LEI SHING HONG CREDIT LTD v. WORLD EAST ENGINEERING LTD AND OTHERS

HCMP 396/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLLANEOUS PROCEEDINGS NO. 396 OF 2014

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JUDGMENT
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Introduction

1.  This is a mortgagee action by an Originating Summons dated 20 February 2014. Lei Shing Hong Credit Limited (“LSH”) is the lender and Chow Ho Fung (“Chow”) is the borrower. The loan is secured by a mortgage and the mortgaged property is owned by World-East Engineering Limited (“the Company”). Wan Fook (“Wan”) is allegedly an occupant of the mortgaged property.

2.  There is no dispute about the outstanding indebtedness of LSH and Chow under the mortgage which now amounts to over HK$8 million inclusive of interest. The Company has not taken any part in these proceedings. Chow in his affirmation claims without giving any particulars that the Property interests many perspective purchasers in the market and asks for an adjournment so as to enable a sale of the mortgaged property which should yield from HK$14 million to HK$16 million. He claims that the net sale proceeds should well exceed all the outstanding indebtedness to LSH. Ms Yang, counsel for Chow, makes no submission on this basis. Instead, she relies on a fraud claim made by Wan against Chow for her contention that the present dispute should not be disposed of by way of the Originating Summons and should be turned into a writ action pursuant to Order 28 rule 8.

3.  Wan in his affirmation says that Chow perpetuated fraud on him and caused him to transfer his shares in the Company to Chow by an agreement dated 31 October 2012 (“the Agreement”). After the transfer, Chow illegitimately executed the subject mortgage in favour of LSH. He says that these proceedings should be adjourned pending police investigation.

4.  Ms Leung, counsel for Wan, argues against the claim of LSH on two grounds. First, she contends that Wan retains beneficial interests in the Property and that LSH should have constructive if not actual notice of his unwritten equity. Second, She argues that the Agreement in any event should be set aside on the ground of non est factum and Wan was the victim of the fraud perpetrated by Chow. On these two grounds she submits that these proceedings should be ordered to continue as if commenced by writ under Order 28 rule 8 so as to allow further investigation of Wan’s interest in the Company and hence the Property and whether LSH had any notice of the same. Indeed, Wan joined these proceedings on his application on 13 May 2014.

Background

5.  I now go further into the background facts. The claim of LSH is essentially supported by contemporaneous documents and their contents are not in dispute. The following facts are non-controversial.

6.  LSH is a licensed moneylender and granted Chow a mortgage loan in the sum of HK$8 million for a term of a year (“the Loan”) pursuant to a facility letter dated 6 June 2013 (“the Facility Letter”).

7.  Chow executed the mortgage dated 10 June 2013 both in his personal capacity and in the capacity of the director of the Company (“the Mortgage”). He has become the sole director of the Company since 27 November 2012. The mortgaged property is known as Lot No.580 in Demarcation District No.185 together with the messuages, erections and buildings thereon (“the Property”). The Company has become the registered owner of the Property since 1994.

8.  Under the Mortgage, the Company being the mortgagor thereunder and Chow being the borrower jointly and severally covenanted to on demand pay to LSH all the outstanding indebtedness of Chow with interest and all usual or lawful costs and charges incurred by LSH in connection with any matters arising from the Mortgage.

9.  The Mortgage also contained the usual provisions to the effect that in default of repayment, LSH should be entitled to enter the Property and take possession thereof and sell the same and all the incidental costs and expenses should be borne by Chow and the Company.     

10.  As mentioned, there is no argument about the indebtedness of the Company and Chow. As at the date of the supporting affirmation of Lam Kam Leung filed by LSH (20 March 2014), the outstanding amount of the Loan inclusive of interest stood at HK$8,581,026.40.

11.  The company search records of the Company reveal the following activities within the Company. As at 8 October 2012, Wan held 9,993 shares and one Madam Law held the remaining 5 shares and both of them were directors.

12.  After the signing of the Agreement, on 23 November 2012, Madam Law ceased to be a director and Chow was appointed to replace her. Madam Law signed a Form 4 to give notice of her resignation.

13.  On the same day, 1 share of the Company was allotted to Chow. Chow signed a Form SC1 for the allotment as the director of the Company.

