CHUN TAT PAPER CO LTD v. WONG IP CHENG AND ANOTHER

DCCJ 201/2011

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 201 OF 2011

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JUDGMENT

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The Application

1.  This is an application under Order 14A by the defendants in an action involving an aborted conveyancing transaction. The question set out in the summons is whether the 1^st and 2^nd defendants showed and proved title to the property known as Unit 1309, Tsuen Wan Industrial Centre, Nos. 220-248 Texaco Road, Tsuen Wan, New Territories (“the Property”) by the letters from the defendants’ solicitors dated 6^th, 12^th, 16^th and 17^th November 2010 in answering the requisition raised by the plaintiff. The defendants’ position stated in the summons is that in the event that this court answers the aforesaid question in favour of the 1^st and 2^nd defendants, then the defendants apply for an order that judgment be entered against the plaintiff.

2.  Before dealing with the nitty-gritty of this application, I have two observations to make.  First, as agreed by Mr. Wang, counsel for the plaintiff, and Mr. Cheung, counsel for the defendant, the central issue in this action is about the reasonableness and proprietary of a requisition raised by the plaintiff’s solicitors and the adequacy of the answers thereto given by the defendants’ solicitors. There is no factual dispute. An application by way of a vendor and purchaser summons under section 12 of the Conveyancing and Property Ordinance, Cap.219 is eminently appropriate to resolve the differences of the parties.

3.  Whilst it is open to the plaintiff to commence this action by writ and hence this O.14A procedure is open to the defendants, the far better course would have been to adopt the usual and less expensive mechanism by vendor and purchaser summons, as observed by Deputy High Court Judge Carlson in So Mariko v. Tse Chun Chung John and Anor., unreported, HCA 579/2010, 6.9.2010 (at §8 of the Judgment). The observation of the Deputy Judge was endorsed by Fok JA in the judgment of the Court of Appeal (unreported, CACV 212/2010, 15.4.2011).   

4.  Second, I found the question posed in the summons too general, imprecise and lacking in particulars. Mr. Cheung clarified that the question should be whether the 1^st and 2^nd defendants showed and proved a good title to the Property by their answers to the requisition relating to a document entitled “Deed of Undertaking to Execute an All Monies an ALL Monies Second Legal Charge by Chargor/Borrower” dated 25^th April 1991 (“the Deed”) in the aforesaid four letters.  Mr. Wang agreed that this was the exact question to be answered by this court without insisting on a formal application to amend the summons by the defendant.

5.  Both counsel further agreed that the O.14A question in fact involved two questions: (1) whether the requisition relating to the Deed was meritorious and if so (2) whether it was satisfactorily and adequately answered by the defendants’ solicitors.  Mr. Cheung also agreed that if the court answers these two questions against the defendants, there should be judgment entered in favour of the plaintiff.

6.  Neither party has filed any evidence for this application. Both of them rely on the affirmations previously filed for the plaintiff’s failed application to amend the Statement of Claim. 

Undisputed Background Facts

7.  The 1^st defendant is the registered owner of the Property. The 1^st and 2^nd defendants are joint owners of a car parking space on the 1^st floor of the same building of the Property (“the Parking Space”) as tenants in common in equal shares.

8.  By a sale and purchase agreement dated 28^th September 2010 (“the 1^st Agreement”) entered into between the plaintiff and the 1^st defendant, the plaintiff agreed to purchase and the 1^st defendant agreed to sell the Property at the price of HK$ 2,180,000.00.

9.  By another sale and purchase agreement of the same date entered into between the plaintiff and the 1^st and 2^nd defendants (“the 2^nd Agreement”), the plaintiff agreed to purchase and the defendants agreed to sell the Parking Space at the price of HK$350,000.00.

10.  It was provided in both the 1^st and 2^nd Agreements that the sale and purchase of the Property and the Parking Space were to be simultaneously completed on 18^th November 2010 and that the default of any party to complete the sale and purchase of either of the Property and the Parking Space should be deemed to be default under both the 1^st and 2^nd Agreements.

