NEW CASTLE INVESTMENTS LTD v. FOO WAI LOK

CACV 46/2020,
CACV 47/2020
and CACV 399/2020
(Heard together)

[2020] HKCA 931

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 46 OF 2020

(ON APPEAL FROM HCB 6077/2018)

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AND

CIVIL APPEAL NO 47 OF 2020

(ON APPEAL FROM HCB 7480/2018)

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AND

CIVIL APPEAL NO 399 OF 2020

(ON APPEAL FROM HCA 1632/2018)

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REASONS FOR JUDGMENT

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Hon Lam VP (giving the Reasons for Judgment of the Court):

1.  At the hearing on 7 October 2020, this Court allowed the appeals in CACVs 46 and 47/2020 and made bankruptcy orders against Mr Yuan and Mr Foo (“the Debtors”). By this judgment, we give the reasons for these determinations.

2.  This Court also dismissed the notice of motion of 16 September 2020 in CACV 399/2020 seeking leave to appeal to the Court of Final Appeal in respect of the Court’s judgment of 20 August 2020 (reasons for which were handed down on 8 September 2020 [2020] HKCA 755).  By this judgment, we also give reasons for the refusal of leave to appeal to the Court of Final Appeal.

3.  CACVs 46 and 47/2020 were brought by the petitioner (New Castle Investments Limited, the judgment creditor in HCA 1632/2018) in HCB 6077/2018 (against Mr Foo) and HCB 7480/2018 (against Mr Yuan) in respect of the judgments of Au-yeung J (“the Judge”) of 22 January 2020.  By these judgments, the Judge set aside the bankruptcy order previously made against Mr Yuan and dismissed the petition against Mr Foo.  Both petitions were presented on the basis of the respective statutory demands issued against the Debtors on 14 September 2018.  The statutory demands were in turn issued on the basis of a default judgment of 7 September 2018 (“the Default Judgment”) entered against the Debtors in HCA 1632/2018.

4.  The petitioner was the plaintiff in HCA 1632/2018 in whose favour the default judgment was entered.  The petition in HCB 6077/2018 was presented on 24 October 2018 against Mr Foo whilst the petition in HCB 7480/2018 was presented on 28 December 2018 against Mr Yuan.  A bankruptcy order was previously made by the Judge against Mr Yuan on 25 November 2019, which she set aside on 22 January 2020.

5.  The Default Judgment was set aside by a master on 16 September 2019 on terms.  On appeal by the defendants (including Mr Yuan and Mr Foo), the conditions imposed by the master were set aside by Linda Chan J.  On further appeal by the plaintiff (viz New Castle, the petitioner in the bankruptcy proceedings) in CACV 399/2020, the Court of Appeal (Lam VP and Barma JA) restored the Default Judgment.  

6.  The factual background and the litigation history in respect of the underlying disputes giving rise to the petitions and these appeals were set out in the judgment of 8 September 2020 [2020] HKCA 755 at [1] to [13] and we shall not repeat the same here.

7.  In CACV 47/2020 (the bankruptcy appeal relating to Mr Yuan), Mr Tommy Cheung (who did not appear below nor in the substantive appeal in CACV 399/2020, but was instructed by the same firm of solicitors who represented Mr Yuan and Mr Foo in that appeal) sought to have these appeals adjourned pending the determination of the application for leave to appeal to the Court of Final Appeal in CACV 399/2020.

8.  Mr Foo, who appeared in person in CACV 46/2020, adopted the same stance.

9.  In light of that, this Court indicated at the hearing to the parties that we were minded to address the Notice of Motion in CACV 399/2020 (in respect of this appeal, Mr Cheung represented all the defendants including Mr Yuan and Mr Foo).  Counsel consented to such course being taken. 

