FORTIS BANK ASIA HK v. YU KAM HOI HERMAN AND ANOTHER

HCMP 134/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 134 OF 2002

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J U D G M E N T

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I. Background

1. On 17 August 1992 3 brothers (Joseph Yu Ching Hoi ("Joseph"), the 1st Defendant ("Herman") and the 2nd Defendant ("Franco") (collectively, "the brothers")) purchased the property ("the Property") known as Flat 12A, Good View Court, 21 Robinson Road, Hong Kong for $1,825,000. The brothers purchased the Property with the help of a mortgage loan ("the Original Mortgage") from Standard Chartered Bank ("Standard Chartered") in the amount of $1,368,750. The brother's Agreement for the Sale and Purchase dated 17 August 1992 ("the Original Agreement") of the Property was registered on 16 September 1992 under Memorial No. 5426954. The Original Mortgage dated 17 August 1992 was registered on 16 September 1992 under Memorial No. 5426955.

2. The brothers contributed towards the balance of the purchase price of the Property not covered by the Original Mortgage ($465,250) as follows:-

(1) Joseph paid $273,750.

(2) Herman paid $132,500.

(3) Franco paid $50,000.

In addition, Joseph contributed approximately $200,000 toward the decoration and furnishing of the Property and Herman paid $72,193.20 covering stamp duty ($50,187.50), estate agent's commission ($18,250), solicitor's expenses ($1,250), insurance premium ($1,505.70) and bank arrangement fee ($1,000).

3. Joseph, a businessman, 43, was married at the time of the purchase. There is evidence that, when the Property was purchased, Joseph owned a number of other premises. Herman, 37, is the proprietor of an insurance agency company trading under the name "The Max and Agencies". Franco, 33, worked as a clerk in a law firm after graduating from secondary school in July 1987. He worked as a conveyancing search clerk for the Third Party ("the Firm") about a year later until around 1994. Until August 2001 Franco was an assistant manager in a surveyor's firm. Thereafter he was unemployed. He has very recently found as a job as a clerk.

4. The Property is a 2-bedroom flat. Herman and Franco bought the Property with the intention of living there. Joseph contributed to the Property's purchase as an investment on his part. Herman and Franco had originally planned to buy the Property on their own. Unfortunately, no bank was prepared to provide them with mortgage finance as their income fluctuated and was not steady. But Standard Chartered said that it would lend money if Joseph participated in the purchase and mortgage. Upon being asked by Herman and Franco, Joseph agreed to help his brothers out. Since its purchase, only Herman and Franco have been living (and continue to live) in the Property. Joseph, who had his own residence, has never lived there.

5. The Original Agreement states that the brothers purchased the Property "as Joint Tenants". The Assignment ("the Assignment") dated 17 August 1992 similarly recites that the vendor assigned the Property to the brothers "TO HOLD the same unto the Purchaser as Joint Tenants for the residue of the term of years created by the Crown Lease".

6. Following the purchase of the Property, the brothers contributed towards the repayment of the Original Mortgage in roughly equal shares. Joseph and Franco each paid $4,000. The understanding was that Herman would make up whatever the difference was between the monthly mortgage repayment and the $8,000 contributed by Joseph and Franco. Thus, for example, the monthly mortgage repayment was $11,662.65 between September 1992 and April 1994. Herman accordingly paid $3,663 to make up the difference between the latter amount and $8,000. When in July 1994 the monthly payment became $12,280.3, Herman paid $4,280 and the contribution from Joseph and Franco remained at $4,000.

7. On occasion Joseph failed to make to his monthly contribution of $4,000. Herman would then make up Joseph's share on the understanding that Joseph would later reimburse him. But from December 1995 Joseph stopped making contributions altogether as he ran into financial problems.

8. At about the end of 1996 Joseph telephoned Herman to say that he was experiencing "cashflow problems" and needed to borrow money. Herman therefore handed a cheque dated 1 December 1996 for $300,000 to Joseph. Joseph said that he would repay Herman within 6 months. On 17 March 1997 Joseph asked to borrow a further $500,000 from Herman. Herman wrote out a cheque dated 17 March 1997 for $498,440. Herman deducted $1,560 from the $500,000 requested by Joseph because on 17 March 1997, at Joseph's request, Herman had paid $1,000 to the Transport Department as vehicle transfer registration fee and $560 for reservation of a vehicle prefix number. Thereafter, from time to time, Herman would chase Joseph for the repayment of the $800,000 loaned. Joseph would then reply that he was waiting for receivable income from his business.

9. The evidence suggests that Joseph had been hit hard by the Asian financial crisis. He seems to have bought several properties in his own name or through related companies and to have encountered difficulty in meeting the requisite mortgage repayments. Joseph's companies also appear to have experienced problems.

10. Thus, on 1 March 1999 First Pacific Bank Limited ("FPB") by HCMP 1226 of 1997 sued M Caveno Limited as mortgagor and Joseph (acting under his trade name of Five Blessing Industrial Company) as borrower for monies due on a mortgage of Unit 7B, Ground Floor, Green Park, Razor Hills Road, Clearwater Bay. By another action (HCMP 1227 of 1999) started on 1 March 1999 FPB sued Wide Base International Limited as mortgagor and Joseph as borrowed for monies due on a mortgage of 8th Floor, Tower 6, Bayshore Towers, 608 Sai Sha Road, Ma On Shan, New Territories.

11. By HCMP 5086 of 1999 dated 20 August 1999 Wing Hang Bank Limited sued United Apex Properties Limited ("United Apex") as mortgagor and borrower and Joseph (under his trade name) and Ms Betty Cheung Siu Bik ("Ms Cheung") as guarantors in respect of monies due under a 1st legal charge of Flat 8A, Tower 23A, South Horizons, 23A South Horizon Drive and a 2nd legal charge of Flat 1H, Tower 20, South Horizons, 20 South Horizon Drive respectively.

12. By HCA 5254 of 2000 ("HCA 5254") dated 26 May 2000 the Plaintiff ("the Bank") sued Joseph and Ms Cheung in relation to a guarantee of United Apex' debts. On 21 July 2000 the Bank obtained a Judgment in default of the filing of an intention to defend against Joseph and Ms Cheung for the sum of $3,888,865.07 plus interest at the rate of 17% per annum on the amount of $3,878,027.85 from 2 May 2000 until judgment date and thereafter at the judgment rate. On the basis of the Judgment in HCA 5254 the Bank applied for a Charging Order Nisi ("the Charging Order Nisi") against Joseph's interest in the Property. Registrar Chan granted the same on 28 July 2000. The Charging Order Nisi was registered on 4 August 2000 under Memorial No. 8149457. It became absolute on 24 August 2000. The Charging Order Absolute ("the Charging Order Absolute") was registered on 2 September 2000 under Memorial No. 8176532. Neither Herman nor Franco were served with notice of the Bank's applications before the Court for the imposition of the Charging Order Nisi and Charging Order Absolute.

13. In February 2000 Joseph suggested that Herman and Franco buy out his interest in the Property and that the price for Joseph's interest be set-off against $800,000 owed by Joseph to Herman. Herman and Franco were amenable to Joseph's proposal.

14. Franco, who was working at a surveyor's firm, ascertained that the Property was then worth about $1,800,000. Franco also estimated that the outstanding amount on the Original Mortgage was between $1,000,000 and $1,100,000. If one gave Joseph the benefit of the doubt and subtracted the lower figure of $1,000,000 from $1,800,000, that would value the brothers' unencumbered interest in the Property at $800,000. Ascribing a 1/3 interest in the property to Joseph, would mean that his share was approximately worth about $260,000.

15. Nonetheless, Herman and Franco thought that a hard-nosed estimate of Joseph's interest at $260,000 would be unfair to Joseph, who was after all their brother. Without Joseph's assistance, Herman and Franco appreciated that they would not have been able to acquire the Property in the first instance. Joseph had never lived in the Property. Only Herman and Franco had. Even more, Joseph had contributed $473,750 towards the initial acquisition, decoration and furnishing of the Property. He had also helped Herman and Franco by making mortgage repayments of $160,000 after the Property's purchase. Considering all these factors, Herman and Franco agreed to deem Joseph's share as worth $600,000 (which was coincidentally 1/3 of its estimated unencumbered value) instead of only about $260,000. The agreement meant that $200,000 would remain due from Joseph to Herman.

16. Herman approached various banks for re-financing of the Original Mortgage. Finally, Standard Chartered offered to replace the Original Mortgage with another mortgage ("the Replacement Mortgage") at a lower interest rate without a penalty for early repayment of the Original Mortgage. At Standard Chartered's suggestion, Herman and Franco instructed the Firm to handle the sale and purchase of Joseph's interest. The Firm also represented Standard Chartered in the preparation of the Replacement Mortgage. Because of the erroneous charging of a penalty for early redemption of the Original Mortgage, finalisation of the sale of Joseph's interest to Herman and Franco was delayed until late August 2000.

