IP HON NAM v. CHAN MOON KAU

DCCJ15849/2000

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 15849 OF 2000

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Judgment

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The parties appeared before me for the Defendant judgment debtor to show cause why the charging order nisi obtained by the Plaintiff judgment creditor should not be made absolute. The court file shows that on 26 February 2001 the parties had consented to an order recording terms of settlement of the action. The Defendant defaulted on the terms of settlement and hence the Plaintiff obtained judgment for $450,000 with interest and costs on 14th August 2001. By virtue of that judgment, the Plaintiff applied for and obtained a charging order nisi against the property which is the residence ("the Matrimonial Home") of the Defendant and his family. At the hearing to show cause, the Defendant opposed making the charging order absolute. After hearing arguments, I made the order absolute with full reasons to be given in writing in due course. These are my reasons.

2. The prevailing law and principles relied upon by the Defendant are summarized by Mr. Chin who appeared for the Defendant :

"1. After granting a charging order nisi upon ex parte application by the creditor, the court, upon further consideration of the matter, shall either made the order absolute, with or without modifications, or discharge it.

[Rules of the District Court, O. 50 r. 3(1)]

2. The general principles governing the exercise of the discretion are as follows :

(1) The question whether a charging order nisi should be made absolute is one for the discretion of the court.

(2) The burden of showing cause why a charging order nisi should not be made absolute is on the debtor.

(3) In exercising the discretion the court has both the right and the duty to take into account all the circumstances of the case, whether such circumstances arose before or after the making of the order nisi.

(4) The court should so exercise its discretion as to do equity, so far as possible, to all the various parties involved, i.e. the judgment creditor, the judgment debtor, and all other unsecured creditors.

[District Court Ordinance, s. 52A(2)]

[Hong Kong Civil Procedure 2002, Vol. 1, Part A, p. 708, para. 50/9A/23]

[The Supreme Court Practice 1999, Vol. 1, p. 859]

3. Where a charging order is sought in respect of a property occupied as a matrimonial home, the position of the spouse of the judgment debtor requires separate consideration.

[Chan Ting Wai William v. Lam Sai Pak at 845H]

4. The court has a proper concern to ensure that a wife's rights of occupation are adequately protected. Although a creditor may be justified in expecting that a charging order would be made in his favour, countervailing factors of sufficient weight, such as hardship to the wife, could displace his rights.

[Harman v. Glencross at 546 f-g]

5. In balancing the competing claims of the creditor and the wife, the court has to consider inter alia :

(1) whether the value of the equity in the matrimonial home was sufficient to enable the charging order to be made absolute and realised at once, even though that could result in the wife and children being housed at a lower standard than they might reasonably have expected;

(2) whether only such order as might be necessary to protect the wife's right to occupy the matrimonial home should be made (e.g. by postponing the sale of the home); and

(3) any hardship which would be suffered by the creditor if he was denied a charging order or if its enforcement was postponed.

[Harman v. Glencross at 546 g-j]

6. Where the creditor had put in no evidence as to his circumstances the court had been entitled to decide that the hardship to the wife was an overwhelming factor outweighing the creditor's interests.

[Harman v. Glencross at 546j-547a]

[Hong Kong Civil Court Practice Vol.1 (A), p. 201A, para. 2436]

7. Where it was established that an order for payment of a judgment debt by instalments had been observed, it would in any event be wrong to interfere with a refusal of the court below to make a charging order. There was no jurisdiction to make a charging order where the judgment debtor had not defaulted in paying the instalments ordered.

[Mercantile Credit v. Ellis]

[Hong Kong Civil Procedure 2002 Vol. 1 p. 707 para. 50/9A/20]

8. Even where a creditor is justified in expecting a charging order over the husband's beneficial interest to be made in its favour, where enforcement would cause undue hardship to the wife and children the court is required to make only such order as may be necessary to protect the wife's right to occupy (with the children) the matrimonial home, e.g. by way of a Mesher type of order (whereby enforcement would be postponed until the children reach the age of majority).