CACV 399 of 2020 application for leave to appeal to the Court of Final Appeal

10.  We shall therefore address the refusal of leave to appeal in CACV 399/2020 first.

11.  Mr Cheung did not dispute the construction given to Clause 5.03 by the Court of Appeal in CACV 399/2020.  In the oral submission before us, counsel confined himself to one argument in seeking leave to appeal to the Court of Final Appeal which was formulated as a point of great general and public importance in the Notice of Motion as follows:

“ 1. The question involved in the intended appeal is one, which by reason of its great general and public importance, ought to be submitted to the Court of Final Appeal for decision pursuant to section 22(1)(b) of the Hong Kong Court of Final Appeal Ordinance (Cap 484) (“HKCFAO”). The question is as follows (the “Question”):

‘ Whether, upon a landlord’s final election to terminate or forfeit a tenancy by serving proceedings on the tenant, the landlord has an implied obligation under the tenancy to reduce the landlord’s monetary claim (for, e.g., outstanding rent, damages, monetary compensation, etc.) against the tenant by the amount of the tenant’s deposit paid to the landlord, so that the landlord and the tenant can achieve, inter alia, a clean break as finally elected by the landlord.’

The Defendants’ position is that the Question should be answered in the affirmative, in that such implied obligation is generally implied in all tenancies (the “Implied Obligation”), and the Plaintiff has contravened the Implied Obligation.”

12.  The essence of Mr Cheung’s submission was that there was an implied term (which was implied by law from the relationship of landlord and tenant) that upon the election by a landlord to terminate a tenancy, the landlord must immediately apply the deposit towards the reduction of arrears of rent so that a clean break would be achieved.  Such implied term, counsel said, arose from the true nature of a deposit and it was a term which could not be overridden by the express terms of the tenancy agreement.

13.  Mr Cheung relied on the following authorities to support his argument.  In Geys v Societe Generale, London Branch [2013] 1 AC 523 at [55] to [56], Lady Hale JSC (as she then was) distinguished between two different kinds of implied terms.  The first kind was a term implied into a particular contract where it is necessary to give business efficacy to the very contract in question.  Mr Cheung submitted that the implied term he advocated fell within the second category alluded to by Lady Hale.

14.  At [55], Her Ladyship explained the second kind of implied term as follows:

“ … Second, there are those terms which are implied into a class of contractual relationship, such as that between landlord and tenant or between employer and employee, where the parties may have left a good deal unsaid, but the courts have implied the term as a necessary incident of the relationship concerned, unless the parties have expressly excluded it…” (our emphasis)

15.  The case of Geys concerned a contract of employment and the other parts of the judgment shed no light on the landlord and tenant relationship.

16.  It is however clear from the judgment of Lady Hale quoted above that even in the context of the second kind of implied term, with its rationale based on parties leaving a good deal unsaid, such implied term cannot contradict an express term.

17.  For the overriding effect of such implied term, Mr Cheung relied upon a judgment on derogation from grant.  In Gloucester Place Music Limited v Simon Le Bon [2016] EWHC 3091 (Ch), Arnold J cited a judgment of Neuberger J (as he then was) in Platt v London Underground Ltd [2001] 2 EGLR 121 at 122 for the law concerning the doctrine of derogation from grant.  In particular, Mr Cheung drew our attention to the following part of Neuberger J’s judgment:

“ 5. The terms of the lease will inevitably impinge on the extent of the obligation not to derogate. Express terms will obviously play a part, possibly a decisive part, in determining whether a particular act or omission constitutes a derogation. An express term should, if possible, be construed so as to be consistent with what Hart J called ‘the irreducible minimum’ implicit in the grant itself. However, as he went on to say, a covenant relied on by the landlord ‘if construed as ousting the doctrine in its entirety is repugnant … and should itself be rejected in its entirety’: see Petra Investments Ltd v Jeffrey Rogers plc (2000) L & TR 451 at 471.”

18.  Gloucester Place Music Limited v Simon Le Bon, supra, was a copyright case and the doctrine of derogation from grant was considered in the context of assignments of copyright.  Mr Cheung did not place before us the judgments in Platt v London Underground Ltd, supra or Petra Investments Ltd v Jeffrey Rogers plc, supra, which were apparently cases concerning the landlord and tenant relationship.

19.  Be that as it may, we could not derive from these authorities the proposition that an implied term can override the clear effect of an express term.  Neuberger J clearly regarded the express terms of a lease as highly relevant in defining what has been granted by the landlord.  At most, the comment of Hart J cited by Neuberger J (and we should not be taken as accepting this to be correct in light of the lack of full argument before us) operates only in cases where the express term purports to negate the irreducible minimum of what has clearly been envisaged as part of the grant. In such scenario, the doctrine of derogation from grant may preclude are unduly wide effect not within the common contemplation of the parties from being given to an express term.  In that sense, the doctrine of derogation from grant cannot be excluded by an express term of a lease.

