CHEUNG HING v. WONG CHOR CHEUNG AND ANOTHER

HCMP588/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

MISCELLANEOUS PROCEEDINGS NO. 588 OF 2011

(ON AN INTENDED APPEAL FROM HCA NO. 336 OF 2008)

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BETWEEN

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REASONS FOR JUDGMENT

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Hon Chu JA giving the Reasons for Judgment of the Court:

1.  At the hearing of the 1^st and 2^nd applicants’ application for leave to appeal against three sets of order made by Yam J made on 11 February 2011 and 18 March 2011, we granted the application.  Our reasons appear below.

Background

2.  The 1^st applicant (“Wong”) and the respondent (“Cheung”) are equal shareholders in the 2^nd applicant (“Wah Fung”).  Wah Fung is the registered owner of a property situated at 3^rd Floor and a portion of Garage Space B1 on the Ground Floor of No.23 Plantation Road, Hong Kong (“the Property”).

3.  In High Court Action No. 336 of 2008 (“HCA336/2008”), Cheung claimed against Wong and Wah Fung for a declaration of interest in the Property, an account for the rent and income of the Property as well as the loans obtained by the 1^st applicant by charging the Property.  On 5 March 2008, Cheung caused the writ to be registered in the Land Registry against the Property.

4.  At the trial of the action on 24 March 2010, Cheung and Wong, who were both unrepresented, reached a settlement agreement, the terms of which were embodied in the order made by consent on 24 March 2010 (“the Consent Order”).  As recorded in the opening part of the order, the agreement was a full and final settlement of the action and all the claims in respect of the Property.  Paragraph 1 of the Consent Order provided that Cheung and Wong agreed Wah Fung should forthwith sell the Property and to pay into court the proceeds of sale, after deduction of the expenses for the sale.  It further provided that the lis pendens should be vacated so as to enable the Property to be sold.  Under paragraph 3 of the Consent Order, there is liberty to apply.

5.  Subsequent to the making of the Consent Order, Cheung and later his present solicitors entered into correspondence with Wong regarding the sale of the Property.  On 5 May 2010, Cheung issued a summons seeking directions on the sale of the Property. 

6.  In response to this application, Wong filed an affirmation dated 1 June 2010 in which he disclosed that Wah Fung had entered into a provisional sale and purchase agreement dated 28 May 2010 (“the Provisional Agreement”) to sell the Property to Best Century Holdings Ltd (“Best Century”) at the price of HK$ 15 million.  Under the Provisional Agreement, Wah Fung was given an option to purchase 30% of the interest in the Property at the original purchase price within six months of the expiration of the existing tenancy, which falls on 31 August 2011.  The Provisional Agreement was registered in the Land Registry on 3 June 2010.     

7.  Cheung took issue with the sale to Wah Fung, contending that under the Consent Order, Wong had no right to sell the Property without his agreement.  Cheung also challenged the sale on the basis that it was a sham transaction and the Property was sold at gross undervalue. Consequently, Cheung issued a second summons on 2 June 2010 seeking to set aside the sale to Best Century. 

8.  On 3 June 2010, Yam J adjourned Cheung’s two summonses for argument and gave directions on filing of evidence.

9.  On 22 June 2010, Cheung commenced High Court Action No. 925 of 2010 (“HCA925/2010”) against Wong, Best Century and Wah Fung (as the 1^st, 2^nd and 3^rd defendants respectively), claiming an order to set aside the Provisional Agreement and damages for conspiracy to defraud and injure.  On 29 June 2010, Cheung applied ex parte on notice and obtained an injunction restraining Wong, Best Century and Wah Fung from, inter alia, proceeding with the sale under the Provisional Agreement.  By a consent order dated 22 July 2010, the injunction was continued until trial or further order of the court.