11.  In both 1^st and 2^nd Agreements, it was expressly provided that the defendants should at their own expense show and prove their title to the Property and the Parking Space in accordance with section 13 of the Conveyancing and Property Ordinance, Cap.219.

12.  Pursuant to the 1^st Agreement, the plaintiff paid to Messrs. N.K. Tsang & Co. as stakeholders the sum of HK$218,000.00 being the initial and further deposits and pursuant to the 2^nd Agreement, the plaintiff paid to Messrs. N.K. Tsang & Co. as stakeholders the sum of HK$35,000.00 being the initial and further deposits. Messrs. N.K. Tsang & Co. act for both defendants.

13.  By letter dated 11^th October 2010, the plaintiff’s solicitors raised a few requisitions in respect of the Property. The requisition relating to the Deed (“the Requisition”) was first raised in the said letter. I shall deal with the merit of the Requisition and the answers given by the defendants thereto later in this judgment.

14.  The defendants’ solicitors purported to answer the Requisition by the 4 letters referred to in the summons. None of them satisfied the plaintiff. By letter dated 17^th November 2010, the plaintiff’s solicitors insisted on the Requisition and advised that there would be no completion due to the defendants’ failure to prove title to the Property. The plaintiff’s solicitors further indicated that the plaintiff was willing to postpone the completion date so as to allow the defendants more time to prove title to the Property.

15.  Completion did not take place on 18^th November 2010. Instead the plaintiff wrote to the defendants’ solicitors to demand return of the deposits paid under the 1^st and 2^nd Agreements and reserve the right to claim damages against the defendants.

16.  By 2 letters both dated 22^nd November 2010, the defendants’ solicitors wrote to the plaintiff’s solicitors alleging that the plaintiff had failed to complete the purchase of the Property and the Parking Space and reserve the defendants’ rights including forfeiture of all the deposits and further claim for loss and damages.

17.  By letter dated 6^th December 2010 of the defendants’ solicitors, the defendants forfeited all the deposits the plaintiff had paid under the 1^st and 2^nd Agreements.

18.  Against this background, the plaintiff took out the Writ and commenced these proceedings on 1^st March 2011 to ask, in the main, for declaratory relief and return of the deposits paid under the 1^st and 2^nd Agreements.

The Requisition and the Purported Answers thereto

19.  The following facts are essential for the assessment of the merit of the Requisition.

20.  The Deed was made on 25^th April 1991 and registered with the Land Registry under Memorial No. 751595. The operative part of the Deed is reproduced below:

1.  In consideration of Wayfoong Credit Limited (hereinafter called “the Company”) agreeing to grant to Forever Metalware Factory of Unit 1309 Tsuen Wan Industrial Centre, 220-248 Texaco Road, Tsuen Wan, N. T. (hereinafter called “the Borrower”) general credit facilities. At any one time the Borrower and Mr Leung Wing Keung (hereafter called “the Chargors”) hereby declares that the property more particularly described in Part I of the Schedule (hereinafter called “the property charged”) is equitably charged to secure the repayment to the Company on demand of all moneys which may at any time during the existence of this security be or become payable by the Chargor/Borrower and as shall be outstanding at the date of demand together with interest thereon at the rate of 13% per annum flat subject to your discretion.

2.  The Chargor/Borrower hereby undertake (whenever called upon so to do) to excute at the Chargor’s/Borrower’s own cost a proper all monies second legal charge over the property charged to secure all monies for the time being due or to become due to the Company on this security with interest thereon as aforesaid in such form and containing such powers and provisions as the Company shall reasonably require.

3.  The Chargor/Borrower hereby declare and agree that the Chargor/Borrower will hence forth hold the property charged as trustee for executing such all monies second legal charge as aforesaid in favour of the Company and the statutory power of appointing a new trustee in place of the Chargor/Borrower shall be exercisable by the Company and the person deriving title under the Company who shall have full power to make such appointment and to remove the Chargor/Borrower from such trusteeship at the Company’s sole and unfettered will and pleasure notwithstanding that none of the events referred to in the said statutory power as conditions precedent to its exercise shall have occurred and further that on any such exercise of the said statutory power the party or parties exercising the same may appoint himself or themselves or one of themselves to be the new trustee or trustees.