17. The brothers each signed a Memorandum for Sale & Purchase ("the Memorandum") dated 23 August 2000. That provided for completion of the sale of Joseph's interest on 16 September 2000. The Memorandum was registered on 20 September 2000 under Memorial No. 8192509. In fact completion took place on 7 September 2000.

18. On 7 September 2000 the Original Mortgage was discharged upon payment of $1,110,941.39. Standard Chartered's receipt of discharge dated 7 September 2000 was registered against the Property on 29 September 2000. By the Replacement Mortgage dated 7 September 2000 Standard Chartered loaned $1,110,000 to Herman and Franco against the Property. The Replacement Mortgage was registered on 29 September 2000 under Memorial No. 8203398.

19. By an Assignment ("the New Assignment") dated 7 September 2000 Joseph assigned his interest in the Property to Herman and Franco "TO HOLD the same unto the Purchaser as Joint Tenants for the residue of the term of years created by the Government Lease". The New Assignment was registered on 29 September 2000 under Memorial No. 8203397.

20. The purchase of Joseph's interest meant that, on paper, Herman and Franco each held an identical interest in the Property. This was despite the consideration for the purchase having come entirely from Herman's loan to Joseph. But, Franco being the youngest brother, Herman did not mind such an outcome. Franco could settle with Herman later through a separate accounting of their individual contributions and payments towards the mortgage and upkeep of the Property should Herman and Franco each ever wish to realise half shares in the Property. Until such time, whatever the situation on paper, Herman and Franco regarded themselves as respectively holding 2/3 and 1/3 of the Property.

21. Immediately before the Replacement Mortgage was made, the Firm wrote to Standard Chartered by letter dated 6 September 2000 in the following terms;-

"We have prepared security in respect of the [Property] in favour of the [Standard Chartered] Bank in accordance with the instructions given to us by your letter dated 28th August 2000.

From our examination of the title deeds to the [Property] and searches at the relevant Land Registry, we certify as follows:-

...

2. We confirm the title is in order.

3. Our search at the relevant Land Registry of today's date against the [Property] reveals no entries adverse to your title.

4. On the basis of:-

(a) a search of title to the property at the relevant Land Registry; and

(b) our examination of the title deeds and documents supplied to us in support thereof;

we are of the opinion that (based on the circumstances known to us at the date of our report on title to you) the Bank's security is unassailable subject however, to:-

(1) the laws of bankruptcy, insolvency, liquidation, reorganisation and other laws of general application relating to or affecting the rights of creditors;

...

(4) any equitable interest in favour of a third party of which the Bank has notice or may be deemed by law to have had notice at the time of the giving of the security;

..."

22. Contrary to the Firm's letter of 6 September 2000, all was not well with the title assigned to Herman and Franco or Standard Chartered's interest under the Replacement Mortgage. The Firm omitted to inform Standard Chartered, Herman and Franco of the Charging Orders Nisi and Absolute on the Land Registry. At trial there was no issue that the Firm had been in a position to (but did not) advise Standard Chartered, Herman and Franco of the existence of the Charging Order Nisi (at the very least) before the execution of the Replacement Mortgage and New Assignment. As far as Standard Chartered is concerned, the Firm's omission has meant that, whereas the Original Mortgage had priority over the Bank's Charging Orders, the Replacement Mortgage (which advanced more or less the same amount of money as was outstanding under the Original Mortgage in September 2000) is postponed to the Bank's entitlement (if any) under its Charging Orders.

23. The sale and purchase of Joseph's share was handled by Mr Ronald Suen ("Mr Suen"), a conveyancing clerk at the Firm, under the supervision of Ms Florence Chan ("Ms Chan"). Ms Chan was then Assistant Head Clerk of the Firm's conveyancing department. Mr Suen and Ms Chan worked under the supervision of Mr A O T Ngan ("Mr Ngan"), a partner of the Firm at the time. Mr Suen and Ms Chan no longer work at the Firm. Neither Mr Suen, Ms Chan nor Mr Ngan were called to give evidence at trial.

24. The sole witness called by the Firm to give evidence on its behalf was Mr Wu Chi Fai ("Mr Wu"), now Head Clerk of the Firm's conveyancing department. Mr Wu was not employed by the Firm at the time of the transfer in 2000. He was not personally involved on the Firm's behalf in the transfer of Joseph's 1/3 interest in the Property to Herman and Franco.

25. The Firm's file on the purchase of Joseph's share in the Property indicates that Mr Suen conducted land searches against the Property on 2 September and 24 November 2000. By the former date the Charging Order Nisi certainly and the Charging Order Absolute possibly (depending on the time when Mr Suen conducted his search) would have appeared on the Land Register. A copy of the Charging Order Absolute was found among the Firm's documents. At the top of the latter is a date (25 November 2000). This suggests that Mr Suen retrieved the copy Charging Order Absolute from the Land Registry on the day after his 2nd search on 24 November 2000.

26. After the sale of his interest to Herman and Franco, Joseph repaid Herman $85,000 of the $200,000 outstanding balance on the original $800,000 debt. The $85,000 was paid by way of cheques or cash between July 2001 and November 2002. $113,440 remains due to Herman from Joseph.

27. Neither Herman nor Franco were actually aware at the time of their purchase of Joseph's interest, that the Bank had acquired Charging Orders in respect of the same.

28. By an Originating Summons dated 11 January 2002 (amended on 8 May 2002) the Bank has sought an Order for vacant possession, sale of the Property pursuant to Partition Ordinance (Cap. 352) ("PO") ss. 3 and 6, and payment to the Bank of the equivalent from the sale proceeds of Joseph's interest in the Property. Alternatively, the Bank seeks an Order that Herman and Franco account to the Bank for the $600,000 paid by them to Joseph in consideration for the assignment of Joseph's interest in the Property.

29. By a Third Party Notice dated 3 January 2003 (amended 10 December 2003) Herman and Franco claim an indemnity against the Firm in respect of any liability to the Bank.

30. By letter dated 26 April 2002 Standard Chartered's solicitors (Messrs Siao, Wen and Leung ("SWL")) invited the Bank's solicitors (Messrs Wilkinson & Grist ("WG")) to amend the Bank's Originating Summons:-

"to the effect that the residue of the proceeds of sale after repayment of the indebtedness due to your client under the Charging Order Absolute (if any) be paid to our client instead of the 1st and 2nd Defendants. Otherwise, we will consider advising our client to attend the oncoming hearing to oppose your client's application with costs against your client."

The Originating Summons has been so amended. SWL further wrote in their letter:-

"For the sole purpose to inform the Court of the amount due to our client under the Legal Charge but not otherwise, we are instructed by our client to inform you that the total amount due under the Legal Charge, as calculated up to April 2002 is HK$1,029,883.66. Subject to fluctuation in interest rate, further interest accrues on the said sum of HK$998,237.26 at the rate of 3.125% per annum (i.e. a daily rate of HK$85.47(from 27th April 2002 until payment."

Standard Chartered did not appear before me at trial.

31. By letter dated 13 January 2003 the Director of Lands informed WG that he had "no objection to the proposed sale of the [Property] subject to aforementioned conditions [contained in the Government Lease] being complied with".

32. The Firm denies liability to Herman and Franco and in any event disputes quantum. The Firm's case on liability is principally that its omission to inform Herman and Franco did not cause any damage to them.

II. Discussion

A. Sale of the Property under the PO

33. The PO provides as follows:-

"2. Power to order partition or sale of property in land

Subject to this Ordinance, where any property in land is held by 2 or more persons, whether as joint tenants or as tenants in common, the Court may:-

(a) make an order under section 4 for a partition of the property;

(b) make an order under section 6 for a sale of the property; or

(c) refuse to make any order.

3. Institution of proceedings and parties thereto

(1) Where any property in land is held in the manner referred to in section 2, any person interested in such property may institute proceedings in the Court under this ordinance by way of an action for partition or sale.

(2) In any proceedings under this Ordinance, the Director [of Lands] shall be served with such documents relating to the proceedings as may be prescribed by the Partition Rules (Cap. 352 sub leg).

(3) Subject to subsection (2), proceedings under this Ordinance may be instituted against one or more of the persons interested without serving the other or others, and no defendant may object for want of parties.

(4) At the hearing of the proceedings the Court may direct such inquiries as to the nature of the property, the persons interested therein and such other matters as it thinks necessary or proper, and it may add any person as a party whose presence before the Court is considered desirable; and where a person is added as a party by the Court under this subsection, the person having the conduct of the proceedings shall serve notice of the addition on the Director.

...

6. Sale of land

(1) In any proceedings under this Ordinance, where it appears to the Court that a partition of the property would not be beneficial to all the persons interested by reason:-

(a) the nature of the land to which the proceedings relate;

(b) the number of persons interested or presumptively interested;

(c) the absence or disability of some of the persons interested; or

(d) any other circumstances,

the Court may make an order for the sale of the property.

(2) The Court may exercise its powers under subsection (1), notwithstanding the dissent or disability of any person interested.

(3)	(a) Without prejudice to subsection (1), if any person interested in the property applies to the Court to make an order for the sale of the property instead of an order for partition, then, unless the other persons interested undertake to purchase the interest of the party applying for an order for sale, the Court may, if it thinks fit, make an order for the sale of the property.
	(b) If an undertaking is given by the other persons interested, the Court may order a valuation of the interest of the person applying for an order for sale in such manner as it thinks fit.