[Austin-Fell v. Austin Fell at 179F-181F]

3. Mr. Chin for the Defendant suggested that the following circumstances should be taken into consideration by the court in the exercise of its discretion :-

"Negative Equity

(a) The Matrimonial Home is subject to a mortgage dated 18 April 2000 to secure General Banking Facilities granted to TGM, a family company managed by the Defendant, in favour of the Nanyang Commercial Bank as security for credit facilities.

(b) The terms of borrowing by TGM from the bank are set out in 3 letters of the bank dated 24 April 2001, 2 November 2000, and 5 January 2000 respectively. As at present, the bank has made available 2 facilities to TGM : an overdraft facility with a limit of HK$800,000.00 and a fixed SME loan facility of HK$2,000,000.00. As at the end of November 2001, the overdraft facility has a debit balance of HK$814,804.76.

(c) The average market value per square foot of comparables to the Matrimonial Home is about HK$1,600.00. Even assuming a market value per square foot of HK$1,700.00, the value of the Matrimonial Home is unlikely to exceed HK$1,298,000.00. In juxtaposition with the total amount borrowed of over HK$2.8 million, there is clearly negative equity on the property.

(d) There is clearly insufficient value in the Defendant's equitable interest in the Matrimonial Home for discharging any part of the judgment debt herein.

The bank's interest in the property

The mortgage in favour of the bank ranks in priority to a charging order made in favour of the Plaintiff. Should the court exercise its discretion to make the charge absolute and subsequently the Plaintiff seeks to enforce the charge, the bank would be compelled to foreclose on the matrimonial home. Since there is insufficient market value in the matrimonial home to cover the bank borrowing, the bank is likely to suffer prejudice as a result of being compelled by the Plaintiff to call the loans to TGM, while the Plaintiff would gain absolutely no advantage by enforcing the charge. Also, the Defendant's family business would be ruined for no good reason.

The intention and behaviour of the Defendant

(a) The Defendant had make 2 prior offers to pay the judgment debt by instalments.

(b) The Defendant has made a payment into court in the amount of HK$100,000.00 on 5 January 2002.

(c) There is clear intention on the part of the Defendant to discharge the judgment debt with utmost diligence. This is a formidable effort in the light of his monthly income of HK$15,000.00 and his family obligations.

(d) If the court approves the schedule of payment proposed by the Defendant, the Plaintiff would be fully repaid by the end of June 2002. This must be taken into account in any balancing exercise regarding the horrific consequences to the Defendant's wife and daughter if they were evicted from the Matrimonial Home as a result of enforcement of the charge.

The interests of Mrs. Chan and her daughter

(a) The Defendant's wife is a joint tenant of the Matrimonial Home. Her interests (and that of her daughter's) must be taken into account in juxtaposition with the interest of the Plaintiff. There is no question that the interests and the life of the Defendant's wife and her daughter would be seriously prejudiced in the event of an enforcement of the charge. The impact on the daughter would be particularly draconian.

(b) Authorities indicate that even if the charge were to be made absolute, its execution, in the circumstances, would have to be postponed until the daughter reaches the age of majority, which would be years away. In comparison, if the court accepts the Defendant's offer to pay by instalments, the judgment debt would be completely discharged by June 2002.

The Principles

4. In general, I accept Mr. Chin's summary set out above as representing the prevailing law and principles. However, with respect, not all the points stated are good law. I shall state my objections below.

