L Y GROUP DEVELOPMENT LTD v. EAST CANTON LTD AND ANOTHER

HCA 1428/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1428 OF 2014

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DECISION
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INTRODUCTION

1.  There are two summonses before the court taken out by the 2^nd Defendant.  By its first summons filed on 17 September 2014, the 2^nd Defendant seeks to cease to be a party in this action and to have its name struck out from the writ of summons and all subsequent proceedings, pursuant to Order 15 rule 6(2)(a) of the Rules of the High Court (“RHC”); and to vacate the registration of a lis pendens by the Plaintiff against its property situated at Section A of Lot No 295 in Demarcation District No 444 (the Property”).  By its second summons filed on 10 December 2014, the 2^nd Defendant seeks to strike out the Plaintiff’s writ of summons and statement of claim (“SOC”) and to have the Plaintiff’s action dismissed as against the 2^nd Defendant, pursuant to Order 18 rule 19(1) of the RHC. 

2.  In response to the 2^nd Defendant’s summonses, the Plaintiff took out a summons on 2 February 2015, seeking to amend the SOC by adding another party, namely Century Peace Limited (“Century Peace”), to this action together with a claim for injunctive relief (the “Amendment Summons”).  This summons has not yet been served on Century Peace.

3.  Thus, there are altogether four applications: two striking out applications, one pursuant to Order 15 rule 6(2)(a) and one pursuant to Order 18 rule 19(1); one application to amend the SOC and one application to vacate the lis pendens.  I shall deal with the two striking out applications together as they involve common issues.

The background

4.  The 1^st Defendant is a company incorporated in British Virgin Islands (“BVI”).  It wholly owns Century Peace, which is another BVI company.  In turn, Century Peace is the sole owner of all the issued shares of and in the 2^nd Defendant which holds the Property.  

5.  On 31 August 2013, the Plaintiff entered into a provisional agreement with the 1^st Defendant whereby the Plaintiff agreed to buy and the 1^st Defendant agreed to sell the entire issued share capital of Century Peace (the “Shares of Century Peace”) at a consideration of $380 million (the “provisional agreement”).  There is no dispute that the real subject matter of the sale and purchase under the provisional agreement is the Property owned by the 2^nd Defendant.

6.  Upon signing the provisional agreement, the Plaintiff entered into a loan arrangement with the 1^st Defendant under which the 1^st Defendant agreed to arrange a loan facility in the amount of $266 million (the “loan facility”) to finance the Plaintiff’s purchase under the provisional agreement.

7.  On divers dates since 2 October 2013, the 1^st Defendant answered the Plaintiff’s requisitions in respect of the Property by providing the relevant title deeds and documents.  The Plaintiff paid the initial and further deposits totalling $38 million.  

8.  On 4 November 2013, the 1^st Defendant sent a draft formal sale and purchase agreement to the Plaintiff for approval.  The Plaintiff proposed certain amendments to the terms of the loan facility which were different from those contained in the provisional agreement.  After protracted delay, the formal sale and purchase agreement (the “Agreement”) was signed on 14 July 2014, shortly before the scheduled completion date on 25 July 2014.

9.  Then, some dispute arose over the loan arrangement and the payment of the balance of the purchase price of $76 million. The Plaintiff and the 1^st Defendant accused each other of repudiation of the Agreement.  On 28 July 2014, the Plaintiff issued a writ of summons against the 1^st and 2^nd Defendants and registered the writ of summons and the SOC as a lis pendens against the Property. On 22 August 2014, the 1^st Defendant purportedly accepted the Plaintiff’s repudiation and forfeited the deposits.

THE STRIKING OUT APPLICATIONS

The Plaintiff’s claim and relief sought

10.  Ms Kung, counsel for the 2^nd Defendant, complains about the confusing state of the Plaintiff’s SOC.  In paragraphs 32 to 34 of the SOC, the Plaintiff avers that it suffered loss and damage as result of the 1^st Defendant’s breach of the Agreement; and that it is entitled to repayment of the deposits, a lien over the Shares of Century Peace, the shareholding in the 2^nd Defendant and the Property.  In its prayer for relief, it seeks a declaration that the 1^st Defendant was in repudiatory breach of the Agreement; a declaration that it is entitled to a lien over the Shares of Century Peace; repayment of the deposits; and damages for breach of the Agreement.  But, no declaration is sought in respect of the shareholding of the 2^nd Defendant or the Property.

11.  In the draft amended SOC, the Plaintiff seeks to add Century Peace as the 3^rd Defendant and to introduce a new plea that it is entitled to preserve the value of the lien over the Shares of Century Peace, the shareholding in the 2^nd Defendant and the Property.  In its prayer for relief, it seeks an additional injunctive relief restraining the 1^st and 2^nd Defendants and Century Peace from disposing of the Shares of Century Peace and exercising its power as shareholder of Century Peace, pending the satisfaction and discharge of the lien over the Shares of Century Peace, the shareholding in the 2^nd Defendant and the Property. 

12.  Ms Kung draws my attention to the fact that the Amendment Summons has not yet been served on Century Peace and refers me to paragraph 20/8/4 of Hong Kong Civil Procedure 2015, which suggests that where it is clearly realised from the start that there would be reasoned opposition to the making of such a joinder, the more convenient course is to serve the summons on the party intended to be joined so that the matter would be dealt with directly before the joinder takes place, rather than to obtain the order in the absence of the added party who would have to give notice of intention to defend and then to apply under Order 12 rule 8 to be dismissed from the action.  Ms Kung submits that the Amendment Summons should not be dealt with in the present hearing. 