(4) On making an order under subsection (1) or subsection (3), the Court may direct a distribution of the proceeds of the sale and give all other necessary or proper consequential directions.

(5) ...

7. Application of proceeds of sale

(1) The proceeds of a sale of property under an order under section 6 may, after deduction of the expenses thereof, be paid to trustees appointed by the Court.

(2) Trustees appointed under subsection (1) shall apply the proceeds of sale paid to them in the following order:-

(a) in the discharge of any liability due to the Government in respect of the property; and the

(b) in the discharge of any incumbrance affecting the property directed to be sold; and then

(c) in payment of the residue to the persons interested."

34. Two questions arise under the PO.

35. First, the Bank's position is analogous to that of an equitable chargee over land. See High Court Ordinance (Cap. 4) ("HCO")

s. 20B(3)¹. In Chan Ching Kit, Katherine v. Lam Sik Shi and Lam Sik Ying HCMP 2239 of 2000, 24 June 2002 Kwan J held (at §44) that "an equitable chargee of a co-owner without any right to possession or foreclosure ... is not eligible to apply for an order for sale of the entire Property under the [PO]". The Bank must therefore persuade me that I have jurisdiction to order the sale of the whole Property notwithstanding that the Bank only has a partial interest therein.

36. Second, even if the Court has power to order a sale of the Property by the PO as the Bank contends, such power is undoubtedly discretionary. The Bank must convince the Court that the discretion should be exercised in the Bank's favour.

A.1 Jurisdiction to order sale under the PO

37. PO s. 3(1) enables "any person interested in such property" (namely, land held by 2 or more persons as joint tenants or tenants in common) to apply for partition or sale of the land. The expression "any person interested in such property" in PO s. 3(1) is literally wide enough to encompass a person holding an interest in land as an equitable chargee. But a difficulty arises because at common law the rule ("the Rule") was that only a person holding an interest in possession was entitled to partition.

38. The operation of the Rule may be illustrated by reference to the decision of Maloney J of the Ontario High Court in Re Garnet and McGoran (1980) 117 DLR (3d) 649 (affirmed by the Ontario Court of Appeal in 122 DLR (3d) 192). Husband (H) and Wife (W) were joint tenants of premises. Unknown to W, H mortgaged his interest to B. Upon H's default, B applied for sale of the home. In the meantime W had brought an action under the Family Law Reform Act 1978 for a declaration that the premises constituted the couple's matrimonial home and the mortgage should be set aside.

39. B's application was made under Ontario's Partition Act 1970. Section 3(1) of that statute was similar to PO s. 3(1). It provided:-

"Any person interested in land in Ontario, or the guardian appointed by a surrogate court of an infant entitled to the immediate possession of an estate therein, may take proceedings for the partition of such land or for the sale thereof under the directions of the court if such sale is considered by the court to be more advantageous to the parties interested."

B had not instituted foreclosure proceedings in respect of the premises, but had obtained a judgment for possession against H.

40. Maloney J referred to the Rule that "none but those entitled to possession ... are entitled to partition" in construing whether B had standing to seek an order for sale under s. 3(1) of the Partition Act. B had no immediate right of possession. Instead W had a prior right of possession to the premises, as she had been in actual possession of them at the time the mortgage was granted and her right of possession would have been apparent to B then². Resort to the Rule means that "a mortgagee is not entitled to partition ... until he has perfected his title by foreclosure or otherwise." By not pursuing foreclosure B had failed to perfect title in the premises and thus had no locus under the 1970 Act.

41. An equitable chargee (such as the Bank) is "not entitled to possession nor foreclosure" (Fisher and Lightwood's Law of Mortgage (11th ed.) §2.10 (p. 30), citing Garfitt v. Allen (1887) 37 Ch D 48; Tennant v. Trenchard (1869) 4 Ch App 537; Re Lloyd, Lloyd v. Lloyd [1903] 1 Ch 385; and United Travel Agencies Pty Ltd. v. Cain (1990) 20 NSWLR 566). Thus, if the approach in Garnet is correct and the expression "any person interested in such property" in PO s. 3(1) should likewise be read as qualified by the Rule, the Bank as a mere equitable chargee would not have an interest in possession and would not be entitled to apply for partition or sale under the PO. Is PO s. 3(1) so qualified?

42. Originally partition was only available at common law to coparceners, that is, persons who jointly inherited a parcel of land^3. In 1539 statute (Act 31 Henry VIII c.1) extended the right of partition to joint tenants and tenants in common of freehold estates. In 1540 statute (Act 32 Henry VIII c.32) granted a right of partition to joint tenants and tenants in common of land held for a term of life or years. This later act provided that partition would not be ordered if it was prejudicial to persons who were not parties to the proceedings. Under the 1539 and 1540 Acts the Court had no discretion, where the stipulated conditions were met, to refuse partition. English law was liberalised further by Partition Acts promulgated in 1868 and 1876. These gave the Court the power to order a sale of property instead of partition, if it was thought more beneficial.

43. Before 1969 the Acts of 1539 and 1540 were enforceable in Hong Kong under the Application of English Law Ordinance. The PO was enacted in 1969 following proposals made by the Fifth Report ("the Report") of the Hong Kong Law Reform Committee ("the Committee") in 1964.

44. The Report commented as follows:-

"No such powers [as have been conferred to the English Courts by the Partition Acts 1868 and 1876] exist in Hong Kong. Since partition does not necessarily provide a just or convenient solution in every case where one or more of several co-tenants wish to put an end to their community of ownership with the remaining co-tenants, we consider that the courts in Hong Kong should have similar wide discretionary powers to order sale in lieu of partition. We are aware that co-tenancies in Hong Kong are comparatively more numerous than was the case in England at the time of the Partition Acts and in many cases probably more complex, so complex in fact that it is doubtful whether either partition or sale in lieu of partition would necessarily prove convenient or just in every case. In England under the Partition Acts the court, in partition proceedings, was obliged to grant either a partition or an order for sale. We consider that, in the special circumstances of the Colony, the courts in Hong Kong should not be similarly obliged, but should have the discretion, where it sees fit, to refuse to grant either a partition or an order for sale in lieu. Furthermore, in view of the complexity of some co-tenancies, we consider that the legislation on this subject should give the courts the widest powers in regard to the joinder of parties in any such proceedings, and power to make vesting orders consequential upon the giving of judgment for a partition or sale in lieu, as in the case of judgments for specific performance of a contract concerning an interest in land (cf. section 49 of the Trustee Ordinance, Chapter 29)."

45. The Report concluded by recommending that legislation confer upon the Courts:-

"(a) a discretion, in proceedings for partition, to grant either a partition or a sale in lieu (whether requested or not) or to refuse both;

(b) a wide discretion a to the joinder of parties in any such proceedings; and

(c) powers, similar to those in section 49 of the Trustee Ordinance, Chapter 29, to make vesting orders consequential upon judgments for a partition or a sale in lieu."

The Report did not mention any change of the Rule that only the holder of an interest in possession could obtain partition.

46. The Partition Bill 1969 ("the Bill") (which ultimately became the PO) stated the following in its Explanatory Memorandum:-

"2. The Committee recommended legislation to confer upon the courts a discretion, in proceedings for partition, to grant either a partition or a sale in lieu (whether requested or not) or to refuse both. Clause 2⁴ confers such a power on the Supreme Court.

3. The Committee also recommended a wide discretion as to the joinder of parties in any such proceedings. Clause 3(3)-(5)⁵ seeks to give effect to this, and is based on section 9 of the English Partition Act 1868⁶. Clause 3(1), which deals with the institution of proceedings under the Ordinance, is based on section 7 of the Partition Act 1876⁷. Clause 3(2)⁸ protects the interests of mortgagees by requiring their consent. Clause 3(6) is based on section 3 of the 1876 Act."

There is no suggestion in the Explanatory Memorandum that it was intended to modify the Rule. On the contrary, the Explanatory Memorandum indicates that the PO was conceived as being in line with the English Partition Acts of 1868 and 1876, save for the grant of wider powers and discretions to the Court as recommended by the Report to cater for the greater prevalence of co-ownership in Hong Kong.

47. The Bill having been enacted on 3 July 1969 as Ordinance No. 36 of 1969, it was proposed in 1978 to amend the same by (among other things) deleting the reference to "any person interested in such property" in PO s. 3(1) and substituting:-

"a person interested in such property as joint tenant, tenant in common or as legal mortgagee of a tenant in common".

The Explanatory Memorandum to the Partition (Amendment) Bill 1978 ("the Amendment Bill") gave the following rationale for that revision:-

"The Bill ... amends the principal Ordinance to make it clear that proceedings may be instituted under the Ordinance only by persons who are interested in property in land by virtue of their status as joint tenants, tenants in common of the property or legal mortgagees of a tenant in common."