5. In Mercantile Credit Co Ltd v. Ellis Times Law Report, 1st April 1987, the English Court of Appeal held that where the court has already made an order for a judgment debtor to satisfy judgment by instalment payments, the court has no jurisdiction to make a charging order unless the judgment debtor has defaulted on the order to pay by instalments. It appears from the necessarily abbreviated report that their lordships considered a charging order as a mode of execution. Since an order for satisfaction of judgment by instalments is in effect an order to stay execution, logically the court should not make another order that nullifies the effect of stay of execution by the earlier order giving time to pay by instalments. With respect, I venture to suggest that their lordships misunderstood the true nature and effect of a charging order. It is trite law that a charging order creates an encumbrance upon the property in question and the chargee is immediately entitled to register the order against the Land Registry record of the property. A charging order, unlike a writ of fi. fa. or a writ of possession, does not immediately deprive the judgment debtor of use or occupation of the property. Thus, although nominally it is a mode of execution, a charging order is not a writ of execution. A charging order does no more than preserve asset that may be converted to satisfy judgment. I cannot emphasize too strongly the need to convert. A judgment creditor cannot by virtue of a charging order take possession or dispose of the property. It is only when the property is sold either by the judgment debtor, another creditor, or by the judgment creditor that the proceeds of sale may be taken to satisfy judgment. As pointed out by Mr. Tong for the Plaintiff, when a judgment creditor seeks to enforce a charging order, proceedings must be taken by originating summons under Order 88 of the Rules of the District Court (similar provisions in the Rules of the High Court for Court of First Instance cases). Until the court has made an order directing sale of the property on an Order 88 application, the property placed under a charging order remains in the possession of the judgment debtor. The court has wide discretion in Order 88 proceedings to refuse to make an order for sale. Hence, in principle and in practice, a charging order only provides the judgment creditor with security, to preserve the statu quo, over the beneficial interest of the judgment debtor in a property. A charging order should not be equated with other modes of execution whereby assets belonging the judgment debtor may be appropriated or disposed of by the judgment creditor without further order.

6. As to the situation where the court has made an order allowing the judgment debtor to pay by instalments, again I beg to disagree with their lordships in Mercantile Credit Co. Ltd. v. Ellis. Section 52A of the District Court Ordinance, Cap. 366 expressly provides that :-

(1) The Court may by order impose a charge for securing the payment of any money due or to become due under a judgment or order of the Court on a judgment debtor's property specified in the order.

The plain wording of S. 52A (1) clearly envisages an order for payment to become due, i.e. an order for payment by instalments. So there is express provision for a charging order to secure instalment payments. The same wording can be found in Section 1 of the Charging Orders Act 1979. In the premises, I may be forgiven for not accepting the decision in Mercantile Creditor Co. Ltd. v. Ellis as sound.

7. In any event, the record shows that the Defendant defaulted in payments under a consent order. The court, therefore, is not precluded from making a charging order even if the decision in Mercantile Credit Co. Ltd. v. Ellis is good law.

Consideration for the Spouse's Interest

8. The other three authorities cited by Mr. Chin - Harman v. Glencross [1986] 1 All ER 545, Austin-Fell v. Austin-Fell [1990] Fam. 172 and Chan Ting Wai, William v. Lam Sai Pak [1999] 1 HKC 843 are cases involving husband and wife already in divorce proceedings so that the interest of wife qua spouse (in addition to whatever rights as joint tenant) had arisen or crystallized. They are, therefore, distinguishable from the instant one where the Defendant and his wife are still in matrimonial union and there is no indication of their parting: In fact, according to the headnote in Harman v. Glencross, the English Court of Appeal indicated that:-

"Where a creditor applies for a charging order on the husband's share of the matrimonial home before the wife brings divorce proceedings the wife has no competing claim to the husband's share and must seek to protect her rights of occupation under s. 30 of the 1925 Act. However, where the creditor applies after the wife's petition the court should consider whether it is proper to make the order before the wife's application for ancillary relief has been heard in the Family Division and should normally transfer the creditor's application to the Family Division so that it can be heard with the wife's application for ancillary relief. However (per Fox and Mustill LJJ), the creditor's application remains an application for a charging order and should not be treated as though it were a wife's application under the matrimonial jurisdiction for the disposition of the husband's property for the benefit of the wife and children (see p. 558 g to p. 559 a and p. 563 f to h)."