13.  The approach suggested in paragraph 20/8/4 of Hong Kong Civil Procedure 2015 makes practical sense.  However, where an application to amend a statement of claim which is sought to be struck out has been made, it would be more expedient and convenient to deal with the striking out application on the basis of the facts as pleaded in the proposed amended statement of claim.  If on that basis, the amended pleading should not be struck out, the application to amend should be allowed and the application to strike out dismissed.  Then upon service of the amended statement of claim, the added party may apply for it to be dismissed from the action if it sees fit.  If the proposed amended statement of claim cannot survive the striking out application, it would be futile to allow the application.  The court should dismiss the application to amend and consider the striking out application on the pleading as it stands.  The same approach should be adopted in an application under Order 15 rule 6(2)(a) and an application to amend the statement of claim heard together.  Accordingly, I shall consider the 2^ndDefendant’s summonses on the basis of the Plaintiff’s draft amended SOC.

Some applicable legal principles

14.  It is trite law that it is only in plain and obvious cases that the court should exercise its summary powers to strike out an indorsement on any writ or pleading under Order 18 rule 19.  The following is a summary of the applicable principles extracted from Hong Kong Civil Procedure 2015[1].  There should be no trial upon affidavit.  Disputed facts are to be taken in favour of the party sought to be struck out.  Nor should the court decide difficult points of law in striking out proceedings.  The claim must be obviously unsustainable, the pleading unarguably bad and it must be impossible, not just improbable, for the claim to succeed before the court will strike it out.  If the court does not think the matter to be clear beyond doubt or if it fails to be satisfied that there is no reasonable cause of action or that the proceedings are frivolous or vexatious, then, there should be no striking out. One must be careful not to drive a plaintiff from the judgment seat nor should the court decide difficult points of law.  Where the legal viability of a cause of action is sensitive to the facts, an order to strike out should not be made.

15.  Order 15 rule 6(2)(a) of the RHC gives the court power to order any person who has been improperly or unnecessarily made a party or who has for any reason ceased to be a proper or necessary party, to cease to be a party.  An application under this rule is essentially a striking out application.  It seeks to remove a party from the proceedings against whom the statement of claim discloses no reasonable cause of action and/or is scandalous, frivolous or vexatious and/or may prejudice, embarrass or delay the fair trial of the action and/or is an abuse of process of the court.  I think the same principles applicable to a striking out pleading under Order 18 rule 19(1) apply to an application under Order 15 rule 6(2)(a).

The issues

16.  The thrust of the 2^nd Defendant’s argument in these summonses is that it was never been a party to the Agreement which was about the sale and purchase of the Shares of Century Peace, not about sale and purchase of the Property held by the 2^nd Defendant.  That Agreement has nothing to do with the 2^nd Defendant and no remedy is sought against the 2^nd Defendant.  The Plaintiff is not seeking an order against the 2^nd Defendant to transfer the Property to the Plaintiff.  Ms Kung also argues that despite that in substance the subject matter of the sale and purchase is the Property held by the 2^nd Defendant, the obligation to prove good title rests with the 1^st Defendant and not the 2^nd Defendant.  The 2^nd Defendant had nothing to do with the deposits paid or their return. Hence, the Plaintiff cannot claim a lien over the Property in respect of the deposits.  Relying on the principle in Salomon and Salomon & Co[2], Ms Kung submits that this is not a case which makes it appropriate to pierce the corporate veil by reason of the 2^nd Defendant’s ownership of the Property.

17.  The thrust of the Plaintiff’s opposition is that by paying the deposits, it acquired a purchaser’s lien over the Shares of Century Peace. That puts it in the position of a secured creditor with the right to preserve the value of its security.  By adding Century Peace as a party, it is entitled to injunctive relief against all the Defendants, including the 2^nd Defendant, for the purpose of preservation of the value of its security.

18.  In essence, the central issue raised by these applications are whether the action against the 2^nd Defendant could be struck out under one of the sub-paragraphs of Order 18 rule 19(1) of the RHC.  The issues in these applications are:

(1) whether the Plaintiff has a purchaser’s lien over the Shares of Century Peace;

(2) if it has, whether it is entitled to injunctive relief against the 2^nd Defendant for the purpose of preservation of its security, notwithstanding the principle of separate corporate personality and the fact that the 2^nd Defendant was not a party to the Agreement; and

(3) whether the writ and SOC are registrable as lis pendens against the Property.

Bearing in mind that the applications are essentially striking out applications under or akin to Order 18 rule 19(1), the standard of proof required of the Plaintiff is just to prove an arguable case.

The case of Good Profit Development Ltd v Leung Hoi[3]

19.  Before dealing with the above issues, I shall say a few words about the case of Good Profit which is heavily relied on by Ms Kung in support of her argument that the 2^nd Defendant was improperly joined as a party.  Ms Kung says that Good Profit is on all fours with the present case.

20.  In Good Profit, the 1^st and 2^nd defendants were shareholders and directors of the 3^rd defendant company, the substantial asset of which was a property.  They agreed to sell all their shares in the 3^rd defendant to the plaintiff. The plaintiff claimed declaratory relief against the 3^rd defendant that it was a bare trustee for the other defendants or was their alter ego and registered a lis pendens against the property held by the 3^rd defendant. The 3^rd defendant applied to strike out the entire statement of claim as against itself on the ground that it disclosed no reasonable cause of action or was an abuse of process of the court.  In striking out the statement of claim as against the 3^rd defendant, Woo J (as he then was) said[4]:

“The incorporation or acquisition of a private limited company to hold a landed property purchased or to be purchased by the shareholders is nothing out of the ordinary, and if I may say so, a very common practice in Hong Kong. The mere fact that the shareholders in litigation have absolute control of the company which has no other business activity than dealing in and with the landed property being its sole asset does not ipso facto justify the court to depart with from the general principles as enunciated in Salomon v Salomon.”

21.  Ms Kung submits that Good Profit is indistinguishable from the present case.  As in Good Profit, the Agreement was for the purchase of the entire issued share capital of Century Peace, not the Property.  Even if the ultimate purpose of the Agreement is to effect the transfer of the Property held by the 2^nd Defendant, an agreement for sale and purchase of shares of its holding company has nothing to do with the 2^nd Defendant as its wholly-owned subsidiary.  There is no privity of contract between the Plaintiff and the 2^nd Defendant nor does the 2^nd Defendant have any issued shares in itself to sell.  Hence, Ms Kung submits, applying the case of Good Profit to the facts of the present case, the writ of summons and SOC ought to be struck out as against the 2^nd Defendant and the court should make an order that the 2^nd Defendant ceases to be a party.