48. The reference to a legal mortgagee in the Explanatory Memorandum to the Amendment Bill is significant. Unlike an equitable mortgagee, "a mortgagee under a legal charge is entitled to seek possession of the mortgaged property at any time after the mortgage is executed, by virtue of the estate vested in him". The legal mortgagee "is entitled to possession without notice or demand and, subject to statutory or contractual restrictions, without a court order." See Fisher and Lightwood §19.1 (p. 479). The restriction of the proposed amendment to legal mortgagees suggests that the legislature did not regard PO s. 3(1) as extending to persons having interests which are not interests in possession or interests conferring an immediate right to possession.

49. This impression of the import of the proposed revision is reinforced by the Solicitor General's remarks when moving the 2nd reading of the Amendment Bill. He said:-

"The Bill will also make it clear that only a joint tenant, a tenant in common or a legal mortgagee of a tenant in common may institute proceedings under the Ordinance. The vagueness of expression in the principal Ordinance on this aspect has led to some doubt."

50. But the revision to PO s. 3(1) was never enacted. On 29 November 1978 at a resumption of the debate following the 2nd reading of the Amendment Bill, Mr Peter Wong said:-

"However, I am not happy with the proposed amendment to section 3(1) of the principal Ordinance. This section defines the parties who may institute proceedings under the Ordinance. In my opinion, section 3(1) is quite adequate for the purpose for which it is intended.

I will not trouble the Honourable Members with legal technicalities, but will only inform this Council that after consultation with the Solicitor General, Government has now agreed not to amend section 3(1) of the principal Ordinance."

The Solicitor General acknowledged the Government's agreement in these terms:-

"Sir, having had the benefit of consultation with Mr Peter C WONG, I propose to move an amendment to give effect to his suggestion. Section 3(1) will therefore remain as it now is in the statute book, that is an application for partition may be made by any 'person interested' in the property. If there should be a dispute it will be for the courts to determine who is a 'person interested' for the purposes of the section."

Consequently, as far as the amendment of PO s. 3 was concerned, only PO s. 3(2) was revised to drop (as unnecessary and possibly unreasonable) the requirement of a mortgagee's consent to a sale or partition of relevant land.

51. I now turn to examine the way in which the Hong Kong Courts have applied the PO.

52. In Cromwell Investment Co. Ltd. v. Fook Sun Enterprises Co. Ltd. [1976] 1 HKLR 1 (Full Court), the parties (P, D1 and D2) were tenants in common of premises. The premises were let to T. D1 and D2 mortgaged their interest in the premises to B. P applied for an order for sale under the PO. D1 and D2 resisted the making of an order. They argued (among other points) that P as reversioner did not have an interest in possession and was thus ineligible to sue under the PO. The Full Court concluded that P held an interest in possession and was thus entitled to apply for sale. But, since P had not obtained B's consent as required by PO s. 3(2) (as then enacted⁹), no order for sale could be made under PO s. 6. As far as the present case is concerned, what is of interest is the Full Court's discussion on whether a person seeking an order for partition or sale under PO s. 3(1) needs to have an interest in possession.

53. Huggins J in Cromwell observed (at 5):-

"The Partition Ordinance does not state in terms that only a tenant in common in possession may sue under its provisions, but authorities have been cited to show that that was the position under the old law, the principle being, it was said, that a reversioner had no need to partition and should not be allowed to disturb the existing state of things when there was an interest in possession: Cantwell v. Hassard [(1858) 7 Ir Ch R 370]. Two matters require consideration: (1) whether the Plaintiff has in truth no interest 'in possession' which would have entitled it to partition under the old law, and (2) whether the Ordinance must be construed as having abrogated the old law."

If Huggins J had thought that it was enough under PO s. 3(1) to show that an applicant had any interest in land (whether or not in possession), there would be no point in investigating consideration (1) identified by him. A leasehold reversioner undoubtedly holds an interest in land. That Huggins J thought that it was nonetheless necessary to examine whether P held an interest in possession, implies that he believed that it was necessary to demonstrate an interest in possession in order to qualify for an order for sale under PO s. 6. In the end, relying on Robinson v. Robinson (1902) 2 NSWSR 197 (Eq), Huggins J concluded that, while a reversion expectant upon a termination of a life interest may not be an estate in possession, a reversion expectant on a term of years was and could accordingly be partitioned.

54. McMullin J in Cromwell was content to reject the P's case on the basis that B's consent had not been obtained to a sale of the premises. He did not analyse whether P held an estate in possession.

55. Trainor J, on the other hand, considered P's standing to obtain an order for sale in detail. Having outlined the history of partition at common law, Trainor J stated (at pp. 23-5):-

"As I understand the Common law position as developed by Coke with regard to coparceners and extended by legislation that reversioners could not obtain partition, it is that when land is held (tenet) as to a freehold interest by co-owners and they grant a freehold estate out of it, e.g. an estate for life they no longer hold (tenant) the freehold, 'non insimul et pro indiviso tenant', they are out of possession. If what they grant is less than freehold, even a lease for 1,000 years, as this does not dispossess them, they hold insimul et pro indiviso, they could. Where a prior estate in freehold ceases to exist the estate reverts to the grantor. That would be the position where, by the failure of the lives conditional on which the freehold lease was to be renewed, a tenancy from year to year arises by operation of law; and the co-owners of the estate could partition. In other words Cantwell v. Hassard was decided not on the grounds that the plaintiff was a reversioner (he was in possession if it were established that all the lives had dropped) but because of the possible prejudice to third parties, the lessees, who had a real and substantial interest but who were not before the Court...

...

That is not the position in the case at Bar. The tenants in common in this case are only sub-lessors and it is on the existence of the further sub-lease granted by them that Mr Swaine relies to justify his contention that the tenants in common are not 'in possession', but only reversioners to the sub-lessees. His argument can, of course, only be based on analogy, because none of the parties have a freehold interest and none of them are in possession in the sense that no one holds (tenet) a freehold estate. Equally by analogy it could be argued that the owner of a leasehold's interest for 999 years who is in receipt of rent from, and is entitled to determine a sub-lease on breach of covenant, or re-enter on the expiration of a term, remains in possession."

Again it will be seen that Trainor J's extensive discussion of the history of partition would have been pointless, if he thought that PO s. 3(1) allowed a person having any interest in land to apply for partition or sale.

56. Cromwell is authority then for the proposition that, despite their apparent width, the words "any person interested in such property" in PO s. 3(1) must be read restrictively as confined to persons holding an interest in possession. Cromwell so read would be binding on me as a decision of the Full Court.

57. In Pun Jong-sau and others v. Poon Wing-kong and others [1979] HKLR 662 Trainor J re-visited the history of partition in England and Hong Kong. There the Ps and Ds were co-owners of a multi-storey building. The Ps wanted an order for sale, the Ds did not. Clearly, the Ps held an interest in possession, so no issue as to Ps standing to apply arose. But in the course of his judgment Trainor J said (at 670):-

"I said earlier that the key to the interpretation of the [Partition] Ordinance is to be found in the preamble¹⁰. It did not repeal the law then existing, and when section 2 commences, 'Subject to this Ordinance' it means that the existing law is to be interpreted in conjunction with the Ordinance, but where there is a difference the law previously existing is amended to the extent set out in the legislation e.g. partition is no longer the only and compellable remedy. It enables the Court to order partition or sale or to decline to make an order. Those are three separate and distinct powers. But when section 3 was enacted and stated that persons interested in property as set out in section 2 might apply either for partition or sale it meant such persons as were eligible to apply under the law; any person who was theretofore eligible to invoke the assistance of the law pertaining to the termination of a co-ownership might apply for partition or sale, and the Court in its discretion might make an order or refuse to make an order in exercise of the powers conferred by section 2..."

Trainor J's remarks on PO s. 3 reinforce the view that, as far as property held in joint tenancy or tenancy in common is concerned, only persons "interested" in the sense understood under Hong Kong law prior to the enactment of the PO are able to apply for a relevant order.

58. As mentioned above, Kwan J recently concluded in Chan that an equitable chargee was not able to apply for an order for sale under the PO. In Chan a husband obtained a charging order in respect of property held in common by his wife and his wife's half-brother. Kwan J noted that the words "any person interested in such property" in PO s. 3(1) are ambiguous in that they have "both an ordinary meaning and a technical meaning in real property law" (Chan §19). It was thus necessary to bring the "informed interpretation rule" to bear on the construction of PO s. 3(1).

59. The informed interpretation rule required that Kwan J consider PO s. 3(1) "in the light of the guides to legislative intention, the context of the enactment, including all such matter as may illumine the text and make clear the meaning intended by the legislator in the factual situation of the instant case" (Chan § §18, citing Bennion on Statutory Interpretation (3rd ed.) p. 449). Like Trainor J before her, Kwan J therefore looked at the development of the law of partition in England and Hong Kong.

60. By reason of her historical survey, Kwan J thought (at §33) that Trainor J's dictum in Pun cited above "correctly summarised the position on an informed interpretation of the statute". She felt that there was "real doubt whether the grammatical meaning of the relevant words in section 3(1) is the legal meaning intended by the legislature".

