on 7 October, the day of completion, with a letter imposing the usual undertakings to deliver the assignments, and they in turn sent to the defendant's solicitors the formal sale and purchase agreements, assignments, and the cheques for $3,400,000.00.

11. On 9 October the assignments were returned to Messrs Ho & Partners duly executed and Suntex's cheque for the balance of $7,339,400.00 was presented for payment. The bank issued an unpaid item memo on 10 October in respect of the cheque, although it is not clear when this came to the attention of the defendant. In any event, the executed sale and purchase agreements and the assignments were sent to the plaintiff's solicitors by Messrs Ho & Partners on 12 October and passed by Miss Chan to their stamping and filing clerk for further action. On 13 October the defendant's solicitors, who by then were presumably aware of the cheque's dishonour, demanded payment from their guarantor Mr James Ho, and the next day commenced proceedings against him and Mr Fung, in HCA 17287 of 1998, for the balance owing and a lien, and registered the writ as a lis pendens in the Land Registry. On 16 and 20 October the mortgages, agreements and assignments were duly stamped by the plaintiff's solicitors, and on 26 October were registered in the Land Registry. This being within the one month period required by section 5 of the Land Registration Ordinance, Cap. 128, their priority dated from the date of execution, namely, 7 October 1998. The loans to Suntex have not been repaid and in separate proceedings the plaintiff has, in February 1999, obtained judgment against Suntex for the sums due and for possession under the mortgages.

12. On 13 April 1999 the defendant obtained a judgment against Suntex for a declaration that they were entitled to a lien on the properties for the balance of the purchase price of $7,339,400.00.

13. It is the plaintiff's case that the priority of the defendant in respect of their lien dates from 15 October 1998, the day following the registration of the writ in their proceedings, whereas the plaintiff's priority is from 7 October 1998, the date of execution of the mortgages.

14. The defendant's position is that, the plaintiff having had constructive notice of their lien, prior to that date, that takes precedence. It is not disputed that it is unlikely that the plaintiff had actual notice of the unpaid vendor's lien, but it is submitted that a mortgagee, or a purchaser, will be deemed to have constructive notice where it would have come to his knowledge if proper enquiries had been made. This, of course, presupposes that there are facts within the knowledge of the mortgagee or purchaser which call for further enquiries to be made, and they abstain from doing so.

15. Mr Lok says that the plaintiff's solicitors should have been put on notice by the letter of 30 September, stating the balance to be paid on completion was only $3,400,000.00 of the total of $10,739,400.00, and the authorization of Mr Fung to pay the balance to his solicitors, and should have made further enquiries as to how the balance had been paid. His expert witness as to conveyancing procedure, Mr Foo Tak Ching, an experienced solicitor of many years' standing, said in evidence that this is what he would have done. But Miss Chan had made enquiries with the purchaser's solicitors, and had been informed that only $3,400,000.00 was payable, with the 30 September letter to back this up. The obvious inference of this is that the balance had already been paid by some other means. To expect her to go further and make them divulge the means of payment seems to me to be a counsel of perfection, rather than a reasonable step to take. She was in effect being told that the balance was paid. How it was paid did not concern her, as there was no reason to believe that it was by way of post-dated cheque, an extremely unusual way for any payment on completion to be made in Hong Kong, where a personal cheque itself for such a transaction is very rare. In any event, she knew that the assignments, which had been approved by all parties, and would be executed in the form approved, included an acknowledgement of receipt of the whole purchase price, and it would be unusual, to the point of being unbelievable, that a mortgagee would envisage the vendor signing such an acknowledgement if the payment had not in fact been made.

16. Further, there was nothing in the granting of the loan requiring the money to be used only for the purpose of this purchase. While it may well have been assumed that this was the intention, this was, on the face of it, a simple loan of a sum of money for one month, and Mr Foo accepted that it was not unusual for the balance of a loan not required for the purchase to be paid to the borrower. The only concern of the lender was to ensure that the loan was adequately secured, and the property assigned to the borrower. The only matter, which I am asked to say should have caused the plaintiff's solicitors to enquire further, is that a large amount of the purchase price had apparently already been paid prior to completion. If the purchaser and the vendor were seen to be satisfied as to this, and the vendor was going to acknowledge full receipt upon completion, I am not persuaded that the circumstances were such that the plaintiff's solicitors should have their suspicions aroused to such an extent that they should investigate further. Even if they had found that a personal cheque had been issued, the acknowledgement of receipt to be signed would have been sufficient to indicate that the cheque had already been presented and cleared, and they would have had to take such enquiries considerably further to discover the arrangement between the purchaser and vendor that it was only to be presented after completion. Bearing in mind the lengths to which the solicitors for the other parties had gone to disguise this from the plaintiff's solicitors, in the amendments to the 30 September letter, I find it inconceivable that such enquiries would have revealed the extent of the arrangements, and the risks being run. On the information available to the plaintiff, if there was a problem regarding the payment on completion, the worst that could happen was that the whole deal would fall through, and they would have their money returned.

17. Similarly, there is in my view nothing in the nature of the loan itself which gives rise to any disquiet. Both Mr Yau Po Hung of the plaintiff, and Miss Chan, were under the impression that the purchaser, Suntex, intended to resell the properties within a short space of time and this was effectively a bridging loan. In view of the amount, the value of the properties, the security, the guarantee, and the time, Mr Yau regarded it as a low risk loan. And so it should have been.

18. In the circumstances of this case, therefore, I am satisfied that there was nothing to cause the plaintiff to make more enquiries than they did, and neither am I satisfied that such enquiries would have revealed matters which would have led them to take steps to protect their position further than they did, or led them to believe that the defendant was likely to have an equitable lien on the properties.

19. That is enough to dispose of this matter, but for the sake of completeness I will go on to look at the question of waiver and estoppel. The basis of this part of the claim is that the defendant knew from an early stage that the plaintiff was involved as prospective mortgagee and must therefore have known that they would make enquiries as to amounts payable on completion. In the knowledge of this, by agreeing to the rewording of the 30 September letters, they were party to deliberate concealment of the fact of the tendering of a cheque, to be presented only after completion, and their assertion of a lien in the event of non-payment. Their last letter, which was the only one sent to the plaintiff's solicitors, in effect represented that the only sum payable to complete the purchase was $3,400,000.00, and that the properties would be assigned upon payment being made, without incumbrances. The plaintiff acted upon this to its detriment. Further, by approving the assignments which included the acknowledgement of receipt of the purchase price, the defendant led the plaintiff to believe that they would not assign the properties without receiving it. While it is established law that an unpaid vendor's lien is not excluded by the fact that the conveyance contains an express receipt for the purchase money - see Barclays Bank Plc v. Estates & Commercial Ltd and anor. [1997] 1 W.L.R. 415 - by leading the mortgagee to believe that the assignment will only be executed upon that receipt, they were making a representation to that effect upon which they knew the plaintiff would act.

20. Upon these facts I am in agreement with Mr Leong that the defendant has not only conducted itself in a way intended to impart to the plaintiff the belief that the assignments would not proceed unless the full purchase price was paid, and that the only balance of that remaining to be paid was the sum to be paid by the plaintiff, but has deliberately withheld from the plaintiff the possibility of a lien. It must follow that the defendant is not only estopped from asserting that lien as against the plaintiff, but has waived its right to do so.

21. For these reasons I am satisfied that the plaintiff is entitled to judgment for a declaration that its interest in the properties under the mortgages have priority over the unpaid vendor's lien of the defendant. There will also be an order nisi for costs in favour of the plaintiff to be taxed with a certificate for two counsel.