22.  Mr Hui, counsel for the Plaintiff, does not seek to distinguish Good Profit from the present case.  I do not think the present case is factually distinguishable from Good Profit.  In Good Profit, the court arrived at its conclusion by applying relevant legal principles to the facts of the case before it and on the basis of the arguments advanced by the parties.  In applying precedents, the court applies the legal principles decided in the precedent to the facts of the case before it to reach a conclusion on the merits.  The court does not apply the conclusion in a precedent to the facts of the case before it to come to the same conclusion.  The case Mr Hui advances on behalf of the Plaintiff against the 2^nd Defendant is wholly different from that against the defendants’ in Good Profit.  Here, the Plaintiff’s case is based on equitable lien over the Shares of Century Peace purchased under the Agreement and the lien holder’s right to preservation of the value of its security.  These issues were not argued before Woo J.  Nor did Woo J decide on the factual circumstances in Good Profit that, as a matter of legal principle, plaintiff could have no cause of action against the defendants such that its action had to be struck out.  Hence, I do not think Good Profit relevant.  Had Mr Hui run a similar case and advanced similar arguments as did the plaintiff in Good Profit, or if the Plaintiff fails to show an arguable case based on lien and preservation of security, I would have no hesitation to strike out the SOC against the 2^nd Defendant as in Good Profit. 

The purchaser’s lien over the Shares of Century Peace

23.  Mr Hui argues that in paragraph 34(a) of the SOC, the Plaintiff claims it is entitled to return of the deposits and asserts a purchaser’s lien over the Shares of Century Peace.  He argues, quoting Snell’s Equity[5], that a purchaser of land who has paid the vendor a deposit towards the purchase price has a purchaser’s lien over the land.  Relying on Halsbury’s Laws of England[6] and the dicta of Anthony Chan J in Wong Kam Fung v Smart Profit Enterprises Limited[7] as approved by the Court of Appeal[8], Mr Hui submits that all that the purchaser needs to show to establish his lien are that (a) money has been paid on account of the purchase price; and (b) the money has been paid to the vendor.  Quoting paragraph 10-25 of Equity and Trusts Law in Hong Kong[9], Mr Hui further submits that a purchaser’s lien does not only arise in sale of land, but to personal properties as well.

24.  Ms Kung does not dispute the legal principle that a purchaser’s lien over the land to be purchased is created by payment of deposit towards the purchase price.  Nor does she dispute that the deposits in the present case had been paid and were released to the 1^st Defendant.  Her argument is that the principle of a purchaser’s lien applies only to a contract for sale and purchase of real property but is inapplicable to sale and purchase of shares.  She also relies on the same passage in Equity and Trusts Law in Hong Kong in support of the above proposition. 

25.  Paragraph 10-25 of Equity and Trusts Law in Hong Kong[10] contains a summary of the law relating to common law lien and equitable lien.  The passage reads:

“Lien is the right to hold the property of another as security for the performance of an obligation for the payment of a debt. Common law lien is found in bailment situations (the right to retain possession of a chattel until a claim is satisfied or an obligation is performed); and where a solicitor seeks to withhold possession of the client’s document or other personal property until the legal fees are paid. Equitable lien exists only in relation to real property. An equitable lien over land creates a right in equity to have the land applied to satisfy the obligation owed and gives the lienee proprietary rights that may be dealt with in the same way as other proprietary rights. It arises by the operation of law from the relationship of the parties independently of any contract or possession. It arises in two situations: firstly, where a purchaser has paid the purchase money or part thereof (including deposit or interest), the purchaser has a lien as a security over the property which can be enforced in the event that the vendor fails to complete (purchaser’s lien); and secondly, a vendor who parted with title and possession of his property (by execution of a deed of transfer or deed of assignment), under a specifically enforceable contract, without receipt of the entire purchase money, has an equitable lien for the unpaid portion of the purchase money (an unpaid vendor’s lien). The right to an equitable lien is not limited to the sale of land but also includes the sale of personal property. Generally, however, this is not the case when the transaction is subject to the English sales of goods legislation where the statute provides for unpaid seller’s lien. An equitable lien is a form of equitable charge over the property which confers on the holder a proprietary right so that he is regarded as a secured creditor in respect of that money. The lien holder is then entitled to register a lis pendens in the Land Registry. Since it is an equitable charge, it is a ‘security over land for money or money’s worth’ and therefore a ‘mortgage’ within the meaning of the Conveyancing and Property Ordinance (Cap. 219). The consequence is that the holder of the equitable lien might lose its priority to a prior mortgagee who made further advances after the creation of the equitable lien by way of tacking. A purchaser’s lien is not extinguished by entry into a settlement agreement to repay or refund the money that the purchaser has paid the vendor unless it can be implied in the agreement that the lien is extinguished. …”

(Emphasis added)

Ms Kung relies on the first underlined sentence, while Mr Hui relies on the second. The two sentences are inconsistent with each other. What is the law? 

26.  The learned author of Equity and Trusts Law in Hong Kong quoted no authority in support of the proposition that equitable lien exists only in relation to real property, but cited four authorities for the contrary proposition.  Those authorities were all about sale of a reversionary interest in a person’s estate.  The first two were about purchaser’s lien.  The other two were about vendor’s lien.

27.  In the first authority, Barker v Cox[11], the vendor and owner of property in fee simple subject to certain trusts in a marriage settlement sold an estate to the purchaser after having set aside a sum of money to produce an income equal to what the wife would receive for her life interest.  Expecting all necessary parties would concur to the arrangement, the purchaser paid the price to the vendor.  The vendor died but the wife refused to concur to the conveyance of the property.  Bacon VC held that the purchaser had a lien on the sum of stock.