10.  The substantive hearing of Cheung’s two summonses took place on 11 February 2011 Yam J.  The case management conference of HCA925/2010 took place at the same hearing.  The Judge ordered that the sale of the Property should take place within 42 days and be completed within four months (“the Sale Order”).  On 24 February 2011, Wong and Wah Fung applied for leave to appeal against this order.  They also applied for a stay of execution of the Order (“the Stay Application”). 

11.  On 16 March 2011, Best Century issued a summons applying to intervene and to be heard in HCA 336/2008 (“the Intervener Application”).

12.  At the hearing on 18 March 2011, Yam J dismissed the applications for leave to appeal and for stay of execution as well as the Intervener Application.  On Cheung’s request, Yam J gave further orders and directions on the sale of the Property (“the Further Order”). Paragraph 7 of the Further Order provided that Cheung and Wong be authorised to proceed and complete the sale of the Property in accordance with the Order, notwithstanding the making of the Provisional Agreement.  Paragraph 10 (which was amended on 17 May 2011) further provided that:

“For the avoidance of doubt, and without prejudice to Best Century Holdings Limited’s rights and interests in HCA No. 925 of 2010, the [Provisional Agreement] was not made pursuant to the Consent Order dated 24^th March 2010 and as such, the sale pursuant to the Consent Order shall take free of any interest of Best Century Holdings Limited which may subsist in the Property by reason of the [Provisional Agreement] but the aforesaid order is made without prejudice to Best Century’s claim in the proceeds of the aforesaid sale in High Court Action 925/2010;”

Under paragraph 11, it was also directed that the registration of the Provisional Agreement shall be vacated forthwith from the Land Registry.

13.  By the application herein, Wong and Wah Fung apply to this court under Order 59 rule 2B(3) of Rules of the High Court, Cap.4A for leave to appeal against the Sale Order.  They also apply direct to this court under Order 59 rule 2B(4) for leave to appeal against the Further Order and the dismissal of the Stay Application.

14.  On 14 April 2011, Best Century applied unsuccessfully to Yam J for leave to appeal against the dismissal of the Intervener Application.   Ko Cheong Hung Gary, the beneficial owner of Best Century, and Wong were ordered to be jointly and severally liable for the costs of Cheung in Best Century’s application for leave to appeal.  On 26 May 2011, Hartmann JA granted leave to Best Century to appeal against the dismissal of the Intervener Application and also the Order of 14 April 2011.          

Discussions

15.  Under Order 59 rule 2B(4), an application for leave may be made direct to the Court of Appeal if the Court of Appeal allows. Mr Hung, who appeared for Wong, submitted that it is with a view to saving costs and avoiding multiplicity of proceedings that the application for leave to appeal against the Further Order was made direct to this court.  Having regard to the fact that Wong is in the process of applying for leave to appeal against the Sale Order, and that the two orders and the intended grounds of appeal are closely related, we agree it is appropriate to allow Wong to apply direct to this court for leave to appeal against the Further Order.

16.  The Draft Notice of Appeal filed on behalf of Wong and Wah Fung raises four main grounds. They are:

(1) In making the Sale Order and the Further Order, the Judge effectively disposed of HCA925/2010 summarily in favour of Cheung, without affording the defendants therein an opportunity to adduce evidence and be heard, thereby depriving them of a fair appeal. The Judge had ignored the ramifications that will enure if upon trial of HCA925/2010, it was found that the Provisional Agreement is not a sham as alleged by Cheung.

(2) The Sale Order and the Further Order should not have been made when Cheung had chosen to institute HCA925/2010 and to obtain an interlocutory injunction restraining the completion of the sale under the Provisional Agreement and when the action has yet to be adjudicated upon. Having elected to resolve the dispute in HCA925/2010, Cheung is stopped from resiling from his position and from seeking the two orders in question.

(3) In acceding to Cheung’s requests and making the two orders, the Judge has re-written the settlement agreement made between Cheung and Wong. The Consent Order is complete and effective in itself and the two orders are unnecessary.