61. Counsel referred Kwan J to Midland Bank plc v. Pike [1988] 2 All ER 434 where the Court held that a bank in the position of an equitable chargee over land held under a trust for sale was a "person interested" in such property for the purposes of Law of Property Act 1925 s. 30. But the judge was unimpressed by the authority. She pointed out (at §36) that:-

"The Partition Acts were repealed in England by the Law of Property Act 1925 when the partition of land held in co-ownership was abolished. By section 34 of the 1925 Act, land held by co-owners is subject to a statutory trust for sale and the interest of each co-owner in the and is automatically converted into an interest in the proceeds of sale in respect of that land. Unlike the position in Hong Kong, until the law was amended by the Charging Orders Act 1979, it was the position in England that the interest of a co-owner could not be charged by the imposition of a charging order under section 35(1) of the Administration of Justice Act 1956, because the interest of a beneficiary under a trust for sale of land did not constitute 'land' or an 'interest in land' for the purpose of the 1956 Act."

62. Kwan J thought that it was unlikely that the PO was meant to abrogate the Rule. She said (at §40):-

"[I]t would seem improbable that an important change broadening the class of persons eligible to apply for partition or sale should be introduced into the Ordinance in such a casual manner, particularly in view of the enacting history."

The judge therefore concluded (at §44):-

"... I am inclined to favour the interpretation of the defendants that the relevant words in section 3(1) should not be given a grammatical meaning. I rule in favour of the defendants that the legal meaning does not correspond to the grammatical meaning and that the words 'person interested' do not include an equitable chargee of a co-owner without any right to possession or foreclosure. The plaintiff is not eligible to apply for an order for sale of the entire Property under the Ordinance."

I wholly adopt Kwan J's reasoning. Her conclusion seems to be entirely consistent with the Full Court's approach in Cromwell.

63. Mr C W Ling (appearing for the Bank), however, argues that the an equitable chargee has locus within PO s. 3(1). I briefly consider his submissions.

64. Mr Ling first notes that the words "person interested" or near identical expressions frequently appear in the PO. He suggests that in those other contexts "person interested" must include an equitable chargee. It follows (Mr Ling says) that the words "person interested" in PO s. 3(1) also include an equitable chargee.

65. I am not persuaded by this argument. The fact that "person interested" means one thing in one section or sub-section of a statute, does not necessarily mean that it means exactly the same thing in another section. The meaning to be ascribed to an expression in a specific section of a statute will depend on a variety of factors: for example, context, previous case law as to the meaning of the expression, and sometimes even the enacting history of the section in question. There is no strong presumption that the expression is used consistently throughout the statute with only one and the same meaning throughout.

66. In any event, Mr Ling's examples are far from compelling.

67. Mr Ling asserts that it is "inherently unlikely" that the interest of a chargee should be excluded from an inquiry by the Court as to the nature of the property and "the persons interested therein" under s. 3(4). But it is entirely plausible in light of the Rule and the history of partition that the legislature intended the words "the persons interested therein" to comprise only persons having an interest in possession in the property. The Court would not be barred from looking at potential adverse effects of a partition or sale on an equitable chargee of land, since PO s. 3(4) also empowers the Court to inquire into "such other matter as it thinks necessary or proper" and confers an ability to "add any person as a party whose presence before the Court is considered desirable".

68. Mr Ling relies on PO s. 3(5). But the relevant words used there are "every other person interested in any manner". The addition of the words "in any manner" may even be against Mr Ling's argument since it could be said by those additional words the statute is consciously distinguishing between the class of "persons interested" (as understood through the prism of the Rule) and the more general class of "persons interested in any manner".

69. By the same token, Mr Ling's citation of PO s. 3(6) is inconclusive. PO s. 3(5) requires individual notices to be served on "persons interested in any manner" subject to PO ss. 3(6) and (7). The 2 latter sub-sections empower the Court to dispense with individual notices in specific circumstances. Thus, insofar as s. 3(6) permits general (as opposed to individual) notices to be given to "all persons claiming to be interested in the property," such power should be read in conjunction with PO s. 3(5) as providing an alternative means of notification to "persons interested in any manner". From the context, the expression "all persons claiming to be interested in the property" in PO s. 3(6) cannot be any reliable guide to the construction of "any person interested" in PO s. 3(1).

70. Mr Ling refers to occurrence of "all the persons interested" and "any person interested" in PO ss. 6(1) and (2) respectively. In fact the words "any person interested" or similar are used throughout PO s. 6. The expressions seem to refer to persons entitled to an order of partition or sale under PO s. 3(1). See, for example, PO s. 6(3)(a). I do not think that it can be assumed that the references in PO s. 6 include an equitable chargee. But there is no need for me to determine the point finally for the purposes of this case. It is sufficient to observe that the words highlighted by Mr Ling in PO s. 6 do not strongly support his desired reading of PO s. 3(1).

71. On grammatical construction, Mr Ling also refers to PO s. 7(2)(c). Again the provision is far from compelling. By that sub-section a trustee may apply the residue of proceeds from the sale of property in common ownership "in payment of the person interested". That must refer to the persons interested in the residue of the proceeds of sale. Since by that stage all incumbrances affecting the property sold would have been discharged (see PO s. 7(2)(b)), it is hard to see how an equitable chargee could nonetheless still form part of "the persons interested" in the residue of the proceeds of sale under PO s. 7(2)(c). If anything, PO s. 7(2)(c) militates against Mr Ling's argument.

72. Mr Ling then comments on the legislative history of partition. I have dealt with most of his points in the course of my examination of the development of the law of partition earlier in this Judgment.

73. One point that I have not dealt with is Mr Ling's suggestion that PO s. 3(2) was repealed in 1978 because the provision requiring a mortgagee's consent was unnecessary in light (Mr Ling asserts) of PO ss. 3(4) and 6(1). Both contain references to "persons interested". This (Mr Ling submits) reinforces the literal reading of the words "persons interested" advocated by the Bank.

74. I have discussed the construction of PO ss. 3(4) and 6(1) above. In any event, I doubt whether these were the provisions which the legislature had in mind when deciding that PO s. 3(2) as it stood before the Amendment Bill was superfluous. For example, in his remarks prefacing the 2nd reading of the Amendment Bill, the Solicitor General stated:-

"This Bill, therefore, seeks to amend the principal Ordinance to enable proceedings to be instituted without the concurrence of the mortgagee, whether he is a mortgagee of the entire property or only of a share of the property. Under other provisions in the principal Ordinance a mortgagee can be added as a party to the proceedings if his presence before the court is considered desirable. Unless he is made a party to the proceedings no order for partition can be made which would prejudice him. This is considered to provide adequate safeguards to mortgagees."

The Solicitor General's observations suggest that he had in mind the power in PO s. 3(4) to join any necessary or proper parties (regardless of whether they are "persons interested") and possibly the requirement in PO s. 3(5) to serve notice of any judgment or order not just on "persons interested" but also on the potentially wider class of "every person interested in any manner".

75. Finally, Mr Ling suggested that I read the formula "persons interested" in PO s. 3(1) as meaning the same thing as similar expressions used in Probate and Administration Ordinance (Cap. 10) s. 54(5), Trustee Ordinance (Cap. 29) ss. 49 and 101, Land Registration Ordinance (Cap. 128) s. 20 and Law of Property Act 1925 s. 30. These (Mr Ling said) were statutes "in pari materia," that is, "Acts which deal with the same subject matter on the same lines" (Bennion (4th ed.), §210 (p. 515)). On the application of this mode of construction, Bennion himself comments (at §210 (p. 515)):-

"It is however necessary to remain realistic. A drafter who produces an amending Bill does not always have the time or industry to read through the whole of a mass of preceding legislation to make sure the current drafting is in full accordance with it. 'The broad principle laid down by Lord Mansfield as to the exposition of one statute by the language of another must be taken with a pinch of salt when a long series of Acts is being dealt with' [Littlewoods Mail Order Stores v. IRC [1961] Ch 597, at 633 (Harman J)]."

There was no evidence before me to justify the reading of the 3 Hong Kong Ordinances and 1 English statute relied on by Mr Ling as comprising legislation intended to be "taken together as forming one system, and as interpreting and enforcing each other" (R v. Palmer (1785) Leach 352). I accordingly think that it would be undesirable for me to read the 4 acts as if they all formed part of one consistent code.

76. The result is that I am bound by Cromwell. Case law and legislative history on partition support the conclusion which I have derived from Cromwell that PO s. 3(1) should be construed subject to the Rule. I have no jurisdiction to order partition or sale under the PO at the behest of mere equitable chargee such as the Bank.

A.2 Discretion to order sale under the PO

77. In light of my conclusion on the Court's lack of jurisdiction, it is unnecessary for me to consider the question of discretion.

78. Nonetheless, in case this matter proceeds to appeal, I should state that, even if I had concluded that the Court had jurisdiction to order a sale under the PO, I would have declined to order a sale of the Property in the exercise of my discretion.