28.  In the second authority, Levy v Stogdon[12], a vendor contracted to sell a contingent reversionary interest in personalty free from incumbrances to a purchaser who paid a deposit on the purchase money.  The reversion proved to be incumbered.  Stirling J held that the purchaser was entitled to a lien on the subject matter of the contract.

29.  In the third authority, Davies v Thomas[13], a testator bequeathed some leasehold houses to trustees upon trust to a number of person successively to receive the rents and profits thereof for their respective lives, and after the death of the last surviving tenant for life upon trust to sell and hold the net proceeds of sale upon trust for certain persons named in the will.  One of the persons who became entitled to a share of the proceeds of sale under this last trust assigned all his share under the will to another.  There were subsequent mortgages and assignments, which I need not be concerned.  The English Court of Appeal held that the subsequent vendor of this personal estate was entitled to a lien for unpaid purchase money on the property sold.

30.  In the fourth authority, In re Stucley, Stucley v Kekewich[14], a son entitled in reversion upon the death of his father to a trust legacy, assigned his interest to his father by deed absolutely for £1,500, but without being paid the consideration.  After the death of the father, the son claimed a lien for the sum of £1,500 in the hands of the father’s executors.  Following Davies v Thomas[15], the English Court of Appeal held that the doctrine of vendor’s lien on real estate was equally applicable to personal estate.  This is a clear statement from the English Court of Appeal that a vendor’s lien can be created over personal property.

31.  These four authorities were about reversionary interest in a personal estate.  There is another case which is directly on the point, Langen & Wind Ltd and Others v Bell[16], which unfortunately was not quoted by counsel on either side.  It is a more recent example of an unpaid vendor’s lien arising over sale and purchase of shares.  In that case, under the terms of his employment with the plaintiffs, the defendant was given the right to acquire shares in the plaintiffs’ company, which he would have to transfer back to the plaintiffs in the event of termination of his employment at a price dependent on the average net annual profit or loss in the accounts approved by the directors at the two annual general meetings of the company immediately following the date of the transfer.  Upon the termination of his employment, the defendant refused to execute the transfer until he had been paid the price of the shares.  But the price could not be determined until after the two annual general meetings.  The plaintiffs sought specific performance.  Brightman J held at 175:

“Therefore it seems to me that the parties have not by their contract purported to exclude the lien which prima facie, as it seems to me, arises in the case of a vendor who has not (either under the terms of the contract or in the events which have happened) been paid the full purchase price.

I think it right that I should add – though this again is common ground between the parties – that an unpaid vendor’s lien extends not only to land but all property over which a court of equity will assume jurisdiction in the case of a contract of sale: see for example In re Stucley [1906] 1 Ch 67, 79.

I therefore reach the conclusion that if and when Mr Bell transfers his shares to Mr Langen and Mr Wind in accordance with the terms of clause 17 of the principal agreement in advance of the calculation and payment of the purchase price he will be entitled in equity to a lien on the shares so transferred.”  

32.  In re Stucley and Langen & Wind Ltd and Others v Bell were followed by Lam J in Mandecly Limited and Chan Tat Man and Hao Wei and Others[17] which was also a case of a vendor’s lien over shares sold.  I think this line of authorities amply supports the proposition that the principle of an unpaid vendor’s lien and purchaser’s lien applies not only to landed properties but also to all properties over which a court of equity will assume jurisdiction, including personal properties such as shares.  

33.  How do I resolve the inconsistency between first and second underlined sentences in Equity and Trusts Law in Hong Kong?  By its nature, an unpaid vendor’s lien and purchaser’s lien are equitable liens: the vendor having parted with his property and the purchaser having parted with the purchase price.  An essential element necessary for the creation of an equitable lien is that there must be asset appropriated to the contract: ie the property which is the subject matter of the contract from which the lien arises.  I believe that was what the learned author of Equity and Trusts Law in Hong Kong meant by the words ‘real property’, otherwise the proposition in the first underlined sentence would be contrary to well established authorities.  

34.  There is some dispute as to which party was in breach of the Agreement.  If the Plaintiff was in breach, it would have lost its lien.  However, for the purpose of dealing with these applications, there is no need for me to come to any conclusion one way or the other.  I shall assume the facts as pleaded by the party sought to be struck out are true.  Accordingly, on the assumption that the Plaintiff would be able to prove that it was not in repudiatory breach, it has a purchaser’s lien over all the Shares of Century Peace sold under the Agreement.

The extent of the purchaser’s lien 

35.  Apart from claiming a purchaser’s lien over the Shares of Century Peace in respect of the deposits, Mr Hui argues that the lien extends to cover all the claims in the SOC, including damages, interest and costs.  He quotes Karex (Hong Kong) Ltd v Fortune Talent Development Ltd[18] in support of his argument.

36.  Ms Kung disagrees.  Relying on paragraph 29 of the judgment of the Court of Appeal in Wong Kam Fung, she submits that the Karex does not lend support to Mr Hui’s argument.  With respect, Ms Kung is quoting the dicta out of context.  In Wong Kam Fung, Ms Lau, counsel for the purchaser, quoted Karex and other authorities in support of her argument that the purchaser’s lien may be extended to cover damages and costs.  But theCourt of Appeal held that as the two conditions of payment on account of purchase price and payment to the vendor were not satisfied, no lien was created in the first place.  It was in that context that Kwan JA effectively said in paragraph 29 that there was no need to refer to Super Keen and Karex.  She said:

“29. Super Keen, Karex, and a further case cited by Ms Lau, Lee Fu Wing v Yan Po Ting Paul [2009] 5 HKLRD 513 at §§117 to 128, are authorities for the proposition there are no reasons in principle to limit the remedy of an equitable lien only to cover the purchaser’s deposit but this remedy may be extended to cover the purchaser’s claim for damages for loss of profits if the court finds it just to do so. These cases do not provide support for Ms Lau’s contention that the mere claim of the purchaser for damages could give rise to an equitable lien where there is no entitlement to a lien in the first place arising from the payment of a deposit or money on account of the purchase price to the vendor.”