Negative Equity

9. This is the only circumstance which stands out in the instant case and which the authorities say should be taken as weighty consideration. Once more, with all due respects, I do not think it is sensible at the stage of application for charging order to consider this circumstance. It has already been explained that a judgment creditor has to come to court again to seek an order for sale under Order 88. When that happens, of course the court will be obliged to consider whether it would be appropriate to sell the property. No court will order sale under Order 88 proceedings if it would bring no benefit to any party.

10. In my view, many things may happen between the time of the making of the charging order absolute and the time when the court is obliged to consider making an order for sale. The property market may have risen. The judgment debtor may have found the means to discharge the bank's mortgage thereby leaving himself with valuable equity in the property. For the time being, i.e. on an application for charging order, the principal consideration, after taking into account all factors and circumstances, is whether the property should be preserved so that perhaps some day, sooner or later, judgment may be satisfied by taking further steps to enforce the charging order. In general, there can be hardly any real ground to oppose a preservative charging order.

Vexatious Opposition

11. I observed during the course of the hearing that it was unreasonable for the Defendant to oppose the making of charging order absolute. At the risk of repeating myself, a charging order poses no immediate threat to the Defendant's (and his family's) use or enjoyment of the Matrimonial Home. If and when the Plaintiff judgment creditor issues proceedings under Order 88, obviously the court will duly look at all the appropriate circumstances and the rights of other parties affected. Meanwhile, if the Defendant, as Mr. Chin was eager to impress upon the court, is able to satisfy judgment within 6 months from now, needless to say the charging order will be discharged. All the arguments in the circumstances of the instant case in opposition to charging order absolute were a waste of time and costs, if not outright misconceived.

12. Mr. Chin suggested that the Defendant is entitled to argue twice, once at the stage of the application for charging order and once at the stage of application under Order 88 to enforce the charging order. I accept that under existing law the Defendant is entitled to argue twice. But, if I have succeeded in showing that a charging order does no more than preserve the status quo, arguments at the charging order stage in the circumstances of the instant case are pointless and hence unjustified. The Judiciary has put in hand a well publicized exercise to reform civil procedure. Two of the principal objectives of reform are to streamline procedure and to reduce costs. I should think the provisions relating to the making of charging order ought to be reconsidered. The law should allow for automatic charging order unless any party can show that the order is misdirected at the wrong party or the wrong property. Dispute should be deferred to the stage when the judgment creditor seeks to enforce the charging order.

13. In the premises, taking into account all factors and circumstances, especially the fact that the charging order absolute cannot be enforced without further proceedings in which there will be opportunities for full arguments and when the facts and circumstances relevant for consideration may well be different, I had no difficulty in deciding that the charging order should be made absolute. I made the order accordingly with costs to the Plaintiff.

Stay of Execution

14. On 11 January 2002, solicitors for the Defendant came before me again on an ex parte application for stay of execution pending appeal against the charging order absolute. It would appear that the "stay of execution" sought was to hold back the charging order absolute.

15. It is not in my nature to begrudge appeals against my decision. But I cannot resist pointing out that the appeal is, bearing in mind the passive effect of the charging order except to preserve the status quo, a vain exercise leading to further wasting of time and costs.

16. On "stay of execution", solicitors for the Defendant stated in affidavit and in court that if the charging order is not "stayed", by the time the Defendant succeeds in appeal, the Defendant would have suffered prejudice. I was at a complete loss as to what prejudice to the Defendant if the charging order is not stayed. As those solicitors envisaged, if the charging order is not stayed, the order would be registered with the Land Registry. So what? Registration of the order does not affect use or occupation of the property by the Defendant and his family. Meanwhile, if the property is, as the Defendant alleged, negative asset, the Defendant and all other parties surely would not contemplate selling the property.

17. In my view, the application for stay was not only ill-conceived, but probably an abuse of process. The costs incurred for such application could well have been used to satisfy judgment. Accordingly, I refused to "stay" the charging order absolute.