20.  On the other hand, it is well established that implied terms cannot contradict the express terms of the agreement: in addition to the dicta of Lady Hale in Geys at [55], see BP Refinery v Shire of Hastings (1978) 52 ALJR 20 at 26.

21.  In the present case, we are not concerned with any suggestion of derogation from grant.  The position with regard to the deposit was fully considered in the judgment of 8 September 2020 in CACV 399/2020.  As submitted by Mr Suen SC, Clause 5.04 of the Tenancy Agreement of 27 April 2018 is highly relevant.  It reads:

“ 5.04 Subject as aforesaid, a sum equivalent to the Deposit (reduced by the amount of Rent or other charges in arrear or the loss or damage suffered by the Landlord, if applicable) shall be paid to the Tenant by the Landlord without interest within thirty days after the expiration or sooner determination of this Agreement and the delivery of vacant possession of the Premises and the Furniture to the Landlord in such repair and condition in accordance with Clause 6.08 hereof or within thirty days of the settlement of the last outstanding claim by the Landlord against the Tenant in respect of any breach, nonobservance or non-performance of any of the agreements stipulations or conditions herein contained and on the part of the Tenant to be observed and performed, whichever is the later.”

22.  At [42] to [47] of the judgment of 8 September 2020, the Court explained how the deposit operated in the context of this Tenancy Agreement.  For present purposes, we only need to highlight the following features:

(a)     Once paid, the deposit became the landlord’s money both legally and beneficially and it was not held on trust;

(b)     The tenant only had a right for the payment of a sum equivalent to the deposit (reduced by the permissible reductions provided for in Clause 5.04) within 30 days after all the conditions under Clause 5.04 have been fulfilled.  It is a chose in action as opposed to a proprietary interest in the money during the term of the tenancy;

(c)     The conditions under Clause 5.04 include the delivery of vacant possession of the leased premises and the settlement of outstanding claims by the landlord against the tenant in respect of the breach of the tenancy agreement;

(d)     The potential claims the landlord include claims for legal costs for recovery of rent and interests, see Clause 8.02.

23.  In light of such analysis as to the true nature and the mechanism for refund of deposit under Clause 5.04, it is difficult to see any basis for implying a term that the petitioner must give immediate credit to the tenant for an amount equivalent to the deposit when it commenced proceedings for termination of the lease and recovery of possession.

24.  First, according to Clause 5.04, the obligation to make payment to the tenant did not arise until 30 days after actual delivery of vacant possession and settlement of all claims.  Even assuming that it is arguable that settlement of claims in the final account should include deduction of liabilities by the amount of deposit, this could not have taken place before the recovery of possession in a satisfactory condition.  These events had not taken place as at the time when the petitioner commenced proceedings in HCA 1632/2018.

25.  Second, the time taken for recovering actual vacant possession was outside the control of the petitioner (as much depends on the progress of the proceedings and the enforcement process) and in the meantime mesne profit would be incurred.  Further, there was also no certainty that the tenancy would be determined because there is a statutory right on the part of the tenant to seek relief under Section 21F of the High Court Ordinance (Cap 4).  It is simply impossible for the landlord to do any final accounting when the proceedings for possession were commenced.

26.  In the present case, vacant possession was only recovered by the petitioner on 29 November 2018 after the Default Judgment had been entered, statutory demands had been served and bankruptcy petition in HCB 6077/2018 had been presented.  By then, the sums owed by the tenant (and Mr Yuan and Mr Foo as guarantors) had exceeded the amount of deposit.  In addition to the arrears of rent and mesne profit, there were also liabilities on account of interest and legal costs.  None of these had been paid by the tenant in accordance with the terms of the Tenancy Agreement.  The petition in HCB 7480/2018 was presented on 28 December 2018 and by the amendments made on 20 November 2019 the petitioner stated that it had applied the deposit to reduce the outstanding liabilities on 29 November 2018.