79. Three factors would have influenced me in refusing an order for sale.

80. First, Herman and Franco have lived in the Property since its purchase by the brothers in 1992. Immediately prior to obtaining the Charging Order Nisi over Joseph's interest in the Property, the Bank would have had notice not just of the interest held by Herman and Franco in the Property, but also that Herman and Franco were in actual occupation of the Property and living in the same as their home. The Bank knew or ought to have realised that as a matter of law, the enforcement of a charging order by sale being a matter within the Court's discretion, the interests of Herman and Franco as actual occupants would be relevant. The Bank's interest in the Property was a potentially precarious one, being subject to the prior existing rights and equities arising from the occupation thereof by Herman and Franco.

81. Second, in the circumstances, it would be inequitable to turn Herman and Franco out of their residence simply in order to enable the Bank to sell the Property and realise the value of Joseph's share. Herman and Franco had no involvement in the transactions which have led to Joseph's default and which eventually caused the Bank to obtain the Charging Order Nisi against Joseph's interest. I do not see why the ordered daily existence of Herman and Franco should be disturbed merely as a result of Joseph's wrongs and simply to enable the Bank to recoup some of its losses incurred as a result of extending credit to Joseph.

82. Third, Herman appears to have moderate financial means. Franco seems to enjoy a more modest income. If they were now forced to surrender the Property, I doubt that they would be able to acquire any similar premises in replacement.

A.3 The consequences of any sale

83. By way of a footnote, I should also comment briefly on the Bank's proposed distribution of sale proceeds in the event that I were minded (which I am not) to order a sale. By its Amended Statement of Claim the Bank suggests the following scheme of distribution:-

"(i) for discharging all liabilities due to the Government in respect of the Property;

(ii) for paying all lawful remuneration, legal costs, charges and expenses properly incurred in the sale or other dealing of the Property;

(iii) after deducting the items as per paragraphs (i) and (ii) above, HK$600,000.00 out of the remaining Sale Proceeds for repaying the Plaintiff in such amount due and owing under the Charging Order Absolute on the Property in High Court Action No. 5254 of 2000 and registered in the Land Registry by Memorial No. 8176532 and costs of those proceedings;

(iv) the residue, after deducting items as per paragraphs (i), (ii) and (iii) above from the Sale Proceeds, if any, for repaying the STANDARD CHARTERED BANK such amount due and owing under the Legal Charge; and

(v) the residue, after deducting items as per paragraphs (i), (ii), (iii) and (iv) above from the Sale Proceeds, if any be to the 1st and 2nd Defendants."

84. I do not think that the distribution of sale proceeds proposed by the Bank is right. One must bear in mind that the Bank only exercises a charge over a 1/3 interest in the Property. The Bank's error may be seen by considering an example.

85. Suppose that I ordered the Property to be sold and total proceeds of $800,000 were realised. Under PO s. 7(2)(a) the proceeds should first be applied in discharging any liability due to Government. Paragraph (i) of the Bank's scheme is therefore correct. PO s. 7(2)(b) stipulates that the remaining proceeds should then be used in discharge of any incumbrance affecting the Property. No charge ranks in priority to the Charging Order Nisi, so PO s. 7(2)(b) does not directly apply here. Nevertheless, in light of PO s. 7(2)(b), to my mind, paragraph (ii) of the Bank's scheme rightly provides for the costs incurred in selling the Property (that is, realising the Charging Order Nisi) to be deducted from the proceeds.

86. Assume now that paragraphs (i) and (ii) of the Bank's scheme use up $200,000. That would leave $600,000 for distribution among the Bank, Standard Chartered, Herman and Franco. I do not see that the Bank should have the entire $600,000. I think that its charge would only entitle it to 1/3 of the sale proceeds up to a maximum of the value of the Bank's charge. The Bank should thus only receive $200,000. Standard Chartered would be entitled to the balance of $400,000 representing the 2/3 interest of Herman and Franco mortgaged to Standard Chartered. Of course, if the outstanding balance due to Standard Chartered on the mortgage was less than $400,000, Herman and Franco would be entitled to the residue.

87. The amount that the Bank would be entitled to receive upon sale of the Property cannot be fixed at $600,000 in whatever circumstance. The Bank should only be entitled to 1/3 of any sale proceeds once prior interests have been paid and subject to the maximum amount for which Joseph's 1/3 interest stood charged as stated in the Charging Order Absolute.

88. Accordingly, even if I had exercised a discretion to order the sale of the Property pursuant to the PO, I would not have ordered the sale proceeds to be dealt with in the manner suggested by the Bank.

B. The Bank's claim for an account of $600,000

89. The Bank's case is that, the Charging Order Nisi having been registered before the Memorandum, Herman and Franco had notice of the Bank's equitable interest in Joseph's share of the Property prior to completion. Accordingly, the Bank says that Herman and Franco ought to have paid the $600,000 purchase price for Joseph's 1/3 interest to the Bank, rather than to Joseph.

B.1 Joseph's interest in the Property

90. Before analysing the Bank's argument, I should initially clarify a question that arose at trial as to the nature and size of Joseph's interest in the Property.

91. Franco said in evidence that when purchasing the Property the brothers had no particular notion of owning a 1/3 share each. According to Franco, the brothers intended to work out their respective shares in the Property (based on their contributions to the capital and running costs of the same) at such time (if ever) as they might decide to sell the same.

92. Nonetheless, taking the evidence as a whole, it is difficult to escape the conclusion that the brothers notionally regarded themselves as each having a 1/3 share in the Property at the time of purchase. I attach weight in particular to the fact that initially, at least until Joseph ran into "cashflow problems," the brothers saw themselves as each being responsible for contributing roughly 1/3 of the monthly mortgage repayments. It is true that Franco contributed less towards the deposit and part payment of the purchase price of the Property. But the brothers seem to have intended to account among themselves for any inequalities in their respective contributions at some later date, possibly following any sale of the Property and distribution of the sale proceeds.

93. I thus find that, although by the Original Assignment the Property was conveyed to the brothers at law as Joint Tenants, the brothers held the Property in equity as tenants in common in equal 1/3 shares. When the Bank obtained a charge over Joseph's interest, it acquired an equitable interest in an undivided 1/3 share.

94. Even if I were wrong on the latter conclusion, it should not greatly affect my analysis of the Bank's case. The only other realistic possibility is that the Property was assigned to the brothers as joint tenants both at law and in equity. Assume that was the case. Where A, B and C are joint tenants and A alienates his interest to T, severance takes place. In such situation, B and C continue to hold an interest in 2/3 of the property as join tenants between themselves. The remaining 1/3 interest is held by T as tenant in common with B and C. Thus, when Joseph's interest was charged to the Bank, a 1/3 share in the Property would have become severed in equity from the joint tenancy among the brothers. The same result as that stated in the previous paragraph would have arisen. The Bank would have acquired an interest in Joseph's share as tenant in common in equity. At law, the Property would have continued to be held by the brothers as joint tenants.

B.2 The duty to account: notice

95. Herman and Franco had no actual notice of the Charging Order Nisi. The Firm did not discover the existence of the Charging Order Nisi before completion of the sale of Joseph's interest to Herman and Franco. However, there is no dispute that the Firm should have known of the Charging Order Nisi following its registration. Further, by reason of the registration of the Charging Order Nisi, Herman and Franco had constructive notice of the Bank's equitable claim to Joseph's interest. The question is whether that constructive notice on the part of Herman and Franco is sufficient to give rise to any duty to account for all or some part of the $600,000 consideration for Joseph's interest. The question is addressed in a trilogy of Court of Appeal cases, which I now discuss.

96. In Ho King-yin v. Lau King-mo [1980] HKLR 42 A agreed to buy C's land for $110,000. A paid $10,000 by way of deposit. The agreement was registered on 30 June 1978. On 17 July 1978 R acquired a charging order nisi over C's land. R registered the charging order on 18 July 1978. C's land was assigned to A on 24 August 1978. At the time of the assignment, A paid the balance of the purchase price for the land to C, rather than to R. Part of that balance went towards discharging a mortgage which R accepted had priority over R's charging order.

97. The Court of Appeal (Huggins JA, Cons and Yang JJ) held that, since the agreement had been registered before the charging order nisi, A was not liable to account to R for the $10,000 deposit paid at the time when the agreement was signed. But, given A's concession that he had actual notice of R's charging order before execution of the assignment, A ought to have paid to R the balance of the purchase price which was not used in discharge of the mortgage. As Huggins JA put it (at 45): "[U]pon receipt of actual notice of the charge the purchaser became liable to account to the Respondent for the purchase money but only to the extent of the charge".

98. Two points may be noted in connection with Ho.

99. First, Ho is authority for the proposition that actual notice of an incumbrance before payment of any purchase monies on completion, gives rise to a duty to account for the purchase monies to the incumbrancer to the extent of his charge. But Mr Ling has pointed out to me that, since it was conceded by A in Ho that he had actual notice, it was unnecessary for the Court of Appeal to consider whether constructive notice of an incumbrance was enough to generate a similar obligation to account for the purchase monies. Ho does not say that only actual notice can give rise to a duty to account for the purchase monies.