(My emphasis added)

Understood in its proper context, Kwan JA was simply dismissing Ms Lau’s contention that the purchaser’s lien covers damages and costs because there was no lien in the first place.  She was not dismissing the contention that the lien covers damages and costs, which is a proposition accepted by the Court of Appeal in Karex, to which I now turn.

37.  In Karex, the parties entered into an agreement for sale and purchase of landed property pursuant to which the purchaser paid a deposit.  Dispute arose.  The purchaser claimed an entitlement to a purchaser’s lien and registered a lis pendens against the property.  The vendor applied to strike out part of the purchaser’s claim and sought to have the lis pendens vacated.  The judge held that the purchaser was entitled to a lien.  The purchaser appealed.

38.  Mayo JA referred to the decision of Waung J in Super Keen Investments Ltd. v. Global Time Investments Ltd[19] quoted by counsel.  Then accepting the conclusion of Waung J and the rationale of the English Court of Appeal in Whitbread v Watt[20], Mayo JA held, inter alia, that (1) the purchaser acquired a lien in the same way as if the vendor had executed a mortgage to him of the estate to that extent; and (2) it was eminently arguable and that a purchaser’s lien would not be limited to the deposit paid but could be extended to damages for breach of contract.  He said[21]:

“He placed reliance upon the observations made by Waung, J. at 359 of Super Keen Investments Ltd. v. Global Time Investments Ltd. & Another (third party) [1996] 4 HKC 355:

"The heavy firepower of Mr Chan was directed towards the proposed reamendment of lien on the damages. The subject matter is the purchaser's lien on the default of the vendor and Mr Chan made the powerful point that there is no legal authority saying that there is a lien for damages for loss of profit. He said that while there is authority that equitable lien for deposit paid and that lien could extend to interests and costs, that is the limit of the purchaser's lien and he said that Halsbury's Laws of England on this aspect was wrong. It seems to me that the point is clearly arguable having regard to Halsbury's Laws, Vol 28 para 560-1 and the specimen forms in Atkin, Court Forms. Elaborate arguments were advanced to me by Mr Chan to say that it is clear law that no equitable lien exists for damages in respect of loss of bargain and he cited some old cases in support of his contentions. I found the authority of Whitbread v Watt [1902] 1 Ch 835, which unfortunately was not cited to me by Mr Chan, to be of some guidance. The case concerned the extent of the equitable lien of the purchaser and whether it extends to a case as in that one where the contract was terminated not due to any fault of the vendor but pursuant to a power in the contract for the vendor to rescind. Vaughan Williams LJ said at p 838:

The lien which a purchaser has for his deposit is not the result of any express contract, it is a right which may be said to have been invented for the purpose of doing justice. It is a fiction of a kind which is sometimes resorted to at law as well as in equity ... When Lord Westbury in Rose v Watson speaks of 'transfer to the purchaser of the ownership of a part of the estate corresponding to the purchase-money paid,' and Lord Cranworth speaks of the purchaser being exactly in the position of a mortgagee of the estate to the extent of the purchase-money which he has paid, those expressions are merely verbal vehicles to carry the right which justice demands that the purchaser should have.

Sterling LJ at p 840 also referred to the foundation of the doctrine of lien being the desire to do justice between the vendor and the purchaser. It seems to me that having regard to what was said by the English Court of Appeal in Whitbread v Watt [1902] 1 Ch 835 as the basis of the equitable lien of the purchaser namely to do justice to the purchaser, I see no reason in principle why equity would not recognise the defendant's right to a lien for its damages in respect of its loss of profits. If nothing else, the authority of Whitbread v Watt demonstrates that the point is wholly arguable and in the circumstances, my subsequent perusal of authorities seem to confirm my original view of the equitable reach of the principle of purchaser's lien to cover damages in respect of loss of profits. As was said at p 456 of Snell Equity, an equitable lien arises by operation of equity from the relationship between the parties rather than by any act of theirs. Leave should be given therefore for this heavily contested item of claim.”

I consider that this is also eminently arguable and that at least the lien would not be limited to the $3,450,000 deposit D2 paid to D1.”

In holding that the lien would not be limited to deposit paid, Mayo JA left open the question whether a purchaser’s lien covers damages and costs but said that proposition was eminently arguable.

39.  In the present case, the Plaintiff has shown that a purchaser’s lien over the Shares of Century Peace covers the deposits paid and has shown that arguably it covers damages in respect of its loss of profits for the vendor’s breach of the Agreement, interest and costs.  For the present purpose, that is sufficient.

The Plaintiff’s right to preserve the value of its security

40.  The main plank of the Plaintiff’s opposition to the striking out applications is that as holder of an equitable lien over the Shares of Century Peace, the Plaintiff is in the same position as a mortgagee and has the right to preserve the value of its security.  Then quoting Fisher & Lightwood’s Law of Mortgage[22] and Standard Chartered Bank v Walker[23], Mr Hui submits that in order to preserve the sufficiency of his security, the mortgagee is entitled, from the time of the mortgage, to have the mortgaged property preserved from deterioration or diminution in value, either at the hands of the mortgagor, or any other person whose interest is inferior to that of the mortgagee, or a third party. 

41.  In Standard Chartered Bank v Walker which was quoted in   Fisher & Lightwood’s Law of Mortgage, the defendants were beneficial owners of substantial blocks of ordinary and preference shares in a company which owed a total of over £1 billion to a number of banks.  In order to prevent the collapse of the company, it was necessary to restructure the bank loans.  On the other hand, the defendants had also incurred heavy liabilities to the plaintiffs which had been secured by charges over some of their shares in the company, entitling the plaintiffs to vote in respect of the shares so charged.  Believing that if the banks’ restructuring proposals were not approved the company would collapse, the plaintiffs issued writs against the defendants, claiming payment of sums due together with notices of motion seeking injunctions to restrain the defendants from voting in respect of the uncharged shares otherwise than in favour of the restructuring resolutions. In granting the injunction, Vinelott J held there was a point beyond which the conduct of a debtor in relation to his property was so plainly injurious that, whatever his motive, the court had power to intervene and restrain him; and that, although the court would interfere with the exercise by a shareholder of voting rights attaching to his own shares only in an extreme case, for either defendant to obstruct the restructuring proposals would be so pointlessly harmful as to amount to a wilful dissipation of their charged assets, which the court had, on Mareva principles jurisdiction to restrain.  He said at 567:

“Mr Oliver said that the proposition that a creditor with a security over shares should be entitled to prevent a defendant from voting shares over which he has no security in order to preserve the value of the shares over which he has security is an extravagant one.