27.  Therefore, the position of the petitioner in the present case was that credit had to be given to the defendants in HCA 1632/2018 in respect of the monetary claims upon recovery of vacant possession.  Mr Suen told this court that the same position was adopted towards Mr Foo though similar amendments had not been made in HCB 6077/2018.  We were told by Mr Suen that without taking account of legal costs (which would have to be taxed and therefore cannot form the basis of a petition), the up-dated (viz up to 7 October 2020) outstanding sums added up to $1,075,258.76 after deducting the amount of the deposit.

28.  Mr Cheung referred to Polyset Ltd v Panhandat Ltd (2002) 5 HKCFAR 234 and Ng & another v Ashley King (Developments) Ltd [2011] Ch 115 concerning the right to have the deposit to be taken into account in the calculation of mesne profit and damages.  We have no quarrel with such proposition.  But those cases do not support the argument that such account must be taken immediately upon the commencement of proceedings so that if the deposit amount is greater than the arrears of rent up to that point in time the landlord does not have a valid monetary claim.

29.  We do not see anything in the inherent nature of a deposit that requires the court to strike down Clause 5.04 as being repugnant to the obligation to refund deposit after its purpose as security has been fulfilled.  To the contrary, as submitted by Mr Suen, Clause 5.04 makes good commercial sense because before the recovery of vacant possession in a satisfactory state, the landlord would still need to have something to hold onto as security.  If immediate deduction is required upon commencement of proceedings, that purpose could be frustrated.

30.  For the reasons set out above, we are also unable to agree with Mr Cheung that the petitioner had made a final election on not returning the deposit when they commenced proceedings in HCA 1632/2018. Such submission was built on the false premise that the petitioner had an immediate obligation to pay an amount equal to the deposit back to the tenant when they sought to terminate the tenancy.  Clause 5.04 provided otherwise.  As we have seen, such election was only made by the petitioner, as it was entitled to, upon recovery of possession on 29 November 2018.

31.  Despite the valiant and diligent efforts of Mr Cheung, we do not find his contention to be reasonably arguable.  Since there is no merit in the intended appeal, we refused to grant leave to appeal to the Court of Final Appeal in respect of CACV 399/2020. 

32.  Mr Cheung also relied on some other grounds on the “or otherwise” limb.  Quite apart from the usual practice that leave on such limb should only be granted by Appeal Committee, we do not find such grounds to be arguable.  The Default Judgment was entered due to the failure of the defendants to file notice of intention to defend as prescribed by the rules.  On the correct analysis as explained in the judgment of 8 September 2020, the plaintiff had no obligation to draw the court’s attention to Clause 5 and the deposit in the application for default judgment.  As explained above, as at the date of the Default Judgment, the obligation of the plaintiff to do final accounting (including using the deposit amount to reduce the outstanding liabilities) had not yet arisen.  This was the reason the Court of Appeal restored the Default Judgment as it was without regard to the deposit amount.

33.  For these reasons, the Notice of Motion was dismissed.

The Bankruptcy Appeals

34.  In light of the judgment of 8 September 2020, we respectfully hold that Au-yeung J erred in her construction of Clause 5.03. She accordingly erred in setting aside the bankruptcy order previously made against Mr Yuan and dismissing the petition against Mr Foo.

35.  Mr Cheung fairly accepted that his resistance to these appeals depended on the prospect of success in his application for leave to appeal to the Court of Final Appeal.  For the reasons given above, we cannot see any prospect in that regard.

36.  We enquired with Mr Cheung (for Mr Yuan) and Mr Foo if the Debtors would be able to discharge the outstanding liquidated liabilities in the sum of $1,075,258.76.  Mr Cheung told us Mr Yuan asked for 2 months to pay whilst Mr Foo said he had no means to meet such liabilities.

37.  Bearing in mind that the Debtors had been given substantial time to make the necessary payments (as their counsel Mr Wong in CACV 399/2020 had indicated on 20 August 2020 that they should be given an opportunity to pay in light of the outcome of that appeal), we did not think it was appropriate to delay the making of bankruptcy orders against the Debtors.

38.  We allowed the petitioner’s appeals in CACVs 46 and 47/2020 with costs and made the usual bankruptcy orders against the Debtors accordingly.