14.  On the other hand, Madam Law and Wan executed the requisite Instrument of Transfer and bought and sold notes to transfer the former’s 5 shares to the latter.  Madam Law hence ceased to be a member of the Company.

15.  On 27 November 2012, Wan and Chow executed the necessary documents including an Instrument of Transfer and the bought and sold notes to transfer Wan’s 9,998 shares to Chow. A board meeting was held and both Wan and Chow approved the said transfer. At the end of the board meeting, Wan resigned as a director and Chow then became the sole director of the Company. The minutes of the board meeting were signed by both Wan and Chow.

16.  On the same day, Wan signed a D4 to give notice of his resignation to the Companies Registry.

17.  Lastly, on 7 June 2013, Chow as the sole director of the Company signed a memorandum pursuant to Article 8(a) of the Articles of Association of the Company (“AA”). The effect of the memorandum was to confirm that the Company was agreeable to execute a mortgage in favour of LSH to secure the indebtedness of Chow to LSH whereby the Property would be charged as security. Further, the memorandum evidenced a resolution of the Company to authorise Chow to execute all the necessary documents relating to the intended mortgage by, among other things, affixing the Seal of the Company.

18.  It is common ground that neither the Company nor Chow has made any repayment of the outstanding amount of the Loan despite repeated demands.  LSH took out the Originating Summons for an order that (a) The Company and Chow do make payment of the Loan under the Mortgage; (b) they do deliver up vacant possession of the Property to LSH and (c) costs on a full indemnity basis.

Wan’s allegations

19.  Now I turn to Wan’s allegations in his short affirmation. Only Chow and Wan are privy to most of his allegations and no contrary evidence has ever been filed by Chow.

20.  Wan first alleges that in October 2012, Chow walked past the Property and asked Wan whether he was interested in a sale of the Property to him. After some negotiation, Wan agreed to sell Chow the Property at the price of HK$10 million.

21.  On 31 October 2012, Chow asked Wan to go to the office of Messrs. Cheung & Choy, a firm of solicitors (“the Office”) to sign certain documents. Eventually Wan did sign a document without any explanation given to him about its contents and any suggestion that he should seek legal advice. He claims he did not know what he signed and no copy of the signed document was given to him.

22.  He only received a copy of the signed document afterwards and it turned out to be the Agreement, whereby he agreed to sell to Chow all his 9,993 shares in the Company in consideration of HK$10 million. Chow was obliged to pay a deposit of HK$2million and the balance of HK$8 million should be paid on or before the completion date which was fixed on 30 April 2013.

23.  Purportedly pursuant to the Agreement, in or about November 2012, Chow paid Wan the deposit of HK$2 million but he defaulted the payment of the balance of the purchase price on the completion date. Hence, Wan claims that Chow breached the Agreement and so the sale of his shares under the Agreement could not be completed.

24.  Despite the Agreement, Wan contends that he has throughout remained in occupation of the Property. He claims to have occupied the Property ever since its acquisition in 1994.

25.  Based on the foregoing allegations against Chow, Wan sets out his case in his affirmation in the following terms:

(a) Chow induced him to sign the Agreement;

(b) Chow induced him to deliver up the title documents of the Property;

(c) Without paying the balance of the purchase price under the Agreement, Chow transferred Wan’s 9,993 shares in the Company to himself;

(d) Without his knowledge and in the absence of any prior agreement, Chow transferred Wan’s remaining 5 shares in the Company to himself;

(e) When the sale was not yet completed, Chow dishonestly obtained loans from some finance companies.

26.  Wan says under these circumstances he suspects whether the Mortgage is legally enforceable. He further avers that he would report the matter to the police and the Law Society of Hong Kong to see whether the solicitors firm was negligent and/or guilty of professional misconduct.

Discussion

Fraud?

27.  Quite rightly in my view, Ms Leung does not strongly advocate a case of fraud in her submission. I am unable to accept that the thin evidence of Wan can substantiate such a serious charge at all.  Alarmingly, his allegations are flatly contradicted by the activities of the Company as shown in its company records mentioned above.

28.  Whilst Wan has made no complain about the way Madam Law and he executed all the transfer documents and tendered their resignations as directors of the Company, I fail to see how his allegations can be made out.

29.  It is also pertinent to note that thus far Wan has not initiated any criminal investigation into the alleged fraud and he has not commenced any proceedings to set aside the Agreement and to recover his shares in the Company from Chow.