I do not think it is an extravagant proposition.  It is a very unusual situation, but the situation is that the shares over which the security exists cannot be preserved except in a way which also preserves the other shares.  But the aim is, quoad those shares, to ensure that the debtor does not act in a way which is destructive of the security he has given to the creditor.  However that jurisdiction is described, whether it is waste or brought under some other head, I myself feel no doubt that the courts of equity do have jurisdiction to restrain conduct which would destroy property over which a debtor has given a charge in appropriate, and no doubt rare, circumstances.” 

(My emphasis added)

42.  The legal principle established in that case is that the court of equity has jurisdiction to restrain a person, whether a debtor, mortgagor or chargor, from doing anything which would destroy property over which he has given a charge.  As noted by Vinelott J, such circumstances are rare but, if appropriate, the jurisdiction will be exercised.

43.  The main theme of the 2^nd Defendant’s applications is that the 1^st and 2^nd Defendants are separate corporate entities; the 2^nd Defendant is not a party to the Agreement and has not been paid the deposits; that the subject matter of the Agreement is the Shares of Century Peace, not the shares of the 2^nd Defendant or the Property it holds; and that the Plaintiff is not claiming against the 2^nd Defendant for the transfer of the Property or a lien over the Property.  Based on the above, Ms Kung argues that the Plaintiff does not have a viable cause of action for injunctive relief against Century Peace and the 2^nd Defendant, regardless of the Plaintiff’s right to preservation of the value of its security.

44.  To overcome that argument, Mr Hui tries to make a quantum leap by extending the principle in Standard Chartered Bank v Walker to third parties who are in the position to destroy or diminish the value of the security.  He argues that the defendant in Standard Chartered Bank v Walker in his capacity as owner of the uncharged shares was a third party to the loan arrangement between the banks and himself in his capacity as owner of the charged shares.  Yet the court saw fit to restrain him in the exercise of his voting right in respect of the uncharged shares.  He therefore submits that the jurisdiction could be extended to third parties.  I consider that argument very strained and artificial.  The defendant in that case was not a truly distinct third party as he was the one and same owner of both the charged and uncharged shares. 

45.  Mr Hui also refers to Fisher & Lightwood’s Law of Mortgage[24] and Cousins on the Law of Mortgages[25] in which the learned authors referred to cases in which injunctive relief for the purpose of preserving the value of security was granted against third parties.  He also refers to Legg v Mathieson[26] and London and County Banking Company v Lewis[27].  But those third parties were subsequent third parties claiming an interest in the security and not the actual owner or holder of the property.

46.  However, in my view, if the principle is to restrain a person who has furnished security for his debt or other liability from destroying that security or diminishing its value, there is no reason why the restraint should not be extended to those over whom he has control, who act at his direction and instruction and who are in the position to indirectly destroy or diminish the value of the security by destroying or diminishing the value of that which formed the essence of the security.  The precise nature of the court’s equitable jurisdiction in this regard is not cast in stone.  If there is no direct authority on the above proposition, it is, at least, one in a developing area of law which, if supported by the fact, ought to have its day in court to be tested and argued than to be nipped away in the bud at the interlocutory stage: see Tadjudin Sunny v Bank of America[28]. 

47.  Ms Kung submits that Standard Chartered Bank v Walker is based on a completely different factual scenario and a different legal proposition.  It concerned whether a court should grant an injunction restraining debtors from voting on uncharged shares with a result which would be detrimental to the company.  I do not think it right to limit a legal principle so narrowly to those facts.  My reading of the dicta of Vinelott J is that this discretion should be exercised with great caution or in rare cases.  But I do not think it right to limit the principle to the factual circumstances of the case before the learned judge.  In my view, the factual scenario in that case has no bearing on the principle, which is that the court will exercise its discretion in an appropriate case to restrain a debtor from diminishing the value of the charged assets.  The circumstances of each case vary.  It is impossible to lay down criteria governing the exercise of this discretion.  It is all a matter of balancing what is at stake for the debtor and the mortgagee.  The question is whether the circumstances are such as to make it appropriate for the court to exercise this jurisdiction which it would very rarely exercise.

48.  Next, Ms Kung argues that it would be wrong to assume that disposal of the Property, or the shares of the 2^nd Defendant issued to Century Peace for that matter, would render the Shares of Century Peace valueless or would amount to dissipation or diminution of the value of the security.  The consideration received in exchange for the Property would be retained in the 2^nd Defendant as asset in a different form.  However, life is not logic, but experience.  Promises are made to be honoured, but sometimes some may be broken.  Trains are made to run or rails, but sometimes, some may be de-railed.  It is better to have foresight to safeguard certain risks when such risks present themselves than to be wise with hindsight.