(4) The Judge erred in accepting Cheung’s invitation to make the Sale Order by virtue of its active case management power under Order 1A of Rules of the High Court, when the rule is inapplicable in the circumstances.

17.  In opposing the leave applications, Mr Li who appeared for Cheung had advanced the following arguments:

(1) The Sale Order and the Further Order are directions on the conduct of the sale of the Property and were made on the basis of the liberty to apply provision in the Consent Order. The intended appeals are therefore an attempt to appeal against the Consent Order and there is no proper basis for them.

(2) As a matter of proper construction, the settlement practical effect of paragraph 1 of the Consent Order agreement was the agreement of Cheung and Wong that they should act together to bring about the sale of the Property by Wah Fung. Wong is therefore not entitled to sell the Property without the agreement of Cheung.

(3) The sale of the Property to Best Century is an attempt to frustrate the Consent Order. Yam J was entitled to conclude that the sale was at gross undervalue and to form an adverse view on the fides of the transaction.

(4) The sale under the Provisional Agreement was subject to the lis pendens of Cheung. Accordingly, any claim that Best Century may have is a claim for damages.

(5) In commencing HCA925/2010 and obtaining an interlocutory injunction restraining the completion of the sale under the Provisional Agreement, Cheung has not made any election. The action was commenced under the exigency of the circumstances. Cheung had not taken any inconsistent position by seeking the directions embodied in the two orders.

18.  As we are only dealing with applications for leave to appeal, this is not an occasion to embark upon a detailed analysis of the arguments or to make definitive conclusions on the merits of the intended appeals.  What we have to consider and decide is whether the intended appeals have a reasonable prospect of success so that leave to appeal should be given: s.14AA(4) of  the High Court Ordinance, Cap.4.  

19.  In our view, the intended appeals have satisfied the threshold for granting leave.  In particular, we note that the combined effect of the two Orders is to sanction a sale of the Property in disregard of the Provisional Agreement.  Paragraph 10 of the Further Order declares that the purchaser shall take free of Best Century’s interest in the Property under the Provisional Agreement while paragraph 11 directs the vacating of the registration of the Provisional Agreement.  It is, to say the least, highly arguable that the two Orders have shut out any proprietary claim by Best Century in the Property and have effectively determined the dispute between the parties in HCA925/2010 when the trial in the action is pending.  It will be most unsatisfactory if, after the trial in HCA925/2010, the Provisional Agreement were upheld. 

20.  We note further that there are serious disputes between the parties as to the fides of the sale to Best Century, including whether the sale is at undervalue.  We doubt whether these factual disputes should be resolved on conflicting affidavit evidence alone.

21.  The plain consequence of the  Sale Order and the Further Order is that Best Century’s claim or rights in the Property are limited to damages.  Mr Li justifies this on the basis that the Provisional Agreement is subject to the lis pendens that Cheung had registered against the Property.  However, the lis between Cheung and Wong and Wah Fung had been finally disposed of by the Consent Order, which also ordered that the registration of the lis pendens be vacated.  Moreover, given that the Consent Order provided for a sale of the Property in full and final settlement of the action and all claims in the Property, it is difficult to see on what basis can the registration of the lis pendens be sustained.

22.  We also have reservation about the argument that the intended appeals amount to appeals against the Consent Order.  Although under the liberty to apply provision of the Consent Order, Cheung may apply for directions on the conduct of the sale of the Property, it does not mean that the directions thus made are part of the Consent Order.  This is especially so when, to say the least, arguably the Sale Order and the Further Order have gone beyond what is necessary to carry out the terms of the Consent Order.

Conclusion

23.  We therefore gave leave to appeal against the Orders of 11 February 2011 and 18 March 2011 and also the Order dismissing the Stay Application.  We also ordered that the appeal be heard together with Best Century’s appeal in CACV 97 of 2011.  The costs of these proceedings shall be costs in the appeal.