4.  The Chargor/Borrower hereby constitute and appoint the Manager or Acting Manager or other duly authorised officer of the Company for the time being in Hong Kong his attorney in his name and on his behalf to execute any such second legal charge as aforesaid and any other relating documents.

5.  The Chargor/Borrower hereby further undertake that during the subsistence of the security hereby constituted the Chargor/Borrower shall not effect or create any mortgage charge or other disposition of the property charged or any interest therein without obtaining the Company’s prior written consent.

6.  In this Deed where the content admits the expression “the Borrower”, “the Company” and “the Chargors” shall include the persons specifically named and their respective executors, administrators and assigns and words importing the singular number shall include the plural number and vice versa and words importing the masculine feminine or neuter gender shall include the other of them.

21.  According to the land search record of the Property, Leung Wing Keung was the predecessor-in-title of the Property and he assigned the Property to the 1^st defendant in March 2010. Prior to the sale, the following transactions are relevant. First, a mortgage dated 30^th September 1986 was created in favour of the Hongkong & Shanghai Banking Corporation and a release dated 19^th August 1997 was registered.

22.  Then the Deed was registered on 24^th June 1991 and subsequently an “all moneys” legal charge dated 19^th August 1997 in favour of Kwong On Bank Limited was registered. The release of the legal charge dated 18^th March 2010 was registered.

23.  After the Property was assigned to the 1^st defendant, an all moneys mortgage dated 18^th March 2010 was created in favour of the Industrial and Commercial Bank of China (Asia) Limited.

24.  The Requisition in the letter dated 11^th October 2010 was stated in the following terms:

“Please let us have documentary evidence showing that the Deed of Undertaking has been duly discharged or released by Wayfoong Credit Limited.”

25.  The first answer to the Requisition was contained in the letter of the defendants’ solicitors dated 6^th November 2010 in the following terms:

“What Deed of Undertaking you are asking. The Vendor is under no obligations to prove the Deed of Undertaking has been discharged by Wayfoong Credit Limited who is not a party in this transaction. The Deed of Undertaking is personal and will not affect the title of the Property.”

26.  The second answer to the Requisition can be found in the letter of the defendants’ solicitor dated 12^th November 2010 as follows:

“We hold a different view that the Vendor is under obligation to produce the Deed of Undertaking Memorial No.TW751595 for the reasons that the given undertaking is personal and in fact, it is a pre-root document not relating exclusively to the Property pursuant to Section 13A of CPO.”

27.  By letter dated 15^th November 2010, the plaintiff’s solicitors, quite rightly in my view, pointed out to the defendants that the Deed was neither a pre-root document nor a personal undertaking. They suggested that the defendants write to Wayfoong Credit Limited and ask them to execute a release in respect of the Deed, without which the plaintiff would not accept that the defendants had proved a good title to the Property.

28.  The third answer of the defendants in their solicitors’ letter dated 16^th November 2010 were stated in the following terms:

“We repeat the reasonings given. The Vendor is under no obligations to supply you a Release of the relevant Undertaking for the reasons that the said Undertaking was given personally by Leung Wing Keung to Wayfoong Credit Limited whereby the Chargor therein mentioned given undertaking to Wayfoong Credit Limited that he undertook during the security constituted the charger shall not effect or create any mortgage and the said Undertaking was merged and extinguished when the ownership of the Chargor was changed.”

29.  I must say that this reply, apart from being grammatically unsound, is quite incomprehensible to me. Mr. Cheung indicated that the defendants did not rely on any of the reasons advanced therein for the purpose of this application.

30.  Lastly, the defendants’ solicitors had this to say in regard to the Requisition in their letter dated 17^th November 2010:

“We repeat the reasonings given. Moreover, there is no evidence that there is any claim on the breach of the alleged Undertaking which was extinguished and merged on conveyance. If there is any breach of the alleged Undertakings, the time limit is barred for any claim on the breaches.”