49.  It is common ground that the subject matter of the Agreement is sale and purchase of the Property through the sale and purchase of the Shares of Century Peace.  Sale and purchase of the Property is at the heart of the Agreement.  Even if the Property is disposed of for market value with the proceeds of sale fully paid to the 2^nd Defendant, the Plaintiff would still lose what it has bargained for.  To say the least, it would lose the development potential the Property would bring to the Plaintiff. If the Property is disposed of otherwise than for its full value or if the proceeds are dissipated, the damage to the Plaintiff would be even greater.  The conduct of the 1^st Defendant, albeit disputed, is now called in question.  For the purpose of these applications, the Plaintiff’s allegations must be assumed to be true.  On the very simple facts of this case, the Property is the only asset of the 2^nd Defendant; the 2^nd Defendant is the sole asset and wholly owned subsidiary of Century Peace; all the issued share capital of Century Peace and shareholder’s loan formed the sole subject matter of the Agreement.  In the circumstances, the disposal of the Property would amount to the total destruction of the subject matter of the Agreement.  There would be a risk of total dissipation of the asset of the 2^nd Defendant and Century Peace.  On the other hand, the 1^st and 2^nd Defendants and Century Peace have no “uncharged interest” in the Property or in any asset.  They have no “uncharged rights” to exercise over the Property or the Shares of Century Peace.  They could have nothing to place in the weighing pan in their favour.  In the ultimate balancing exercise, it is at least arguable that this is an extreme case in which the court may exercise its discretion to restrain a debtor from diminishing the value of the charged assets.   

50.  There is no dispute that the 1^st Defendant has contracted to sell all the issued Shares of Century Peace to the Plaintiff.  The Plaintiff has a right to preserve the value of the Shares of Century Peace and for that purpose to compel the 1^st Defendant as the sole shareholder of Century Peace not to do anything which would diminish the value of the Shares of Century Peace.  The security represented all the issued share capital of Century Peace which holds all the issued shares of the 2^nd Defendant which holds the Property.  The Property represents the total value of the security.  It is the essence of the security.  Through this shareholding structure, the 1^st Defendant has total control of Century Peace and the 2^nd Defendant, and through them, the Property.

51.  These facts presents an appropriate opportunity for the proposition that the court’s jurisdiction to restrain a debtor from destroying or diminishing the value of his security is extended to third parties over whom the debtor has control and to property which forms the essence of the security to be tested and argued.  If this proposition is found to be the correct statement of the law, then regardless of whether there is any contractual relationship between the Plaintiff and Century Peace, or between the Plaintiff and the 2^nd Defendant, the court has power to enjoin the 1^st Defendant to exercise such control over Century Peace and thence over the 2^nd Defendant not to dispose of the Property, which would have the effect of diminishing the value of its security, ie the Shares in Century Peace. 

Conclusion

52.  On the basis of the facts alleged, the Plaintiff has a purchaser’s lien over the Shares of Century Peace in respect of the deposits paid under the Agreement.  The lien is of the nature of an equitable charge over the Shares of Century Peace.  As such the Plaintiff is in the same position as a secured creditor secured by those shares.  As a secured creditor, the Plaintiff has the right to preservation of its security.  These propositions are supported by well established legal principles.  Though this adds little to the Plaintiff’s case, it is also arguable that the lien extends to cover damages for the 1^st Defendant’s breach of the Agreement, interest and costs. 

53.  I therefore find it is arguable that the right to preservation of security exercisable against the debtor is extended to third parties over whom the debtor has control.  In the circumstances, the Plaintiff has shown an arguable case that it has a viable cause of action against Century Peace and the 2^nd Defendant for injunctive relief in respect of the Property.  The 2^nd Defendant’s applications to be removed as a party to the action under Order 15 rule 6(2)(a) and  to strike out the Plaintiff’s action under Order 18 rule 19(1) are therefore dismissed.

APPLICATION TO VACATE THE REGISTRATION OF LIS PENDENS

54.  In its first summons, the 2^nd Defendant applies to vacate the lis pendens registered by the Plaintiff against the Property, pursuant to sections 19 and 20 of the Land Registration Ordinance.  Under section 20, the application may be made by any person interested in the property whether it is a party to the lis pendens or not.  As the registered owner of the Property, the 2^nd Defendant has locus standi under section 20 to make the application.  Its burden is to show that the litigation is not prosecuted bona fide or for some other good cause.  The 2^nd Defendant advanced two grounds: (1) that the litigation is not prosecuted bona fide; and (2) that the registration is wrongful as a matter of law.

Litigation not prosecuted bona fide

55.  Having found that the Plaintiff has arguably a viable cause of action against the 2^nd Defendant and having dismissed the 2^nd Defendant’s application to strike out the Plaintiff’s action pursuant to Order 18 rule 19(1), there is not much left of this application based on this ground. 

56.  If the Plaintiff has arguably a viable cause of action for injunctive relief against the 2^nd Defendant in respect of the Property, there is nothing in Ms Kung’s argument that the Plaintiff’s admitted purpose of joining the 2^nd Defendant and to claim for a lien over the 2^nd Defendant’s Property is merely to protect the Plaintiff’s position and to provide the Plaintiff with a pro tanto security over the substance of what it has bargained for under the Agreement.  Ms Kung’s reliance on Good Profit is, for reasons as already explained, misplaced. Her arguments as to which party was in breach are matters which should be dealt with at trial and not on affidavit evidence.  None of these is indicative of bad faith on the part of the Plaintiff in prosecuting this action against the 2^nd Defendant.

Wrongful registration

57.  Ms Kung’s attack under this ground is that this action is not registrable as s lis pendens as it is not a claim affecting title to land. 

58.  “Lis pendens” is defined in section 1A of the Land Registration Ordinance as meaning:

“(a) any action or proceeding pending in a court or tribunal that relates to land or any interest in or charge on land; and

(b) a bankruptcy petition.”

This term was construed by Blair-Kerr J in Thian’s Plastics Industrial Co Ltd and others and Tins’ Chemical Industrial Co Ltd and another[29], in which the learned judge held[30]:

 “Before a plaintiff registers an action as a lis pendens, it is his bounden duty to ensure that it is an action in which a claim to land or some interest in land is asserted; that there is a claim of right or a claim to charge some specific property.  In other words that the landed property mentioned in the memorial is (in the words of s.19) “in litigation”.

…

In my view, when the propriety of a lis pendens registration is called in question (as it is in this motion before me), it behoves the court of scrutinize the circumstances in which the registration came to be made, and to satisfy itself that the plaintiff is not attempting to obtain by a back-door method what he may not be entitled to by, say, a preservation order or an interim injunction restraining dealings with the property.”