Unwritten equity?

30.  The major contention of Ms Leung is that Wan still retains an equitable interest in the Property by reason of his tenancy and the fact that the Agreement should be set aside on the ground of non est factum/fraud.

31.  For the alleged tenancy of Wan, Ms Leung draws my attention to a written declaration of the Company signed by Chow dated 7 June 2013 (“the Declaration”). The Declaration was given to LSH for the purpose of the Mortgage and Chow ticked the box of the following declaration/confirmation/warranty/representation:

“The Property is subject to tenancy and details and information of the tenancy has been disclosed and produced to you before the date hereof and such details and information are true, complete and accurate.”

32.  Relying on the Declaration, Ms Leung submits that there is a pre-existing tenancy agreement. She continues to argue that LSH therefore should have actual knowledge of the unwritten equity of Wan in the Property given the unchallenged evidence that Wan has occupied the Property throughout. At least, she submits, if LSH had made a reasonable inquiry, it should have become aware of it.  She thus concludes that LSH may not be a bona fide purchase without notice.

33.  I cannot accept this submission. It does not have sufficient evidential basis. As rightly pointed out by Mr Leung, counsel for LSH, nowhere in his own affirmation did Wan mention about an existence of a tenancy agreement. He merely asserts that he resides in the Property but this of course does not follow that his present residence is pursuant to a tenancy.  If there had been a current tenancy agreement and Wan had been the tenant thereunder, no doubt he would have produced further particulars of such a tenancy agreement or even disclosed a copy of the tenancy agreement if made in writing.

34.  In the premises, notwithstanding the Declaration and Wan’s alleged current occupation of the Property, I do not accept that Wan is the tenant of the Property under a tenancy agreement and has any unwritten equity in respect of the Property.

35.  Lastly, concerning this contention, Mr Leung points out that even where there is an existing tenancy, the mortgagee is still entitled to possession by way of demanding the tenant to pay rent to instead of the mortgagor. He refers me to Megarry & Wade: Law of Real Property, 8^th edn., §25-024 and Fisher & Lightwood’s Law of Mortgage, 13^th edn., §29.8. I agree with his submission.  

36.  I should for completeness deal with Wan’s another contention that he retains beneficial interest in the Property because of his beneficial ownership of the shares in the Company. Wan accepts that the Company is the owner of the Property. Ms Leung again quite sensibly does not say much about this contention at the hearing.

37.  The short answer to this contention, as provided by Mr Leung, is that it is a fundamental legal principle that the shareholders of a company have no interest, legal or equitable, in the properties of the company: Luo Xing Juan v Estate of Hui Shui See (2009) 12 HKCFAR 1 per Ribeiro PJ at §34. The same principle applies even in case of single ownership of a company: Macaura v Northern Assurance Co Ltd [1925] AC 619. 

38.  Hence, it is clear that even if Wan remains to be a beneficial owner of the Company, which I do not accept, he does not have any equitable interest in the Property.

Non est factum?

39.  Ms Leung relies on the assertions of Wan that he had not been explained the contents of the Agreement and not advised to take legal advice before the execution of the Agreement to make a plea of non est factum. She argues that if this plea can be established at trial, the Agreement should be set aside and Chow could have no authority to execute the Mortgage on behalf of the Company.

40.  This plea, on the evidence, is a complete non-starter in my view. Ribeiro PJ set out the applicable approach to such “no knowledge and consent” arguments in Ming Shiu Chung & Ors v Ming Shiu Sum & Ors (2006) 9 HKCFAR 334 at §84:

“… It is in law highly material to ask how or why the father nevertheless signed the documents. Reliance is universally placed on signatures appended to documents by persons of full age and understanding as signifying the signatory’s assent or adherence to what that document states. Where such a person has signed a document which purports to have legal effect, the law has never regarded it as enough to show that he signed without knowing its contents for the document to be disavowed. It is an everyday occurrence that people sign documents without reading the small (or even the large) print and therefore sign without actually knowing the terms (or all the terms) of the document signed. But they are held to the documents which they have chosen to sign unless there is shown to be a recognized legal basis for concluding that their apparent consent has been in some way vitiated or that reliance on that document by some other person falls into some category of unconscionable conduct justifying relief in equity.”