31.  Mr. Cheung made it clear that the defendants would not argue that the Deed was a pre-root document and that it was a mere personal undertaking. Indeed, on a fair reading of the Deed, an equitable charge was thereby created over the Property.

32.  Mr. Wang fairly highlighted to me the fact that the plaintiff’s solicitors by letter dated 16^th November 2010 enquired with Wayfoong Credit Limited (“Wayfoong”) as to whether the Deed executed in its favour had been released and that on 30^th December 2010, one Mr. Chan of Wayfoong replied by phone that Wayfoong agreed to execute a release in respect of the Deed. These matters were verified by a statement of truth and an affirmation filed on behalf of the plaintiff and had been proposed to be added to the Statement of Claim by way of amendments. As mentioned, the proposed amendments were rejected. 

Applicable Legal Principles

33.  The legal principles relating to a vendor’s duty in a conveyancing transaction are well-established and the parties do not differ in this regard.

34.  A vendor is obliged to show a good title by satisfactorily answering requisitions irrespective of the vendor’s ability to pass/give good title on the date for completion: Chen Paul v. Lord Energy Ltd [1997] 3 HKC 270 per Le Pichon J (as she then was).

35.  The standard of proof is high and a vendor has to prove beyond reasonable doubt that the purchaser will not be at risk of a successful assertion against him of an incumbrance: MEPC Ltd v. Christian-Edwards [1981] AC 205 at 220.

36.  In Active Keen Industries Ltd v. Fok Chi Keong [1994] 1 HKLR 396 Litton JA had this to say:

“But assume the objection to have no substance. In such a case, as Godfrey J remarked, this presents considerable difficulties. Is it enough for the vendor to say: ‘there is no substance in the purchaser’s objection’? The judge answered this question as follows:

         ‘if there is nothing the vendor can usefully add, I would hold that it is enough …’ [A proposed answer was put forward to deal with the facts of that case.]

In my judgment the judge’s approach must in principle be correct. If the matter was self-evident, the purchaser’s solicitor cannot insist upon a fuller reply. But the vendor’s solicitor must act with total candour, so that the purchaser can be reasonably certain that there are no facts and material relevant to the requisition known to the vendor which have not been disclosed. A requisition as to title is not an occasion for the parties’ solicitors to bandy propositions of law; each party must decide for himself, ultimately, what the legal position is, based upon the facts known to himself: although, obviously, if one party can persuade the other to his own point of view on the law, so much the better.”

37.  For unmeritorious requisitions, Deputy Judge A. Chung (as he then was) went even further in Excel Wood Limited v. Charmed Investments Limited, unreported, HCMP 4130/1997, 16.6.1998 (at §4(b)) and had this to say:

“… At one extreme is a requisition for which the answer is so self-evident, or clearly related to non-existing difficulties, that it need not be answered…”

38.  The following dicta of Liu JA in his dissenting judgment in Jumbo Gold Investment Ltd v. Yuen Cheong Leung & Anor. [1999] 3 HKLRD 825 at p.833D were referred to me by Mr. Cheung and are apposite:

“The purchaser demanded proof of a given consent of the Governor-in-Council for a structural height above 35 feet. None was produced. The question before Yeung J was whether there was any real risk, not a fanciful one, of Government enforcement of the height restriction covenant. In cases such as this, concrete proof of Government’s knowledge and attitude is often not easy to find. In a vendor and purchaser summons under s.12 of the Conveyancing and Property Ordinance (Cap.129), the court would be considered best guided by the commercial reality as to whether there is any real risk of problems in title. It is not to be troubled by the absence of an absolute risk-free assurance, nor unduly hampered by strict legal proof in matters requisitioned. Conveyancing practice must be geared to uphold bargains. In most cases, unless the obvious commercial reality is shaken by compelling contra-indications, the court would more readily conclude beyond reasonable doubt that risk of Government intervention is remote.”