100. Second, there was no dispute in Ho that the $110,000 purchase price agreed between A and C constituted valid consideration reached after arm's length negotiation. The $110,000 must be regarded as evidence of the then market value of C's land. A was being held liable to account to R for the unpaid balance of $100,000 on the basis that the agreed price of $110,000 was a fair valuation of the relevant land. Ho says nothing about what a buyer must account for when the agreed purchase price is either much less than market value (for example, where the consideration includes an element of gift from vendor to purchaser) or significantly greater than market value (for example, where the consideration includes an element of gift from purchaser to vendor).

101. In Lam Sau Wah v. Tam Chi Hung [2001] 2 HKLRD 104 company C claimed that A held property on resulting trust for C. C registered a lis pendens in the Land Registry. C failed at first instance and the lis pendens was vacated. A then agreed to sell the property to R. The sale agreement was registered on 26 May 2000. On 29 May 2000 C registered a Notice of Appeal in respect of its claim against A as a lis pendens. Having received actual notice of the registration of the Notice of Appeal as a lis pendens, R raised a requisition and asked A to clarify his title. A's solicitors replied that the Notice of Appeal did not act as a stay of the original judgment in A's favour against C and A's title was thus indefeasible. There was no need (A's solicitors wrote) to vacate the lis pendens. R required A to expunge the lis pendens before completion. The issue was whether A or R was right.

102. The Court of Appeal (Rogers VP, Keith and Le Pichon JJA) held that, although A had priority over C as result of the prior registration of the formal sale agreement, R would have to account to C (should C succeed on appeal) for any balance of the purchase price which remained unpaid at the time when R received notice of C's appeal. R could not safely hand over such balance to A prior to the outcome of C's appeal becoming known. The situation in Lam could not be distinguished from that in Ho.

103. Two points may be noted in connection with Lam.

104. First, as in Ho, Lam was a case of actual notice. It was unnecessary for the Court of Appeal to consider whether constructive notice was enough to give rise to a duty to account on the part of R to C in the event that C's appeal was successful.

105. Second, as in Ho, there was no issue in Lam that the consideration agreed between A and R represented other than a fair value for the relevant property arrived through arm's length negotiation. Lam says nothing about the situation where the purchase price is palpably different (whether higher or lower) from the market value of a piece of land.

106. In Wong Chick Keung and others v. Woo Man Sang and others CACV 1945 of 2001, 15 May 2002 D1 and P2 were husband and wife respectively. P1 and P2 set up an estate agency and purchased a flat using their own monies. The flat was registered in D1's name. P1 and P2 instructed their employee E to sell the flat, but they deliberately did not tell E that they were the beneficial owners of the flat. D2, D3 and D4 made an offer for the flat to E. P1 and P2 rejected the offer. In the meantime, D1 instructed F to sell the flat. F introduced D2-D4 to D1 as the owner of the flat. D2-D4 became suspicious and asked for proof of D1's ownership. They were shown mortgage documents in D1's name. They signed a provisional agreement with D1 on 10 November 1991. On 18 November D2-D4 signed a formal agreement and paid a deposit. That agreement was registered on 25 November. On 18 November 1991 P1 and P2 (who was then in divorce proceedings with D1) issued a summons to vest the legal title to the flat in them. The summons was registered on 22 November as a lis pendens. Due to the negligence of their solicitors in conducting a Land Registry search, D2-D4 were unaware of the lis pendens prior to completion of their agreement with D1 on 5 December 1991. D1 disappeared with the purchase money paid by D2-D4. Following victory in the Court at first instance, D2-D4 sold the flat in April 2001. On appeal, P1 and P2 claimed an account an account from D2-D4 of the purchase price from the April 2001 sale on the basis that D2-D4 were trustees of the flat for P1 and P2. In the alternative, P1 and P2 claimed the balance of the purchase price paid to D1 on completion.

107. The Court of Appeal (Rogers VP, Le Pichon and Yuen JJA) held that D1 was a trustee of the flat for P1 and P2. The beneficial interest of P1 and P2 in the flat was an unwritten equity in the flat. As a result, prior to completion, D2-D4 obtained no equitable interest in the flat. D1 had no such interest to convey. The registration of P1 and P2's lis pendens meant that D2-D4 had constructive notice of the beneficial interest held by P1 and P2 in the flat prior to payment of the balance of the purchase monies for the flat to D1. Accordingly, D2-D4 were bare trustees and took the flat subject to the interests of P1 and P2.

108. Wong clearly goes further than Ho and Lam. In Wong it was only possible to show constructive notice on the part of D2-D4 arising from registration of the summons as a lis pendens. The Court of Appeal thought that was sufficient to fix liability on D2-D4. It should be noted that there was again no question in Wong about the prices paid for the flat, whether by D2-D4 to D1 or by the subsequent purchaser to D2-D4, being anything other than reflections of the true market price of the property.

109. Before leaving Wong, I should confess to having misgivings about the conclusion reached there. Wong was a hard case. Its outcome is paradoxical. In Ho and Lam the Court of Appeal held that legal and beneficial title passed to the buyers of relevant properties, subject to their personal obligation to account for the balance of purchase monies to equitable interests of which they had actual notice. By contrast, in Wong, where D2-D4 had no actual notice of the equitable interest claimed by P1 and P2, D2 and D4 were held to have obtained only a bare title.

110. The difference seems to have arisen as far as the Court of Appeal was concerned because in Wong D1 only held a legal title to the flat. The Court in effect gave priority to an unwritten equity of which D2-D4 had no notice at the time when their sale and purchase agreement was registered.

111. At best the sale and purchase agreement when executed, could only confer an equitable interest in the land on D2-D4. Where there are 2 competing equitable interests (specifically, an interest under a constructive or resulting trust in favour of P1 and P2 and an equitable interest under an estate contract in favour of D2-D4, then everything else being equal the equitable interest created first in time normally prevails.

112. However, once the unwritten equity of P1 and P2 was reduced into writing in the form of the summons and became registrable, it is unclear why Land Registration Ordinance (Cap. 128) ("LRO") s. 3(1)¹¹ did not have the result of postponing the equitable interest evidenced by the summons to the interest evidenced by the sale and purchase agreement.

113. Nor is it apparent why LRO s. 4¹² would not render the question of notice (whether actual or constructive) irrelevant. Immediately before registration actual or constructive notice of the summons could not affect the priority of the duly registered sale and purchase agreement. How is it then that, following registration of the summons as a lis pendens, the priority secured by D2-D4's sale and purchase agreement through registration should be lost?

114. The evidence in Wong was that P1 and P2 had deliberately clothed D1 with the semblance of being the owner of the flat because they feared the suggestion of a conflict of interest in light of their business as estate agents. Having so arranged their affairs, it would not be unduly harsh for P1 and P2 to bear the consequences of keeping their beneficial interest secret. It should be remembered that D2-D4 actually made enquiries of D1 as to the ownership of the flat and were shown documents evidencing D1's legal title.

115. The Court of Appeal reasoned (at §20) that D2-D4 obtained no equitable title under the sale and purchase agreement. The Court argued that this was because had D1's breach of trust "become known before the conveyance were to take place a court would not specifically enforce the contract because to do so would have been to enforce a breach of trust". But this may beg the question. The problem arose precisely because D1's breach did not become known to D2-D4 before conveyance. I am not sure that one can draw an inference as to the nature of the interest which D2-D4 acquired upon signing the sale and purchase contract, on the basis of a contingency which did not happen.

116. Had D2-D4 obtained actual knowledge of the interest prior to conveyance, they would have come under a personal duty to account for the unpaid balance of any purchase price to P1 and P2 following Ho and Wong. It may be that constructive notice on the part of D2-D4 would have been enough to fix them with a personal duty to account for the unpaid balance of the purchase price to P1 and P2. What is not readily apparent is how, despite LRO ss. 3(1) and (2), constructive notice of a later (in priority terms) instrument evidencing a previously unwritten equity should result in P1 and P2 both acquiring personal remedies against D2-D4 and retaining proprietary rights in the flat.

117. Contrast the approach in Li Sze Fat v. Cheng Kai Leung Tommy and another [2000] 3 HKC 224. In Li an unwritten equity (an interest under a resulting trust which came into existence in 1985) was reduced into written form (an express declaration of trust purportedly made in 1988) and registered subsequent to the registration of a sale and purchase agreement relating to the alleged trust property. Yuen J (as she then was), citing the decision of the Full Court in Chu Yam Om and another v. Li Tam Hoi Hing (1954) 38 HKLR 114 (at 116-7) (approved by the Privy Council in [1946-1972] HKC 55 (at 61G-H)), held that the unwritten equity became subsumed in the trust declaration. The sale and purchase agreement having been registered before the declaration, the agreement prevailed over the declaration.

118. Despite my misgivings over the ratio in Wong, I am constrained by it. The trust on behalf of P1 and P2 in Wong has no analogous feature in the present case. Joseph did not hold his 1/3 interest in the Property on trust for the Bank. The sole question here is whether Herman and Franco have a personal duty to account to the Bank (for some or all of the $600,000 which they paid for Joseph's interest) by reason of the registration of the Charging Order Nisi prior to the Memorandum. On that question, Wong is clear. It binds me to hold that constructive notice arising from the registration is enough to give rise to a duty to account on the part of Herman and Franco for the balance of the purchase price unpaid at the time of registration of the Charging Order Nisi.