41.  Ribeiro PJ went on to cite with approval the following dictum of Litton NPJ in Bank of China (Hong Kong) Ltd v Fung Chin Kan (2002) 5 HKCFAR 515 at 533:

“......the fundamental principle that, generally speaking, when a person signs a legal document, he or she is bound by the act of signature : As a matter of general law, it is no defence to say that he or she did not understand the contents of a legal document; that person takes the chance of being bound by its terms, as he or she can take the simple precaution of not signing until its contents have been fully explained and understood.”

42.  Wan is a person of full age and the Agreement was written in the Chinese language. There is no allegation of illiteracy on the part of Wan. I cannot see how the law requires Chow to explain to the contents of the Agreement to Wan and urge him to take legal advice when on the face of the Agreement, they were concluding a commercial sale: Kincheng Bank Corp v Kao Yu Kuei [1986] HKC 212 per Huggins VP at p.215F.

43.  More importantly, his plea of non est factum cannot sit comfortably with all other company documents Wan and Madam Law executed without any complaint. Such documents including D4 were clearly executed pursuant to the Agreement and not related to the conveyance of the Property. If Wan had not known the contents of the Agreement or had been under some kind of a mistake of the nature of the Agreement, it is inexplicable why he signed such documents for the purpose of the sale of his shares in the Company in accordance with the Agreement.

44.  Even if this court accepts that Chow has breached the Agreement by his failure or refusal to pay the balance of the purchase price on or before the completion date, it does not follow that the Agreement would be rescinded ab initio. Chow’s appointment as director of the Company may remain valid and the execution of the Mortgage in his capacity of the director pursuant to the AA cannot be vitiated.

45.  In my judgment, no issue of non est factum can ever arise on the evidence and I reject Ms Leung’s submission accordingly. I have also dealt with the issue of fraud and hold against Wan. There is, in my judgment, no question of the enforceability of the Mortgage.

Quantum

46.  As mentioned, no argument has been made about the quantum of indebtedness of the Company and Chow under the Mortgage. However, a complication arises as to whether this court should allow the enforcement of the provision of penalty interest in the Facility Letter (“the Penalty Provision”).

47.  The Penalty Provision provides that an interest of 4% per month on a day to day basis is chargeable for any outstanding amount due and not paid from the due date to the date of payment.

48.  Mr Leung fairly draws my attention to section 22 of the Money Lenders Ordinance, Cap.163 (“the MLO”). The Penalty Provision is apparently against the prohibition under section 22(1)(c) for its penalty nature.

49.  Nevertheless, Mr Leung urges this court to exercise its discretion to allow the Penalty Provision under section 22(2) of the MLO. He submits that it would be inequitable if it is to be held to be unenforceable in the absence of any objections mounted by Chow and the Company and in all the circumstances of the present case.

50.  LSH is a licenced moneylender and Chow procured the Loan to serve his purpose. It was an ordinary commercial transaction. The Company and Chow made no complains about the interest rate chargeable under the Facility Letter. Chow did not allege any sharp practice of LSH.  

51.  Taking all these into account in the balancing exercise, I am of the view that it would be inequitable for LSH to be deprived of the enhanced interest rate under the Penalty Provision. I therefore exercise my discretion under section 22(2) to allow LSH to enforce the Penalty Provision in its computation of the interest.

Conclusion and Orders

52.  For the reasons given above, I come to the conclusion that none of the Company, Chow and/or Wan has any defence to the present application. LSH is entitled to the relief claimed in the Originating Summons save that I would allow 28 days for Chow to deliver up vacant possession of the Property to LSH.

53.  For the amount payable to LSH by the Company and Chow, the solicitors of LSH should in their draft order state the exact amount payable as at the date of this Judgment given my conclusion that the monthly interest rate of 4% in the Penalty Provision should be allowed. The same interest rate should apply until the date of full payment by the Company and Chow.

54.  Costs should follow the event and I see no justification for a departure from this general rule. Mr Leung asks for costs on a full indemnity basis, which is usually provided for in mortgages. However, in the Mortgage, I cannot find such a provision. In the circumstances, I would only order that all the defendants do pay LSH its costs of the Originating Summons on the usual basis.

55.  It remains for me to thank all counsel for their helpful assistance.