The Plantiff’s Contention

39.  The plaintiff contends that the equitable charge over the Property evidenced by the Deed is an incumbrance and since there was neither documentary nor direct evidence of its being discharge prior to completion, it was only proper and reasonable for the plaintiff to have raised the Requisition. Even though it transpired that it had been released and Wayfoong subsequently agreed with the plaintiff to execute a release, it does not alter the fact that the defendants’ solicitors failed to answer sufficiently and satisfactorily the Requisition and therefore the defendants were in breach of their contractual duty to show and prove a good title to the Property. Mr. Wang submitted that this was one of the rare cases where a vendor has in fact a good title but fails to show a good title, as in Active Keen Industries Ltd v. Fok Chi Keong, supra.

The Defendants’ Contention

40.  Mr. Cheung’s analysis, to which I agree, provides a full answer to the plaintiff’s contention.

41.  First, there is compelling circumstantial evidence pointing to the de facto release of the equitable charge even in the absence of a release properly executed by Wayfoong. The transaction history of the Property related above shows that subsequent to the Deed, the Property was first charged to Kwong On Bank Limited for all moneys. Then after its release, the Property was mortgaged to the Industrial and Commercial Bank of China (Asia) Limited again for all moneys. 

42.  Given this history, Mr. Cheung submitted that common sense dictated that the banks would not offer an all money charge/mortgage on the Property if they would be subject to the prior equitable charge of an unknown sum, which could well exceed the market value of the Property. I agree.

43.  The reasonable conclusion is that the equitable charge was discharged before the legal charge in favour of  and the mortgage in favour of the Industrial and Commercial Bank of China (Asia) Limited and it cannot still be valid.

44.  On the other hand, the Limitation Ordinance, Cap. 347 (“the LO”) also prevents Wayfoong from enforcing the equitable charge even if it has not yet been released.

45.  The equitable charge was created by the Deed on 25^th April 1991 and its limitation period began to run on the date of its creation (for 12 years): Chevalier Property Management Limited (formerly known as Rich Fortress Limited) v. Yu Chau Yeung [2007] 4 HKLRD 473 per Cheung JA at §8. Any enforcement action arising from the equitable charge is hence time-barred after 25^th April 2003: section 19(1) of the LO.

46.  In the circumstances, with all the information available to the plaintiff’s solicitors, even in the absence of a formal release of the equitable charge, they should have properly assessed the risk of a successful assertion of interest in the Property by Wayfoong. There was no other matters which was within the exclusive knowledge of the defendants about the equitable charge not having been disclosed to the plaintiff’s solicitors. They should have come to a negative conclusion and agreed that the equitable charge cannot possibly constitute a blot on the title to the Property.

47.  The Requisition was therefore unmeritorious and the plaintiff’s solicitors should not insist on a release of the equitable charge to be executed by Wayfoong.  No doubt the plaintiff’s solicitors were genuinely concerned about the equitable charge but their misgivings could have been allayed or removed well before completion if they had made enquires with Wayfoong earlier and pressed for its reply.

48.  Admittedly, the defendants’ solicitors’ answers were not helpful until their last letter on this subject dated 17^th November 2010. They could and should have been more cooperative when they were assisting their clients to complete the transaction. Their attitude towards the Requisition was not conducive to completion at all. That said, I do not find them to have failed to answer the Requisition satisfactorily even though it should not have been raised in the first place.

Conclusion

49.  To conclude, the Requisition was not meritorious and the Defendants in any event have satisfactorily and sufficiently answered the same. In the result, the defendants have shown and proved a good title to the Property and the question posed in the summons is answered in favour of the defendants.

50.  In the result, the plaintiff’s claim should be dismissed. There is also no apparent reason why costs should not follow the event and so I make an order nisi that the costs of this action including this application be paid by the plaintiff to the defendants to be taxed if not agreed with certificate for counsel.

51.  Lastly, I thank Mr. Wang and Mr. Cheung for their helpful assistance.