B.3 The duty to account: valuation

119. Ho, Lam and Wong were all cases in which there was no issue as to the purchase price paid constituting a fair valuation of a relevant property. In the present case, the evidence shows that Herman and Franco agreed to pay Joseph significantly more than his 1/3 interest was worth in appreciation of Joseph's help in the acquisition of the Property. It is not surprising that as brothers Herman and Franco should wish to include an element of bounty in the purchase price as a measure of their appreciation of Joseph's assistance. I do not see why the Bank should be the beneficiary of that element of bounty which was essentially intended to be a personal gift to Joseph from Herman and Franco. Ho, Lam and Wong do not compel a different conclusion. In my judgment, Herman and Franco should only be accountable to the Bank for the actual market value of Joseph's interest at the time of the Memorandum. That part of the $600,000 representing the generosity of Herman and Franco towards Joseph must be extracted.

120. Of the actual market value at the time of the Memorandum, there has been no other evidence at trial apart from Franco's valuation of the unencumbered Property at $1,800,000. Deducting the then outstanding value of the Original Mortgage (around $1,000,000) and dividing by 3, yielded a value of about $260,000 for Joseph's 1/3 interest. On the evidence, I hold that amount to be the actual market value of Joseph's 1/3 interest at the time of its sale to Herman and Franco.

121. I note that I am not persuaded by the Bank's submission that the correct valuation of Joseph's interest at the time of the Assignment was $184,426. The Bank bases that figure on the total amount contributed by Joseph for the Property (including mortgage repayments). I do not think that is the correct method for calculating the value of Joseph's 1/3 interest.

122. In fact no money actually passed between Herman and Franco on the one hand and Joseph on the other between the time when the sale of Joseph's 1/3 interest was agreed and the time when the sale was completed. Payment was by way of a set-off against the monies due from Joseph to Herman. I was originally attracted to the view that this feature distinguished the present case from Ho and Lam where monies were actually paid between the time of registration of a relevant instrument by a 3rd party and completion.

123. But I am persuaded by Mr Ling's argument that the critical consideration must be the time when the obligation to pay arose. Until the New Assignment was executed, Herman and Franco would have been entitled to withdraw from the agreed arrangement and refuse a set off. Their evidence is in fact that, had they known of the Charging Order Nisi, they would not have proceeded with the transaction. There would then presumably not have been any set off. The fact that on 7 September 2000 payment was effected by way of set off does not materially distinguish this case in my mind from the position where cash is actually handed over as payment. Consequently, given constructive notice of the Charging Order Nisi prior to the New Assignment, I conclude that Herman and Franco are liable to account to the Bank for $260,000.

C. The Firm's negligence

124. Mr Chua SC (appearing for the Firm) concedes that the Firm failed to inform Herman and Franco of the registration of the Charging Order Nisi and its consequences. In my judgment, that omission was plainly a breach by the Firm of the duty of care which it owed to Herman and Franco under its retainer.

125. The Firm was instructed to take all steps necessary to effect the purchase of Joseph's 1/3 interest and its transfer to Herman and Franco. There is no dispute that it knew or ought to have learned about the registration of the Charging Order Nisi prior to the execution of the Memorandum. That registration had a material bearing on the title being transferred to Herman and Franco and the Firm ought to have advised the 2 brothers of the possibility that:-

(1) their title to Joseph's 1/3 interest may be subject to the Bank's charge; and,

(2) Herman and Franco would have a personal obligation to account to the Bank for any balance of the value of Joseph's 1/3 interest payable upon execution of the New Assignment.

The Firm failed to advise Herman and Franco of any of these matters. It did not obtain their instructions as to whether, in light of the registration of the Charging Order Nisi, the 2 brothers still wished to proceed with the transaction since Joseph could not assign to them an interest free of the Bank's charge.

126. The evidence (which I accept) is that, had Herman and Franco been properly advised of the Charging Order Nisi, neither of them would have wanted to continue with the purchase of Joseph's 1/3 interest. However, Mr Chua suggests that, although negligent, the Firm's wrong caused no damage or only nominal damage to Herman and Franco. I disagree.

127. As a result of the Firm's negligence, Herman and Franco are faced with an additional liability for $260,000. They had intended the monies payable to Joseph for his interest to be set off against Joseph's debt to Herman. The New Assignment was executed and the set off took place. Although the 2 brothers (in particular Herman) have allowed Joseph the set-off of $600,000, they now find themselves having to pay a further sum for Joseph's 1/3 interest. The 2 brothers did not expect to have to come up with a further $260,000 for the Bank. They must pay part of the purchase price twice over as a result of the Firm's negligence.

128. It is no answer for Mr Chua to say that Herman and Franco can seek reimbursement of that $260,000 from Joseph. Joseph has no money. Herman and Franco believed that they had settled with him (at least as far as the $600,000 was concerned) long ago in 2000. They have not chased after him since then. It is cold comfort for the Firm to say that the 2 brothers should sue Joseph rather than the Firm. That Herman and Franco are in their present predicament is due to the Firm and the Firm should indemnify the 2 brothers accordingly. Having so indemnified them, the Firm would itself become subrogated to the 2 brothers' claims (if any) against Joseph and the Firm can (if it deems fit and so wishes) seek to recover any loss from Joseph.

129. Mr Chua has referred me to the decision of the House of Lords in South Australia Asset Management v. York Montague Ltd. [1997] AC 191 ("SAAMCO"). I recently considered SAAMCO in some detail in the context of a claim for solicitors' negligence. See Industrial and Commercial Bank of China (Asia) Limited v. Messrs B C Chow & Co. HCA No. 1792 of 2001, 30 January 2004. I do not propose to burden this already long judgment by repeating the discussion there. I should only point out that, in terms of the distinction drawn by Lord Hoffmann in SAAMCO, the present situation is closer to the situation where a person is asked to advise on a course of action rather than one where a person is requested to provide a valuation or other information on the basis of which (among other factors) someone will decide whether a cause of action is appropriate. Given that is the case, it is not surprising that the Firm's failure to give proper advice as to the existence of the Charging Order Nisi should have a significant causative link on the 2 brothers' liability to account for $260,000 to the Bank.

130. Mr Chua submits that Herman and Franco turned a blind eye to a very real possibility that Joseph was heavily in debt and thus likely to have either charged his 1/3 interest to his creditors or to have creditors seeking to enforce their claims against Joseph's 1/3 interest. This submission is devoid of merit and logic. The Firm was hired to do everything necessary to ensure the smooth transfer of Joseph's interest to the 2 brothers. One of the Firm's duties would have been to inform the 2 brothers of any charge on Joseph's interest. The Firm said nothing about a charge, when it should have done so. How then are Herman and Franco to be blamed for "turning a blind eye" to something which the Firm failed to tell them about? Herman and Franco were entitled to expect competent solicitors to tell them if there was or was not a charge over Joseph's interest in the Property. If the Firm says nothing, why should Herman and Franco be required at law to second guess the matter? On the contrary, it was natural and proper for them to assume that there was no incumbrance to Joseph's interest other than the Original Mortgage. Constructive notice or Nelsonian blindness simply does not enter into the equation.

131. By reason of the foregoing, I hold that the Firm is liable to indemnify Herman and Franco against their liability to the Bank for $260,000 and any interest thereon.

III. Conclusion

132. The Bank's claim against Herman and Franco succeeds to the extent that the 2 brothers are liable to account to the Bank for $260,000. Interest on that amount is to run at 1% over the Hong Kong prime rate from date of writ until date of judgment and thereafter at the judgment rate.

133. Herman and Franco having accounted to the Bank for $260,000 together with interest thereon, the registration of the Charging Order Absolute is to be vacated from the Land Registry. By payment of the $260,000 Herman and Franco would have accounted to the Bank for the value of its Charging Order at the time of purchase of Joseph's 1/3 interest. The Changing Order would then effectively be discharged.

134. The Firm is liable to indemnify Herman and Franco against the sum of $260,000 and interest thereon due from the 2 brothers to the Bank.

135. I make the following Orders Nisi as to costs:-

(1) The Bank is to have the costs of its claim against Herman and Franco. Costs are to be on a party and party basis.

(2) Herman and Franco are to have the costs of their proceedings against the Firm. But for the Firm's negligence, Herman and Franco should not have had to sue the Firm, their former solicitors. Further, in all the circumstances there was little merit in the Firm's defence of the Third Party proceedings. I think it is appropriate then to order that the Firm be liable for the costs of Herman and Franco on an indemnity basis. The Court expects proper standards of professionalism and competence from solicitors in the handling of conveyancing transactions. There was a conspicuous departure here on the Firm's part from such standards.

(3) The Firm shall also fully indemnify Herman and Franco and hold them harmless against the costs which they are liable to pay the Bank.

(4) All costs are to be taxed, if not agreed.