59.  On appeal to the Full Court, Briggs J approved the above statement as to the duty of the plaintiff before registering a lis pendens and the court’s approach when such a registration is called in question.  He referred to section 15 of the Land Registration Ordinance which stated that the memorial to be registered must contain the name of “the defendant or person whose estate is intended to be affected thereby”.  By reference to that section, he held that in relation to the first limb of the definition of the term “lis pendens”, the only lites pendentes which are registrable are those which “affect” land.  In approving the statement of Blair-Kerr J, he said[31]:

 “I do not think that the above quotation from the learned Judge's judgment in the court below is wrong.  The expression "affects" is not a term of art. It can have a very wide meaning.  In one sense any judgment given against a person who owns land may affect that land.  For the successful litigant may only be able to recover any damages awarded to him by the sale of such land.  However it has not been suggested that any proposed action can be registered as a lis pendens simply because the intended defendant owns landed property.  Various authorities were quoted from other branches of the law in an effort to arrive at a more exact definition of the word “affects” but I did not derive any help therefrom.

That the doctrine of lis pendens does not apply to personal property other than chattel interests in lands is settled law: See Wigram v. Buckley (1894) 3 Ch 483.  In In re Barned's Banking Company ex parte Thornton (1867) 2 Ch App 171, 178 - Cairns L.J. said that a lis pendens “always implied a claim of right, or a claim to charge some specific property.  That was always a necessary ingredient in a lis pendens .....”

I adopt these words and accept the words I have quoted from the judgment of the court below as being a correct statement of the law.”

(Emphasis added by Ms Kung)

60.  Three years later, a similar construction was given by Megarry J in Calgary and Edmonton Land Co Ltd v Dobinson[32] when construing the meaning of the phrase “any action or proceeding pending in court relating to land” in section 17(1) of the Land Charges Act 1972 of England.  Megarry J held:

“What is registrable as a pending land action is an action or proceeding which claims some proprietary right in the land, and not an action merely claiming that the owner should be restrained from exercising his powers of disposition.”

61.  Thus, the essential ingredients of a lis pendens are that it must be an action affecting land in the sense that it is one which asserts a claim of right, or a claim to charge some specific property or some proprietary right in land.  An action may not be registered as a lis pendens simply because the defendant owns landed property.

62.  A more recent decision which is directly on the point is Fung Kan Wai & Anor v Leung Shui Fat & Ors[33].  The purchaser paid an initial deposit and a further deposit for the purchase of a property.  The plaintiff claimed a lien in respect of the deposits and registered a lis pendens against the property.  At first instance, the judge held that the plaintiff was in breach of the sale and purchase agreement which entitled the vendor to terminate the agreement and forfeit the initial deposit but not the further deposit and hence allowed the lis pendens to stay.  On the vendor’s appeal, Nazareth VP made a declaration that the registration of the lis pendens was wrongful.  He adopted the principle as stated  by Megarry J in Calgary and Edmonton Land Co Ltd v Dobinsonand held[34]:

“… Clearly here his submission must fail for the claim to the lien in respect of the first stage payment was not a claim to a proprietary interest in land; on the contrary it would appear to be a claim merely that the owners should be restrained from exercising their powers of disposition.”

63.  Mr Hui submits, quoting Hong Kong Conveyancing and Porperty Law Handbook[35],that the plea for injunction obviously relates to and affects the Property and therefore justifies the registration of the writ and SOC against the Property.  With respect, Mr Hui is quoting that authority out of context.  There, the learned authors repeated the principle as stated by Megarry J in Calgary and Edmonton Land Co Ltd v Dobinsonthat what is registrable as a pending action must be an action or proceeding claiming some proprietary right in the land.  The learned authors then took a step further to submit that the interest claimed needs not be an existing one and includes a future interest, such as a wife’s application under the Matrimonial Causes Act 1973 for the transfer of land in which she had no proprietary interest until the order was made; or an application by a landlord for leave to commence proceedings for breach of covenant to repair.  That is very far from saying that an injunction restraining an owner’s right of disposition of landed property is a future proprietary interest in land, which what Nazareth VP said was not registrable.  That future interest must, when it matures into a present interest, be proprietary in nature.  If a lien in respect of deposit is not a proprietary interest in land, it simply defies logic to say that an injunction to enforce that lien turns it into a proprietary interest. 

64.  The claim to the lien in respect of the deposits was not a claim to a proprietary interest in land.  What the Plaintiff seeks to do by registering the lis pendens was to restrain the 2^nd Defendant from exercising its powers of disposition as owner, which is what the authorities say it cannot do.  The registration of the lis pendens has to be vacated.

 THE APPLICATION TO AMEND THE STATEMENT OF CLAIM

65.  It is manefestly clear from the above analysis that the joinder and amendment sought would enable the real issue in controversy between the parties to be decided.  Furthermore, it would be appropriate to join Century Peace as a party to this action, so that any relief in relation to the Shares of Century Peace ordered by the court could be made binding on Century Peace.  Accordingly, the Plaintiff’s application to amend the statement of claim is allowed.

CONCLUSION

66.  In respect of the 2^nd Defendant’s first summons filed on 17 September 2014, the application to cease to be a party is dismissed but the application that the Plaintiff do vacate the lis pendens at its own costs is allowed.  As the 2^nd Defendant is only partially successful and partially unsuccessful, I make a costs order nisi that there be no order as to costs of the application and the hearing.

67.  As for the 2^nd Defendant’s second summons filed on 10 December 2014 seeking to strike out the Plaintiff’s action as against the 2^nd Defendant, it is dismissed with a costs order nisi that the 2^nd Defendant shall pay the Plaintiff’s costs, to be taxed if not agreed.

68.  As for the Plaintiff’s summons filed on 2 February 2015 seeking to amend the writ and statement of claim in this action, it is allowed with costs to the 2^nd Defendant in any event.